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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 26, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number
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NAVIGANT INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-2080967
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
84 INVERNESS CIRCLE EAST
ENGLEWOOD, COLORADO 80112
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number: (303) 706-0800
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None. None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value per share
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(Title of Class)
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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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ( 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [_]
The aggregate market value of the Registrant's voting stock held as of
February 29, 2000 by non-affiliates of the Registrant was $117,037,800. This
calculation assumes that certain parties may be affiliates of the Registrant
and that, therefore, 11,703,780 shares of voting stock are held by non-
affiliates. As of February 29, 2000, the Registrant had 13,100,000 shares of
its common stock and 685,000 shares of treasury stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report, to the extent not set
forth herein, is incorporated by reference from the Registrant's definitive
proxy statement relating to the annual meeting of stockholders to be held in
2000, which definitive proxy statement shall be filed with the Securities and
Exchange Commission within 120 days after the end of the fiscal year to which
this Report relates.
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FORWARD-LOOKING STATEMENTS
Statements contained in this Annual Report on Form 10-K ("Annual Report") of
Navigant International, Inc. ("Navigant" or the "Company"), 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 Items 1. and 2.,
"Business and Properties," Item 5., "Market for Registrant's Common Equity and
Related Stockholder Matters" and Item 7., "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," 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.
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NAVIGANT INTERNATIONAL, INC.
ANNUAL REPORT ON
FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 26, 1999
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES.
General
Navigant is one of the largest providers of corporate travel management
services in the United States based on airline ticket sales. Navigant
differentiates itself from its largest competitors by primarily focusing on
middle market clients, which Navigant defines as businesses spending between
$500,000 and $50 million annually on travel related expenses. With locations
throughout the United States, in Canada, and in the United Kingdom, Navigant
manages all aspects of its clients' travel processes, focusing on reducing
their travel expenses, typically one of the largest controllable expenses in a
corporate budget. Navigant believes that by providing high quality service and
by entering into management contracts, which may have terms of up to five
years, Navigant is able to maintain a significant proportion of its clients
from year to year. Navigant also provides specific group, leisure and special
event management travel services, largely to its corporate clients. On December
26, 1999, Navigant had approximately 160 regional and branch offices and
approximately 400 on-site locations.
With its technology and experienced personnel, Navigant creates, implements
and manages corporate travel policies, helping its clients cut travel costs.
Navigant provides its clients with extensive data about individual,
departmental and company travel activity and patterns to help identify
potential cost savings. Navigant also provides comprehensive accounting systems
that track and reconcile travel expenses, process and classify billing
information and provide management reports, all of which can be tailored to
meet a client's particular needs.
Navigant's proprietary AQUA(TM) quality control software products are
industry leaders. AQUA's FareBuster(TM) cost avoidance system checks each
travel record for a lower airline fare or hotel rate and continuously checks
wait-list flight inventories for discount fares that become available prior to
travel. AQUA's Trip Auditor(TM) system repetitively searches airline seat maps
for each traveler's preferred seat assignments and frequent flier upgrade
opportunities.
The Internet has the potential to allow Navigant to provide an even higher
level of service to its corporate clients while significantly reducing
distribution costs, especially labor costs. Navigant currently provides
reservation and ticketing services, as well as quality control and cost
reduction systems, and other travel management products, including its travel
accounting and management reporting services, through its consolidated Web
site, Navigant.com, and its suite of Internet products and services,
BusinessFLYR(TM) and ReportFLYR(TM). These services allow Navigant's clients to
take advantage of its existing offline services more quickly and efficiently.
Navigant's Internet subsidiary, NaviagantVactions.com, LLC, expects to
leverage the existing client and customer base of Navigant to create an
expanded leisure travel revenue source. Through agreements with Navigant's
clients using private label and co-branding arrangements,
NaviagantVacations.com plans to reach both employees of clients and customers
of clients. The Company believes its CruiseCenter.com website provides
exceptional value to customers, and the Company plans to augment the site with
additional technology to further meet the demands of leisure travel customers
for exceptional value and service. NavigantVacations.com expects to launch a
comprehensive tour package product on its website in 2000, which should further
expand its revenue generating opportunities.
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As of December 26, 1999, Navigant believes that at least 95% of its total
transactions are generated from clients under management contracts or service
fee arrangements. Although the terms of its management contracts vary depending
on the type of services provided and by client, Navigant typically is entitled
to receive a pre-negotiated management fee and to be reimbursed for its direct
operating expenses and indirect overhead costs.
Development of Business
In the late 1970s, Edward S. Adams, Navigant's Chairman and Chief Executive
Officer, started a company in Denver, Colorado, focused on managing corporate
travel. In 1983, Mr. Adams formed Professional Travel Corporation by merging
his company with three of the largest corporate travel management companies in
Colorado. By 1995, Professional Travel Corporation had become one of the 20
largest travel management companies in the United States.
In 1997, U.S. Office Products purchased Professional Travel Corporation, and
Mr. Adams became president of U.S. Office Products' Corporate Travel Services
Division. He was charged with building a national corporate travel management
company focused on middle market clients. Under U.S. Office Products'
ownership, the management team led by Mr. Adams acquired an additional eleven
regional corporate travel management companies and significantly increased the
geographical scale and client-base of the business. In June 1998, U.S. Office
Products distributed 10,984,000 shares of Navigant's common stock to the
stockholders of U.S. Office Products (the "Travel Distribution"). Additionally,
Navigant completed an initial public offering of 2,000,000 shares of Navigant
common stock simultaneously with the Travel Distribution (the "Stock
Offering"). The Travel Distribution was part of a restructuring plan (the
"Strategic Restructuring"), in which U.S. Office Products spun-off its print
management, technology solutions, educational supplies and corporate travel
services businesses. Following the Travel Distribution, Navigant acquired seven
more regional corporate travel management companies in 1998, with nine more
regional corporate travel management companies and an incentive and meeting
company following in 1999. As of December 26, 1999, Navigant owned the
following regional corporate travel management companies:
Name Headquarters Date Founded
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Akra Travel, d/b/a Navigant
International/Northeastern Florida Jacksonville, Florida 1985
Arrington Travel Center, d/b/a
Navigant International/North Central Chicago, Illinois 1969
Associated Travel, d/b/a Navigant
International/Southwest Santa Ana, California 1961
Atlas Travel, d/b/a Navigant
International/South Central (1) (3) Houston, Texas 1958
Atlas Travel, d/b/a Navigant
International/British Columbia Vancouver, British Columbia 1961
Bowers Worldwide Travel, d/b/a
Navigant International/Arizona Phoenix, Arizona 1978
Chartrek International (2) Norwalk, Connecticut 1978
Cornerstone Enterprises, d/b/a
Cornerstone, A Navigant
International Company Marlboro, Massachusetts 1983
Couch/Mollica Travel, d/b/a Navigant
International/Pennsylvania Pittsburgh, Pennsylvania 1984
Dollinger Travel, d/b/a Navigant
International/Western New York Rochester, New York 1986
Evans Travel Group, d/b/a Navigant
International/Louisiana New Orleans, Louisiana 1986
First Travelcorp, d/b/a Navigant
International/Southeast Raleigh, North Carolina 1991
Forbes Travel Service, d/b/a Navigant
International/Pittsburgh Pittsburgh, Pennsylvania 1972
Jarvis Travel, d/b/a Navigant
International/Alberta Calgary, Alberta 1971
Lovejoy-Tiffany & Associates, Inc.,
d/b/a Navigant International/
Southeastern Michigan Ann Arbor, Michigan 1973
McGregor Travel Management, d/b/a
Navigant International/ Northeast
(2) (4) Stamford, Connecticut 1977
M.D. Travel Management, d/b/a
Navigant International/ United
Kingdom London, England 1988
Moran Travel Bureau, d/b/a Navigant
International/Boston Boston, Massachusetts 1988
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Mutual Travel, d/b/a Navigant
International/Northwest Seattle, Washington 1984
Oaks Travel (3) Houston, Texas 1983
Omni Travel, d/b/a Navigant International/Boston Cambridge, Massachusetts 1979
Professional Travel, d/b/a Navigant
International/Rocky Mountain Denver, Colorado 1983
Simmons Associates, d/b/a Navigant
International/District of Columbia Alexandria, Virginia 1975
Travel Consultants, d/b/a Navigant
International/Grand Rapids Grand Rapids, Michigan 1972
TravelCorp, d/b/a Navigant International/Twin
Cites Minneapolis, Minnesota 1974
World Express Travel, d/b/a Navigant
International/Alaska Anchorage, Alaska 1987
1377665 Ontario Inc., d/b/a Navigant Travel
Resources Toronto, Ontario 1999
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(1) On December 28, 1998, Travel Arrangements, Inc. and St. Pierre
Enterprises, Inc., which had been doing business as "Supertravel," and
Atlas Travel Services, LLC, were all restructured into a common entity,
Atlas Travel Services, L.P.
(2) On December 29, 1999, Chartrek International, Inc., was merged into
McGregor Travel Management, Inc.
(3) On February 22, 2000, Oaks Travel Corp. was merged into Atlas Travel
Services, L.P.
(4) On September 10, 1999, Wareheim Travel Services, Inc. (which had been
doing business as "Travel Guide") was merged into McGregor Travel
Management, Inc.
Beginning January 1, 2000 all Navigant companies began doing business as
Navigant International with the individual identifiers shown in the table
above.
Navigant acquired three more regional corporate travel management companies
in January and February of 2000.
Travel Services Industry
Navigant believes the travel services industry can be divided into two
sectors: the unmanaged leisure/small business sector, and the managed,
corporate sector. Navigant competes in the managed, corporate sector, which
Navigant believes is made up of approximately 300 travel management companies.
According to the Travel Industry Association of America and the United States
Department of Commerce, Americans spent a total of $424 billion on domestic
travel in 1998, of which Navigant believes a significant portion was for
business travel.
The corporate travel management industry grew dramatically as a result of
the deregulation of the airline industry in 1978. The complex pricing
strategies adopted by the airlines to maximize their yields and loads created
an opportunity for travel management companies to assist mid-sized and large
companies in managing their travel expenses. Over the years, the industry has
progressed from merely delivering low-cost airline tickets to providing end-to-
end support and services.
Travel is among the largest controllable expense for most companies.
Businesses hire corporate travel management companies to reduce these expenses,
and to manage the travel process. Corporate travel management companies can cut
travel expenses for their clients in many ways, including creating travel
policies that take advantage of savings opportunities inherent in complex
airline pricing structures, collecting data for greater leverage with
suppliers, and negotiating favorable pricing directly with travel suppliers for
the benefit of a particular client, and passing on cost savings and price
reductions negotiated for the benefit of all clients.
The corporate travel management industry has changed significantly since
1995. Some of the major changes are:
. Conversion to management contracts and service fee arrangements;
. Reduction in commission rates from airlines;
. Increasing industry reliance on technology; and
. Expansion of services offered to clients.
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Navigant believes that a successful response to these changes requires
significant technological and financial resources, and that larger corporate
travel management companies therefore may have a competitive advantage.
Accordingly, Navigant believes the business travel management industry is
undergoing a period of consolidation and that significant growth opportunities
exist. Navigant believes that large companies providing integrated systems from
purchasing to data collection will eventually dominate the industry.
The industry's role and capacity as a distribution channel, and its
relationship with both clients and suppliers, is also undergoing significant
change as a result of the Internet and other technological innovations.
Navigant believes these innovations offer opportunities for corporate travel
management companies to increase the efficiency of their distribution
capacities and enhance services provided to travelers and management.
Business Strategy
Navigant's mission is to provide progressive travel management services
delivered globally by its unified team of locally based professionals who are
committed to exceeding the expectations of shareholders, clients, and fellow
associates. Navigant refers to its employees as associates.
The principal elements of Navigant's business strategy are to:
. Generate internal growth through:
. Local marketing focused on increasing its middle market client
base. Navigant intends to expand its client base of middle market
companies by capitalizing on the breadth of its services, size,
geographic scope and financial resources while maintaining its local
and regional relationships and service. Navigant believes that its
global presence will attract middle market corporate clients that
have locations in more than one geographic region;
. Cross-selling. Navigant plans to market its incentive, meeting and
special event travel services to corporate clients, sell corporate
travel management services to current incentive and group clients,
and market leisure travel to its clients' employees through
NavigantVacations.com; and
. Continuing to shift clients to management contracts and service fee
arrangements. Navigant's shift toward a compensation structure based
primarily on management contracts and service fee arrangements
enables Navigant to share with clients the cost savings it achieves
through operating efficiencies.
. Use the Internet to attract new clients and increase efficiency. The
Internet provides a multi-faceted opportunity for Navigant, which can be
exploited both in its existing corporate business and in its growing
leisure travel operations. On the corporate side, the Internet can be
used to attract new clients and to serve existing clients more
efficiently. By serving its clients electronically, whether over the
Internet or through corporate Intranets, Navigant can reduce transaction
costs. In addition, both the Internet and client Intranets should allow
NavigantVactions.com to more effectively market leisure travel services
to employees of its existing corporate clients and to reach substantial
new markets for leisure travel through private label and co-branding
initiatives. Further, by leveraging its technology platforms and its
purchasing powers, NavigantVacations.com can provide a leisure travel
sales operation with low costs and improved margins.
. Leverage Navigant's size to decrease costs and increase revenues. As one
of the largest corporate travel management companies, Navigant
negotiates favorable contracts with vendors and travel suppliers,
including incentive override contracts. These contracts include
agreements with selected computer reservation systems vendors, hotel
commission clearinghouses, rental car companies, and airlines. Some of
these agreements provide payments to Navigant of up-front incentives, as
well as annual payments or costs savings that management believes are
significantly higher than amounts that would have been offered to any of
its individual subsidiary companies. In addition, Navigant believes that
it can benefit from greater purchasing power in such key expense areas
as telecommunication, advertising, insurance, overnight delivery,
employee benefits, office supplies and printing. Navigant believes that
it will achieve economies of scale through the integration of its back-
office operations, technology development and information and management
systems at its current operations, while
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freeing local management to focus on growth and customer service. For
instance, Navigant has approximately 85% of its transactions being
processed on a single, company-wide information technology platform to
service its accounting and reporting requirements. Navigant also believes
that it can reduce total operating expenses by eliminating or
consolidating certain duplicative facilities and administrative functions,
such as ARC processing, 24-hour toll-free number services as well as
research and development. In addition, Navigant is consolidating regional
locations and eliminating unnecessary facilities.
. Continue to acquire established, profitable and well-managed corporate
travel management companies. Navigant continues to believe that the
corporate travel management industry is highly fragmented with
significant opportunities to consolidate through selective acquisitions
of leading regional and local companies. Navigant will seek to acquire
companies that (i) have demonstrated growth and profitability, (ii) have
desirable geographical locations, (iii) are run by successful,
experienced entrepreneurs whom Navigant will endeavor to retain, (iv)
predominantly serve the corporate market and (v) emphasize customer
service. Navigant routinely reviews, and conducts investigations of,
potential acquisitions of domestic and foreign travel management
companies. When Navigant believes a favorable opportunity exists,
Navigant seeks to enter into discussions with the owners of such
businesses regarding the possibility of an acquisition by Navigant. At
any given time, Navigant may be in discussion with one or more corporate
travel management company owners. Navigant may also make other strategic
investments in and acquisitions of travel-related businesses.
Services
Travel Management Services
Navigant provides its clients with a wide range of travel management
services in addition to reservation and ticketing, including:
. Developing corporate travel policies;
. Managing adherence to travel policies;
. Outsourcing travel management consulting services;
. Designing information and management reporting systems;
. Negotiating favorable pricing with travel suppliers; and
. Planning and organizing incentive programs, corporate meetings and
special events.
Navigant books travel reservations for its clients with a variety of travel
suppliers, including airlines, hotels and rental car companies. Navigant uses
three major computer reservation systems, SABRE, Galileo/Apollo and Worldspan
to book airline tickets, hotel reservations and rental car reservations. After
making travel reservations for its clients, Navigant issues tickets, both paper
and electronic, and provides its customers with detailed itineraries, which
include confirmation numbers for hotel and car rental reservations.
Navigant can assist its clients in developing travel policies that enable
the client to manage its travel expenses. These policies can mandate the use of
particular vendors, set parameters on the class of service used by travelers,
require advance purchase of airline tickets and define the use of "frequent
flier" program benefits. These policies may also have risk management features,
such as limiting the number of officers and employees who may travel on the
same flight.
Navigant's management reports provide detailed and comprehensive information
about each client's travel expenses and patterns. These reports show savings
achieved through the use of preferred vendors and adherence to travel policies,
and analyze destinations, airlines and hotel usage and rental car expense. The
information collected helps Navigant and the client negotiate discounts and
pricing with vendors, and allows the client to monitor and enforce its travel
policies.
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Navigant operates a 24-hour toll free telephone service to provide emergency
assistance to travelers. Many other travel management companies use this
service and Navigant believes it is regarded as one of the best 24-hour
services in the travel industry.
As a growing part of its business, Navigant has created an incentive,
corporate meeting and special-event subsidiary called Cornerstone. Cornerstone
is comprised of existing meetings and incentive operations within Navigant's
various subsidiaries, and Cornerstone Enterprises, and it provides innovation
and expertise in the areas of incentive programs, meetings and special events.
Cornerstone operates out of regional offices throughout the United States, and
will soon expand into the United Kingdom. Services provided by Cornerstone
include, but are not limited to, strategic planning, promotion support, site
selection, contract negotiations, program planning, registration, creative
support and on-site management.
In addition to corporate travel management, Navigant provides leisure travel
services to both individuals and groups as a small portion of its overall
business. Navigant derives part of its leisure travel business through its
existing corporate client base. Navigant expects that NavigantVacations.com
will utilize Navigant's existing resources to increase revenues and operating
profits from leisure travel sales.
Use of Technology
Navigant embraces technology as a key to future success in the corporate
travel management industry. Navigant's information technology can provide its
clients' corporate travel managers as well as financial officers with extensive
data about individual, departmental and company travel activity and patterns.
Navigant can use this information to consult with its corporate clients
regarding the structure, operation and efficiency of a variety of corporate
travel policies. In addition, Navigant can provide corporate clients with
comprehensive information about cost-saving opportunities for the travel
undertaken by their employees.
Navigant has developed a fully-automated quality assurance program,
AQUA(TM), which features both a quality auditing system and a computerized cost
avoidance system. AQUA's Trip Auditor(TM) system checks each travel record for
accuracy and completeness and repetitively searches airline seat maps for each
traveler's preferred seat assignments and frequent-flier upgrade opportunities.
AQUA's FareBuster(TM) cost avoidance system is a computerized cost avoidance
program which checks each record for a lower airline fare or hotel rate and
continuously checks wait list flights and flight inventories for discount fares
that become available prior to travel. AQUA(TM) also advises travel managers of
travelers who are not taking advantage of the lowest fare. Currently, Navigant
has the AQUA(TM) system installed to process approximately 80% its
transactions, and plans to convert the balance during 2000. Approximately 60%
of the top ten travel management companies in the United States use portions of
the AQUA(TM) system.
During 1999, Navigant embarked upon a concerted accounting and client
reporting standardization program. This resulted in converting accounting
systems to a single system and reporting systems to a standard system.
Conversions are ongoing, but approximately 85% of all travel transactions
processed by Navigant are now processed on its consolidated system.
The Internet has the potential to allow Navigant to provide an even higher
level of service to its corporate clients while significantly reducing
distribution costs, especially labor costs. Navigant serves its corporate
clients through its consolidated Web site, Navigant.com and its suite of
Internet products and services, BusinessFLYR(TM) and ReportFLYR(TM).
BusinessFLYR(TM) allows Navigant's corporate clients to book air, car and hotel
travel online while enforcing corporate travel policy and capturing their
travel spending patterns. Several different online booking systems can be
configured based on the corporate client's requirements. Through Report
FLYR(TM), the corporate client can view trip information sorted at every level
of corporate organization, from individual travel to department, division or
entire company. ReportFLYR(TM) allows corporate travel managers and other
executives the ability to view their company's travel activities and real-time
data 24 hours a day using a password protected system.
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Through its existing Internet subsidiaries, NavigantVacations.com and
CruiseCenter.com, and client Intranet presence, Navigant is also expanding its
efforts to cross-sell leisure travel to employees of its corporate clients,
members of affinity group clients and to provide reservation and ticketing, as
well as its quality control and cost reduction services, to other leisure
consumers.
Distribution of Services
Navigant provides corporate travel management services to its clients
through several channels, including on-site offices, regional travel management
offices and on-site satellite ticket printers ("STPs").
At December 26, 1999, Navigant had approximately 400 on-site offices on
client premises, where it provides customized trip planning, reservation and
ticketing services to the employees of corporate clients. On-site operations
are typically desirable for clients with airline expenditures in excess of $1.0
million per year. Through an on-site office, Navigant is able to work one-on-
one with the client's travel manager to meet the client's travel needs,
including the need for customized corporate travel information and negotiations
with travel suppliers frequently used by the customer.
As of December 26, 1999, Navigant had approximately 160 regional and branch
offices. These offices are typically used by corporate customers with less than
$1.0 million in travel expenditures per year. The regional offices provide
local companies with comprehensive travel management services, including trip
planning, reservation and ticketing services, accounting, corporate travel
reporting, negotiations with frequently used travel suppliers and consulting.
The regional nature of these offices allows them to leverage their local market
expertise and to provide quick, responsive and personalized service. In
addition, regional offices provide backup to nearby on-site locations.
As of December 26, 1999, Navigant also operated approximately 500 STPs at
client locations across the country. Navigant uses these printers to distribute
tickets instantly to clients' field locations that have enough volume to
justify the STP. Locations with lower volume can receive tickets via overnight
delivery services. Navigant believes that the advent of electronic ticketing
will eventually eliminate the need for STPs and overnight delivery, thus
lowering distribution costs.
Navigant has entered into arrangements with third parties pursuant to which
it fulfills travel reservations placed on the Internet. In addition, Navigant,
through its Navigant.com Web site, allows clients to, among other things, check
flight times, make reservations, access and sort password-protected corporate
travel data, find restaurants and automatic teller machines, and access the
latest currency conversions.
Navigant offers reservation services to its clients through the Internet, e-
mail and facsimile. These distribution methods offer clients the option of
performing reservation services directly, while Navigant provides a supporting
role. Navigant's role includes performing quality control on the reservation,
travel policy compliance, assisting the traveler with the use of the
reservation system and issuing and delivering tickets reserved by the client.
Additionally, Navigant reports to management on matters such as pre- and post-
travel activity, cost-saving opportunities and the development and assessment
of the client's travel policy and negotiated rate opportunities.
Marketing and Sales
Navigant's marketing continually targets both new and existing customers.
Navigant's sales staff identifies potential clients, and develops opportunities
to provide additional travel services to existing clients. Over the past few
years, travel policy and travel purchasing decisions in larger companies have
been centralized in purchasing departments, with travel managers, or within the
offices of chief financial officers. The selection of a travel agency has also
become more formal, with larger accounts soliciting bids through "requests for
proposals." Navigant has adapted to these changes by relying on a sales force
specially trained in the business
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of corporate travel, supported by experienced marketing staff. Navigant has
approximately 120 associates in its sales and marketing departments.
Competition
The corporate travel management industry is extremely competitive. Navigant
competes primarily with other corporate travel management companies. Some of
its competitors are larger and have greater brand-name recognition and
financial resources than Navigant does. Competition within the corporate travel
management industry is increasing as the industry undergoes a period of
consolidation. Certain of Navigant's competitors are expanding their size and
financial resources through consolidation. Some travel management companies may
have relationships with certain travel suppliers, which give them access to
favorable availability of products (including airplane seats and hotels room).
Furthermore, some corporate travel management companies have a strong presence
in particular geographic areas which may make it difficult for Navigant to
attract clients in those areas. As a result of competitive pressures, Navigant
may suffer a loss of clients, and its revenues or margins may decline.
Navigant also competes with travel suppliers, including airlines, hotels and
rental car companies. Innovations in technology, such as the Internet and
computer on-line services, have increased the ability of travel suppliers to
distribute their travel products and some limited services directly to the
consumer. Although corporate travel management companies and travel agencies
remain the primary channel for travel distribution, businesses and consumers
can use the Internet to access information about travel products and services
and to purchase such products and services directly from the suppliers, thereby
bypassing corporate travel management companies and travel agents. Navigant
believes that no single Internet-based service presently provides access to the
full range of information that is available through Navigant. An Internet-based
travel service may, however, provide such access in the future.
Navigant believes that it competes for clients based upon service, price and
specialized knowledge. Navigant believes that it is well-positioned to compete
in these areas due to its combination of size and regional focus. Navigant uses
its size to achieve operating efficiencies by implementing customized and
industry-standard technologies and by consolidating administrative functions.
Navigant's size also provides opportunities to negotiate favorable arrangements
with travel suppliers, such as airlines, hotels and rental car companies.
Navigant's regional focus, conversely, fosters personalized customer service
and specialized local market knowledge, which helps improve customer service,
solidify customer relationships and expand the Company's customer base.
Management Information Systems
Navigant uses networked management information systems for financial
management, reporting, and communication. These systems provide management with
current financial information from all Navigant offices, and allow management
to share that information easily and quickly with others. The systems also
allow management to communicate efficiently with associates and each other
throughout the business day. Navigant employs technicians to administer,
install, and maintain its computer hardware and software, as well as computer
programmers to create software solutions for Navigant and its customers.
Navigant began implementing a single, Company-wide information technology
platform to service its accounting and reporting requirements in 1998, and
approximately 85% of the Company's transactions are currently being transacted
on the new system. The Company expects the remaining transactions to be on the
new system by the end of its 2000 fiscal year.
Year 2000 Issues
Navigant addressed the potential Year 2000 Problems throughout fiscal 1998
and fiscal 1999. A "Year 2000 Problem" is one where systems either fail to
operate as expected, or cease to be operational because date dependent
functions improperly interpret dates after December 31, 1999. As of March 24,
2000, the Company
10
has not experienced any material interruption in business as a result of any
Year 2000 Problem. Nevertheless, the Company will continue to monitor its
critical systems for indications of a latent Year 2000 Problem to be sure that
any such problem will be addressed promptly. Likewise, the Company will
continue to monitor its material vendors to be sure that they correct any
latent Year 2000 Problems quickly.
Navigant did not incur material costs in investigating and remediating the
Year 2000 Problem. The costs of replacing some systems were borne by the
Company's vendors, while other costs were part of Navigant's normal capital
expenditure budget. The Company's primary costs were incurred in the
consolidation of the back-office accounting system; however, this activity was
undertaken for business reasons apart from potential Year 2000 Problems. The
Company's total incremental costs related to the Year 2000 Problem remediation
were less than $200,000.
Employees
As of December 26, 1999, Navigant had approximately 3,500 full-time
associates, none of whom is subject to collective bargaining agreements. The
Company believes that it enjoys good relations with its associates.
Properties
As of December 26, 1999, Navigant operated at 28 travel agency facilities, 2
of which are owned and 26 of which are leased. The following are the Company's
primary properties:
Approximate
Square Owned/
Region Location Footage Leased Expiration
------ -------- ----------- ------ ----------
Canada Vancouver, British Columbia 6,684 Leased August 31, 2001
Canada Calgary, Alberta 10,277 Leased October 31, 2001
Canada Toronto, Ontario 2,446 Leased August 14, 2005
North
Central Chicago, Illinois 28,253 Leased July 21, 2001
North
Central Edina, Minnesota 12,624 Leased May 31, 2003
North
Central Ann Arbor, Michigan 12,600 Leased July 31, 2004
North
Central Grand Rapids, Michigan 4,700 Leased May 12, 2002
North
Central Grand Rapids, Michigan 29,142 Owned N/A
Northeast Stamford, Connecticut 10,000 Leased May 18, 2004
Northeast Alexandria, Virginia 6,000 Leased month-to-month
Northeast Marlboro, Massachusetts 7,661 Leased September 1, 2004
Northeast Norwalk, Connecticut 7,235 Leased June 30, 2004(1)
Northeast Pittsburgh, Pennsylvania 3,276 Leased June 24, 2002
Northeast Pittsburgh, Pennsylvania 4,245 Leased June 29, 2002
Northeast Rochester, New York 4,674 Leased July 31, 2004
Northeast Cambridge, Massachusetts 15,500 Leased December 31, 2001(2)
Northeast Boston, Massachusetts 3,080 Leased May 31, 2000(2)
Northwest Seattle, Washington 18,538 Leased August 31, 2001
Northwest Anchorage, Alaska 8,726 Leased month-to-month
Rocky
Mountain Englewood, Colorado 49,900 Owned N/A
South
Central New Orleans, Louisiana 7,590 Leased September 30, 2003
South
Central Houston, Texas 26,723 Leased April 30, 2001
South
Central Houston, Texas 13,617 Leased September, 30, 2002
Southeast Raleigh, North Carolina 12,002 Leased March 31, 2001
Southeast Jacksonville, Florida 4,849 Leased June 30, 2006
Southwest Phoenix, Arizona 14,615 Leased September 30, 2004
11
Approximate
Square Owned/
Region Location Footage Leased Expiration
------ -------- ----------- ------ ----------
Southwest Santa Ana, California 25,439 Leased November 15, 2003
United Kingdom London, England 4,110 Leased December 26, 2001
- --------
(1) On December 30, 1999, Chartrek assigned this lease, and vacated the
premises in December of 1999.
(2) On December 2, 1999, Moran Travel Bureau, d/b/a Navigant
International/Boston entered into a lease with a commencement date of
March 1, 2000 for 15,500 square feet to be used as a common location for
the Cambridge and Boston facilities. This lease expires on February 29,
2005 and the landlord of the Cambridge location has released Navigant from
its current lease agreement.
The office building owned by Navigant and located at 84 Inverness Circle
East, Englewood, Colorado is subject to first and second deeds of trust. The
first deed of trust secures payment of a Promissory Note dated May 16, 1995 and
payable to Colorado National Bank, in the principal amount of $1,556,000. The
second deed of trust secures payment of a Promissory Note dated June 20, 1995
and payable to Colorado National Bank, in the principal amount of $225,000.
Navigant believes that its properties are adequate to support its operations
for the foreseeable future.
Recent Developments
In February 2000, Navigant undertook a formal plan approved by the Board of
Directors for cost reduction measures including the consolidation of certain
operating functions on a regional basis and the elimination of additional
duplicative facilities. The implementation of the cost reduction measures
commenced in March 2000 and resulted in the Company recording a restructuring
charge of approximately $1.9 million in March 2000. Management anticipates that
these measures will be completed throughout 2000. The 2000 charge includes the
severance associated with the termination of approximately 130 positions and
the merger of several facilities.
Executive Offices
Navigant's principal executive offices are located at 84 Inverness Circle
East, Englewood, Colorado 80112, and our telephone number is (303) 706-0800.
ITEM 3. 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 and certain former and present executive officers of U.S.
Office Products 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 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 December 26, 1999, the
approximate book value of these two subsidiaries was $12.6 million. The Company
intends to vigorously defend against this lawsuit.
12
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 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. If the cases are not settled by mediation, the
cases will be reopened with the court.
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.
13
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the Company's stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of fiscal year
1999.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information
The Company's Common Stock ("Common Stock") is quoted on the Nasdaq Stock
Market National Market under the symbol "FLYR." The following table sets forth,
for the period indicated, the range of high and low sales prices per share of
Common Stock, as reported on the Nasdaq Stock Market National Market:
High Low
------ ------
1999
- ----
First Quarter (December 28, 1998 through March 28, 1999)......... $ 8.31 $ 5.00
Second Quarter (March 29, 1999 through June 27, 1999)............ $ 8.81 $ 4.81
Third Quarter (June 28, 1999 through September 26, 1999)......... $ 9.13 $ 7.38
Fourth Quarter (September 27, 1999 through December 26, 1999).... $12.00 $ 6.31
1998
- ----
Second Quarter (June 9, 1998 (1) through June 27, 1998).......... $ 8.63 $ 6.25
Third Quarter (June 28, 1998 through September 26, 1998)......... $ 8.75 $ 5.38
Fourth Quarter (September 27, 1998 through December 27, 1998).... $ 7.13 $ 4.00
(1) Prior to June 9, 1998, Navigant was a division of U.S. Office Products.
Holders
At March 13, 2000, the last reported sales price of the Common Stock was
$9.44 per share, and the number of holders of record of the Common Stock was
approximately 3,283.
Dividends
The Company has not declared or paid dividends on its Common Stock since its
formation, and the Company does not anticipate paying dividends in the
foreseeable future. The decision whether to apply legally available funds to
the payment of dividends on Navigant Common Stock will be made by the Board of
Directors from time to time in the exercise of its business judgment, taking
into account, among other things, Navigant's results of operations and
financial condition, any then existing or proposed commitments by Navigant for
the use of available funds, and Navigant's obligations with respect to the
holders of any then outstanding indebtedness or preferred stock. Furthermore,
Navigant's ability to pay dividends may be restricted from time to time by
financial covenants in its credit agreements.
Sales of Unregistered Securities
During the fiscal year ended December 26, 1999, there were no sales by the
Company of unregistered securities.
15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The historical financial data presented below should be read in conjunction
with the consolidated financial statements, including the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that appear elsewhere in this Annual Report.
Fiscal Year Ended
----------------------------------------------------------------
December 26, December 27, December 28, December 29, December 30,
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(In thousands, except per share data)
Statement of Income Data
(1):
Revenues................ $229,161 $171,368 $90,917 $54,749 $45,267
Operating expenses...... 128,971 99,734 52,517 29,060 25,836
General and
administrative
expenses............... 61,320 47,988 27,377 19,707 14,645
Depreciation and
amortization expense... 9,752 7,167 3,090 1,386 918
Non-recurring charges
(2).................... 8,236 1,156
-------- -------- ------- ------- -------
Operating income........ 29,118 8,243 6,777 4,596 3,868
Interest expense........ 5,929 2,070 685 540 515
Interest income......... (199) (227) (400) (452) (352)
Other, net.............. 15 (30) (29) 60 42
-------- -------- ------- ------- -------
Income before provision
for income taxes....... 23,373 6,430 6,521 4,448 3,663
Provision for income
taxes.................. 10,217 3,987 2,975 709 565
-------- -------- ------- ------- -------
Income before minority
interest............... 13,156 2,443 3,546 3,739 3,098
Minority interest....... 120
-------- -------- ------- ------- -------
Net income.............. $ 13,036 $ 2,443 $ 3,546 $ 3,739 $ 3,098
======== ======== ======= ======= =======
Net income per share:
Basic................. $ 1.02 $ 0.19 $ 0.33 $ 0.45 $ 0.52
Diluted............... $ 1.01 $ 0.18 $ 0.32 $ 0.44 $ 0.52
Weighted average number
of common shares
outstanding:
Basic................. 12,841 13,156 10,858 8,250 5,906
Diluted............... 12,868 13,250 11,078 8,425 6,002
December 26, December 27, December 28, December 29, December 30,
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(unaudited) (unaudited)
(In thousands)
Balance Sheet Data (1):
Working capital......... $ 20,067 $ 1,208 $12,379 $ 5,828 $ 4,288
Total assets............ 287,311 206,848 137,861 25,967 25,258
Total debt.............. 107,219 62,463 16,806 5,655 8,160
Stockholders' equity.... 124,963 114,125 99,644 13,569 9,187
Fiscal Year Ended
----------------------------------------------------------------
December 26, December 27, December 28, December 29, December 30,
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(In thousands)
Other Data (1):
EBITDA (3).............. $ 38,870 $ 15,410 $ 9,867 $ 5,982 $ 4,786
Cash flow--operating
activities............. 9,988 10,078 6,527 5,814 4,161
Cash flow--investing
activities............. (47,175) (65,381) (2,588) (1,796) 561
Cash flow--financing
activities............. 38,961 49,341 (7,733) (350) (3,119)
Increase (decrease) in
cash................... 1,688 (5,733) (3,837) 3,668 1,603
Capital expenditures.... 5,234 4,313 1,424 1,796 1,858
16
- --------
(1) The historical financial information of the businesses that were acquired
in business combinations accounted for under the pooling-of-interests
method during the period from January through April 1997 have been combined
on a historical basis in accordance with generally accepted accounting
principles ("GAAP") to present this financial data as if these pooled
businesses had always been members of the same operating group. The
financial information of the businesses acquired in business combinations
accounted for under the purchase method is included from the dates of their
respective acquisitions.
(2) For a discussion of non-recurring charges, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Introduction."
(3) "EBITDA" is defined as income from operations, plus depreciation and
amortization. EBITDA is not intended to represent cash flow from operations
in accordance with GAAP and should not be used as an alternative to net
income as an indicator of operating performance or to cash flow as a
measure of liquidity. EBITDA is included in this Annual Report because it
is a basis upon which Navigant assesses its financial performance. While
EBITDA is frequently used as a measure of operations and the ability to
meet debt service requirements, it is not necessarily comparable to other
similarly titled captions of other companies due to potential
inconsistencies in the method of calculation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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 give retroactive effect to
the four business combinations accounted for under the pooling-of-interests
method during the period from January through April 1997 (the "Pooled
Companies") and includes the results of operations for the seven companies
acquired in business combinations in 1997 accounted for under the purchase
method (the "1997 Purchased Companies"), the eight companies acquired in
business combinations in 1998 accounted for under the purchase method (the
"1998 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 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
17
provided and by client, the Company typically deducts a pre-negotiated
management fee, its direct operating expenses and its indirect overhead costs
from commissions collected for travel arrangements made on behalf of the
client. If the commissions do not exceed the amounts deducted, the client pays
the difference to the Company. If the commissions exceed the amounts deducted,
the Company typically pays the excess to the client. In addition, the Company
typically charges a service fee for each ticket and other transactions to
clients who do not have a management contract with the Company. The Company
charges between $10 and $35 for each air travel ticket issued to such clients
and retains all of the related commissions collected from the airlines.
The Company believes that its management contracts and service fee
arrangements should minimize the financial impact of the above noted commission
caps, as well as any future changes in the airline commission rates. The
Company believes that at least 95% of its total transactions are currently
generated from clients under management contracts and service fee arrangements
and expects this percentage to increase to 98% to 100% during the early part of
2000 as contracts are renegotiated.
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 Navigant.
Expenses
The Company's direct operating expenses include principally labor (which
comprised approximately 76.3% and 70.7% of total direct operating expenses in
1999 and 1998, 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
(which comprised approximately 50.4% and 52.1% of total general and
administrative expenses in 1999 and 1998, respectively), occupancy and other
costs.
1997 Non-Recurring Charges
The Company incurred non-recurring acquisition costs of $1.16 million during
1997 in connection with the acquisition of the Pooled Companies. These non-
recurring charges included accounting, legal and investment banking fees, real
estate and environmental assessments and appraisals and various regulatory
fees.
1998 Non-Recurring Charges
During 1998, the Company incurred the following non-recurring charges:
Cash Non-cash Total
------ -------- ------
(In thousands)
Prior to or in conjunction with the Distribution:
Impaired Goodwill--March 1998.......................... $ 613 $ 613
Operation consolidation................................ $ 365 333 698
Allocated charges associated with the Distribution..... 1,073 2,677 3,750
Subsequent to the Distribution:
Operational consolidation and elimination of redundant
facilities............................................ 2,602 573 3,175
------ ------ ------
Total non-recurring charges............................ $4,040 $4,196 $8,236
====== ====== ======
18
On March 13, 1998, the Company received 90 days' notice of termination of a
business relationship that contributed approximately $600,000 to net operating
income during 1997. In March 1998, the Company wrote off $613,000 in intangible
assets relating to the original acquisition of this contract. In addition to
this charge, the Company took a charge in April 1998 of approximately $698,000
in connection with the disposition of certain equipment, severance charges and
other costs associated with a change in operational strategy to a centralized
management structure at one of its locations. This switch to a centralized
management structure from a regional structure at this location is consistent
with the existing structure at the other regional travel management companies
acquired.
The Company incurred strategic restructuring costs of $3.75 million in
connection with the Travel Distribution as an allocation from U.S. Office
Products. Of this amount, $1.0 million was an allocation to the Company for a
portion of the strategic restructuring charge incurred by U.S. Office Products
and the remaining $2.75 million was as a result of U.S. Office Products
Company's purchase of a pro rata portion of the Company's stock options
pursuant to a tender offer made in connection with the Travel Distribution. Of
the $2.75 million, $2.68 million was recorded as a non-cash compensation charge
while the $73,000 relates to the Company's portion of payroll taxes on the
compensation.
As part of the Company's increased focus on operational matters subsequent
to the Travel Distribution, it undertook a formal plan approved by its Board of
Directors for cost reduction measures including the elimination of duplicative
facilities, the consolidation of certain operating functions and the deployment
of common information systems. The implementation of the cost reduction
measures commenced in November 1998 and resulted in the Company recording a
restructuring charge of $3.18 million in November and December 1998. The 1998
charge included the closure of 20 facilities, the sale of one building and the
severance associated with the termination of 127 employees. Through December
1999, 18 facilities have been closed or consolidated and 142 employees have
been terminated. The following table summarizes non-recurring charges
associated with the 1998 cost reduction plan and sets forth their usage for the
periods indicated:
Employee
Severance and Facility
Termination Closures and
Costs Consolidations Total
------------- -------------- -------
(In thousands)
1998 Charge............. $1,172 $ 2,003 $ 3,175
Payments................ (513) (472) (985)
Non-cash usage.......... (573) (573)
------ ------- -------
Balance at December 27,
1998................... 659 958 1,617
Payments................ (905) (1,004) (1,909)
Non-cash usage..........
Additional expense
recorded during 1999... 246 46 292
------ ------- -------
Balance at December 26,
1999................... $ 0 $ 0 $ 0
====== ======= =======
2000 Non-Recurring Charges
In February 2000, the Company undertook a formal plan approved by the Board
of Directors for further cost reduction measures including the consolidation of
certain operating functions on a regional basis and the elimination of
duplicative facilities. The implementation of the cost reduction measures
commenced in March 2000 and resulted in the Company recording a restructuring
charge of approximately $1.9 million in March 2000. Management anticipates that
these measures will be completed throughout 2000. The 2000 charge includes the
severance associated with the termination of approximately 130 positions and
the merger of several facilities.
19
The following discussion should be read in conjunction with Navigant's
consolidated financial statements and related notes thereto appearing elsewhere
in the Annual Report.
Results of Operations
The following table sets forth various items as a percentage of revenues for
1999, 1998 and 1997:
For the Fiscal Year Ended
--------------------------------------
December 26, December 27, December 28,
1999 1998 1997
------------ ------------ ------------
Revenues............................... 100.0% 100.0% 100.0%
Operating Expenses..................... 56.3 58.2 57.8
General and administrative expenses.... 26.8 28.0 30.1
Depreciation and amortization expense.. 4.2 4.2 3.4
Non-recurring costs.................... 4.8 1.2
----- ----- -----
Operating income....................... 12.7 4.8 7.5
Interest expense, net.................. 2.5 1.1 0.3
Other (income) expense................. 0.0 0.0 0.0
----- ----- -----
Income before provision for income
taxes................................. 10.2 3.7 7.2
Provision for income taxes............. 4.5 2.3 3.3
----- ----- -----
Income before minority interest........ 5.7% 1.4% 3.9%
===== ===== =====
Consolidated Results of Operations
Fiscal Year Ended December 26, 1999 Compared to Fiscal Year Ended December 27,
1998
Consolidated revenues increased 33.7%, from $171.4 million for 1998 to
$229.2 million for 1999. This increase was primarily due to the inclusion of
the revenues from the 1998 and 1999 Purchased Companies from their respective
dates of acquisition, which added approximately $52.5 million in consolidated
revenues. Additionally, the Company has increased revenues in 1999 through
improved national contracts with certain of its vendors and internal growth.
Operating expenses increased 29.3%, from $99.7 million, or 58.2% of
revenues, for 1998 to $129.0 million, or 56.3% of revenues, for 1999. The
decrease in operating expense as a percentage of revenues was due primarily to
the spreading of certain fixed operating expenses over a larger revenue base
and an increase in revenue from certain vendors, due to the Company's
negotiation of improved national contracts with these vendors.
General and administrative expenses increased 27.8%, from $48.0 million, or
28.0% of revenues, for 1998 to $61.3 million, or 26.8% of revenues, for 1999.
The decrease in general and administrative expenses as a percentage of revenues
was due primarily to the 1998 and 1999 Purchased Companies having lower general
and administrative expenses as a percentage of revenues than the Company and as
a result of spreading certain fixed general and administrative expenses over a
larger revenue base. Additionally, the Company has begun implementing
integration efforts to reduce redundant facilities and functions, resulting in
a decrease in general and administrative expenses during 1999.
Depreciation and amortization expense increased 36.1%, from $7.2 million, or
4.2% of revenues, for 1998 to $9.8 million, or 4.2% of revenues, for 1999. This
increase was due to the increase in the number of purchase acquisitions and the
resultant higher goodwill amortization included in the results for 1999
compared to 1998.
The Company did not incur any non-recurring charges in 1999 compared to $8.2
million during 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Introduction--1998 Non-Recurring Charges."
20
Interest expense, net, increased from $1.8 million or 1.1% of revenues, for
1998 to $5.7 million, or 2.5% of revenues, for 1999. The increase was
attributable to financing the acquisition of the 1998 and 1999 Purchased
Companies with borrowings under the Company's credit facility as the average
debt balance for 1999 increased to $75.5 million compared to $31.7 million for
1998 resulting in approximately $2.9 million in interest expense. Additionally,
the increase in interest rates associated with the Federal Reserve rate
increases resulted in $1.0 million additional interest expense as the Company's
average interest rate increased from 6.5% in 1998 to 7.8% in 1999.
Provision for income taxes increased from $4.0 million for 1998 to $10.2
million for 1999, reflecting effective income tax rates of 62.0% and 43.7%,
respectively. The high effective income tax rate compared to the federal
statutory rate of 35% was primarily due to an increase in non-deductible
goodwill amortization resulting from acquisition activity. The effective rate
in 1999 was lower than the effective rate in 1998 due to a lower ratio of non-
deductible goodwill amortization to pre-tax income in the later periods.
Additionally, the 1998 effective rate is adversely affected by the large non-
recurring charges, which increased the ratio of non-deductible goodwill
amortization to pre-tax income in 1998 from 16.1% to 36.8%.
Fiscal Year Ended December 27, 1998 Compared to Fiscal Year Ended December 28,
1997
Consolidated revenues increased 88.5%, from $90.9 million for 1997 to $171.4
million for 1998. This increase was primarily due to the inclusion of the
revenues from the 1997 and 1998 Purchased Companies from their respective dates
of acquisition, which added approximately $79.0 million in consolidated
revenues. Additionally, the Company also increased the number of clients under
management contracts and service fee arrangements. This revenue offset the
approximate 20% reduction in commission revenue, due to the commission cuts
imposed by the airlines on all travel in October 1997. Additionally, the
Company increased revenues in 1998 due to the internal growth of approximately
1.5%.
Operating expenses increased 89.9%, from $52.5 million, or 57.8% of
revenues, for 1997 to $99.7 million, or 58.2% of revenues, for 1998. The
increase in operating expense as a percentage of revenues was due primarily to
normal inflationary pressures on salaries and other operating expense in 1998
while overall revenues remained flat when excluding revenues from acquisitions
as discussed above.
General and administrative expenses increased 75.3%, from $27.4 million, or
30.1% of revenues, for 1997 to $48.0 million, or 28.0% of revenues, for 1998.
The decrease in general and administrative expenses as a percentage of revenues
was due primarily to the 1998 Purchased Companies having lower general and
administrative expenses as a percentage of revenues than the Company and as a
result of spreading certain fixed general and administrative expenses over a
larger revenue base.
Depreciation and amortization expense increased from $3.1 million, or 3.4%
of revenues, for 1997 to $7.2 million, or 4.2% of revenues, for 1998. This
increase was due to the increase in the number of purchase acquisitions and the
resultant higher goodwill amortization included in the results for 1998
compared to 1997.
The Company incurred non-recurring charges of $8.2 million during 1998
compared to $1.2 million during 1997. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Introduction--1998 Non-
Recurring Charges."
Interest expense, net, increased from $285,000 or 0.3% of revenues, for 1997
to $1.8 million, or 1.1% of revenues, for 1998. The increase was attributable
to financing the acquisition of the 1998 Purchased Companies with borrowings
under the Company's credit facility as the average debt balance for 1998
increased to $31.7 million compared to $10.0 million for 1997.
Provision for income taxes increased from $3.0 million for 1997 to $4.0
million for 1998, reflecting effective income tax rates of 45.6% and 62.0%,
respectively. The high effective income tax rate compared to the federal
statutory rate of 35% was primarily due to an increase in non-deductible
goodwill amortization
21
resulting from acquisition activity. The effective rate in 1998 was higher than
the effective rate in 1997 due to a higher ratio of non-deductible goodwill
amortization to pre-tax income in 1998, which was attributable to the larger
non-recurring charge in 1998. This increased the ratio of non-deductible
goodwill amortization to pre-tax income in 1998 from 16.1% to 36.8%.
Additionally, the Pooled Companies were not subject to federal income taxes on
a corporate level prior to being acquired by Navigant as they had elected to be
treated as subchapter S corporations ("Subchapter S Companies"), resulting in
minimal income tax expense during the period from January through April 1997.
Liquidity and Capital Resources
At December 26, 1999, the Company had cash of $2.0 million, excluding
restricted cash in NavigantVacations.com, working capital of $20.1 million
($5.1 excluding restricted cash in NavigantVacations.com), borrowings of $90.0
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 $35.0 million. The Company's capitalization, defined as
the sum of long-term debt and stockholders' equity at December 26, 1999 was
approximately $232.2 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 1999, net cash provided by operating activities was $10.0 million.
Net cash used in investing activities was $47.2 million, including $5.2 million
for additions to property and equipment, such as computer equipment and office
furniture, and $28.0 million for the acquisition of the 1999 Purchased
Companies, and $15.0 million for the purchase of cash equivalents with the
restricted cash in NavigantVacations.com offset by the proceeds from the sale
of a building for $1.0 million. Net cash provided by financing activities was
$39.0 million, consisting of $8.1 million for repayments by the Company of
long-term indebtedness, $2.2 million for payment of debt issuance costs
attributable to the Company's new revolving credit facility and $3.2 million
for the repurchase of common stock offset by net increases of $36.7 million in
the Company's Credit Facility, $15 million from the proceeds of the issuance of
a minority interest in NavigantVacations.com, and $800,000 for the proceeds
from the exercise of stock options.
During 1998, net cash provided by operating activities was $10.1 million.
Net cash used in investing activities was $65.4 million, including $4.3 million
for additions to property and equipment, such as computer equipment and office
furniture, and $59.5 million for the acquisition of the 1998 Purchased
Companies. Net cash provided by financing activities was $49.3 million,
consisting of $53.3 million in proceeds from the Company's Credit Facility and
$15.0 million from the Stock Offering, partially offset by repayment to U.S.
Office Products of the $8.8 million of indebtedness allocated to the Company in
the Travel Distribution (net of advances from U.S. Office Products in 1998) and
by $6.9 million of dividends to U.S. Office Products.
During 1997, net cash provided by operating activities was $6.5 million. Net
cash used in investing activities was $2.6 million, including $1.4 million for
additions to property and equipment, such as computer equipment and office
furniture, and $1.2 million to pay for non-recurring acquisition costs. Net
cash used in financing activities was $7.7 million, including $12.2 million for
repayment of indebtedness and $3.0 million for the payment of dividends,
partially offset by advances to Navigant of $7.3 million from U.S. Office
Products.
In August 1999, the Company obtained the Credit Facility, a secured $125.0
million revolving credit facility to replace the Company's previous $60.0
million revolving credit facility and a $15.0 million short term
22
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 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
23
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.
Risk Factors
Significant Indebtedness and Interest Payment Obligations
Navigant is significantly leveraged. At December 26, 1999, Navigant had
$107.2 million of consolidated outstanding debt and its total consolidated
debt, as a percentage of capitalization, was 46.2%. Navigant may also need to
incur additional debt in the future to complete acquisitions or capital
projects or for working capital even though its Credit Facility imposes some
limits on its ability to do so. Navigant's high level of indebtedness could
have important consequences to its stockholders, which include the following:
. its ability to obtain additional financing to fund its business strategy,
debt service requirements, capital expenditures, working capital or other
purposes may be impaired;
. its ability to use operating cash flow in other areas of its business
will be limited because Navigant must dedicate a substantial portion of
these funds to pay interest and principal on its debt;
. certain of its borrowings bear interest at variable rates, which could
result in higher interest expense in the event of increases in interest
rates;
. it may not be able to compete with others who are not as highly
leveraged; and
. its significant leverage may limit its flexibility to adjust to changing
market conditions, changes in its industry and economic downturns.
Navigant's ability to pay interest on its debt obligations will depend upon
its future operating performance and its ability to obtain additional debt or
equity financing. Prevailing economic conditions and financial, business and
other factors, many of which are beyond Navigant's control, will affect its
ability to make these payments. If in the future Navigant cannot generate
sufficient cash from operations to meet its obligations, Navigant will need to
refinance, obtain additional financing or sell assets. Navigant cannot assure
its stockholders that its business will generate cash flow, or that it will be
able to obtain funding, sufficient to satisfy its debt service requirements.
Restrictions Imposed by Terms of Indebtedness
The covenants in Navigant's existing debt agreements, including the Credit
Facility and any future financing agreements may adversely affect its ability
to finance future operations or capital needs or to engage in other business
activities. These covenants limit or restrict Navigant's ability to:
. incur additional debt or prepay or modify any additional debt that may be
incurred;
. make certain acquisitions or investments;
. pay dividends and make distributions;
. repurchase its securities;
. create liens;
. transfer or sell assets;
. enter into transactions with affiliates;
. issue or sell stock of subsidiaries;
. merge or consolidate; or
. materially change the nature of its business.
24
In addition, Navigant's Credit Facility also requires it to comply with
certain financial ratios. Navigant's ability to comply with these ratios may be
affected by events beyond its control. If Navigant breaches any of these
covenants in its Credit Facility, or if Navigant is unable to comply with the
required financial ratios, it may be in default under its Credit Facility. A
significant portion of Navigant's indebtedness then may become immediately due
and payable. Navigant is not certain whether it would have, or be able to
obtain, sufficient funds to make these accelerated payments. Compliance with
the covenants is also a condition to revolver borrowings under the Credit
Facility on which Navigant relies to fund its liquidity.
Holding Company Structure
Navigant is a holding company. Navigant's subsidiaries conduct substantially
all of its consolidated operations and own substantially all of its
consolidated assets. Consequently, Navigant's cash flow and its ability to meet
its debt service obligations depends upon the cash flow of its subsidiaries,
the payment of funds by its subsidiaries to Navigant in the form of loans,
dividends or otherwise. Navigant's subsidiaries are not obligated to make funds
available to Navigant for payment on debt or otherwise. In addition, their
ability to make any payments will depend on their earnings, the terms of their
indebtedness, business and tax considerations and legal restrictions.
Risks Related to Revenue
Historically, corporate travel management companies were largely dependent
for their air travel ticketing revenues on the point of sale percentage
commissions paid by airlines for each ticket issued. Since 1995, most airlines
have substantially reduced the amount of commissions paid to travel agents for
booking domestic and international flights. The airlines have both capped the
total commissions paid per ticket and reduced the commission rates per ticket
payable to travel agents and may further reduce commissions in the future.
Further reductions in commissions may reduce Navigant's revenue. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Navigant--Introduction--Sources of Revenue" in Item 7. There can
be no assurance that the airlines will not further reduce commissions.
Navigant has responded to the reductions in the commissions paid by airlines
by entering into management contracts and service fee arrangements with many of
its corporate clients. Although the terms of its management contracts vary
depending on the type of services provided and by client, Navigant 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 Navigant. If the commissions exceed the
amounts deducted, Navigant typically pays the excess to the client. In
addition, Navigant typically charges a service fee for each ticket and other
transactions to clients who do not have a management contract with Navigant. In
the future Navigant may not be able to maintain or continue to negotiate
management contracts or continue to receive current levels of fees from those
contracts, and also may not be able to charge service fees or maintain the
level of such service fees.
Navigant also derives part of its revenues from incentive override
commissions paid by the major airlines. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Introduction--
Sources of Revenue" in Item 7. If, during any period, Navigant fails to meet
incentive levels, revenues could decrease. In addition, the airlines may reduce
or terminate incentive override commissions and Navigant may not be able to
extend its current incentive override commission arrangements or enter into new
arrangements that are as favorable as its current arrangements.
Substantial Competition and Industry Consolidation; New Methods of
Distribution
The corporate travel management industry is extremely competitive. Navigant
competes primarily with other corporate travel management companies. Some of
Navigant's competitors are larger and have greater brand-name recognition and
financial resources than Navigant. Competition within the corporate travel
25
management industry is increasing as the industry undergoes a period of
consolidation. Certain of Navigant's competitors are expanding their size and
financial resources through consolidation. Some travel management companies may
have relationships with certain travel suppliers which give them access to
favorable availability of products (including airplane seats and hotel rooms)
or more competitive pricing than that offered by Navigant. Furthermore, some
corporate travel management companies have a strong presence in particular
geographic areas which may make it difficult for Navigant to attract customers
in those areas. As a result of competitive pressures, Navigant may suffer a
loss of clients, and its revenues or margins may decline.
Navigant also competes with travel suppliers, including airlines, hotels and
rental car companies. Innovations in technology, such as the Internet and
computer on-line services, have increased the ability of travel suppliers to
distribute their travel products and services directly to consumers. Although
corporate travel management companies and travel agencies remain the primary
channel for travel distribution, businesses and consumers can now use the
Internet to access information about travel products and services and to
purchase such products and services directly from the suppliers, thereby
bypassing corporate travel management companies and travel agents. Navigant
believes that no single Internet-based service presently provides access to the
full range of information available to Navigant and its agents. An Internet-
based travel service may, however, provide such access in the future. In
addition, although Navigant believes the service, knowledge and skills of its
employees and its incorporation of new, alternative distribution channels,
position it to compete effectively in the changing industry, there can be no
assurance that Navigant will compete successfully or that the failure to
compete successfully will not have a material adverse effect on Navigant's
financial condition and results of operations.
Dependence on Travel Suppliers
Navigant is dependent upon travel suppliers for access to their products and
services (including airplane seats and hotel rooms). Certain travel suppliers
offer Navigant pricing that is preferential to published fares, enabling
Navigant to offer prices lower than would be generally available to travelers
and other corporation travel management companies or travel agents. Travel
suppliers can generally cancel or modify their agreements with Navigant upon
relatively short notice, leaving Navigant subject to the loss of contracts,
changes in its pricing agreements, commission schedules and incentive override
commission arrangements, and more restricted access to travel suppliers'
products and services, which could have a material adverse effect on Navigant's
business, financial condition and results of operations.
Dependence Upon Technology
Navigant's business is dependent upon a number of different information and
telecommunications technologies. In addition, Navigant's ability to quote air
travel ticket prices, make reservations and sell tickets is dependent upon its
contractual right to use, and the performance of, computer reservation systems
operated by SABRE, Galileo/Apollo, Worldspan and Amadeus. Navigant's business,
financial condition and results of operations may be materially adversely
affected if these technologies or systems fail, or if Navigant's access to
these systems is restricted.
Risks Associated with the Corporate Travel Management Industry; General
Economic Conditions
Navigant's operating results generally depend upon factors affecting the
corporate travel management industry. Navigant's revenues and earnings are
especially sensitive to events that affect business air travel, and the level
of car rentals and hotel reservations. A number of factors, including recession
or slower economic growth, rising travel costs, extreme weather conditions and
concerns about passenger safety, could result in a temporary or longer-term
overall decline in demand for business travel. Advances in technology and
communications, such as videoconferencing and Internet-based teleconferencing,
may also adversely impact travel patterns and travel demand. Navigant believes
that price-based competition will continue in the airline industry for the
foreseeable future. The continuation of such competition and the occurrence of
any of the events described above could have a material adverse effect on
Navigant's business, financial condition and results of operations.
26
Risks Related to Integration of Operations and Acquisitions
One of Navigant's strategies is to increase operating margins by
consolidating and integrating certain administrative functions common to all of
its subsidiaries. This integration will require substantial attention from
senior management and may require future substantial capital expenditures. The
integration process may disrupt Navigant's operations as well as those of its
subsidiaries as its management's attention is diverted from other tasks, and as
technological, practical or personnel issues arise. There can be no assurance
that the integration and consolidation will be completed, or that, if
completed, Navigant will recognize economic benefit.
Currently, Navigant and some of its subsidiaries operate on separate
computer systems and Navigant and most of its subsidiaries operate on separate
telephone systems, several of which use different technologies. Although
Navigant has made substantial progress in consolidating its back-room
accounting, several other systems have not been consolidated. Navigant expects
that it will eventually integrate these other systems, but it has not yet
established a definitive timetable for integration of all of such systems or
its definitive capital needs for the integration. The contemplated integration
of its systems may cause disruption to Navigant's business and may not result
in the intended cost efficiencies. In addition, rapid changes in technologies
may require capital expenditures to improve or upgrade client service.
Risks Related to Navigant's Acquisition Strategy
General. One of Navigant's strategies is to increase its revenues and the
markets it serves through the acquisition of additional corporate travel
companies. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Risk Factors--Risk of Rapid Growth; Limited History as a
Stand-Alone Company" in Item 7. Navigant may not be able to make acquisitions
at the pace it desires or on favorable terms, if at all. In addition, the
consolidation of the travel management industry has reduced the number of
companies available for sale, which could lead to higher prices being paid for
the acquisition of the remaining travel management companies.
The companies Navigant has acquired, or which Navigant may acquire in the
future, may not achieve sales and profitability that would justify Navigant's
investment in them. Navigant's acquisitions of companies outside the United
States may subject it to certain risks inherent in conducting business
internationally. These risks include fluctuations in currency exchange rates,
new and different legal and regulatory requirements and difficulties in
staffing and managing foreign operations.
Integration. Integration of operations of the companies Navigant acquired or
may acquire in the future may also involve a number of special risks, which may
have adverse short-term effects on Navigant's operating results. These may be
caused by:
. severance payments to employees of acquired companies;
. restructuring charges associated with the acquisitions; and
. other expenses associated with a change in control.
Integration of acquire companies may also result in:
. diversion of management's attention;
. difficulties with retention;
. the need to hire and train key employees;
. risks associated with unanticipated problems or legal liabilities; and
. amortization of acquired intangible assets, including goodwill.
Navigant conducts due diligence and generally requires representations,
warranties and indemnifications from the former owners of acquired companies.
Navigant cannot be certain, however, that such owners will
27
have accurately represented the financial and operating conditions of their
companies. If an acquired company's financial or operating results were
misrepresented, the acquisition could have a material adverse effect on
Navigant's results of operations and financial condition.
Financing. Navigant currently intends to finance its future acquisitions by
using cash, borrowed funds, shares of its Common Stock or a combination
thereof. If Navigant's Common Stock does not maintain a sufficient market
value, if its price is highly volatile, or if, for other reasons, potential
acquisition candidates are unwilling to accept Navigant's Common Stock as part
of the consideration for the sale of their businesses, Navigant may then be
required to use more of its cash resources or more borrowed funds in order to
maintain its acquisition program. Navigant's ability to use shares of its
Common Stock to make acquisitions may also be limited by Section 355(e) of the
Internal Revenue Code. That section provides that a company that distributes
shares of a subsidiary in a spin-off that is otherwise tax-free will incur U.S.
federal income tax liability if 50% or more, by vote or value, of the capital
stock of either the company making the distribution or the spin-off subsidiary
is acquired pursuant to a plan or series of related transactions that includes
the spin-off. Acquisitions made by Navigant within two years before or after
the distribution by U.S. Office Products of Navigant's Common Stock in June
1998 may be deemed part of such a plan or series of related transactions. If
Navigant is unable to use Common Stock for acquisitions and Navigant does not
have sufficient cash resources, its growth could be limited unless Navigant is
able to obtain additional capital through debt or other financing. Navigant may
not be able to obtain additional capital if and when needed on terms Navigant
deems acceptable. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Risk Factors--Restrictions Imposed by
Terms of Indebtedness" in Item 7.
Accounting. Generally accepted accounting principles require that an entity
be autonomous for a period of two years before it is eligible to complete
business combinations under the pooling-of-interests method. Navigant has been
and will be unable to satisfy this criterion for a period of two years
following the distribution of its common stock by U.S. Office Products (until
approximately June 2000). Therefore, any business combination completed by
Navigant during such period will be accounted for under the purchase method,
resulting in the recording of goodwill. The amortization of the goodwill has
and will reduce Navigant's reported net income below that which would have been
reported if it had used the pooling-of-interests method. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Risk
Factors--Material Amount of Goodwill" in Item 7. Existing stockholders may
suffer dilution if Navigant uses Navigant Common Stock as consideration for
future acquisitions. Moreover, the issuance of additional shares of Navigant
Common Stock may negatively impact earnings per share and the market price of
Navigant Common Stock.
Additionally, the Financial Accounting Standards Board is currently
considering proposed guidance that could eliminate the pooling-of-interest
method and could shorten the amortization period for goodwill from the current
maximum of 40 years to 20 years. This proposed guidance, if adopted, may
negatively impact earnings per share and the market price of Navigant Common
Stock.
Reliance on Key Personnel
Navigant's operations depend on the continued efforts of Edward S. Adams,
its Chairman and Chief Executive Officer, C. Thomas Nulty, its President and
Chief Operating Officer, Robert C. Griffith, its Chief Financial Officer and
Treasurer, its other executive officers and the senior management of its
subsidiaries. Furthermore, Navigant's operations will likely depend on the
senior management of the companies that may be acquired in the future. If any
of these people become unable to continue in his or her present role, or if
Navigant is unable to attract and retain other skilled employees, its business
could be adversely affected.
Material Amount of Goodwill
As of December 26, 1999, approximately $193.4 million, or 67.3%, of
Navigant's total assets and 154.8% of Navigant's stockholders' equity represent
intangible assets, the significant majority of which is goodwill.
28
Goodwill represents the excess of cost over the fair market value of net assets
acquired in business combinations accounted for under the purchase method.
Navigant amortizes goodwill on a straight-line method over a period of 35 years
with the amount amortized in a particular period constituting a non-cash
expense that reduces its net income. Amortization of goodwill resulting from
certain past acquisitions, and additional goodwill recorded in certain future
acquisitions may not be deductible for tax purposes. In addition, Navigant will
be required to periodically evaluate the recoverability of goodwill by
reviewing the anticipated undiscounted future cash flows from the operations of
the acquired companies and comparing such cash flows to the carrying value of
the associated goodwill. If Navigant determines that goodwill has become
impaired in later years, earnings in such years will be significantly adversely
affected.
A reduction in net income resulting from the amortization or write down of
goodwill would currently affect financial results and could have a material and
adverse impact upon the market price of Navigant Common Stock. Navigant
believes that anticipated cash flows associated with intangible assets
recognized in the 1997 Purchased Companies, the 1998 Purchased Companies and
the 1999 Purchased Companies will continue over the period during which the
associated goodwill will be amortized, and there presently is no persuasive
evidence that any material portion will dissipate during such period.
Additionally, the Financial Accounting Standards Board is currently
considering proposed guidance that could shorten the amortization period for
goodwill from the current maximum of 40 years to 20 years. This proposed
guidance, if adopted, may negatively impact earnings per share and the market
price of Navigant Common Stock.
Seasonality and Quarterly Fluctuations
The domestic and international travel service industry is extremely
seasonal. Navigant's past results have fluctuated because of seasonal
variations in the travel services industry. Navigant's net revenues and net
income are generally higher in the second and third calendar quarters and
lowest in the fourth calendar quarter. Navigant expects this seasonality to
continue in the future. Navigant's quarterly results of operations may also be
subject to fluctuations as a result of the timing and cost of acquisitions,
changes in relationships with certain travel suppliers, changes in the mix of
services offered by Navigant, the timing of the payment of incentive override
commissions by travel suppliers, extreme weather conditions or other factors
affecting travel.
Risk of Rapid Growth; Limited History as a Stand-Alone Company
Navigant was formed through the acquisition of twelve corporate travel
management companies from January 1997 through May 1998, and Navigant has made
seventeen additional acquisitions since that time. Navigant expects to continue
to grow in part through acquisitions. The rapid pace of acquisitions has, and
will continue to, put pressure on Navigant's executive management, personnel
and corporate support systems. Any inadequacy of Navigant's systems to manage
the increased size and scope of operations resulting from growth could
adversely affect Navigant's operations, business and financial results and
condition.
Navigant has been an independent company since its initial public offering
in June 1998. Navigant's future performance will depend on its ability to
function as a stand-alone entity, to finance and manage expanding operations
and to adapt its information systems to changes in its business. Furthermore,
the financial information included herein may not necessarily reflect what the
results of operations and financial condition would have been had Navigant been
a separate, stand-alone entity during the periods presented. The financial
information also may not be indicative of Navigant's future results of
operations and financial condition.
Potential Liabilities Related to Distributions
In connection with the distributions of the shares of four U.S. Office
Products' businesses (including Navigant) in June 1998, Navigant and three
other companies whose shares were distributed by U.S. Office Products entered
into a series of agreements providing the allocation of certain liabilities.
Navigant and the
29
other companies agreed in a Tax Allocation Agreement to jointly and severally
indemnify U.S. Office Products for tax losses relating to the distribution that
are attributable to acts or omissions of Navigant and the other companies. A
Tax Indemnification Agreement among Navigant and the other spun-off companies
requires each company responsible for tax losses to indemnify the other
companies for those losses and their liabilities to U.S. Office Products under
the Tax Allocation Agreement. If the tax losses are not attributable to either
U.S. Office Products or any of the other companies, each of the companies and
U.S. Office Products is liable for its pro rata portion of the losses based on
the value of each company's common stock after the distributions.
Navigant also entered into a Distribution Agreement with U.S. Office
Products under which Navigant is responsible for liabilities related to its
business; certain employee benefits liabilities; securities laws liabilities
arising from the distribution of Navigant shares, its initial public offering
and information related to its business supplied to U.S. Office Products; and
U.S. Office Products' liabilities for earn-outs from acquisitions of its
subsidiaries made prior to the distribution. Navigant and the other companies
that were spun off have also agreed to bear a pro rata portion of certain
United States securities law and general corporate liabilities of U.S. Office
Products incurred prior to the distribution (including a pro rata portion of
any liability of another spun off company to U.S. Office Products that is not
paid) up to a maximum of $1.75 million for each company.
Jonathan J. Ledecky, a previous member of Navigant's Board of Directors, and
U.S. Office Products have been named as defendants in at least 10 lawsuits
alleging that Mr. Ledecky and U.S. Office Products violated various United
States securities laws. The plaintiffs in those lawsuits generally claim that
Mr. Ledecky, on behalf of U.S. Office Products, made a series of materially
false and misleading statements in connection with the distributions of the
shares of Navigant and the other companies and the related tender offer and
restructuring. Although neither Navigant nor its executive officers have been
named as defendants in these lawsuits, Navigant could be required pursuant to
the Distribution Agreement to indemnify U.S. Office Products for a portion of
its liability in connection with these lawsuits.
Potential Volatility of Stock Price
The trading price of the Navigant Common Stock could be subject to wide
fluctuations in response to variations in Navigant's quarterly operating
results, changes in earnings estimates by analysts, conditions in Navigant's
businesses, general market or economic conditions or other factors. In
addition, in recent years the stock market has experienced extreme price and
volume fluctuations. These fluctuations have had a substantial effect on the
market prices for many companies, often unrelated to the operating performance
of the specific companies. Such market fluctuations could have a material
adverse effect on the market price of Navigant Common Stock.
Dependence on ARC Agreements
Navigant depends on the ability to sell airline tickets for a substantial
portion of its revenue. To sell airline tickets, Navigant must enter into, and
maintain, an Agent Reporting Agreement for each operating subsidiary with the
Airlines Reporting Company ("ARC"). Agent Reporting Agreements impose numerous
financial, operational, and administrative obligations on Navigant. These
agreements allow ARC to cancel an Agent Reporting Agreement for failure to meet
any of these obligations. If Navigant's Agent Reporting Agreements are
cancelled by ARC, Navigant would be unable to sell airline tickets and its
results of operations would be materially adversely affected.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Market risks related 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 included elsewhere herein. Based upon the Company's 1999
average borrowings under the Credit Facility, a 50 basis point movement in the
base rate or LIBOR rate would approximate $378,000 annual increase or decrease
in interest expense.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following financial information is included on the pages indicated:
Report of Independent Accountants...................................... 32
Consolidated Balance Sheets as of December 26, 1999 and December 27,
1998.................................................................. 33
Consolidated Statements of Income for each of the three years in the
period ended
December 26, 1999..................................................... 34
Consolidated Statement of Stockholders' Equity for each of the three
years in the period ended December 26, 1999........................... 35
Consolidated Statements of Cash Flows for each of the three years in
the period ended
December 26, 1999..................................................... 36--37
Notes to Consolidated Financial Statements............................. 38--57
31
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Navigant International, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Navigant International, Inc. and its subsidiaries (the "Company")
at December 26, 1999 and December 27, 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
26, 1999, in conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Denver, Colorado
February 28, 2000
32
NAVIGANT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
December 26, December 27,
1999 1998
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 2,003 $ 315
Restricted cash in NavigantVacations.com........... 14,965
Accounts receivable, less allowance for doubtful
accounts of $424 and $413, respectively 42,278 27,744
Prepaid expenses and other current assets.......... 3,168 2,517
Deferred income taxes.............................. 1,551 2,610
Income tax receivable.............................. 2,368
-------- --------
Total current assets.............................. 66,333 33,186
-------- --------
Property and equipment, net.......................... 22,282 21,569
Intangible assets, net............................... 193,387 150,554
Deferred income taxes................................ 1,160
Other assets......................................... 4,149 1,539
-------- --------
Total assets...................................... $287,311 $206,848
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term portion of long-term debt............... $ 11,867 $ 4,437
Short-term portion of capital lease obligations.... 800 564
Accounts payable................................... 4,880 2,875
Accrued compensation............................... 8,740 5,907
Accrued income taxes............................... 1,334
Other accrued liabilities.......................... 19,979 16,861
-------- --------
Total current liabilities......................... 46,266 31,978
-------- --------
Long-term debt....................................... 93,844 56,436
Capital lease obligations............................ 708 1,026
Deferred income taxes................................ 835
Other long-term liabilities.......................... 6,410 2,448
-------- --------
Total liabilities................................. 147,228 92,723
-------- --------
Minority interest in NavigantVacations.com........... 15,120
-------- --------
Commitments and contingencies (Notes 11 and 13)
Stockholders' equity:
Common stock; $.001 par value, 150,000,000 shares
authorized; 13,075,000 and 12,984,000 issued and
outstanding, respectively......................... 13 13
Additional paid-in capital......................... 114,044 113,251
Treasury stock; 460,000 and 55,000 shares
outstanding, respectively......................... (3,520) (312)
Retained earnings.................................. 14,304 1,268
Accumulated other comprehensive income (loss)...... 122 (95)
-------- --------
Total stockholders' equity........................ 124,963 114,125
-------- --------
Total liabilities and stockholders' equity........ $287,311 $206,848
======== ========
See accompanying notes to consolidated financial statements.
33
NAVIGANT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except per Share Amounts)
For the Year Ended
--------------------------------------
December 26, December 27, December 28,
1999 1998 1997
------------ ------------ ------------
Revenues............................... $229,161 $171,368 $90,917
Operating expenses..................... 128,971 99,734 52,517
General and administrative expenses.... 61,320 47,988 27,377
Depreciation and amortization expense.. 9,752 7,167 3,090
Non-recurring charges.................. 8,236 1,156
-------- -------- -------
Operating income....................... 29,118 8,243 6,777
Other (income) expenses:
Interest expense..................... 5,929 2,070 685
Interest income...................... (199) (227) (400)
Other, net........................... 15 (30) (29)
-------- -------- -------
Income before provision for income
taxes................................. 23,373 6,430 6,521
Provision for income taxes............. 10,217 3,987 2,975
-------- -------- -------
Income before minority interest........ 13,156 2,443 3,546
Minority interest...................... 120
-------- -------- -------
Net income............................. $ 13,036 $ 2,443 $ 3,546
======== ======== =======
Weighted average number of common
shares outstanding:
Basic................................ 12,841 13,156 10,858
Diluted.............................. 12,868 13,250 11,078
Net income per share:
Basic................................ $ 1.02 $ 0.19 $ 0.33
Diluted.............................. $ 1.01 $ 0.18 $ 0.32
See accompanying notes to consolidated financial statements.
34
NAVIGANT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands)
Accumulated
Additional Other Total
Divisional Common Paid-in Treasury Comprehensive Retained Stockholders'
Equity Shares Stock Capital Shares Stock Income (loss) Earnings Equity
---------- ------ ----- ---------- ------ ------- ------------- -------- -------------
Balance at December 29,
1996................... $ 4,093 $ 9,476 $ 13,569
Transactions of Pooled
Companies:
Issuance of Pooled
Company common stock
for cash.............. 142 142
Capital contribution... 43 43
Cash dividends......... (3,038) (3,038)
Discontinuance of
subchapter S
corporation
election.............. 4,270 (4,270)
Issuance of U.S. Office
Products common stock
for repayment of debt
...................... 1,772 1,772
Issuance of U.S. Office
Products common stock
in conjunction with
acquisitions
conjunction with
acquisitions.......... 83,780 83,780
Comprehensive income:
Net income............. 3,546 3,546
Other comprehensive
income, net of tax:
Foreign currency
translation
adjustment.......... $(170) (170)
--------
Total comprehensive
income.............. 3,376
------- ------ ---- -------- ----- ------- ----- ------- --------
Balance at December 28,
1997................... 94,100 (170) 5,714 99,644
Capital contribution by
U.S. Office Products.. 1,495 1,495
Dividend to U.S. Office
Products.............. (6,889) (6,889)
Distribution of Shares
in Strategic
Restructuring......... (95,595) 10,984 $ 11 $ 95,584
Initial public
offering, net of
costs................. 2,000 2 14,990 14,992
Compensation charge for
options tendered...... 2,677 2,677
Share repurchase
program............... (55) $ (312) (312)
Comprehensive income:
Net income............. 2,443 2,443
Other comprehensive
income, net of tax:
Foreign currency
translation
adjustment.......... 75 75
--------
Total comprehensive
income.............. 2,518
------- ------ ---- -------- ----- ------- ----- ------- --------
Balance at December 27,
1998................... 12,984 13 113,251 (55) (312) (95) 1,268 114,125
Exercise of stock
options, net of tax
benefit............... 91 793 793
Share repurchase
program............... (405) (3,208) (3,208)
Comprehensive income:
Net income............. 13,036 13,036
Other comprehensive
income, net of tax:
Foreign currency
translation
adjustment.......... 217 217
--------
Total comprehensive
income.............. 13,253
------- ------ ---- -------- ----- ------- ----- ------- --------
Balance at December 26,
1999................... $ 13,075 $ 13 $114,044 (460) $(3,520) $ 122 $14,304 $124,963
======= ====== ==== ======== ===== ======= ===== ======= ========
See accompanying notes to consolidated financial statements.
35
NAVIGANT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
For the Year Ended
--------------------------------------
December 26, December 27, December 28,
1999 1998 1997
------------ ------------ ------------
Cash flows from operating activities:
Net income............................ $ 13,036 $ 2,443 $ 3,546
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization
expense............................. 9,752 7,167 3,090
Non-recurring charges................ 4,196 1,156
Deferred tax provision (benefit)..... (936) (232) (650)
Minority interest.................... 120
Changes in current assets and
liabilities (net of assets acquired
and liabilities assumed in
combinations accounted for under
the purchase method):
Accounts receivable................ (2,231) 389 (1,460)
Prepaid expenses and other
assets............................ 19 (840) 1,193
Accounts payable................... (530) (4,744) (592)
Income taxes payable
(receivable)...................... (4,165) 1,334
Accrued liabilities and other
liabilities....................... (5,077) 365 244
-------- -------- -------
Net cash provided by operating
activities...................... 9,988 10,078 6,527
-------- -------- -------
Cash flows from investing activities:
Additions to property and equipment,
net of disposals..................... (5,234) (4,313) (1,424)
Proceeds from disposal of building.... 1,025
Cash paid in acquisitions, net of cash
received............................. (28,001) (59,505) (340)
Cash paid for earn-outs related to
prior acquisitions................... (1,563)
Payments of non-recurring acquisition
costs................................ (1,156)
Restricted cash equivalents in
NavigantVacations.com................ (14,965)
Proceeds on sale of investments, net.. 332
-------- -------- -------
Net cash used in investing
activities...................... (47,175) (65,381) (2,588)
-------- -------- -------
Cash flows from financing activities:
Proceeds from issuance of long-term
debt................................. 149
Payments of long-term debt............ (8,099) (2,457) (8,043)
Proceeds from (payments of) credit
facilities, net...................... 36,700 53,300 (4,158)
Payment of debt issue costs........... (2,225) (656)
Payments of dividends of Pooled
Companies............................ (3,038)
Proceeds from issuance of common
stock................................ 14,992 142
Proceeds from issuance of minority
interest in NavigantVacations.com.... 15,000
Proceeds from exercise of stock
options, net......................... 793
Repurchase of common stock............ (3,208) (312)
Capital contributed by stockholders of
Pooled Companies..................... 43
Payment of dividend to U.S. Office
Products............................. (6,889)
Net advances from (payments to) U.S.
Office Products Company.............. (8,786) 7,321
-------- -------- -------
Net cash provided by (used in)
financing activities............ 38,961 49,341 (7,733)
-------- -------- -------
Effect of exchange rate changes on
cash................................... (86) 229 (43)
-------- -------- -------
Net increase (decrease) in cash and cash
equivalents............................ 1,688 (5,733) (3,837)
Cash and cash equivalents at beginning
of period.............................. 315 6,048 9,885
-------- -------- -------
Cash and cash equivalents at end of
period................................. $ 2,003 $ 315 $ 6,048
======== ======== =======
Supplemental disclosures of cash flow
information:
Interest paid......................... $ 5,410 $ 1,442 $ 649
Income taxes paid..................... $ 14,382 $ 1,819 $ 470
See accompanying notes to consolidated financial statements.
36
NAVIGANT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS--(Continued)
(In Thousands)
The Company issued U.S. Office Products (see Note 1) common stock, notes
payable and cash in connection with certain business combinations accounted for
under the purchase method in the years ended December 26, 1999, December 27,
1998 and December 28, 1997. The fair values of the assets and liabilities of
the acquired companies at the dates of the acquisitions are presented as
follows:
For the Year Ended
--------------------------------------
December 26, December 27, December 28,
1999 1998 1997
------------ ------------ ------------
Accounts receivable.................... $12,303 $ 6,583 $11,324
Prepaid expenses and other current
assets................................ 523 757 1,231
Property and equipment................. 924 1,705 9,664
Intangible assets...................... 45,043 61,926 84,345
Other assets........................... 531 135 1,266
Short-term debt........................ (4,392) (850) (2,594)
Accounts payable....................... (2,568) (1,002) (3,785)
Accrued liabilities.................... (10,676) (5,012) (10,066)
Long-term debt......................... (161) (5,162)
Other long-term liabilities............ (2,087) (1,020) (2,103)
------- ------- -------
Net assets acquired.................. $39,601 $63,061 $84,120
======= ======= =======
The acquisitions were funded as
follows:
U.S. Office Products common stock.... $83,780
Notes payable due to former owners... $11,600 $ 3,556
Cash paid, net of cash received...... 28,001 59,505 340
------- ------- -------
Total.............................. $39,601 $63,061 $84,120
======= ======= =======
Noncash transactions:
- --------
. During the year ended December 28, 1997, the Company used U.S. Office
Products common stock to repay $1,772 of indebtedness.
. During the year ended December 27, 1998, U.S. Office Products contributed
$1,495 of capital to the Company.
. During the year ended December 27, 1998, the Company acquired $1,590 in fixed
assets by capital lease transactions.
See accompanying notes to consolidated financial statement
37
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 one
of the five largest corporate travel management companies in the United States.
The Company manages all aspects of its client's travel processes, focusing on
reducing their travel expenses.
Prior to June 9, 1998, the Company was a wholly-owned subsidiary of U.S.
Office Products Company ("U.S. Office Products"). On June 9, 1998, as part of
its comprehensive restructuring plan, U.S. Office Products spun off its
Corporate Travel Services division as an independent publicly owned company.
This transaction was effected through the distribution of shares of the Company
to U.S. Office Products shareholders (the "Travel Distribution"). U.S. Office
Products and the Company also entered into a number of agreements to facilitate
the Travel Distribution and the transition of the Company to an independent
business enterprise. At the date of the Travel Distribution, U.S. Office
Products allocated to the Company $15,000 in debt plus an additional $1,400 in
debt incurred by U.S. Office Products for a business travel acquisition prior
to the Travel Distribution to the Company. The Company was allocated $1,000 in
strategic restructuring costs which represents the Company's portion of the
costs incurred by U.S. Office Products as a result of the Travel Distribution.
These costs were paid upon the completion of the Travel Distribution.
Additionally, in connection with the Travel Distribution, the Company sold 2.0
million shares of the Company's common stock in an initial public offering (the
"Stock Offering"). The gross proceeds to the Company in the Stock Offering were
$18,000 and the expenses incurred were as follows: (i) $1,260 for the
underwriters discount and non-accountable expense allowance; and (ii)
approximately $1,748 for other expenses, including legal, accounting and
printing fees. The Company used the net proceeds in the Stock Offering of
$14,992 to repay a portion of the outstanding indebtedness the Company borrowed
under its line of credit facility (See Note 9) to repay the indebtedness
allocated to it in the Travel Distribution.
The Corporate Travel Services division was created by U.S. Office Products
in January 1997 and completed four business combinations accounted for under
the pooling-of-interests method during the period from January 1997 to April
1997 (the "Pooled Companies"). As a result, the operations of the Company prior
to the completion of such business combinations represent the combined results
of the Pooled Companies operating as separate autonomous entities.
The Company's operations are primarily concentrated in one market segment -
airline travel- and the customers are geographically diverse with no single
customer base concentrated in a single industry. Management considers a
downturn in this market segment to be unlikely. The Company's operations are
seasonal, with the November and December periods having the lowest airline
bookings. 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
Subsequent to the Travel Distribution, the consolidated financial statements
of the Company include the accounts of Navigant International, Inc. and its
subsidiaries after elimination of intercompany accounts and transactions.
Prior to the Travel Distribution, the consolidated financial statements
reflect the assets, liabilities, divisional equity, revenues and expenses that
were directly related to the Company as it was operated within U.S. Office
Products. In cases involving assets and liabilities not specifically
identifiable to any particular business of U.S. Office Products, only those
assets and liabilities expected to be transferred to the Company
38
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Thousands, Unless Otherwise Noted)
prior to the Travel Distribution were included in the Company's separate
consolidated balance sheet. The Company's statement of income includes all of
the related costs of doing business including an allocation of certain general
corporate expenses of U.S. Office Products which were not directly related to
these businesses including certain corporate executives' salaries, accounting
and legal fees, departmental costs for accounting, finance, legal, purchasing,
marketing and human resources as well as other general overhead costs. These
allocations were based on a variety of factors, dependent upon the nature of
the costs being allocated, including revenues, number and size of acquisitions
and number of employees. Management believes these allocations were made on a
reasonable basis.
U.S. Office Products used a centralized approach to cash management and the
financing of its operations. As a result, minimal amounts of cash and cash
equivalents were allocated to the Company at the time of the Travel
Distribution. The consolidated statement of income includes an allocation of
interest expense on all debt allocated to the Company. See Note 9 for further
discussion of interest expense.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
footnotes thereto. Actual results could differ from those estimates.
Fiscal Year
The Company reports its financial results on a 52- or 53-week fiscal year
ending on the Sunday closest to December 31. Each fiscal quarter consists of a
13-week period with one 14-week period in a 53-week year. All fiscal years
presented were 52-week periods.
Reclassifications
Certain reclassifications have been made in the 1998 and 1997 financial
statements to conform to the 1999 presentation.
Cash and Cash Equivalents
The Company considers temporary cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
Restricted Cash in NavigantVacations.com
The Company's received a $15 million investment from an unrelated venture
capital fund for an ownership interest in NavigantVacations.com LLC which was
previously wholly owned (see additional discussion in Note 12). The proceeds of
this investment are restricted and can only be used to fund the operations of
NavigantVacations.com LLC.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
Receivables arising from sales to customers are not collateralized and, as a
result, management continually monitors the financial condition of its
customers to reduce the risk of loss.
39
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Thousands, Unless Otherwise Noted)
Property and Equipment
Property and equipment are stated at cost. Additions and improvements are
capitalized. Maintenance and repairs are expensed as incurred. Depreciation of
property and equipment is calculated using the straight-line method over the
estimated useful lives of the respective assets. The estimated useful lives
range from 25 to 40 years for buildings and their components and 3 to 10 years
for furniture, fixtures and equipment. Property and equipment leased under
capital leases is being amortized over the lesser of its useful life or its
lease terms.
Intangible Assets
Intangible assets consist of goodwill, which represents the excess of cost
over the fair value of assets acquired in business combinations accounted for
under the purchase method. Substantially all goodwill is amortized on a
straight line basis over an estimated useful life of 35 years. Management
periodically evaluates the recoverability of the carrying value of goodwill
using a methodology prescribed in Statement of Financial Accounting Standards
("SFAS") No. 121. The Company also reviews long-lived assets and the related
intangible assets for impairment whenever events or changes in circumstances
indicate the carrying amounts of such assets may not be recoverable.
Recoverability of these assets is evaluated by comparing the forecasted
undiscounted future cash flows of the operation to which the assets relate to
their net book value, including associated intangible assets, of such
operation. If the operation is determined to be unable to recover the carrying
amount of its assets, then intangible assets are written down first, followed
by the other long-lived assets of the operation, to fair value. Fair value is
determined based on discounted cash flows or appraised values, depending upon
the nature of the assets.
Translation of Foreign Currencies
Balance sheet accounts of foreign subsidiaries are translated using the
year-end exchange rate, and statement of income accounts are translated using
the average exchange rate for the year. Translation adjustments are recorded in
stockholders' equity as a component of comprehensive income.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments including cash
and cash equivalents, accounts receivable, accounts payable, accrued
liabilities and indebtedness approximate fair value.
Income Taxes
Subsequent to the Travel Distribution, the Company began recognizing and
paying taxes as a separate legal entity. The provision for income taxes is
based on income before taxes as reported in the accompanying consolidated
statements of income. Deferred tax assets and liabilities are determined based
on the differences between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Prior to the Travel Distribution and as a
division of U.S. Office Products, the Company did not file separate federal
income tax returns but rather was included in the federal income tax returns
filed by U.S. Office Products and its subsidiaries from the respective dates
that the entities within the Company were acquired by U.S. Office Products and
through the date of the Travel Distribution. Prior to the Travel Distribution,
for purposes of the consolidated financial statements, the Company's allocated
share of U.S. Office Products' income tax provision was based on the "separate
return" method. Certain companies acquired in pooling-of-interests transactions
elected to be taxed as Subchapter S corporations, and accordingly, no federal
income taxes were recorded by those companies for periods prior to their
acquisition by U.S. Office Products.
40
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Thousands, Unless Otherwise Noted)
Revenue Recognition
Revenues consist of commissions on travel services and year-end volume
bonuses from travel service providers. The Company records revenues from air
reservations, hotel and car reservations and management and service fee
arrangements when earned, which is at the time a reservation is booked and
ticketed. The Company provides a reserve for cancellations and reservation
changes, and provisions for such amounts are reflected in net revenues. The
reserves that have been netted against net revenues are not material in the
periods reflected. The Company's estimate for cancellations and reservation
changes could vary significantly from actual results based upon changes in
economic and political conditions that impact corporate travel patterns. Cruise
revenues are recorded when the customer is no longer entitled to a full refund
of the cost of the cruise. The Company records incentive override commissions
on an accrual basis in the month they are earned based upon the Company's
estimated ticket sales in excess of required thresholds. Incentive payments
from vendors for signing extended contracts are deferred and recognized as
income over the life of the contract.
Operating Expenses
Operating expenses include travel agent salaries, communications, revenue
sharing expense and other costs associated with the selling and processing of
travel reservations.
Advertising Costs
The Company expenses advertising costs when the advertisement occurs.
Advertising costs are included in the consolidated statement of income as a
component of general and administrative expenses.
Net Income Per Share
Net income per share is calculated in accordance with SFAS No. 128,
"Earnings Per Share." Basic earnings per share amounts are based upon the
weighted average number of common shares outstanding during the year. Diluted
earnings per share amounts are based upon the weighted average number of common
and common equivalent shares outstanding during the year. The difference
between basic and diluted earnings per share, for the Company, is solely
attributable to stock options. Common equivalent shares are excluded from the
computation in periods in which they have an anti-dilutive effect. For the
years ended December 26, 1999, December 27, 1998 and December 28, 1997, options
for 3.4 million; 3.1 million; and 340,000 shares, respectively, were excluded
from diluted earnings per share.
Distribution Ratio
On May 14, 1998, the U.S. Office Products Board of Directors approved the
distribution ratio for the Company in connection with the Travel Distribution.
At the date of the Travel Distribution, the Company issued to U.S. Office
Products shareholders one share of its common stock for every ten shares of
U.S. Office Products common stock held by each respective shareholder. The
share data reflected in the accompanying financial statements represents the
historical share data for U.S. Office Products for the period, or as of the
date indicated, and retroactively adjusted to give effect to the one for ten
distribution ratio.
New Accounting Pronouncements
On June 15, 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("FAS 133").
41
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Thousands, Unless Otherwise Noted)
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
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. Management of the Company
anticipates 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.
NOTE 4--BUSINESS COMBINATIONS
Pooling-of-Interests Method
In 1997, the Company issued 3,731,152 shares of U.S. Office Products common
stock to acquire the Pooled Companies. The Pooled Companies and the number of
shares issued in each business combination are as follows:
Number of
Company Name Shares Issued
------------ -------------
Professional Travel Corporation............................ 794,078
Travel Arrangements, Inc. and St. Pierre Enterprises
(Supertravel)............................................. 1,293,713
Simmons Associates, Inc.................................... 611,607
MTA, Inc................................................... 1,031,754
---------
Total shares issued...................................... 3,731,152
=========
The Company's consolidated financial statements give retroactive effect to
the acquisitions of the Pooled Companies for all periods presented.
The following presents the separate results, in each of the periods
presented, of the Company (excluding the results of the Pooled Companies prior
to the dates on which they were acquired), and the Pooled Companies up to the
dates on which they were acquired:
Navigant
International, Pooled Combined
Inc. Companies Companies
-------------- --------- ---------
For the year ended December 28, 1997
Revenue............................. $76,115 $14,802 $90,917
Net income.......................... 2,782 764 3,546
Purchase Method
In 1999, the Company made ten acquisitions accounted for under the purchase
method. The aggregate purchase price for these acquisitions was $39,601
consisting of cash, net of cash acquired, of $28,001 and notes payable of
$11,600. None of these acquisitions was significant on an individual basis. The
total assets acquired in these ten acquisitions were $59,324, including
intangible assets of $45,043. The results of these acquisitions have been
included in the Company's results from their respective dates of acquisition.
Some of these acquisitions have earn-out provisions that could result in
additional purchase consideration payable in 2000 depending upon the earnings
of these acquisitions. No accrual has been recorded on the balance sheet for
these potential payments.
42
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Thousands, Unless Otherwise Noted)
In 1998, the Company made eight acquisitions accounted for under the
purchase method for an aggregate purchase price of $63,061 consisting of cash,
net of cash acquired, of $59,505 and notes payable of $3,556. The total assets
acquired in these eight acquisitions were $71,106, including intangible assets
of $61,926. Included in this aggregate purchase price is the acquisition of
Arrington Travel Center, Inc. for $17.1 million, Atlas Travel Services Ltd.
(Houston) for $17.6 million, and World Express Travel, Inc. for $8.2 million.
The other six acquisition were not significant on an individual basis. The
results of these acquisitions have been included in the Company's results from
their respective dates of acquisition. Several of these acquisitions have earn-
out provisions that could result in additional purchase consideration payable
in 1999 and 2000 dependent upon the earnings of these acquisitions. During
1999, there were no additional payments related to these earn-out provisions.
No accrual has been recorded on the balance sheet for any additional potential
payments.
In 1997, the Company made seven acquisitions accounted for under the
purchase method for an aggregate purchase price of $84,120, consisting of
3,802,367 shares of U.S. Office Products' common stock with a market value of
$83,780 and cash, net of cash acquired, of $340. Included in this aggregate
purchase price is the acquisition of Associated Travel Services, LLC for $19.6
million, McGregor Travel Management, Inc. for $31.3 million. Travel
Consultants, Inc. for $11.7 million, and Omni Travel Service, Inc. for $10.9
million. The other three acquisitions were not significant on an individual
basis. The total assets related to these seven acquisitions were $107,830,
including intangible assets of $84,345. The results of these acquisitions have
been included in the Company's results from their respective dates of
acquisition. One of these acquisitions had an earn-out provision that resulted
in additional purchase consideration payable in 1998 which was dependent upon
earnings of this acquisition. In 1998, $1,563 was paid related to this earn-
out.
The following presents the unaudited pro forma results of operations of the
Company for the years ended December 26, 1999 and December 27, 1998 and
includes the Company's consolidated financial statements, which give
retroactive effect to the results of the companies acquired in purchase
acquisitions as if all such purchase acquisitions had been made at the
beginning of each period presented. The results presented below include certain
pro forma adjustments of $(850) and $(91) for the years ended December 26, 1999
and December 27, 1998, respectively, to reflect the amortization of intangible
assets, adjustments in executive compensation, the interest expense associated
with the debt incurred to finance the 1999 and 1998 acquisitions, and the
inclusion of a federal income tax provision on all earnings:
For the Year Ended
-----------------------------
December 26, December 27,
1999 1998
------------ ------------
(unaudited)
Revenues.................................... $263,051 $255,670
Net income.................................. $ 14,859 $ 11,901
Net income per share--basic................. $ 1.16 $ 0.92
Net income per share--diluted............... $ 1.15 $ 0.92
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions occurred at the beginning of each period or the
results which may occur in the future.
43
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Thousands, Unless Otherwise Noted)
Acquisitions for 1999, 1998 and 1997 accounted for under the purchase method
and their related date of acquisition are as follows:
Name of Acquisition Date of Acquisition
------------------- -------------------
1999 Acquisitions
Cornerstone Enterprises, Inc. September 1999
Couch/Mollica Travel, Inc. July 1999
Dollinger Travel, Inc. November 1999
First Travelcorp, Inc. September 1999
Forbes Travel Service, Inc. June 1999
Lovejoy-Tiffany and Associates, Inc. October 1999
M.D. Travel Management Limited December 1999
Moran Travel Bureau, Inc. May 1999
Oaks Travel Corp. November 1999
Travel Resources Inc. October 1999
1998 Acquisitions
Akra Travel, Inc. December 1998
Arrington Travel Center, Inc. July 1998
Atlas Travel Services Ltd. (Houston) July 1998
Bowers Worldwide Travel Management, Inc. November 1998
Chartrek International, Inc. November 1998
Jarvis Travel, Ltd. October 1998
TravelCorp, Inc. May 1998
World Express Travel, Inc. September 1998
1997 Acquisitions
Associated Travel Services, LLC June 1997
Atlas Travel Services, Ltd. (Vancouver) September 1997
Evans Travel Group, Inc. July 1997
McGregor Travel Management, Inc. October 1997
Omni Travel Service, Inc. September 1997
Travel Consultants, Inc. October 1997
Wareheim Travel Services, Inc. December 1997
44
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Thousands, Unless Otherwise Noted)
NOTE 5--NON-RECURRING CHARGES
During 1998, the Company incurred the following non-recurring charges:
Cash Non-cash Total
------ -------- ------
Prior to or in conjunction with the Distribution:
Impaired goodwill--March 1998..................... $ 613 $ 613
Operation consolidation........................... $ 365 333 698
Allocated charges associated with the
Distribution..................................... 1,073 2,677 3,750
Subsequent to the Distribution:
Operational consolidation and elimination of
redundant facilities............................. 2,602 573 3,175
------ ------ ------
Total non-recurring charges..................... $4,040 $4,196 $8,236
====== ====== ======
On March 13, 1998, the Company received 90 days' notice of termination of a
business relationship that contributed approximately $600 to net operating
income during 1997. The Company had provided travel administration services to
this client under a five-year agreement based on a fee per transaction basis,
with all commissions being remitted back to this client. During March 1998, the
Company wrote off $613 in intangible assets relating to the original
acquisition of this contract. In addition to this charge, the Company took a
charge in April 1998 of approximately $698 in connection with the disposition
of certain equipment, severance charges and other costs associated with a
change in operational strategy to a centralized management structure at one of
its locations. This switch to a centralized management structure from a
regional structure at this location is consistent with the existing structure
at the other regional travel management companies acquired.
The Company incurred a strategic restructuring costs of $3,750 in connection
with the Travel Distribution as an allocation from U.S. Office Products. Of
this amount, $1,000 was an allocation to the Company for a portion of the
strategic restructuring charge incurred by U.S. Office Products and the
remaining $2,750 was as a result of U.S. Office Products Company's purchase of
a pro rata portion of the Company's stock options pursuant to a tender offer
made in connection with the Travel Distribution. Of the $2,750, $2,677 was
recorded as a non-cash compensation charge while the $73 relates to the
Company's portion of payroll taxes on the compensation.
45
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Thousands, Unless Otherwise Noted)
As part of the Company's increased focus on operational matters subsequent
to the Travel Distribution, it undertook a formal plan approved by its Board of
Directors for cost reduction measures including the elimination of duplicative
facilities, the consolidation of certain operating functions and the deployment
of common information systems. The implementation of the cost reduction
measures commenced in November 1998 and resulted in the Company recording a
restructuring charge of $3,175 in November and December 1998. The 1998 charge
included the closure of 20 facilities, the sale of one building and the
severance associated with the termination of 127 employees. Through December
1999, 18 facilities have been closed or consolidated and 142 employees have
been terminated. The following table summarizes non-recurring charges
associated with the 1998 cost reduction plan and sets forth their usage for the
periods indicated
Employee
Severance nd Facility Closures
Termination and
Costs Consolidations Total
------------ ----------------- ------
1998 Charge............................ $1,172 $2,003 $3,175
Payments............................... (513) (472) (985)
Non-cash usage......................... (573) (573)
------ ------ ------
Balance at December 27, 1998........... 659 958 1,617
Payments............................... (905) (1,004) (1,909)
Non-cash usage.........................
Additional expense recorded during
1999.................................. 246 46 292
------ ------ ------
Balance at December 26, 1999........... $ 0 $ 0 $ 0
====== ====== ======
During 1997, the Company incurred non-recurring acquisition costs of $1,156,
in connection with the acqusition of the Pooled Companies. Non-recurring
acquisition costs represent costs incurred by the Company in business
combinations accounted for under the pooling-of-interests method. These costs
include accounting, legal, and investment banking fees, real estate and
environmental assessments and appraisals, various regulatory fees and
recognition of transaction related obligations. Generally accepted accounting
principles require the Company to expense all acquisition costs (both those
paid by the Company and those paid by the sellers of the acquired companies)
related to business combinations accounted for under the pooling-of-interests
method. These costs were recorded and paid in 1997.
NOTE 6--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 26, December 27,
1999 1998
------------ ------------
Land............................................. $ 325 $ 325
Buildings........................................ 6,305 7,998
Furniture and fixtures........................... 23,037 18,257
Leasehold improvements........................... 4,332 2,878
Assets under capital leases...................... 1,590 1,590
------- -------
35,589 31,048
Less: Accumulated depreciation................... (13,307) (9,479)
------- -------
Net property and equipment....................... $22,282 $21,569
======= =======
46
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Thousands, Unless Otherwise Noted)
Depreciation expense for the years ended December 26, 1999, December 27,
1998 and December 28, 1997 was $4,592, $3,467 and $1,722, respectively.
Amortization expense for assets under capital leases for the years ended
December 26, 1999 and December 27, 1998 was $95 and $124, respectively.
NOTE 7--INTANGIBLE ASSETS
Intangible assets consist of the following:
December 26, December 27,
1999 1998
------------ ------------
Goodwill......................................... $204,150 $156,252
Less: Accumulated amortization................... (10,763) (5,698)
-------- --------
Net intangible assets............................ $193,387 $150,554
======== ========
Amortization expense for the years ended December 26, 1999, December 27,
1998 and December 28, 1997 was $5,065, $3,576 and $1,368, respectively.
NOTE 8--OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
December 26, December 27,
1999 1998
------------ ------------
Customer deposits................................ $ 9,381 $ 6,378
Customer revenue share........................... 3,357 4,682
Accrued restructuring costs...................... 1,617
Accrued interest payable......................... 844 625
Allowance for refunds and exchanges.............. 471 417
Other............................................ 5,926 3,142
------- -------
Total other accrued liabilities................ $19,979 $16,861
======= =======
47
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Thousands, Unless Otherwise Noted)
NOTE 9--CREDIT FACILITIES
Long-Term Debt
Long-term debt consists of:
December 26, December 27,
1999 1998
------------ ------------
Line of credit facility, weighted average
interest rate of 8.37% and 6.46% at December 26,
1999 and December 27, 1998...................... $ 90,000 $ 53,300
Mortgage payable, collateralized by certain
assets of the Company, 8.75% interest rate, due
February 1, 2007, monthly payments of $7, repaid
in full in 1999................................. 515
Mortgage payable, collateralized by certain
assets of the Company, 9.08% to 9.4% interest
rates, due 2015 , monthly payments of $19....... 1,716 1,839
Notes payable due to former owners, unsecured,
interest rates ranging from 5.5% to 9.0%,
maturities through 2001......................... 13,995 5,219
-------- --------
105,711 60,873
Less: Current maturities of long-term debt...... 11,867 4,437
-------- --------
Total long-term debt.......................... $ 93,844 $ 56,436
======== ========
On the date of the Travel Distribution, the Company executed a credit
agreement with NationsBank, N.A., as administrative agent. Effective August 6,
1999, this credit agreement was expanded to $125 million and the new facility
matures on August 2004. The facility is secured by substantially all of the
Company's assets and the credit is subject to terms and conditions typical of
facilities of such size, including certain financial covenants. At December 26,
1999, the Company was in compliance with these debt covenants. Interest rate
options available to the Company vary depending upon the satisfaction of
certain specified financial ratios.
The Company withholds between 20% and 30% of the purchase price for
acquisitions and executes an unsecured note payable with the former owners with
an interest rate ranging from 5.5% to 6.5%. Maturities are typically one to two
years and are subject to the acquired company meeting certain revenue
thresholds for the period immediately following the acquisition. Additionally,
repayment of the note payable is subject satisfaction of certain
representations and warranties.
Maturities of Long-Term Debt
Maturities of long-term debt are as follows:
2000................................ $ 11,867
2001................................ 2,184
2002................................ 107
2003................................ 65
2004................................ 90,072
Thereafter.......................... 1,416
--------
Total maturities of long-term
debt............................. $105,711
========
48
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Thousands, Unless Otherwise Noted)
Payable to U.S. Office Products
The short-term payable to U.S. Office Products was incurred by the Company
primarily as a result of U.S. Office Products repaying short-term debt
outstanding at the businesses acquired by U.S. Office Products at or soon after
their respective dates of acquisition and through the centralized cash
management system, which involves daily advances or sweeps of cash to keep the
cash balance at or near zero on a daily basis. U.S. Office Products has charged
the Company interest on the short-term payable at U.S. Office Products'
weighted average interest rate during the applicable periods.
The average outstanding long-term payable to U.S. Office Products during the
years ended December 27, 1998 and December 28, 1997 was $4,709 and $5,440,
respectively. Interest has been allocated to the Company based upon the
Company's average outstanding payable balance with U.S. Office Products at U.S.
Office Products' weighted average interest rate during such period.
The Company's financial statements include allocations of interest expense
from U.S. Office Products totaling $376 and $352 during the years ended
December 27, 1998 and December 28, 1997, respectively.
In conjunction with the Travel Distribution, U.S. Office Products allocated
a specified amount of debt outstanding under its credit facilities to the
Company and required the Company, on or prior to the Travel Distribution, to
obtain a credit facility, to borrow funds under such facility and to use the
proceeds of such borrowings to pay off the U.S. Office Products debt so
allocated plus any additional debt incurred by U.S. Office Products after
January 12, 1998 (the date of the approval by the board of directors of U.S.
Office Products to spin-off the Company) in connection with the acquisition of
an entity that has become or will become a subsidiary of the Company. As part
of the Travel Distribution, $15,000 of U.S. Office Products' debt was allocated
to the Company, and since January 12, 1998, U.S. Office Products incurred an
additional $1,400 of debt in connection with such an acquisition. The Company
borrowed $16,400 under its credit facility with NationsBank, N.A. on the date
of Travel Distribution to pay off the debt of U.S. Office Products.
NOTE 10--INCOME TAXES
Income before income taxes consist of the following:
For the Year Ended
--------------------------------------
December 26, December 27, December 28,
1999 1998 1997
------------ ------------ ------------
Domestic.......................... $22,217 $5,916 $6,422
Foreign subsidiaries.............. 1,156 514 99
------- ------ ------
$23,373 $6,430 $6,521
======= ====== ======
49
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Thousands, Unless Otherwise Noted)
The provision for income taxes consists of:
For the Year Ended
--------------------------------------
December 26, December 27, December 28,
1999 1998 1997
------------ ------------ ------------
Income taxes currently payable:
Federal.......................... $ 9,046 $ 3,331 $ 3,021
Foreign.......................... 494 281 52
State............................ 1,613 607 552
------- ------- -------
11,153 4,219 3,625
Deferred income tax benefit
Federal.......................... $ (795) $ (197) $ (552)
State............................ (141) (35) (98)
------- ------- -------
(936) (232) (650)
------- ------- -------
Total provision for income taxes... $10,217 $ 3,987 $ 2,975
======= ======= =======
Deferred taxes are comprised of the following:
December 26, December 27,
1999 1998
------------ ------------
Deferred tax assets:
Allowance for doubtful accounts................ $ 156 $ 169
Accrued restructuring charge................... 686
Accrued salary and vacation.................... 1,220 1,042
Property and equipment......................... 121
Other accrued liabilities...................... 2,588 713
------- ------
Total deferred tax assets.................... $ 4,085 $2,610
======= ======
Deferred tax liabilities:
Property and equipment......................... $ $ (417)
Intangible assets.............................. (1,374) (135)
Other.......................................... (283)
------- ------
Total deferred tax liabilities............... $(1,374) $ (835)
======= ======
Net deferred tax asset........................... $ 2,711 $1,775
======= ======
50
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Thousands, Unless Otherwise Noted)
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
For the Year Ended
--------------------------------------
December 26, December 27, December 28,
1999 1998 1997
------------ ------------ ------------
U.S. federal statutory rate....... 35.0% 35.0% 35.0%
State income taxes, net of federal
income tax benefit............... 3.8 5.7 4.3
Subchapter S corporation income
not subject to corporate level
taxation......................... (7.4)
Nondeductible goodwill............ 4.1 13.4 4.3
Nondeductible non-recurring
charges.......................... 5.4 4.7
Other............................. 0.8 2.5 4.7
---- ---- ----
Effective income tax rate......... 43.7% 62.0% 45.6%
==== ==== ====
Certain Pooled Companies were organized as Subchapter S corporations prior
to the closing of their acquisitions by the Company and, as a result, the
federal tax on their income was the responsibility of their individual
stockholders. Accordingly, the specific Pooled Companies provided no federal
income tax expense prior to their acquisitions.
Taxes are not provided on undistributed earnings of non-U.S. subsidiaries
because such earnings are either permanently reinvested or do not exceed
available foreign tax credits.
NOTE 11--LEASE COMMITMENTS
The Company leases various types of office facilities, equipment and
furniture and fixtures under noncancelable lease agreements, which expire at
various dates. Future minimum lease payments under noncancelable capital and
operating leases are as follows:
Capital Operating
Leases Leases
------- ---------
2000.................................................. $ 862 $ 9,040
2001.................................................. 634 7,523
2002.................................................. 70 4,527
2003.................................................. 2,880
2004.................................................. 1,559
Thereafter............................................ 2,326
------ -------
Total minimum lease payments...................... 1,566 $27,855
=======
Less: Amounts representing interest................... (58)
------
Present value of net minimum lease payments Including
current portion of $800.............................. $1,508
======
Rent expense for all operating leases for the years ended December 26, 1999,
December 27, 1998 and December 28, 1997 was $6,936, $5,632, and $3,583,
respectively.
NOTE 12--MINORITY INTEREST IN NAVIGANTVACATIONS.COM LLC
On October 13, 1999, the Company sold a minority interest in its
NavigantVacations.com LLC subsidiary to third party venture capital firms for
$15 million. This minority interest can ultimately be converted to an
approximately 22.5% stake in the subsidiary. Of the $15 million investment,
$2.5 million was for 125,000
51
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Thousands, Unless Otherwise Noted)
common units and the remaining $12.5 million was for 12,500 convertible
preferred units with a 6% guaranteed dividend rate. Repayment of the $12.5
million is redeemable by NavigantVacations.com upon certain conditions
including: if an initial public offering of the subsidiary does not occur
within two years, if the Company defaults under its Credit Facility, or if the
Company undergoes a change of control as defined in the Credit Facility. Should
the subsidiary not redeem the units, the holders of the preferred units have
the right to have the Company redeem them. The Preferred Stock is convertible
into common units at a ratio of ten to one, plus an additional amount equal to
the accrued but unpaid dividends any time prior to an initial public offering
or if NavigantVacations.com is sold. Additionally, NavigantVacations.com issued
a warrant to these third party venture capital firms for an additional 50,000
common units, at an exercise price of $60 that is exercisable anytime through
October 13, 2009.
NOTE 13--COMMITMENTS AND CONTINGENCIES
Litigation
The Company and its subsidiaries are involved in various legal actions in
the ordinary course of their business. The Company believes that none of these
actions will have a material adverse effect on its business, financial
condition and results of operations.
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 and certain former and present executive officers of U.S.
Office Products 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 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 December 26, 1999, the
approximate book value of these two subsidiaries was $12.6 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 the Company), U.S.
Office Products, and, in some cases, Sands Brothers & Co. Ltd. as defendants.
The Company 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
52
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Thousands, Unless Otherwise Noted)
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 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. If the cases are not settled by mediation, the
cases will be reopened with the court.
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.
Post Employment Benefits
The Company has entered into employment agreements with several employees
that would result in payments to these employees upon a change of control or
certain other events. No amounts have been accrued at December 26, 1999 and
December 27, 1998 related to these agreements, as no change of control has
occurred.
53
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Thousands, Unless Otherwise Noted)
Travel Distribution
At the date of the Travel Distribution, the Company, U.S. Office Products
and the other Spin-Off Companies entered into the Distribution Agreement, the
Tax Allocation Agreement and the Employee Benefits Agreement, and the Spin-Off
Companies entered into the Tax Indemnification Agreement and may enter into
other agreements, including agreements related to referral of customers to one
another. These agreements provided, among other things, for U.S. Office
Products and the Company to indemnify each other from tax and other liabilities
relating to their respective businesses prior to and following the Travel
Distribution. Certain of the obligations of the Company and the other Spin-Off
Companies to indemnify U.S. Office Products are joint and several. Therefore,
if one of the other Spin-Off Companies fails to indemnify U.S. Office Products
when such a loss occurs, the Company may be required to reimburse U.S. Office
Products for all or a portion of the losses that otherwise would have been
allocated to other Spin-Off Companies. In addition, the agreements allocate
liabilities, including general corporate and securities liabilities of U.S.
Office Products not specifically related to the business travel agency
business, between U.S. Office Products and each Spin-Off Company.
NOTE 14--EMPLOYEE BENEFIT PLANS
Effective September 1, 1996, the Company implemented the U.S. Office
Products 401(k) Retirement Plan which allows employee contributions in
accordance with Section 401(k) of the Internal Revenue Code. Subsequent to the
Travel Distribution, the assets of the Company's employees were rolled over
into a separate 401(k) Retirement Plan (the "401(k) Plan") implemented by the
Company. The Company matches a portion of employee contributions and all full-
time employees are eligible to participate in the 401(k) Plan after six months
of service.
Certain subsidiaries of the Company have, or had prior to implementation of
the 401(k) Plan, qualified defined contribution benefit plans, which allow for
voluntary pre-tax contributions by the employees. Within one year following
their acquisition by the Company, the assets of these plans are rolled into the
Company's 401(k) Plan.
For the years ended December 26, 1999, December 27, 1998 and December 28,
1997, the Company incurred expenses totaling $736, $678 and $277, respectively,
related to this plan.
NOTE 15--STOCKHOLDERS' EQUITY
Capital Contribution by U.S. Office Products
During the year ended December 27, 1998, U.S. Office Products contributed
$1,495 of capital to the Company. The contribution reflects the forgiveness of
inter-company debt by U.S. Office Products, as it was agreed that the Company
would be allocated only $15,000 of debt plus the amount of any additional debt
incurred after January 12, 1998 in connection with the acquisition of entities
that will become subsidiaries of the Company.
Employee Stock Plans
Prior to the Travel Distribution, certain employees of the Company
participated in the U.S. Office Products 1994 Long-Term Incentive Plan ("the
USOP Plan") covering employees of U.S. Office Products. In June 1998, the
Company adopted the 1998 Stock Incentive Plan (the "Plan"), which allows the
Company to issue options under the plan up to 30% of the outstanding common
stock. All employees of the Company and its subsidiaries, as well as non-
employee directors of the Company, are eligible for awards under the Plan
54
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Thousands, Unless Otherwise Noted)
. Incentive stock options and non-qualified stock options granted to employees
are generally exercisable beginning one year from the date of grant in
cumulative yearly amounts of 25% of the shares under option and generally
expire ten years from the date of grant. Generally, options are issued at
exercise prices equal to the market price at the date of grant. At December 26,
1999, the Company had 622,032 shares available for future option grants.
The Company replaced the options to purchase shares of common stock of U.S.
Office Products held by employees with options to purchase shares of common
stock of the Company. In order to keep the optionholders in the same economic
position immediately before and after the Travel Distribution, the number of
U.S. Office Products' options held by Company employees was multiplied by 1.556
and the exercise price of those options was divided by 1.556 for purposes of
the replacement options. All option data reflected below has been retroactively
restated to reflect the effects of the Travel Distribution.
The Company accounts for options issued in accordance with APB Opinion No.
25. Accordingly, because the exercise prices of the options have equaled the
market price on the date of grant, no compensation expense has been recognized
for the options granted. Had compensation cost for the Company's stock options
been recognized based upon the fair value of the stock options on the grant
date under the methodology prescribed by SFAS No. 123, "Accounting for Stock-
Based Compensation," the Company's net income and net income per share would
have been impacted as indicated in the following table:
For the Year Ended
--------------------------------------
December 26, December 27, December 28,
1999 1998 1997
------------ ------------ ------------
Net income (loss):
As reported...................... $13,036 $2,443 $3,546
Pro forma........................ 9,524 (112) 3,152
Net income (loss) per share:
As reported:
Basic.......................... $ 1.02 $ 0.19 $ 0.33
Diluted........................ $ 1.01 $ 0.18 $ 0.32
Pro forma:
Basic.......................... $ 0.74 $(0.01) $ 0.29
Diluted........................ $ 0.74 $(0.01) $ 0.28
The fair value of the options granted (which is amortized over the option
vesting period in determining the pro forma impact) is estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions:
For the Year Ended
--------------------------------------
December 26, December 27, December 28,
1999 1998 1997
------------ ------------ ------------
Expected life of option........... 7 years 7 years 7 years
Risk free interest rate........... 5.94% 5.56% 6.15%
Expected volatility of stock...... 66.87% 85.06% 62.21%
Dividends......................... $ 0 $ 0 $ 0
The weighted-average fair value of options granted was $5.17, $8.36 and
$11.10 for the years ended December 26, 1999, December 27, 1998 and December
28, 1997, respectively.
55
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Thousands, Unless Otherwise Noted)
A summary of option transactions follows:
Weighted Weighted
Average Average
Exercise Options Exercise
Options Price Exercisable Price
--------- -------- ----------- --------
Balance at December 29, 1996
Granted....................... 886,772 $10.72
Exercised..................... (9,638) 0.73
Canceled...................... (14,000) 11.65
---------
Balance at December 28, 1997.... 863,134 10.82 3,948 $ 0.73
Granted....................... 2,730,540 10.02
Exercised..................... (418,682) 10.96
Canceled...................... (27,011) 9.44
---------
Balance at December 27, 1998.... 3,147,981 10.12 77,670 $ 8.55
Granted....................... 324,749 8.19
Exercised..................... (90,852) 7.80
Canceled...................... (81,410) 9.57
---------
Balance at December 26, 1999.... 3,300,468 $10.01 1,962,380 $ 9.46
=========
As part of the Travel Distribution, U.S. Office Products allowed
optionholders the opportunity to tender up to 23.2% of their outstanding
options for a price of $17.36 per share (the pre-Travel Distribution price was
$27.00 per share). All of the options exercised in 1998 were tendered in
connection with the Travel Distribution.
The following table summarizes information about stock options outstanding
and exercisable at December 26, 1999:
Options
Options Outstanding Exercisable
------------------------------- ------------------
Weighted Weighted
Average Average
Range of Weighted Exercise Exercise
Exercise Price Options Average Life Price Options Price
-------------- --------- ------------ -------- --------- --------
$4.56--$8.96 270,195 9.09 $ 7.28 45,125 $ 7.31
$9.00--$9.69 1,720,101 8.48 9.02 1,585,553 9.01
$9.75--$11.89 1,084,910 8.09 11.52 256,013 11.34
$12.00--$14.90 225,262 8.00 13.49 75,689 13.65
--------- ---------
$4.56--$14.90 3,300,468 8.37 $10.01 1,962,380 $ 9.46
========= =========
Under a service agreement entered into with Jonathan J. Ledecky, the Board
of Directors of U.S. Office Products agreed that Mr. Ledecky would receive from
the Company a stock option for the Company's common stock as of the date of the
Travel Distribution. The Board intended the option to be compensation for
Mr. Ledecky's services as a director of the Company, and certain services as an
employee of the Company. The option was to cover 7.5% of the outstanding
Company common stock determined as of the date of the Travel Distribution, with
no anti-dilution provisions in the event of issuance of additional shares of
common stock (other than with respect to stock splits or reverse stock splits).
The total number of options issued to Mr. Ledecky in connection with this grant
was 823,000 shares with an exercise price equal to the IPO price of $9.00 per
share. These options vested immediately but could not be exercised by Mr.
Ledecky for one year.
56
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Thousands, Unless Otherwise Noted)
Immediately following the effective date of the registration statement filed
in connection with the IPO and the Distribution, the Company's Board of
Directors granted 823,000 options covering 7.5% of the outstanding shares of
the Company's common stock, to certain executive management personnel and non-
employee directors. The options were granted under the Plan and had a per share
exercise price equal to the IPO price of $9.00 per share, and although these
options vested immediately, they could not be exercised for one year.
During 1999, 111,000 options for NavigantVacations.com, LLC units were
granted at an exercise price of $10. The options vest immediately, are
exercisable immediately and expire ten years from the date of grant. Had
compensation cost for these stock options been recognized based upon the fair
value of the stock options on the grant date under the methodology prescribed
by SFAS No. 123, "Accounting for Stock-Based Compensation," the expense would
have been $286,317 for 1999, which would have been allocated 100% to the
minority shareholder. The fair value of the options granted is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions: expected life of option of seven years, risk free
interest rate of 5.94%, 66.87% expected volatility of stock and zero dividends.
The weighted-average fair value of options granted was $3.32 for the year ended
December 26, 1999.
NOTE 16--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents certain unaudited quarterly financial data for the
years ended December 26, 1999 and December 27, 1998:
Year Ended December 26, 1999
----------------------------------------
First Second Third Fourth Total
------- ------- ------- ------- --------
Revenues............................... $54,603 $58,035 $55,682 $60,841 $229,161
Operating income....................... 7,223 9,291 7,914 4,691 29,119
Net income............................. 3,463 4,631 3,693 1,250 13,037
Per share amounts:
Basic................................ $ 0.27 $ 0.36 $ 0.29 $ 0.10 $ 1.02
Diluted.............................. $ 0.27 $ 0.36 $ 0.29 $ 0.10 $ 1.01
Year Ended December 27, 1998
------------------------------------------
First Second Third Fourth Total
------- ------- ------- ------- --------
Revenues............................. $37,709 $41,463 $45,059 $47,137 $171,368
Operating income (loss).............. 3,562 33 4,832 (184) 8,243
Net income (loss).................... 1,763 (887) 2,159 (592) 2,443
Per share amounts:
Basic.............................. $ 0.13 $ (0.07) $ 0.17 $ (0.05) $ 0.19
Diluted............................ $ 0.13 $ (0.07) $ 0.17 $ (0.05) $ 0.18
NOTE 17--SUBSEQUENT EVENT
In February 2000, the Company undertook a formal plan approved by the Board
of Directors for cost reduction measures including the consolidation of certain
operating functions on a regional basis and the elimination of duplicative
facilities. The implementation of the cost reduction measures commenced in
March 2000 and resulted in the Company recording a restructuring charge of
approximately $1,900 in March 2000. Management anticipates that these measures
will be completed throughout 2000. The 2000 charge includes the severance
associated with the termination of approximately 130 positions and the closure
of several facilities.
57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
This information is incorporated by reference from the Company's Proxy
Statement to be filed with the Securities and Exchange Commission in connection
with the Company's annual meeting of stockholders.
ITEM 11. EXECUTIVE COMPENSATION.
This information is incorporated by reference from the Company's Proxy
Statement to be filed with the Securities and Exchange Commission in connection
with the Company's annual meeting of stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
This information is incorporated by reference from the Company's Proxy
Statement to be filed with the Securities and Exchange Commission in connection
with the Company's annual meeting of stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
This information is incorporated by reference from the Company's Proxy
Statement to be filed with the Securities and Exchange Commission in connection
with the Company's annual meeting of stockholders.
58
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statement Schedules:
All schedules called for by Form 10-K are omitted because they are
inapplicable or the required information is shown in the financial
statements, or notes thereto, included herein.
(b) Reports on Form 8-K:
Navigant filed a report on Form 8-K dated October 27, 1999 covering the
Limited Liability Company Agreement with OZ Domestic Partners, L.P. and OZ
SPCI, Ltd., forming NavigantVacations.com LLC.
Navigant filed a report on Form 8-K/A dated October 27, 1999 covering
the acquisition of Arrington Travel Center, Inc. on July 28, 1998.
(c) Exhibits:
Exhibit Index
Exhibit
Number Description of Document
------- -----------------------
2.1+ Stock Purchase Agreement dated July 28, 1998 by and among Navigant
International, Inc., Professional Travel Corporation, Arrington
Travel Center, Inc. and Michael B. Arrington.
2.2++ Interest Purchase Agreement dated July 24, 1998 by and among Navigant
International, Inc., Professional Travel Corporation, Atlas Travel
Services, Ltd., Ariel Leibovitz, Doreen N. Leibovitz and Gary Pearce.
2.3+++ Stock Purchase Agreement dated September 17, 1998 by and among
Navigant International, Inc., Professional Travel Corporation, World
Express Travel, Inc. and Robert B. Acree.
3.1++++ Form of Amended and Restated Certificate of Incorporation
3.2++++ Bylaws
3.3++++ Form of Amendment to Bylaws
4.1++++ Form of certificate representing shares of Common Stock
10.1++++ Form of Distribution Agreement among U.S. Office Products Company,
Workflow Management, Inc., Aztec Technology Partners, Inc., Navigant
International, Inc. and School Specialty, Inc.
10.2++++ Form of Tax Allocation Agreement among U.S. Office Products Company,
Workflow Management, Inc., Aztec Technology Partners, Inc., Navigant
International, Inc. and School Specialty, Inc.
10.3++++ Form of Tax Indemnification Agreement among Workflow Management,
Inc., Aztec Technology Partners, Inc., Navigant International, Inc.
and School Specialty, Inc.
10.4++++ Employment Agreement dated as of January 24, 1997 between Edward S.
Adams and Professional Travel Corporation.
10.5++++ Employment Agreement dated as of January 24, 1997 between Robert C.
Griffith and Professional Travel Corporation.
10.6 Employment Agreement dated as of May 17, 1999 between C. Thomas Nulty
and Navigant International, Inc.
10.7++++ Form of Agreement between U.S. Office Products and Jonathan J.
Ledecky, as amended.
59
Exhibit
Number Description of Document
------- -----------------------
10.8++++ Form of Employee Benefits Agreement among U.S. Office Products
Company, Workflow Management, Inc., Aztec Technology Partners, Inc.,
Navigant International, Inc. and School Specialty, Inc.
10.9++++ Form of Agent Reporting Agreement with Airline Reporting Company.
10.10++++ Form of Employment Agreement between Jonathan J. Ledecky and
Navigant International, Inc.
10.11++++ Form of 1998 Stock Incentive Plan of Navigant International, Inc.
10.12** Amended and Restated Credit Agreement dated as of August 6, 1999
between NationsBank, N.A., as Agent, and Navigant International,
Inc.
10.13+ Form of Amendment to Employment Agreement between Edward S. Adams,
Professional Travel Corporation and Navigant International, Inc.
10.14+ Form of Amendment to Employment Agreement between Robert C.
Griffith, Professional Travel Corporation and Navigant
International, Inc.
10.15 Employement Agreement dated as of December 23, 1998 between Neville
Teagarden and Navigant International, Inc.
10.16 Amendment to Employment Agreement between Neville Teagarden and
Navigant International, Inc.
10.17* Limited Liability Company Agreement of NavigantVacations.com, dated
October 13, 1999.
21.1 Subsidiaries of Registrant
23.1 Consent of Independent Accountants
24.1 Power of Attorney (included on signature page hereto)
27.1 Financial data schedule
- --------
+ Incorporated by reference from Navigant's Report on Form 8-K filed with
the Securities and Exchange Commission on August 11, 1998, as amended by
Form 8-K/A filed with the Securities and Exchange Commission on October 9,
1998.
++ Incorporated by reference herein from Navigant's Report on Form 10-Q for
the quarterly period ended July 25, 1998, filed with the Securities and
Exchange Commission on September 8, 1999.
+++ Incorporated by reference herein from Navigant's Report on Form 8-K filed
with the Securities and Exchange Commission on October 1, 1998, as amended
by Form 8-K/A filed with the Securities and Exchange Commission on
November 30, 1998.
++++ Incorporated by reference herein from Navigant's Registration Statement on
Form S-1 initially filed with the Securities and Exchange Commission on
February 19, 1998 (File No. 333-46539).
* Incorporated by reference to Exhibit 10.1 of Navigant's Current Report on
Form 8-K filed with the Securities and Exchange Commission on October 27,
1999 (file No. 0-24387)
** Incorporated by reference to Exhibit 10.1 of Navigant's Quarterly Report
on Form 10-Q for the quarterly period ended September 26, 1999, filed with
the Securities and Exchange Commission on November 10, 1999 (File No. 0-
24387)
60
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: March 24, 2000
Navigant International, Inc.
a Delaware corporation
/s/ Edward S. Adams
By: _________________________________
Edward S. Adams
Chairman of the Board, Chief
Executive Officer, and Director
(Principal Executive Officer)
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Edward S. Adams his true and lawful attorney-in-
fact and agent, with full power of substitution and resubstitution, for him or
in his name, place and stead, in any and all capacities to sign to this report,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent or his substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities indicated as of March 24, 2000.
/s/ Robert C. Griffith
By: _________________________________
Robert C. Griffith
Chief Financial Officer and
Treasurer (Principal Financial
and Accounting Officer)
/s/ C. Thomas Nulty
By: _________________________________
C. Thomas Nulty
President and Chief Operating
Officer
/s/ Eugene A. Over, Jr.
By: _________________________________
Eugene A. Over, Jr.
Vice President, General Counsel
and Secretary
/s/ Paul Blackney
By: _________________________________
Paul Blackney
Director
61
/s/ Vassilios Sirpolaidis
By: _________________________________
Vassilios Sirpolaidis
Director
/s/ Ned A. Minor
By: _________________________________
Ned A. Minor
Director
/s/ D. Craig Young
By: _________________________________
D. Craig Young
Director
62