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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 27, 1998
-----------------
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
NAVIGANT INTERNATIONAL, INC.
- - -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 52-2080967
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
84 INVERNESS CIRCLE EAST
ENGLEWOOD, COLORADO 80112
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (303) 706-0800
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
registered
None. None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value per share
(Title of Class)
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
1
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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 March
16, 1999 by non-affiliates of the Registrant was $72,751,000. This calculation
assumes that certain parties may be affiliates of the Registrant and that,
therefore, 12,373,000 shares of voting stock are held by non-affiliates. As of
March 16, 1999, the Registrant had 12,911,000 shares of its common stock
outstanding.
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 services 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 Year 2000 compliance, the Company's payment or
non-payment of dividends, implementation by the Company of management
contracts and service fees with corporate clients, planned cost reduction
measures and fluctuations in the Company's quarterly results of operations.
Forward-looking statements involve certain risks and uncertainties that
could cause actual results to differ materially from anticipated results.
These risks and uncertainties include changes or reductions in the commission
structure in the travel services industry, changes in laws or regulations
concerning the travel services industry, trends in the travel services
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, limitiations 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, the Company's Year 2000
compliance, liabilities arising under indemnification and contribution
agreements entered into by the Company in connection with its spin-off from
U.S. Office Products Company ("U.S. Office Products") in June 1998, changes in
the Company's ability to amortize goodwill, an impairment of goodwill due to
downturn in the cash flows relating to past acquisitions, and a variety of
factors such as a recession or slower economic growth, weather conditions and
concerns for passenger safety that could cause a decline in travel demand, as
well as the risk factors set forth in Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Risk Factors," 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.
2
NAVIGANT INTERNATIONAL, INC.
ANNUAL REPORT ON
FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 27, 1998
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES.
GENERAL
Navigant is one of the five largest corporate travel management companies in
the United States. Navigant differentiates itself from its largest competitors
by primarily focusing on middle market clients, which Navigant defines as
businesses that spend between $500,000 and $50 million annually on travel
related expenses. 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. On December 27, 1998,
Navigant had 142 regional and branch offices and 293 on-site locations.
Effective for the December 27, 1998 reporting period, Navigant changed its
fiscal year from a fiscal year ending on the last Saturday in April to a
fiscal year ending on the last Sunday in December. Navigant's financial
statements in this Annual Report have been restated from its previously
reported results to conform to this change.
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 among
the industry leaders. AQUA's FareBusterTM cost avoidance system checks each
travel 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'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, to its corporate clients through its 15 regionally tailored
and separately branded Web sites as well as through their Intranets. Navigant
is in the process of combining features of its Web sites on its common Web
site, navigant.com. Navigant also plans to deliver its other travel management
products, including its travel accounting and management reporting services,
through the Internet and its clients' Intranets, allowing its clients to take
advantage of its existing services more quickly and efficiently. Through its
existing Internet and client Intranet presence, Navigant is also expanding its
efforts to cross-sell leisure travel to employees of its corporate clients and
to provide reservation and ticketing, as well as its quality control and cost
reduction services, to other leisure consumers. Navigant already serves as the
sole provider of ticketing services for a third-party Web site, TRIP.com,
which targets small business and professional travelers.
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Navigant believes that at least 65% of its total transactions are currently
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.
In the late 1970's, Edward S. Adams, Navigant's President and Chief
Executive Officer, started a travel management 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 the 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 current management team led by Mr. Adams acquired an
additional eleven regional corporate travel management companies and
significantly increased the geographic 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, 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. Navigant currently
owns the following regional corporate travel management companies:
Date
Name Headquarters Founded
- - ---- --------------------------- ---------
Akra Travel.............................. Jacksonville, Florida 1985
Arrington Travel Center.................. Chicago, Illinois 1969
Associated Travel........................ Santa Ana, California 1961
Atlas Travel (1)......................... Houston, Texas 1958
Atlas Travel............................. Vancouver, British Columbia 1961
Bowers Worldwide Travel.................. Phoenix, Arizona 1978
Simmons Associates
(doing business as Cal Simmons Travel).. Alexandria, Virginia 1976
Chartrek International................... Norwalk, Connecticut 1978
Evans Travel............................. New Orleans, Louisiana 1986
Jarvis Travel............................ Calgary, Canada 1971
McGregor Travel.......................... Stamford, Connecticut 1953
Mutual Travel............................ Seattle, Washington 1985
Omni Travel.............................. Cambridge, Massachusetts 1979
Professional Travel ..................... Englewood, Colorado 1983
Travel Arrangements Inc. and St. Pierre
Enterprises, Inc.
(doing business as SuperTravel) (1)..... Houston, Texas 1975/1985
Travel Consultants....................... Grand Rapids, Michigan 1972
TravelCorp .............................. Minneapolis, Minnesota 1974
Wareheim Travel Services
(doing business as Travel Guide)........ Baltimore, Maryland 1951
World Express Travel..................... Anchorage, Alaska 1984
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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.
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TRAVEL INDUSTRY
Navigant believes the travel services industry can be divided into two
sectors: the unmanaged leisure and 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 $408.2 billion on domestic
travel in 1997, of which Navigant believes a significant portion was for
business travel.
The corporate travel management industry evolved from 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
service.
Travel is among the largest controllable expenses for most companies.
Businesses hire corporate travel management companies to reduce these expenses
through management of 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, 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.
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 payment 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
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
relationships and service. Navigant believes that its nationwide
presence will attract middle market corporate clients that have
locations in more than one geographic region;
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. Cross-selling. Navigant plans to market its incentive and group
travel services to corporate clients, sell corporate travel management
services to current incentive and group clients and market leisure
travel to its clients' employees; 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 and client Intranets to attract new clients and increase
efficiency. The Internet provides a dual opportunity: to attract new
clients and to serve Navigant's existing clients more efficiently. By
serving its corporate clients electronically, whether over the Internet or
through their Intranets, Navigant can reduce transaction costs. In
addition, the Internet and client Intranets should allow Navigant to more
effectively market leisure travel services to employees of its existing
corporate clients, small businesses and leisure consumers.
. Leverage Navigant's size to decrease costs and increase revenues. As one
of the five 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 fees or annual
payments or cost savings by Navigant that management believes are
significantly higher than amounts that would have been offered to any of
its individual companies. In addition, Navigant believes that it can
benefit from greater purchasing power in such key expense areas as
telecommunications, advertising, insurance, courier expenses and employee
benefits. 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 freeing local management to focus on customer service.
For instance, Navigant has begun implementing 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
administrative functions, such as ARC processing, 24-hour toll-free number
services and research and development. In addition, Navigant is
consolidating regional locations and eliminating unnecessary facilities.
During 1998 Navigant closed over 10 locations in various parts of the
United States as part of this process.
. Continue to acquire established, profitable and well-managed corporate
travel management companies. Navigant believes 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 geographic
locations, (iii) are run by successful, experienced entrepreneurs whom
Navigant will generally 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 discussions
with one or more corporate travel management company owners. Navigant may
also make other strategic investments in and acquisitions of travel-
related businesses.
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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;
. Designing information and management reporting systems;
. Negotiating favorable pricing with travel suppliers; and
. Planning and organizing incentive trips, corporate meetings and 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 clients 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 its clients' travel expenses and patterns. These reports show savings
achieved through the use of preferred vendors and adherence to travel policies,
and analyze destinations, airline and hotel usage and rental car expenses. 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.
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 provides both group meeting and
incentive travel planning and booking services. For its group meeting clients,
Navigant helps groups choose a site matching their specific needs and
requirements. This includes selecting a site with sufficient size to handle the
group and a site with appropriate amenities, including food service and nearby
activities. For its incentive travel clients, Navigant plans trips the clients
use to reward, or motivate, selected employees. Again, this includes selecting
appropriate destinations and making all travel arrangements.
In addition to corporate travel management, Navigant provides leisure travel
services to 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. In addition, Navigant actively advertises leisure travel
in certain markets.
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 with extensive data about individual,
departmental and company travel activity and patterns. Navigant can use this
information to consult
7
with its corporate clients regarding the structure, operation and efficiency
of a variety of corporate travel policies. In addition, Navigant can provide
its 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 FareBuster(TM) cost avoidance system 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'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(TM) also advises travel managers of employees who are not
taking advantage of the lowest fare. Navigant intends to use AQUA(TM)
throughout its offices.
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 15 regionally tailored and separately branded Web sites as
well as through their Intranets. Navigant is in the process of combining
features of its Web sites on its common Web site, navigant.com. Through
Navigant's existing Internet and client Intranet presence, it is also
expanding its efforts to cross-sell leisure travel to employees of its
corporate clients and to provide reservation and ticketing as well as its
quality control and cost reduction services to other leisure consumers.
Navigant already serves as the sole provider of ticketing services for a
third-party Web site, TRIP.com, which targets small business and professional
travelers.
Some of Navigant's Web sites allow clients to search for, review and make
travel arrangements. Several of these sites have "booking engines," which
allow Navigant's corporate clients to purchase airline tickets for business
and leisure travel. Some of these Web sites also allow the general public to
purchase airline tickets. In addition, some of these Web sites allow clients
to request and review reports, and make inquiries regarding group and
incentive travel arrangements. Navigant has recently developed an Internet
system that allows its clients' travel managers and other executives to view
their company's travel activities 24 hours a day using a password protected
system. The user can view both pre-trip and post-trip information sorted at
every level of corporate organization, from individual traveler to department,
division or company.
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").
As of December 27, 1998, Navigant had 293 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 client.
As of December 27, 1998, Navigant had 142 regional and branch offices. These
offices are typically used by corporate clients 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 27, 1998, 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.
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Navigant believes that the advent of electronic ticketing will eventually
eliminate the need for STPs and overnight delivery.
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 clients using
its strong local relationships and local sales force. Navigant believes that
its local management teams have a thorough understanding of their respective
geographic markets and businesses and have developed strong relationships with
their clients. Navigant's sales staff identifies potential clients in local
markets, and develops opportunities to provide additional travel and
management services to existing clients. Over the past few years, travel
policy and travel purchasing decisions in larger and middle market companies
have been centralized in purchasing departments, with travel managers or
within the offices of chief financial officers. The selection of a corporate
travel management company 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 of
corporate travel, supported by experienced marketing staff. Navigant currently
has a sales and marketing force of approximately 70 individuals located
throughout its organization.
Navigant also uses co-branding to enhance its national identity, combining
its name with the better known regional brand names.
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 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 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
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 that is available to
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
on these bases due to its combination of size and regional
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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 and expand Navigant's client
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 employees 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 clients.
Navigant has begun implementing a single, company-wide information technology
platform to service its accounting and reporting requirements.
YEAR 2000 ISSUES
Navigant has implemented a program to attempt to assess, remediate and
mitigate the potential impact of problems associated with the Year 2000
throughout Navigant. A "Year 2000 Problem" is one where systems either fail to
operate as expected or cease to be operational because date dependent
functions improperly interpret dates after December 31, 1999.
As part of Navigant's program, Navigant has assigned staff, including staff
at each subsidiary, to identify hardware, software, and other systems that may
be affected by the Year 2000 Problem. The staff has also been instructed to
determine and monitor the progress made by Navigant's material vendors in
remediating and mitigating their Year 2000 Problems. The staff provides
periodic reports to senior management, who advise Navigant's Board of
Directors.
Navigant has reviewed its primary software systems, including its various
computer reservation systems, mid-office systems and back-office systems, and
has determined which systems are and are not adversely affected by the Year
2000 Problem. Software in these systems which are adversely impacted by the
Year 2000 Problem have been, or are scheduled to be, replaced with Year 2000
compliant software.
In some cases, such as with computer reservation systems, Navigant must rely
on the efforts and ability of its vendors to replace non-Year 2000 compliant
software systems. The computer reservation system vendors, however, have
repeatedly given public assurances that their systems are Year 2000 compliant.
Navigant has received warranties from two of its major computer reservation
system vendors assuring that their software and hardware will not have a Year
2000 Problem. Navigant is attempting to obtain the same warranty from its
other computer reservation system vendors. On February 4, 1999, all computer
reservation systems passed a significant test as they began booking
reservations in the year 2000.
Navigant is also converting its subsidiaries to back-office accounting
software warranted as Year 2000 compliant. Conversion of subsidiaries whose
current back-office accounting software will be adversely affected by the Year
2000 Problem is expected to be complete by May 31, 1999. Navigant has also
identified Year 2000 compliant mid-office software systems that can be used by
its subsidiaries to replace non-Year 2000 compliant systems.
Navigant has also reviewed its material computer hardware systems, and has
determined which systems are and are not adversely affected by the Year 2000
Problem. Systems associated with Navigant's computer reservation systems and
back-office accounting systems which are adversely affected by the Year 2000
Problem have been, or will be, replaced in conjunction with the replacement of
the appropriate software systems.
Navigant is in the process of identifying other non-information technology
systems, including telephone, HVAC, mechanical and security systems, which may
be adversely affected by the Year 2000 Problem. Navigant
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plans to have this process complete by June 1999. Systems that are discovered
to be adversely impacted will be replaced or repaired as necessary.
In addition, Navigant and its individual subsidiaries are in the process of
requesting information from their other major vendors concerning these
vendors' Year 2000 readiness. Navigant has requested that it receive this
information by April 1999. Navigant, however, cannot control this process, but
must rely on the cooperation of the vendors involved.
To date, Navigant has not incurred material costs of remediation, and it
does not expect to incur material costs in the future. The costs of replacing
some systems are being borne by the vendors, while other costs are within
Navigant's normal and expected capital expenditure budget. Some elements of
Navigant's Year 2000 plan, such as the consolidation of the back-office
accounting systems, are being undertaken for business reasons apart from the
Year 2000 concerns, and any Year 2000 benefit is an incidental bonus. Navigant
believes its total incremental costs related to the Year 2000 Problem
remediation will be less than $250,000.
If Navigant's efforts to remediate its Year 2000 Problems are not
successful, or if any of Navigant's material vendors, such as its computer
reservation system vendors, are not Year 2000 compliant, Navigant's ability to
make travel reservations for its clients could be jeopardized. If any such
Year 2000 problems persist, they could cause a material decrease in Navigant's
revenues. Navigant is in the process of developing contingency plans to
address these situations. Navigant plans to finalize its contingency plans by
June 1999 but these plans may not adequately address any unforseen
circumstances. In addition, the companies that Navigant may acquire may have
Year 2000 Problems that require remediation.
EMPLOYEES
As of December 27, 1998, Navigant had approximately 2,800 full-time
employees, none of whom is subject to collective bargaining agreements.
Navigant believes that it enjoys good relations with its employees.
PROPERTIES
As of December 27, 1998, Navigant operated at 142 regional and branch
offices, three of which are owned and 139 of which are leased. The following
are material properties:
Approximate
Square Owned/
Location Footage Leased Expiration
-------- ----------- ------ ------------------
Jacksonville, Florida.................. 4,000 Leased June 30, 2006
Chicago, Illinois...................... 24,664 Leased July 21, 2001
Santa Ana, California.................. 25,439 Leased November 15, 2003
Houston, Texas......................... 26,723 Leased April 30, 2001
Vancouver, British Columbia............ 6,684 Leased August 31, 2001
Phoenix, Arizona....................... 14,615 Leased September 30, 2004
Alexandria, Virginia................... 3,618 Leased December 13, 1998
Norwalk, Connecticut................... 7,235 Leased June 30, 2004
New Orleans, Louisiana................. 7,259 Leased September 30, 2003
Calgary, Alberta....................... 10,277 Leased October 31, 2001
Stamford, Connecticut.................. 10,000 Owned N/A (1) (2)
Seattle, Washington.................... 17,500 Leased August 31, 2001
Cambridge, Massachusetts............... 15,500 Leased December 31, 2001
Englewood, Colorado.................... 49,900 Owned N/A (3)
Grand Rapids, Michigan................. 29,142 Owned N/A (2)
Edina, Minnesota....................... 12,624 Leased May 31, 2003
Baltimore, Maryland.................... 4,469 Leased September 30, 2000
Anchorage, Alaska...................... 8,726 Leased February 29, 2000
- - --------
(1) The portions of the office building owned by Navigant and located at 112
Prospect Street, Stamford, Connecticut are subject to a mortgage securing
payment of a Promissory Note payable to First County Bank, in the principal
amount of $515,000.
11
(2) Navigant has negotiated a sale-leaseback transaction of its owned property
in Stamford, Connecticut with DeFranco & Knight, LLC. Navigant expects to
close this transaction by May 30, 1999. Douglas R. Knight, the former Chief
Operating Officer of Navigant, is a member in this company. Navigant is also
evaluating the possibility of entering into a sale-leaseback transaction
with respect to its owned property in Grand Rapids, Michigan.
(3) 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
payable to U.S. Bank National Association, in the principal amount of
$1,628,000. The second deed of trust secures payment of a Promissory Note
dated June 20, 1995 payable to U.S. Bank National Association, in the
principal amount of $211,000.
Navigant believes that its properties are adequate to support its operations
for the foreseeable future.
RECENT DEVELOPMENTS
On January 27, 1999 the Board of Directors approved the change in fiscal
year from a period ending on the last Saturday in April to a period ending on
the last Sunday in December.
In February 1999, Navigant reached an agreement to acquire a corporate
travel management company based in the Northeast (the "Planned Acquisition").
The agreed purchase price is approximately $19.0 million (subject to
adjustment), payable with a combination of cash and notes payable (in the form
of stock or cash or both). The agreement is subject to the completion of due
diligence and negotiation of definitive terms. In addition, both parties must
receive certain approvals and consents before the transaction can be
consummated. Navigant expects to complete this acquisition in the second
quarter of 1999. The acquisition will be accounted for under the purchase
method. Navigant expects to use its existing credit facility to fund this
acquisition.
On April 9, 1999, Douglas R. Knight announced his decision to relinquish his
duties as Chief Operating Officer of the Company, although he continues to be
employed by the Company. The Company is seeking a suitable replacement Chief
Operating Officer.
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.
Navigant has been named as a defendant in a lawsuit filed by the previous
stockholders of two of Navigant's subsidiaries. The lawsuit also names
Jonathan J. Ledecky, a member of Navigant's Board of Directors, and certain
other executive officers of U.S. Office Products as defendants. The plaintiffs
allege that Mr. Ledecky and the named U.S. Office Products executive officers
made fraudulent misrepresentations and omissions about U.S. Office Products'
accounting methods, the value of U.S. Office Products' stock and U.S. Office
Products' intent to spin-off its travel business in the Travel Distribution.
The plaintiffs contend that such alleged misrepresentations and omissions
induced the plaintiffs to sell their businesses to U.S. Office Products.
Navigant 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 Navigant and have requested that Navigant be
required to hold such assets in a constructive trust for the plaintiffs.
Navigant's management intends to vigorously defend against this lawsuit.
Mr. Ledecky and U.S. Office Products have also been named as defendants in
at least 10 lawsuits which allege that Mr. Ledecky and U.S. Office Products
violated various United States securities laws. The plaintiffs 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
12
that were spun off by U.S. Office Products (the "Spin-Off Companies") and the
related tender offer and restructuring. The validity and the amount of the
claims made in the lawsuits is uncertain.
In connection with the Travel Distribution, Navigant (and the other Spin-Off
Companies) 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, Navigant's indemnification obligation, however, would be
limited to 5.2% of U.S. Office Products' indemnifiable loss, up to a maximum
of $1.75 million.
Navigant and its subsidiaries are also involved in various other legal
actions in the ordinary course of their 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.
Not applicable
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
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
----- -----
1998
Second Quarter (June 9, 1998 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
At March 16, 1999, the last reported sale price of the Common Stock was
$5.88 per share, and the number of holders of record of the Common Stock was
approximately 3550.
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.
The Company's registration statement on Form S-1 (SEC File No. 333-46539)
covering the Company's initial public offering (the "Offering") of 2,000,000
shares of Common Stock at $9.00 per share, was declared effective on June 9,
1998. Smith Barney Inc., NationsBanc Montgomery Securities LLC and Raymond
James and Associates, Inc. acted as representatives for the underwriters. The
gross proceeds to the Company in the Offering were $18,000,000 and the
expenses incurred were as follows: (i) $1,260,000 for the underwriters
discount and non-accountable expense allowance; and (ii) approximately
$1,740,000 for other expenses, including legal, accounting and printing fees.
The Company used the net proceeds in the Offering of approximately $15,000,000
to repay a portion of the $16,400,000 of indebtedness from NationsBank, N.A.
(See Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations Liquidity and Capital Resources") that was incurred at
the time of the Travel Distribution to refinance intercompany indebtedness to
U.S. Office Products.
During the fiscal year ended December 27, 1998, the Company has issued and
sold unregistered securities as set forth below:
On February 13, 1998, 1,000 shares of Common Stock was issued to U.S.
Office Products for the purchase price of $1,000 in reliance upon an
exemption from registration found in Section 4(2) of the Securities
Act of 1933, as amended.
14
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 27, December 28, December 29, December 30, December 31,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(In thousands, except per share data)
Statement of Income Data
(1):
Revenues.................. $171,368 $ 90,917 $54,749 $45,267 $34,569
Operating expenses........ 99,734 52,517 29,060 25,836 19,692
-------- -------- ------- ------- -------
Gross profit.............. 71,634 38,400 25,689 19,431 14,877
General and administrative
expense.................. 47,988 27,377 19,707 14,645 11,162
Depreciation and amortiza-
tion expense............. 7,167 3,090 1,386 918 710
Non-recurring charges
(2)...................... 8,236 1,156
-------- -------- ------- ------- -------
Operating income.......... 8,243 6,777 4,596 3,868 3,005
Interest expense.......... 2,070 685 540 515 118
Interest income........... (227) (400) (452) (352) (253)
Other, net................ (30) (29) 60 42 48
-------- -------- ------- ------- -------
Income before provision
for income
taxes.................... 6,430 6,521 4,448 3,663 3,092
Provision for income tax-
es....................... 3,987 2,975 709 565 18
-------- -------- ------- ------- -------
Net income................ $ 2,443 $ 3,546 $ 3,739 $ 3,098 $ 3,074
======== ======== ======= ======= =======
Net income per share:
Basic................... $ 0.19 $ 0.33 $ 0.45 $ 0.52 $ 0.67
Diluted................. $ 0.18 $ 0.32 $ 0.44 $ 0.52 $ 0.67
Weighted average number of
common shares outstanding:
Basic................... 13,156 10,858 8,250 5,906 4,556
Diluted................. 13,250 11,078 8,425 6,002 4,570
December 27, December 28, December 29, December 30, December 31,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited)
(In thousands)
Balance Sheet Data (1):
Working capital........... $ 1,208 $ 12,379 $ 5,828 $ 4,288 $ 4,366
Total assets.............. 206,848 137,861 25,967 25,258 14,602
Total debt................ 62,463 16,806 5,655 8,160 3,455
Stockholders' equity...... 114,125 99,644 13,569 9,187 7,736
Fiscal Year Ended
----------------------------------------------------------------
December 27, December 28, December 29, December 30, December 31,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(In thousands, except per share data)
Other Data (1):
EBITDA (3)................ $ 15,410 $ 9,867 $ 5,982 $ 4,786 $ 3,715
Adjusted EBITDA (4)....... 23,646 11,023 5,982 4,786 3,715
Capital expenditures...... 4,313 1,424 1,796 1,858 804
- - --------
15
(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 cost 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.
(4) "Adjusted EBIDA" reflects EBITDA as calculated in note (3) above adjusted
to exclude the effect of the non-recurring charges Navigant took of $8,236
in 1998 and $1,156 in 1997. Adjusted EBITDA is included in this Annual
Report because it is a basis upon which Navigant assesses its financial
performance.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
Navigant 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.
Navigant'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") and the eight companies acquired in business
combinations in 1998 accounted for under the purchase method (the "1998
Purchased Companies") from their respective dates of acquisition.
Sources of Revenue
Historically, arrangements between corporate travel management companies and
their clients generally did not provide for any direct compensation from
clients for travel bookings and services completed on their behalf.
Consequently, corporate travel management companies were largely 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. Navigant and other travel
management companies were significantly affected by these commission
reductions, particularly the October 1997 reduction, which resulted in a
decrease in gross revenue per transaction.
In response to the reduction in airline commissions and consistent with
growing industry practice, Navigant has entered into management contracts and
service fee arrangements with a significant number of its clients. Although
the terms of Navigant's 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. Navigant charges
between $10 and $35 for each air travel ticket issued to such clients and
retains all of the related commissions collected from the airlines.
In October 1998, the airlines instituted a commission cap of $100 on round-
trip international tickets and $50 on one-way international tickets. Navigant
believes that its management contracts and service fee arrangements should
minimize the financial impact of this commission cap, as well as any future
changes in the airline commission rates. Navigant believes that at least 65%
of its total transactions are currently generated from clients under
management contracts and service fee arrangements.
Navigant 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
Navigant's ticket sales surpasses specified thresholds, which typically are
based on the airlines' share of the relevant markets.
Expenses
Navigant's direct operating expenses include principally labor expense
(which comprised approximately 70.7% of total direct operating expenses in
1998), net commission payments to clients under management contracts,
communication costs and other costs associated with the selling and processing
of travel reservations.
17
Navigant's general and administrative expenses include principally labor
expense (which comprised approximately 52.1% of total general and
administrative expenses in 1998), occupancy costs and other costs.
1997 Non-Recurring Charges
Navigant 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, Navigant incurred the following non-recurring charges:
Cash Non-cash Total
------- -------- -------
(In thousands)
Prior to or in conjunction with the Travel Distri-
bution:
Impaired Goodwill--March 1998..................... -- $ 613 $ 613
Operational consolidation at Associated Travel.... $ 365 333 698
Allocated charges associated with the Travel Dis-
tribution........................................ 1,073 2,677 3,750
------- ------- -------
1,438 3,623 5,061
Subsequent to the Travel Distribution:
Operational consolidation and elimination of re-
dundant facilities............................... 2,602 573 3,175
------- ------- -------
$ 4,040 $ 4,196 $ 8,236
======= ======= =======
Navigant incurred a strategic restructuring charge 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 Navigant for a
portion of the strategic restructuring charge incurred by U.S. Office Products
and the remaining $2.75 million was a result of U.S. Office Products' purchase
of a pro rata portion of Navigant'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 compensation charge and is a non-cash expense, while
the remaining $73,000 relates to Navigant's portion of payroll taxes on
compensation. On March 13, 1998, Navigant received 90 days' notice of
termination of a business relationship that contributed approximately $600,000
to net operating income during 1997. In March 1998, Navigant wrote off
$613,000 in intangible assets relating to the original acquisition of this
contract. Navigant 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 at its
subsidiary, Associated Travel. This switch from a centralized management
structure to a regional management structure at this subsidiary is consistent
with the existing structure at the other regional travel management companies
acquired.
As part of Navigant'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 Navigant's
recording a restructuring charge of $3.18 million in November and December
1998. Management anticipates that these measures will be completed by
September 1999. The 1998 charge includes the closure of 20 facilities, the
sale of one building and the severance associated with the termination of
approximately 130 employees. To date, 10 facilities have been closed or
consolidated and approximately 40 employees have been terminated.
The following discussion should be read in conjunction with Navigant's
consolidated financial statements and related notes thereto appearing
elsewhere in this Annual Report.
18
Results of Operations
The following table sets forth various items as a percentage of revenues for
1998, 1997 and 1996:
For the Fiscal Year Ended
-----------------------------------------------------
December 27, 1998 December 28, 1997 December 29, 1996
----------------- ----------------- -----------------
Revenues................. 100.0% 100.0% 100.0%
Operating Expenses....... 58.2 57.8 53.1
----- ----- -----
Gross profit........... 41.8 42.2 46.9
General and administra-
tive expenses........... 28.0 30.1 36.0
Depreciation and amorti-
zation expense.......... 4.2 3.4 2.5
Non-recurring costs...... 4.8 1.2 0.0
----- ----- -----
Operating income....... 4.8 7.5 8.4
Interest expense, net.... 1.1 0.3 0.2
Other, net............... 0.0 0.0 0.1
----- ----- -----
Income before provision
for income taxes...... 3.7 7.2 8.1
Provision for income tax-
es...................... 2.3 3.3 1.3
----- ----- -----
Net income............. 1.4% 3.9% 6.8%
===== ===== =====
Consolidated Results of Operations
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 1998 Purchased Companies from their respective dates of
acquisition.
Gross profit increased 86.5%, from $38.4 million, or 42.2% of revenues, for
1997 to $71.6 million, or 41.8% of revenues, for 1998. The decrease in gross
profit as a percentage of revenues was due primarily to the decrease in
commission revenues resulting from the commission cuts imposed by airlines on
all travel in October 1997. Management contracts and service fee arrangements
implemented throughout 1998 partially offset the effect of these commission
cuts.
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 Navigant
and certain fixed general and administrative expenses being spread 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
included in the results for 1998 compared to 1997.
Navigant 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 the acquisitions of the 1998 Purchased Companies which were financed with
borrowings under the Credit Facility.
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 for 1997 and
19
1998, compared to the federal statutory rate of 35%, was primarily due to an
increase in non-deductible goodwill amortization resulting from the
acquisitions of the 1997 Purchased Companies and the 1998 Purchased Companies.
The 1998 effective rate was higher than the 1997 effective rate due to a
higher ratio of non-deductible goodwill amortization to pre-tax income in
1998, which was attributable to the non-recurring charges recorded in 1998.
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.
Fiscal Year Ended December 28, 1997 Compared to Fiscal Year Ended December
29, 1996
Consolidated revenues increased 66.1%, from $54.7 million for 1996 to $90.9
million for 1997. This increase was primarily due to the inclusion of the
revenues from the 1997 Purchased Companies, from their respective dates of
acquisition.
Gross profit increased 49.5%, from $25.7 million, or 46.9% of revenues, for
1996 to $38.4 million, or 42.2% of revenues, for 1997. The decrease in gross
profit as a percentage of revenues was due primarily to the 1997 Purchased
Companies having a lower gross profit as a percentage of revenues than
Navigant as a result of their mix of domestic travel versus international
travel, and to a lesser extent to commission cuts imposed by airlines in
October 1997.
General and administrative expenses increased 38.9%, from $19.7 million, or
36.0% of revenues, for 1996 to $27.4 million, or 30.1% of revenues, for 1997.
The decrease in general and administrative expenses as a percentage of
revenues was due primarily to the 1997 Purchased Companies having lower
general and administrative expenses as a percentage of revenue than Navigant
and certain fixed general and administrative expenses being spread over a
larger revenue base.
Depreciation and amortization expense increased from $1.4 million, or 2.5%
of revenues, for 1996 to $3.1 million, or 3.4% of revenues, for 1997. This
increase was due to the increase in the number of purchase acquisitions
included in the results for 1997 compared to 1996.
Navigant incurred non-recurring charges of $1.2 million in 1997. No such
charges were incurred in 1996. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Introduction--1997 Non-
Recurring Charges."
Provision for income taxes increased from $709,000 in 1996 to $3.0 million
in 1997, reflecting effective income tax rates of 15.9% and 45.6%,
respectively. The low effective income tax rate in 1996 compared to the
effective tax rate in 1997 and the federal statutory rate of 35.0% was
primarily due to the fact that the Pooled Companies were Subchapter S
Companies prior to being acquired by Navigant in 1997. The high effective
income tax rate for 1997 was due primarily to an increase in non-deductible
goodwill amortization resulting from the acquisitions of the 1997 Purchased
Companies.
Liquidity and Capital Resources
At December 27, 1998, Navigant had cash of $315,000, working capital of $1.2
million, borrowings of $53.3 million under the revolving credit facility from
NationsBank, N.A. and U.S. Bank National Association as lenders (the "Credit
Facility"), $9.2 million of other indebtedness, including capital lease
obligations, and available capacity under the Credit Facility of $6.7 million.
During June 1998, Navigant completed the Stock Offering. The net proceeds from
the Stock Offering (after deducting underwriting discounts and commissions and
offering expenses) were approximately $15 million, which was used to repay a
portion of the $16.4 million that Navigant borrowed under the Credit Facility
to repay indebtedness allocated to it in the Travel Distribution. Navigant's
capitalization, defined as the sum of debt and stockholders' equity, at
December 27, 1998 was approximately $176.6 million.
Historically, Navigant has financed its operational growth and acquisitions
with internally generated cash flow from operations and borrowings from
commercial banks or other lenders. These borrowings were generally secured by
the accounts receivable and other assets of Navigant.
20
Navigant anticipates that its cash flow from operations and borrowings under
the Credit Facility will provide sufficient cash to enable Navigant to meet
its working capital needs, debt service requirements and planned capital
expenditures for property and equipment through fiscal 1999.
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 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 Navigant 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 non-recurring acquisition costs. Net cash
used in financing activities was $7.7 million, including $12.2 million for the
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.
During 1996, net cash provided by operating activities was $5.8 million. Net
cash used in investing activities was $1.8 million, for additions to property
and equipment, such as computer equipment and office furniture. Net cash used
in financing activities was $350,000, including $5.6 million for the repayment
of indebtedness and $1.0 million for the payment of dividends, partially
offset by proceeds from the sale of $1.6 million of common stock of one of the
Pooled Companies and $4.6 million in proceeds from new indebtedness.
In June 1998, Navigant obtained the Credit Facility, a secured $60.0 million
revolving credit facility from NationsBank, N.A. and U.S. Bank National
Association as lenders. NationsBanc Montgomery Securities LLC, one of the
underwriters of the Stock Offering and an affiliate of NationsBank, N.A., was
the arranger and syndication agent for the facility. The Credit Facility is
scheduled to expire in June 2003. Interest on borrowings under the Credit
Facility accrues at a rate of, at Navigant's option, either (1) LIBOR plus a
margin of between 1.00% and 2.00%, depending on Navigant's funded debt to
EBITDA ratio, or (2) the Alternative Base Rate (defined as the higher of (x)
the NationsBank, N.A. prime rate and (y) the Federal Funds rate plus 0.50%)
plus a margin of between 0% and 0.75%, depending on Navigant's funded debt to
EBITDA ratio. Indebtedness under the Credit Facility is secured by
substantially all of the assets of Navigant. The Credit Facility is subject to
terms and conditions typical of facilities of such size and includes certain
financial and other covenants. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Risk Factors-- Restrictions
Imposed by Terms of Indebtedness" in this Item 7.
Navigant 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.
Navigant expects to fund future acquisitions primarily with cash flow from
operations and borrowings, including any borrowings under the Credit Facility
as well as issuances of additional equity or debt. To the extent Navigant
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
Navigant will be able to secure such financing if and when it is needed or on
terms Navigant deems acceptable. If Navigant 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.
21
Fluctuations in Quarterly Results of Operations
The business travel industry is seasonal and Navigant's results have
fluctuated because of these seasonal variations. Net revenues and net income
for Navigant are generally higher in the second and third calendar quarters.
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 changes in relationships with certain travel suppliers, changes in
the mix of services offered by Navigant, extreme weather conditions or other
factors affecting travel. Unexpected variations in quarterly results could
also adversely affect the price of Navigant Common Stock, which in turn could
limit the ability of Navigant to make acquisitions.
As Navigant 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 Navigant 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 Navigant, 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 Navigant may
achieve for any subsequent fiscal quarter or for a full fiscal year.
Inflation
Navigant 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 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1,
2000 for Navigant). FAS 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair value
of derivatives are to be recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part
of a hedge transaction and, if it is, the type of hedge transaction. Navigant
believes that, due to its limited use of derivative instruments, the adoption
of FAS 133 will not have a significant effect on Navigant's results of
operations or its financial position.
Risk Factors
Significant Indebtedness and Interest Payment Obligations
Navigant is significantly leveraged. At December 27, 1998, Navigant had
$62.5 million of consolidated outstanding debt and its total consolidated
debt, as a percentage of capitalization, was 35.4%. 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.
22
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.
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 the
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 the airlines for each ticket issued. Since 1995, most
airlines have substantially reduced the amount of commissions paid for booking
domestic and international
23
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--Introduction--Sources of
Revenue" in this 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 this 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
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 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 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.
24
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 corporate 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, Amadeus and Worldspan. 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 depend upon factors affecting the corporate
travel management industry generally. 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 forseeable 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.
Risks Related to Integration of Operations
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 most of its subsidiaries, operate on separate
computer and telephone systems, several of which use different technologies.
Navigant expects that it will integrate these systems, but it has not yet
established a definitive timetable for integration of all of the systems or
its definitive capital needs for the integration. The contemplated integration
of these 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
management companies. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Risk Factors--Risk of Rapid Growth;
Limited History as a
25
Stand-Alone Company" in this 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 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 the 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;
. other expenses associated with a change of control;
Integration of acquired companies may also result in:
. diversion of management's attention;
. difficulties with retention;
. the need to hire and train key personnel;
. 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 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 under certain conditions. Those conditions
are met 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 include the spin-
off. Acquisitions made by Navigant within two years before or after the
distribution by U.S. Office Products of its 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 financings. 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 this Item 7.
26
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 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. Therefore, Navigant
will be precluded from completing business combinations under the pooling-of-
interests method for a period of two years from the distribution, and any
business combinations 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 will reduce Navigant's reported net
income below that which would have been reported if it had used the pooling-
of-interests method. See "Risk Factors--Material Amount of Goodwill" in this
Item 7.
Dependence Upon Acquisitions for Future Growth
One of Navigant's strategies is to increase its revenues and the markets it
serves through the acquisition of additional corporate travel businesses.
There can be no assurance that suitable candidates for acquisitions can be
identified or, if suitable candidates are identified, that acquisitions can be
completed on acceptable terms. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Risk Factors--Risk Related to
Acquisition Financing; Additional Dilution" in this Item 7. In addition, prior
to the Travel Distribution, Navigant's acquisitions were completed with
substantial business, legal and accounting assistance from U.S. Office
Products and most of the acquisitions were paid for with common stock of U.S.
Office Products. Furthermore, Navigant's ability to pay for acquisitions with
stock may be materially limited in the two-year period following the Travel
Distribution. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Risk Factors--Risks Related to Navigant's
Acquisition Strategy -Financing." in this Item 7. The pace of Navigant's
acquisition program may be adversely affected by the absence of U.S. Office
Products support for the acquisitions and Navigant's limited ability to issue
Navigant Common Stock.
Navigant's acquisition of corporate travel businesses outside the United
States may subject it to certain risks inherent in conducting business
internationally, including fluctuations in currency exchange rates. Changes in
exchange rates could have a significant effect on Navigant's business,
financial condition and results of operations.
Risks Related to Acquisition Financing; Additional Dilution
Navigant currently intends to finance its future acquisitions by using
shares of Navigant Common Stock, cash, borrowed funds or a combination
thereof. If Navigant Common Stock does not maintain a sufficient market value,
if the price of Navigant Common Stock is highly volatile or if potential
acquisition candidates are otherwise unwilling to accept Navigant Common Stock
as part of the consideration for the sale of their businesses, Navigant may be
required to use more of its cash resources or more borrowed funds, in order to
initiate and maintain its acquisition program. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Risk Factors--
Risks Related to Navigant's Acquisition Strategy - Financing" in this Item 7.
If Navigant does not have sufficient cash resources, its growth could be
limited unless it is able to obtain additional capital through debt to equity
financings.
Navigant will have 150,000,000 authorized shares of Navigant Common Stock, a
portion of which could be available (subject to the rules and regulations of
federal and state securities laws, applicable limits under U.S. federal income
tax laws and rules, and rules of the NASDAQ Stock Market) to finance
acquisitions without obtaining stockholder approval for such issuance. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Risk Factors--Risks Related to Navigant's Acquisition Strategy -
Financing" in this 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.
27
Year 2000 Issues
Navigant has implemented a program to attempt to assess, remediate and
mitigate the potential impact of problems associated with the Year 2000
throughout its company. A "Year 2000 Problem" is one where systems either fail
to operate as expected or cease to be operational because date dependent
functions improperly interpret dates after December 31, 1999.
If Navigant's efforts to remediate its Year 2000 Problems are not
successful, or if any of Navigant's material vendors, such as its computer
reservation system vendors, are not Year 2000 compliant, Navigant's ability to
make travel reservations for its clients could be jeopardized. If any such
Year 2000 Problems persist, they could cause a material decrease in Navigant's
revenues. Navigant is in the process of developing contingency plans to
address these situations. Navigant plans to finalize its contingency plans by
June 1999 but these plans may not adequately address any unforseen
circumstances. In addition, the companies that Navigant may acquire may have
Year 2000 Problems that require remediation. See Items 1. and 2. "Business and
Properties--Year 2000 Issues."
Reliance on Key Personnel
Navigant's operations depend on the continued efforts of Edward S. Adams,
its President and Chief Executive 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 executives 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 27, 1998, approximately $150.6 million, or 72.8%, of
Navigant's total assets and 131.9% of Navigant's stockholders' equity
represents intangible assets, the significant majority of which is goodwill.
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 1998 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.
Seasonality and Quarterly Fluctuations
The domestic and international travel services industry is 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.
28
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
seven 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 its 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 its 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 of U.S. Office
Products' businesses (including Navigant) in June 1998, Navigant and the three
other companies whose shares were distributed by U.S. Office Products entered
into a series of agreements providing for the allocation of certain
liabilities. Navigant and the other companies agreed in a Tax Allocation
Agreement jointly and severally to indemnify U.S. Office Products for tax
losses relating to the distributions 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 law 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 distributions (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 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.
29
Dependence on ARC Agreements
Navigant depends on its 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
canceled 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 DISCLOSURES ABOUT MARKET RISK.
Market risks relating to the Company's operations result primarily from
changes in interest rates. The Company's interest rate exposure relates
primarily to long-term debt obligations. A significant portion of the
Company's interest expense is based upon variable interest rates of its bank's
prime rate or the Eurodollar rate, as discussed in Footnote 9 of the Notes to
Consolidated Financial Statements included elsewhere herein. Based upon the
Company's 1998 average borrowings under the Credit Facility, a 25 basis point
movement in the base rate or LIBOR rate would approximate $113,000 annualized
increase or decrease in interest expense.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following financial information is included on the pages indicated:
Page
----
Report of Independent Accountants........................................ 31
Consolidated Balance Sheets as of December 27, 1998 and December 28, 1997
........................................................................ 32
Consolidated Statements of Income for each of the three years in the pe-
riod ended December 27, 1998............................................ 33
Consolidated Statement of Stockholders' Equity for each of the three
years in the period ended December 27, 1998............................. 34
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 27, 1998.......................................... 35
Notes to Consolidated Financial Statements............................... 37
30
Report of Independent Accountants
To the Board of Directors and Shareholders of
Navigant International, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Navigant
International, Inc. and its subsidiaries (the "Company") at December 27, 1998
and December 28, 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 27, 1998, in
conformity with generally accepted accounting principles. 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
generally accepted auditing standards 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.
/s/ PricewaterhouseCoopers LLP
Denver, Colorado
February 19, 1999
31
NAVIGANT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
December 27, December 28,
1998 1997
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 315 $ 6,048
Accounts receivable, less allowance for doubtful
accounts of $413 and $191, respectively........... 27,744 22,730
Prepaid expenses and other current assets.......... 2,517 650
Deferred income taxes.............................. 2,610 2,153
Short-term receivable from U.S. Office Products.... 490
-------- --------
Total current assets............................. 33,186 32,071
-------- --------
Property and equipment, net.......................... 21,569 18,468
Intangible assets, net............................... 150,554 86,304
Other assets......................................... 1,539 1,018
-------- --------
Total assets..................................... $206,848 $137,861
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term portion of long-term debt............... $ 4,437 $ 1,449
Short-term portion of capital lease obligations.... 564
Accounts payable................................... 2,875 6,617
Accrued compensation............................... 5,907 4,624
Accrued income taxes............................... 1,334
Other accrued liabilities.......................... 16,861 7,002
-------- --------
Total current liabilities........................ 31,978 19,692
-------- --------
Long-term debt, net of short-term portion............ 56,436 3,865
Capital lease obligations............................ 1,026
Long-term payable to U.S. Office Products............ 11,492
Deferred income taxes................................ 835 817
Other long-term liabilities.......................... 2,448 2,351
-------- --------
Total liabilities................................ 92,723 38,217
-------- --------
Commitments and contingencies (Notes 4, 11 and 12)
Stockholders' equity:
Common stock; $.001 par value, 150,000,000 shares
authorized;
12,929,000 issued and outstanding................. 13
Additional paid-in capital......................... 112,939
Divisional equity.................................. 94,100
Retained earnings.................................. 1,268 5,714
Accumulated other comprehensive income............. (95) (170)
-------- --------
Total stockholders' equity....................... 114,125 99,644
-------- --------
Total liabilities and stockholders' equity....... $206,848 $137,861
======== ========
See accompanying notes to consolidated financial statements.
32
NAVIGANT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except per Share Amounts)
For the Year Ended
--------------------------------------
December 27, December 28, December 29,
1998 1997 1996
------------ ------------ ------------
Revenues............................... $171,368 $90,917 $54,749
Operating expenses..................... 99,734 52,517 29,060
-------- ------- -------
Gross profit......................... 71,634 38,400 25,689
General and administrative expenses.... 47,988 27,377 19,707
Depreciation and amortization expense.. 7,167 3,090 1,386
Non-recurring charges.................. 8,236 1,156
-------- ------- -------
Operating income..................... 8,243 6,777 4,596
Other (income) expenses:
Interest expense..................... 2,070 685 540
Interest income...................... (227) (400) (452)
Other, net........................... (30) (29) 60
-------- ------- -------
Income before provision for income
taxes................................. 6,430 6,521 4,448
Provision for income taxes............. 3,987 2,975 709
-------- ------- -------
Net income............................. $ 2,443 $ 3,546 $ 3,739
======== ======= =======
Weighted average number of common
shares outstanding:
Basic................................ 13,156 10,858 8,250
Diluted.............................. 13,250 11,078 8,425
Net income per share:
Basic................................ $ 0.19 $ 0.33 $ 0.45
Diluted.............................. $ 0.18 $ 0.32 $ 0.44
See accompanying notes to consolidated financial statements.
33
NAVIGANT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands)
Accumulated
Additional Other Total
Divisional Common Paid-in Comprehensive Retained Stockholders'
Equity Shares Stock Capital Income Earnings Equity
---------- ------ ------ ---------- ------------- -------- -------------
Balance at December 31,
1995.................. $ 2,468 $6,719 $ 9,187
Transactions of Pooled
Companies:
Issuance of Pooled
Company common stock
for cash............ 1,625 1,625
Cash dividends........ (982) (982)
Comprehensive income:
Net income............ 3,739 3,739
--------
Total comprehensive
income............... 3,739
------- ------ --- -------- ----- ------ --------
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......... 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 in-
come................. 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
Shares repurchased..... (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................... $ 12,929 $13 $112,939 $ (95) $1,268 $114,125
======= ====== === ======== ===== ====== ========
See accompanying notes to consolidated financial statements.
34
NAVIGANT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
For the Year Ended
--------------------------------------
December 27, December 28, December 29,
1998 1997 1996
------------ ------------ ------------
Cash flows from operating activities:
Net income............................ $2,443 $3,546 $3,739
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization
expense.............................. 7,167 3,090 1,386
Non-recurring charges................. 4,196 1,156
Deferred tax provision (benefit)...... (232) (650) 444
Changes in current assets and
liabilities (net of assets acquired
and liabilities assumed in
combinations accounted for under the
purchase method):
Accounts receivable................. 389 (1,460) (1,692)
Prepaid expenses and other assets... (840) 1,193 (159)
Accounts payable.................... (4,744) (592) 610
Accrued liabilities and other
liabilities........................ 1,699 244 1,486
------- ------ ------
Net cash provided by operating
activities......................... 10,078 6,527 5,814
------- ------ ------
Cash flows from investing activities:
Additions to property and equipment,
net of disposals..................... (4,313) (1,424) (1,796)
Cash paid in acquisitions, net of cash
received............................. (59,505) (340)
Cash paid for earn-outs related to
prior acquisition.................... (1,563)
Payments of non-recurring acquisition
costs................................ (1,156)
Proceeds on sale of investments, net.. 332
------- ------ ------
Net cash used in investing
activities......................... (65,381) (2,588) (1,796)
------- ------ ------
Cash flows from financing activities:
Proceeds from issuance of long-term
debt................................. 149 3,800
Payments of long-term debt............ (2,457) (8,043) (5,594)
Proceeds from (payments of) credit
facilities, net...................... 53,300 (4,158) 801
Payment of debt issue costs........... (656)
Payments of dividends of Pooled
Companies............................ (3,038) (982)
Proceeds from issuance of common
stock................................ 14,992 142 1,625
Repurchase of common stock............ (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............... 49,341 (7,733) (350)
------- ------ ------
Effect of exchange rate changes on
cash................................... 229 (43)
------- ------ ------
Net increase (decrease) in cash and cash
equivalents............................ (5,733) (3,837) 3,668
Cash and cash equivalents at beginning
of period.............................. 6,048 9,885 6,217
------- ------ ------
Cash and cash equivalents at end of
period................................. $ 315 $6,048 $9,885
======= ====== ======
Supplemental disclosures of cash flow
information:
Interest paid......................... $ 1,442 $ 649 $ 561
Income taxes paid..................... $ 1,819 $ 470 $ 364
See accompanying notes to consolidated financial statements.
35
NAVIGANT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(In Thousands)
There were no business combinations accounted for under the purchase method
in the year ended December 29, 1996. 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 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 27, December 28,
1998 1997
------------ ------------
Accounts receivable................................ $ 6,583 $11,324
Prepaid expenses and other current assets.......... 757 1,231
Property and equipment............................. 1,705 9,664
Intangible assets.................................. 61,926 84,345
Other assets....................................... 135 1,266
Short-term debt.................................... (850) (2,594)
Accounts payable................................... (1,002) (3,785)
Accrued liabilities................................ (5,012) (10,066)
Long-term debt..................................... (161) (5,162)
Other long-term liabilities........................ (1,020) (2,103)
------- -------
Net assets acquired.............................. $63,061 $84,120
======= =======
The acquisitions were funded as follows:
U.S. Office Products common stock.................. $83,780
Notes payable...................................... $ 3,556
Cash paid, net of cash received.................... 59,505 340
------- -------
Total............................................ $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 asset by capital lease transactions.
See accompanying notes to consolidated financial statements.
36
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. 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 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,
37
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Unless Otherwise Noted)
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 reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Change in Fiscal Year
Effective for the December 27, 1998 reporting period, the Company changed
its fiscal year from a fiscal year ending on the last Saturday in April to a
fiscal year ending on the last Sunday in December. The financial statements
have been restated from the previously reported results to conform to this
change.
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 1997 and 1996 financial
statements to conform to the 1998 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.
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.
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
38
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Unless Otherwise Noted)
years for buildings and their components and 3 to 15 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. 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.
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 and hotel and car reservations 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
39
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Unless Otherwise Noted)
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
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. Common equivalent shares are
excluded from the computation in periods in which they have an anti-dilutive
effect. The difference between basic and diluted earnings per share, for the
Company, is solely attributable to stock options. For the years ended December
27, 1998, December 28, 1997 and December 29, 1996, options for 3.1 million;
340,000; and 205,000 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 is 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). FAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1,
2000 for the Company). FAS 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair value
of derivatives are 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 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.
40
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Unless Otherwise Noted)
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 29, 1996
Revenue............................... $54,749 $54,749
Net income............................ 3,739 3,739
For the year ended December 28, 1997
Revenue............................... $76,115 $14,802 $90,917
Net income............................ 2,782 764 3,546
Purchase Method
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
related to these eight acquisitions were $71,106, including intangible assets
of $61,926. 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 dependent upon the earnings of these
acquisitions. No accrual has been recorded on the balance sheet for these
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. 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 the 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 27, 1998 and December 28, 1997 and
includes the Company's consolidated financial statements,
41
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Unless Otherwise Noted)
which give retroactive effect to the acquisitions of the Pooled Companies for
all periods presented, and 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 $(4,147) and $(12,013) for the years ended
December 27, 1998 and December 28, 1997, respectively, to reflect the
amortization of intangible assets, adjustments in executive compensation, the
interest expense associated with the debt incurred to finance the 1998
acquisitions, and the inclusion of a federal income tax provision on all
earnings:
For the Year Ended
-------------------------
December 27, December 28,
1998 1997
------------ ------------
(unaudited)
Revenues........................................ $212,376 $214,960
Net income...................................... $ 7,097 $ 9,010
Net income per share--basic..................... $ 0.55 $ 0.69
Net income per share--diluted................... $ 0.55 $ 0.69
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.
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 Travel Distribu-
tion:
Impaired Goodwill--March 1998....................... $ 613 $ 613
Operation consolidation at Associated Travel........ $ 365 333 698
Allocated charges associated with the Travel Distri-
bution............................................. 1,073 2,677 3,750
------ ------ ------
1,438 3,623 5,061
Subsequent to the Travel Distribution:
Operational consolidation and elimination of redun-
dant 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 charge 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
42
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Unless Otherwise Noted)
result of U.S. Office Products' 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.
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.
Management anticipates that these measures will be completed by September
1999. The 1998 charge includes the closure of 20 facilities, the sale of one
building and the severance associated with the termination of 127 employees.
The following table summarizes non-recurring charges associated with the 1998
cost reduction plan and sets forth their usage for the periods indicated.
Employee Facility Closures
Severance and and
Termination 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
====== ====== ======
During 1997, the Company incurred non-recurring acquisition costs of $1,156,
in connection with the acquisition 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 27, December 28,
1998 1997
------------ ------------
Land............................................. $ 325 $ 325
Buildings........................................ 7,998 7,671
Furniture and fixtures........................... 18,257 14,325
Leasehold improvements........................... 2,878 2,263
Assets under capital leases...................... 1,590
------- -------
31,048 24,584
Less: Accumulated depreciation................... (9,479) (6,116)
------- -------
Net property and equipment....................... $21,569 $18,468
======= =======
Depreciation expense for the years ended December 27, 1998, December 28,
1997 and December 29, 1996 was $3,467, $1,722 and $820, respectively.
Amortization expense for assets under capital leases for the year ended
December 27, 1998 was $124.
43
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Unless Otherwise Noted)
NOTE 7--INTANGIBLE ASSETS
Intangible assets consist of the following:
December 27, December 28,
1998 1997
------------ ------------
Goodwill......................................... $156,252 $88,655
Less: Accumulated amortization................... (5,698) (2,351)
-------- -------
Net intangible assets............................ $150,554 $86,304
======== =======
Amortization expense for the years ended December 27, 1998, December 28,
1997 and December 29, 1996 was $3,576, $1,368 and $566, respectively.
NOTE 8--OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
December 27, December 28,
1998 1997
------------ ------------
Customer deposits................................ $ 6,378 $4,476
Customer revenue share........................... 4,682 1,159
Accrued restructuring costs (Note 5)............. 1,617
Accrued interest payable......................... 625
Allowance for refunds and exchanges.............. 417 339
Other............................................ 3,142 1,028
------- ------
Total other accrued liabilities................ $16,861 $7,002
======= ======
NOTE 9--CREDIT FACILITIES
Long-Term Debt
Long-term debt consists of:
December 27, December 28,
1998 1997
------------ ------------
Line of credit facility, weighted average inter-
est rate of 6.46% at December 27, 1998.......... $53,300
Mortgage payable, collateralized by certain as-
sets of the Company, 8.75% interest rate, due
February 1, 2007, monthly payments of $7........ 515 $ 562
Mortgage payable, collateralized by certain as-
sets of the Company, 9.08% to 9.4% interest
rates, due 2015, monthly payments of $19........ 1,839 1,895
Notes payable, due to former owners, unsecured,
interest rates ranging from 5.5% to 9.0%,
maturities through 2000......................... 5,219 2,857
------- ------
60,873 5,314
Less: Current maturities of long-term debt....... 4,437 1,449
------- ------
Total long-term debt........................... $56,436 $3,865
======= ======
44
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Unless Otherwise Noted)
On the date of the Travel Distribution, the Company executed a credit
agreement with NationsBank, N.A., as administrative agent. The Company's
borrowing capacity under this facility was $60,000 and the facility matures on
June 9, 2003. 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 27, 1998, 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.
Maturities of Long-Term Debt
Maturities of long-term debt are as follows:
1999........................................................... $ 4,437
2000........................................................... 986
2001........................................................... 135
2002........................................................... 119
2003........................................................... 53,430
Thereafter..................................................... 1,766
-------
Total maturities of long-term debt........................... $60,873
=======
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 long-term payable to U.S. Office Products primarily represents payments
made by U.S. Office Products on behalf of the Company and a reasonable
allocation by U.S. Office Products of certain general corporate expenses. An
analysis of the activity in this account is as follows:
Balance at December 29, 1996...................................... $ 0
Payments of long-term debt of Pooled Companies upon acquisi-
tion........................................................... 394
Payments of long-term debt of acquired companies upon
acquisition.................................................... 4,174
Payments of acquisition costs................................... 2,130
Allocated corporate expenses.................................... 846
Normal operating costs paid by U.S. Office Products............. 3,948
-------
Balance at December 28, 1997...................................... 11,492
Payments of long-term debt of acquired companies upon acquisi-
tion........................................................... 1,400
Normal operating costs paid by U.S. Office Products, net of cash
sweeps......................................................... 3,244
Allocated corporate expenses.................................... 264
Repayment of outstanding balance at the Travel Distribution..... (16,400)
-------
Balance at December 27, 1998...................................... $ 0
=======
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
45
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Unless Otherwise Noted)
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 the Travel Distribution to pay off the debt of U.S. Office
Products.
NOTE 10--INCOME TAXES
The provision for income taxes consists of:
For the Year Ended
--------------------------------------
December 27, December 28, December 29,
1998 1997 1996
------------ ------------ ------------
Income taxes currently payable:
Federal........................... $3,331 $3,021 $224
Foreign........................... 281 52
State............................. 607 552 41
------ ------ ----
4,219 3,625 265
Deferred income tax expense (bene-
fit)............................... (232) (650) 444
------ ------ ----
Total provision for income taxes.... $3,987 $2,975 $709
====== ====== ====
Deferred taxes are comprised of the following:
December 27, December 28,
1998 1997
------------ ------------
Current deferred tax assets:
Allowance for doubtful accounts................. $ 169 $ 79
Accrued restructuring charge.................... 686
Accrued salary and vacation..................... 1,042 1,966
Other accrued liabilities....................... 713 108
------ ------
Total current deferred tax assets............. 2,610 2,153
------ ------
Long-term deferred tax liabilities:
Property and equipment.......................... (417) (400)
Intangible assets............................... (135) (417)
Other........................................... (283)
------ ------
Total long-term deferred tax liabilities...... (835) (817)
------ ------
Net deferred tax liability........................ $1,775 $1,336
====== ======
46
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 27, December 28, December 29,
1998 1997 1996
------------ ------------ ------------
U.S. federal statutory rate......... 35.0% 35.0% 35.0%
State income taxes, net of federal
income tax benefit................. 5.7 4.3 1.9
Subchapter S corporation income not
subject to corporate level taxa-
tion............................... (7.4) (22.0)
Nondeductible goodwill.............. 13.4 4.3 0.6
Nondeductible non-recurring
charges............................ 5.4 4.7
Other............................... 2.5 4.7 0.4
---- ---- -----
Effective income tax rate........... 62.0% 45.6% 15.9%
==== ==== =====
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.
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 Leases Operating Leases
-------------- ----------------
1999...................................... $ 601 $ 5,670
2000...................................... 601 5,177
2001...................................... 381 3,853
2002...................................... 76 1,948
2003...................................... 45 1,069
Thereafter................................ 673
------ -------
Total minimum lease payments.............. 1,704 $18,390
=======
Less: Amounts representing interest....... (114)
------
Present value of net minimum lease pay-
ments including current portion of $564.. $1,590
======
Rent expense for all operating leases for the years ended December 27, 1998,
December 28, 1997 and December 29, 1996 was $5,632, $3,583 and $2,401,
respectively.
NOTE 12--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.
47
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Unless Otherwise Noted)
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
Jonathan J. Ledecky, a member of the Company's Board of Directors, and certain
other executive officers of U.S. Office Products. The plaintiffs allege that
Mr. Ledecky and the named U.S. Office Products executive officers made
fraudulent misrepresentations and omissions about U.S. Office Products'
accounting methods, the value of U.S. Office Products' stock and U.S. Office
Products' intent to spin-off its travel business in the Travel Distribution.
The plaintiffs contend that such alleged misrepresentations and omissions
induced the plaintiffs to sell their businesses to U.S. Office Products. The
Company has been named in the lawsuit as a successor to U.S. Office Products'
travel businesses. The plaintiffs contend that they may seek rescission of the
purchases of these two subsidiaries or damages for the value of the assets of
the two subsidiaries from the Company and have requested that the Company be
required to hold such assets in a constructive trust for the plaintiffs. The
Company's management intends to vigorously defend against this lawsuit.
Mr. Ledecky and U.S. Office Products have also been named as defendants in
at least 10 lawsuits which allege that Mr. Ledecky and U.S. Office Products
violated various United States securities laws. The plaintiffs 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 the Company and the other companies that were
spun off by U.S. Office Products (the "Spin-Off Companies") and the related
tender offer and restructuring. The validity and the amount of the claims made
in the lawsuits is uncertain.
Pursuant to the Distribution Agreement, the Company (and the other Spin-Off
Companies) 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
the Distribution Agreement, the Company's indemnification obligation, however,
would be limited to 5.2% of U.S. Office Products' indemnifiable loss, up to a
maximum of $1.75 million.
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 27, 1998 and
December 28, 1997 related to these agreements, as no change of control has
occurred.
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 will 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.
48
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Unless Otherwise Noted)
NOTE 12--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 27, 1998, December 28, 1997 and December 29,
1996, the Company incurred expenses totaling $678, $277 and $259,
respectively, related to this plan.
NOTE 13--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 has 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.
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
27, 1998, the Company had 744,500 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
49
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Unless Otherwise Noted)
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 27, December 28,
1998 1997
------------ ------------
Net income (loss):
As reported................................... $2,443 $3,546
Pro forma..................................... (112) 3,152
Net income (loss) per share:
As reported:
Basic....................................... $ 0.19 $ 0.33
Diluted..................................... $ 0.18 $ 0.32
Pro forma:
Basic....................................... $(0.01) $ 0.29
Diluted..................................... $(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 27, December 28,
1998 1997
------------ ------------
Expected life of option.......................... 7 years 7 years
Risk free interest rate.......................... 5.56% 6.15%
Expected volatility of stock..................... 85.06% 62.21%
Dividends........................................ $ 0 $ 0
The weighted-average fair value of options granted was $8.36 and $11.10 for
the years ended December 27, 1998 and December 28, 1997, respectively.
50
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
=========
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). Of the options exercised in 1998, 418,682 shares were
tendered in connection with the Distribution.
The following table summarizes information about stock options outstanding
and exercisable at December 27, 1998:
Options Outstanding Options Exercisable
--------------------------- ---------------------
Weighted Weighted
Weighted Average Average
Average Exercise Exercise
Range of Exercise Options Life Price Options Price
Price --------- -------- -------- --------- ----------
$4.56-$6.00.................... 63,050 8.88 $ 5.15 37,050 $ 4.56
$8.96-$12.65................... 2,974,599 9.26 10.06 32,649 10.75
$14.58-$14.90.................. 110,332 8.75 14.64 7,971 14.64
--------- ---------
$4.56-$14.90................... 3,147,981 9.24 $10.12 77,670 $ 8.55
========= =========
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 Stock
Offering price of $9.00 per share. These options vested immediately but could
not be exercised by Mr. Ledecky for one year.
Immediately following the effective date of the registration statement filed
in connection with the Stock Offering and the Travel 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 Stock Offering
price of $9.00 per share, and although these options vested immediately, they
could not be exercised for one year.
51
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Unless Otherwise Noted)
NOTE 14--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents certain unaudited quarterly financial data for the
years ended December 27, 1998 and December 28, 1997:
Year Ended December 27, 1998
------------------------------------------
First Second Third Fourth Total
------- ------- ------- ------- --------
Revenues............................. $37,709 $41,463 $45,059 $47,137 $171,368
Gross Profit......................... 16,089 17,754 18,869 18,922 71,634
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
Year Ended December 28, 1997
---------------------------------------
First Second Third Fourth Total
------- ------- ------- ------- -------
Revenues................................ $15,485 $17,288 $25,664 $32,480 $90,917
Gross profit............................ 6,825 7,768 10,885 12,922 38,400
Operating income........................ 1,710 2,487 1,435 1,145 6,777
Net income.............................. 826 1,311 929 480 3,546
Per share amounts:
Basic................................. $ 0.08 $ 0.12 $ 0.08 $ 0.04 $ 0.33
Diluted............................... $ 0.08 $ 0.12 $ 0.08 $ 0.04 $ 0.32
NOTE 15--SUBSEQUENT EVENT
In February 1999, the Company reached an agreement to acquire a corporate
travel management company. The agreed purchase price is approximately $19,000
(subject to adjustment), payable with a combination of cash of approximately
$15,200 and notes payable for the balance (payable in the form of stock or
cash or both). This agreement is subject to the completion of due diligence
and negotiation of definitive terms. In addition, both parties must receive
certain approvals and consents before the transaction can be consummated. The
Company expects to complete this acquisition in the second quarter of 1999.
The acquisition will be accounted for under the purchase method.
52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
53
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth information concerning each of the directors,
executive officers and key employees of Navigant. All directors serve until
their successors are duly elected and qualified, subject, however, to prior
death, resignation, retirement, disqualification or removal from office.
Officers are appointed by and serve at the discretion of Navigant's Board of
Directors.
Name Age Position
---- --- --------
Edward S. Adams.................. 48 Chairman of the Board, Chief
Executive Officer, President and
Director (3)
Robert C. Griffith............... 49 Chief Financial Officer and Treasurer
Douglas R. Knight................ 41 Chief Operating Officer (4)
Robert P. Dunlop................. 52 Executive Vice President, Marketing
and Technology
Michael B. Arrington............. 55 Executive Vice President, Global
Operations
John S. Coffman.................. 37 Vice President and Corporate
Controller
Eugene A. Over, Jr............... 40 Vice President, General Counsel and
Secretary
Neville Teagarden................ 35 Vice President, Information Systems
Jonathan J. Ledecky.............. 41 Director (1)
Vassilios Sirpolaidis............ 51 Director (3)
Ned A. Minor..................... 53 Director (2)
D. Craig Young................... 44 Director (2)
- - --------
(1)Term expires in 1999.
(2)Term expires in 2000.
(3)Term expires in 2001.
(4)On April 9, 1999, Mr. Knight announced his decision to relinquish his
duties as Chief Operating Officer, although he continues to be employed by the
Company.
Business Biographies
Edward S. Adams has served as Chairman of the Board, Chief Executive
Officer, President and Director of Navigant since February 1998. He has served
as Chairman and Chief Executive Officer of Professional Travel Corporation
("PTC"), a subsidiary of Navigant, since 1983, served as President of PTC from
1983 through April 1998, and as President of the U.S. Office Products
Corporate Travel Services Division from January 1997 through June 9, 1998.
Robert C. Griffith has served as Chief Financial Officer and Treasurer of
Navigant since February 1998. He has served as Chief Financial Officer of PTC
since January 1997 and served as Chief Financial Officer of the U.S. Office
Products Corporate Travel Services Division from January 1997 through June 9,
1998. Mr. Griffith served as Vice President of Finance and Administration of
PTC from June 1993 through January 1997. Prior to joining PTC, Mr. Griffith
served as Senior Manager and Area Director of IDS Tax and Business Services, a
subsidiary of American Express, from September 1991 to June 1993. Before
joining IDS, Mr. Griffith was employed by Deloitte & Touche. Mr. Griffith is
licensed as a certified public accountant in the state of Colorado.
Douglas R. Knight has served as Chief Operating Officer of Navigant since
March 1998. Mr. Knight has served as President of McGregor Travel Management,
Inc., a subsidiary of Navigant ("McGregor"), since April 1993 and as Chairman
of McGregor since October 1997. Mr. Knight joined McGregor in 1987 as
Controller and became Vice President of Finance in 1989. From 1984 to 1987,
Mr. Knight worked for American Airlines and was responsible for implementing
and maintaining American Airline's travel agency accounting system, ADS, in
travel agencies across the United States.
54
Robert P. Dunlop has served as Executive Vice President, Marketing and
Technology, of Navigant since November 1998, and as President of Navigant's
Pacific Northwest Region since August 1998. In addition, Mr. Dunlop has served
as CEO of Mutual Travel, Inc. ("Mutual Travel"), now a subsidiary of Navigant,
since 1985. He entered the travel industry in 1977 as Vice President, Finance
for Doug Fox Travel in Seattle, serving as that company's President from 1980
to 1984. Originally from England, Mr. Dunlop was educated as an engineer and
lived and worked in South Africa before coming to the United States in 1972 as
a management consultant for Touche Ross.
Michael B. Arrington has served as Executive Vice President of Global
Operations of Navigant since November 1998 and as President of Navigant's
Central Region since August 1998. Mr. Arrington served as President and Chief
Executive Officer of Arrington Travel Center, Inc. ("Arrington Travel") (a
subsidiary of Navigant since July 1998) from August 1969 through December
1997, and as Chairman and Chief Executive Officer of Arrington Travel from
December 1997 to present. Mr. Arrington served in the U.S. Marine Corps, First
Force Reconnaissance Company, 1st Marine Division, from 1962 through 1964. He
received his bachelor of arts degree in political science from the University
of Illinois at Chicago.
John S. Coffman, has served as Vice President, Corporate Controller of
Navigant since June 1998. Prior to that, Mr. Coffman was a senior manager in
the business advisory group of Price Waterhouse LLP. Mr. Coffman began with
Price Waterhouse in September 1984. Mr. Coffman is licensed as a certified
public accountant in the state of Colorado.
Eugene A. Over, Jr. has served as General Counsel and Secretary of Navigant
since February 1998. He served as Legal Affairs and Administrative Officer of
U.S. Office Product's corporate travel services division from December 1997
through June 9, 1998. Mr. Over was an attorney at Clanahan Tanner Downing &
Knowlton, P.C. from December 1994 through November 1997. From January 1994
through November 1994, he served as General Counsel of GSA Corporation, a
private investment company. Prior to January 1994, Mr. Over was an attorney at
Montgomery, Little & McGrew, P.C.
Neville Teagarden has served as Vice President of Information Systems at
Navigant since January 1999. Mr. Teagarden served as Manager and subsequently
Director of Technology Architecture at Janus Capital Corporation, from May
1996 through January 1999. From 1989 through 1996, Mr. Teagarden worked for
Advantage kbs, Inc, an information systems consulting firm. In 1993, Mr.
Teagarden was promoted to Manager and given responsibility for the consulting
practice in the western half of the United States. Mr. Teagarden has also
performed research at the Massachusetts Institute of Technology ("MIT")
Artificial Intelligence Laboratory. He received his degree in Computer Science
and Engineering from MIT.
Jonathan J. Ledecky has served as a director of Navigant since June 15,
1998. Mr. Ledecky founded the predecessor to Building One Services Corporation
in February 1997 and serves as its Chairman and Chief Executive Officer. Mr.
Ledecky founded U.S. Office Products in October 1994 and served as its
Chairman of the Board until June 9, 1998, and as its Chief Executive Officer
until November 5, 1997. Mr. Ledecky serves as a director of U.S.A. Floral
Products, Inc., UniCapital Corporation, Aztec Technology Partners, School
Specialty, Inc., Workflow Management, Micro Strategy Corporation, and Building
One Services Corporation. Mr. Ledecky served from 1989 to 1991 as the
President of The Legacy Fund, Inc., and from 1991 to September 1994 as
President and Chief Executive Officer of Legacy Dealer Capital Fund, Inc., a
wholly-owned subsidiary of Steelcase Inc. Prior to his tenure at The Legacy
Fund, Inc., Mr. Ledecky was a partner at Adler and Company and a Senior Vice
President at Allied Capital Corporation, an investment management company.
Vassilios Sirpolaidis has served as a director of Navigant since June 9,
1998. Mr. Sirpolaidis has been President of Mile High Office Supply Company,
Inc. ("Mile High") since 1978. U.S. Office Products acquired Mile High in July
1996. Mr. Sirpolaidis has also served as a District President of U.S. Office
Products since August 1996 and as President of Arizona Office Products, a
subsidiary of U.S. Office Products, since May 1997.
55
Ned A. Minor has served as a Director of Navigant since June 9, 1998. Mr.
Minor has served as Director, President and Vice-President of Minor & Brown,
P.C., a private law firm, since 1977. Mr. Minor is a practicing attorney in
the state of Colorado, specializing in the areas of general corporate law and
mergers and acquisitions.
D. Craig Young has served as a Director of Navigant since June 9, 1998. Mr.
Young currently serves as Director, President and Chief Executive Officer of
Metronet Communications, a telecommunications company. From 1995 through 1998,
Mr. Young served as the President and Chief Operating Officer of Brooks Fiber
Properties, Inc. Mr. Young served from 1993 to 1995 as Vice President of
Custom Business for Ameritech Corp., a telecommunications company based in
Chicago, Illinois. Mr. Young also serves on the board of Metronet
Communications.
Section 16 Reports
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires Navigant's officers and directors, and persons who
beneficially own more than 10% of Navigant Common Stock, to file reports of
securities ownership and changes in such ownership with the Securities and
Exchange Commission ("SEC"). Officers, directors, and greater than 10%
beneficial owners are also required by rules promulgated by the SEC to furnish
Navigant with copies of all Section 16(a) forms they file.
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished
to the Company, the following are persons who, at any time during the fiscal
year, were a director, officer, beneficial owner of more than 10% of any class
of equity securities of the Company registered pursuant to Section 12 of the
Exchange Act, or any other person subject to Section 16 of the Exchange Act,
that failed to file on a timely basis, as disclosed in the above Forms,
reports required by Section 16(a) of the Exchange Act during the most recent
and prior fiscal years:
Person Number of Late Reports Transactions
------ ---------------------- ------------
Edward S. Adams.......................... 1 2
Michael B. Arrington..................... 1 0
John S. Coffman.......................... 2 2
Robert P. Dunlop......................... 1 0
There are no known failures to file a required Form during the most recent
fiscal year.
As of April 15, 1999, based solely upon a review of Forms 3 and Forms 4 and
amendments thereto furnished to the Company, all directors and officers have
filed all forms required to be filed in the current fiscal year.
56
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth information with respect to the compensation
paid by all persons for services rendered to Navigant and its subsidiaries
during the fiscal years ended December 27, 1998 and December 28, 1997 to the
Chief Executive Officer and to the other four most highly compensated officers
of Navigant (the "Named Officers").
Summary Compensation Table
Annual Compensation
-------------------------------------
All Other
Name and Principal Position Year Salary Bonus Compensation(1)
--------------------------- ---- -------- ------- ---------------
Edward S. Adams.......................... 1998 $295,260 -- $8,873
Chairman of the Board, Chief Executive 1997 255,995 -- 7,640
Officer, President and Director
Robert C. Griffith....................... 1998 188,333 -- 5,458
Chief Financial Officer and Treasurer 1997 146,689 -- 4,700
Douglas R. Knight(2)..................... 1998 251,923 -- 2,891
Chief Operating Officer
Robert P. Dunlop(3)...................... 1998 235,437 $57,971 21,667
Executive Vice President, Marketing and
Technology
Michael B. Arrington(4).................. 1998 118,273 -- --
Executive Vice President, Global
Operations
- - --------
(1) Represents automobile expenses paid by Navigant.
(2) Mr. Knight became an employee of Navigant effective October 1997 and
became an officer of Navigant effective March 1998.
(3) Mr. Dunlop became an officer of Navigant effective November 1998.
(4) Mr. Arrington became an employee of Navigant effective July 1998 and
became an officer of Navigant effective November 1998.
57
Option Grants
The following table sets forth certain information regarding options to
acquire Navigant Common Stock granted to the Named Officers during the fiscal
year ended December 27, 1998.
Options Granted in Fiscal Year 1998
Potential Realizable
Value at Assumed
Annual Rate of Stock
Options Granted in Price Appreciation for
Fiscal Year 1998 Option Term(4)(5)
---------------------------- ----------------------
Percent of Total
Options Options Granted Exercise Expiration
Name Granted in Fiscal Year(2) Price Date 5% 10%
- - ---- ------- ----------------- -------- ---------- ---------- -----------
Edward S. Adams......... 746,667(1) 27.3 $11.89(3) 3/20/08 $4,486,781 $11,370,384
376,500 13.8 9.00 6/10/08 2,131,009 5,400,396
Robert C. Griffith...... 186,667(1) 6.8 11.89(3) 3/20/08 1,205,412 3,054,751
111,000 4.0 9.00 6/10/08 628,266 1,592,149
Douglas R. Knight....... 52,500 1.9 9.00 6/10/08 297,153 753,043
Robert P. Dunlop........ 25,000 0.9 9.00 6/10/08 141,501 358,592
Michael B. Arrington.... -- -- -- -- -- --
- - --------
(1) Options were granted by U.S. Office Products to acquire U.S. Office
Products common stock, and were replaced with options to acquire Navigant
Common Stock in connection with the Travel Distribution. Of these options
granted by U.S. Office Products in 1998, 146,634 of Mr. Adams' options and
25,463 of Mr. Griffith's options were repurchased with U.S. Office
Products' tender of 23.2% of outstanding shares and options in connection
with its strategic restructuring and these options were not replaced with
options to acquire Navigant Common Stock.
(2) Based on options granted in 1998 to purchase an aggregate of 2,730,540
shares of Navigant Common Stock.
(3) The original exercise prices of the options to acquire U.S. Office
Products common stock were $18.50 per share, which exercise prices were
adjusted when they were replaced with options to acquire Navigant Common
Stock in connection with the Travel Distribution to be $11.89.
(4) The potential realizable value is calculated based on the term of the
option at its time of grant (10 years) and is calculated by assuming that
the stock price on the date of grant appreciates at the indicated annual
rate compounded annually for the entire term of the option and that the
option is exercised and sold on the last day of its term for the
appreciated price. The 5% and 10% assumed rates of appreciation are
derived from the rules of the SEC and do not represent Navigant's estimate
or projection of the future Navigant Common Stock price.
(5) Excludes the options that were repurchased by U.S. Office Products
immediately prior to the Travel Distribution (see note (1) above).
58
Option Exercises and Holdings
The following table sets forth certain information regarding option
exercises and unexercised options held by the Named Officers at December 27,
1998.
Aggregated Option Exercises in Fiscal Year Ended December 27, 1998
and Fiscal Year-End 1998 Option Values
Number of Unexercised Value of Unexercised
Options Held at In-the-Money Options at
December 27, 1998 December 27, 1998
------------------------- -------------------------
Shares Acquired Value
on Exercise (1) Realized($)(2) Exercisable Unexercisable Exercisable Unexercisable
Name --------------- -------------- ----------- ------------- ----------- -------------
Edward S. Adams......... 181,634 $1,067,428 -- 976,533 -- --
Robert C. Griffith...... 48,796 316,586 -- 272,204 -- --
Douglas R. Knight....... -- -- -- 52,500 -- --
Robert P. Dunlop........ -- -- -- 25,000 -- --
Michael B. Arrington.... -- -- -- -- -- --
- - --------
(1) Options were repurchased with U.S. Office Products' tender of 23.2% of
outstanding shares and options for $17.36 per share post-Travel
Distribution ($27.00 prior to the Travel Distribution) in connection with
its strategic restructuring.
(2) Values stated are the bargain element recognized in 1998, which is the
difference between the option price and the market price (or price
tendered by U.S. Office Products) at the time of exercise.
1998 Stock Incentive Plan
Navigant has adopted the 1998 Stock Incentive Plan (the "Plan"). The purpose
of the Plan is to promote the long-term growth and profitability of Navigant
by providing employees with incentives to improve stockholder value and
contribute to the growth and financial success of Navigant. The Plan also
allows Navigant to attract, retain and reward highly motivated and qualified
employees. The maximum percentage of shares of Navigant Common Stock that may
be issued with respect to awards granted under the Plan is 30% of the
outstanding Navigant Common Stock. The maximum number of shares that may be
issued with respect to awards granted under the Plan to an individual in a
calendar year may not exceed 1,100,000 shares. The Compensation Committee of
the Board of Directors administers the Plan. All employees of Navigant and its
subsidiaries, as well as non-employee directors of Navigant, are eligible to
receive awards under the Plan. The Plan authorizes the Compensation Committee
to make awards of stock options, restricted stock and other stock-based
awards. The Compensation Committee will determine the prices, vesting
schedules, expiration dates and other material conditions under which such
awards may be exercised.
Committees of the Board
The Board of Directors has created an Audit Committee consisting of Messrs.
Sirpolaidis, Minor and Young. The Audit Committee is charged with reviewing
Navigant's annual audit and meeting with Navigant's independent accountants to
review Navigant's internal control and financial management practice.
The Board of Directors has created a Compensation Committee consisting of
Messrs. Sirpolaidis, Minor and Young. The Compensation Committee is charged
with determining the compensation of executive officers of Navigant and
administering any stock option plan Navigant may adopt.
Compensation of Directors
Non-management directors are compensated with $10,000 of airline tickets and
other travel accommodations for their services as directors. In addition, such
directors will be paid $2,500 in cash for each committee of the Board of
Directors on which they serve and may be granted Navigant Options under the
Plan. Non-management directors will also be reimbursed for all out-of-pocket
expenses related to their service as directors.
59
On June 10, 1998, Jonathan J. Ledecky received a stock option pursuant to
the Plan to purchase 822,671 shares of Common Stock at the exercise price of
$9.00 per share. The option expires on June 9, 2008, and was granted to Mr.
Ledecky in order to compensate Mr. Ledecky for services to Navigant as an
employee.
On June 10, 1998, each of Ned A. Minor, Vassilios Sirpolaidis and D. Craig
Young received a stock option pursuant to the Plan to purchase 10,000 shares
of Common Stock at the exercise price of $9.00 per share. The options expire
on June 9, 2008.
Ledecky Services Agreement
Jonathan J. Ledecky entered into a services agreement (the "Ledecky Services
Agreement") with U.S. Office Products on January 13, 1998, which agreement was
amended as of June 8, 1998. The principal terms of the Ledecky Services
Agreement, as amended, are summarized below.
The Ledecky Services Agreement, which continues through June 30, 2001,
provides that Mr. Ledecky will provide high-level acquisition negotiation
services and strategic business advice to the Board of Directors of U.S.
Office Products.
Navigant entered into an employment agreement with Mr. Ledecky, effective as
of June 10, 1998, that implemented its assigned portion of the Ledecky
Services Agreement. Under the employment agreement, Mr. Ledecky will report to
the Board of Directors and senior management of Navigant. In such capacity,
Mr. Ledecky will provide high-level acquisition negotiations services and
strategic business advice. Navigant can require Mr. Ledecky's performance of
such services, consistent with his other contractual obligations to
Consolidation Capital Corporation, U.S. Office Products and the other Spin-Off
Companies. As an employee, Mr. Ledecky will also be subject to the generally
applicable personnel policies of Navigant and will be eligible for such
benefit plans in accordance with their terms. Navigant will pay Mr. Ledecky an
annual salary of $48,000 for up to two years. Navigant may terminate Mr.
Ledecky's employment with "cause," where cause includes (1) his conviction of
or guilty or nolo contendere plea to a felony demonstrably and materially
injurious to Navigant or (2) his violation of the non-competition provision as
it relates to Navigant.
The Ledecky Services Agreement provides for non-competition and non-
solicitation restrictions that continue, in the case of Navigant, until the
later of June 10, 2000 or the date one year after Mr. Ledecky leaves
Navigant's employ. These provisions generally restrict Mr. Ledecky from, among
other things, investing in or working for, or on behalf of, any business
selling any products or services in direct competition with U.S. Office
Products or the Spin-Off Companies (collectively, the "U.S. Office Products
Companies"), within 100 miles of any location where the relevant U.S. Office
Products Company regularly maintains an office with employees. (For this
purpose, "products or services" are those that U.S. Office Products offered on
January 13, 1998). Notwithstanding this prohibition, Mr. Ledecky may serve in
a policy-making role (but not engage in direct personal competition) with
respect to certain businesses including: (1) businesses providing Internet
access services and (2) U.S. Marketing Services' incentive marketing
businesses (as currently publicly described to include travel incentives), but
Mr. Ledecky must cease serving as a director and be solely an investor after
that company is public. The Ledecky Services Agreement prohibits Mr. Ledecky
from trying to hire away managerial employees of the U.S. Office Products
Companies or calling upon customers of the U.S. Office Products Companies to
solicit or sell products or services in direct competition with the U.S.
Office Products Companies. Navigant can enforce the non-competition provision
described above as it applies to Navigant.
Employment Contracts and Related Matters
On June 9, 1998, Mr. Adams' employment agreement with PTC was assigned to
Navigant and amended. As amended, the agreement provides for a term of five
years, and provides that Mr. Adams is entitled to receive minimum annual
compensation of $300,000. In addition, Mr. Adams is entitled to receive
incentive bonuses as determined by Navigant's Board of Directors, all
perquisites and benefits customarily provided by Navigant to
its employees and reimbursement for the actual cost of leasing an automobile
for business use (not to exceed
60
$712 per month). If Mr. Adams' employment is terminated for any reason other
than cause, Mr. Adams is entitled to receive his base salary and benefits for
the longer of (1) six months from the date of termination or (2) the remaining
time under the initial term of the employment agreement (subject to a right of
offset if Mr. Adams secures other employment during the period that payment is
continuing under the agreement). The employment agreement also prohibits Mr.
Adams from engaging in certain activities deemed competitive with Navigant or
its affiliates during the duration of his employment with Navigant and for the
longer of (1) a period of two years thereafter or (2) as long as Mr. Adams
continues to receive severance payments from Navigant.
On June 9, 1998, Mr. Griffith's employment agreement with PTC was assigned
to Navigant and amended. As amended, the agreement provides for a term of five
years, and provides that Mr. Griffith is entitled to receive minimum annual
compensation of $200,000. In addition, Mr. Griffith is entitled to receive
incentive bonuses as determined by Navigant's Board of Directors, all
perquisites and benefits customarily provided by Navigant to its employees and
reimbursement for the actual cost of leasing an automobile for business use
(not to exceed $438 per month). In the event that Mr. Griffith's employment is
terminated for any reason other than cause, Mr. Griffith's employment
agreement provides that Mr. Griffith is entitled to receive his base salary
and benefits for the longer of (1) four months from the date of termination or
(2) the remaining time under the initial term of the employment agreement,
subject to a right of offset if Mr. Griffith secures other employment during
the period that payment is continuing under the agreement. The employment
agreement also prohibits Mr. Griffith from engaging in certain activities
deemed competitive with Navigant or its affiliates during the duration of his
employment with Navigant and for the longer of (1) a period of two years
thereafter or (2) as long as Mr. Griffith continues to receive severance
payments from Navigant.
On June 9, 1998, Mr. Knight's employment agreement with McGregor was
assigned to Navigant and amended. As amended, the agreement provides for a
term of two years, and provides that Mr. Knight is entitled to receive minimum
annual compensation of $250,000. In addition, Mr. Knight is entitled to
receive all perquisites and benefits customarily provided by Navigant to its
employees and reimbursement for the actual cost of leasing an automobile for
business use (not to exceed $550 per month). In the event that Mr. Knight's
employment is terminated without cause, Mr. Knight's employment agreement
provides that Mr. Knight is entitled to receive severance compensation at the
rate of $250,000 per year for whatever time period is remaining under the term
of the agreement, subject to a right of offset if Mr. Knight secures other
employment during the period that payment is continuing under the agreement.
The employment agreement also prohibits Mr. Knight from engaging in certain
activities deemed competitive with Navigant or its affiliates during the
duration of his employment with Navigant and for the longer of (1) a period of
one year thereafter or (2) as long as Mr. Knight continues to receive
severance payments from Navigant.
On April 25, 1997, Mr. Dunlop entered into an employment agreement with
Mutual Travel. The agreement provides for a two-year term, with an additional
year at the option of Mutual Travel, and a base salary of $250,000 per year.
In addition, Mr. Dunlop is entitled to receive incentive bonuses as determined
by Navigant's Board of Directors, and all perquisites and benefits customarily
provided by Mutual Travel to its employees. If Mr. Dunlop's employment is
terminated without cause, Mr. Dunlop is entitled to receive his base salary
for the longer of (1) three months from the date of termination and (2) the
time period remaining under the initial term of the employment agreement,
subject to a right of offset if Mr. Dunlop secures other employment during the
period that payment is continuing under the agreement. The employment
agreement also prohibits Mr. Dunlop from engaging in certain activities deemed
competitive with Mutual Travel or its affiliates during the duration of his
employment with Mutual Travel or its affiliates and for the longer of (1) a
period of one year thereafter or (2) as long as Mr. Dunlop continues to
receive severance payments from Mutual Travel.
On July 28, 1998, Mr. Arrington entered into an employment agreement with
Arrington Travel. The agreement provides for an initial four-year term, with
successive one-year extensions at the option of Arrington Travel, and a base
salary of $250,000 per year. In addition, Mr. Arrington is entitled to
participate in any incentive bonus plan adopted by Navigant for all of its
senior regional executives, and all perquisites and benefits
customarily provided by Arrington Travel to its employees. If Mr. Arrington's
employment is terminated without cause, Mr. Arrington is entitled to receive
his base salary for the longer of (1) three months from the date of
61
termination and (2) the time period remaining under the initial term of the
employment agreement, subject to a right of offset if Mr. Arrington secures
other employment during the period that payment is continuing under the
agreement. The employment agreement also prohibits Mr. Arrington from engaging
in certain activities deemed competitive with Arrington Travel or its
affiliates during the duration of his employment with Arrington Travel or its
affiliates and for the longer of (1) a period of two years thereafter or (2)
as long as Mr. Arrington continues to receive severance payments from
Arrington Travel.
Compensation Committee Interlocks and Insider Participation
The Board of Directors has created a Compensation Committee consisting of
Vassilios Sirpolaidis, Ned A. Minor and D. Craig Young. The Compensation
Committee is charged with determining the compensation of all executive
officers. No member of the Compensation Committee has ever been an officer of
Navigant or any of its subsidiaries.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the number and percentage of outstanding
shares of Navigant Common Stock beneficially owned as of December 27, 1998, by
(1) all persons known by Navigant to own beneficially more than 5% of
Navigant's Common Stock, (2) each director and each executive officer of
Navigant, and (3) all directors and executive officers of Navigant as a group.
All persons listed below have sole voting and investment power with respect to
their shares of Common Stock unless otherwise indicated.
Number of Shares of
Navigant Percent of Navigant
Name and Address of Beneficial Owner Common Stock Common Stock (1)(2)
------------------------------------ ------------------- -------------------
Edward S. Adams (3)................. 122,986 *
Robert C. Griffith (4).............. 1,000 *
Douglas R. Knight (5)............... 53,322 *
Robert P. Dunlop (6)................ 27,573 *
Michael B. Arrington................ -- --
John S. Coffman (7)................. 1,000 *
Eugene A. Over, Jr. (7)............. -- --
Neville Teagarden................... -- --
Jonathan J. Ledecky (8)............. 186,391 1.4%
Vassilios Sirpolaidis (9)........... 140,170 1.1%
Ned Minor (10)...................... 2,000 *
D. Craig Young (10)................. 4,100 *
All current executive officers and
directors as a
group (12 persons)(11)............. 538,542 4.1%
5% Stockholders
The Baupost Group, LLC (12)......... 2,194,241 16.8%
44 Brattle Street, 5th Floor
P.O. Box 389125
Cambridge, MA 02238-9125
Capital Research and Management Com-
pany (13).......................... 940,000 7.2%
333 South Hope Street
Los Angeles, CA 90071
SMALLCAP World Fund, Inc. (14)...... 840,000 6.4%
333 South Hope Street
Los Angeles, CA 90071
- - --------
*Less than 1%.
62
(1) Beneficial ownership is determined in accordance with the rules of the
SEC and generally includes voting or investment power with respect to
securities. Shares of Navigant Common Stock subject to options, warrants
and convertible debentures currently exercisable or convertible, or
exercisable or convertible within 60 days of December 27, 1998 are deemed
outstanding for computing the percentage of the person or entity holding
such securities but are not outstanding for computing the percentage of
any other person or entity.
(2) Percentage of ownership is based on 12,929,000 shares of Navigant Common
Stock outstanding at December 27, 1998 and 137,375 shares of Navigant
Common Stock subject to options, warrants and convertible debentures
currently exercisable or convertible, or exercisable or convertible
within 60 days of December 27, 1998 are deemed outstanding for computing
the percentage of the person or entity holding such securities but are
not outstanding for computing the percentage of any other person or
entity.
(3) Includes 12,353 shares held by Marcono, LLC; Mr. Adams disclaims
beneficial ownership of these shares except for his pecuniary interest
therein. Excludes 976,533 shares of Navigant Common Stock which may be
acquired upon exercise of options which are not exercisable within 60
days following December 27, 1998.
(4) Excludes 272,204 shares of Navigant Common Stock which may be acquired
upon exercise of options which are not exercisable within 60 days
following December 27, 1998.
(5) Includes 1,408 shares of Navigant Common Stock held by DeFranco & Knight,
LLC; Mr. Knight disclaims beneficial ownership of these shares except for
his pecuniary interest therein. Excludes 52,500 shares of Navigant Common
Stock which may be acquired upon exercise of options which are not
exercisable within 60 days following December 27, 1998.
(6) Excludes 25,000 shares of Navigant Common Stock which may be acquired
upon the exercise of options which are not exercisable within 60 days
following December 27, 1998.
(7) Excludes 50,000 shares of Navigant Common Stock which may be acquired
upon the exercise of options which are not exercisable within 60 days
following December 27, 1998
(8) Excludes 822,671 shares of Navigant Common Stock which may be acquired
upon exercise of options which are not exercisable within 60 days
following December 27, 1998.
(9) Excludes 10,000 shares of Navigant Common Stock which may be acquired
upon exercise of options which are not exercisable within 60 days
following December 27, 1998.
(10) Excludes 10,000 shares of Navigant Common Stock which may be acquired
upon exercise of options which are not exercisable within 60 days
following December 27, 1998.
(11) Excludes 2,278,908 shares of Navigant Common Stock which may be acquired
upon exercise of options which are not exercisable within 60 days
following December 27, 1998.
(12) The Baupost Group, LLC is a registered investment adviser. SAK
Corporation is the Manager of the Baupost Group, L.L.C. Seth A. Klarman,
as the sole director of SAK Corporation and a controlling person of
Baupost Group, LLC, may also be deemed to have beneficial ownership of
these securities. These securities include securities purchased on behalf
of a registered investment company and various limited partnerships.
(13) Capital Research and Management Company is a registered investment
adviser.
(14) SMALLCAP World Fund, Inc. is a registered investment company which is
advised by Capital Research and Management Company.
There has been no change in control of Navigant since the beginning of its
last fiscal year, and there are no arrangements known to Navigant, including
any pledge of securities of Navigant, the operation of which may at a
subsequent date result in a change in control of Navigant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On January 24, 1997, U.S. Office Products acquired PTC, which is now a
wholly-owned subsidiary of Navigant, from Edward S. Adams, Navigant's Chairman
of the Board, Chief Executive Officer and President, for 725,923 shares of
U.S. Office Products common stock (which now represent 72,592 shares of Common
Stock) valued at $22.725 per share (the "PTC Acquisition"). In connection with
the PTC Acquisition, PTC also entered into an employment agreement, as
amended, with Mr. Adams at an annual base salary of $300,000 per
63
year and an employment agreement, as amended, with Robert C. Griffith,
Navigant's Chief Financial Officer and Treasurer, at an annual base salary of
$200,000 per year. Navigant believes that the terms of these transactions are
as favorable as could be negotiated with third parties.
On January 24, 1997, in a transaction related to the PTC Acquisition, PTC
acquired a commercial office building at 84 Inverness Circle East, Englewood,
Colorado from Marcono LLC ("Marcono"), a Colorado limited liability company,
for an aggregate purchase price of approximately $3.4 million, consisting of
68,154 shares of U.S. Office Products common stock (which now represent 6,815
shares of Navigant Common Stock) valued at $22.725 per share and PTC's
assumption of certain notes from Marcono in the aggregate amount of
$1,846,721. Marcono is owned as follows: 2% by Edward S. Adams, 2% by Mr.
Adams' wife and 48% by each of two trusts established for the benefit of Mr.
Adams' two children. Vassilios Sirpolaidis, a director of Navigant, is the
trustee of the two trusts. Prior to the purchase of the office building by
PTC, PTC leased the office building from Marcono for approximately $22,000 per
month. The office building purchased by PTC is used as its headquarters and as
the headquarters of Navigant. Navigant believes that the terms of this
transaction are as favorable as could be negotiated with third parties.
On October 24, 1997, U.S. Office Products acquired McGregor, which is now a
wholly-owned subsidiary of Navigant, from its stockholders for 1,255,008
shares of U.S. Office Products common stock (which now represent 125,501
shares of Navigant Common Stock) valued at $24.54 per share (the "McGregor
Acquisition"). One of McGregor's beneficial owners was Douglas R. Knight, who
was Navigant's Chief Operating Officer. In connection with the McGregor
Acquisition, Mr. Knight received 676,265 shares of U.S. Office Products common
stock (which now represent 67,626 shares of Navigant Common Stock) valued at
$24.54 per share. Also in connection with the McGregor Acquisition, McGregor
entered into an employment agreement with Mr. Knight at an annual base salary
of $250,000 per year. Navigant believes that the terms of this transaction are
as favorable as could be negotiated with third parties.
On October 28, 1997, in a transaction related to the McGregor Acquisition,
McGregor acquired portions of an office building at 112 Prospect Street,
Stamford, Connecticut from DeFranco & Knight, LLC for an aggregate purchase
price of approximately $1,035,000, consisting of 18,336 shares of U.S. Office
Products common stock (which now represent 1,834 shares of Navigant Common
Stock) valued at $24.54 per share and McGregor's assumption of a note from
DeFranco & Knight LLC in the approximate amount of $585,000. Mr. Knight is a
50% owner of DeFranco & Knight, LLC. Navigant believes that the terms of this
transaction are as favorable as could be negotiated with third parties.
Mr. Knight is a partner in an emergency travel service provider that
contracts with McGregor to provide emergency travel service to clients of
McGregor at a rate of $12.00 per emergency call. During the fiscal year ended
December 27, 1998, McGregor paid approximately $533,092 to such emergency
travel service provider.
On April 25, 1997, U.S. Office Products acquired Mutual Travel, which is now
a wholly-owned subsidiary of Navigant, from its stockholders for 1,031,754
shares of U.S. Office Products common stock (which now represent approximately
103,175 shares of Navigant Common Stock) valued at $15.242 per share (the
"Mutual Acquisition"). One of Mutual Travel's beneficial owners was Robert
Dunlop, who is now Navigant's Executive Vice President, Marketing and
Technology. In connection with the Mutual Acquisition, Mr. Dunlop received
approximately 345,637 shares of U.S. Office Products common stock (which now
represent approximately 34,564 shares of Navigant Common Stock). Mutual Travel
also entered into an employment agreement with Mr. Dunlop at an annual base
salary of $250,000 per year. Navigant believes that the terms of these
transactions are as favorable as could be negotiated with third parties.
On July 28, 1998, PTC, a wholly-owned subsidiary of Navigant, acquired
Arrington Travel from Michael B. Arrington, Navigant's Executive Vice
President, Global Operations, for $17,097,911 (the "ATC Acquisition"). In
connection with the ATC Acquisition, Arrington Travel also entered into an
employment agreement with Mr. Arrington at an annual base salary of $250,000
per year. Navigant believes that the terms of these transactions are as
favorable as could be negotiated with third parties.
64
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statement Schedules:
Not applicable
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K that was subsequently amended by
a Form 8-K/A dated October 9, 1998, covering the acquisition by the Company
of Arrington Travel Center, Inc. on July 28, 1998.
The Company filed a report on Form 8-K dated September 30, 1998 that was
subsequently amended by a Form 8-K/A dated November 30, 1998, covering the
acquisition by the Company of World Express Travel, Inc. on September 17,
1998.
(c) Exhibits:
65
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 October 24, 1997 between McGregor
Travel Management, Inc. and Douglas R. Knight.
10.7++++ Form of Agreement between U.S. Office Products and Jonathan J.
Ledecky, as amended.
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+++++ Credit Agreement dated as of June 9, 1998 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++++ Form of Amendment to Employment Agreement between Douglas R.
Knight, McGregor Travel Management, Inc. and Navigant
International, Inc.
21.1++++ Subsidiaries of Registrant
24.1 Power of Attorney (included on signature page hereto)
27.1 Financial data schedule
- - --------
66
+ 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 herein from Navigant's Report on Form 10-K for
the fiscal year ended April 25, 1998 filed with the Securities and Exchange
Commission on July 21, 1998.
67
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: April 26, 1999.
NAVIGANT INTERNATIONAL, INC.
a Delaware corporation
By: /s/ Edward S. Adams
_________________________________
Name: Edward S. Adams
Title: Chairman of the Board,
Chief Executive Officer,
President 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 April 26, 1999.
By: /s/ Robert C. Griffith
_________________________________
Name: Robert C. Griffith
Title: Chief Financial Officer and
Treasurer (Principal Financial
and Accounting Officer)
By: /s/ Eugene A. Over, Jr.
_________________________________
Name: Eugene A. Over, Jr.
Title: General Counsel and
Secretary
By: /s/ Jonathan J. Ledecky
_________________________________
Name: Jonathan J. Ledecky
Title: Director
68
/s/ Vassilios Sirpolaidis
By: _________________________________
Name: Vassilios Sirpolaidis
Title: Director
/s/ Ned A. Minor
By: _________________________________
Name: Ned A. Minor
Title: Director
/s/ D. Craig Young
By: _________________________________
Name: D. Craig Young
Title: Director
69