Back to GetFilings.com

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended December 28, 2003

OR

For the transition period from                                  to                                 

Commission file number: 0-24387

NAVIGANT INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (303) 706-0800

Securities registered pursuant to Section 12(b) of the Act:

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 þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (paragraph 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ No ¨

The aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates on June 27, 2003 was approximately $159,155,000, based on the closing price as reported on the NASDAQ National Market on such date of $12.67 per unit.

As of March 10, 2004, the registrant had 14,684,000 shares of its common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this Report, to the extent not set forth herein, is incorporated by reference from the Registrant’s definitive proxy statement relating to the annual meeting of stockholders to be held in 2004, which definitive proxy statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates.

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K, or Annual Report, includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. These forward-looking statements include, without limitation, statements in Item 1. Business, Item 2. 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. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “seek,” “could,” “predict,” “continue,” “future,” “may” and variations of such words and similar expressions are intended to identify such forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. Our actual results could differ materially. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions, including:

All of our forward-looking statements are expressly qualified by these cautionary statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

i

ANNUAL REPORT ON

FORM 10-K

FOR FISCAL YEAR ENDED DECEMBER 28, 2003

PART I

GENERAL

We are the second largest provider of corporate travel management services in the United States based on number of airline tickets sold in 2002. With operations throughout the United States, various U.S. territories and 20 foreign countries, we manage all aspects of our clients’ travel processes, focusing on reducing their travel expenses, typically one of the largest controllable expenses in a corporate budget. We believe that by providing high quality service, proprietary technology, a local presence and entering into management contracts we are able to retain a significant portion of our clients from year to year. Through Scheduled Airlines Traffic Offices, Inc., or SatoTravel^®, which we acquired in June 2001, we provide airline travel reservation services to the U.S. government and its employees and other private sector organizations. We also provide specific group, leisure and special event management travel services, largely to our corporate clients. On March 10, 2004, we had 116 regional and branch offices and approximately 540 on-site locations.

With our technology and experienced personnel, we create, implement and manage corporate travel policies, helping our clients reduce travel costs. We provide our clients with extensive data about individual, departmental and company travel activity and patterns to help identify potential cost savings. We also provide 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.

We believe that nearly all of our transactions currently are generated from clients under management contracts or service fee arrangements. Although the terms of our management contracts vary depending on the type of services provided and by client, we typically are entitled to receive a pre-negotiated management fee and to be reimbursed for our direct operating expenses and indirect overhead costs.

AVAILABLE INFORMATION

Additional information on us can be found on our website, www.Navigant.com. Here we make available free of charge our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practical after such material is electronically filed with or furnished to the Securities and Exchange Commission, or SEC. We have not incorporated by reference the information on our website into this annual report and you should not consider it part of this document. We also have available a code of ethics, which we will provide free of charge upon request.

The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.

1

DEVELOPMENT OF BUSINESS

In the late 1970s, Edward S. Adams, our Chairman, Chief Executive Officer and President, started a company in Denver, Colorado, focused on managing corporate travel. In 1983, Mr. Adams formed Professional Travel Corporation by merging his company with three of the largest corporate travel management companies in Colorado. By 1995, Professional Travel Corporation had become one of the 20 largest travel management companies in the United States.

In 1997, U.S. Office Products purchased Professional Travel Corporation, and Mr. Adams became president of U.S. Office Products’ Corporate Travel Services Division. He was charged with building a national corporate travel management company focused on middle market clients. Under U.S. Office Products’ ownership, the management team led by Mr. Adams acquired an additional eleven regional corporate travel management companies and significantly increased the geographical scale and client base of the business. In June 1998, U.S. Office Products distributed 10,984,000 shares of our common stock to the stockholders of U.S. Office Products, or the Travel Distribution. Additionally, we completed an initial public offering of 2,000,000 shares of our common stock simultaneously with the Travel Distribution. 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, we continued to acquire regional corporate travel management companies. From 1998 through 2002, we acquired approximately 30 regional travel management companies, including SatoTravel and an incentive and meeting company. In 2003, we acquired seven additional travel management companies along with a company specializing in the delivery of travel services over the Internet.

As of March 10, 2004 we had the following significant subsidiaries:

TRAVEL SERVICES INDUSTRY

We believe the travel services industry can be divided into two sectors: the unmanaged leisure and small business sector and the corporate travel management sector. We compete in the corporate travel management sector, which we believe is made up of approximately 170 travel management companies. According to the Travel Industry Association of America, Americans spent a total of $462 billion on domestic travel in 2002, of which we believe a significant portion was for business travel.

The corporate travel management industry grew dramatically as a result of the deregulation of the airline industry in 1978. The complex pricing strategies adopted by the airlines to maximize their yields and loads created an opportunity for travel management companies to assist mid-sized and large companies in managing their travel expenses. Over the years, the industry has progressed from merely delivering low-cost airline tickets to providing end-to-end support and services.

Travel generally is among the largest controllable expense for most companies. Businesses hire corporate travel management companies to reduce these expenses, and to manage the travel process. Corporate travel management companies can cut travel expenses for their clients in many ways, including creating travel policies to take advantage of

2

savings opportunities inherent in complex airline pricing structures, collecting data for greater leverage with suppliers, 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:

We believe 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, we believe the corporate travel management industry is undergoing a period of consolidation and that significant growth opportunity exists. We believe that large companies providing integrated systems from purchasing to data collection, offering their services through both traditional and online means, will eventually be more successful.

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. We believe 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.

The industry has been undergoing numerous challenges since the September 11, 2001 terrorist attacks, including the decline in travel from the levels that existed prior to those attacks, the decline of the U.S. economy, continued geopolitical instability, and world health concerns. These challenges, in part, led to bankruptcy filings by major airlines, including United Airlines and US Air. Although US Air emerged from bankruptcy protection, many factors could cause other airlines to experience adverse economic pressure, which could lead to other carriers seeking bankruptcy protection as well.

BUSINESS STRATEGY

Our mission is to provide corporate travel management services delivered globally by our unified team of responsive professionals who are committed to exceeding the expectations of shareholders, clients and fellow associates (we refer to our employees as associates).

The principal elements of our business strategy are to:

3

SERVICES

Travel Management Services

We provide our clients with a wide range of travel management services in addition to reservation and ticketing, including:

4

We book travel reservations for our clients with a variety of travel suppliers, including airlines, hotels and rental car companies, using three major global distribution systems—Sabre, Galileo/Apollo and Worldspan. We have long term agreements with each of these companies. After making travel reservations for our clients, we issue tickets, both paper and electronic, and provide our customers with detailed itineraries, which include confirmation numbers for airline, hotel and car rental reservations.

We can assist our 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.

Our management reports provide detailed and comprehensive information about each client’s travel expenses and patterns. These reports show savings achieved through the use of preferred vendors and adherence to travel policies, and analyze destinations, airlines and hotel usage and rental car expense. The information collected assists us and the client in negotiating discounts and pricing with vendors, and allows the client to monitor and enforce its travel policies.

We operate a 24-hour toll-free telephone service to provide emergency assistance to travelers. Many other travel management companies use this service and we believe it is one of the best 24-hour services in the travel industry.

We have a meetings and incentive subsidiary doing business as Navigant Performance Group^™, or NPG. NPG operates out of regional offices throughout the United States, Canada and the United Kingdom and provides innovation and expertise in the areas of incentive programs, meetings and special events. Services provided by NPG include, but are not limited to, strategic planning, promotion support, site selection, contract negotiations, program planning, registration, creative support and on-site management.

In 2001, we formed Navigant Integrated Services, or NIS to serve our large-scale corporate accounts. Through state-of-the-art call centers, NIS delivers cutting edge technology, providing our clients with premium service, flexibility and cost-saving opportunities.

In addition to corporate travel management, we provide leisure travel services to both individuals and groups as a small portion of our overall business. We derive part of our leisure travel business through our existing corporate client base.

Use of Technology

We embrace technology as a key to future success in the corporate travel management industry. Our information technology can provide our clients’ corporate travel managers, as well as financial officers, with extensive data about individual, departmental and company travel activity and patterns. We can use this information to consult with our corporate clients regarding the structure, operation and efficiency of a variety of corporate travel policies. In addition, we can provide corporate clients with comprehensive information about cost-saving opportunities for the travel undertaken by their employees.

Our wholly owned subsidiary, AQUA^™ Software Products, Inc., has developed a fully-automated quality assurance program, AQUAPlatinum^TM, which features both a quality auditing system and a computerized cost avoidance system. We have branded our version of this product AQUA. AQUA’s Trip Auditor^™ module checks each travel record for accuracy and completeness and repetitively searches airline seat maps for each traveler’s preferred seat assignments, hotel rate comparisons and frequent-flier upgrade opportunities. AQUA’s FareBuster^™ module is a computerized cost avoidance program which checks each record for a lower airline fare and continuously checks wait list flights and flight inventories for discount fares that become available prior to travel. AQUA also advises travel managers of travelers who are not taking advantage of the lowest fare. AQUAQuest^™ is a product in development for AQUA’s customers, which is planned to offer travel agents access to Orbitz web-based search engine and its inventory of low fare ticket prices from numerous airlines. Currently, we have the AQUA system installed to process approximately 97% of our transactions, and plan to continue conversions of newly acquired companies during 2004. Three of the top five travel management companies in the United States license portions of the AQUA system.

In 1999, we embarked upon a standardized program to consolidate our accounting and client reporting systems. This resulted in converting accounting systems to a single system and reporting systems to a standard system. With the

5

exception of SatoTravel and acquisitions made in the last six months, 100% of our North America transactions are now processed on our consolidated system. We continue to evaluate the consolidation of SatoTravel’s system and expect to consolidate their transactions when it is appropriate to do so.

We believe that the Internet has the potential to allow us to provide an even higher level of service to our corporate clients while significantly reducing distribution costs, especially labor costs. We serve our corporate clients through our consolidated website, Navigant.com, and our suite of Internet products and services, BusinessFLYR^™, ReportFLYR^™, RescueFLYR^™, AlertFLYR^™ and WebFLYR^™. BusinessFLYR allows our corporate clients to book air, car and hotel travel online while enforcing corporate travel policy and capturing their travel spending patterns. Several different online booking systems can be configured based on the corporate client’s requirements. Through ReportFLYR, the corporate client can view trip information sorted at every level of corporate organization, from individual travel to department, division or entire company. ReportFLYR allows corporate travel managers and other executives the ability to view their company’s travel activities and real-time data 24 hours a day using a password protected system. We have introduced additional Internet products, including RescueFLYR, a product designed to help travelers salvage value from an unused, non-refundable ticket; AlertFLYR, a tool to organize and monitor valuable travel data in a single, customizable view; and WebFLYR, a product to provide customers with access to the Orbitz inventory of low fare ticket prices from numerous airlines. In addition, we have developed an integrated online travel management solution, Passportal^™, and plan to launch the initial version of this product in the second quarter of 2004. We have also been developing a web-based application, NetProfile^™, to provide customer creation and management of traveler profiles that are centrally managed, standardized, and easily accessible.

We are also expanding our efforts to cross-sell leisure travel to employees of our corporate clients and members of affinity group clients through our BenefitVacations^® Corporate Affiliate program and to provide reservation and ticketing, as well as our quality control and cost reduction services, to other leisure consumers. This program will allow our customers and their employees access to discount pricing, exclusive inventory and added incentives for leisure travel.

Distribution of Services

We provide corporate travel management services to our clients through several channels, including on-site offices, regional travel management offices, call centers and on-site satellite ticket printers, or STPs.

As of March 10, 2004, we had approximately 540 on-site offices on client premises, where we provide customized trip planning and reservation and ticketing services to the employees of corporate and governmental clients. On-site operations are typically used by clients with airline expenditures in excess of $1.0 million per year. Through an on-site office, we are able to work one-on-one with the client’s travel manager to meet the client’s travel needs, including the need for customized travel information and negotiations with travel suppliers frequently used by the customer.

As of March 10, 2004, we had approximately 116 regional and branch offices. These offices are typically used by corporate customers with less than $1.0 million in travel expenditures per year. The regional offices provide local companies with comprehensive travel management services, including trip planning, reservation and ticketing services, accounting, corporate travel reporting, negotiations with frequently used travel suppliers and consulting. The regional nature of these offices allows them to leverage their local market expertise and to provide quick, responsive and personalized service. In addition, regional offices provide backup to nearby on-site locations.

As of March 10, 2004, we operated five call centers, which serve our large-scale corporate clients and several military and governmental customers. Call centers are typically used by corporate, military and government clients with more than $40.0 million in travel expenditures per year. The call centers provide clients with premium service, flexibility and cost-saving opportunities.

As of March 10, 2004, we also operated approximately 290 STPs at client locations across the country. We use these printers to distribute tickets instantly to clients whose field locations have enough volume to justify the STP. Locations with lower volume can receive tickets via overnight delivery services. We believe that the growth of electronic ticketing will eventually eliminate the need for STPs and overnight delivery, thus lowering distribution costs.

We have entered into arrangements with third parties pursuant to which we fulfill travel reservations placed on the Internet. In addition, through our Navigant.com website, we allow clients to, among other things, check flight times, make reservations, access and sort password-protected corporate travel data, find restaurants and automatic teller machines and access the latest currency conversions.

6

We offer reservation services to our clients through the Internet, e-mail and facsimile. These distribution methods offer clients the option of performing reservation services directly, while we provide a supporting role. Our role includes performing quality control on the reservation, assessing travel policy compliance, assisting the traveler with the use of the reservation system and issuing and delivering tickets reserved by the client. Additionally, we report 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

Our marketing continually targets both new and existing customers. Our sales staff identifies potential clients, and develops opportunities to provide additional travel services to existing clients. Over the past few years, travel policy and travel purchasing decisions in larger companies have been centralized in purchasing departments, with travel managers or within the offices of chief financial officers. The selection of a travel agency has also become more formal, with larger accounts soliciting bids through “requests for proposals.” We have adapted to these changes by relying on a sales force specially trained in the business of corporate travel, supported by experienced marketing staff. We have approximately 120 associates in our sales and marketing departments.

COMPETITION

The corporate travel management industry is extremely competitive. We compete primarily with other corporate travel management companies. Some of our competitors may have greater brand-name recognition and financial resources than we do. The largest corporate travel management company is significantly larger than us or our other competitors, and we compete with several companies which are similar in size to us. Competition within the corporate travel management industry is increasing as the industry undergoes a period of consolidation. Some of our competitors are expanding their size and financial resources through consolidation. Some travel management companies may have relationships with travel suppliers that give them access to favorable availability of products, including airplane seats and hotel rooms, or more competitive pricing than that offered by us. Furthermore, some corporate travel management companies have a strong presence in particular geographic areas that may make it difficult for us to attract clients in those areas. As a result of competitive pressures, we may suffer a loss of clients, and our revenues or margins may decline.

We also compete with online travel providers as well as travel suppliers, including airlines, hotels and rental car companies. Innovations in technology, such as the Internet and computer online services, have increased the ability of travel suppliers to distribute their travel products and some limited services directly to the consumer. Although corporate travel management companies and travel agencies remain the primary channel for travel distribution, businesses and consumers can use the Internet to access information about travel products and services and to purchase such products and services directly from the suppliers, thus bypassing corporate travel management companies and travel agents. We believe that no single Internet-based service presently provides access to the full range of information or services that we can provide. An Internet-based travel service may, however, provide such access in the future.

We believe that we compete for clients based upon service, price and specialized knowledge. We believe that we are well-positioned to compete on these bases due to our combination of size and regional focus. We use our size to achieve operating efficiencies by implementing customized and industry-standard technologies and by consolidating administrative functions. Our size also provides opportunities to negotiate favorable arrangements with travel suppliers, such as airlines, hotels and rental car companies. Our regional focus, conversely, fosters personalized customer service and specialized local market knowledge, which help improve customer service, solidify customer relationships and expand our customer base.

MANAGEMENT INFORMATION SYSTEMS

We use networked management information systems for financial management, reporting and communication. These systems provide management with current financial information from all of our offices, and allow management to share that information easily and quickly with others. The systems also allow management to communicate efficiently with associates and each other throughout the business day. We employ technicians to administer, install and maintain our computer hardware and software, as well as computer programmers to create software solutions for us and our customers. We began implementing a single, company wide information technology platform to service our accounting and reporting requirements in 1999, and with the exception of SatoTravel and acquisitions made in the last six months, 100% of our North American transactions are currently being transacted on the same platform. We continue to evaluate the consolidation of SatoTravel’s system and expect to consolidate their transactions when it is appropriate to do so.

7

EMPLOYEES

As of March 10, 2004, we had approximately 4,200 full-time associates, none of whom is subject to collective bargaining agreements. We believe that we enjoy good relations with our associates.

As of March 10, 2004, we operated 116 travel agency facilities, all of which are leased. We operated 100 travel agency facilities in the United States and 16 internationally. We believe that our properties are generally in good condition, are well maintained and are generally suitable and adequate to carry on our business at capacity for the foreseeable future.

Our headquarters facility is also leased. See Item 8, Note 10 in Notes to Consolidated Financial Statements for details.

Our principal executive offices are located at 84 Inverness Circle East, Englewood, Colorado 80112, and our telephone number is (303) 706-0800.

We are involved in certain disputes and legal actions arising in the ordinary course of our business. While it is not feasible to predict or determine the outcome of these proceedings, in our opinion, based on a review with legal counsel, none of these disputes and legal actions is expected to have a material impact on our consolidated financial position, results of operations or cash flows. However, litigation is subject to inherent uncertainties, and an adverse result in these matters may arise from time to time that may harm our business (see Item 8, Note 14, “Commitments and Contingencies”, for additional discussion of our legal contingencies).

No matter was submitted to a vote of our stockholders, through the solicitation of proxies or otherwise, during the fourth quarter of fiscal year 2003.

PART II

Market Information

Navigant’s common stock, or Common Stock, is quoted on the NASDAQ National Market under the symbol “FLYR.” The following table sets forth, for the period indicated, the high and low closing sales prices per share of Common Stock, as reported on the NASDAQ National Market:

8

Holders

As of March 10, 2004, the number of holders of record of the Common Stock was 2,771.

Dividends

We have not declared or paid dividends on our Common Stock since our formation, and we do not anticipate paying dividends in the foreseeable future. The decision whether to apply legally available funds to the payment of dividends on our 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, our results of operations and financial condition, any then existing or proposed commitments by us for the use of available funds and our obligations with respect to the holders of any then outstanding indebtedness or preferred stock. Furthermore, we are prohibited from paying dividends by financial covenants in our credit agreement.

Equity Compensation Plan Information

9

Sales of Unregistered Securities

During the fourth quarter of fiscal year 2003, we issued the following unregistered securities:

10

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.

11

Introduction

We provide travel management services to corporations, government agencies and the military and, to a more limited extent, other travel services to these customers. We have operations throughout the United States, Canada, the United Kingdom, Germany, France, Belgium, The Netherlands, Spain, Italy, Greece, Ireland, Scotland, Norway, Iceland, Turkey, Kuwait, Qatar, Japan, Singapore, Guam, Puerto Rico, Cuba and Brazil.

Our consolidated financial statements include the five companies acquired in business combinations in 2001 accounted for under the purchase method, or the 2001 Purchased Companies, the one company acquired in a business combination in 2002 accounted for under the purchase method, or the 2002 Purchased Company, and the eight companies acquired in business combinations in 2003 accounted for under the purchase method, or the 2003 Purchased Companies, from their respective dates of acquisition.

During the years ended December 28, 2003 and December 29, 2002, we were adversely affected by the continued weak economic conditions in the United States, the war with Iraq and general concerns regarding Severe Acute Respiratory Syndrome, or SARS. During these periods, our 2003 transaction levels decreased when compared to 2002 as a result of these world conditions.

12

Sources of Revenue

Historically, corporate travel management companies were largely dependent for their air travel ticketing revenues on the point of sale percentage commissions paid by airlines for each ticket issued. However, most U.S. airlines have eliminated point of sale percentage commissions altogether and many international airlines have capped the total commissions paid per ticket and reduced the commission rates per ticket payable to travel agents.

In response to the reduction and elimination of U.S. airline commissions and consistent with growing industry practice, we have entered into management contracts and service fee arrangements with nearly all of our clients. Although the terms of our management contracts vary depending on the type of services provided and by client, we typically deduct a pre-negotiated management fee, our direct operating expenses and our indirect overhead costs from commissions collected for travel arrangements made on behalf of the client on a monthly basis. If the commissions do not exceed the amounts deducted, the client pays us the difference. If the commissions exceed the amounts deducted, we typically pay the excess to the client. With the elimination of commissions by most U.S. airlines, we do not expect to have any excess domestic airline commissions available to pay to our clients. In addition, we typically charge a service fee for each ticket and other transactions to our clients who do not have a management contract with us. We charge between $25.00 and $50.00 for each air travel ticket issued to these clients and retain any commissions collected from the airlines and other vendors.

We believe that our management contracts and service fee arrangements have minimized the financial impact on us of past commission caps and cuts and will continue to minimize the financial impact as base airline commissions are eliminated. We believe that nearly all of our total transactions are generated from clients under management contracts and service fee arrangements.

We have entered into agreements with major airlines for the payment of incentive override commissions. Under these agreements, the airlines generally pay commissions on domestic and international air travel if the volume of our ticket sales surpasses specified thresholds, which typically are based on the airlines’ share of the relevant markets. Additionally, we have negotiated favorable contracts with select global distribution systems vendors, hotel commission clearinghouses and rental car companies. Some of these contracts provide for payments to us of up-front fees, annual payments or cost savings to us.

We have also entered into agreements with customers for meetings and incentive business. Revenues and expenses for this business are recognized using percentage of completion methodology based on the terms of the contracts.

Expenses

Our direct operating expenses include principally labor expense (which comprised 67%, 65% and 71% of total direct operating expenses in 2003, 2002 and 2001), net payments to clients under management contracts, communication costs and other costs associated with the selling and processing of travel reservations.

Our general and administrative expenses include principally labor expense (which comprised 54%, 57% and 55% of total general and administrative expenses in 2003, 2002 and 2001), occupancy and other costs.

Labor expense as a percentage of total direct operating expense increased in 2003 as a result of the restoration in the second and third quarters of 2002 of salary cuts that were put in place after the September 11, 2001 attacks. Labor expense as a percentage of general and administrative expenses decreased from prior year as a result of an increase in productivity due to our implementation of more efficient procedures, synergies from common systems and the continued integration of general and administrative expenses of previously purchased companies.

2001 Restructuring Charges

See details on restructuring charges recorded in 2001 in Note 4 in the Notes to Consolidated Financial Statements.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect

13

the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We evaluate these estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our critical accounting policies are as follows:

Revenue recognition. Revenues generally consist of service and management fees from customers and commissions and other incentive payments from travel service providers. We record revenues from air reservations, hotel and car reservations and service fee arrangements when earned, which is at the time a reservation is booked and ticketed. Management fees are recognized as revenue in the period benefited, which is generally on a monthly basis. Cruise revenues are recorded when our service obligation is complete, which is at the time the customer is no longer entitled to a full refund of the cost of the cruise. We record incentive override commissions on an accrual basis in the month they are earned based upon our estimated ticket sales in excess of required thresholds. Payments from vendors for signing extended contracts are deferred and recognized as income over the life of the contract. Meetings and incentive revenues are recognized using percentage of completion methodology based on the terms of the contracts.

Valuation of goodwill. In 2002 FAS 142 became effective and, as a result, we ceased to amortize goodwill. In lieu of amortization, we evaluate the recoverability of the carrying value of our goodwill on an annual basis and whenever events or changes in circumstances indicate the carrying value of its goodwill may not be recoverable. Recoverability of goodwill is evaluated by comparing our capitalization, defined as the sum of long-term debt and stockholders’ equity, to the estimated enterprise value calculated using EBITDA amounts and a predetermined multiplier for each reporting unit. If the operation is determined to be unable to recover the carrying amount of its goodwill, then it is written down to fair value. Based on management’s review, we believe the goodwill currently is fully recoverable, and that no impairment charges are necessary for the year ended December 28, 2003. Goodwill amounted to $331.9 million as of December 28, 2003.

Income taxes. We are subject to regular audits by federal, state and foreign tax authorities. These audits may result in proposed assessments that may result in additional tax liabilities. We account for any income tax contingencies in accordance with the SFAS No. 5, “Accounting for Contingencies.” Future benefits or charges to our reported income tax provision can result from the resolution of open tax matters. Some factors which may result in a change in our estimates for contingent tax matters include (i) the expiration of statutes of limitations, (ii) changes in tax regulations, or (iii) tax rulings, settlements and other factors affecting estimates of tax contingencies. The interaction of all these factors, together with any opportunities for us to minimize the impact of these factors through the carryback or carryforward of any associated tax liabilities or benefits in the multiple tax jurisdictions we do business, is very complex and requires considerable judgment. Furthermore, these uncertainties may require an extended period of time to resolve and may not be determinable until the statutes of limitations have expired in the respective tax jurisdictions. While we believe that we have appropriately provided for income taxes for all years, any of these factors may result in significant adjustments to our tax provision. Any adjustments to our reserves for tax contingencies may result in benefits or charges that would impact our reported financial results in future periods.

The following discussion should be read in conjunction with our consolidated financial statements and related notes thereto appearing elsewhere in this Annual Report.

14

Results of Operations

The following table sets forth various items as a percentage of revenues for 2003, 2002 and 2001:

Consolidated Results of Operations

Fiscal Year Ended December 28, 2003 Compared to Fiscal Year Ended December 29, 2002

Consolidated revenues decreased 5.1%, from $371.3 million for 2002 to $352.3 million for 2003. This decrease was primarily due to a decrease in transactions in 2003 as a result of the decline in the economy, the impact of SARS and the war with Iraq. The decrease was also due to a change in the mix of transactions as some customers shifted to our online or unmanaged services as compared to our full service or managed services. This decrease was offset by the inclusion of the revenues from the 2003 Purchased Companies and the 2002 Purchased Company from their respective dates of acquisition, which added approximately $5.7 million in consolidated revenues.

Operating expenses decreased 6.1%, from $202.2 million, or 54.5% of revenues, for 2002 to $189.9 million, or 53.9% of revenues, for 2003. This decrease was primarily due to our continuing cost cutting measures in an effort to manage costs to lower transaction levels and an increase in productivity due to our implementation of more efficient procedures. This decrease was also due to a change in the mix of transactions as some customers shifted to our online or unmanaged services, which require less agent intervention. Offsetting this decrease was an increase related to the inclusion of the operating expenses from the 2003 Purchased Companies and the 2002 Purchased Company from their respective dates of acquisition.

General and administrative expenses increased 1.0%, from $111.5 million, or 30.0% of revenues, for 2002 to $112.7 million, or 32.0% of revenues, for 2003. This increase is primarily due to the inclusion of the general and administrative expenses from the 2003 Purchased Companies from their respective dates of acquisition, as well as higher costs related to employee benefits and technology. Offsetting this increase were several other cost cutting measures instituted to manage costs to lower transaction levels, as well as our continued efforts to integrate the general and administrative expenses of the previously acquired companies. We expect salaries will increase in the second quarter of 2004 and health care costs will also increase throughout 2004.

Depreciation and amortization expense increased 2.6%, from $10.0 million, or 2.7% of revenues, for 2002 to $10.3 million, or 2.9% of revenues, for 2003. This increase was due to an increase to depreciation expense due to the inclusion of additional fixed assets and the related depreciation of the 2003 Purchased Companies and the amortization of the intangible assets purchased in the second and third quarter of 2003 (see details on intangible assets in Note 6 in the Notes to Consolidated Financial Statements).

Interest expense, net, increased from $17.1 million or 4.6% of revenues, for 2002 to $28.3 million, or 8.1% of revenues, for 2003. The increase in the dollar amount of interest expense was primarily attributable to the refinancing that we underwent during the fourth quarter of fiscal 2003, where we completed the issuance of $72 million aggregate principal amount of 4.875% convertible subordinated debentures due in 2023 and a new revolving credit facility and repurchased substantially all our 9.84% senior secured notes at a premium and cancelled the old outstanding credit facility. Accordingly, we recorded an incremental interest expense of $13.7 million related to the early extinguishment of these senior secured notes and the old credit facility. The prepayment penalty and other related charges of $11.7 million were increased by the write-off of $2.0 million in debt issuance costs. This increase in interest expense was offset by a decrease in the average debt balance for 2003 to $178.0 million as compared to $195.3 million for 2002, resulting in approximately $1.4 million less in interest expense. This decrease was also as a result of a decrease in interest rates in 2003 resulting in $1.1 million less interest expense as our average interest rate decreased from 8.8% in 2002 to 8.2% in 2003. We expect our interest expense will decrease by approximately $3.0 million in 2004 as a result of the refinancing in 2003.

15

Provision for income taxes decreased from $11.5 million for 2002 to $4.2 million for 2003, reflecting effective income tax rates of 37.8% and 38.0%. The decrease in the amount of the provision is a result of the decreased net income in 2003, mainly as a result of the make-whole payment pursuant to our refinancing.

Fiscal Year Ended December 29, 2002 Compared to Fiscal Year Ended December 30, 2001

Consolidated revenues increased 6.0%, from $350.3 million for 2001 to $371.3 million for 2002. This increase was primarily due to the inclusion of the revenues from the 2001 Purchased Companies from their respective dates of acquisition, which added approximately $56.6 million in consolidated revenues. This increase was offset by a decrease in revenues in 2002 associated with the overall downturn in the economy and the impact of the September 11 attacks, which reduced transactions in 2002.

Operating expenses decreased 1.8%, from $206.0 million, or 58.8% of revenues, for 2001 to $202.2 million, or 54.5% of revenues, for 2002. The decrease in operating expenses was a result of several cost cutting measures instituted by us following the September 11 attacks, an increase in productivity due to the implementation of more efficient procedures and synergies from common systems, as well as spreading certain operating expenses over a larger revenue base.

General and administrative expenses increased 7.4%, from $103.8 million, or 29.6% of revenues, for 2001 to $111.5 million, or 30.0% of revenues, for 2002. The increase in general and administrative expenses was due primarily to the inclusion of general and administrative expenses of the 2001 Purchased Companies. This increase was offset by the salary cuts that were instituted by us in October 2001 as a result of the September 11 attacks. We restored 50% of the original 10% salary reductions in April 2002 and the remaining 50% was restored in July 2002. Also offsetting this increase were several other cost cutting measures instituted by us following the September 11 attacks as well as our efforts to integrate the general and administrative expenses of the 2001 Purchased Companies.

Depreciation and amortization expense decreased 44.3%, from $18.0 million, or 5.2% of revenues, for 2001 to $10.0 million, or 2.7% of revenues, for 2002. This decrease was due to our adoption of FAS 142 on December 31, 2001, the provisions of which ceased the amortization of goodwill. Offsetting this decrease was an increase to depreciation expense due to the inclusion of additional fixed assets and the related depreciation of the 2001 Purchased Companies.

Interest expense, net, increased from $15.9 million or 4.6% of revenues, for 2001 to $17.1 million, or 4.6% of revenues, for 2002. The increase in the dollar amount of interest expense was primarily attributable to the acquisition financing of the 2001 Purchased Companies with borrowings under our Credit Facility. The average debt balance for 2002 increased to $195.3 million compared to $183.4 million for 2001, resulting in approximately $1.0 million in additional interest expense. This increase was offset by the decrease in interest rates in 2002 resulting in $240 less interest expense as our average interest rate decreased from 8.9% in 2001 to 8.8% in 2002.

Provision for income taxes increased from $2.2 million for 2001 to $11.5 million for 2002, reflecting effective income tax rates of 79.6% and 37.8%. The increase in the amount of the provision is a result of the additional income earned by us in 2002. The high effective income tax rate for 2001 compared to the federal statutory rate of 35% was primarily due to amortization of goodwill from acquisition activity that was not deductible for tax purposes. This significant decrease in the effective income tax rate in 2002 was due to us no longer recording non-deductible goodwill amortization as of December 31, 2001, when we adopted the provisions of FAS 142.

Liquidity and Capital Resources

At December 28, 2003, we had cash and cash equivalents of $1.9 million, working capital of $40.3 million, borrowings of $107.8 million under the Credit Agreement from Bank of America, N.A. as Administrative Agent, or the Credit Facility, $72 million of convertible subordinated debentures, $890 of other indebtedness, including capital lease obligations, and available capacity under the Credit Facility of $62.2 million. Our capitalization, defined as the sum of long-term debt and stockholders’ equity at December 28, 2003 was approximately $381.8 million.

We have financed our operational growth and acquisitions primarily from internally generated cash flow from operations and borrowings under the Credit Facility.

16

We anticipate that our cash flow from operations and borrowings under the Credit Facility will provide sufficient cash to enable us to meet our working capital needs, debt service requirements and planned capital expenditures for property and equipment through at least fiscal 2004 based on current budgets. We also anticipate that our cash flows from operations and borrowings under the Credit Facility will provide sufficient cash to enable us to meet our long term obligations, as our Credit Facility does not mature until October 31, 2007 and as we do not foresee any unusual expenditures other than potential acquisition costs and the amortization of the term loan in the amount of $10 million per year for the next five years (see discussion of the term loan below).

During 2003, net cash provided by operating activities was $6.0 million. Net cash used in investing activities was $14.1 million, including $6.7 million for additions to property and equipment, net of disposals, such as computer equipment and office furniture, and $7.3 million for the acquisition of the 2003 Purchased Companies and earn-out consideration for the 2003 Purchased Companies and 2002 Purchased Company. Net cash provided by financing activities was $8.0 million, including proceeds from our credit facilities of $21.1 million, proceeds from the issuance of convertible subordinated debentures of $72.0 million and proceeds from the exercise of stock options of $2.5 million, offset by $80.0 million for prepayment of senior secured notes, $3.1 million for payments of long-term debt and $4.4 million for payments of debt issuance costs.

During 2002, net cash provided by operating activities was $39.3 million ($22.3 million after deducting the vendor payment received, net of taxes paid). Net cash used in investing activities was $3.2 million, including $4.7 million for additions to property and equipment, net of disposals, such as computer equipment and office furniture, and $1.4 million for the acquisition of the 2002 Purchased Company and earn-out consideration for the 2001 Purchased Companies, offset by $2.9 million net proceeds from the disposal of the Grand Rapids, Michigan building. Net cash used in financing activities was $38.9 million, including $34.8 million for payments of our credit facilities, $3.1 million for payments of long-term debt and $3.5 million for repurchase of minority interest in FireVine^®, offset by proceeds from the exercise of stock options of $2.5 million.

During 2001, net cash provided by operating activities was $18.3 million. Net cash used in investing activities was $42.1 million, including $7.3 million for additions to property and equipment, net of disposals, such as computer equipment and office furniture and $46.8 million for the acquisitions of the 2000 and 2001 Purchased Companies, offset by $5.4 million net proceeds from the disposal of the corporate headquarter’s building and $6.7 million for the sale of restricted cash equivalents in FireVine. Net cash provided by financing activities was $25.3 million, consisting of $49.0 million in proceeds from our credit facilities primarily to finance the 2001 Purchased Companies and proceeds from the exercise of stock options of $1.3 million, offset by $13.5 million for repayments of our credit facilities, $10.5 million for repurchase of minority interest in FireVine and $1.0 million for the repurchase of common stock.

On October 31, 2003, we executed a credit agreement for a new $170.0 million senior secured credit facility, or the Credit Facility, provided by a syndicate of lenders led by Bank of America, N.A., as administrative agent, for the purpose of replacing our previous credit facility. The Credit Facility consists of a revolving credit line for up to $120.0 million and a $50.0 million term loan and is guaranteed by all our existing and future direct and indirect domestic subsidiaries. We closed this Credit Facility on November 7, 2003 and believe that, absent drawing down on the available balance under the Credit Facility, the aggregate interest expense will decrease as a result of this refinancing. As of December 28, 2003, we were in compliance with the financial covenants of this Credit Facility. Please see “Risk Factors-Our Credit Facility imposes restrictions which may adversely affect our ability to finance future operations or capital needs or engage in other business activities.”

On November 7, 2003 we concluded an offering of $72.0 million in aggregate principal amount of our 4.875% convertible subordinated debentures due 2023. The debentures are convertible into shares of Navigant’s common stock at an initial conversion rate of 60.4084 shares per $1,000 principal amount of debentures, subject to adjustment. We used the net proceeds from this offering, together with borrowings under our new Credit Facility, to repay our then existing $80.0 million aggregate principal amount of senior secured notes, which were accruing interest at 9.84% per annum, and to pay associated make-whole payment premiums of $11.7 million, and to repay the entire balance outstanding under our existing credit facility. Please see “Risk Factors-Our Credit Facility imposes restrictions which may adversely affect our ability to finance future operations or capital needs or engage in other business activities.” The debentures were offered only to qualified institutional buyers in a Rule 144A Offering under the Securities Act of 1933. We have the right to deliver, in lieu of common stock, cash or a combination of cash and common stock.

We intend to continue to evaluate acquisition opportunities. Our Credit Facility limits our ability to consummate acquisitions using total consideration in excess of $10 million without the consent of the participating banks. These limitations may limit our ability to continue our acquisition program. Nevertheless, we 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. We expect to fund future acquisitions primarily with cash flow from operations and borrowings, including borrowings under the Credit Facility, as

17

well as issuance of additional equity or debt. To the extent we fund a significant portion of the consideration for future acquisitions with cash, we 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 we will be able to secure such financing if and when it is needed or on terms we deem acceptable. If we are unable to secure acceptable financing our acquisition program could be negatively affected. Capital expenditures for equipment and expansion of facilities are expected to be funded from cash flows from operations and supplemented as necessary by borrowings under the Credit Facility.

Contractual Obligations

The following is a summary of all of our contractual obligations as of December 28, 2003 (in thousands):

We expect to fund these obligations through cash flows from operations and the refinancing of our Credit Facility as it nears maturity in October 2007. We have letters of credit totaling $2,271 supported by our Credit Facility. We do not have any special purpose entities or off balance sheet activity.

Derivatives

We may enter into derivative financial instruments to mitigate or eliminate certain risks, primarily interest changes, associated with our debt structure. We have entered into forward interest rate swaps to convert floating-rate loans to fixed-rate loans. Specific amounts that we hedge are determined based on the prevailing market conditions and the current shape of the yield curve. The specific terms and notional amounts of the swaps are determined based on management’s assessment of future interest rates, as well as other factors, including short-term strategic initiatives. The notional amount of these types of interest rate swaps aggregated $75 million as of December 28, 2003. For derivatives qualifying as hedges of future cash flows, the effective portion of changes in fair value is recorded temporarily as a component of equity, and is then recognized as interest expense along with the related effects of the hedged items. Any ineffective portion of a hedge is reported as interest expense as it occurs. All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness. For the years ended December 28, 2003, December 29, 2002 and December 30, 2001, we did not report a loss or a gain associated with the total ineffectiveness of all cash flow hedges. As of December 28, 2003 and December 29, 2002, the aggregate fair value of the cash flow hedges aggregates an unrealized loss of $1,310 and $2,809, and this is recorded in Other Long-Term Liabilities and as an offset to Accumulated Other Comprehensive Loss and Deferred Income Taxes. The change in value for the year ended December 28, 2003 was a gain of $938, net of taxes of $561. The change in value for the year ended December 29, 2002 was a loss of $580, net of a tax benefit of $352. The change in value for the year ended December 30, 2001 was a loss of $1,164, net of tax benefit of $713.

Fluctuations in Quarterly Results of Operations

The business travel industry is seasonal and our results have fluctuated because of these seasonal variations. Revenues and net income for us are generally higher in the second and third calendar quarters. We expect this seasonality to continue in the future. Our quarterly results of operations may also be subject to fluctuations as a result of changes in relationships with travel suppliers, changes in the mix of services offered by us, extreme weather conditions or other factors affecting travel. Unexpected variations in quarterly results could also adversely affect the price of our common stock, which in turn could limit our ability to make acquisitions.

As we continue to complete acquisitions, we 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 us for the products we sell, the mix of products sold and general economic conditions. Moreover, the operating margins of companies acquired may differ substantially from ours, which could

18

contribute to the further fluctuation in our quarterly operating results. Therefore, results for any quarter are not necessarily indicative of the results that we may achieve for any subsequent fiscal quarter or for a full fiscal year.

Inflation

We do not believe that inflation has had a material impact on our results of operations.

New Accounting Pronouncements

See details on new accounting pronouncements in Note 2 in the Notes to Consolidated Financial Statements.

Risk Factors

Our significant indebtedness and interest payment obligations may adversely affect our ability to obtain additional financing, use our operating cash flow in other areas of our business or otherwise adversely affect our operations.

We continue to be significantly leveraged. As of December 28, 2003, we had $180.7 million of consolidated debt outstanding and our consolidated debt as a percentage of capitalization was 47.3%. We may also need to incur additional debt in the future to complete acquisitions or capital projects or for working capital, even though our Credit Facility and other indebtedness may impose some limits on our ability to do so. Our high level of indebtedness could have important consequences, which include the following:

Our ability to pay interest on our debt obligations will depend upon our future operating performance and our ability to obtain additional debt or equity financing. Prevailing economic conditions and financial, business and other factors, many of which are beyond our control, will affect our ability to make these payments. If in the future we cannot generate sufficient cash flow from operations to meet our obligations, we will need to refinance, obtain additional financing or sell assets. Our business may not generate cash flow, or we may not obtain funding sufficient to satisfy our debt service requirements.

Our Credit Facility imposes restrictions which may adversely affect our ability to finance future operations or capital needs or engage in other business activities.

The restrictions in our existing debt agreements, including the Credit Facility, and any future financing agreements may adversely affect our ability to finance future operations or capital needs or to engage in other business activities. These restrictions limit our ability to:

19

In addition, our Credit Facility limits our ability to consummate acquisitions using total consideration in excess of $10 million without the consent of the participating banks. These limitations may reduce our ability to continue our acquisition program.

Our Credit Facility requires us to among other things: (1) comply with financial ratios including consolidated senior leverage ratio, consolidated total leverage ratio and consolidated fixed charge coverage ratio; (2) maintain a minimum consolidated net worth; and (3) limit capital expenditures in any fiscal year to less than 20% of consolidated EBITDA, as defined by the Credit Facility, for the prior fiscal year. Our ability to comply with these requirements may be affected by events beyond our control. If we breach any of these covenants in our Credit Facility, or if we are unable to comply with the required financial ratios, we may be in default under our Credit Facility or other indebtedness. A significant portion of our indebtedness then may become immediately due and payable. We may not have, or be able to obtain, sufficient funds to make these accelerated payments. Compliance with the covenants is also a condition to continued borrowings under our revolving line of credit under our Credit Facility on which we will rely to fund our liquidity.

We compete in a volatile industry and declines or disruptions in the travel industry, such as those caused by terrorism, war or general economic downturns, could reduce our revenues and seriously harm our business.

Our operating results generally depend upon factors affecting the corporate travel management industry. Our revenues and earnings are especially sensitive to events that affect business air travel, and the level of car rentals and hotel reservations such as economic conditions and issues that impact travel safety. We could experience a protracted decrease in demand for our travel services due to fears regarding acts of terrorism, breakouts of war, military responses to acts of terrorism, health and safety concerns and increased costs and reduced operations by airlines due, in part, to new security directives adopted by the Transportation Security Administration. In addition, travel-related accidents, bad weather and increased fuel prices which make travel more expensive may reduce demand for our travel services. This decrease in demand, depending on its scope and duration—which we cannot predict at this time—together with any future issues impacting travel safety, could significantly impact our long-term results of operations or financial condition.

If commissions, overrides or incentives for reservations or other revenues from vendors or suppliers are decreased or eliminated altogether, our revenue may be reduced.

Historically, corporate travel management companies were largely dependent for their air travel ticketing revenues on the point of sale percentage commissions paid by airlines for each ticket issued. However, most U.S. airlines have eliminated point of sale percentage commissions altogether and many international airlines have capped the total commissions paid per ticket and reduced the commission rates per ticket payable to travel agents. Further reductions in or eliminations of point of sale percentage commissions may reduce our revenue, which would seriously harm our business.

We also derive part of our revenues from incentive override commissions paid by the major airlines, incentive payments and other revenues from distribution system vendors and commissions from hotel and car vendors. If, during any period, we fail to meet incentive levels, revenues could decrease. In addition, the airlines may reduce or terminate incentive override commissions, the distribution system vendors may reduce or terminate incentive payments or other revenues, hotel and car vendors may reduce or terminate commissions and we may not be able to extend our current arrangements or enter into new arrangements that are as favorable as our current arrangements.

20

Our industry is extremely competitive, becoming increasingly consolidated and subject to new methods of distribution, all of which may result in loss of clients or declining revenues or margins.

The corporate travel management industry is extremely competitive. We compete primarily with other corporate travel management companies. Some of our competitors have greater brand-name recognition and financial resources than we do. Competition within the corporate travel management industry is increasing as the industry undergoes a period of consolidation. Many of our competitors are expanding their size and financial resources through consolidation. Some travel management companies may have relationships with travel suppliers which give them access to favorable availability of products, including airplane seats and hotel rooms, or more competitive pricing than that offered to us. Furthermore, some corporate travel management companies have a strong presence in particular geographic areas which may make it difficult for us to attract customers in those areas. As a result of competitive pressures, we may suffer a loss of clients, and our revenues or margins may decline.

We also compete with travel suppliers, including airlines, hotels and rental car companies. Innovations in technology, such as the Internet and computer online 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. We believe that no single Internet-based service presently provides access to the full range of information available to us and our agents. An Internet-based travel service may, however, provide such access in the future. In addition, although we believe the service, knowledge and skills of our employees and our incorporation of new, alternative distribution channels position us to compete effectively in the changing industry, there can be no assurance that we will compete successfully or that the failure to compete successfully will not have a material adverse effect on our financial condition and results of operations.

If our travel suppliers cancel or modify their agreements with us, we may be subject to changes in our pricing agreements, commission schedules and incentive override commission arrangements and more restricted access to travel suppliers’ products and services, which could seriously harm our results of operations.

We are dependent upon travel suppliers for access to their products and services, including airplane seats and hotel rooms. Travel suppliers offer us pricing that is preferential to published fares, enabling us 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 us upon relatively short notice. If a travel supplier cancels or modifies their agreement with us, we may be subject to changes in our pricing agreements, commission schedules and incentive override commission arrangements, and more restricted access to travel suppliers’ products and services, which could seriously harm our results of operations.

If technologies we depend on fail or our right to use global distribution systems is restricted, our business, financial condition and results of operations may be materially adversely affected.

Our business is dependent upon a number of different information and telecommunications technologies. In addition, our ability to quote air travel ticket prices, make reservations and sell tickets is dependent upon our contractual right to use, and the performance of, global distribution systems operated by Sabre, Galileo/Apollo and Worldspan. Our business, financial condition and results of operations may be materially adversely affected if these technologies or systems fail, or if our access to these systems is restricted.

We intend to integrate operations of our subsidiaries which may cause a disruption to our business, may lead to technological, practical or personnel issues, and may not result in the intended cost efficiencies.

Currently, we and our subsidiaries, SatoTravel, Navigant/United Kingdom, Navigant/France, Navigant/Deutschland, Navigant/Belgium and Navigant/Brazil, operate on separate computer systems and we and most of our subsidiaries operate on separate telephone systems, several of which use different technologies. We expect that we will integrate these systems, but we have not yet established a definitive timetable for integration of all such systems or our definitive capital needs for the integration. This integration will require substantial attention from senior management and may require future substantial capital expenditures. The contemplated integration of these systems may cause disruption to our 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.

21

Future acquisitions are a key component of our strategy and our anticipated growth. We face risks in continuing to acquire corporate travel management companies.

A substantial amount of the growth of our revenues has come from acquisitions. One of our strategies is to increase our revenues and the markets we serve through the acquisition of additional corporate travel companies. In the future, we may not make acquisitions at the pace we desire 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. If we are unable to identify and successfully negotiate suitable acquisitions at the pace we desire or at all, we may not be able to generate sufficient internal growth to sustain our historical growth rate.

The companies we have acquired, or which we may acquire in the future, may not achieve sales and profitability that would justify our investment in them. Our acquisitions of companies outside the United States may subject us 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.

We face risks in the integration of acquired companies which may impact our financial condition and results of operations.

Integration of operations of the companies we acquired or may acquire in the future may also involve a number of special risks, which may have adverse short-term effects on our operating results. These may be caused by:

Integration of acquired companies may also result in:

We conduct due diligence and generally require representations, warranties and indemnifications from the former owners of acquired companies. We 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 our results of operations and financial condition.

Our ability to finance our future acquisitions by using cash, borrowed funds, shares of our common stock or a combination thereof is limited, and may adversely affect our future growth.

We currently intend to finance our future acquisitions by using cash, borrowed funds, shares of our common stock or a combination thereof. If our common stock does not maintain a sufficient market value, if our price is highly volatile, or if, for other reasons, potential acquisition candidates are unwilling to accept our common stock as part of the consideration for the sale of their businesses, we may then be required to use more of our cash resources or more borrowed funds in order to maintain our acquisition program. Our Credit Facility limits our ability to consummate acquisitions using total consideration in excess of $10 million without the consent of participating banks. If we are unable to use common stock for acquisitions and we do not have sufficient cash resources, our growth could be limited unless we are able to obtain additional capital through debt or other financing. We may not be able to obtain additional capital, if and when needed, on terms we deem acceptable.

22

We rely on key employees and if such employees become unavailable, our business could be adversely affected.

Our operations depend on the continued efforts of Edward S. Adams, our Chief Executive Officer and President, Robert C. Griffith, our Chief Operating Officer, Chief Financial Officer and Treasurer, and John S. Coffman, our Chief Accounting Officer, as well as our other executive officers and the senior management of our subsidiaries. Furthermore, our operations will likely depend on the senior management of the companies that may be acquired in the future. If any of these people become unable to continue in his or her present role, or if we are unable to attract and retain other skilled employees, our business could be adversely affected. Edward S. Adams, Robert C. Griffith and John S. Coffman are subject to employment agreements with us.

Goodwill comprises much of our total assets and if we determine that goodwill has become impaired in the future, net income in such years may be materially adversely affected.

As of December 28, 2003, approximately $331.9 million, or 73.3% of our total assets and 165.0% of our stockholders’ equity represent 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. Through December 30, 2001, we amortized 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 reduced our net income. On December 31, 2001, we adopted the provisions of FAS 142, and discontinued the amortization of goodwill. We now test for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.

A reduction in net income resulting from the write down or impairment of goodwill would affect financial results and could have a material adverse impact upon the market price of our common stock. Based on our annual review performed in accordance with FAS 142, we believe that anticipated cash flows and fair value associated with goodwill recognized in connection with our acquisitions is fully realizable and there presently is no persuasive evidence that any material portion should be impaired.

Our customers are not committed to provide us with a specific volume of business and may terminate their contracts with us or choose not to renew contracts which could seriously harm our revenues.

Our contracts with customers do not commit our customers to provide us with a specific volume of business and many can typically be terminated by our customers with or without cause, with little or no advance notice and without penalty. Customers may terminate their agreements with us for a variety of reasons, including acquisition or consolidation, a change in outsourcing strategy, or reactions to pressures, changes, or perceived advantages in the travel industry generally. If a significant number of customers elected to terminate their agreements with us, or decided to reduce their travel expenditures, it could reduce our revenues and harm our business.

Governmental agencies, which in the aggregate are a material part of our customer base, are subject to budget processes, which could limit the demand for our travel services.

Governmental agencies are subject to budgetary processes and expenditure constraints. The funding of government programs is subject to legislative appropriation. Budgetary allocations are dependent, in part, upon governmental policies which fluctuate from time to time in response to political and other factors. Although we have multi-year contracts with our governmental agency customers, governments generally appropriate funds on a fiscal year basis even though a contract may continue for several years. Consequently, programs are often only partially funded and additional funds are committed only upon further appropriations. If our government agency customers do not receive legislative appropriation, such agencies may reduce their travel, which could reduce our revenue.

Governmental agencies have special contracting requirements, which create additional risks.

In contracting with governmental agencies, we are subject to governmental agency contract requirements that vary from agency to agency. Future sales to governmental agencies will depend, in part, on our ability to meet governmental agency contract requirements, which may be onerous or even impossible for us to satisfy.

23

Government contracts typically contain termination provisions unfavorable to us and are subject to audit and modification by the government at its sole discretion, which subject us to additional risks. These risks include the ability of the U.S. government to unilaterally:

The U.S. government can terminate any of its contracts with us either for its convenience or if we default by failing to perform in accordance with the contract schedule and terms. Termination for convenience provisions generally enable us to recover only our costs incurred or committed, and settlement expenses and profit on the work completed prior to termination. Termination for default provisions do not permit these recoveries and make us liable for excess costs incurred by the U.S. government in procuring undelivered items from another source.

As a government contractor, we are subject to periodic audits and reviews. Based on the results of its audits, the U.S. government may adjust our contract-related costs and fees, including allocated indirect costs. In addition, under U.S. government purchasing regulations, some of our costs may not be reimbursable or allowed in our negotiation of fixed-price contracts. Further, as a U.S. government contractor, we are subject to an increased risk of investigations, criminal prosecution, civil fraud, whistleblower lawsuits and other legal actions and liabilities to which purely private sector companies are not.

Our industry is extremely seasonal causing fluctuating results of operations.

The domestic and international travel service industry is extremely seasonal. Our past results have fluctuated because of seasonal variations in the travel services industry. Our net revenues and net income are generally higher in the second and third calendar quarters and lowest in the fourth calendar quarter. We expect this seasonality to continue in the future. Our quarterly results of operations may also be subject to fluctuations as a result of the timing and cost of acquisitions, changes in relationships with travel suppliers, changes in the mix of services offered by us, the timing of the payment of incentive override commissions by travel suppliers, extreme weather conditions or other factors affecting travel.

We are growing rapidly, which has put pressure on our executive management, personnel and corporate support systems and could adversely affect our operations, business and financial results and condition.

We were formed through the acquisition of twelve corporate travel management companies from January 1997 through May 1998, and we have made more than 39 acquisitions since that time. We expect to continue to grow in part through acquisitions. The rapid pace of acquisitions has, and will continue to, put pressure on our executive management, personnel and corporate support systems. Any inadequacy of our systems to manage the increased size and scope of operations resulting from growth could adversely affect our operations, business and financial results and condition.

If our agent reporting agreements are cancelled, we would be unable to sell airline tickets and our results of operations would be materially adversely affected.

We depend on the ability to sell airline tickets for a substantial portion of our revenue. To sell airline tickets, we must enter into, and maintain, an agent reporting agreement for each operating subsidiary with the Airlines Reporting Corporation, or ARC, for domestic agencies or with the Bank Settlement Plan, or BSP, for international agencies. Agent reporting agreements impose numerous financial, operational and administrative obligations on us. These agreements allow ARC or BSP to cancel an agent reporting agreement for failure to meet any of these obligations. If our agent reporting agreements are cancelled by ARC or BSP, we would be unable to sell airline tickets and our results of operations would be materially adversely affected.

24

We are currently reviewing and testing our material internal control systems, processes and procedures in compliance with the requirements of Sarbanes-Oxley Regulation 404.

Sarbanes-Oxley Regulation 404 requires us to review and test our material internal control systems, processes and procedures to ensure compliance. There can be no assurances that such a review will not result in the identification of significant control deficiencies or that our auditors will be able to attest to the adequacy of our internal controls.

The market price of our stock could be volatile.

The market price of our common stock has been subject to volatility and, in the future, the market price of our common stock and debentures may fluctuate substantially due to a variety of factors, including the risk factors in this annual report and the following:

The market price for our common stock may also be affected by our ability to meet analysts’ expectations. Any failure to meet such expectations, even slightly, could have an adverse effect on the market price of our common stock. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to the operating performance of these companies. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against that company. If similar litigation were instituted against us, it could result in substantial costs and a diversion of our management’s attention and resources, which could have an adverse effect on our business, results of operations and financial condition.

Our cash flow and our ability to meet our debt service obligations depend upon the cash flow of our subsidiaries which are not obligated to make funds available to us.

We are a holding company. Our subsidiaries conduct substantially all of our consolidated operations and own substantially all of our consolidated assets. Consequently, our cash flow and our ability to meet our debt service obligations depend upon the cash flow of our subsidiaries and the payment of funds by our subsidiaries to us in the form of loans, dividends or otherwise. Our subsidiaries are not obligated to make funds available to us 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. If our subsidiaries do not make payments to us, we may not be able to service our obligations, which would seriously harm our business.

25

Market risks related to our operations result primarily from changes in interest rates and foreign currency exchange rates.

Our interest rate exposure relates primarily to long-term debt obligations. A significant portion of our interest expense is based upon variable interest rates of our bank’s prime rate or the LIBOR rate, as discussed in Note 8 of the Notes to Consolidated Financial Statements. Based upon our borrowings under the Credit Facility at December 28, 2003 of $107.8 million, a 50 basis point movement in the base rate or the LIBOR rate would result in approximately $539 annualized increase or decrease in interest expense. We also enter into certain hedging activities that mitigate or offset the risk of changes in interest rates. See the “Derivatives” section in Item 7, Management’s Discussion and Analysis of Financial Conditions and Results of Operations, for details on these hedging activities.

We transact business in various foreign countries. A substantial portion of our revenue, expense and capital purchasing activities are transacted in U.S. dollars. However, we do enter into transactions in other currencies, primarily the Canadian Dollar, the Euro and the British Pound. We continue to monitor the possible impact of currency fluctuations on our operations and evaluate various methods to minimize the effects of currency.

26

The following financial information is included on the pages indicated:

27

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of Navigant International, Inc.

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Navigant International, Inc. and its subsidiaries (the “Company”) at December 28, 2003 and December 29, 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 28, 2003 in conformity with accounting principles generally accepted in the United States of America. These consolidated financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 our opinion.

As discussed in Note 1 to the consolidated financial statements, effective December 31, 2001, the Company changed its method of accounting for goodwill in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.

28

NAVIGANT INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Data)

See accompanying notes to consolidated financial statements.

29

NAVIGANT INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Amounts)