<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 5, 1998.
REGISTRATION NO. 333-46539
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
------------------
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
NAVIGANT INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 4700 52-2080967
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
--------------------------
84 INVERNESS CIRCLE EAST
ENGLEWOOD, COLORADO 80112-5314
(303) 706-0800
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
EDWARD S. ADAMS
CHIEF EXECUTIVE OFFICER
NAVIGANT INTERNATIONAL, INC.
84 INVERNESS CIRCLE EAST
ENGLEWOOD, COLORADO 80112-5314
(303) 706-0800
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
WITH A COPY TO:
GEORGE P. STAMAS, ESQ.
WILMER, CUTLER & PICKERING
2445 M STREET, N.W.
WASHINGTON, D.C. 20037
(202) 663-6000
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE
PUBLIC: As soon as possible after the effective date of this Registration
Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the offering. / /______
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /______
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE (2) OFFERING PRICE FEE (3)
<S> <C> <C> <C> <C>
Common Stock, par value $.001 per share, to be
distributed to holders of U.S. Office Products
Company common stock............................ 100,000,000(1) $.984 $98,384,000 $29,024
</TABLE>
(1) Approximate number of shares of Navigant International, Inc. common stock
expected to be distributed based upon an assumed distribution ratio of one
share of Navigant International, Inc. common stock for every one share of
U.S. Office Products Company common stock held by each stockholder of U.S.
Office Products Company on the record date for the distribution. The actual
distribution ratio will be determined prior to effectiveness of this
Registration Statement, and is expected to be less than one share of
Navigant International, Inc. common stock for every one share of U.S. Office
Products Company common stock.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f)(2) of the Securities Act based on book value of
$98,384,000 as of October 27. 1997.
(3) The Company has previously paid the Securities and Exchange Commission the
registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE DISTRIBUTED
PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS INFORMATION
STATEMENT/PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION
OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE
IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 5, 1998
INFORMATION STATEMENT/PROSPECTUS
NAVIGANT INTERNATIONAL, INC.
DISTRIBUTION OF UP TO SHARES OF COMMON STOCK OF
NAVIGANT INTERNATIONAL, INC. TO STOCKHOLDERS OF U.S. OFFICE PRODUCTS COMPANY
This Information Statement/Prospectus is being furnished by U.S. Office
Products Company ("U.S. Office Products") in connection with the distribution to
its stockholders of the stock of Navigant International, Inc. ("Navigant" or the
"Company"). Navigant is a Delaware corporation formed by U.S. Office Products
that will own substantially all the assets of, and will be responsible for
substantially all the liabilities associated with, U.S. Office Products'
Corporate Travel Services Division. Pursuant to this distribution (the "Travel
Distribution" or the "Distribution"), all of the issued and outstanding shares
of the common stock, $.001 par value per share, of Navigant (the "Navigant
Common Stock") will be distributed to holders of record as of the close of
business on , 1998 (the "Record Date") of the common stock, par value
$.001 per share, of U.S. Office Products ("U.S. Office Products Common Stock").
The Company currently estimates that each such holder will receive one share of
Navigant Common Stock for every shares of U.S. Office Products Common
Stock held on the Record Date (the "Distribution Ratio"). Fractional shares will
be aggregated into whole shares of Navigant Common Stock and sold on the open
market by the Distribution Agent (as defined herein). The proceeds of such sales
will be distributed to holders who otherwise would be entitled to receive
fractional shares. See "The Travel Distribution--General."
Holders of U.S. Office Products Common Stock will not be required to pay any
consideration for the shares of Navigant Common Stock they receive in the
Distribution. There is no current public trading market for Navigant Common
Stock. Navigant intends to seek approval for quotation of the shares of Navigant
Common Stock on the National Market System of the Nasdaq Stock Market upon
issuance, but there is no assurance that such approval will be obtained or that
an active trading market for Navigant Common Stock will develop following the
Travel Distribution.
The Travel Distribution is an element of a comprehensive restructuring plan
(the "Strategic Restructuring Plan") approved by the Board of Directors of U.S.
Office Products. The principal elements of the Strategic Restructuring Plan are
(1) a self-tender offer by U.S. Office Products (the "Tender Offer") to purchase
37,037,037 shares of U.S. Office Products Common Stock (including shares that
may be issued on exercise of vested and unvested options for U.S. Office
Products Common Stock) at $27.00 per share (or, in the case of stock options, at
$27.00 minus the exercise price of the options) and the incurrence of debt to
pay a portion of the purchase price in the Tender Offer; (2) after acceptance of
shares in the Tender Offer, the pro rata distribution to U.S. Office Products
stockholders of shares of four companies that will conduct U.S. Office Products'
current print management, technology solutions, educational supplies and
corporate travel services businesses (the "Distributions"); and (3) the sale to
an affiliate ("CD&R") of Clayton, Dubilier & Rice, Inc. of equity interests in
U.S. Office Products (the "Equity Investment") following acceptance of shares in
the Tender Offer and the Record Date for the Distributions. In addition to this
Information Statement/Prospectus, U.S. Office Products is distributing a Tender
Offer Statement regarding the Tender Offer and a Proxy Statement regarding
stockholder approval of the issuance of securities in the Equity Investment. See
"Additional Information." All holders of U.S. Office Products Common Stock,
including the executive officers and directors of the Company, have the right to
participate in the Tender Offer. The Company has been advised that its executive
officers and directors who hold shares (or options to purchase shares) of U.S.
Office Products Common Stock intend to tender shares (or options) in the Tender
Offer.
IN REVIEWING THIS INFORMATION STATEMENT/PROSPECTUS, STOCKHOLDERS SHOULD
CAREFULLY CONSIDER THE MATTERS DESCRIBED UNDER THE HEADING "RISK FACTORS"
BEGINNING ON PAGE 7.
THIS INFORMATION STATEMENT/PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS
ABOUT BUSINESS STRATEGIES, MARKET POTENTIAL, FUTURE FINANCIAL PERFORMANCE AND
OTHER MATTERS. IN ADDITION, WHEN USED IN THIS INFORMATION STATEMENT/PROSPECTUS,
THE WORDS "INTENDS TO," "BELIEVES," "ANTICIPATES," "EXPECTS" AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS
INVOLVE MANY RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM SUCH STATEMENTS, INCLUDING, WITHOUT LIMITATION, THOSE RISKS AND
UNCERTAINTIES DESCRIBED UNDER THE HEADING "RISK FACTORS" BEGINNING ON PAGE 7.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS INFORMATION STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THIS INFORMATION STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
------------------------
THE DATE OF THIS INFORMATION STATEMENT/PROSPECTUS IS , 1998
<PAGE>
ADDITIONAL INFORMATION
Navigant has filed with the Securities and Exchange Commission (the "SEC") a
Registration Statement on Form S-1 (including exhibits, schedules and amendments
thereto, the "Navigant Form S-1") pursuant to the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the Navigant Common Stock. This
Information Statement/Prospectus, while forming a part of the Navigant Form S-1,
does not contain all of the information set forth in the Navigant Form S-1.
Reference is hereby made to the Navigant Form S-1 for further information with
respect to Navigant and the securities to be distributed to the U.S. Office
Products stockholders in the Travel Distribution. Statements contained herein
concerning the provisions of documents filed as exhibits to the Navigant Form
S-1 are necessarily summaries of such documents, and each such statement is
qualified in its entirety by reference to the copy of the applicable document
filed with the SEC.
The Navigant Form S-1 is available for inspection and copying at the public
reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, as well as the Regional Offices of the SEC at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of such information can be obtained by mail from the Public Reference
Branch of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates, or on the Internet at http://www.sec.gov.
Following the Travel Distribution, Navigant will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and, in accordance therewith, will file reports, proxy
statements and other information with the SEC that will be available for
inspection and copying at the SEC's public reference facilities referred to
above. Copies of such material can be obtained by mail at prescribed rates by
writing to the Public Reference Branch of the SEC at the address referred to
above.
Additional information regarding the Strategic Restructuring Plan and
Navigant may be found in reports, proxy statements and other information filed
by U.S. Office Products with the SEC, including U.S. Office Products Tender
Offer Statement on Schedule 13E-4 filed on , 1998 and U.S. Office
Products Proxy Statement filed on , 1998.
Navigant intends to furnish its stockholders annual reports containing
financial statements audited by its independent accountants. Navigant does not
intend to furnish its stockholders quarterly reports.
Questions concerning the Travel Distribution should be directed to Mark D.
Director, Chief Administrative Officer, Secretary and General Counsel of U.S.
Office Products, or Donald H. Platt, Senior Vice President, Chief Financial
Officer and Treasurer of U.S. Office Products, at (202) 339-6700. After the
Travel Distribution, holders of Navigant Common Stock having inquiries related
to their investment in Navigant should contact Robert C. Griffith, Chief
Financial Officer and Treasurer of Navigant, at (303) 706-0800.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS INFORMATION
STATEMENT/PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
------------------------
Until , 1998 (the expiration of the twenty-fifth calendar day
following the Travel Distribution) all dealers effecting transactions in the
Navigant Common Stock, whether or not participating in this distribution, may be
required to deliver an Information Statement/Prospectus.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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SUMMARY................................................................................................... 1
RISK FACTORS.............................................................................................. 7
THE TRAVEL DISTRIBUTION................................................................................... 16
ARRANGEMENTS AMONG U.S. OFFICE PRODUCTS, NAVIGANT AND THE OTHER SPIN-OFF COMPANIES AFTER THE
DISTRIBUTIONS........................................................................................... 27
DIVIDEND POLICY........................................................................................... 29
CAPITALIZATION............................................................................................ 30
SELECTED FINANCIAL DATA................................................................................... 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF NAVIGANT......... 33
INDUSTRY OVERVIEW......................................................................................... 41
BUSINESS.................................................................................................. 41
MANAGEMENT OF NAVIGANT.................................................................................... 49
RELATED PARTY TRANSACTIONS................................................................................ 55
PRINCIPAL STOCKHOLDERS OF NAVIGANT........................................................................ 57
DESCRIPTION OF NAVIGANT CAPITAL STOCK..................................................................... 58
EXPERTS................................................................................................... 61
LEGAL MATTERS............................................................................................. 61
INDEX TO FINANCIAL STATEMENTS............................................................................. F-1
</TABLE>
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL INFORMATION APPEARING ELSEWHERE IN THIS INFORMATION
STATEMENT/PROSPECTUS. STOCKHOLDERS SHOULD READ THE INFORMATION
STATEMENT/PROSPECTUS IN ITS ENTIRETY. UNLESS THE CONTEXT INDICATES OTHERWISE,
THE INFORMATION HEREIN (A) DOES NOT REFLECT THE PUBLIC OFFERING OF SHARES OF
NAVIGANT COMMON STOCK (INCLUDING EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT
OPTION) BY NAVIGANT (THE "OFFERING") AND (B) HAS BEEN ADJUSTED FOR THE
DISTRIBUTION RATIO. UNLESS THE CONTEXT REQUIRES OTHERWISE, REFERENCES TO (I)
U.S. OFFICE PRODUCTS AND NAVIGANT SHALL INCLUDE THEIR RESPECTIVE SUBSIDIARIES,
AND (II) NAVIGANT PRIOR TO THE DISTRIBUTION DATE SHALL REFER TO THE CORPORATE
TRAVEL SERVICES DIVISION OF U.S. OFFICE PRODUCTS.
NAVIGANT INTERNATIONAL, INC.
Navigant International, Inc. ("Navigant" or the "Company"), one of the five
largest providers of corporate travel management services in the United States
based on airline ticket sales, was formed by U.S. Office Products Company ("U.S.
Office Products") through the acquisition of eleven regional corporate travel
agencies. In calendar year 1997, Navigant booked $1.38 billion in airline ticket
sales, or approximately 2.5 million airline tickets. With locations throughout
the United States, in Canada, and in the United Kingdom, Navigant provides its
corporate customers with the full range of corporate travel management services
through several channels, including on-site travel agencies, regional travel
agency offices and satellite ticket printers. Navigant also provides group and
leisure travel services, largely to its corporate customers.
The travel agency industry in the United States is highly fragmented and
characterized by intense competition. There are more than 30,000 travel agencies
producing an estimated $70 billion in annual airline ticket sales. Airline
ticket sales by travel agencies increased at a rate of approximately 10.5% for
calendar year 1997. The business travel agency industry has undergone
significant changes since 1995, due in part to the reduction in commission
revenues from airline carriers, increasing industry reliance on technology and
the concentration of the industry's customer base. Navigant believes that
significant technological and financial resources are required to compete in
today's corporate travel market, and that larger corporate travel agencies may
therefore have a competitive advantage. Accordingly, Navigant believes the
business travel agency industry is undergoing a period of consolidation and that
significant growth opportunities exist.
Navigant's objective is to be a premier provider of corporate travel
management services to middle market and larger companies in North America and,
increasingly, around the world. Navigant intends to pursue this objective by
implementing the following business strategies: (i) focusing on corporate
travel; (ii) maintaining personalized customer service; (iii) operating with a
decentralized management structure; (iv) achieving operating efficiencies; and
(v) utilizing technology to improve service and reduce costs.
In addition, Navigant intends to execute a focused growth strategy by
implementing an internal growth strategy and by pursuing an aggressive
acquisition program to further consolidate the corporate travel agency industry.
The key elements of Navigant's internal growth strategy are as follows: (i)
generating new customers through an aggressive marketing program; (ii)
continuing to reduce customer costs; (iii) implementing best practices; and (iv)
achieving economies of scale.
U.S. Office Products began building Navigant with the acquisition of
Professional Travel Corporation in January 1997 and thereafter acquired 10
additional corporate travel management companies. Navigant currently has 128
offices, including offices in 16 of the 25 largest U.S. business travel markets.
Navigant is a Delaware corporation with its principal executive offices located
at 84 Inverness Circle East, Englewood, Colorado, 80112-5314. Navigant's
telephone number is 303-706-0800.
<PAGE>
BACKGROUND OF THE TRAVEL DISTRIBUTION
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THE DISTRIBUTION............. Shares of common stock, par value $.001 per share, of
Navigant (the "Navigant Common Stock" or the "Company Common
Stock") will, subject to certain conditions, be distributed
to the stockholders of record of U.S. Office Products (the
"Travel Distribution" or the "Distribution") as of
, 1998 (the "Record Date"). The Travel
Distribution is part of a comprehensive restructuring plan
adopted by the U.S. Office Products' Board of Directors. The
principal elements of the plan (including modifications the
Board of Directors has made since first adopting this plan,
as so modified, the "Strategic Restructuring Plan") are as
follows:
- Pursuant to a self-tender offer, U.S. Office Products
will purchase 37,037,037 shares of its common stock,
$.001 par value ("U.S. Office Products Common Stock"),
(including shares that may be issued upon exercise of
vested and unvested options for U.S. Office Products
Common Stock) at $27.00 per share (or, in the case of
stock options, at $27.00 minus the exercise price of the
options) (the "Tender Offer").
- After acceptance of shares in the Tender Offer, U.S.
Office Products will distribute to U.S. Office Products'
stockholders the shares of four separate companies:
Aztec Technology Partners, Inc., Workflow Graphics,
Inc., School Specialty, Inc., and Navigant
(collectively, the "Spin-Off Companies"). The
distributions of the shares of the Spin-Off Companies is
referred to in this Information Statement/Prospectus as
the "Distributions." The Spin-Off Companies will hold
U.S. Office Products' current technology solutions,
print management, educational supplies, and corporate
travel services businesses, respectively.
- Following the Record Date, an affiliate ("CD&R") of
Clayton, Dubilier & Rice, Inc., a private investment
firm, will acquire for $270.0 million shares of U.S.
Office Products Common Stock representing 24.9% of the
outstanding equity of U.S. Office Products (after giving
effect to the Tender Offer and the issuance of shares to
CD&R) and warrants to purchase additional U.S. Office
Products Common Stock (the "Equity Investment"). CD&R
will not acquire any interests in the Spin-Off
Companies.
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2
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U.S. Office Products will retain its North American Office
Products Group (which includes the office supply, office
furniture, and office coffee and beverage services
businesses), Mail Boxes, Etc., its New Zealand and Australia
operations, and its 49% interest in Dudley Stationery
Limited (a U.K. contract stationer).
In conjunction with the Strategic Restructuring Plan, U.S.
Office Products plans to undertake the following
transactions (the "Financing Transactions"):
- Pursuant to a tender offer, U.S. Office Products will
purchase any or all of its 5 1/2% Convertible
Subordinated Notes due 2003 (the "2003 Notes") for a
purchase price of 94.5% of the principal amount and
accrued interest (the "2003 Note Tender").
- Pursuant to an exchange offer, U.S. Office Products will
exchange any or all of its 5 1/2% Convertible
Subordinated Notes due 2001 (the "2001 Notes") for U.S.
Office Products Common Stock (the "2001 Note Offer") at
an exchange rate of 61.483 shares per $1,000 principal
amount, which effectively reduces the conversion price
on the 2001 Notes from $19.00 to $16.17 while the 2001
Note Offer is open.
- Pursuant to a commitment letter from a group of lenders,
U.S. Office Products plans to enter into a new $1.225
billion senior credit facility.
- U.S. Office Products plans to issue and sell at least
$400.0 million in Senior Subordinated Notes in a private
placement.
REASONS FOR THE
DISTRIBUTIONS.............. The Distributions are intended to separate the Spin-Off
Companies from U.S. Office Products' other businesses so
that each can:
- adopt strategies and pursue objectives that are
appropriate to its respective industry;
- pursue an independent acquisition program that allows for
a more focused use of resources and, where stock is used
as consideration, provide stock of a public company that
is in the same industry as the businesses being
acquired;
- be recognized by the financial community as a distinct
business that can be evaluated more readily and compared
more easily to industry peers; and
- implement more focused incentive compensation packages
that respond to specific industry and market conditions
and enhance employee retention objectives.
The Distributions are also integral to the objectives of the
Equity Investment, which is conditioned on completion of all
of the Distributions. See "The Travel Distribution--Reasons
for the Distributions."
SHARES TO BE DISTRIBUTED..... Based on the number of shares of U.S. Office Products Common
Stock outstanding on , 1998, less 37,037,037
shares (including shares that may be issued upon exercise of
vested and unvested options for U.S. Office Products Common
Stock) to be repurchased in the Tender Offer, approximately
shares of Navigant Common Stock will be
distributed to stockholders of U.S. Office Products in the
Travel Distribution. The number of shares to be
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3
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distributed could be greater if additional shares of U.S.
Office Products Common Stock are issued prior to the Record
Date pursuant to outstanding convertible debt securities or
stock options of U.S. Office Products.
DISTRIBUTION RATIO........... Each U.S. Office Products stockholder will receive one share
of Navigant Common Stock for every shares of U.S.
Office Products Common Stock held on the Record Date.
FRACTIONAL SHARE INTERESTS... Fractional share interests will be aggregated and sold by
the Distribution Agent and the cash proceeds will be
distributed to those U.S. Office Products stockholders
entitled to a fractional interest. See "The Travel
Distribution--General."
RECORD DATE.................. , 1998.
DISTRIBUTION DATE............ Certificates representing shares of Navigant Common Stock
will be mailed to U.S. Office Products stockholders on or
about , 1998 (the "Distribution Date").
DISTRIBUTION AGENT...........
TAX CONSEQUENCES............. Wilmer, Cutler & Pickering expects to deliver an opinion at
the time of the Distributions stating that, subject to the
matters discussed therein, for U.S. federal income tax
purposes the receipt of Navigant Common Stock by U.S. Office
Products stockholders will be tax-free to U.S. Office
Products and the U.S. Office Products stockholders (except
with respect to cash received in lieu of fractional shares).
See "The Travel Distribution--U.S. Federal Income Tax
Consequences of the Travel Distribution."
ARRANGEMENTS AMONG U.S.
OFFICE PRODUCTS, NAVIGANT
AND THE OTHER SPIN-OFF
COMPANIES AFTER THE
DISTRIBUTIONS.............. Navigant, U.S. Office Products and the other Spin-Off
Companies will enter into an agreement (the "Distribution
Agreement") in connection with the Distribution pursuant to
which, among other things, (i) equity interests in the U.S.
Office Products subsidiaries that engage in the business of
corporate travel services will be transferred to Navigant,
(ii) liabilities will be allocated among Navigant, U.S.
Office Products and the other Spin-Off Companies, and (iii)
Navigant, U.S. Office Products and the other Spin-Off
Companies will indemnify one another for liabilities assumed
under the Distribution Agreement and certain other
liabilities.
Navigant, U.S. Office Products and the other Spin-Off
Companies will also enter into an agreement (the "Tax
Allocation Agreement") (i) allocating to each Spin-Off
Company responsibility for its share of U.S. Office
Products' consolidated tax liability for the years that it
was included in U.S. Office Products' consolidated federal
income tax returns, (ii) sharing certain state, local and
foreign taxes, and (iii) providing for (a) indemnification
by Navigant for certain taxes if they are assessed against
U.S. Office Products as a result of the Distributions and
(b) joint and several indemnification by Navigant and the
other Spin-Off Companies for such taxes resulting from
certain acts taken by Navigant or any of the other Spin-Off
Companies. The liability to U.S. Office Products for taxes
resulting from such acts will be allocated among the
Spin-Off Companies
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
pursuant to a separate agreement (the "Tax Indemnification
Agreement"). As a consequence, Navigant will be primarily
liable for taxes resulting from acts taken by Navigant and
liable (subject to indemnification by the other Spin-Off
Companies) for any taxes resulting from acts taken by the
other Spin-Off Companies.
Navigant, U.S. Office Products and the other Spin-Off
Companies will also enter into an agreement (the "Employee
Benefits Agreement") relating to the allocation of assets,
liabilities and responsibilities with respect to employee
benefit plans and programs and certain related matters. See
"Arrangements Among U.S. Office Products, Navigant and the
Other Spin-Off Companies After the Distributions."
</TABLE>
SUMMARY RISK FACTORS
In reviewing this Information Statement/Prospectus, stockholders should
carefully consider the matters described under the heading "Risk Factors"
beginning on page 7, including, among others, (i) risks associated with
potential volatility of stock prices, and with shares eligible for future sale,
(ii) risks related to revenue, customer fees and airline commissions, (iii)
risks related to substantial competition and industry consolidation, and new
methods of distribution, (iv) risks related to rapid growth and the absence of
history as a stand-alone company, (v) dependence on travel suppliers, (vi)
dependence upon technology, (vii) risks associated with the business travel
industry and general economic conditions, (viii) risks related to the
integration of operations and acquisitions, (ix) conflicts of interest resulting
from the fact that (a) the Distribution Agreement is not the result of
arms'-length negotiation and (b) stock options are being issued to certain
officers and directors of Navigant in connection with the transactions, (x) tax
consequences of the Distribution, (xi) potential liability for taxes related to
the distributions, and (xii) dependence upon acquisitions for future growth.
5
<PAGE>
SUMMARY FINANCIAL DATA (1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 26,
FOUR MONTHS -----------------------------------
ENDED PRO
YEAR ENDED DECEMBER 31, ------------ PRO FORMA
------------------------------------------ APRIL 30, FORMA AS ADJUSTED
1992 1993 1994 1995 1996 1997 1997(2) 1997(2)(5)
--------- --------- --------- --------- ------------ --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
STATEMENT OF INCOME DATA:
Revenues..................... $ 28,853 $ 32,838 $ 34,569 $ 45,267 $ 18,009 $ 57,677 $ 146,981
Operating expenses........... 14,244 17,153 19,692 25,836 9,491 31,541 80,513
--------- --------- --------- --------- ------------ --------- ----------- -----------
Gross profit................. 14,609 15,685 14,877 19,431 8,518 26,136 66,468
General and administrative
expenses................... 10,588 11,647 11,651 15,221 6,660 19,684 47,261
Amortization expense......... 203 197 221 342 128 548 2,997
Non-recurring acquisition
costs...................... 1,156 1,156
--------- --------- --------- --------- ------------ --------- ----------- -----------
Operating income............. 3,818 3,841 3,005 3,868 1,730 4,748 15,054
Interest expense............. 125 139 118 515 173 587 1,268
Interest income.............. (173) (231) (253) (352) (109) (445)
Other (income) expense....... 55 48 42 20 118 312
--------- --------- --------- --------- ------------ --------- ----------- -----------
Income before provision for
income taxes............... 3,866 3,878 3,092 3,663 1,646 4,488 13,474
Provision for income taxes... 188 97 18 565 255 1,145 6,198
--------- --------- --------- --------- ------------ --------- ----------- -----------
Net income................... $ 3,678 $ 3,781 $ 3,074 $ 3,098 $ 1,391 $ 3,343 $ 7,276
--------- --------- --------- --------- ------------ --------- ----------- -----------
--------- --------- --------- --------- ------------ --------- ----------- -----------
Net income per share:
Basic.................... $ 0.08 $ 0.09 $ 0.07 $ 0.05 $ 0.02 $ 0.04 $ 0.07
Dilluted................. $ 0.08 $ 0.09 $ 0.07 $ 0.05 $ 0.02 $ 0.04 $ 0.07
Weighted average shares
outstanding (3):
Basic.................... 44,260 44,260 45,562 59,059 77,501 90,026 109,895
Diluted.................. 44,260 44,260 45,704 60,024 79,100 91,761 109,895
<CAPTION>
NINE MONTHS ENDED
---------------------------------------------------------------
PRO FORMA
PRO FORMA PRO FORMA AS ADJUSTED
JANUARY 25, JANUARY 24, JANUARY 25, JANUARY 24, JANUARY 24,
1997(2) 1998(2) 1997(2) 1998(2) 1998(2)(5)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
STATEMENT OF INCOME DATA:
Revenues..................... $ 41,527 $ 80,706 $ 105,362 $ 119,693
Operating expenses........... 22,656 47,172 59,550 67,869
----------- ----------- ----------- ----------- -----------
Gross profit................. 18,871 33,534 45,812 51,824
General and administrative
expenses................... 15,011 26,274 34,491 38,608
Amortization expense......... 471 1,509 2,336 2,418
Non-recurring acquisition
costs...................... 284 284
----------- ----------- ----------- ----------- -----------
Operating income............. 3,105 5,751 8,701 10,798
Interest expense............. 415 399 951 951
Interest income.............. (382) (338)
Other (income) expense....... 40 (71) 178 (118)
----------- ----------- ----------- ----------- -----------
Income before provision for
income taxes............... 3,032 5,761 7,572 9,965
Provision for income taxes... 551 2,823 3,483 4,584
----------- ----------- ----------- ----------- -----------
Net income................... $ 2,481 $ 2,938 $ 4,089 $ 5,381
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net income per share:
Basic.................... $ 0.03 $ 0.03 $ 0.04 $ 0.05
Dilluted................. $ 0.03 $ 0.03 $ 0.04 $ 0.05
Weighted average shares
outstanding (3):
Basic.................... 85,978 114,758 109,895 109,895
Diluted.................. 87,824 117,185 109,895 109,895
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
(UNAUDITED)
------------------------------------------ APRIL 30,
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................................ $ 4,172 $ 5,051 $ 4,366 $ 4,288 $ 4,338
Total assets............................................................... 15,040 15,487 14,602 25,258 25,692
Long-term debt, less current portion....................................... 4,048 3,909 3,455 8,160 6,366
Long-term payable to U.S. Office Products..................................
Stockholder's equity....................................................... 6,723 7,914 7,736 9,187 11,221
<CAPTION>
JANUARY 24, 1998
-------------------------------------
PRO FORMA
APRIL 26, PRO AS
1997 ACTUAL FORMA(4) ADJUSTED(4)(5)
--------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
BALANCE SHEET DATA:
Working capital............................................................ $ 1,281 $ 8,580 $ 3,027
Total assets............................................................... 29,339 137,661 132,749
Long-term debt, less current portion....................................... 2,012 2,664 15,220
Long-term payable to U.S. Office Products.................................. 787 10,027
Stockholder's equity....................................................... 13,483 100,111 92,725
</TABLE>
- ------------------------
(1) The historical financial information of the businesses that were acquired in
business combinations accounted for under the pooling-of-interests method
(the "Pooled Companies") have been combined on a historical cost basis in
accordance with generally accepted accounting principles ("GAAP") to present
this financial data as if the Pooled Companies had always been members of
the same operating group. The financial information of the businesses
acquired in the business combinations accounted for under the purchase
method (the "Purchased Companies") is included from the dates of their
respective acquisitions. The Purchased Companies and their respective
acquisition dates are as follows: Associated Travel International, June 26,
1997; Evans Travel Group, July 25, 1997; Atlas Travel Services, September
26, 1997; OmniTravel, September 26, 1997; McGregor Travel Management,
October 24, 1997; Travel Consultants, Inc., October 24, 1997; and Wareheim
Travel Services, December 23, 1997. The pro forma financial data reflect
acquisitions completed by Navigant through May 1, 1998. See Note 4 of the
Company's Notes to Consolidated Financial Statements for a description of
the number and accounting treatment of the acquisitions by the Company.
(2) Gives effect to the Travel Distribution and the purchase acquisitions
completed by Navigant since May 1, 1996 as if all such transactions had been
made on May 1, 1996. The pro forma statement of income data are not
necessarily indicative of the operating results that would have been
achieved had these events actually then occurred and should not be construed
as representative of future operating results.
(3) For calculation of the pro forma weighted average shares outstanding for the
fiscal year ended April 26, 1997 and for the nine months ended January 24,
1998 and January 25, 1997, see Note 2(h) of Notes to Pro Forma Combined
Financial Statements included herein.
(4) Gives effect to the Travel Distribution and the purchase acquisition
completed by Navigant subsequent to January 24, 1998 as if such transaction
had been made on January 24, 1998. The pro forma balance sheet data are not
necessarily indicative of the financial position that would have been
achieved had these events actually then occurred and should not be construed
as representative of future financial position.
(5) As adjusted to give effect to the sale of the shares of Navigant Common
Stock by Navigant pursuant to this offering (assuming an initial public
offering price of $ per share) after deducting the Underwriting Discount
and estimated offering expenses payable by Navigant and the use of the
estimated net proceeds therefrom.
6
<PAGE>
RISK FACTORS
THE FOLLOWING FACTORS SHOULD BE CONSIDERED IN ADDITION TO OTHER INFORMATION
INCLUDED IN THIS INFORMATION STATEMENT/PROSPECTUS.
POTENTIAL VOLATILITY OF STOCK PRICE AND OTHER RISKS ASSOCIATED WITH SHARES
ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Navigant Common Stock in the public market
following the Travel Distribution and the Offering could have an adverse effect
on the market price of the Navigant Common Stock. In the Travel Distribution,
stockholders of U.S. Office Products will acquire shares of Navigant Common
Stock that will be freely tradeable without restrictions or further registration
under the Securities Act of 1933, as amended (the "Securities Act"), except that
any shares held by "affiliates" of Navigant within the meaning of the Securities
Act will be subject to the resale limitations of Rule 144 promulgated under the
Securities Act ("Rule 144"). Because the Travel Distribution is being made to
existing stockholders of U.S. Office Products, who have not made an affirmative
decision to invest in Navigant Common Stock, there can be no assurance that some
or all of these stockholders will not sell the shares of Navigant Common Stock
into the market shortly after the Travel Distribution. In addition, U.S. Office
Products is included in certain broad-based indices tracked by a number of
investment companies and other institutional investors, and such investors can
be expected to sell the shares of Navigant Common Stock they receive in the
Travel Distribution shortly thereafter.
A "when-issued" trading market in Navigant Common Stock may develop
immediately upon the Distribution. Such trading could increase the volatility
of, and adversely affect the market price of, Navigant Common Stock.
In addition, upon completion of the Travel Distribution and the Offering,
Navigant will have outstanding (i) shares of Navigant Common Stock issued in
the Offering, all of which will be freely tradeable unless held by affiliates of
Navigant and (ii) immediately exercisable options to acquire shares of Navigant
Common Stock. Navigant intends to register the shares of Navigant Common Stock
reserved for issuance pursuant to its stock incentive plan following the Travel
Distribution and the Offering. Following the Travel Distribution and the
Offering, in view of the large number of shares freely tradeable and available
for immediate sale, the market for Navigant Common Stock could be highly
volatile and the trading price of Navigant Common Stock could be adversely
affected. The officers and directors of Navigant who together hold shares of
Navigant Common Stock have agreed not to offer, sell or otherwise dispose of any
Navigant Common Stock without the prior written consent of Smith Barney Inc. for
a period of 180 days after the date of the underwriting agreement with respect
to the Offering.
RISKS RELATED TO REVENUE, CUSTOMER FEES AND AIRLINE COMMISSIONS
Navigant derives the major portion of its revenues from commissions paid by
airlines. Since 1995, most airlines have substantially reduced the amount of
commissions paid to travel agents for booking domestic flights. The airlines
have both capped the total commissions paid per ticket and reduced the
commission rates per ticket payable to travel agents. See "Business--Revenue
Sources." There can be no assurance that the airlines will not further reduce
commissions.
In response to reductions in the commissions paid to travel agents and
consistent with growing industry practice, Navigant has entered into management
contracts with many of its corporate customers. Under these contracts, Navigant
typically deducts its direct operating expenses, indirect overhead costs and a
management fee from commission revenues collected for travel arrangements made
on behalf of the customer. If the commission revenues collected exceed the
amounts deducted, Navigant may share a negotiated amount of the excess with the
customer. If the commission revenues do not cover the amounts deducted the
customer pays the difference to Navigant. See "Business--Revenue Sources." In
addition, Navigant typically charges a fee for each ticket and other
transactions to customers who do not have a management contract with Navigant.
There can be no assurance that Navigant will be able to maintain or
7
<PAGE>
continue to negotiate management contracts or continue to receive current levels
of revenues from those contracts, or that Navigant will be able to charge
transaction fees or maintain the level of such fees.
Navigant also derives part of its revenues from incentive override
commissions paid by the major airlines. See "Business--Revenue Sources." If,
during any period, Navigant fails to meet incentive levels, revenues could
decrease. There also can be no assurance that the airlines will not reduce or
terminate incentive override commissions or that Navigant will be able to extend
its current incentive override commission arrangements or enter into new
arrangements that are as favorable as Navigant's current arrangements.
SUBSTANTIAL COMPETITION AND INDUSTRY CONSOLIDATION; NEW METHODS OF DISTRIBUTION
The corporate travel management industry is extremely competitive and has
relatively low barriers to entry. Navigant competes primarily with travel
agencies and other distributors of travel services, some of which are larger and
have greater brand name recognition and financial resources than Navigant.
Competition within the corporate travel agency industry is increasing as the
industry undergoes a period of consolidation and certain of Navigant's
competitors are expanding their size and financial resources through
consolidation. Certain agencies and distributors 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 travel agents have a strong
presence in particular geographic areas which may make it difficult for Navigant
to attract customers in those areas. As a result of competitive pressures,
Navigant's 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
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 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. There can be no assurances,
however, that an Internet-based travel service will not 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 the financial
conditions and results of operations of Navigant.
RISK OF RAPID GROWTH; ABSENCE OF HISTORY AS A STAND-ALONE COMPANY
Navigant was formed through the consolidation by U.S. Office Products of
eleven separate corporate travel agency companies and expects to continue to
grow in part through acquisitions. All eleven companies have been acquired since
January 1997. The rapid pace of acquisitions has, and will continue to, put
pressure on Navigant's executive management, personnel and corporate support
systems. Any inadequacy of such systems to manage the increased size and scope
of operations resulting from growth could adversely affect Navigant's
operations, business and financial results and condition.
Prior to the Travel Distribution, certain general and administrative
functions relating to Navigant's business (including some legal and accounting
services) were handled by U.S. Office Products. Navigant's future performance
will depend on its ability to function as a stand-alone entity, and on its
ability to finance and manage expanding operations and to adapt its information
systems to changes in its business. As a result, certain of Navigant's expenses
are likely to be higher than when it was a part of U.S. Office Products, and
Navigant may experience disruptions it would not encounter as a part of U.S.
Office Products. Furthermore, the financial information included herein may not
necessarily reflect what the
8
<PAGE>
results of operations and financial condition would have been had Navigant been
a separate, stand-alone entity during the periods presented or be indicative of
future results of operations and financial condition of Navigant.
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 travel agents. Travel suppliers can generally cancel or modify their
agreements with Navigant upon relatively short notice. The loss of contracts,
changes in Navigant's pricing agreements, commission schedules or incentive
override commission arrangements, or more restricted access to travel suppliers'
products and services 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
telecommunication technologies to access information and manage a high volume of
inbound and outbound telephone calls. Any failure of this technology could have
a material adverse effect on Navigant's business, financial condition and
results of operations. 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 and Worldspan. Any technical failures of these
systems or restrictions on Navigant's access to these systems could have a
material adverse effect on Navigant's business, financial condition and results
of operations.
RISKS ASSOCIATED WITH THE BUSINESS TRAVEL INDUSTRY
Navigant's results of operations will depend upon factors affecting the
business travel industry generally. Navigant's revenues and earnings are
especially sensitive to events that affect domestic and international air
travel, and the level of car rentals and hotel reservations. A number of
factors, including recession or slower economic growth, rising travel costs,
extreme weather conditions, and concerns about passenger safety could result in
a temporary or longer-term overall decline in demand for business travel.
Advances in technology and communications, such as videoconferencing and
Internet-based teleconferencing, may also adversely impact travel patterns and
travel demand. Navigant believes that price-based competition will continue in
the airline industry for the foreseeable future. The continuation of such
competition and the occurrence of any of the events described above could have a
material adverse effect on Navigant's business, financial condition and results
of operations.
RISKS RELATED TO INTEGRATION OF OPERATIONS AND ACQUISITIONS
One of Navigant's strategies is to increase operating margins by
consolidating and integrating certain administrative functions common to all of
its operating subsidiaries. Such integration will require substantial attention
from senior management and may also require substantial capital expenditures.
The integration of operations may disrupt the operations of Navigant and the
operating subsidiaries, as management 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 each 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 such systems or its
definitive capital needs for such integration. There can be no assurance that
the contemplated integration of these systems will be
9
<PAGE>
successful, will be completed without disruption to Navigant's business or will
result in the intended cost efficiencies. In addition, rapid changes in
technologies may require capital expenditures to improve or upgrade customer
service.
Integration of acquisitions may also involve a number of special risks
including adverse short-term effects on its reported operating results
(including those caused by severance payments to employees of acquired
companies, restructuring charges associated with the acquisitions and other
expenses associated with a change of control, as well as non-recurring
acquisition costs including accounting and legal fees, investment banking fees,
recognition of transaction-related obligations and various other acquisition-
related costs); diversion of management's attention; difficulties with
retention, hiring and training of key personnel; risks associated with
unanticipated problems or legal liabilities; and amortization of acquired
intangible assets. Furthermore, although Navigant conducts due diligence and
generally requires representations, warranties and indemnifications from the
former owners of acquired companies, there can be no assurance 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 the
results of operations and financial condition of Navigant.
POTENTIAL CONFLICTS OF INTEREST IN THE DISTRIBUTIONS
Navigant is currently a wholly-owned subsidiary of U.S. Office Products. On
or before the Distribution Date, Navigant, U.S. Office Products and the other
Spin-Off Companies will enter into the Distribution Agreement, the Tax
Allocation Agreement, and the Employee Benefits Agreement, and the Spin-Off
Companies will enter into the Tax Indemnification Agreement. See "Arrangements
Among U.S. Office Products, Navigant and the Other Spin-Off Companies After the
Distributions." These agreements are expected to provide, among other things,
for U.S. Office Products and Navigant to indemnify each other from tax and other
liabilities relating to their respective businesses prior to and following the
Distribution.
Certain indemnification obligations of Navigant and the other Spin-Off
Companies to U.S. Office Products are joint and several. Therefore, if one of
the other Spin-Off Companies fails to satisfy its indemnification obligations to
U.S. Office Products when such a loss occurs, Navigant may be required to
reimburse U.S. Office Products for all or a portion of the losses that otherwise
would have been allocated to such other Spin-Off Company. In addition, the
agreements will allocate certain liabilities, including general corporate and
securities liabilities of U.S. Office Products not specifically related to the
specific businesses to be conducted by the Spin-Off Companies and
post-Distribution U.S. Office Products, among U.S. Office Products and each of
the Spin-Off Companies. Adverse developments involving U.S. Office Products or
the other Spin-Off Companies, or material disputes with U.S. Office Products
following the Distribution, could have a material adverse effect on Navigant.
The terms of the agreements that will govern the relationship among
Navigant, U.S. Office Products and the other Spin-Off Companies will be
established by U.S. Office Products in consultation with the management of
Navigant and the other Spin-Off Companies prior to the Distributions and while
Navigant and the other Spin-Off Companies are wholly-owned subsidiaries of U.S.
Office Products. The terms of these agreements, including the allocation of
general corporate and securities liabilities among U.S. Office Products,
Navigant and the other Spin-Off Companies, may not be the same as they would be
if the agreements were the result of arms'-length negotiations. In addition, the
agreements must contain certain terms specified in U.S. Office Products'
agreement with CD&R relating to the Equity Investment and must otherwise be
reasonably acceptable to CD&R. CD&R will not be a stockholder in any of the
Spin-Off Companies and its interests may be adverse to those of the Spin-Off
Companies. See "Arrangements Among U.S. Office Products, Navigant and the Other
Spin-Off Companies After the Distributions." Accordingly, there can be no
assurance that the terms and conditions of the agreements will not be less
favorable to Navigant than those that might have been obtained from unaffiliated
third parties.
10
<PAGE>
On the Distribution Date, Jonathan J. Ledecky, Chairman of the U.S. Office
Products Board of Directors, will receive options for shares of each of the
Spin-Off Companies exercisable for up to 7.5% of the common stock of each
Spin-Off Company. See "Management of Navigant--Director Compensation and Other
Arrangements." As a result, Mr. Ledecky has interests in the Distributions that
differ in certain respects from, and may conflict with, the interests of other
stockholders of U.S. Office Products and Navigant.
TAX MATTERS
Wilmer, Cutler & Pickering expects to deliver an opinion (the "Tax Opinion")
at the time of the Distributions stating that for U.S. federal income tax
purposes, the Distributions (including the Travel Distribution) will qualify as
tax-free spin-offs under Section 355 of the Internal Revenue Code of 1986, as
amended (the "Code") and will not be taxable under Section 355(e) of the Code.
U.S. Office Products will not complete the Travel Distribution unless it
receives the Tax Opinion. The Tax Opinion will be based on the accuracy as of
the time of the Distributions of factual representations made by U.S. Office
Products, the Spin-Off Companies and CD&R, and certain other information, data,
documentation and other materials as Wilmer, Cutler & Pickering has deemed
necessary. See "The Travel Distribution--U.S. Federal Income Tax Consequences of
the Travel Distribution."
The Tax Opinion will represent Wilmer, Cutler & Pickering's best judgment of
how a court would rule. However, the opinion is not binding upon either the
Internal Revenue Service (the "IRS") or any court. A ruling has not been, and
will not be, sought from the IRS with respect to the U.S. federal income tax
consequences of the Travel Distribution. Accordingly, the IRS and/or a court
could reach a conclusion that differs from the conclusions in the Tax Opinion.
If the Travel Distribution fails to qualify under Section 355 as a tax-free
spin-off, each holder of U.S. Office Products Common Stock on the Record Date
will be treated as having received a taxable corporate distribution in an amount
equal to the fair market value (on the Distribution Date) of the Navigant Common
Stock distributed to such holder of U.S. Office Products Common Stock including
fractional shares. In addition, U.S. Office Products will recognize gain equal
to the difference between the fair market value of the Navigant Common Stock (on
the Distribution Date) and U.S. Office Products' adjusted tax basis in the
Navigant Common Stock (on the Distribution Date). If U.S. Office Products were
to recognize gain on the Travel Distribution, such gain would likely be
substantial.
If the Travel Distribution is taxable under Section 355(e), but otherwise
satisfies the requirements for a tax-free spin-off, U.S. Office Products will
recognize gain equal to the difference between the fair market value of the
Navigant Common Stock (on the Distribution Date) and U.S. Office Products'
adjusted tax basis in the Navigant Common Stock (on the Distribution Date).
However, no gain or loss will be recognized by holders of U.S. Office Products
Common Stock (except with respect to cash received in lieu of fractional
shares). If U.S. Office Products were to recognize gain on the Travel
Distribution, such gain would likely be substantial.
POTENTIAL LIABILITY FOR TAXES RELATED TO THE DISTRIBUTIONS
In connection with the Distributions, U.S. Office Products will enter into a
tax allocation agreement with Navigant and the other Spin-Off Companies (the
"Tax Allocation Agreement"), which will provide that the Spin-Off Companies will
jointly and severally indemnify U.S. Office Products for any losses associated
with taxes related to the Distributions ("Distribution Taxes") if an action or
omission (an "Adverse Tax Act") of any of the Spin-Off Companies materially
contributes to a final determination that any or all of the Distributions are
taxable. Navigant will also enter into a tax indemnification agreement with the
other Spin-Off Companies (the "Tax Indemnification Agreement") under which the
Spin-Off Company that is responsible for the Adverse Tax Act will indemnify the
other Spin-Off Companies for any liability to indemnify U.S. Office Products
under the Tax Allocation Agreement. As a consequence,
11
<PAGE>
Navigant will be liable for any Distribution Taxes resulting from any Adverse
Tax Act by Navigant and liable (subject to indemnification by the other Spin-Off
Companies) for any Distribution Taxes resulting from an Adverse Tax Act by the
other Spin-Off Companies. If there is a final determination that any or all of
the Distributions are taxable and it is determined that there has not been an
Adverse Tax Act by either U.S. Office Products or any of the Spin-Off Companies,
U.S. Office Products and each of the Spin-Off Companies will be liable for its
pro rata portion of the Distribution Taxes based on the value of each company's
common stock after the Distributions. As a result, Navigant could become liable
for a pro rata portion of any Distribution Taxes with respect not only to the
Travel Distribution, but also any of the other Distributions. See "Arrangements
Among U.S. Office Products, Navigant and the Other Spin-Off Companies After the
Distributions--Tax Allocation Agreement and Tax Indemnification Agreement" for a
detailed discussion of the Tax Allocation Agreement and the Tax Indemnification
Agreement.
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 "--Risk Related to Acquisition Financing; Additional
Dilution." 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 the acquisitions were paid for with
U.S. Office Products Common Stock. Furthermore, Navigant's ability to pay for
acquisitions with stock may be materially limited in the two-year period
following the Travel Distribution. See "--Possible Limitations on Issuances of
Common Stock." 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.
POSSIBLE LIMITATIONS ON ISSUANCES OF COMMON STOCK
U.S. Office Products and Navigant will represent to Wilmer, Cutler &
Pickering, for purposes of its Tax Opinion, that the Navigant Common Stock that
will be issued in the Offering, together with all Navigant capital stock that
could be issued pursuant to the exercise of options and other agreements that
may be exercised within one year of the Travel Distribution, represents in the
aggregate less than 20 percent of the Navigant capital stock that would be
outstanding after the Offering and the exercise of all such options and other
agreements. U.S. Office Products and Navigant will also represent to Wilmer,
Cutler & Pickering that there are no written or oral agreements or
understandings, in effect prior to the Travel Distribution, under which Navigant
may be required to issue Navigant Common Stock after the Travel Distribution,
other than agreements covering the stock referenced in the previous sentence and
agreements covering other stock options granted as compensation for services.
Navigant has accordingly not been able, prior to the Travel Distribution, to
enter into any acquisition or other agreement or understanding requiring
issuance of additional Navigant Common Stock.
In addition, Section 355(e) of the Code, which was added in 1997, generally
provides that a company that distributes shares of a subsidiary in a spin-off
that is otherwise tax-free will incur U.S. federal income tax liability if 50%
or more, by vote or value, of the capital stock of either the company making the
distribution or the spun-off subsidiary is acquired by one or more persons
acting pursuant to a plan or series of related transactions that includes the
spin-off. Stock acquired by certain related persons is aggregated in determining
whether the 50% test is met. There is a presumption that any acquisition
occurring two years before or after the spin-off is pursuant to a plan that
includes the spin-off. However,
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the presumption may be rebutted by establishing that the spin-off and such
acquisition are not part of a plan or series of related transactions. As a
result of the provisions of Section 355(e), there can be no assurance that
issuances of stock by Navigant, including issuances in connection with an
acquisition of another business by Navigant, will not create a tax liability for
U.S. Office Products.
Navigant will enter into a Tax Allocation Agreement and a Tax
Indemnification Agreement pursuant to which Navigant will be liable to U.S.
Office Products and the other Spin-Off Companies if its actions or omissions
materially contribute to a final determination that the Travel Distribution is
taxable. See "Arrangements among U.S. Office Products, Navigant and the other
Spin-Off Companies after the Distribution--Tax Allocation Agreement and Tax
Indemnification Agreement."
These limitations could adversely affect the pace of Navigant's acquisitions
and its ability to issue Navigant Common Stock for other purposes, including
equity offerings.
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 "--Possible Limitations on Issuances of
Common Stock." If Navigant does not have sufficient cash resources, its growth
could be limited unless it is able to obtain additional capital through debt or
equity offerings. Prior to the Travel Distribution, Navigant was not responsible
for obtaining external sources of funding. Navigant intends to enter into credit
facilities with one or more lenders to obtain financing to be used in connection
with future acquisitions. There can be no assurance that Navigant, as a stand
alone company, will be able to obtain such financing if and when it is needed or
that any such financing will be available on terms it deems acceptable.
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
"--Possible Limitations on Issuances of Common Stock." 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.
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 people becomes 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. In addition, Jonathan J. Ledecky will
serve as a director and employee of Navigant and is expected to provide services
to Navigant after the Travel Distribution pursuant to an expected employment
agreement with Navigant and an agreement entered into between Mr. Ledecky and
U.S. Office Products, which provides that Navigant and the other Spin-Off
Companies will succeed to certain rights of, and obligations under, such
agreement following the Distribution. See "Management of Navigant--Ledecky
Services Agreement." Mr. Ledecky will also serve
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as a director of each of the other Spin-Off Companies, and is the director or an
officer of two other public companies. Mr. Ledecky may be unable to devote
substantial time to the activities of Navigant.
ABSENCE OF PUBLIC MARKET
Prior to the Travel Distribution and the Offering there will be no public
market for Navigant Common Stock. The initial public offering price of Navigant
Common Stock in the Offering will be determined through negotiations among
Navigant and the underwriters of the Offering and may not be indicative of the
market price for Navigant Common Stock after the Offering and the Travel
Distribution. The trading price of the Navigant Common Stock also 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. See "--Potential
Volatility of Stock Price and Other Risks Associated With Shares Eligible for
Immediate Sale."
MATERIAL AMOUNT OF GOODWILL
Approximately $86.1 million, or 64.8%, of Navigant's pro forma total assets
as of January 24, 1998 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 Navigant's 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 periodically to 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 goodwill becomes impaired,
Navigant would be required to write down the carrying value of the goodwill and
incur a related charge to its income. 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.
RISKS RELATED TO INABILITY TO USE POOLING-OF-INTERESTS METHOD TO ACCOUNT FOR
FUTURE ACQUISITIONS
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 Travel
Distribution. Therefore, Navigant will be precluded from completing business
combinations under the pooling-of-interests method for a period of two years,
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 net income reported by the Company
below that which would have been reported if the pooling of interests method had
been used by the Company. See "--Material Amount of Goodwill."
SEASONALITY AND QUARTERLY FLUCTUATIONS
The domestic and international travel industry is extremely seasonal. The
results of Navigant have fluctuated because of seasonal variations in the travel
industry. 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 the timing and cost of acquisitions, fare
wars by travel suppliers, changes in relationships with
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<PAGE>
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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Navigant--Fluctuations in Quarterly Results of Operations."
DEPENDENCE ON ARC AGREEMENTS
Navigant depends on the ability to sell airline tickets for a substantial
portion of its revenue. To sell airline tickets, Navigant must enter into, and
maintain, an Agent Reporting Agreement with the Airlines Reporting Company
("ARC"). The Agent Reporting Agreement imposes numerous financial, operational,
and administrative obligations on Navigant. The agreement allows ARC to cancel
an Agent Reporting Agreement for failure to meet any of these obligations. If
Navigant's Agent Reporting Agreement is cancelled by ARC, Navigant would be
unable to sell airline tickets and its results of operations would be materially
adversely affected.
NO DIVIDENDS
Navigant does not expect to pay cash dividends on Navigant Common Stock 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 of Navigant (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. Navigant's ability to pay dividends may be restricted from time
to time by financial covenants in its credit agreements. See "Dividend Policy."
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<PAGE>
THE TRAVEL DISTRIBUTION
GENERAL
The Company currently estimates that each holder of shares of U.S. Office
Products Common Stock of record as of the close of business on , 1998 (the
"Record Date"), will receive one share of Navigant Common Stock for each
shares of U.S. Office Products Common Stock held on the Record Date. Navigant
Common Stock will be distributed on behalf of U.S. Office Products by
as the Distribution Agent. No certificates or scrip representing
fractional shares of Navigant Common Stock will be issued. Following the
announcement of the proration results of the Tender Offer, fractional share
interests will be aggregated and sold by the Distribution Agent at such time or
times as it shall determine in open market transactions effected through
broker-dealers selected by it. The cash proceeds will be distributed to those
stockholders entitled to a fractional interest with the distribution of payment
for the tendered shares or as soon thereafter as practicable. Certificates
representing shares of Navigant Common Stock will be distributed on or about
, 1998 (the "Distribution Date").
Navigant is a newly formed subsidiary of U.S. Office Products that will, as
of the Distribution Date, hold substantially all of the businesses and assets
of, and will be responsible for substantially all of the liabilities associated
with, U.S. Office Products Corporate Travel Services Division. See "Arrangements
Among U.S. Office Products, Navigant and the Other Spin-Off Companies After the
Distributions-- Distribution Agreement." Navigant will include the businesses of
the following wholly-owned subsidiaries of U.S. Office Products: Professional
Travel Corporation; Mutual Travel; Travel Arrangement, Inc. and St. Pierre
Enterprises (Supertravel); Simmons Associates, Inc.; Associated Travel; Evans
Travel Group; Atlas Travel Services; Omni Travel; Travel Consultants, Inc.;
McGregor Travel Management; and Wareheim Travel Services (Travel Guide).
Immediately prior to the Travel Distribution, U.S. Office Products will hold all
the issued and outstanding shares of Navigant Common Stock. Based on the number
of shares of U.S. Office Products Common Stock outstanding on , 1998, less
37,037,037 shares (including shares that may be issued on exercise of vested and
unvested options for U.S. Office Products Common Stock) to be repurchased in the
Tender Offer, and on a Distribution Ratio of one share of Navigant Common Stock
distributed for every shares of U.S. Office Products Common Stock,
approximately shares of Navigant Common Stock will be distributed to
stockholders of U.S. Office Products in the Travel Distribution. The number of
shares to be distributed could be greater if additional shares of U.S. Office
Products Common Stock are issued pursuant to outstanding convertible debt
securities or stock options of U.S. Office Products.
THE STRATEGIC RESTRUCTURING PLAN
The Travel Distribution is part of the Strategic Restructuring Plan. The
principal elements of the Strategic Restructuring Plan are:
- Pursuant to the Tender Offer, U.S. Office Products will purchase
37,037,037 shares of U.S. Office Products Common Stock (including shares
that may be issued upon exercise of vested and unvested options for U.S.
Office Products Common Stock) at $27.00 per share (or in the case of stock
options, at $27.00 minus the exercise price of the options) and will incur
additional indebtedness to pay a substantial portion of the purchase price
for these shares.
- Pursuant to the Distributions, U.S. Office Products will distribute the
shares of the Spin-Off Companies to U.S. Office Products' stockholders
based on the shares of U.S. Office Products Common Stock outstanding after
acceptance of shares in the Tender Offer. Each U.S. Office Products
Company stockholder will receive such stockholder's pro rata share of the
stock of each Spin-Off Company.
- Following the Record Date, CD&R will make the Equity Investment in U.S.
Office Products. CD&R will not acquire any interests in the Spin-Off
Companies.
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Following completion of the Distributions, U.S. Office Products will retain
its North American Office Products Group (including its office supply, office
furniture, and office coffee and beverage services businesses), Mail Boxes,
Etc., its New Zealand and Australia operations, and its 49% interest in Dudley
Stationery Limited (a U.K. contract stationer). U.S. Office Products' print
management, technology solutions, educational supplies and corporate travel
services businesses will be operated by the Spin-Off Companies.
In conjunction with the Strategic Restructuring Plan, U.S. Office Products
plans to undertake the following transactions:
- Pursuant to the 2003 Note Tender, U.S. Office Products will purchase any
or all of its 2003 Notes for a purchase price of 94.5% of the principal
amount and accrued interest.
- Pursuant to the 2001 Note Offer, U.S. Office Products will exchange any or
all of its 2001 Notes for U.S. Office Products Common Stock at an exchange
rate of 61.483 shares per $1,000 principal amount, which effectively
reduces the conversion price on the 2001 Notes from $19.00 to $16.17 while
the offer is open.
- Pursuant to a commitment letter from a group of lenders, U.S. Office
Products plans to enter into a new $1.225 billion senior credit facility.
- U.S. Office Products plans to issue and sell at least $400.0 million in
Senior Subordinated Notes in a private placement.
REASONS FOR THE DISTRIBUTIONS
The Board of Directors of U.S. Office Products has approved the Strategic
Restructuring Plan, including the Distributions. The U.S. Office Products Board
of Directors determined that separation of the businesses of the Spin-Off
Companies and the continuing business of U.S. Office Products as part of the
Strategic Restructuring Plan would have advantages for the Spin-Off Companies
and U.S. Office Products. The Distributions allow U.S. Office Products and the
Spin-Off Companies to adopt strategies and pursue objectives that are more
appropriate to their respective industries and geographic territories. After the
Distributions, U.S. Office Products will be focused on a more narrow group of
businesses that involve primarily the distribution of office products and
business services. Each of the Spin-Off Companies will be focused primarily on
their individual businesses.
The Distributions will allow the Spin-Off Companies to pursue independent
acquisition programs with a more focused use of resources and, where stock is
used as consideration, provide stock of a public company that is in the same
industry as the businesses being acquired. Before the Distributions, U.S. Office
Products acquired companies in, for example, the corporate travel services
business, using the U.S. Office Products Common Stock. Sellers were thus
required to accept stock in a business that included office products,
educational supplies, print management and technology solutions businesses.
Following the Travel Distribution, Navigant will be able to offer stock in its
own business, which will be substantially the same as the businesses Navigant
expects to acquire.
The Distributions will enable the financial community to evaluate U.S.
Office Products and the Spin-Off Companies as distinct businesses and compare
them more easily to industry peers. U.S. Office Products believes that this will
allow the financial community to better understand the businesses carried on by
U.S. Office Products and the Spin-Off Companies and more accurately value those
businesses.
The Distributions also will allow U.S. Office Products and the Spin-Off
Companies to offer their respective employees more focused incentive
compensation packages. The incentive compensation packages (which are expected
to consist primarily of stock options) will offer the officers and other key
employees of each Spin-Off Company equity interests in a company whose
performance is tied directly to the business for which they work. Navigant's
ability to issue stock options (as well as other equity) will be subject to
certain limitations in order to avoid triggering certain adverse federal income
tax consequences. See "--U.S. Federal Income Tax Consequences of the Travel
Distribution."
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The Equity Investment is conditioned on completion of all of the
Distributions (as well as the Tender Offer). U.S. Office Products' Board of
Directors recognized that U.S. Office Products was making a transition from an
acquisition-oriented company to a business more focused on growth through
improvement and expansion of existing operations. U.S. Office Products' Board of
Directors concluded that the investment by CD&R in U.S. Office Products, and
support of the management of U.S. Office Products by Clayton, Dubilier & Rice,
Inc. ("CD&R Inc.") would contribute to U.S. Office Products' development. CD&R
Inc. has substantial experience in providing companies in which its affiliates
invest with financial and managerial advisory services aimed at building value
and improving operational, marketing and financial performance. CD&R Inc. is
also experienced in advising and assisting companies in managing high levels of
debt.
OTHER ELEMENTS OF THE STRATEGIC RESTRUCTURING PLAN
TENDER OFFER. Pursuant to the Tender Offer, U.S. Office Products will offer
to repurchase 37,037,037 shares (including shares that may be issued on exercise
of vested and unvested stock options) of U.S. Office Products Common Stock at a
price of $27.00 per share (or, in the case of stock options, at $27.00 minus the
exercise price of the options). Acceptance of and payment for shares of U.S.
Office Products Common Stock under the Tender Offer will be subject to a number
of conditions. These conditions include: (i) a minimum of 37,037,037 shares of
U.S. Office Products Common Stock (including shares that may be issued upon
exercise of vested and unvested options for U.S. Office Products Common Stock)
being validly tendered and not withdrawn; (ii) U.S. Office Products having
obtained financing sufficient to fund the Tender Offer; (iii) all conditions to
the completion of the Equity Investment having been satisfied or waived, except
for consummation of the Tender Offer and the Distributions; and (iv)
registration statements relating to the Distributions having become effective
and all other conditions to the completion of the Distributions, including U.S.
Office Products having received an opinion of Wilmer, Cutler & Pickering
regarding the tax treatment of the Distribution, having been satisfied.
U.S. Office Products expects to finance the aggregate tender price through a
combination of a new senior credit facility for $1.225 billion (the "USOP Credit
Facility"), the net proceeds of the Equity Investment and issuance of $400.0
million of senior subordinated debt securities in a private placement. U.S.
Office Products anticipates that the foregoing borrowings will increase its
outstanding debt by approximately $362.0 million. Approximately $ million was
outstanding under the existing bank credit facility as of March 20, 1998. U.S.
Office Products has entered into a commitment for the USOP Credit Facility.
The Record Date for the Distributions will occur after acceptance of shares
under the Tender Offer. Accordingly, U.S. Office Products stockholders who
tender their shares of U.S. Office Products Common Stock in the Tender Offer
will not receive the Distributions to the extent their U.S. Office Products
shares are accepted in the Tender Offer. Because the Tender Offer is for
37,037,037 shares of U.S. Office Products Common Stock (including shares that
may be issued upon exercise of vested and unvested options for U.S. Office
Products Common Stock), only a portion of the shares tendered by any U.S. Office
Products stockholder is likely to be accepted. U.S. Office Products stockholders
who tender their shares are therefore likely to receive the Distributions with
respect to a portion of their shares of U.S. Office Products Common Stock.
EQUITY INVESTMENT. Pursuant to the Investment Agreement dated as of January
12, 1998, as amended, between U.S. Office Products and CD&R (the "Investment
Agreement"), U.S. Office Products will issue and sell U.S. Office Products
Common Stock and rights to purchase U.S. Office Products Common Stock to CD&R
for a purchase price of $270.0 million. As a result of the Equity Investment,
CD&R will acquire (a) shares of U.S. Office Products Common Stock representing
24.9% of the outstanding shares of U.S. Office Products Common Stock after
giving effect to the issuance of such shares; (b) rights ("Special Warrants") to
receive for nominal consideration additional shares of U.S. Office Products
Common Stock equal to 24.9% (after giving effect to issuance of such additional
shares upon exercise of the Special Warrants) of the additional shares that are
issuable upon the conversion of certain outstanding convertible
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debentures of U.S. Office Products and shares of U.S. Office Products Common
Stock that are actually issued pursuant to certain contingent rights under
existing acquisition agreements; and (c) warrants ("Common Stock Warrants")
representing the right to purchase one share of U.S. Office Products Common
Stock for each share of U.S. Office Products Common Stock purchased by CD&R at
the date of the closing under the Investment Agreement (the "Closing Date") and
for each share of U.S. Office Products Common Stock into which the Special
Warrants become exercisable. The Special Warrants are exercisable from and after
the Closing Date until the 12th anniversary thereof, subject to certain
limitations, and the warrants described in clause (c) above are exercisable from
and after the second anniversary of the Closing Date until such 12th
anniversary. The aggregate exercise price of the warrants described in clause
(c) above is $405.0 million.
Regardless of the number of shares of U.S. Office Products Common Stock
outstanding on the date of the Equity Investment, CD&R has contracted to
purchase a 24.9% equity interest in U.S. Office Products, including the shares
issued to CD&R (the "Initial CD&R Acquisition"). CD&R's percentage ownership of
U.S. Office Products will not increase or decrease depending on the actual
number of shares of U.S. Office Products Common Stock outstanding on the closing
date of the Initial CD&R Acquisition. The Special Warrants will be issued to
allow CD&R to maintain its 24.9% ownership interest if (i) any 2001 Notes that
remain outstanding after the 2001 Note Offer were converted into U.S. Office
Products Common Stock at the conversion price in effect after adjusting for the
Tender Offer and Distributions, or (ii) additional shares are issued under
contracts for acquisitions completed by U.S. Office Products. The Common Stock
Warrants will be exercisable at any time after the second anniversary of the
Initial CD&R Acquisition until the 12th anniversary of that date.
Assuming (i) exercise of all currently exercisable outstanding options and
(ii) no 2003 Notes were repurchased under the 2003 Note Tender and all such 2003
Notes were converted in accordance with their existing terms, in each case
without any adjustment for the restructuring transactions and (a) exercise of
the Special Warrants in full, and (b) exercise of the Common Stock Warrants in
full, CD&R could own approximately 34.7% of outstanding U.S. Office Products
Common Stock on a fully-diluted basis. U.S. Office Products expects to make
adjustments to the number and exercise price of outstanding options and to the
conversion price of any 2001 Notes and 2003 Notes remaining after the 2001 Note
Offer and the 2003 Note Tender, on account of the restructuring transactions,
and these adjustments will result in a greater number of shares that may be
issued upon exercise of the options and conversion of the notes. Although the
amount of these adjustments will not be known until after the completion of the
Strategic Restructuring Plan, the effect of these reductions will be to reduce
CD&R's fully-diluted ownership interest in U.S. Office Products from the amounts
set forth above. If no currently exercisable outstanding options are exercised,
exercises of the Special Warrants and Common Stock Warrants could give CD&R
approximately 39.9% of outstanding U.S. Office Products Common Stock after
implementation of the Strategic Restructuring Plan (assuming that all of the
2001 Notes are exchanged in the 2001 Note Offer and all of the 2003 Notes are
tendered in the 2003 Note Tender). Because the Record Date for the Distributions
will be immediately before the closing of the Equity Investment, CD&R will not
receive any shares of the Spin-Off Companies in the Distributions.
Prior to the closing of the Initial CD&R Acquisition, the Board of Directors
of U.S. Office Products will consist of nine persons, including the chief
executive officer of U.S. Office Products, three designees of CD&R, three
designees of the U.S. Office Products' Board and two persons who are
satisfactory to both CD&R and the U.S. Office Products' Board. After the closing
of the Initial CD&R Acquisition, the existing members of the U.S. Office
Products Board will have the right to nominate six directors, which will include
the chief executive officer. CD&R will have the right to nominate three
directors. So long as CD&R has the right to nominate two or more directors, one
of CD&R's nominees will serve as Chairman of the Board. CD&R can nominate one
additional person to the U.S. Office Products' Board, if the directors of U.S.
Office Products do not nominate its chief executive officer to the Board.
In addition, 75% of the directors of U.S. Office Products must approve the
following transactions: (i) the sale by U.S. Office Products of equity
securities, other than (A) a specified amount made available
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under employee benefit plans, such as option plans, or (B) a specified amount
issued to acquire companies or issued in public offerings; (ii) any merger,
tender offer or sale, lease or disposition of all or substantially all of U.S.
Office Products assets or other business combination involving U.S. Office
Products, unless the consideration for such sale is all cash or is freely
tradeable common stock of a public company with a specified level of market
capitalization; (iii) any major recapitalization; (iv) certain amendments to
stockholder rights plans; (v) any dissolution or partial liquidation of U.S.
Office Products; or (vi) any modification to U.S. Office Products' organization
documents or by-laws that is inconsistent with CD&R's rights under the
Investment Agreement or any other agreements between U.S. Office Products and
CD&R. The effect of this provision is that as long as CD&R can nominate three
directors, at least one of them must vote in favor of any of the above actions
for it to be approved.
The following table summarizes the right of CD&R to nominate directors of
U.S. Office Products and the conditions under which the 75% super-majority
voting requirement will apply:
<TABLE>
<CAPTION>
NUMBER OF DIRECTORS
PERCENTAGE OF SHARES OF U.S. CD&R IS ENTITLED TO RIGHT TO 75% BOARD
OFFICE PRODUCTS VOTING STOCK NOMINATE (OUT OF DESIGNATE APPROVAL
RETAINED BY CD&R(1)(2) NINE)(3)(4) CHAIRMAN REQUIREMENT(2)
- ---------------------------------------------------------- --------------------------- ------------- -----------------
<S> <C> <C> <C>
66 2/3% to 100%........................................... Three Yes Yes
33 1/2% to 66 2/3%........................................ Two Yes Yes
Less than 33 2/3% (but CD&R holds at least 5% of U.S.
Office Products voting stock............................ One No No
Less than 5% of the then outstanding U.S. Office Products
voting stock............................................ None No No
</TABLE>
- ------------------------
(1) Includes shares CD&R can acquire by exercising the Special Warrants.
(2) All of CD&R's corporate governance rights will expire on the earlier of the
fifth anniversary of the closing of the Initial CD&R Acquisition or if CD&R
ever acquires more than 50% of the voting power represented by U.S. Office
Products' then outstanding voting securities.
(3) CD&R can approve one additional nominee if the Chief Executive Officer of
U.S. Office Products is not a member of the Board or is not a Board nominee.
(4) The size of the Board can be increased up to a total of 12 members, in which
case the number of directors that CD&R has the right to nominate will
increase proportionately.
CD&R's obligation to consummate the Equity Investment is subject to the
satisfaction or waiver of various conditions. These include, among others: (i)
accuracy of U.S. Office Products' representations and warranties and compliance
by U.S. Office Products with its obligations under the Investment Agreement;
(ii) receipt of necessary antitrust and other regulatory clearance; (iii)
absence of material litigation; (iv) U.S. Office Products stockholder approval
of issuance of shares in the Equity Investment; (v) consummation of the
Distributions in accordance with Distribution Agreements containing certain
terms specified in the Investment Agreement and otherwise as reasonably approved
by CD&R; (vi) execution and delivery of the Tax Allocation Agreement containing
certain terms specified in the Investment Agreement and otherwise as reasonably
approved by CD&R; (vii) execution of documents relating to financing for the
Tender Offer satisfactory in form and substance to CD&R; (viii) consummation of
the Tender Offer; (ix) execution of a consulting agreement with CD&R Inc.
providing for payment of an annual consulting fee of $500,000 and a registration
rights agreement with CD&R; (x) absence of any development since October 25,
1997 that would have a material adverse effect on U.S. Office Products after
giving effect to the Distributions; and (ix) U.S. Office Products' debt
immediately following completion of the transactions contemplated by the
Strategic Restructuring Plan shall not exceed $1.4 billion (assuming conversion
of certain convertible debt) and the outstanding debt of the Spin-Off Companies
shall be at least $130.0 million plus expenditures by such entities for
acquisitions after the date of the Investment Agreement. See "Arrangements Among
U.S. Office Products, Navigant and the Other Spin-Off Companies After the
Distributions--Distribution Agreement" and "--Tax Allocation Agreement." If U.S.
Office Products does not proceed with the Distributions, or if the Equity
Investment does not occur for certain other reasons, CD&R can terminate the
Investment Agreement and receive a termination fee of $25.0 million plus
reasonable fees and expenses. If the Equity Investment is completed, CD&R Inc.
will
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receive a transaction fee of $15.0 million and reimbursement for expenses it
incurs in connection with the transaction. For additional information concerning
the Equity Investment, investors should refer to U.S. Office Products' Proxy
Statement for its special meeting of stockholders to be held to consider the
issuance of shares in the Equity Investment. See "Additional Information."
RELATED TRANSACTIONS. Jonathan J. Ledecky, the founder, Chairman of the
Board and former Chief Executive Officer of U.S. Office Products, will step down
as Chairman of the Board of U.S. Office Products upon consummation of the
Distributions. In connection with the adoption of the Strategic Restructuring
Plan, U.S. Office Products' Board of Directors concluded that it was important
to the achievement of the objectives of the plan that the Spin-Off Companies
obtain the benefit of Mr. Ledecky's skills and experience. Accordingly, U.S.
Office Products entered into a services agreement with Mr. Ledecky (the "Ledecky
Services Agreement"). Pursuant to this agreement, which is contingent on the
Distributions occurring, Mr. Ledecky has agreed to extend his existing
non-competition agreement with U.S. Office Products until the fourth anniversary
of the Distribution Date. Each Spin-Off Company will have the right to enforce
the non-competition provision with respect to its respective business. In
consideration of this agreement by Mr. Ledecky and his serving as a director and
an employee of each of the Spin-Off Companies following the Distributions, the
Ledecky Services Agreement provides that he will receive options to purchase up
to 7.5% of the outstanding common stock of each Spin-Off Company as of the
Distribution Date, without regard to the Offering. For additional information on
the terms of the Ledecky Services Agreement and options to be granted by
Navigant to Mr. Ledecky, see "Management of Navigant--Ledecky Services
Agreement."
On March 6, 1998, Navigant filed a Registration Statement with the
Commission for the issuance of shares of Navigant Common Stock in the Offering,
which is expected to close concurrent with the Travel Distribution. As a result
of certain U.S. federal income tax limitations under Section 355 of the Code on
the number of shares that Navigant can issue in connection with the Travel
Distribution without jeopardizing the tax-free treatment of the Travel
Distribution, the amount of Navigant capital stock that will be issued in such a
public offering has not been determined and may be limited by the factors
discussed in "Risk Factors--Tax Matters," "--Possible Limitations on Issuance of
Common Stock" and "The Travel Distribution--U.S. Federal Income Tax Consequences
of the Travel Distribution."
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE TRAVEL DISTRIBUTION
Wilmer, Cutler & Pickering expects to deliver an opinion (the "Tax Opinion")
at the time of the Distributions on the material U.S. federal income tax
consequences of the Travel Distribution to U.S. Office Products and holders of
U.S. Office Products Common Stock on the Record Date. The Tax Opinion will be
based on the Code, and regulations, rulings, and judicial decisions as of the
date thereof, all of which may be repealed, revoked, or modified so as to result
in U.S. federal income tax consequences different from those described below.
Such changes could be applied retroactively in a manner that could adversely
affect a holder of U.S. Office Products Common Stock. In addition, the
authorities on which the Tax Opinion will be based are subject to various
interpretations. It is therefore possible that the U.S. federal income tax
treatment of the Travel Distribution and of the holding and disposition of the
Navigant Common Stock may differ from the treatment described below.
The Tax Opinion will apply only to holders of U.S. Office Products Common
Stock who are U.S. persons and who hold U.S. Office Products Common Stock as a
capital asset (generally, property held for investment) within the meaning of
Section 1221 of the Code. A U.S. person is the beneficial owner of U.S. Office
Products Common Stock that is (i) for U.S. federal income tax purposes a citizen
or resident of the United States (including certain former citizens and former
long-term residents), (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or of any political
subdivision thereof, (iii) an estate the income of which is subject to U.S.
federal income taxation regardless of its source or (iv) a trust with respect to
the administration of which a court within the United States is able to exercise
primary supervision and one or more U.S. persons have the authority to control
all substantial decisions of the trust. The Tax Opinion will not address tax
considerations applicable to a
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holder of U.S. Office Products Common Stock's particular circumstances or to a
holder that may be subject to special tax rules (such as holders subject to the
alternative minimum tax) or others with special situations, such as those of
dealers in securities or currencies, financial institutions, insurance
companies, persons holding U.S. Office Products Common Stock as part of a
hedging or conversion transaction or a straddle, persons whose "functional
currency" is not the U.S. dollar, and certain U.S. expatriates.
The Tax Opinion will not address all aspects of U.S. federal income taxation
that may be relevant to holders of U.S. Office Products Common Stock in light of
their particular circumstances, nor will it address any tax consequences arising
under the laws of any state, local, or foreign taxing jurisdiction. Holders of
U.S. Office Products Common Stock should consult their tax advisors about the
particular U.S. federal income tax consequences to them of the Travel
Distribution, or the holding and disposition of the Navigant Common Stock, as
well as any tax consequences arising under the laws of any state, local, or
foreign taxing jurisdiction.
EFFECT ON U.S. OFFICE PRODUCTS AND HOLDERS OF U.S. OFFICE PRODUCTS COMMON
STOCK. Subject to the foregoing, the Tax Opinion will state Wilmer Cutler &
Pickering's opinion that for U.S. federal income tax purposes the Distributions
(including the Travel Distribution) will qualify as tax-free spin-offs under
Section 355 of the Code, and will not be taxable under Section 355(e) of the
Code. U.S. Office Products will not complete the Distributions unless it
receives the Tax Opinion. The Tax Opinion will be based on the accuracy as of
the time of the Distributions of factual representations made by U.S. Office
Products, Navigant, the Spin-Off Companies and CD&R and certain other
information, data, documentation and other materials that Wilmer, Cutler &
Pickering has deemed necessary.
The Tax Opinion will represent Wilmer, Cutler & Pickering's best judgment of
how a court would rule. However, the Tax Opinion is not binding upon either the
IRS or any court. A ruling has not been, and will not be, sought from the IRS
with respect to the U.S. federal income tax consequences of the Travel
Distribution.
Assuming the Travel Distribution qualifies as a tax-free spin-off under
Section 355 and is not taxable under to Section 355(e):
1. No gain or loss will be recognized by holders of U.S. Office Products
Common Stock as a result of their receipt of Navigant Common Stock in the Travel
Distribution. Holders of U.S. Office Products Common Stock will recognize gain
or loss on the receipt of cash in lieu of fractional shares (as discussed
below).
2. No gain or loss will be recognized by U.S. Office Products as a result of
the Travel Distribution.
3. A stockholder's tax basis in such stockholder's U.S. Office Products
Common Stock immediately before the Travel Distribution will be allocated among
the U.S. Office Products Common Stock and the Spin-Off Companies' common stock
(including any fractional shares) received with respect to such U.S. Office
Products Common Stock in proportion to their relative fair market values on the
Distribution Date. Such allocation must be calculated separately for each block
of U.S. Office Products Common Stock (shares purchased at the same time and at
the same cost) with respect to which the Spin-Off Companies' common stock is
received.
4. The holding period of the Navigant Common Stock (including any fractional
shares) received in the Travel Distribution will include the holding period of
the U.S. Office Products Common Stock with respect to which it was distributed.
Treasury regulations governing Section 355 require that each holder of U.S.
Office Products Common Stock who receives shares of Navigant Common Stock
pursuant to the Travel Distribution attach a statement to the U.S. federal
income tax return that will be filed by such stockholder for the taxable year in
which the stockholder receives Navigant Common Stock in the Travel Distribution.
The regulations require that the statement show the applicability of Section 355
to the Travel Distribution. U.S. Office Products will provide each U.S. Office
Products stockholder of record on the Record Date with information necessary to
comply with this requirement.
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CONSEQUENCES OF FAILURE TO QUALIFY AS A TAX-FREE DISTRIBUTION. As noted
above the Tax Opinion is not binding on the IRS or the courts. Holders of U.S.
Office Products Common Stock should be aware that the requirements of Section
355 pertaining to business purpose active trade or business, and absence of a
device for distribution of earnings and profits, as well as the requirements of
Section 355(e) pertaining to a plan or series of related transactions to acquire
50% or more by vote or value of a company, are highly dependent on factual
interpretations, are to a significant extent subjective in nature, and have a
relative absence of authority addressing their application to the particular
facts presented by the Travel Distribution. Accordingly, the IRS and/or a court
could reach a conclusion that differs from the conclusions in the Tax Opinion.
BUSINESS PURPOSE. In order for the Travel Distribution to qualify as a
tax-free spin-off under Section 355, it must be motivated, in whole or
substantial part, by one or more valid business purposes. U.S. Office Products
will represent that the Travel Distribution was motivated, in whole or
substantial part, to allow U.S. Office Products and Navigant to adopt strategies
and pursue objectives that are more appropriate to their respective industries
and stages of growth; to allow Navigant to pursue an independent acquisition
program with a more focused use of resources and, where stock is used as
consideration, to allow Navigant to provide stock of a public company that is in
the same industry as the business being acquired; to allow U.S. Office Products
and Navigant to offer their respective employees more focused compensation
packages; and to make possible the Equity Investment which the Board of
Directors of U.S. Office Products concluded would contribute to U.S. Office
Products' development, based on the skills and experience of CD&R. Based on
these representations and certain other information, data, documentation, and
other materials, Wilmer, Cutler & Pickering expects to deliver on opinion at the
time of the Distributions that the Travel Distribution satisfies the business
purpose requirement of Section 355. However, although similar rationales have
been accepted by the IRS in other circumstances as sufficient to meet the
business purpose requirement of Section 355, there can be no assurances that the
IRS will not assert that the business purpose requirement is not satisfied.
ACTIVE TRADE OR BUSINESS. In order for the Travel Distribution to qualify
as a tax-free spin-off under Section 355, substantially all of the assets of
Navigant must consist of the stock of Professional Travel Corporation ("PTC")
and PTC and U.S. Office Products must be engaged in an active trade or business
that has been actively conducted for the five-year period preceding the Travel
Distribution, taking into account only businesses that have been acquired in
transactions in which no gain or loss was recognized. Whether current and
historical business activity constitutes an active trade or business, and
whether any gain or loss should have been recognized in an acquisition
structured and reported as a nontaxable transaction, turn in some instances on
the application of subjective legal standards and on factual determinations,
such as intentions of the parties involved. Based on the representations of U.S.
Office Products and Navigant, Wilmer, Cutler & Pickering expects to deliver an
opinion at the time of the Distributions that the Travel Distribution will
satisfy the active trade or business requirement. However, because of the
inherently subjective nature of important elements of the active trade or
business requirement, and because the IRS may challenge the representations upon
which Wilmer, Cutler & Pickering relies, there can be no assurance that the IRS
will not assert that the active trade or business requirement is not satisfied.
ABSENCE OF A DEVICE FOR DISTRIBUTION OF EARNINGS AND PROFITS. The Travel
Distribution will not qualify as a tax-free spin-off under Section 355 if the
Travel Distribution was used principally as a device for the distribution of the
earnings and profits of U.S. Office Products or Navigant. Treasury regulations
provide that this test is applied based on all the facts and circumstances,
including the presence or absence of factors described in the Regulations as
"device factors" and "nondevice factors." Application of this test is uncertain
in part because of its subjective nature. Based on the representations of U.S.
Office Products and Navigant, Wilmer, Cutler & Pickering expects to deliver an
opinion at the time of the Distributions that the Travel Distribution is not a
transaction used principally as a device for the distribution of earnings and
profits of either U.S. Office Products or Navigant. However, because of the
inherently subjective nature of
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the device test (including the subjectivity involved in assigning weight to
various factors), and because the IRS may challenge the representations upon
which Wilmer, Cutler & Pickering relies, there can be no assurance that the IRS
will not assert that the Travel Distribution is a transaction used principally
as a device for the distribution of earnings and profits of U.S. Office Products
or Navigant.
If the Travel Distribution fails to qualify as a tax-free spin-off under
Section 355:
1. U.S. Office Products will recognize gain equal to the difference between
the fair market value of the Navigant Common Stock on the Distribution Date and
the U.S. Office Products' adjusted tax basis in the Navigant Common Stock on the
Distribution Date. If U.S. Office Products were to recognize gain on the Travel
Distribution, such gain would likely be substantial.
2. Each holder of U.S. Office Products Common Stock will be treated as
having received a taxable corporate distribution in an amount equal to the fair
market value (on the Distribution Date) of the Navigant Common Stock distributed
to such stockholder, including fractional shares. The distribution would
generally be treated as ordinary dividend income to a U.S. Office Products
stockholder to the extent of such U.S. Office Products stockholder's pro rata
share of U.S. Office Products' accumulated and current earnings and profits. To
the extent the amount of the distribution exceeds such U.S. Office Products
stockholder's pro rata share of U.S. Office Products' accumulated and current
earnings and profits, such excess would be treated first as a basis-reducing,
tax-free return of capital to the extent of the stockholder's tax basis in his
or her U.S. Office Products Common Stock and then as capital gain. For corporate
stockholders, the portion of the taxable distribution that constitutes a
dividend would be eligible for the dividends-received deduction (subject to
certain limitations in the Code) and could be subject to the Code's
extraordinary dividend provisions which, if applicable, would require a
reduction in a corporate stockholder's basis in its U.S. Office Products Common
Stock to the extent of such deduction and the recognition of gain to the extent
the deduction exceeds the corporate stockholder's tax basis in its U.S. Office
Products Common Stock.
3. Each U.S. Office Products stockholder's tax basis in the Navigant Common
Stock would equal the fair market value on the Distribution Date of the Navigant
Common Stock (including fractional shares) distributed to such stockholder.
4. The holding period of the Navigant Common Stock (including fractional
shares) received in the Travel Distribution would begin with, and include, the
day after the Distribution Date.
Whether or not the Travel Distribution is taxable, cash received by a holder
of U.S. Office Products Common Stock in lieu of a fractional share of Navigant
Common Stock will be treated as received in exchange for such fractional share
and the stockholder will recognize gain or loss for U.S. federal income tax
purposes measured by the difference between the amount of cash received and the
stockholder's tax basis in the fractional share. Such gain or loss will be
capital gain or loss to the stockholder.
EFFECT OF POST-DISTRIBUTION TRANSACTIONS. Section 355(e) of the Code, which
was added in 1997, generally, provides that a company that distributes shares of
a subsidiary in a spin-off that is otherwise tax-free will incur U.S. federal
income tax liability if 50% or more, by vote or value, of the capital stock of
either the company making the distribution or the subsidiary is acquired by one
or more persons acting pursuant to a plan or series of related transactions that
includes the spin-off. Stock acquired by certain related persons is aggregated
in determining whether this 50% test is met. There is a presumption that any
acquisition of 50% or more, by vote or value, of the capital stock of the
company or the subsidiary occurring two years before or after the spin-off is
pursuant to a plan that includes the spin-off. However, the presumption may be
rebutted by establishing that the spin-off and the acquisition are not part of a
plan or series of related transactions. Based on the representations of U.S.
Office Products, Navigant and the Investor, and the assumption that the Travel
Distribution is not part of a plan that is outside the knowledge of U.S. Office
Products and Navigant pursuant to which one or more persons will acquire
directly or indirectly 50% or more by vote or value of the capital stock of U.S.
Office Products or Navigant, Wilmer,
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Cutler & Pickering expects to deliver an opinion at the time of the
Distributions that the Travel Distribution will not be taxable under section
355(e). However, there can be no assurance that the IRS will not assert that the
Travel Distribution is taxable under Section 355(e).
If the Travel Distribution is taxable under Section 355(e) of the Code, U.S.
Office Products will recognize gain equal to the difference between the fair
market value of the Navigant Common Stock on the Distribution Date and U.S.
Office Products' adjusted tax basis in the Navigant Common Stock on the
Distribution Date. However, no gain or loss will be recognized by holders of
Common Stock (except with respect to cash received in lieu of fractional
shares). If U.S. Office Products were to recognize gain on the Travel
Distribution, such gain would likely be substantial.
LIABILITY FOR DISTRIBUTION TAXES. Under the Tax Allocation Agreement,
Navigant and the other Spin-Off Companies will jointly and severally indemnify
U.S. Office Products for any Distribution Taxes assessed against U.S. Office
Products if an Adverse Tax Act of any of the Spin-Off Companies materially
contributes to a final determination that any of the Distributions is taxable.
Navigant will also enter into the Tax Indemnification Agreement with the other
Spin-Off Companies under which the Spin-Off Company that is responsible for the
Adverse Tax Act will indemnify the other Spin-Off Companies for any liability to
U.S. Office Products under the Tax Allocation Agreement. As a consequence,
Navigant will be liable for any Distribution Taxes resulting from any Adverse
Tax Act by Navigant and liable (subject to indemnification by the other Spin-Off
Companies) for any Distribution Taxes resulting from an Adverse Tax Act by the
other Spin-Off Companies. Additionally, U.S. Office Products and each of the
Spin-Off Companies will be liable for its pro rata portion of any Distribution
Taxes, based on the value of each company's common stock after the
Distributions, if it is determined that there has not been an Adverse Tax Act by
either U.S. Office Products or any of the Spin-Off Companies. As a result,
Navigant could become liable for a pro rata portion of any Distribution Taxes
with respect not only to the Travel Distribution, but also to any of the other
Distributions. See "Arrangements Among U.S. Office Products, Navigant and the
Other Spin-Off Companies After the Distributions--Tax Allocation Agreement and
Tax Indemnification Agreement" for a detailed discussion of the Tax Allocation
Agreement and Tax Indemnification Agreement.
THE FOREGOING DESCRIPTION OF WILMER CUTLER & PICKERING'S OPINION OF THE
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF U.S. OFFICE PRODUCTS
COMMON STOCK IS FOR GENERAL INFORMATION ONLY AND DOES NOT PURPORT TO COVER ALL
U.S. FEDERAL INCOME TAX CONSEQUENCES THAT MIGHT APPLY TO EVERY HOLDER OF U.S.
OFFICE PRODUCTS COMMON STOCK. ALL HOLDERS OF U.S. OFFICE PRODUCTS COMMON STOCK
SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE PARTICULAR U.S. FEDERAL,
FOREIGN, STATE AND LOCAL TAX CONSEQUENCES OF THE TRAVEL DISTRIBUTION TO THEM.
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EFFECT ON OUTSTANDING U.S. OFFICE PRODUCTS OPTIONS HELD BY NAVIGANT EMPLOYEES
Navigant expects that all or substantially all vested and unvested options
to acquire U.S. Office Products Common Stock that are held by Navigant employees
("U.S. Office Products Options") on the Distribution Date will be replaced with
options to acquire shares of Navigant Common Stock ("Navigant Options"). As of
the Distribution Date, approximately 1,212,222 options to acquire U.S. Office
Products Common Stock will be held by employees of Navigant.
The number of Navigant Options that will be outstanding after the
Distributions will depend on the trading prices of U.S. Office Products Common
Stock around the time of the Distributions and the public offering price of the
Navigant Common Stock in the Offering. Thus, the number and exercise price of
Navigant Options into which the U.S. Office Products Options will convert is not
yet determinable. The following formulas will be used to adjust the number and
exercise price of U.S. Office Products Options. Such formulas will adjust solely
for the Travel Distribution and the Reverse Stock Split (as defined below), and
not for other events, such as the Tender Offer. The option exercise price will
be adjusted by applying the following formula:
Exercise Price (New) = Exercise Price (Old) X Initial Public Offering Price
of Navigant Common Stock in the Offering
Trading Price of U.S. Office Products Common
Stock Pre-Travel Distribution
The number of options will be adjusted by applying the following formula:
Option Shares (New) = Option Shares (Old) XTrading Price of U.S. Office
Products Common Stock Pre-Travel
Distribution
Initial Public Offering Price of
Navigant Common Stock in the
Offering
For all optionees, the "Trading Prices of U.S. Office Products Common Stock
Pre-Travel Distribution" will be the average closing price of U.S. Office
Products Common Stock for the lesser of (a) ten business days preceding the
Distribution Date and (b) the number of business days falling between the
expiration of the Tender Offer and the Distribution Date. The foregoing
formula adjustments are intended to preserve for the holder of U.S. Office
Product Options the intrinsic value per option, measured as the difference
between the market value of one share of U.S. Office Products Common Stock
at the time of the Travel Distribution and the exercise price of such
option. The intrinsic value of the adjusted options will be no greater than
the intrinsic value of the options immediately before the Distribution, and
the ratio of exercise price to market price will be not less than the ratio
immediately before the Distributions. It is anticipated that all other terms
of the Navigant stock options will be the same as the terms of the U.S.
Office Products options they replace. As a result of this, options held by
Navigant employees after the Travel Distribution would represent a greater
percentage interest in Navigant than the percentage interest in U.S. Office
Products represented by such options before the Distributions.
RESTRICTIONS ON TRANSFER
Shares of Navigant Common Stock distributed to the U.S. Office Products
stockholders pursuant to the Travel Distribution will be freely transferable
under the Securities Act, except for shares received by any persons who may be
deemed to be "affiliates" of Navigant as that term is defined in Rule 144
promulgated under the Securities Act. Persons who may be deemed to be affiliates
of Navigant after the Travel Distribution generally include individuals or
entities that control, are controlled by, or are under common control with,
Navigant and may include certain officers and directors of Navigant as well as
principal stockholders of Navigant. Persons who are affiliates of Navigant will
be permitted to sell their shares of Navigant Common Stock only pursuant to an
effective registration statement under the Securities Act or an exemption from
the registration requirements of the Securities Act, such as the exemptions
provided for private transactions or Rule 144 under the Securities Act.
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EXPENSES OF THE DISTRIBUTIONS
U.S. Office Products estimates that legal, financial advisory, investment
banking, financing, accounting, printing, mailing and other expenses (including
the fees of U.S. Office Products' and Spin-Off Companies' transfer agents) of
the Strategic Restructuring Plan (including CD&R's fees and expenses) including
the Distributions, will total approximately $75.0 million. Upon request, U.S.
Office Products will pay the reasonable expenses of brokerage firms, custodians,
nominees and fiduciaries who are record holders of U.S. Office Products Common
Stock for forwarding this Information Statement/Prospectus to the beneficial
owners of such shares. The foregoing expenses will be allocated among U.S.
Office Products and the Spin-Off Companies pursuant to a formula to be
determined. See "Arrangements Among U.S. Office Products, Navigant and the Other
Spin-Off Companies After the Distributions--Distribution Agreement."
ARRANGEMENTS AMONG U.S. OFFICE PRODUCTS, NAVIGANT
AND THE OTHER SPIN-OFF COMPANIES AFTER THE DISTRIBUTIONS
Following the Travel Distribution, U.S. Office Products and Navigant will
operate independently, and (except for interests U.S. Office Products may retain
pursuant to certain pledge agreements) neither will have any stock ownership,
beneficial or otherwise, in the other. For the purposes of governing certain of
the ongoing relationships of U.S. Office Products, Navigant and the other
Spin-Off Companies after the Distributions, and to provide mechanisms for an
orderly transition, on or before the Distribution Date, U.S. Office Products,
Navigant and the other Spin-Off Companies will enter into the Distribution
Agreement, the Tax Allocation Agreement and the Employee Benefits Agreement, and
the Spin-Off Companies will enter into the Tax Indemnification Agreement. The
terms of the Distribution Agreement, Tax Allocation Agreement Tax
Indemnification Agreement and Employee Benefits Agreement have not yet been
finally determined. These terms will be agreed to while Navigant is a
wholly-owned subsidiary of U.S. Office Products. In addition, the Investment
Agreement specifies certain terms of these agreements and provides that they are
subject to CD&R's reasonable approval. They will not be the result of arm's-
length negotiations between independent parties.
Although the terms of Distribution Agreement, Tax Allocation Agreement, the
Tax Indemnification Agreement and Employee Benefits Agreement have not yet been
finally determined, Navigant currently expects that the terms will include those
described below. There can be no assurance that the terms of the Distribution
Agreement, Tax Allocation Agreement, Tax Indemnification Agreement and Employee
Benefits Agreement will not be less favorable to the stockholders of Navigant
than the terms set out below.
DISTRIBUTION AGREEMENT
TRANSFER OF SUBSIDIARIES AND ASSETS. The Distribution Agreement is expected
to provide for the transfer from U.S. Office Products to Navigant of
substantially all of the equity interests in the U.S. Office Products
subsidiaries that are engaged in the business of Navigant as well as the
transfer, in certain instances, of other assets related to the business of
Navigant. It is also expected to provide that the recovery on any claims under
applicable acquisition agreements that U.S. Office Products may have against the
persons who sold businesses to U.S. Office Products that will become part of
Navigant in connection with the Travel Distribution (the "Navigant Acquisition
Indemnity Claims") will be allocated between U.S. Office Products and the
applicable Spin-Off Company under a formula to be determined. In addition, to
the extent that the Navigant Acquisition Indemnity Claims are secured by the
pledge of stock of U.S. Office Products and the Spin-Off Companies that is owned
by persons who sold businesses to U.S. Office Products that will become part of
Navigant (and no previous claims have been made against such shares), the
pledged shares will be used, subject to final resolution of the claim, to
reimburse U.S. Office Products and the applicable Spin-Off Company for their
respective damages and expenses in accordance with the relative allocation of
recovery rights, which will be determined prior to the Travel Distribution.
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DEBT. The Distribution Agreement is expected to provide that Navigant will
have, at the time of the Travel Distribution, $15.0 million debt plus the amount
of any additional debt incurred after the date of the Investment Agreement by
U.S. Office Products or Navigant in connection with the acquisition of entities
that will become subsidiaries of Navigant in connection with the Distributions.
Navigant estimates that the additional debt will be approximately $
million.
ASSUMPTION OF LIABILITIES. The Distribution Agreement is expected to
allocate and provide for the assumption of financial responsibility for certain
liabilities (other than taxes and employee benefit matters, which will be
governed by separate agreements) among U.S. Office Products, Navigant and the
other Spin-Off Companies. Navigant will be responsible for (i) any liabilities
arising out of or in connection with the businesses conducted by Navigant and/or
its subsidiaries, (ii) its liabilities under the Distribution Agreement, the Tax
Allocation Agreement, the Tax Indemnification Agreement and the Employee
Benefits Agreement, and related agreements, (iii) its liabilities for the debt
described above, (iv) certain securities liabilities, and (v) any liabilities of
U.S. Office Products relating to earn-out or bonus payments owed by U.S. Office
Products in respect of Navigant or its subsidiaries. In addition, the
Distribution Agreement is expected to provide for sharing of certain liabilities
among some or all of the parties. Each of U.S. Office Products, Navigant and the
other Spin-Off Companies will bear a portion, on a basis to be determined, of
(i) any liabilities of U.S. Office Products under the securities laws arising
from events prior to the Distributions (other than claims relating solely to a
specific Spin-Off Company or relating specifically to the continuing businesses
of U.S. Office Products), (ii) U.S. Office Products' general corporate
liabilities (other than debt, except for that specifically allocated to the
Spin-Off Companies) incurred prior to the Distributions (I.E., liabilities not
related to the conduct of a particular distributed or retained subsidiary's
business) and (iii) a portion of transactions costs (including legal,
accounting, investment banking, and financial advisory) and other fees incurred
by U.S. Office Products in connection with the Strategic Restructuring Plan
equal to $1.0 million in the case of each Spin-Off Company. The Company will be
responsible for all cost and expenses related to the Offering and its bank
financing.
The Distribution Agreement is expected to provide that each party will
indemnify and hold all of the other parties harmless from any and all
liabilities for which the former assumed liability under the Distribution
Agreement. All indemnity payments will be subject to adjustment upward or
downward to take account of tax costs or tax benefits as well as insurance
proceeds. If there are any claims made under U.S. Office Products' existing
insurance policies, the amount of any deductible or retention will be allocated
by U.S. Office Products among the claimants in a fair and reasonable manner.
OTHER PROVISIONS. The Distribution Agreement is expected to have other
customary provisions including provisions relating to mutual release, access to
information, witness services, confidentiality and alternative dispute
resolution.
TAX ALLOCATION AGREEMENT AND TAX INDEMNIFICATION AGREEMENT
The Tax Allocation Agreement will provide that each Spin-Off Company will be
responsible for its respective share of U.S. Office Products' consolidated tax
liability for the years that each such corporation was included in U.S. Office
Products' consolidated U.S. federal income tax return. The Tax Allocation
Agreement also will provide for sharing, where appropriate, of state, local and
foreign taxes attributable to periods prior to the Distributions.
The Tax Allocation Agreement will further provide that the Spin-Off
Companies will jointly and severally indemnify U.S. Office Products for any
Distribution Taxes assessed against U.S. Office Products if an Adverse Tax Act
of any of the Spin-Off Companies materially contributes to a final determination
that any or all of the Distributions are taxable. Navigant will also enter into
the Tax Indemnification Agreement with the other Spin-Off Companies under which
the Spin-Off Company that is responsible for the Adverse Tax Act will indemnify
the other Spin-Off Companies for any liability to U.S. Office Products under the
Tax Allocation Agreement. As a consequence, Navigant will be liable for any
Distribution Taxes resulting from
28
<PAGE>
any Adverse Tax Act by Navigant and liable (subject to indemnification by the
other Spin-Off Companies) for any Distribution Taxes resulting from an Adverse
Tax Act by the other Spin-Off Companies. If there is a final determination that
any or all of the Distributions are taxable and it is determined that there has
not been an Adverse Tax Act by either U.S. Office Products or any of the
Spin-Off Companies, each of U.S. Office Products and the Spin-Off Companies will
be liable for its pro rata portion of such Distribution Taxes based on the value
of each company's common stock after the Distributions. As a result, Navigant
could become liable for a pro rata portion of any Distribution Taxes with
respect not only to the Navigant Distribution but also any of the other
Distributions.
EMPLOYEE BENEFITS AGREEMENT
In connection with the Distributions, U.S. Office Products expects to enter
into the Employee Benefits Agreement with Navigant and the other Spin-Off
Companies to provide for an orderly transition of benefits coverage between U.S.
Office Products and the Spin-Off Companies. Pursuant to this agreement, the
respective Spin-Off Companies will retain or assume liability for
employment-related claims and severance for persons currently or previously
employed by the respective Spin-Off Companies and their subsidiaries, while U.S.
Office Products and its post-Distribution subsidiaries will retain or assume
responsibility for their current and previous employees. The proposed Employee
Benefits Agreement reflects U.S. Office Products' expectation that each of the
Spin-Off Companies will establish 401(k) plans for their respective employees
effective as of, or shortly after, the Distribution Date and that U.S. Office
Products will transfer 401(k) accounts to those plans as soon as practicable.
The proposed agreement also provides for spinning off portions of the U.S.
Office Products' cafeteria plan that relate to employees of the Spin-Off
Companies (and their subsidiaries) and having those spun-off plans assume
responsibilities for claims submitted on or after the Distribution.
DIVIDEND POLICY
Navigant does not anticipate declaring and paying cash dividends on Navigant
Common Stock in the foreseeable future. The decision whether to apply any
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 Navigant's financial condition, results
of operations, existing and proposed commitments for use of Navigant's funds and
other relevant factors. Navigant's ability to pay dividends may be restricted
from time to time by financial covenants in its credit agreements.
29
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Navigant at January 24,
1998, (i) on an actual basis; (ii) on a pro forma basis to reflect the Travel
Distribution, the allocation of $15.8 million of debt by U.S. Office Products
and the purchase acquisition completed subsequent to January 24, 1998 and (iii)
on a pro forma as adjusted basis to give effect to the Offering at an assumed
initial public offering price of $ per share and after deduction of
estimated offering expenses and underwriting discounts and commissions and
application of the net proceeds therefrom as set forth in "Use of Proceeds".
This table should be read in conjunction with the "Management's Discussion and
Analysis of Financial Position and Results of Operations of Navigant," the
historical consolidated financial statements and the pro forma combined
financial statements of Navigant, and the related notes to each thereof,
included elsewhere in this Information Statement/Prospectus.
<TABLE>
<CAPTION>
JANUARY 24, 1998
------------------------ PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ------------ ------------
<S> <C> <C> <C>
(IN THOUSANDS)
Cash...................................................................... $ 5,919 $ $
---------- ------------ ------------
---------- ------------ ------------
Short-term debt........................................................... $ 625 $ 625
---------- ------------ ------------
---------- ------------ ------------
Short-term payable to U.S. Office Products................................ $ 217 $ $
---------- ------------ ------------
---------- ------------ ------------
Long-term debt............................................................ $ 2,664 $ 15,220
Long-term payable to U.S. Office Products................................. 10,027
Stockholder's equity:
Preferred Stock, $0.001 par value, 1,000,000 shares authorized; no shares
outstanding
Common Stock, $0.001 par value, 150,000,000 shares authorized; shares
actual; shares pro forma; shares pro forma as adjusted
Divisional equity....................................................... 94,140 92,855
Cumulative translation adjustment....................................... (130) (130)
Retained earnings....................................................... 6,101
---------- ------------ ------------
Total stockholder's equity.......................................... 100,111 92,725
---------- ------------ ------------
Total capitalization................................................ $ 112,802 $ 107,945
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
- ------------------------
(1) Excludes options to acquire shares of Navigant Common Stock to be reserved
for issuance upon exercise of options. See "Management--1998 Stock Incentive
Plan."
(2) The net proceeds of the Offering are estimated to be $ ($ if the
underwriters' over-allotment option is exercised in full). Those net
proceeds will be used to repay indebtedness allocated to Navigant by U.S.
Office Products in connection with the Travel Distribution and for general
corporate purposes, including future acquisitions.
30
<PAGE>
SELECTED FINANCIAL DATA
The historical Statement of Income Data for the year ended December 31, 1994
and 1995, the four months ended April 30, 1996, the fiscal year ended April 26,
1997 and the nine months ended January 24, 1998 and the Balance Sheet Data at
April 30, 1996, April 26, 1997 and January 24, 1998 have been derived from
Navigant's consolidated financial statements that have been audited and are
included elsewhere in this Prospectus. The historical Statement of Income Data
for the years ended December 31, 1992 and 1993 and the Balance Sheet Data at
December 31, 1992, 1993, 1994 and 1995 have been derived from unaudited
consolidated financial statements which are not included elsewhere in this
Prospectus or incorporated herein by reference. The Selected Financial Data for
the nine months ended January 25, 1997 (except pro forma amounts) have been
derived from unaudited consolidated financial statements that appear elsewhere
in this Prospectus. These unaudited consolidated financial statements have been
prepared on the same basis as the audited consolidated financial statements and,
in the opinion of management, contain all adjustments, consisting of normal
recurring accruals, necessary for a fair presentation of the financial position
and results of operations for the periods presented.
The pro forma financial data gives effect, as applicable, to the Travel
Distribution and the acquisitions completed by Navigant after May 1, 1996 as if
all such transactions had been consummated on May 1, 1996. In addition, the pro
forma information is based on available information and certain assumptions and
adjustments.
The Selected Financial Data provided herein should be read in conjunction
with the historical financial statements, including the notes thereto, the pro
forma financial information, including the notes thereto, and the "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Navigant" that appear elsewhere in this Prospectus.
31
<PAGE>
SELECTED FINANCIAL DATA (1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 26,
FOUR MONTHS -------------------------------------
ENDED PRO
YEAR ENDED DECEMBER 31, APRIL 30, PRO FORMA
------------------------------------------ ------------- FORMA AS ADJUSTED
1992 1993 1994 1995 1996 1997 1997(2) 1997(2)(5)
--------- --------- --------- --------- ------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
STATEMENT OF INCOME
DATA:
Revenues................ $ 28,853 $ 32,838 $ 34,569 $ 45,267 $ 18,009 $ 57,677 $ 146,981
Operating Expenses...... 14,244 17,153 19,692 25,836 9,491 31,541 80,513
--------- --------- --------- --------- ------------- --------- ------------ ------------
Gross profit............ 14,609 15,685 14,877 19,431 8,518 26,136 66,468
General and
administrative
expenses.............. 10,588 11,647 11,651 15,221 6,660 19,684 47,261
Amortization expense.... 203 197 221 342 128 548 2,997
Non-recurring
acquisition costs..... 1,156 1,156
--------- --------- --------- --------- ------------- --------- ------------ ------------
Operating income........ 3,818 3,841 3,005 3,868 1,730 4,748 15,054
Interest expense........ 125 139 118 515 173 587 1,268
Interest income......... (173) (231) (253) (352) (109) (445)
Other (income)
expense............... 55 48 42 20 118 312
--------- --------- --------- --------- ------------- --------- ------------ ------------
Income before provision
for income taxes...... 3,866 3,878 3,092 3,663 1,646 4,488 13,474
Provision for income
taxes................. 188 97 18 565 255 1,145 6,198
--------- --------- --------- --------- ------------- --------- ------------ ------------
Net income.............. $ 3,678 $ 3,781 $ 3,074 $ 3,098 $ 1,391 $ 3,343 $ 7,276
--------- --------- --------- --------- ------------- --------- ------------ ------------
--------- --------- --------- --------- ------------- --------- ------------ ------------
Net income per share:
Basic................. $ 0.08 $ 0.09 $ 0.07 $ 0.05 $ 0.02 $ 0.04 $ 0.07
Diluted............... $ 0.08 $ 0.09 $ 0.07 $ 0.05 $ 0.02 $ 0.04 $ 0.07
Weighted average common
shares outstanding
(3):
Basic................. 44,260 44,260 45,562 59,059 77,501 90,026 109,895
Diluted............... 44,260 44,260 45,704 60,024 79,100 91,761 109,895
<CAPTION>
NINE MONTHS ENDED
--------------------------------------------------------------------
PRO PRO PRO FORMA
FORMA FORMA AS ADJUSTED
JANUARY 25, JANUARY 24, JANUARY 25, JANUARY 24, JANUARY 24,
1997 1998 1997(2) 1998(2) 1998(2)(5)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
STATEMENT OF INCOME
DATA:
Revenues................ $ 41,527 $ 80,706 $ 105,362 $ 119,693
Operating Expenses...... 22,656 47,172 59,550 67,869
------------ ------------ ------------ ------------ ------------
Gross profit............ 18,871 33,534 45,812 51,824
General and
administrative
expenses.............. 15,011 26,274 34,491 38,608
Amortization expense.... 471 1,509 2,336 2,418
Non-recurring
acquisition costs..... 284 284
------------ ------------ ------------ ------------ ------------
Operating income........ 3,105 5,751 8,701 10,798
Interest expense........ 415 399 951 951
Interest income......... (382) (338)
Other (income)
expense............... 40 (71) 178 (118)
------------ ------------ ------------ ------------ ------------
Income before provision
for income taxes...... 3,032 5,761 7,572 9,965
Provision for income
taxes................. 551 2,823 3,483 4,584
------------ ------------ ------------ ------------ ------------
Net income.............. $ 2,481 $ 2,938 $ 4,089 $ 5,381
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Net income per share:
Basic................. $ 0.03 $ 0.03 $ 0.04 $ 0.05
Diluted............... $ 0.03 $ 0.03 $ 0.04 $ 0.05
Weighted average common
shares outstanding
(3):
Basic................. 85,978 114,758 109,895 109,895
Diluted............... 87,824 117,185 109,895 109,895
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
(UNAUDITED)
------------------------------------------ APRIL 30,
1992 1993 1994 1995 1996
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital....................................................... $ 4,172 $ 5,051 $ 4,366 $ 4,288 $ 4,338
Total assets.......................................................... 15,040 15,487 14,602 25,258 25,692
Long-term debt, less current portion.................................. 4,048 3,909 3,455 8,160 6,366
Long-term payable to U.S. Office Products.............................
Stockholder's equity.................................................. 6,723 7,914 7,736 9,187 11,221
<CAPTION>
JANUARY 24, 1998
---------------------------------------------
PRO FORMA
APRIL 26, PRO AS
1997 ACTUAL FORMA(4) ADJUSTED(4)(5)
----------- ---------- ---------- ---------------------
<S> <C> <C> <C> <C>
(UNAUDITED)
BALANCE SHEET DATA:
Working capital....................................................... $ 1,281 $ 8,580 $ 3,027
Total assets.......................................................... 29,339 137,661 132,749
Long-term debt, less current portion.................................. 2,012 2,664 15,220
Long-term payable to U.S. Office Products............................. 787 10,027
Stockholder's equity.................................................. 13,483 100,111 92,725
</TABLE>
- ------------------------
(1) The historical financial information of the Pooled Companies have been
combined on a historical cost basis in accordance with GAAP to present this
financial data as if the Pooled Companies had always been members of the
same operating group. The financial information of the Purchased Companies
is included from the dates of their respective acquisitions. The Purchased
Companies and their respective acquisition dates are as follows: Associated
Travel International, June 26, 1997; Evans Travel Group, July 25, 1997;
Atlas Travel Services, September 26, 1997; Omni Travel, September 26, 1997;
McGregor Travel Management, October 24, 1997; Travel Consultants, Inc.,
October 24, 1997; and Wareheim Travel Services, December 23, 1997. The pro
forma financial data reflect acquisitions completed by Navigant through May
1, 1998. See Note 4 of the Company's Notes to Consolidated Financial
Statements for a description of the number and accounting treatment of the
acquisitions by the Company.
(2) Gives effect to the Travel Distribution and the purchase acquisitions
completed by Navigant since May 1, 1996 as if all such transactions had been
made on May 1, 1996. The pro forma statement of income data are not
necessarily indicative of the operating results that would have been
achieved had these events actually then occurred and should not be construed
as representative of future operating results.
(3) For calculation of the pro forma weighted average shares outstanding for the
fiscal year ended April 26, 1997 and for the nine months ended January 24,
1998 and January 25, 1997, see Note 2(h) of Notes to Pro Forma Combined
Financial Statements included herein.
(4) Gives effect to the Travel Distribution and the purchase acquisition
completed by Navigant subsequent to January 24, 1998 as if such transactions
had been made on January 24, 1998. The pro forma balance sheet data are not
necessarily indicative of the financial position that would have been
achieved had these events actually then occurred and should not be construed
as representative of future financial position.
(5) As adjusted to give effect to the sale of the shares of Navigant Common
Stock by Navigant pursuant to this offering (assuming an initial public
offering price of $ per share) after deducting the Underwriting Discount
and estimated offering expenses payable by Navigant and the use of the
estimated net proceeds therefrom.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF NAVIGANT INTERNATIONAL, INC.
INTRODUCTION
Navigant, which combines eleven regional corporate travel agencies acquired
by U.S. Office Products, provides corporate travel management services and, to a
more limited extent, other travel services, throughout the United States, in
Canada and in the United Kingdom.
The Company's consolidated financial statements give retroactive effect to
the four business combinations accounted for under the pooling-of-interests
method during the period from January 1997 through April 1997 (the "Pooled
Companies") and include the results of companies acquired in business
combinations accounted for under the purchase method from their respective dates
of acquisition. Prior to their respective dates of acquisition by U.S. Office
Products, the Pooled Companies reported results on years ending on December 31.
Upon acquisition by U.S. Office Products and effective for the fiscal year ended
April 26, 1997 ("fiscal 1997"), the Pooled Companies changed their year-ends
from December 31 to conform to U.S. Office Products' fiscal year, which ends on
the last Saturday in April.
The Company generates revenues principally from (i) base and incentive
override commissions on air travel tickets, (ii) fees for services rendered to
customers and (iii) commissions on hotel reservations and car rentals. Air
travel ticketing generates the largest portion of the Company's revenues. In the
fiscal year ended April 30, 1997 and the calendar years ended December 31, 1995
and 1994, air travel commissions, including both base commissions and incentive
override commissions, accounted for approximately 73.1%, 78.9% and 79.1%,
respectively, of the Company's revenues.
The methods by which the airlines compensate travel agents have changed
considerably in recent years and continue to be in flux. Historically, the
airlines paid a percentage commission on ticket price for each domestic and
international air travel ticket issued by a travel agent. Subsequent to 1995,
most major United States airlines imposed commission caps of $25 on domestic
one-way air travel and $50 on domestic round-trip tickets. Commissions on
international tickets are not subject to a cap. In October 1997, the airlines
reduced base commissions on tickets to approximately 8% of the ticket price. The
reduction of base commissions has reduced the Company's gross revenue and gross
margin below historical levels.
In response to the reductions in the commissions paid to travel agents,
travel agents are in the process of changing their financial arrangements with
their corporate customers either by implementing management contracts, in the
case of middle market and larger customers, or by charging transaction fees.
Under management contracts, the Company typically deducts its direct operating
expenses, indirect overhead costs and a management fee from commission revenues
collected for travel arrangements made on behalf of the customer. If the
commission revenues exceed the amounts deducted, the Company may share a
negotiated amount of the excess with the customer. If the commission revenues do
not cover the amounts deducted, the customer pays the difference to the Company.
Fee income recognized under management contracts has historically been derived
from commissions paid by the airlines. As a result, the Company does not prepare
separate reports distinguishing payments under management contracts from air
travel commission income. Management believes that the implementation of these
measures will ultimately mitigate the negative impact that the commission
reduction has had on gross revenue and gross margin.
After the airlines instituted the commission cap in 1995 and reduced base
commissions in October 1997, travel agencies, including the Company, began
charging transaction fees for some services to non-contract customers. The
Company typically charges between $10 and $15 per ticket for tickets issued to
customers that do not have a management contract with the Company.
The remainder of Navigant's revenues derive largely from commissions on
hotel reservations and car rentals. In accordance with industry practice, the
Company receives a commission equal to approximately
33
<PAGE>
10% of the hotel rate for each hotel reservation and 5% of the base rental car
rate for each rental car reservation that it makes. Some of the Company's
customers negotiate special hotel rates that do not produce commissions. In the
fiscal year ended April 26, 1997 and the calendar years ended December 31, 1995
and 1994, hotel and rental car commissions accounted for approximately 11.9%,
9.4% and 7.4% respectively, of Navigant's revenues.
On March 13, 1998, the Company received 90 days notice of termination of a
business relationship. The Company had provided travel administration services
to this customer under a five year agreement based on a fee per transaction
basis, with all commissions being remitted back to this customer. During the
nine months ended January 24, 1998, this relationship contributed approximately
$400,000 to net operating income. The Company has approximately $635,000 in
intangible assets recorded as of January 24, 1998 relating to the original
acquisition of this contract that will be written off within the next reporting
period as a charge to income. In addition to this charge, the Company
anticipates taking an additional charge in the next reporting period of
approximately $565,000 associated with the severance charge and other costs
associated with a change in operational strategy at one of its locations. The
total charge to income in the next reporting period is expected to be $1.2
million.
As part of the Company's increased focus on operational matters, the Company
expects to undertake 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 may involve the incurrence by the Company of certain
restructuring costs. However, at the present time, no formal plans to implement
any restructuring have been developed. Once developed, any such plans will
necessarily require review by the Company's senior management and the
implementation of such plans would not be initiated prior to the receipt of
proper authorization of the Company's Board of Directors. Based on the
additional time and resources expected to be involved in the development, review
and approval of any such restructuring plans, the Company cannot presently
predict if a restructuring charge will be incurred and, if incurred, the timing
or overall magnitude of such a charge.
The following discussion should be read in conjunction with the Company's
consolidated financial statements and related notes thereto and pro forma
financial statements and related notes thereto appearing elsewhere in this
Prospectus.
34
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of revenues for
the years ended December 31, 1994 and 1995, the fiscal year ended April 26, 1997
and for the nine months ended January 25, 1997 and January 24, 1998, as well as
for the fiscal year ended April 26, 1997 and for the nine months ended January
25, 1997 and January 24, 1998 on a pro forma basis reflecting the Travel
Distribution and the results of companies acquired in business combinations
accounted for under the purchase method as if such transactions had occurred on
May 1, 1996.
<TABLE>
<CAPTION>
FOR THE FISCAL
YEAR ENDED FOR THE NINE MONTHS ENDED
FOR THE YEAR ENDED ------------------------ -------------------------------------------
-------------------------------- PRO FORMA PRO FORMA
DECEMBER 31, DECEMBER 31, APRIL 26, APRIL 26, JANUARY 25, JANUARY 24, JANUARY 25,
1994 1995 1997 1997 1997 1998 1997
--------------- --------------- ----------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating Expenses..... 57.0 57.1 54.7 54.8 54.6 58.4 56.5
----- ----- ----- ----- ----- ----- -----
Gross profit......... 43.0 42.9 45.3 45.2 45.4 41.6 43.5
General and
administrative
expenses............. 33.7 33.6 34.1 32.2 36.1 32.6 32.7
Amortization expense... 0.6 0.8 1.0 2.0 1.1 1.9 2.2
Non-recurring
acquisition costs.... 2.0 0.8 0.7 0.3
----- ----- ----- ----- ----- ----- -----
Operating income..... 8.7 8.5 8.2 10.2 7.5 7.1 8.3
Interest expense,
net.................. (0.4) 0.4 0.3 0.9 0.1 0.1 0.9
Other (income)
expense.............. 0.1 0.1 0.1 0.1 0.1 (0.1) 0.2
----- ----- ----- ----- ----- ----- -----
Income before provision
for income taxes..... 9.0 8.0 7.8 9.2 7.3 7.1 7.2
Provision for income
taxes................ 0.1 1.2 2.0 4.2 1.3 3.5 3.3
----- ----- ----- ----- ----- ----- -----
Net income............. 8.9% 6.8% 5.8% 5.0% 6.0% 3.6% 3.9%
----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- -----
<CAPTION>
PRO FORMA
JANUARY 24,
1998
-------------
<S> <C>
Revenues............... 100.0%
Operating Expenses..... 56.7
-----
Gross profit......... 43.3
General and
administrative
expenses............. 32.3
Amortization expense... 2.0
Non-recurring
acquisition costs....
-----
Operating income..... 9.0
Interest expense,
net.................. 0.8
Other (income)
expense.............. (0.1)
-----
Income before provision
for income taxes..... 8.3
Provision for income
taxes................ 3.8
-----
Net income............. 4.5%
-----
-----
</TABLE>
PRO FORMA COMBINED RESULTS OF OPERATIONS
The unaudited pro forma combined financial data discussed herein does not
purport to represent the results that the Company would have obtained had the
transactions which are the subject of pro forma adjustments occurred at the
beginning of the applicable periods, as assumed, and are not necessarily
representative of the Company's results of operations in any future period.
NINE MONTHS ENDED JANUARY 24, 1998 COMPARED TO NINE MONTHS ENDED JANUARY 25,
1997
Pro forma revenues increased 13.6%, from $105.4 million for the nine months
ended January 25, 1997, to $119.7 million for the nine months ended January 24,
1998. This increase was primarily due to sales to new and existing customer
accounts.
Gross profit increased 13.1%, from $45.8 million, or 43.5% of revenues, for
the nine months ended January 25, 1997 to $51.8 million, or 43.3% of revenues,
for the nine months ended January 24, 1998. The decrease in gross profit as a
percentage of revenues was due primarily to the seven companies acquired in
business combinations accounted for under the purchase method during the nine
months ended January 24, 1998 ("the Fiscal 1998 Purchased Companies") becoming a
higher proportion of the Company's overall revenues. The Fiscal 1998 Purchased
Companies have lower gross margins as a percentage of
35
<PAGE>
revenue due to a lower proportion of revenues being derived from international
air sales and to higher operating cost structures as a result of their
geographic locations. Unlike commissions earned on domestic air sales,
commissions earned on international air sales are not subject to limitations by
the airlines, and therefore result in higher margins.
General and administrative expenses increased 11.9%, from $34.5 million, or
32.7% of revenues, for the nine months ended January 25, 1997 to $38.6 million,
or 32.3% of revenues, for the nine months ended January 24, 1998. The decrease
in general and administrative expenses as a percentage of revenues was primarily
due to the spreading of fixed general and administrative expenses over a larger
revenue base.
The Company incurred non-recurring acquisition costs of $284,000 during the
nine months ended January 25, 1997, in connection with the acquisition of the
Pooled Companies. These non-recurring acquisitions costs included accounting,
legal and investment banking fees, real estate and environmental assessments and
appraisals and various regulatory fees. Generally accepted accounting principles
("GAAP") 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 pooling-of-interests method of
accounting. In accordance with generally accepted accounting principles, the
Company will be unable to utilize the pooling-of-interests method to account for
acquisitions for a period of two years following the completion of the Strategic
Restructuring Plan. During this period, the Company will not reflect any
non-recurring acquisition costs in its results of operations, as all costs
incurred of this nature would be related to acquisitions accounted for under the
purchase method and would, therefore, be capitalized as a portion of the
purchase consideration.
Provision for income taxes has been estimated using an effective income tax
rate of 46.0%. The high effective income tax rate, compared to the federal
statutory rate of 35.0%, was primarily due to nondeductible goodwill
amortization resulting from acquisition of the Fiscal 1998 Purchased Companies.
CONSOLIDATED RESULTS OF OPERATIONS
NINE MONTHS ENDED JANUARY 24, 1998 COMPARED TO NINE MONTHS ENDED JANUARY 25,
1997
Consolidated revenues increased 94.3%, from $41.5 million for the nine
months ended January 25, 1997, to $80.7 million for the nine months ended
January 24, 1998. This increase was primarily due to the inclusion of the
revenues from the Fiscal 1998 Purchased Companies, from their respective dates
of acquisition and to sales to new and existing customer accounts.
Gross profit increased 77.7%, from $18.9 million, or 45.4% of revenues, for
the nine months ended January 25, 1997 to $33.5 million, or 41.6% of revenues,
for the nine months ended January 24, 1998. The decrease in gross profit as a
percentage of revenues was due primarily to the inclusion of the Fiscal 1998
Purchased Companies. The Fiscal 1998 Purchased Companies have lower gross
margins as a percentage of revenue due to a lower proportion of revenues being
derived from international air sales and to higher operating cost structures as
a result of their geographic locations.
General and administrative expenses increased 75.0%, from $15.0 million, or
36.1% of revenues, for the nine months ended January 25, 1997 to $26.3 million,
or 32.6% of revenues, for the nine months ended January 24, 1998. The decrease
in general and administrative expenses as a percentage of revenues was due
primarily to a reduction in executive compensation expense at the Pooled
Companies. Prior to being acquired by the Company, many of the Pooled Companies
were privately held corporations that paid compensation and bonuses
substantially in the amount of their net income. Additionally, the fixed general
and administrative expenses were spread over a larger revenue base.
Amortization expense increased from $471,000, or 1.1% of revenues, for the
nine months ended January 25, 1997 to $1.5 million, or 1.9% of revenues, for the
nine months ended January 24, 1998. This increase is due exclusively to the
increase in the number of purchase acquisitions included in the results for the
nine months ended January 25, 1997 versus the nine months ended January 24,
1998.
36
<PAGE>
The Company incurred non-recurring acquisition costs of $284,000 during the
nine months ended January 25, 1997, in connection with the acquisition of the
Pooled Companies. These non-recurring acquisitions costs included accounting,
legal and investment banking fees, real estate and environmental assessments and
appraisals and various regulatory fees.
Provision for income taxes increased from $551,000 for the nine months ended
January 25, 1997 to $2.8 million for the nine months ended January 24, 1998,
reflecting effective income tax rates of 18.2% and 49.0%, respectively. The low
effective income tax rate for the nine months ended January 25, 1997, compared
to the federal statutory rate of 35.0%, was primarily due to the fact that
several of the companies included in the results of such period, which were
acquired in business combinations accounted for under the pooling-of-interests
method, were not subject to federal income taxes on a corporate level as they
had elected to be treated as subchapter S corporations prior to being acquired
by the Company ("Subchapter S Companies"). The high effective income tax rate
for the nine months ended January 24, 1998 was due primarily to certain of the
Pooled Companies no longer being treated as subchapter S corporations and,
therefore, being subject to federal income taxes and due to an increase in
nondeductible goodwill amortization resulting from the acquisitions of the
Fiscal 1998 Purchased Companies.
YEAR ENDED APRIL 26, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Consolidated revenues increased 27.4%, from $45.3 million in 1995, to $57.7
million in fiscal 1997. This increase was due primarily to the inclusion of
revenues from a company acquired by one of the Pooled Companies during 1995 in a
business combination accounted for under the purchase method (the "1995
Purchased Company") for all of fiscal 1997 and only a portion of 1995.
Gross profit increased 34.5%, from $19.4 million, or 42.9% of revenues, in
1995 to $26.1 million, or 45.3% of revenues, in fiscal 1997. The increase in
gross profit as a percentage of revenues was due primarily to a shift in the mix
of revenues to higher margin services such as international air sales and tours
and cruise sales.
General and administrative expenses increased 29.3%, from $15.2 million, or
33.6% of revenues, in 1995 to $19.7 million, or 34.1% of revenues, in fiscal
1997. The increase in general and administrative expenses as a percentage of
revenues was primarily due to the inclusion, for all of fiscal 1997 and a
portion of 1995, of the 1995 Purchased Company, which had higher general and
administrative expenses as a percentage of revenues.
The Company incurred non-recurring acquisition costs of $1.2 million in
fiscal 1997, in connection with the acquisition of the Pooled Companies. These
non-recurring acquisitions costs included accounting, legal and investment
banking fees, real estate and environmental assessments and appraisals and
various regulatory fees.
Provision for income taxes increased from $565,000 in 1995 to $1.1 million
in fiscal 1997, reflecting effective income tax rates of 15.4% and 25.5%,
respectively. The low effective income tax rates in 1995 and fiscal 1997,
compared to the federal statutory rate of 35.0%, was primarily due to the fact
that several of the companies included in the results of such periods, which
were acquired in business combinations accounted for under the
pooling-of-interests method, were Subchapter S Companies. The difference in the
effective tax rate between the two periods was attributable principally to
differences in the relative operating performance in such periods of such
Subchapter S Companies and companies subject to federal income taxes on a
corporate level.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Consolidated revenues increased 30.9%, from $34.6 million in 1994, to $45.3
million in 1995. This increase was primarily due to the inclusion of the
revenues from the 1995 Purchased Company from its date of acquisition. This
increase was partially offset by a reduction in revenues due to a change in the
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commission structure paid by the airlines. In April 1995 most airlines reduced
the commissions paid to travel agents by imposing a cap on commissions earned
from the booking of domestic flights. Per-ticket commissions are generally
capped at $25 for one-way domestic tickets and $50 for round-trip domestic
tickets.
Gross profit increased 30.6%, from $14.9 million, or 43.0% of revenues, in
1994 to $19.4 million, or 42.9% of revenues, in 1995. The decrease in gross
profit margin as a percentage of revenues was due to the change in air sale
commissions described above, partially offset by the inclusion of the 1995
Purchased Company, which had a higher gross profit percentage than the Company.
General and administrative expenses increased 30.6%, from $11.7 million, or
33.7% of revenues, in 1994 to $15.2 million, or 33.6% of revenues, in 1995. The
increase in general and administrative expenses as a percentage of revenues was
due to the inclusion of the 1995 Purchased Company, which had higher general and
administrative expenses as a percentage of revenues than the Company and as a
result of the change in airline ticket sale commissions described above.
Provision for income taxes increased from $18,000 in 1994 to $565,000 in
1995, reflecting effective income tax rates of 0.6% and 15.4%, respectively. The
low effective income tax rates in 1994 and 1995, compared to the federal
statutory rate of 35.0%, was primarily due to the fact that several of the
companies included in the results for such periods, which were acquired in
business combinations accounted for under the pooling-of-interests method, were
Subchapter S Companies. The difference in the effective tax rate between the two
periods was attributable principally to differences in the relative operating
performance in such periods of such Subchapter S Companies and companies subject
to federal income taxes on a corporate level.
LIQUIDITY AND CAPITAL RESOURCES
At January 24, 1998, the Company had cash of $5.9 million and working
capital of $8.6 million. The Company's capitalization, defined as the sum of
long-term debt, long-term payable to U.S. Office Products and stockholder's
equity, at January 24, 1998 was approximately $112.8 million. On a pro forma
basis at January 24, 1998, the Company had working capital of $3.0 million and
capitalization of $107.9 million. The decreases in pro forma working capital and
capitalization are a result of pro forma adjustments reflecting the Company's
(i) using its cash to pay a long-term payable to U.S. Office Products and (ii)
assuming certain liabilities in connection with the Distribution Agreement. See
"The Spin-Off from U.S. Office Products--Distribution Agreement."
During the nine months ended January 24, 1998, net cash provided by
operating activities was $2.0 million. Cash flow from operating activities was
primarily impacted by a significant increase in deposits made on the behalf of
customers for advance travel reservations. Net cash used in investing activities
was $1.2 million, including $2.3 million for additions to property and
equipment, such as computer equipment and office furniture and $617,000 to pay
non-recurring acquisition costs, partially offset by $1.6 million of cash
acquired with the Fiscal 1998 Purchased Companies. Net cash used in financing
activities was $1.8 million, consisting of $7.1 million for the repayment of
indebtedness, partially offset by advances to the Company of $5.2 million from
U.S. Office Products.
During the nine months ended January 25, 1997, net cash provided by
operating activities was $4.6 million. Net cash used in investing activities was
$2.7 million, including $1.3 million paid for acquisitions, $888,000 related to
additions to property and equipment, such as computer equipment and office
furniture and $284,000 to pay non-recurring acquisition costs. Net cash used in
financing activities was $2.2 million, including $1.7 million for the repayment
of indebtedness and $2.8 million for the payment of dividends, partially offset
by advances to the Company of $1.1 million from U.S. Office Products.
During fiscal 1997, net cash provided by operating activities was $6.5
million. Net cash used in investing activities was $3.1 million, including $1.8
million for an acquisition, $769,000 for additions to
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<PAGE>
property and equipment, such as computer equipment and office furniture and
$539,000 to pay non-recurring acquisition costs. Net cash used in financing
activities was $2.1 million, including $4.6 million for the repayment of
indebtedness and $3.0 million for the payment of dividends, partially offset by
advances to the Company of $5.0 million from U.S. Office Products.
During 1995, net cash provided by operating activities was $4.2 million. Net
cash provided by investing activities was $561,000, including $2.3 million of
cash received in conjunction with a purchase acquisition partially offset by
$1.9 million paid for additions to property and equipment, such as computer
equipment and office furniture. Net cash used by financing activities was $3.1
million, including $2.0 million for the repayment of indebtedness and $2.4
million for the payment of dividends, partially offset by proceeds from the sale
of $800,000 of common stock of one of the pooled companies.
During 1994, net cash provided by operating activities was $3.0 million. Net
cash used in investing activities was $676,000, including $804,000 for additions
to property and equipment, such as computer equipment and office furniture. Net
cash used in financing activities was $4.0 million, including $707,000 to repay
indebtedness and $3.3 million for the payment of dividends.
The Company expects that the Distribution Agreement with U.S. Office
Products will call for an allocation of $15.8 million of debt by U.S. Office
Products resulting in incremental debt of $7.3 million at January 24, 1998,
which will be reflected in the financial statements as a reduction in
stockholder's equity. The Company intends to use a portion of the net proceeds
of this offering to repay such debt. The remainder of the net proceeds from this
offering will be retained by the Company and used for general corporate
purposes, including acquisitions. See "Use of Proceeds."
The Company also intends to enter into a credit facility concurrently with
the Distribution which will contain certain customary financial and other
restrictive covenants. The Company expects that funds from operations and the
availability of the credit facility will be sufficient to meet its working
capital and capital expenditure commitments for the foreseeable future. The
Company also expects that a portion of the credit facility will be available to
fund the cash portion of future acquisitions, subject to the maintenance of bank
covenants.
Capital expenditures for fiscal year 1998 are expected to be approximately
$3.5 million.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The domestic and international travel industry is extremely seasonal. The
results of the Company have fluctuated because of seasonal variations in the
travel industry, especially the leisure travel segment. Net revenues and net
income for the Company are generally higher in the second and third calendar
quarters. The Company expects this seasonality to continue in the future. The
Company's quarterly results of operations may also be subject to fluctuations as
a result of fare wars by travel suppliers, changes in relationships with certain
travel suppliers, changes in the mix of services offered by the Company, extreme
weather conditions or other factors affecting travel. Unexpected variations in
quarterly results could also adversely affect the price of the Company Common
Stock, which in turn could limit the ability of the Company to make
acquisitions.
As the Company continues to complete acquisitions, it may become subject to
additional seasonal influences. Quarterly results also may be materially
affected by the timing of acquisitions, the timing and magnitude of costs
related to such acquisitions, variations in the prices paid by the Company for
the products it sells, the mix of products sold and general economic conditions.
Moreover, the operating margins of companies acquired may differ substantially
from those of the Company, which could contribute to the further fluctuation in
its quarterly operating results. Therefore, results for any quarter are not
necessarily indicative of the results that the Company may achieve for any
subsequent fiscal quarter or for a full fiscal year.
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<PAGE>
The following table sets forth certain unaudited consolidated quarterly
financial data for the year ended December 31, 1995, the fiscal year ended April
26, 1997 and the fiscal year ending April 25, 1998 (in thousands). The
information has been derived from unaudited consolidated financial statements
that in the opinion of management reflect all adjustments, consisting only of
normal recurring accruals, necessary for a presentation of such quarterly
information.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues.................................................... $ 8,486 $ 13,241 $ 12,005 $ 11,535 $ 45,267
Gross profit................................................ 3,142 6,305 5,093 4,891 19,431
Operating income............................................ 188 2,091 1,000 589 3,868
Net income.................................................. 217 1,558 792 531 3,098
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED APRIL 26, 1997
-----------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues................................................... $ 15,243 $ 13,770 $ 12,514 $ 16,150 $ 57,677
Gross profit............................................... 7,637 6,276 4,958 7,265 26,136
Operating income (loss).................................... 2,186 1,131 (212) 1,643 4,748
Net income (loss).......................................... 1,753 937 (209) 862 3,343
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDING APRIL 25, 1998
-----------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues................................................... $ 19,530 $ 27,027 $ 34,149 $ 80,706
Gross Profit............................................... 8,637 11,705 13,192 33,534
Operating income (loss).................................... 2,565 2,138 1,048 5,751
Net income (loss).......................................... 1,358 1,207 373 2,938
</TABLE>
INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
REPORTING COMPREHENSIVE INCOME. In June 1997, FASB issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. SFAS No. 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. The Company intends to
adopt SFAS No. 130 in fiscal 1999.
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INDUSTRY OVERVIEW
The travel agency industry in the United States is highly fragmented and
characterized by intense competition. There are more than 30,000 travel agencies
producing an estimated $70 billion in annual airline ticket sales. Approximately
seven of those agencies, including Navigant, have more than $1.0 billion each in
annual airline sales. Navigant believes that approximately 75% of the United
States market for air travel is booked through travel agencies. Business travel
accounts for approximately 60% of all travel expenditures, with leisure travel
accounting for the balance. Airline ticket sales by travel agencies increased at
a rate of approximately 10.5% for calendar year 1997, and have increased
approximately 66% since 1988, according to recent industry reports.
Travel agencies serve both their customers and travel suppliers. The
agencies have traditionally served their customers by booking travel
reservations with travel suppliers and providing information regarding the array
of travel services available. The agencies review, analyze and simplify the
range of information concerning competing suppliers, schedules and prices to
provide customers with relevant and useful choices. In addition, agencies
servicing corporate customers offer customized reports and other management
tools that facilitate the development and monitoring of corporate travel
policies. Agencies also serve travel suppliers by acting as their primary
distribution channel for information and booking services. Travel agencies
derive their revenue from commissions generated by airline, rental car and hotel
bookings and from service fees paid by customers.
The business travel agency industry has undergone significant changes since
1995, due in part to the reduction in commission revenues from airline carriers,
increasing industry reliance on technology and the concentration of the
industry's customer base. Navigant believes that significant technological and
financial resources are required to compete in today's corporate travel market,
and that larger corporate travel agencies may therefore have a competitive
advantage. Accordingly, Navigant believes the business travel agency industry is
undergoing a period of consolidation and that significant growth opportunities
exist. Navigant believes that large agencies 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 customers and suppliers, is also undergoing significant
changes as a result of the Internet, computer on-line services and other
technological innovations. Navigant believes these innovations offer
opportunities for travel agencies to increase the efficiency of their
distribution capacities and enhance services provided to travelers and corporate
travel managers.
BUSINESS
GENERAL
Navigant, one of the five largest providers of corporate travel management
services in the United States based on airline ticket sales, was formed by U.S.
Office Products through the acquisition of eleven regional corporate travel
agencies. In calendar year 1997, Navigant booked $1.38 billion in airline ticket
sales, or approximately 2.5 million airline tickets. With locations throughout
the United States, in Canada, and in the United Kingdom, Navigant provides its
corporate customers with the full range of corporate travel management services,
including reservations by telephone, facsimile, e-mail, Internet and direct
access; ticketing; accounting; information and management reporting; assistance
in planning and organizing incentive trips, corporate meetings and events; and
travel management consulting services. Navigant provides corporate travel
management services to its customers through several channels, including on-site
travel agencies, regional travel agency offices and satellite ticket printers.
Navigant receives commissions and fees from airlines, hotels, car rental
companies and other travel suppliers, and service and management fees from its
customers. As a small portion of Navigant's overall business, Navigant provides
travel services to leisure customers and groups.
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Navigant employs approximately 2,400 people at 128 offices and 214 on-site
locations in the United States, Canada and the United Kingdom. U.S. Office
Products began building Navigant with the acquisition of Professional Travel
Corporation in January 1997 and thereafter acquired ten additional corporate
travel management companies. The following table sets forth each of the acquired
agencies.
<TABLE>
<CAPTION>
NAME HEADQUARTERS DATE FOUNDED
- ------------------------------------------------ ------------------------------------------------ -------------
<S> <C> <C>
Professional Travel Corporation Englewood, Colorado 1983
Mutual Travel Seattle, Washington 1985
Travel Arrangement, Inc. and
St. Pierre Enterprises (Super Travel) Houston, Texas 1975/1985
Simmons Associates, Inc. Alexandria, Virginia 1976
Associated Travel International Santa Ana, California 1961
Evans Travel Group New Orleans, Louisiana 1986
Atlas Travel Services Vancouver, British Columbia 1961
Omni Travel Cambridge, Massachusetts 1979
Travel Consultants, Inc. Grand Rapids, Michigan 1972
McGregor Travel Management Stamford, Connecticut 1953
Wareheim Travel Services Baltimore, Maryland
(Travel Guide) 1951
</TABLE>
BUSINESS STRATEGY
Navigant's objective is to be a premier provider of corporate travel
management services to middle market and larger companies around the world. To
accomplish this objective, Navigant has a focused business strategy based upon
the following key principles:
- FOCUSING ON CORPORATE TRAVEL. Navigant's customers are primarily middle
market and larger corporations, which typically require the expertise and
efficiencies offered by multi-regional professional service providers.
Navigant provides these customers with end-to-end systems integration of
their corporate travel: from consulting on the development of corporate
travel policies, negotiating with frequently-used travel suppliers and
making reservations to providing corporate management with detailed
accounting, travel expense and travel activity reports.
- MAINTAINING PERSONALIZED CUSTOMER SERVICE. Navigant's strategy is to
combine the resources and efficiencies of a large, national "mega-agency"
with the responsive, personalized service of local and regional travel
agencies. Although the mega-agencies have the resources to manage and
service large national accounts efficiently, they have not maintained a
reputation for delivery of personal service. Navigant believes that its
regional business focus, which allows it to emphasize customer service and
to offer its customers dedicated, local service, is a key feature
differentiating it from its other large competitors.
- OPERATING WITH DECENTRALIZED MANAGEMENT STRUCTURE. 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 customers and suppliers. Navigant intends to
capitalize on its local market expertise and client relationships by
utilizing a decentralized management structure. Even as Navigant
centralizes administrative and technology systems, local management will
continue to handle daily interactions with customers and operate their
businesses with an appreciation of their particular local and regional
markets. Navigant's executive management team will work closely with local
and regional offices to coordinate, integrate and expand their service
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<PAGE>
offerings. Navigant also intends to use appropriate incentive
compensation, including stock ownership, to ensure that local management
interests and Navigant objectives remain aligned.
- ACHIEVING OPERATING EFFICIENCIES. Navigant's strategy is to reduce costs
as a percentage of sales by taking advantage of purchasing, administrative
and other operating efficiencies which it believes can be achieved with
Navigant's existing and potentially increasing size and scale. Navigant
believes that it will be able to achieve operating efficiencies by
eliminating redundant facilities, reducing overhead and combining certain
general and administrative functions, such as ARC processing, 24-hour
toll-free number service, research and development, purchasing, data
processing and the process of securing accounting, insurance, financial
management, human resources and legal support.
- UTILIZING TECHNOLOGY TO IMPROVE SERVICE AND REDUCE COST. Navigant intends
to continue pursuing systems and technological advancement to provide the
most complete, accurate and current information about travel services and
reservations to Navigant's customers. Certain of Navigant's subsidiaries
have developed operating and technology systems designed to improve and
enhance their operations, including a fully-automated quality assurance
and cost savings program. See "-- Services--Use of Technology." Navigant
intends to utilize the Internet, computer on-line booking services and
other technological innovations to enhance its ability to interface with
its customers efficiently and conveniently and to reduce the cost of
transactions to its customers.
GROWTH STRATEGIES
Navigant plans to achieve its objective of being a premier provider of
corporate travel management services to middle market and larger companies
around the world by implementing an internal growth strategy and pursuing an
aggressive acquisition program.
- IMPLEMENTING INTERNAL GROWTH STRATEGY. The key elements of Navigant's
internal growth strategy are as follows:
Generate new customers through an aggressive marketing
program. Navigant intends to expand its customer base by capitalizing on
the breadth of its services, its size, its geographic scope and its
financial resources. Navigant believes that it will be able to leverage its
nationwide presence to attract corporate customers that have locations in
more than one geographic region.
Continue to reduce customer costs. Navigant intends to continue
developing its planning, consulting and other management services to help
clients achieve their travel objectives at the lowest feasible cost. In
addition, Navigant's shift toward a revenue structure based primarily on
management fees enables Navigant to share with customers the cost savings it
achieves through operating efficiencies. See "--Revenue Sources--Management
Contracts."
Implement best practices. Navigant believes that the ability of its
different operating units to access and share the collective experience and
expertise of its management gives it competitive advantages in the industry.
Navigant seeks to identify certain best practices in each of its operating
units that can be implemented in other operating units, and therefore
generate incremental revenue, reduce costs, and enhance profitability. For
example, Navigant expects to identify the best applications among the
software and information technology of each of its subsidiaries.
Achieve economies of scale. Navigant believes that it can achieve
economies of scale through the integration of its back-office operations,
technology development and information and management systems at its current
operations. For instance, Navigant has begun implementing a single,
Company-wide information technology platform to service its accounting and
reporting requirements. Navigant expects to benefit from greater purchasing
power in such key expense areas as telecommunications, advertising,
insurance, courier expenses and employee benefits. Navigant believes that it
can
43
<PAGE>
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.
- PURSUING AN AGGRESSIVE ACQUISITION PROGRAM TO FURTHER CONSOLIDATE THE
INDUSTRY. Navigant believes that the travel service 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) have an emphasis on
customer service. Navigant believes that its acquisition strategy will
enable it to achieve operating efficiencies through consolidation of
purchasing and various administrative functions, while freeing regional
and local management to focus on service and customer satisfaction.
Navigant believes that opportunities exist for global expansion. Navigant,
which already has operations in Canada and the United Kingdom, also
intends to continue seeking opportunities for international expansion
through strategic international acquisitions and through internal
expansion into global markets.
Navigant routinely reviews, and conducts investigations of, potential
acquisitions of domestic and foreign travel agencies. 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 travel agency owners. On February , 1998,
Navigant entered into a letter of intent to purchase a regional corporate
travel agency for approximately $1.6 million in cash, subject to completion
of due diligence and negotiation of definitive terms. Navigant expects to
complete this acquisition in the second half of calendar year 1998.
SERVICES
TRAVEL MANAGEMENT SERVICES
Navigant provides the full range of corporate travel management services,
including: reservations by telephone, facsimile, Internet and direct access;
ticketing; accounting; information and management reporting; assistance in
planning and organizing incentive trips, corporate meetings and events; and
travel management consulting services. In providing these services, Navigant
seeks to assist corporations in managing and controlling their travel costs.
Navigant books travel reservations for its customers with a variety of
travel suppliers, including airlines, hotels and rental car companies. In
calendar year 1997 Navigant booked $1.38 billion in airline ticket sales, or
approximately 2.5 million airline tickets. In order to improve customer value,
Navigant uses several computer reservation systems to book airline tickets,
hotel reservations and rental car reservations. Navigant uses three major
systems, SABRE, Galileo/Apollo and Worldspan. After reserving travel
arrangements for its customers, Navigant issues tickets, both paper and
electronic, and provides its customers with detailed itineraries, which include
confirmation numbers for hotel and car rental reservations. Navigant also
provides a 24-hour toll-free number which its customers can access for emergency
assistance.
For its business customers, Navigant provides various travel management
services. These include tracking and reporting travel expenses, providing
reports to management summarizing travel patterns and policy, and identifying
deviations from the customer's travel policies. See "--Use of Technology."
Navigant can also assist its business customers in the creation of their travel
policies and can manage customer costs by negotiating discounts and other
benefits with travel suppliers, such as airlines, hotels and car rental
companies.
In addition to corporate travel management, Navigant provides leisure travel
services to individuals and groups, as a small portion of Navigant's overall
business. Navigant derives part of its leisure travel
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<PAGE>
business through its existing corporate customer base. Certain of Navigant's
regional offices also actively advertise in the leisure travel market.
USE OF TECHNOLOGY
Navigant embraces technology as a key to future success in the travel
industry. Navigant's information technology can provide corporate travel
managers with extensive feedback about individual, departmental and company
travel activity and patterns. Navigant can use this information to consult with
its customers regarding the structure, operation and efficiency of a variety of
corporate travel policies. In addition, Navigant can provide corporate travel
managers with comprehensive information about cost saving opportunities for the
travel undertaken by their companies' employees.
Navigant has developed a fully-automated quality assurance program,
AQUA-Registered Trademark-, which features both a quality auditing system and a
computerized cost avoidance system. AQUA's Trip Auditor system checks each
travel record for accuracy and completeness and repetitively searches airline
seat maps for each traveler's preferred seat assignments and frequent flier
upgrade opportunities. AQUA's FareBuster-TM- system is a computerized cost
avoidance program which checks each record for a lower airline fare or hotel
rate and continuously checks wait list flights and flight inventories for
discount fares that become available prior to travel. AQUA also advises travel
managers of travelers who are not taking advantage of the lowest fare. Although
certain of Navigant's regional agencies cannot yet access the AQUA system,
Navigant intends to install the system throughout its offices.
In addition, Navigant has recently developed an Internet system that allows
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 customers
through several channels, including on-site travel agencies, regional travel
agency offices and on-site satellite ticket printers ("STP").
Navigant currently has 214 on-site travel operations on customer premises,
where it provides customized trip planning, reservation and ticketing services
to the employees of corporate customers. On-site operations are typically
desirable for customers 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
customer's travel manager to meet the customer's travel needs, including the
need for customized corporate travel information and negotiations with travel
suppliers frequently used by the customer.
Navigant has 128 regional travel agency offices. These offices are typically
used by corporate customers with less than $1.0 million in travel expenditures
per year. The regional travel agency 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 travel
agency offices provide backup to nearby on-site locations.
Navigant also operates over 300 STPs at customer locations across the
country. Navigant uses these printers to distribute tickets instantly to
customers' field locations that have enough volume to justify the STP. Locations
with lower volume can receive tickets via overnight delivery services. Navigant
believes that the advent of electronic ticketing will eventually eliminate the
need for STPs and overnight delivery.
Navigant has entered into arrangements with third parties pursuant to which
it fulfills travel reservations placed on the Internet. In addition, Navigant
has several sites on the World Wide Web where individual customers can, among
other things, check flight times, make reservations, access and sort
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<PAGE>
password-protected corporate travel data, find restaurants and automatic teller
machines, and access the latest currency conversions.
Navigant also offers desktop reservation services to its customers. This
distribution method offers customers the option of performing reservation
services directly, while the travel agent provides a supporting role. The travel
agent's role includes performing quality control on the reservation, assisting
the traveler with the use of the reservation system and issuing and delivering
tickets reserved by the customer. Additionally, the travel agent reports to
management on matters such as pre- and post-travel activity, cost saving
opportunities and the development and assessment of the company's travel policy
and negotiated rate opportunities.
REVENUE SOURCES
Navigant generates revenues principally from (i) base and incentive override
commissions on air travel tickets, (ii) fees for services rendered to customers
and (iii) commissions on hotel reservations and car rentals. In accordance with
industry practice, Navigant receives a commission on each domestic and
international air travel ticket that it issues of approximately 8%, with a
commission cap of $25 on domestic one-way air travel tickets and $50 on domestic
round-trip tickets. Commissions on international tickets are not subject to a
commission cap. Navigant has also entered into agreements with major airlines
for the payment of "incentive override commissions" in addition to the base
commissions Navigant receives. Under such agreements, the airlines generally
award 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. Furthermore,
Navigant receives a commission equal to approximately 10% of the hotel rate for
hotel reservations that it makes and a commission equal to 5% of the base rental
car rate for rental car reservations that it makes.
In response to reductions in the commissions paid to travel agents and
consistent with growing industry practice, Navigant has entered into management
contracts with many of its corporate customers. Under these contracts, Navigant
typically deducts its direct operating expenses, indirect overhead costs and a
management fee from commission revenues collected from travel arrangements made
on behalf of the customer. If the commission revenues collected exceed the
amounts deducted, Navigant may share a negotiated amount of the excess with the
customer. If the commission revenues do not cover the amounts deducted, the
customer pays the difference to Navigant. Fee income recognized under management
contracts has historically been paid from commissions paid by travel suppliers.
As a result, Navigant does not prepare separate reports distinguishing payments
under management contracts from commission income.
After the airlines instituted the commission cap in 1995, and reduced base
commissions to approximately 8% in October 1997, travel agencies, including
Navigant, began charging transaction fees for some services to non-contract
customers. Navigant typically charges between $10 and $15 per ticket for tickets
issued to customers who do not have a management contract with Navigant.
Despite the management fees, increasingly being charged to customers since
airlines reduced commissions, it is Navigant's belief that corporate customers
will continue to use travel agents for their service and knowledge capabilities.
The expense and opportunity costs to a corporate customer of processing
reservations and comprehending the magnitude of information available regarding
travel services would probably exceed the fees charged by a travel agency. In
addition, the management fee structure enables the customer to benefit from
operating efficiencies and other cost reductions that Navigant is able to
achieve. Moreover, an internal travel management capability would fall outside
the core business expertise of most companies. Customers have the option of
contracting directly with airlines and other travel suppliers, but at the risk
of increased costs, inadequate information and a substantial time investment.
Navigant also provides group and leisure travel services, largely to its
corporate customers. Navigant's leisure travel services include booking airline
tickets, hotel reservations, car rentals, tours, cruises and
46
<PAGE>
specialty travel packages. As is the case with non-contract corporate customers,
Navigant usually charges between $10 and $15 per airline ticket for tickets
issued to leisure customers.
COMPETITION
Navigant competes with a variety of other providers of travel and
travel-related products and services. Its principal competitors are (i) other
travel agencies and other distributors of travel services, (ii) travel suppliers
offering their products and services directly to consumers and (iii) various
on-line services available on the Internet.
Navigant faces competition from local, regional and large travel agencies.
Local and regional agencies often have a strong presence in particular
geographic areas and benefit from a detailed knowledge of their particular
markets. Large travel agencies and other travel distributors may have
substantial resources and the leverage to achieve certain purchasing and
operating efficiencies. In addition, travel suppliers, including airlines,
hotels and rental car companies, are increasingly offering their products and
services directly to consumers through the Internet and computer on-line
services. Because of low barriers to entry in the travel service industry,
Navigant constantly faces competition from possible new entrants. See "Risk
Factors--Substantial Competition and Industry Consolidation; New Methods of
Distribution."
Navigant believes that it competes for customers 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 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 customer base.
MARKETING AND SALES
Navigant's marketing continually targets both new and existing customers.
Navigant's sales staff identifies potential customers and develops opportunities
to provide additional travel services to existing customers. Over the past few
years, travel policy and travel purchasing decisions in larger companies have
been centralized in purchasing departments, with travel managers, or within the
offices of chief financial officers. The selection of a travel agency has also
become more formal, with larger accounts soliciting bids through "requests for
proposals." Navigant has adapted to these changes by relying on a sales force
specially trained in the business of corporate travel, supported by experienced
marketing staff. Navigant has approximately 100 employees in its sales and
marketing departments.
Navigant also plans to utilize co-branding to enhance its national identity.
Navigant expects that each of its subsidiaries will use Navigant's name and its
own name together in its advertising and marketing efforts.
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's 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 customers. Navigant has begun
implementing a single, Company-wide information technology platform to service
its accounting and reporting requirements and expects the new system to be in
place Company-wide by the first quarter of calendar 1999.
47
<PAGE>
YEAR 2000 ISSUES
Navigant is addressing the Year 2000 issues relating to its financial
accounting system by upgrading its financial accounting software to a program
that is Year 2000 compliant. This upgrade is being done in conjunction with
Navigant's shift towards an integrated system for all of its operating
subsidiaries and, therefore, Navigant expects that the upgrade to Year 2000
compliant software will not result in any material capital expenditure above and
beyond that which would have been incurred to integrate Navigant's systems.
Navigant expects the new system to be in place Company-wide by the first quarter
of calendar 1999. Other significant software used in Navigant's operations, such
as its computerized reservation system, is provided by third-party vendors, who
have represented that their software will be Year 2000 compliant.
EMPLOYEES
As of December 31, 1997, Navigant had approximately 2,400 full time
employees, none of which is subject to collective bargaining agreements.
Navigant believes that it enjoys good relations with its employees.
PROPERTIES
As of December 31, 1997, Navigant operated at 128 travel agency facilities,
three of which are owned and 125 of which are leased. The following are material
properties:
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE OWNED/
LOCATION FOOTAGE LEASED EXPIRATION
- ------------------------------------------------------------------ ------------- --------- ----------------------
<S> <C> <C> <C>
Santa Ana, California............................................. 22,852 Leased October 31, 1998
Alexandria, Virginia.............................................. 6,000 Leased December 13, 1998
New Orleans, Louisiana............................................ 2,521 Leased June 30, 1998
Stamford, Connecticut............................................. 10,000 Owned N/A
Seattle, Washington............................................... 1,200 Leased January 31, 1999
Seattle, Washington............................................... 560 Leased October 31, 1998
Cambridge, Massachusetts.......................................... 15,500 Leased December 31, 2001
Englewood, Colorado............................................... 49,900 Owned N/A
Grand Rapids, Michigan............................................ 29,142 Owned N/A
</TABLE>
The office building owned by Navigant and located at 84 Inverness Circle
East, Englewood, Colorado is subject to first and second deeds of trust. The
first deed of trust secures payment of a Promissory Note dated May 16, 1995 and
payable to Colorado National Bank, in the principal amount of $1,650,000. The
second deed of trust secures payment of a Promissory Note dated June 20, 1995
and payable to Colorado National Bank, in the principal amount of $225,000.
The office building owned by Navigant and located at 112 Prospect Street,
Stamford, Connecticut is subject to a mortgage securing payment of a Promissory
Note payable to First County Bank, in the principal amount of $585,000.
Navigant is evaluating the possibility of entering into sale-leaseback
transactions with respect to its owned properties in Stamford, Connecticut and
Grand Rapids, Michigan.
Navigant believes that its properties are adequate to support its operations
for the foreseeable future.
LEGAL PROCEEDINGS
Navigant is involved in various legal actions arising in the ordinary course
of business. Navigant believes that none of these actions will have a material
adverse effect on its business, financial condition and results of operations.
48
<PAGE>
MANAGEMENT OF NAVIGANT
EXECUTIVE OFFICERS AND DIRECTORS
Following the Travel Distribution, it is anticipated that the executive
officers and directors of Navigant will be as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- --------------------------------------------
<S> <C> <C>
Edward S. Adams........................... 47 Chairman of the Board, Chief Executive
Officer, President and Director
Robert C. Griffith........................ 48 Chief Financial Officer and Treasurer
Douglas R. Knight......................... 40 Chief Operating Officer
Eugene A. Over, Jr........................ 39 General Counsel and Secretary
Jonathan J. Ledecky....................... 40 Director*
Vassilios Sirpolaidis..................... 50 Director*
Ned A. Minor.............................. 52 Director*
D. Craig Young............................ 44 Director*
</TABLE>
- ------------------------
* Messrs. Ledecky, Sirpolaidis, Minor and Young are expected to join the Board
of Directors immediately following the effective date of the Offering (the
"Effective Date").
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, 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 the Distribution Date.
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 as Chief Financial Officer of the U.S. Office Products
Corporate Travel Services Division from January 1997 through the Distribution
Date. 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 will serve as Chief Operating Officer of Navigant as of
the Distribution Date. 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.
EUGENE A. OVER, JR. has served as General Counsel and Secretary of Navigant
since February 1998. He has also served as Legal Affairs and Administrative
Officer of PTC since December 1997. 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.
JONATHAN J. LEDECKY will serve as a Director and employee of Navigant and
each of the other Spin-Off Companies as of the Effective Date. He founded
Consolidation Capital Corporation in February 1997 and serves as its Chairman
and Chief Executive Officer. Mr. Ledecky founded U.S. Office Products in October
1994 and will serve as its Chairman of the Board until the Distribution Date and
served as its Chief Executive Officer until November 5, 1997. Mr. Ledecky has
also served as the Non-Executive Chairman of the Board of USA Floral Products,
Inc. since April 1997 and as the Non-Executive Chairman
49
<PAGE>
of the Board of UniCapital Corporation since October 1997. 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 will serve as a Director of Navigant as of the
Effective Date. He 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.
NED A. MINOR will serve as a Director of Navigant as of the Effective Date.
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 will serve as a director of Navigant as of the Effective
Date. 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.
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 year ended April 25, 1998 to the Chief Executive Officer and to the
other most highly compensated officer of Navigant (the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY(1) BONUS COMPENSATION(2)
- -------------------------------------------------------------------------- ---------- --------- -----------------
<S> <C> <C> <C>
Edward S. Adams........................................................... $ 250,000 -- $ 8,554
Chairman of the Board, Chief Executive Officer, President and Director
Robert C. Griffith........................................................ $ 150,000 -- $ 5,256
Chief Financial Officer and
Treasurer
</TABLE>
(1) Upon the completion of the Travel Distribution, the annual salaries of the
named executives will be: Mr. Adams--$300,000 and Mr. Griffith--$200,000.
(2) Represents automobile expenses paid by Navigant.
50
<PAGE>
The following table sets forth certain information regarding options to
acquire U.S. Office Products Common Stock granted to the Named Officers during
the year ended April 25, 1998. All options were granted by U.S. Office Products
as options to acquire U.S. Office Products Common Stock and are expected to be
replaced with options to acquire Navigant Common Stock in connection with the
Travel Distribution. See "The Travel Distribution--Effect on Outstanding U.S.
Office Products Options Held by Navigant Employees."
OPTIONS GRANTED IN FISCAL YEAR 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
PERCENT OF APPRECIATION FOR
TOTAL OPTIONS OPTION TERM
OPTIONS GRANTED IN EXERCISE EXPIRATION ----------------------------
NAME GRANTED(1) FISCAL YEAR PRICE(1) DATE 5% 10%
- -------------------------- ------------- --------------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Edward S. Adams........... 22,500 $ 15.17 4/28/2007 $ 214,657 $ 543,984
480,000 $ 18.50 3/20/2008 5,584,584 14,152,433
Robert C. Griffith........ 15,000 15.17 4/28/2007 143,105 362,656
120,000 $ 18.50 3/20/2008 1,396,146 3,538,108
</TABLE>
- ------------------------
(1) The option exercise price will be adjusted by applying the following
formula:
Exercise Price (New) = Exercise Price (Old) XInitial Public Offering Price
of Navigant Common Stock in the Offering
Trading Price of U.S. Office Products Common
Stock Pre-Travel Distribution
The number of option will be adjusted by applying the following formula:
Option Shares (New) = Option Shares (Old) XTrading Price of U.S. Office
Products Common Stock Pre-Travel
Distribution
Initial Public Offering Price of
Navigant Common Stock in the
Offering
For all optionees, the "Trading Price of U.S. Office Products Common Stock
Pre-Travel Distribution" will be the average closing price of U.S. Office
Products Common Stock for the lesser of ten business days preceding the
Distribution Date or the business days falling between the expiration of the
Tender Offer and the Distribution Date.
The following table sets forth certain information regarding option
exercises and unexercised options held by the Named Officers at April 25, 1998.
All options were granted by U.S. Office Products as options to acquire U.S.
Office Products Common Stock and are expected to be replaced with options to
acquire shares of Navigant Common Stock in connection with the Travel
Distribution. See "The Travel Distribution--Effect on Outstanding U.S. Office
Products Options held by Navigant Employees."
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED APRIL 25, 1998
AND FISCAL YEAR-END 1998 OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE- MONEY OPTIONS
OPTIONS HELD AT APRIL 25, AT FISCAL YEAR END
1998(1) ($)(1)(2)(3)
SHARES ACQUIRED VALUE ---------------------------- --------------------------
NAME ON EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------- --------------- ----------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Edward S. Adams............ 0 0 5,625 496,875 $ 9,591 $ 28,772
Robert C. Griffith......... 0 0 3,750 131,250 6,394 19,181
</TABLE>
- ------------------------
(1) The option exercise price will be adjusted by applying the following
formula:
Exercise Price (New) = Exercise Price (Old) X Initial Public Offering Price
of Navigant Common Stock in
the Offering
Trading Price of U.S. Office
Products Common Stock
Pre-Travel Distribution
The number of option will be adjusted by applying the following formula:
Option Shares (New) = Option Shares (Old) XTrading Price of U.S. Office
Products Common Stock Pre-Travel
Distribution
Initial Public Offering Price of
Navigant Common Stock in the
Offering
51
<PAGE>
For all optionees, the "Trading Price of U.S. Office Products Common Stock
Pre-Travel Distribution" will be the average closing price of U.S. Office
Products Common Stock for the lesser of ten business days preceding the
Distribution Date or the business days falling between the expiration of the
Tender Offer and the Distribution Date.
(2) Options are "in-the-money" if the closing market price of U.S. Office
Products Common Stock exceeds the exercise price of the options.
(3) The value of unexercised options represents the difference between the
exercise price of such options and $16.875, the closing market price of U.S.
Office Products Common Stock at April 24, 1998.
1998 STOCK INCENTIVE PLAN
Navigant expects to adopt the 1998 Stock Incentive Plan (the "Plan"). The
purpose of the Plan is to promote the long-term growth and profitability of the
Company by providing employees with incentives to improve stockholder value and
contribute to the growth and financial success of the Company, and by enabling
the Company 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 23% of the outstanding
Navigant Common Stock following the Travel Distribution and the Offering. 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 shares. The
Plan will be administered by the Compensation Committee of the Board of
Directors. All employees of the Company and its subsidiaries, as well as
non-employee directors of the Company, 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.
Mr. Ledecky will receive a stock option for Common Stock from Navigant,
pursuant to the Plan, as of the Distribution Date. The option is intended to
compensate Mr. Ledecky for services to Navigant as an employee. The option will
cover up to 7.5% of the outstanding Navigant Common Stock determined as of the
Distribution Date, without regard to the Offering. The option will have a per
share exercise price equal to the initial public offering price of the Navigant
Common Stock.
It is expected that Mr. Ledecky's option will become fully vested when
granted but will not be exercisable until the 12-month anniversary of the
Distribution Date. Mr. Ledecky's option from the Company will be exercisable
immediately if Mr. Ledecky dies before the option expires or, if and to the
extent that, Navigant accelerates the exercise schedule of options for
substantially all management option holders. All unexercised portions of the
option will expire ten years after its date of grant or, if applicable, as of
the date Mr. Ledecky violates his non-competition agreement with Navigant.
The Company expects that Edward Adams will also receive an option (the
"Adams Option") pursuant to the Plan for 4.0% of the outstanding Navigant Common
Stock as of the Distribution Date. The Adams Option is anticipated to have the
same terms as Mr. Ledecky's option, including an exercise price equal to the
initial public offering price of the Navigant Common Stock. In addition,
management currently expects to recommend option grants to certain executive
officers of the Company for approximately 3.5% of the Navigant Common Stock
following the Offering and the Travel Distribution, also at an exercise price
equal to the initial public offering price of the Navigant Common Stock.
COMMITTEES OF THE BOARD
The Board of Directors intends to create an Audit Committee effective as of
the Effective Date. The Audit Committee will be charged with reviewing
Navigant's annual audit and meeting with Navigant's independent accountants to
review Navigant's internal control and financial management practice.
52
<PAGE>
The Board of Directors intends to create a Compensation Committee effective
as of the Effective Date. The Compensation Committee will be charged with
determining the compensation of executive officers of Navigant and administering
any stock option plan Navigant may adopt.
DIRECTOR COMPENSATION
Non-management directors are expected to be 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. Non-management directors will also
be reimbursed for all out-of-pocket expenses related to their service as
directors.
LEDECKY SERVICES AGREEMENT
Jonathan J. Ledecky entered into the Ledecky Services Agreement with U.S.
Office Products on January 13, 1998, as amended, to become effective on the
Distribution Date and contingent on the consummation of the Distributions. The
Ledecky Services Agreement will expire on September 30, 1998 if none of the
Distributions has occurred by that date. If the Ledecky Services Agreement
becomes effective, it will replace his employment agreement with U.S. Office
Products as amended November 4, 1997. The principal terms of this agreement, as
it is expected to be amended, are summarized below.
The Ledecky Services Agreement governs Mr. Ledecky's continuing obligations
to U.S. Office Products. Under the Ledecky Services Agreement, Mr. Ledecky will
report to the U.S. Office Products Board of Directors and will provide
high-level acquisition negotiation services and strategic business advice. Under
the Agreement, Mr. Ledecky will remain an employee of U.S. Products, at an
annual salary of $48,000 through June 30, 2001. U.S. Office Products can
terminate Mr. Ledecky's employment only for "cause" where cause consists of (i)
his conviction of or guilty or nolo contendere plea to a felony, (ii) his
engaging, despite notice, in conduct demonstrably and materially injurious to
U.S. Office Products, or (iii) his violation of the noncompetition agreement as
it relates to U.S. Office Products. If Mr. Ledecky resigns or is terminated, he
will cease to vest in his U.S. Office Products stock options and will have 90
days to exercise any vested options.
It is expected that Navigant will enter into an employment agreement with
Mr. Ledecky to implement its assiged 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 negotiation 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. The Company may terminate Mr. Ledecky's employment with or
without "cause," where cause is defined as in the Ledecky Services Agreement, as
modified to refer to Navigant. If without cause, the termination would entitle
Mr. Ledecky to severance equal to his salary for the lesser of 12 months or the
remainder of the employment term.
The Ledecky Services Agreement provides for non-competition and
non-solicitation restrictions that continue for four years after the Travel
Distribution has been completed. 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 any of the U.S. Office
Products Companies conducts business. (For this purpose, "products or services"
are those that U.S. Office Products offered on January 13, 1998.) 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
53
<PAGE>
competition with the U.S. Office Products Companies. Mr. Ledecky also may not
hire away for Consolidation Capital Corporation any person then or in the
preceding one year employed by the U.S. Office Products Companies. U.S. Office
Products is permitted to (and will) assign to Navigant and the other Spin-Off
Companies the ability to enforce the non-competition provisions described above
as they apply to the Spin-Off Companies' respective businesses, which will then
constitute part of his employment agreement with each Spin-Off Company.
Mr. Ledecky will receive a stock option for Navigant Common Stock from
Navigant as of the Distribution Date. The option is intended to compensate Mr.
Ledecky for his services to Navigant as an employee. The option will be granted
under Navigant's 1998 Stock Incentive Plan. The option will cover up to 7.5% of
the outstanding Navigant Common Stock determined as of the Distribution Date,
without regard to the Offering. The option will have a per share exercise price
equal to the initial public offering price of the Navigant Common Stock.
It is expected that Mr. Ledecky's option will become fully vested when
granted but will not be exercisable until the 12-month anniversary of the Travel
Distribution. Mr. Ledecky's option from Navigant will be exercisable immediately
if Mr. Ledecky dies before the option expires or if Navigant accelerates the
exercise schedule of options for substantially all management option holders.
(In this latter case, Mr. Ledecky's option will become exercisable on the same
accelerated schedule or the other management option holders.) All unexercised
portions of the option will expire ten years after its date of grant or, if
applicable, as of the date Mr. Ledecky violates his non-competition agreement
with Navigant.
EMPLOYMENT CONTRACTS AND RELATED MATTERS
In January 1997, PTC entered into an employment agreement with Edward S.
Adams, its President and Chief Executive Officer. The employment agreement
provides for an initial two-year term and successive one-year extensions at the
option of PTC. Pursuant to this agreement, Mr. Adams is entitled to receive
minimum annual compensation of $250,000 (which will be increased to $300,000
upon completion of the Travel Distribution), incentive bonuses as determined by
the Board of Directors of PTC (and approved by the U.S. Office Products Board of
Directors) and all perquisites and benefits customarily provided by PTC to its
employees. The agreement also provides for the issuance of options to purchase
60,000 shares of U.S. Office Products Common Stock (up to a maximum of 600,000
shares) for every $10 million increase in commission revenue earned by U.S.
Office Products after the date of the agreement. As of the date hereof, Mr.
Adams has earned and been granted options for the maximum number of shares. Mr.
Adams has assigned 20% of these options to Mr. Griffith. In the event that Mr.
Adams' employment is terminated for any reason other than cause, Mr. Adams'
employment agreement provides that Mr. Adams is entitled to receive his base
salary and benefits for the longer of (i) six months from the date of
termination, or (ii) the remaining time under the initial term of the employment
agreement. The employment agreement also prohibits Mr. Adams from engaging in
certain activities deemed competitive with PTC or its affiliates during the
duration of his employment with PTC and for the longer of (i) a period of two
years thereafter, or (ii) as long as Mr. Adams continues to receive severance
payments from PTC.
In January 1997, PTC entered into an employment agreement with Robert C.
Griffith, its Chief Financial Officer and Treasurer. The employment agreement
provides for an initial two-year term and successive one-year extensions at the
option of PTC. Pursuant to this agreement, Mr. Griffith is entitled to receive
minimum annual compensation of $150,000 (which will be increased to $200,000
upon completion of the Travel Distribution), incentive bonuses as determined by
the President of PTC (and approved by the U.S. Office Products Board of
Directors) and all perquisites and benefits customarily provided by PTC to its
employees. 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
(i) four months from the date of termination, or (ii) the remaining time under
the initial term of the employment agreement. The employment agreement also
prohibits Mr. Griffith from
54
<PAGE>
engaging in certain activities deemed competitive with PTC or its affiliates
during the duration of his employment with PTC and for the longer of (i) a
period of two years thereafter, or (ii) as long as Mr. Griffith continues to
receive severance payments from PTC.
Effective as of the Distribution Date, PTC will assign Messrs. Adams' and
Griffith's employment agreements to Navigant and, thereafter, all decisions
formerly made by PTC's Board of Directors (and approved by the U.S. Office
Products Board of Directors) will be made by Navigant's Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors expects to create a Compensation Committee effective
as of the Distribution Date. The Compensation Committee will be charged with
determining the compensation of all executive officers. Until a Compensation
Committee of the Board of Directors is created, decisions regarding the
compensation of executive officers will be made by the Board of Directors. No
member of the Board of Directors has ever been an officer of Navigant or any of
its subsidiaries, except that Mr. Adams is the Chief Executive Officer of
Navigant. In addition, Mr. Ledecky was the Chief Executive Officer of U.S.
Office Products until November 5, 1997 and will be the Chairman of U.S. Office
Products until the Distribution Date and Mr. Sirpolaidis has been President of
Mile High, which was acquired by U.S. Office Products in July 1996, since 1978
and a District President of U.S. Office Products since August 1996.
RELATED PARTY TRANSACTIONS
On January 24, 1997, U.S. Office Products acquired PTC, which will be a
wholly-owned subsidiary of Navigant following the Distribution, 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 valued at $22.725 per
share. In connection with the acquisition, PTC also entered into an employment
agreement with Mr. Adams at an annual base salary of $250,000 per year and an
employment agreement with Robert C. Griffith, Navigant's Chief Financial Officer
and Treasurer, at an annual base salary of $150,000 per year. See "Management of
Navigant--Employment Contracts and Related Matters." The Company believes that
the terms of this transaction are as favorable as could be negotiated with third
parties.
On January 24, 1997, in a related transaction, U.S. Office Products 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 valued at $22.725 per share and U.S.
Office Products' assumption of certain notes from Marcono in the aggregate
amount of $1,846,721.27. 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, who is expected to be a director
of Navigant, is the trustee of the two trusts. Prior to the purchase of the
office building by U.S. Office Products, PTC leased the office building from
Marcono for approximately $22,000 per month. The office building purchased by
U.S. Office Products is used as the headquarters of PTC. The Company 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 will be a
wholly-owned subsidiary of Navigant following the Travel Distribution, from its
stockholders (the "McGregor Acquisition") for approximately 1,273,346 shares of
U.S. Office Products Common Stock valued at approximately $24.54 per share (the
"Purchase Price"). The McGregor Acquisition included the purchase of an office
building at 112 Prospect Street, Stamford, Connecticut from DeFranco & Knight,
LLC. $450,000 of the Purchase Price was allocated to the purchase of the
building and $585,000 of debt related to the building was assumed by U.S. Office
Products. One of McGregor's beneficial owners was Douglas R. Knight, who will be
Navigant's Chief Operating Officer following the Distribution. In connection
with the McGregor Acquisition, Mr. Knight received approximately shares of
U.S. Office Products Common Stock and DeFranco & Knight, LLC, of which Mr.
Knight is a 50% owner, received approximately shares of
55
<PAGE>
U.S. Office Products Common Stock. 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. The Company believes that the terms of
this transaction are as favorable as could be negotiated with third parties.
Mr. Knight owns a property in Columbus, Ohio, which he leases to McGregor
for approximately $150,000 per year. In addition, Mr. Knight is a partner in an
emergency travel service provider that contracts with McGregor to provide
emergency travel service to customers of McGregor.
For a discussion of matters related to the spin-off of Navigant from U.S.
Office Products, see "The Travel Distribution" and "Arrangements Among U.S.
Office Products, Navigant and the Other Spin-Off Companies After the
Distributions."
For a discussion of transactions between Navigant and Mr. Ledecky, see
"Management of Navigant-- Ledecky Services Agreement."
56
<PAGE>
PRINCIPAL STOCKHOLDERS OF NAVIGANT
The following table sets forth the number and percentage of outstanding
shares of U.S. Office Products Common Stock beneficially owned as of April 1,
1998 and as adjusted to reflect the results of the Tender Offer and application
of the Distribution Ratio by (i) all persons known by Navigant to own
beneficially more than 5% of the U.S. Office Products Common Stock, (ii) each
director and each Named Officer who is a stockholder, and (iii) all directors
and executive officers as a group, in each case after giving effect to the
Travel Distribution. See "The Travel Distribution--Effect on Outstanding U.S.
Office Products Options Held by Navigant Employees." Except as otherwise
indicated, the business address of each of the following is 84 Inverness Circle
East, Englewood, Colorado, 80155.
<TABLE>
<CAPTION>
NUMBER PERCENT
AS AS
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT ADJUSTED(1) ADJUSTED
- --------------------------------------------------------------- ------------ --------- ------------- ---------
<S> <C> <C> <C> <C>
Edward S. Adams(2)............................................. 699,702 *
Robert C. Griffith(3).......................................... 3,750 *
Douglas R. Knight(4)........................................... 694,629 *
Jonathan J. Ledecky(5)......................................... 2,428,125 1.7%
Vassilios Sirpolaidis(6)....................................... 1,206,375 *
All current executive officers and directors as a group (7
persons)..................................................... 5,032,581 3.6%
5% STOCKHOLDERS
FMR Corp.(7)................................................... 15,754,406 11.2%
82 Devonshire Street
Boston, MA 02109
Massachusetts Financial Services Company(7).................... 8,262,886 5.9%
500 Boylston Street
Boston, MA 02116
</TABLE>
- ------------------------
* Less than 1%.
(1) Reflects the results of the Tender Offer and the application of the
Distribution Ratio.
(2) Includes 5,625 shares which may be acquired upon exercise of options
exercisable within 60 days following the Travel Distribution.
(3) Includes 3,750 shares which may be acquired upon exercise of options
exercisable within 60 days following the Travel Distribution.
(4) Includes 18,336 shares with respect to which Mr. Knight shares investment
and voting power.
(5) Excludes options for U.S. Office Product Common Stock that will not be
converted into options for Navigant Common Stock at the time of the Travel
Distribution.
(6) Includes 9,375 shares which may be acquired upon exercise of options
exercisable within 60 days following the Travel Distribution and 48,000
shares held by Mr. Sirpolaidis' wife.
(7) Based upon a Schedule 13G filed with the SEC.
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<PAGE>
DESCRIPTION OF NAVIGANT CAPITAL STOCK
GENERAL
Set forth below is a summary of Navigant's authorized capital stock. At the
time of the Travel Distribution and the Offering, Navigant's authorized capital
stock is expected to consist of shares of Navigant Common Stock, par value
$.001 per share, and shares of preferred stock, par value $.001 per share
(the "Preferred Stock"). At the time of the Travel Distribution and the
Offering, Navigant is expected to have outstanding approximately shares of
Navigant Common Stock and no shares of Preferred Stock.
NAVIGANT COMMON STOCK
The holders of Navigant Common Stock are entitled to one vote for each share
on all matters voted upon by stockholders, including the election of directors.
Subject to the rights of any then outstanding shares of Preferred Stock, the
holders of Navigant Common Stock are entitled to such dividends as may be
declared in the discretion of the Board of Directors out of funds legally
available therefor. See "Dividend Policy." The holders of Navigant Common Stock
are entitled to share ratably in the net assets of Navigant upon liquidation
after payment or provision for all liabilities and any preferential liquidation
rights of any Preferred Stock then outstanding. The holders of Navigant Common
Stock have no preemptive rights to purchase shares of stock of Navigant. Shares
of Navigant Common Stock are not subject to any redemption provisions and are
not convertible into any other securities of Navigant. All of the shares of
Navigant Common Stock to be distributed pursuant to the Travel Distribution will
be fully paid and nonassessable.
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more classes or series. Subject to the provisions
of Navigant's certificate of incorporation (the "Certificate of Incorporation")
and limitations prescribed by law, the Board of Directors is expressly
authorized to adopt resolutions to issue the shares, to fix the number of shares
and to change the number of shares constituting any series, and to provide for
or change the voting powers, designations, preferences and relative,
participating, optional or other special rights, qualifications, limitations or
restrictions thereof, including dividend rights (including whether dividends are
cumulative), dividend rates, terms of redemption (including sinking fund
provisions), redemption prices, conversion rights and liquidation preferences of
the shares constituting any class or series of the Preferred Stock, in each case
without any further action or vote by the stockholders. Navigant has no current
plans to issue any shares of Preferred Stock of any class or series.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of Navigant by means of a tender offer, proxy contest, merger or
otherwise, and thereby to protect the continuity of Navigant's management. The
issuance of shares of the Preferred Stock pursuant to the Board of Directors'
authority described above may adversely affect the rights of the holders of
Navigant Common Stock. For example, Preferred Stock issued by Navigant may rank
prior to Navigant Common Stock as to dividend rights, liquidation preference or
both, may have full or limited voting rights and may be convertible into shares
of Navigant Common Stock. Accordingly, the issuance of shares of Preferred Stock
may discourage bids for Navigant Common Stock or may otherwise adversely affect
the market price of Navigant Common Stock.
STATUTORY BUSINESS COMBINATION PROVISION
Navigant is subject to the provisions of Section 203 of the Delaware General
Corporation Law ("Section 203"). Section 203 provides, with certain exceptions,
that a Delaware corporation may not
58
<PAGE>
engage in any of a broad range of business combinations with a person or an
affiliate, or associate of such person, who is an "interested stockholder" for a
period of three years from the date that such person became an interested
stockholder unless: (i) the transaction resulting in a person becoming an
interested stockholder, or the business combination, is approved by the board of
directors of the corporation before the person becomes an interested
stockholder; (ii) the interested stockholder acquired 85% or more of the
outstanding voting stock of the corporation in the same transaction that makes
such person an interested stockholder (excluding shares owned by persons who are
both officers and directors of the corporation, and shares held by certain
employee stock ownership plans); or (iii) on or after the date the person
becomes an interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66 2/3% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. Under Section 203, an
"interested stockholder" is defined as any person who is: (i) the owner of 15%
or more of the outstanding voting stock of the corporation; or (ii) an affiliate
or associate of the corporation if such affiliate or associate was the owner of
15% or more of the outstanding voting stock of the corporation at any time
within the three-year period immediately prior to the date on which it is sought
to be determined whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws, by action of
its stockholders, to exempt itself from coverage, provided that such bylaws or
certificate of incorporation amendment shall not become effective until 12
months after the date it is adopted. Navigant has not adopted such an amendment
to its Certificate of Incorporation or bylaws (the "Bylaws"). Under Navigant's
Certificate of Incorporation, the affirmative vote of a majority of the
directors is required to approve an interested stockholder transaction.
PROVISIONS OF NAVIGANT'S CERTIFICATE OF INCORPORATION AND BYLAWS AFFECTING
CHANGE OF CONTROL
The Board of Directors of Navigant (the "Board of Directors") is
contemplating adoption of certain provisions of the Certificate of Incorporation
or Bylaws that may, if adopted, provide Navigant's Board of Directors with more
negotiating leverage by delaying or making more difficult unsolicited
acquisitions or changes of control of Navigant. It is believed that such
provisions will enable Navigant to develop its business in a manner that will
foster its long-term growth without disruption caused by the threat of a
takeover not deemed by Navigant's Board of Directors to be in the best interests
of Navigant and its stockholders. Such provisions could have the effect of
discouraging third parties from making proposals involving an unsolicited
acquisition or change of control of Navigant, although such proposals, if made,
might be considered desirable by a majority of Navigant's stockholders. Such
provisions may also have the effect of making it more difficult for third
parties to cause the replacement of the management of Navigant without
concurrence of Navigant's Board of Directors. These provisions include: (i) the
availability of capital stock for issuance from time to time at the discretion
of Navigant's Board of Directors (see "-- Preferred Stock" above); (ii) the
classification of Navigant's Board of Directors into three classes, each of
which serves for a term of three years; (iii) limitation on stockholders calling
a special meeting of stockholders; (iv) prohibition on stockholders acting by
written consent in lieu of a meeting; (v) requirements for advance notice for
raising business or making nominations at stockholders' meetings; and (vi) the
requirement of a supermajority vote to amend Navigant's Bylaws.
CLASSIFIED BOARD
Navigant's Certificate of Incorporation may include provisions dividing the
Board of Directors into three classes, each of which serves until the third
succeeding annual meeting with one class being elected at each annual meeting of
stockholders. Under Delaware law, each class will be as nearly equal in number
as possible. As a result, at least two annual meetings of stockholders may be
required for Navigant's stockholders to change a majority of the members of the
Board of Directors. Navigant believes that a classified board of directors will
assure continuity and stability of Navigant's management and policies,
59
<PAGE>
without diminishing accountability to stockholders. Navigant's classified Board
of Directors will ensure that a majority of directors at any given time will
have experience in the business and competitive affairs of Navigant.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT
The Certificate of Incorporation and Bylaws may provide that stockholder
action can be taken only at an annual or special meeting and cannot be taken by
written consent in lieu of a meeting.
ADVANCE NOTICE FOR RAISING BUSINESS AT MEETINGS
The Bylaws may establish an advance notice procedure for stockholder
proposals to be brought before an annual meeting of stockholders. Only such
business may be conducted at an annual meeting of stockholders as has been
brought before the meeting by, or at the direction of, the Board of Directors,
or by a stockholder who has given to the Secretary of Navigant timely written
notice, in proper form, of the stockholder's intention to bring that business
before the meeting. The chairman of such meeting has the authority to make the
determination of whether business has been properly brought before such meeting.
These provisions are intended to establish orderly procedures for the conduct of
Navigant's business and to allow the Board of Directors adequate time to
evaluate and respond to stockholder initiatives. They may have the effect of
impeding the ability of a stockholder to present proposals or make nominations
in a control context if the requisite notice provisions cannot be satisfied.
AMENDMENT OF BYLAWS
The Certificate of Incorporation may require a vote of at least 75% of the
outstanding Navigant Common Stock for the stockholders to amend the Bylaws. This
super-majority requirement could make it more difficult for stockholders to
compel action by the Board of Directors by amending the Bylaws to require
actions not presently permitted by the Bylaws.
RIGHTS PLAN
Navigant may consider adoption of a shareholder rights plan or "poison
pill." As with the Certificate of Incorporation and Bylaw provisions discussed
above, if such a plan is adopted, it could render more difficult or discourage
an attempt to obtain control of Navigant. However, such a plan might also
provide the Board of Directors with more negotiating leverage by delaying or
making more difficult unsolicited acquisitions or changes of control of
Navigant.
LIMITATION ON DIRECTORS' LIABILITIES
Pursuant to the Certificate of Incorporation and under Delaware law,
directors of Navigant are not liable to Navigant or its stockholders for
monetary damages for breach of fiduciary duty, except for liability in
connection with a breach of duty of loyalty, for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law, for
dividend payments or stock repurchases illegal under Delaware law or any
transaction in which a director has derived an improper personal benefit.
Navigant's By-Laws provide that Navigant will, to the fullest extent permitted
under Delaware law, indemnify its officers and directors against any damages
arising out of their actions as officers or directors of Navigant.
TRANSFER AGENT AND REGISTRAR
Navigant has not yet appointed a Transfer Agent and Registrar for Navigant
Common Stock but expects to do so prior to the Travel Distribution.
60
<PAGE>
EXPERTS
The consolidated financial statements of Navigant International, Inc. as of
April 30, 1996, April 26, 1997 and January 24, 1998 and for the years ended
December 31, 1994 and December 31, 1995, for the four months ended April 30,
1996, for the year ended April 26, 1997 and for the nine months ended January
24, 1998 included in this Prospectus, except as they relate to MTA, Inc. as of
December 31, 1995 and for the period from January 25, 1995 (date of
incorporation) to December 31, 1995, have been so included in reliance on the
March 27, 1998 report of Price Waterhouse LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
The consolidated balance sheet of MTA, Inc. as of December 31, 1995 and the
related consolidated statements of income and retained earnings and of cash
flows for the period from January 25, 1995 (date of incorporation) to December
31, 1995 (not presented separately or incorporated separately by reference
herein), have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report which is included herein in reliance upon such firm as
experts in accounting and auditing.
The financial statements of Associated Travel Services, Inc. as of December
31, 1996 and 1995 and for each of the three years in the period ended December
31, 1996 included in this Prospectus have been so included in reliance on the
May 22, 1997 report of Deloitte & Touche LLP, independent auditors, given on the
authority of said firm as experts in auditing and accounting.
The financial statements of Evans Travel Group, Inc. and Evans Consulting
Services, Inc. as of July 25, 1997 and for the year then ended included in this
Prospectus have been so included in reliance on the February 3, 1998 report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The financial statements of McGregor Travel Management, Inc. as of December
31, 1996 and 1995 included in this Prospectus have been so included in reliance
on the March 6, 1997 report, except for Note 10, Note 12 and the last paragraph
of Note 1, as to which the date is January 29, 1998 of Walter J. McKeever &
Company, independent auditors, given on the authority of said firm as experts in
auditing and accounting.
The financial statements as of December 31, 1996 for Omni Travel Service,
Inc. included in this Prospectus have been so included in reliance on the August
22, 1996 (except for Note 10 as to which the date is January 30, 1998) report of
Nardella & Taylor, independent accountants, given on the authority of said firm
as experts in auditing and accounting.
The combined financial statements of Travel Consultants, Inc. and Envisions
Vacations, Inc. as of October 24, 1997 and for the year then ended included in
this Prospectus have been so included in reliance on the January 23, 1998 report
of Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
LEGAL MATTERS
The validity of shares of Navigant Common Stock and certain tax matters
relating to the Distributions will be passed upon on behalf of Navigant and U.S.
Office Products by Wilmer, Cutler & Pickering, Washington, D.C.
61
<PAGE>
NAVIGANT INTERNATIONAL, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
NAVIGANT INTERNATIONAL, INC.
Report of Price Waterhouse LLP, Independent Accountants.................................................. F-3
Report of Deloitte & Touche LLP, Independent Auditors.................................................... F-4
Consolidated Balance Sheet as of April 30, 1996, April 26, 1997 and January 24, 1998..................... F-5
Consolidated Statement of Income for the years ended December 31, 1994 and 1995, the four months ended
April 30, 1996, the fiscal year ended April 26, 1997 and the nine months ended January 25, 1997
(unaudited) and January 24, 1998....................................................................... F-6
Consolidated Statement of Stockholder's Equity for the years ended December 31, 1994 and 1995, the four
months ended April 30, 1996, the fiscal year ended April 26, 1997 and the nine months ended January 24,
1998................................................................................................... F-7
Consolidated Statement of Cash Flows for the years ended December 31, 1994 and 1995, the four months
ended April 30, 1996, the fiscal year ended April 26, 1997 and the nine months ended January 25, 1997
(unaudited) and January 24, 1998....................................................................... F-8
Notes to Consolidated Financial Statements............................................................... F-10
Introduction to Pro Forma Financial Information.......................................................... F-24
Pro Forma Combined Balance Sheet as of January 24, 1998 (unaudited)...................................... F-26
Pro Forma Combined Statement of Income for the nine months ended January 24, 1998 (unaudited)............ F-27
Pro Forma Combined Statement of Income for the nine months ended January 25, 1997 (unaudited)............ F-28
Pro Forma Combined Statement of Income for the fiscal year ended April 26, 1997 (unaudited).............. F-29
Notes to Pro Forma Combined Financial Statements......................................................... F-30
ASSOCIATED TRAVEL SERVICES, INC.
Report of Deloitte and Touche LLP, Independent Auditors.................................................. F-32
Balance Sheets as of December 31, 1995 and 1996 and March 31, 1997 (unaudited)........................... F-33
Statements of Income for the years ended December 31, 1994, 1995 and 1996 and the three months ended
March 31, 1996 (unaudited) and 1997 (unaudited)........................................................ F-35
Statements of Shareholder's Equity for the years ended December 31, 1994, 1995 and 1996 and the three
months ended March 31, 1997 (unaudited)................................................................ F-36
Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and the three months ended
March 31, 1996 (unaudited) and 1997 (unaudited)........................................................ F-37
Notes to Financial Statements............................................................................ F-39
EVANS TRAVEL GROUP, INC. AND EVANS CONSULTING SERVICES, INC.
Report of Price Waterhouse LLP, Independent Accountants.................................................. F-47
Combined Balance Sheet as of July 25, 1997............................................................... F-48
Combined Statement of Income and Retained Earnings for the year ended July 25, 1997...................... F-49
Combined Statement of Cash Flows for the year ended July 25, 1997........................................ F-50
Notes to Combined Financial Statements................................................................... F-51
</TABLE>
F-1
<PAGE>
NAVIGANT INTERNATIONAL, INC.
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
---------
MCGREGOR TRAVEL MANAGEMENT, INC.
<S> <C>
Report of Walter J. McKeever & Company, Independent Accountants.......................................... F-55
Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997 (unaudited)....................... F-56
Statement of Income and Retained Earnings for the years ended December 31, 1995 and 1996 and the nine
months ended September 30, 1996 (unaudited) and 1997 (unaudited)....................................... F-58
Statements of Cash Flows for the years ended December 31, 1995 and 1996 and the nine months ended
September 30, 1996 (unaudited) and 1997 (unaudited).................................................... F-59
Notes to Financial Statements............................................................................ F-61
OMNI TRAVEL SERVICE, INC.
Report of Nardella & Taylor, Independent Accountants..................................................... F-68
Balance Sheets as of December 31, 1996 and June 30, 1997 (unaudited)..................................... F-69
Statements of Income and Retained Earnings for the year ended June 30, 1996, the six months ended
December 31, 1996 and the six months ended June 30, 1996 (unaudited) and 1997 (unaudited).............. F-70
Statements of Cash Flows for the year ended June 30, 1996, the six months ended December 31, 1996 and the
six months ended June 30, 1996 (unaudited) and 1997 (unaudited)........................................ F-71
Notes to Financial Statements............................................................................ F-72
TRAVEL CONSULTANTS, INC. AND ENVISIONS VACATIONS, INC.
Report of Price Waterhouse LLP, Independent Accountants.................................................. F-78
Combined Balance Sheet as of October 24, 1997............................................................ F-79
Combined Statement of Income and Retained Earnings for the year ended October 24, 1997................... F-80
Combined Statement of Cash Flows for the year ended October 24, 1997..................................... F-81
Notes to Combined Financial Statements................................................................... F-82
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Navigant International, Inc.
In our opinion, based upon our audits and the report of other auditors, the
accompanying consolidated balance sheet and the related consolidated statements
of income, of stockholder's equity and of cash flows present fairly, in all
material respects, the financial position of Navigant International, Inc. (the
"Company") and its subsidiaries at April 30, 1996, April 26, 1997 and January
24, 1998, and the results of their operations and their cash flows for the
fiscal years ended December 31, 1994 and 1995, the four months ended April 30,
1996, the fiscal year ended April 26, 1997 and the nine months ended January 24,
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 did not audit the financial statements of MTA, Inc., a
wholly-owned subsidiary, which statements reflect total revenues of $11,418,751
for the period from January 25, 1995 (date of incorporation) to December 31,
1995. Those statements were audited by other auditors whose report thereon has
been furnished to us, and our opinion expressed herein, insofar as it relates to
the amounts included for MTA, Inc., is based solely on the report of the other
auditors. 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 and the report of other auditors provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Denver, Colorado
March 27, 1998
F-3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
MTA, Inc.
We have audited the consolidated balance sheet of MTA, Inc. as of December
31, 1995 and the related consolidated statements of income and retained earnings
and of cash flows for the period from January 25, 1995 (date of incorporation)
to December 31, 1995 (not presented separately herein). These financial
statements are the responsibility of MTA, Inc.'s management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MTA, Inc. as
of December 31, 1995, and the results of its operations and its cash flows for
the period from January 25, 1995 (date of incorporation) to December 31, 1995,
in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Seattle, Washington
September 23, 1996
F-4
<PAGE>
NAVIGANT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, JANUARY 24,
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 5,646 $ 6,952 $ 5,919
Accounts receivable, less allowance for doubtful accounts of $96, $271 and
$198, respectively......................................................... 5,449 5,965 24,171
Prepaid expenses and other current assets.................................... 655 775 1,638
--------- --------- -----------
Total current assets..................................................... 11,750 13,692 31,728
Property and equipment, net.................................................... 7,947 7,954 19,406
Intangible assets, net......................................................... 5,456 7,112 85,525
Other assets................................................................... 539 581 1,002
--------- --------- -----------
Total assets............................................................. $ 25,692 $ 29,339 $ 137,661
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term debt.............................................................. $ 2,059 $ 456 $ 625
Short-term payable to U.S. Office Products................................... 4,221 217
Accounts payable............................................................. 2,385 3,226 5,918
Accrued compensation......................................................... 1,508 1,085 4,916
Other accrued liabilities.................................................... 1,460 3,423 11,472
--------- --------- -----------
Total current liabilities................................................ 7,412 12,411 23,148
Long-term debt................................................................. 6,366 2,012 2,664
Long-term payable to U.S. Office Products...................................... 787 10,027
Deferred income taxes.......................................................... 190 196
Other long-term liabilities.................................................... 503 450 1,711
--------- --------- -----------
Total liabilities........................................................ 14,471 15,856 37,550
--------- --------- -----------
Commitments and contingencies
Stockholder's equity:
Divisional equity............................................................ 4,093 10,320 94,140
Cumulative translation adjustment............................................ (130)
Retained earnings............................................................ 7,128 3,163 6,101
--------- --------- -----------
Total stockholder's equity............................................... 11,221 13,483 100,111
--------- --------- -----------
Total liabilities and stockholder's equity............................... $ 25,692 $ 29,339 $ 137,661
--------- --------- -----------
--------- --------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
NAVIGANT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FOR THE NINE
FOR THE YEAR ENDED FOR THE FOUR FISCAL MONTHS ENDED
-------------------------- MONTHS ENDED YEAR ENDED ------------------------
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26, JANUARY 25, JANUARY 24,
1994 1995 1996 1997 1997 1998
------------ ------------ ------------ ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues.............................. $ 34,569 $ 45,267 $ 18,009 $ 57,677 $ 41,527 $ 80,706
Operating expenses.................... 19,692 25,836 9,491 31,541 22,656 47,172
------------ ------------ ------------ ------------- ----------- -----------
Gross profit.................... 14,877 19,431 8,518 26,136 18,871 33,534
General and administrative expenses... 11,651 15,221 6,660 19,684 15,011 26,274
Amortization expense.................. 221 342 128 548 471 1,509
Non-recurring acquisition costs....... 1,156 284
------------ ------------ ------------ ------------- ----------- -----------
Operating income................ 3,005 3,868 1,730 4,748 3,105 5,751
Other (income) expense:
Interest expense.................. 118 515 173 587 415 399
Interest income................... (253) (352) (109) (445) (382) (338)
Other............................. 48 42 20 118 40 (71)
------------ ------------ ------------ ------------- ----------- -----------
Income before provision for income
taxes............................... 3,092 3,663 1,646 4,488 3,032 5,761
Provision for income taxes............ 18 565 255 1,145 551 2,823
------------ ------------ ------------ ------------- ----------- -----------
Net income............................ $ 3,074 $ 3,098 $ 1,391 $ 3,343 $ 2,481 $ 2,938
------------ ------------ ------------ ------------- ----------- -----------
------------ ------------ ------------ ------------- ----------- -----------
Weighted average shares outstanding:
Basic............................... 45,562 59,059 77,501 90,026 85,978 114,758
Diluted............................. 45,704 60,024 79,100 91,761 87,824 117,185
Income per share:
Basic............................... $ 0.07 $ 0.05 $ 0.02 $ 0.04 $ 0.03 $ 0.03
Diluted............................. $ 0.07 $ 0.05 $ 0.02 $ 0.04 $ 0.03 $ 0.03
Unaudited pro forma net income (see
Note 9)............................. $ 2,289 $ 1,546 $ 2,938
------------- ----------- -----------
------------- ----------- -----------
Unaudited pro forma income per share:
Basic............................... $ 0.03 $ 0.02 $ 0.03
------------- ----------- -----------
------------- ----------- -----------
Diluted............................. $ 0.02 $ 0.02 $ 0.03
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
NAVIGANT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE TOTAL
DIVISIONAL TRANSLATION RETAINED STOCKHOLDER'S
EQUITY ADJUSTMENT EARNINGS EQUITY
----------- ----------- --------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993................................... $ 1,668 $ $ 6,246 $ 7,914
Cash dividends of Pooled Companies........................... (3,252) (3,252)
Net income................................................... 3,074 3,074
----------- ----------- --------- -------------
Balance at December 31, 1994................................... 1,668 6,068 7,736
Transactions of Pooled Companies:
Issuance of Pooled Company common stock for cash........... 800 800
Cash dividends............................................. (2,447) (2,447)
Net income................................................... 3,098 3,098
----------- ----------- --------- -------------
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)
Net income................................................... 1,391 1,391
----------- ----------- --------- -------------
Balance at April 30, 1996...................................... 4,093 7,128 11,221
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
Net income................................................... 3,343 3,343
----------- ----------- --------- -------------
Balance at April 26, 1997...................................... 10,320 3,163 13,483
Issuance of U. S. Office Products common stock in conjunction
with acquisitions.......................................... 83,820 83,820
Cumulative translation adjustment............................ (130) (130)
Net income................................................... 2,938 2,938
----------- ----------- --------- -------------
Balance at January 24, 1998.................................... $ 94,140 $ (130) $ 6,101 $ 100,111
----------- ----------- --------- -------------
----------- ----------- --------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
NAVIGANT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE NINE
FOR THE FOUR FISCAL MONTHS
FOR THE YEAR ENDED MONTHS ENDED YEAR ENDED ENDED
---------------------------- ------------- ------------- -----------
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26, JANUARY 25,
1994 1995 1996 1997 1997
------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net income....................................... $ 3,074 $ 3,098 $ 1,391 $ 3,343 $ 2,481
Adjustment to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization expense.......... 679 986 452 1,660 1,236
Non-recurring acquisition costs................ 1,156 284
Other.......................................... (82) 137 (27) 6 (75)
Changes in current assets and liabilities (net
of assets acquired and liabilities assumed in
business combinations accounted for under the
purchase method):
Accounts receivable.......................... (772) 679 (361) (106) 235
Prepaid expenses and other current assets.... 12 46 (43) 6 426
Accounts payable............................. 464 124 453 755 166
Accrued liabilities.......................... (380) (909) (985) (323) (152)
------------- ------------- ------------- ------------- -----------
Net cash provided by operating activities.. 2,995 4,161 880 6,497 4,601
------------- ------------- ------------- ------------- -----------
Cash flows from investing activities:
Additions to property and equipment, net of
disposals...................................... (804) (1,858) (486) (769) (888)
Cash paid in acquisitions, net of cash received.. 2,293 (1,758) (1,293)
Payments of non-recurring acquisition costs.... (539) (284)
Other............................................ 128 126 (129) (197)
------------- ------------- ------------- ------------- -----------
Net cash (used in) provided by investing
activities............................... (676) 561 (615) (3,066) (2,662)
------------- ------------- ------------- ------------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt......... 72 3,800 362 907
Payments of long-term debt....................... (518) (1,968) (5,594) (3,039) (1,651)
Proceeds from (payments of) short-term
debt, net...................................... (189) 424 801 (1,603) 211
Payments of dividends of Pooled Companies........ (3,252) (2,447) (982) (3,038) (2,837)
Proceeds from issuance of common stock........... 800 1,625 142 112
Capital contributed by stockholders of Pooled
Companies...................................... 43
Net advances from U.S. Office Products Company... 5,008 1,061
------------- ------------- ------------- ------------- -----------
Net cash used in financing activities...... (3,959) (3,119) (350) (2,125) (2,197)
------------- ------------- ------------- ------------- -----------
Net increase (decrease) in cash and cash
equivalents...................................... (1,640) 1,603 (85) 1,306 (258)
Cash and cash equivalents at beginning of period... 5,768 4,128 5,731 5,646 5,646
------------- ------------- ------------- ------------- -----------
Cash and cash equivalents at end of period......... $ 4,128 $ 5,731 $ 5,646 $ 6,952 $ 5,388
------------- ------------- ------------- ------------- -----------
------------- ------------- ------------- ------------- -----------
Supplemental disclosures of cash flow information:
Interest paid.................................... $ 161 $ 562 $ 189 $ 579 $ 365
Income taxes paid................................ $ 9 $ 361 $ 364 $ 453 $ 375
<CAPTION>
JANUARY 24,
1998
-----------
<S> <C>
Cash flows from operating activities:
Net income....................................... $ 2,938
Adjustment to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization expense.......... 3,143
Non-recurring acquisition costs................
Other.......................................... (132)
Changes in current assets and liabilities (net
of assets acquired and liabilities assumed in
business combinations accounted for under the
purchase method):
Accounts receivable.......................... (6,887)
Prepaid expenses and other current assets.... 105
Accounts payable............................. (918)
Accrued liabilities.......................... 3,726
-----------
Net cash provided by operating activities.. 1,975
-----------
Cash flows from investing activities:
Additions to property and equipment, net of
disposals...................................... (2,345)
Cash paid in acquisitions, net of cash received.. 1,570
Payments of non-recurring acquisition costs.... (617)
Other............................................ 204
-----------
Net cash (used in) provided by investing
activities............................... (1,188)
-----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt......... 66
Payments of long-term debt....................... (4,697)
Proceeds from (payments of) short-term
debt, net...................................... (2,425)
Payments of dividends of Pooled Companies........
Proceeds from issuance of common stock...........
Capital contributed by stockholders of Pooled
Companies......................................
Net advances from U.S. Office Products Company... 5,236
-----------
Net cash used in financing activities...... (1,820)
-----------
Net increase (decrease) in cash and cash
equivalents...................................... (1,033)
Cash and cash equivalents at beginning of period... 6,952
-----------
Cash and cash equivalents at end of period......... $ 5,919
-----------
-----------
Supplemental disclosures of cash flow information:
Interest paid.................................... $ 136
Income taxes paid................................ $ 17
</TABLE>
F-8
<PAGE>
NAVIGANT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
The Company issued common stock, notes payable and cash in connection with
certain business combinations accounted for under the purchase method in the
year ended December 31, 1995, the fiscal year ended April 26, 1997, the nine
months ended January 25, 1997 and the nine months ended January 24, 1998. The
fair values of the assets and liabilities of the acquired companies at the dates
of the acquisitions are presented as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE NINE
FOR THE FISCAL MONTHS ENDED
YEAR ENDED YEAR ENDED ------------------------
DECEMBER 31, APRIL 26, JANUARY 25, JANUARY 24,
1995 1997 1997 1998
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED)
Accounts receivable......................................................... $ 2,406 $ 410 $ 410 $ 11,119
Prepaid expenses and other current assets................................... 248 99 99 1,279
Property and equipment...................................................... 928 348 348 10,450
Intangible assets........................................................... 5,109 2,127 1,682 79,704
Other assets................................................................ 176 70 70 1,508
Short-term debt............................................................. (859) (2,593)
Accounts payable............................................................ (817) (86) (86) (3,974)
Accrued liabilities......................................................... (1,610) (1,167) (334) (8,415)
Long-term debt.............................................................. (43) (896) (5,119)
Other long-term liabilities................................................. (520) (1,709)
------------- ------------- ----------- -----------
Net assets acquired..................................................... $ 5,061 $ 1,758 $ 1,293 $ 82,250
------------- ------------- ----------- -----------
------------- ------------- ----------- -----------
The acquisitions were funded as follows:
U.S. Office Products common stock........................................... $ $ $ $ 83,820
Notes payable............................................................... 7,354
Cash paid, net of cash received............................................. (2,293) 1,758 1,293 (1,570)
------------- ------------- ----------- -----------
Total................................................................... $ 5,061 $ 1,758 $ 1,293 $ 82,250
------------- ------------- ----------- -----------
------------- ------------- ----------- -----------
</TABLE>
Noncash transactions:
- - During the fiscal year ended April 26, 1997, the Company used U.S. Office
Products common stock to repay $1,772 of indebtedness.
F-9
<PAGE>
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1--BACKGROUND
Navigant International, Inc. ("the Company") is a Delaware Corporation which
is a wholly-owned subsidiary of U.S. Office Products Company ("U.S. Office
Products"). On January 13, 1998, U.S. Office Products announced its intention to
spin-off its Corporate Travel Services division as an independent publicly owned
company. This transaction is expected to be effected through the distribution of
shares of the Company to U.S. Office Products shareholders effective on or about
April 25, 1998 (the "Distribution"). Prior to the Distribution, U.S. Office
Products plans to contribute its equity interests in certain wholly-owned
subsidiaries associated with U.S. Office Products' Corporate Travel Services
division to the Company. U.S. Office Products and the Company will enter into a
number of agreements to facilitate the Distribution and the transition of the
Company to an independent business enterprise.
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 of these business combinations being
accounted for under the pooling-of-interests method, the results 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.
NOTE 2--BASIS OF PRESENTATION
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 Distribution were included in the
Company's separate consolidated balance sheet. With the exception of interest
expense, the Company's statement of income includes all of the related costs of
doing business including an allocation of certain general corporate expenses of
U.S. Office Products which were not directly related to these businesses
including certain corporate executives' salaries, accounting and legal fees,
departmental costs for accounting, finance, legal, purchasing, marketing, 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 uses a centralized approach to cash management and the
financing of its operations. As a result, minimal amounts of cash and cash
equivalents and an agreed upon amount of debt will be allocated to the Company
at the time of the Distribution. The consolidated statement of income does not
include an allocation of interest expense on all debt allocated to the Company.
See Note 8 for further discussion of interest expense.
F-10
<PAGE>
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
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
Prior to their respective dates of acquisition by U.S. Office Products, the
Pooled Companies reported results on years ending on December 31. Upon
acquisition by U.S. Office Products and effective for the fiscal year ended
April 26, 1997 ("fiscal 1997"), the Pooled Companies changed their year-ends
from December 31 to conform to U.S. Office Products' fiscal year, which ends on
the last Saturday in April. A four month fiscal transition period from January
1, 1996 through April 30, 1996 has been presented for the Company to conform its
fiscal year-end.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions and
accounts are eliminated in consolidation.
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 is stated at cost. Additions and improvements are
capitalized. Maintenance and repairs are expensed as incurred. Depreciation of
property and equipment is calculated using the straight-line method over the
estimated useful lives of the respective assets. The estimated useful lives
range from 25 to 40 years for buildings and its 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
F-11
<PAGE>
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amortized on a straight line basis over an estimated useful life of 35 years.
Management periodically evaluates the recoverability of goodwill, which would be
adjusted for a permanent decline in value, if any, by comparing anticipated
undiscounted future cash flows from operations to net book value.
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 as
a separate component of stockholders' equity.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments including cash
and cash equivalents, accounts receivable, accounts payable and accrued
liabilities approximate fair value.
INCOME TAXES
As a division of U.S. Office Products, the Company does not file separate
federal income tax returns but rather is 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. 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
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 estimates and records accruals for cancellations
and changes to reservation revenues booked. However, such estimates could vary
significantly based upon changes in economic and political conditions that
impact corporate travel patterns. Cruise revenues are recorded when the customer
is no longer entitled to a full refund of the cost of the cruise. The Company
records override commissions on an accrual basis in the month it is earned based
upon the Company's estimated ticket sales in excess of required thresholds.
Revenues consist of commissions on travel services and year-end volume bonuses
from travel service providers.
OPERATING EXPENSES
Operating expenses include travel agent commissions, salaries,
communications and other costs associated with the selling and processing of
travel reservations.
F-12
<PAGE>
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
NON-RECURRING ACQUISITION COSTS
Non-recurring acquisition costs represent acquisition 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.
NET INCOME PER SHARE
Net income per share is calculated in accordance with the Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which
establishes standards for computing and presenting earnings per share ("EPS").
SFAS No. 128 requires dual presentation of basic and diluted EPS on the face of
the income statement. Basic EPS excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number of shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. The difference between the
weighted-average number of common shares used for the calculation of basic EPS
and the weighted-average number of shares of common shares used for the diluted
EPS is comprised of the dilutive effect of outstanding common stock options.
However, a portion of the Company's employee stock options outstanding during
the periods presented were not included in the computation of diluted EPS as
they were anti-dilutive.
NEW ACCOUNTING PRONOUNCEMENT
In June 1997, the FASB issued SFAS No. 130. "Reporting Comprehensive
income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. SFAS No. 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company intends to adopt SFAS No. 130 in
fiscal 1999.
UNAUDITED INTERIM FINANCIAL DATA
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the results of operations and of cash flows for the nine months ended January
25, 1997, as presented in the accompanying unaudited consolidated financial
data.
F-13
<PAGE>
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 4--BUSINESS COMBINATIONS
POOLING-OF-INTERESTS METHOD
In fiscal 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:
<TABLE>
<CAPTION>
NUMBER OF
COMPANY NAME SHARES ISSUED
- ------------------------------------------------------------------------------- -------------
<S> <C>
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
-------------
-------------
</TABLE>
The Company's consolidated financial statements give retroactive effect to
the acquisitions of the Pooled Companies for all periods presented. Prior to
being acquired by U.S. Office Products, the Pooled Companies all reported on
years ending on December 31. Upon completion of the acquisitions of the Pooled
Companies, their year-ends were changed to U.S. Office Products' year-end of the
last Saturday in April.
The following presents the separate results, in each of the periods
presented, of the Company (excluding the results of Pooled Companies prior to
the dates on which they were acquired), and the Pooled Companies up to the dates
on which they were acquired:
<TABLE>
<CAPTION>
NAVIGANT
INTERNATIONAL, POOLED
INC. COMPANIES COMBINED
----------------- ----------- -----------
<S> <C> <C> <C>
For the year ended December 31, 1994
Revenues............................................................. $ $ 34,569 $ 34,569
Net income........................................................... $ $ 3,074 $ 3,074
For the year ended December 31, 1995
Revenues............................................................. $ $ 45,267 $ 45,267
Net income........................................................... $ $ 3,098 $ 3,098
For the four months ended April 30, 1996
Revenues............................................................. $ $ 18,009 $ 18,009
Net income........................................................... $ $ 1,391 $ 1,391
For the fiscal year ended April 26, 1997
Revenues............................................................. $ 6,135 $ 51,542 $ 57,677
Net income........................................................... $ 231 $ 3,112 $ 3,343
For the nine months ended January 25, 1997 (unaudited):
Revenues............................................................. $ $ 41,527 $ 41,527
Net income........................................................... $ $ 2,481 $ 2,481
For the nine months ended January 24, 1998:
Revenues............................................................. $ 80,706 $ 80,706
Net income........................................................... $ 2,938 $ 2,938
</TABLE>
F-14
<PAGE>
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 4--BUSINESS COMBINATIONS (CONTINUED)
PURCHASE METHOD
During 1995, the Company made one acquisition accounted for under the
purchase method for an aggregate purchase price of $5,061, consisting of $7,354
of notes payable and net of $2,293 of cash acquired. The total assets related to
the acquisition were $8,867, including goodwill of $5,109. The results of the
acquisition have been included in the Company's results from the date of
acquisition.
In fiscal 1997, the Company made one acquisition accounted for under the
purchase method for an aggregate cash purchase price of $1,758. The total assets
related to the acquisition were $3,054, including goodwill of $2,127. The
results of the acquisition have been included in the Company's results from the
date of acquisition.
During the nine months ended January 24, 1998 the Company made seven
acquisitions accounted for under the purchase method for an aggregate purchase
price of $82,250, consisting of 3,805,379 shares of common stock with a market
value of $83,820 and net of $1,570 of cash acquired. The total assets related to
these seven acquisitions were $104,060, including intangible assets of $79,704.
The results of these acquisitions have been included in the Company's results
from their respective dates of acquisition.
The following presents the unaudited pro forma results of operations of the
Company for the year ended December 31, 1995 and the fiscal year ended April 26,
1997 and includes the Company's consolidated financial statements, 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 1995. The
results presented below include certain pro forma adjustments to reflect the
amortization of intangible assets, adjustments in executive compensation of $7.1
million for the fiscal year ended April 26, 1997 and $265,000 for the nine
months ended January 24, 1998, and the inclusion of a federal income tax
provision on all earnings:
<TABLE>
<CAPTION>
FOR THE FOR THE
FISCAL YEAR NINE MONTHS
ENDED ENDED
APRIL 26, JANUARY 24
1997 1998
----------- -----------
<S> <C> <C>
(UNAUDITED)
Revenues............................................................. $ 144,394 $ 117,324
Net income........................................................... 7,267 5,209
</TABLE>
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 on May 1, 1996 or the results which may
occur in the future.
F-15
<PAGE>
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 5--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, JANUARY 24,
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
Land....................................................... $ 325 $ 325 $ 325
Buildings.................................................. 3,605 3,088 7,679
Furniture and fixtures..................................... 7,013 7,934 15,396
Leasehold improvements..................................... 667 1,273 2,277
--------- --------- -----------
11,610 12,620 25,677
Less: Accumulated depreciation............................. (3,663) (4,666) (6,271)
--------- --------- -----------
Net property and equipment................................. $ 7,947 $ 7,954 19,406
--------- --------- -----------
--------- --------- -----------
</TABLE>
Depreciation expense for the years ended December 31, 1994 and 1995, the
four months ended April 30, 1996, the fiscal year ended April 26, 1997 and the
nine months ended January 24, 1998 was $458, $644, $324, $1,112 and $1,634,
respectively.
NOTE 6--INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, JANUARY 24,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Goodwill.................................................... $ 6,103 $ 8,138 $ 88,139
Less: Accumulated amortization.............................. (647) (1,026) (2,614)
----------- ----------- -----------
Net intangible assets....................................... $ 5,456 $ 7,112 $ 85,525
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Amortization expense for the years ended December 31, 1994 and 1995, the
four months ended April 30, 1996, the fiscal year ended April 26, 1997 and the
nine months ended January 24, 1998 was $221, $342, $128, $548, and $1,509
respectively.
NOTE 7--OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, JANUARY 24,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Customer deposits........................................... $ 142 $ 1,198 $ 5,286
Deferred revenue............................................ 1,761
Customer Revenue Share...................................... 407 521 1,295
Accrued acquisition costs................................... 618
Accrued income taxes........................................ 314 917 1,276
Other....................................................... 597 169 1,854
----------- ----------- -----------
Total other accrued liabilities......................... $ 1,460 $ 3,423 $ 11,472
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-16
<PAGE>
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 8--CREDIT FACILITIES
SHORT-TERM DEBT
Short-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, JANUARY 24,
1996 1997 1998
----------- ----------- -------------
<S> <C> <C> <C>
Other....................................................... $ 705 $ $ 151
Current maturities of long-term debt........................ 1,354 456 474
----------- ----------- -----
Total short-term debt................................... $ 2,059 $ 456 $ 625
----------- ----------- -----
----------- ----------- -----
</TABLE>
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, JANUARY 24,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Notes payable, secured by certain assets of the Company,
interest rates ranging from 9.04% to 9.4%, maturities from
October 1997 through 2015................................. $ 7,720 $ 2,393 $ 3,051
Capital lease obligations................................... 75 87
----------- ----------- -----------
7,720 2,468 3,138
Less: Current maturities of long-term debt.................. (1,354) (456) (474)
----------- ----------- -----------
Total long-term debt.................................... $ 6,366 $ 2,012 $ 2,664
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
MATURITIES OF LONG-TERM DEBT
Maturities on long-term debt, including capital lease obligations, are as
follows:
<TABLE>
<S> <C>
1998................................................................ $ 474
1999................................................................ 414
2000................................................................ 154
2001................................................................ 109
2002................................................................ 115
Thereafter.......................................................... 1,872
---------
Total maturities of long-term debt $ 3,138
---------
---------
</TABLE>
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
the 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
F-17
<PAGE>
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 8--CREDIT FACILITIES (CONTINUED)
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:
<TABLE>
<S> <C>
Balance at April 30, 1996.......................................... $
Payments of long-term debt of Pooled Companies upon acquisition.... 394
Payments of acquisition costs...................................... 263
Allocated corporate expenses....................................... 107
Normal operating costs paid by U.S. Office Products................ 23
---------
Balance at April 26, 1997.......................................... 787
Payments of long-term debt of acquired companies upon
acquisition...................................................... 4,174
Normal operating costs paid by U.S. Office Products................ 3,003
Payments of acquisition costs...................................... 1,370
Allocated corporate expenses....................................... 693
---------
Balance at January 24, 1998........................................ $ 10,027
---------
---------
</TABLE>
The average outstanding long-term payable to U.S. Office Products during the
fiscal year ended April 26, 1997 and the nine months ended January 24, 1998 were
$43 and $4,538, respectively. Interest has been allocated to the Company based
upon the Company's average outstanding payable balance with U.S. Office Products
at U.S. Office Products' weighted average interest rate during such period.
The Company's financial statements include allocations of interest expense
from U.S. Office Products totaling $58 during the year ended April 26, 1997 and
$245 during the nine months ended January 24, 1998.
At the date of Distribution, U.S. Office Products has agreed to allocate
$15.0 million in debt to the Company, plus expenditures for acquisitions
completed after January 12, 1998. The Company has one such acquisition that is
probable as of January 24, 1998. The total expected expenditure for this
acquisition is $771. The allocation will include debt outstanding with third
parties and intercompany debt payable to U.S. Office Products. The debt payable
to U.S. Office Products will be payable upon the completion of the Distribution.
The Company is currently in discussions with several financial institutions
regarding a credit facility of approximately $75 to $100 million which would be
used for working capital and acquisition purposes. The Company expects that the
credit facility will include customary covenants including maintenance of
financial ratios and limitations on dividend payments.
F-18
<PAGE>
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 9--INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
FOR THE
FOUR FOR THE FOR THE
MONTHS FISCAL NINE MONTHS
FOR THE YEAR ENDED ENDED YEAR ENDED ENDED
-------------------------------- ----------- ----------- -----------
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26, JANUARY 24,
1994 1995 1996 1997 1998
--------------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Income taxes currently
payable:
Federal..................... $ $ 435 $ 348 $ 991 $ 2,666
State....................... 18 75 43 159 562
----- ----- ----- ----------- -----------
18 510 391 1,150 3,228
----- ----- ----- ----------- -----------
Deferred income tax expense
(benefit)................... 55 (136) (5) (405)
----- ----- ----- ----------- -----------
Total provision for income
taxes................... $ 18 $ 565 $ 255 $ 1,145 $ 2,823
----- ----- ----- ----------- -----------
----- ----- ----- ----------- -----------
</TABLE>
Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, JANUARY 24,
1996 1997 1998
----------- ----------- -------------
<S> <C> <C> <C>
Current deferred tax assets:
Allowance for doubtful accounts........................... $ 28 $ 36 $ 86
Accrued liabilities....................................... 191 229 662
----- ----- -----
Total current deferred tax assets....................... 219 265 748
----- ----- -----
Long-term deferred tax liabilities:
Property and equipment.................................... (409) (680) (647)
Intangible assets......................................... (3) (2)
Other..................................................... 222 106
----- ----- -----
Total long-term deferred tax liabilities................ (409) (461) (543)
----- ----- -----
Net deferred tax liability $ (190) $ (196) $ 205
----- ----- -----
----- ----- -----
</TABLE>
F-19
<PAGE>
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 9--INCOME TAXES (CONTINUED)
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
FOR THE
FOUR FOR THE
MONTHS FISCAL FOR THE NINE
FOR THE YEAR ENDED ENDED YEAR ENDED MONTHS ENDED
-------------------------------- ----------- ----------- -------------
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26, JANUARY 24,
1994 1995 1996 1997 1998
--------------- --------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
U.S. federal statutory rate....................... 35.0% 35.0% 35.0% 35.0% 35.0%
State income taxes, net of federal income tax
benefit......................................... 0.6 1.8 1.7 2.3 6.3
Subchapter S corporation income not subject to
corporate level taxation........................ (35.0) (21.4) (21.2) (24.7)
Nondeductible Goodwill............................ 5.8
Nondeductible acquisition costs................... 6.8 1.3
Other............................................. 6.1 0.6
----- ----- ----- ----- ---
Effective income tax rate......................... 0.6% 15.4% 15.5% 25.5% 49.0%
----- ----- ----- ----- ---
----- ----- ----- ----- ---
</TABLE>
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 these acquisitions by the Company.
The following unaudited pro forma income tax information is presented in
accordance with SFAS 109 as if the Pooled Company had been subject to federal
income taxes for the fiscal year ended April 26, 1997. There was no pro forma
adjustment for income taxes for the nine months ended January 24, 1998.
<TABLE>
<CAPTION>
FOR THE
FISCAL
YEAR ENDED
APRIL 26,
1997
-------------
<S> <C>
Net income per consolidated statement of income................................ $ 3,343
Pro forma income tax provision adjustment...................................... 1,054
------
Pro forma net income......................................................... $ 2,289
------
------
</TABLE>
F-20
<PAGE>
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 10--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:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- -----------
<S> <C> <C>
1998..................................................................... $ 79 $ 1,726
1999..................................................................... 14 2,330
2000..................................................................... 2,042
2001..................................................................... 1,536
2002..................................................................... 766
Thereafter............................................................... 92
--- -----------
Total minimum lease payments............................................. 93 $ 8,492
-----------
-----------
Less: Amounts representing interest...................................... (6)
---
Present value of net minimum lease payments.............................. $ 87
---
---
</TABLE>
Rent expense for all operating leases for the years ended December 31, 1994
and 1995, the four months ended April 30, 1996, the fiscal year ended April 26,
1997, and the nine months ended January 24, 1998 was $1,791, $1,811, $573,
$1,903 and $2,345, respectively.
NOTE 11--COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of this litigation
will have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
POSTEMPLOYMENT 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 April 30, 1996, April 26,
1997 and January 24, 1998 related to these agreements, as no change of control
has occurred.
DISTRIBUTION
On or immediately after the Distribution, the Company expects to have a
credit facility in place. The terms of the credit facility is expected to
contain customary covenants including financial covenants. The Company plans to
use a portion of the proceeds from the credit facility to repay certain amounts
payable to U.S. Office Products.
On or before the date of the distribution, the Company, U.S. Office Products
and the other Spin-Off Companies will enter into the Distribution Agreement, the
Tax Allocation Agreement and the Employee Benefits Agreement, and the Spin-Off
Companies will enter into the Tax Indemnification Agreement and may enter into
other agreements, including agreements related to referral of customers to one
another.
F-21
<PAGE>
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 11--COMMITMENTS AND CONTINGENCIES (CONTINUED)
These agreements are expected to provide, 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 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.
NOTE 12--EMPLOYEE BENEFIT PLANS
Effective September 1, 1996, the Company implemented the U.S. Office
Products 401(k) Retirement Plan (the "401(k) Plan") which allows employee
contributions in accordance with Section 401(k) of the Internal Revenue Code.
The Company matches a portion of employee contributions and all full-time
employees are eligible to participate in the 401(k) Plan after one year 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. The subsidiaries paid all
general and administrative expenses of the plans and in some cases made matching
contributions on behalf of the employees. For the years ended December 31, 1994
and 1995, the four months ended April 30, 1996, the fiscal year ended April 26,
1997 and the nine months ended January 24, 1998, the subsidiaries incurred
expenses totaling $194, $204, $73, $249 and $208 respectively, related to these
plans.
NOTE 13--STOCKHOLDER'S EQUITY
EMPLOYEE STOCK PLANS
Prior to the Distribution, certain employees of the Company participated in
the U.S. Office Products 1994 Long-Term Incentive Plan ("the Plan") covering
employees of U.S. Office Products. The Company intends to adopt an employee
stock option plan at approximately the time of the Distribution. The Company
expects to replace 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.
U.S. Office Products granted 105,948 and 1,106,274 options to Company
employees under the Plan during fiscal 1997 and the nine months ended January
24, 1998, respectively; the Company accounted for these options 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 was
recognized for the options granted. Had compensation expense been recognized
based upon the fair value of the stock options on the grant date under the
methodology prescribed by SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net income would have been reduced by approximately
$15 and $550 for the year ended April 26, 1997 and the nine months ended January
24, 1998, respectively. Additionally, the impact on the net income per share is
less than $.005 per share for the respective periods.
Under a service agreement entered into with Jonathan J. Ledecky, the Board
of Directors of U.S. Office Products has agreed that Jonathan J. Ledecky will
receive a stock option for the Company common
F-22
<PAGE>
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 13--STOCKHOLDER'S EQUITY (CONTINUED)
stock from the Company as of the date of the Distribution. The Board intends 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 will
cover up to 7.5% of the outstanding Company common stock determined as of the
date of the 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 option will have a per share exercise price
equal to the price of the first trade on the day the Company's common stock is
first publicly traded.
NOTE 14--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents certain unaudited quarterly financial data for the
year ended December 31, 1995 and the fiscal year ended April 26, 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH TOTAL
--------- --------- --------- --------- ---------
Revenues.................................................... $ 8,486 $ 13,241 $ 12,005 $ 11,535 $ 45,267
Gross profit................................................ 3,142 6,305 5,093 4,891 19,431
Operating income............................................ 188 2,091 1,000 589 3,868
Net income.................................................. 217 1,558 792 531 3,098
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 26, 1997
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH TOTAL
--------- --------- --------- --------- ---------
Revenues................................................... $ 15,243 $ 13,770 $ 12,514 $ 16,150 $ 57,677
Gross profit............................................... 7,637 6,276 4,958 7,265 26,136
Operating income (loss).................................... 2,186 1,131 (212) 1,643 4,748
Net income (loss).......................................... 1,753 937 (209) 862 3,343
Pro forma net income (see Note 9).......................... 1,964 1,771 284 3,257 7,276
<CAPTION>
YEAR ENDING APRIL 25, 1998
-----------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues................................................... $ 19,530 $ 27,027 $ 34,149 $ 80,706
Gross Profit............................................... 8,637 11,705 13,192 33,534
Operating income (loss).................................... 2,565 2,138 1,048 5,751
Net income (loss).......................................... 1,358 1,207 373 2,938
</TABLE>
NOTE 15--SUBSEQUENT EVENTS
On March 13, 1998, the Company received 90 days notice of termination of a
business relationship. The Company had provided travel administrative services
to this customer under a five year agreement based on a fee per transaction
basis, with all commissions being remitted back to this customer. During the
nine months ended January 24, 1998, this relationship contributed approximately
$400,000 to net operating income. The Company has approximately $635,000 in
intangible assets recorded as of January 24, 1998 relating to the original
acquisition of this contract that will be written off within the next reporting
period as a charge to income.
F-23
<PAGE>
NAVIGANT INTERNATIONAL, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited pro forma financial statements give effect to the spin-off of
Navigant International, Inc. (the "Company"), formerly the Corporate Travel
Services division of U.S. Office Products Company ("U.S. Office Products"),
through the distribution of shares of the Company to U.S. Office Products
shareholders (the "Distribution") and acquisitions completed through March 5,
1998.
The pro forma combined balance sheet gives effect to the Distribution and to
all acquisitions completed through May 1, 1998 as if such transactions had
occurred as of the Company's most recent balance sheet date, January 24, 1998.
The pro forma combined statement of income for the fiscal year ended April
26, 1997 gives effect to (i) the Distribution; (ii) the acquisition of one
individually insignificant company acquired in a business combination accounted
for under the purchase method completed during the fiscal year ended April 26,
1997 (the "Fiscal 1997 Purchase Acquisition"); and (iii) the acquisitions of
Associated Travel Services, Inc. ("Associated Travel"), Evans Travel Group, Inc.
and Evans Consulting Services, Inc. ("Evans Travel"), McGregor Travel
Management, Inc. ("McGregor Travel"), Omni Travel Service, Inc. ("Omni Travel"),
Travel Consultants, Inc. and Envisions Vacations, Inc. ("Travel Consultants")
and two other individually insignificant companies in business combinations
accounted for under the purchase method and completed during the fiscal year
ending April 25, 1998 (the "Fiscal 1998 Purchase Acquisitions"), as if all such
transactions had occurred on May 1, 1996. The pro forma combined statement of
income for the year ended April 26, 1997 includes (i) the audited financial
information of the Company for the year ended April 26, 1997; (ii) the unaudited
financial information of the Fiscal 1997 Purchase Acquisition for the period May
1, 1996 through its respective date of acquisition; and (iii) the unaudited
financial information of the Fiscal 1998 Purchase Acquisitions for the period
from May 1, 1996 through April 26, 1997.
The pro forma combined statement of income for the nine months ended January
24, 1998 gives effect to the Distribution and the Fiscal 1998 Purchase
Acquisitions, as if all such transactions had occurred on April 27, 1997. The
pro forma combined statement of income for the nine months ended January 24,
1998 includes the audited financial information of the Company for the nine
months ended January 24, 1998 and the unaudited financial information of the
Fiscal 1998 Purchase Acquisitions for the period from April 27, 1997 through the
earlier of their respective dates of acquisition or January 24, 1998.
The pro forma combined statement of income for the nine months ended January
25, 1997 gives effect to (i) the Distribution; (ii) the fiscal 1997 Purchase
Acquisition; and (iii) the Fiscal 1998 Purchase Acquisitions, as if all such
transactions had occurred on May 1, 1996. The pro forma combined statement of
income for the nine months ended January 25, 1997 includes (i) the unaudited
financial information of the Company for the nine months ended January 25, 1997;
(ii) the unaudited financial information of the fiscal 1997 Purchase Acquisition
for the nine months ended January 25, 1997; and (iii) the unaudited financial
information of the Fiscal 1998 Purchase Acquisitions for the nine months ended
January 25, 1997.
The historical financial statements of the Company give retroactive effect
to the results of the four companies acquired by the Company during the year
ended April 26, 1997 in business combinations accounted for under the
pooling-of-interests method of accounting.
The historical financial statements of the Company also reflect an allocated
portion of general and administrative costs and interest expense incurred by
U.S. Office Products. The allocated general and administrative costs include
expenses such as: certain corporate executives' salaries, accounting and legal
fees, departmental costs for accounting, finance, legal, purchasing, marketing
and human resources, as well as other general overhead costs. These corporate
overheads have been allocated to the Company using one of several factors,
dependent on the nature of the costs being allocated, including, revenues,
number and
F-24
<PAGE>
NAVIGANT INTERNATIONAL, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
size of acquisitions and number of employees. Interest expense has been
allocated to the Company based upon the Company's average outstanding
intercompany balance with U.S. Office Products at U.S. Office Products' weighted
average interest rate during such periods.
The pro forma adjustments are based upon preliminary estimates, available
information and certain assumptions that management deems appropriate. The
unaudited pro forma combined financial data presented herein does not purport to
represent what the Company's financial position or results of operations would
have been had the transactions which are the subject of pro forma adjustments
occurred on those dates, as assumed, and are not necessarily representative of
the Company's financial position or results of operations in any future period.
The pro forma combined financial statements should be read in conjunction with
the other financial statements and notes thereto included elsewhere in this
Prospectus.
F-25
<PAGE>
NAVIGANT INTERNATIONAL, INC.
PRO FORMA COMBINED BALANCE SHEET
JANUARY 24, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
NAVIGANT POST JANUARY 24, PRO FORMA
INTERNATIONAL, 1998 PURCHASE PRO FORMA OFFERING PRO FORMA
ASSETS INC. ACQUISITION ADJUSTMENTS SUBTOTAL ADJUSTMENTS COMBINED
- -------------------------------------- ------------- ----------------- ----------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash Equivalents........... $ 5,919 $ 622 $ (6,541)(b) $
Accounts receivable, net............ 24,171 252 24,423
Prepaid and other current assets.... 1,638 46 1,684
------------- ------ ----------- --------- ------------- -----------
Total current assets.............. 31,728 920 (6,541) 26,107
Property and equipment, net........... 19,406 62 19,468
Intangible assets, net................ 85,525 529(a) 86,054
Other assets.......................... 1,002 118 1,120
------------- ------ ----------- --------- ------------- -----------
Total assets...................... $ 137,661 $ 1,100 $ (6,012) $ 132,749
------------- ------ ----------- --------- ------------- -----------
------------- ------ ----------- --------- ------------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short term debt..................... $ 625 $ $ $ 625
Short term payable to U.S. Office
Products.......................... 217 (217)(b)
Accounts payable.................... 5,918 17 5,935
Accrued compensation................ 4,916 127 5,043
Other accrued liabilities........... 11,472 5 11,477
------------- ------ ----------- --------- ------------- -----------
Total current liabilities......... 23,148 149 (217) 23,080
Long-term debt........................ 2,664 167 12,389(b) 15,220
Long-term payable to U.S. Office
Products............................ 10,027 1,300(a)
(11,327)(b)
Deferred income taxes................. 13 13
Other long-term liabilities........... 1,711 1,711
------------- ------ ----------- --------- ------------- -----------
Total liabilities................. 37,550 329 2,145 40,024
Stockholder's Equity:
Divisional equity................... 94,140 (1,285)(b) 92,855
Cumulative translation adjustment... (130) (130)
Retained earnings................... 6,101 (6,101)(b)
Equity in purchased company......... 771 (771)(a)
------------- ------ ----------- --------- ------------- -----------
Total stockholder's equity........ 100,111 771 (8,157) 92,725
------------- ------ ----------- --------- ------------- -----------
Total liabilities and
stockholder's equity............ $ 137,661 $ 1,100 $ (6,012) $ 132,749
------------- ------ ----------- --------- ------------- -----------
------------- ------ ----------- --------- ------------- -----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-26
<PAGE>
NAVIGANT INTERNATIONAL, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JANUARY 24, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
INDIVIDUALLY
INSIGNIFICANT
NAVIGANT FISCAL 1998
INTERNATIONAL, ASSOCIATED EVANS MCGREGOR OMNI TRAVEL PURCHASE
INC. TRAVEL TRAVEL TRAVEL TRAVEL CONSULTANTS ACQUISITIONS
------------- ----------- --------- ----------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............................ $ 80,706 $ 7,146 $ 1,524 $ 13,134 $ 2,983 $ 7,052 $ 7,148
Operating expenses.................. 47,172 4,034 669 7,887 1,259 3,955 2,893
------------- ----------- --------- ----------- --------- ------ ------
Gross profit...................... 33,534 3,112 855 5,247 1,724 3,097 4,255
General and administrative
expenses.......................... 26,274 2,169 401 3,182 1,132 2,159 3,556
Amortization expense................ 1,509 17 15 53 26
------------- ----------- --------- ----------- --------- ------ ------
Operating income.................. 5,751 926 439 2,012 592 912 699
Other (income) expense:
Interest expense.................. 399 32 4 63 1 41 38
Interest income................... (338) (35) (61) (28) (26)
Other............................. (71) (47)
------------- ----------- --------- ----------- --------- ------ ------
Income before provision for income
taxes............................. 5,761 976 435 2,010 619 871 687
Provision for income taxes.......... 2,823 252 7 137
------------- ----------- --------- ----------- --------- ------ ------
Net income.......................... $ 2,938 $ 724 $ 435 $ 2,003 $ 619 $ 871 $ 550
------------- ----------- --------- ----------- --------- ------ ------
------------- ----------- --------- ----------- --------- ------ ------
Weighted average shares outstanding:
Basic............................. 114,758
Diluted........................... 117,185
Income per share:
Basic............................. $ 0.03
Diluted........................... $ 0.03
<CAPTION>
PRO FORMA
PRO FORMA OFFERING PRO FORMA
ADJUSTMENTS SUBTOTAL ADJUSTMENTS COMBINED
------------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues............................ $ $ 119,693 $ $
Operating expenses.................. 67,869
------------- --------- ----------- -----------
Gross profit...................... 51,824
General and administrative
expenses.......................... (265)(c) 38,608
Amortization expense................ 798(e) 2,418
------------- --------- ----------- -----------
Operating income.................. (533) 10,798
Other (income) expense:
Interest expense.................. 373(f) 951
Interest income................... 488(f)
Other............................. (118)
------------- --------- ----------- -----------
Income before provision for income
taxes............................. (1,394) 9,965
Provision for income taxes.......... 1,365(g) 4,584
------------- --------- ----------- -----------
Net income.......................... $ (2,759) $ 5,381 $
------------- --------- ----------- -----------
------------- --------- ----------- -----------
Weighted average shares outstanding:
Basic............................. 109,895(h)
Diluted........................... 109,895(h)
Income per share:
Basic............................. $ 0.05
Diluted........................... $ 0.05
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-27
<PAGE>
NAVIGANT INTERNATIONAL, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JANUARY 25, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
INDIVIDUALLY INDIVIDUALLY
INSIGNIFICANT INSIGNIFICANT
NAVIGANT FISCAL 1998 FISCAL 1997
INTERNATIONAL, ASSOCIATED EVANS MCGREGOR OMNI TRAVEL PURCHASE PURCHASE
INC. TRAVEL TRAVEL TRAVEL TRAVEL CONSULTANTS ACQUISITIONS ACQUISITIONS
------------- ----------- --------- ----------- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 41,527 $ 21,532 $ 3,700 $ 16,379 $ 4,549 $ 8,532 $ 6,513 $ 2,630
Operating expenses...... 22,656 12,981 2,196 9,543 1,893 5,498 2,778 2,005
------------- ----------- --------- ----------- --------- ------ ------ ------
Gross profit.......... 18,871 8,551 1,504 6,836 2,656 3,034 3,735 625
General and
administrative
expenses.............. 15,011 7,190 1,215 6,247 1,930 2,628 3,422 1,446
Amortization expense.... 471 194 12 90 41 6 8
Non-recurring
acquisition costs..... 284
------------- ----------- --------- ----------- --------- ------ ------ ------
Operating income...... 3,105 1,167 277 499 726 365 307 (829)
Other (income) expense:
Interest expense...... 415 74 10 104 3 74 35
Interest income....... (382) (57) (42) (103) (18)
Other................. 40 138
------------- ----------- --------- ----------- --------- ------ ------ ------
Income before provision
for income taxes...... 3,032 1,012 267 437 826 291 290 (829)
Provision for income
taxes................. 551 647 30 52 62
------------- ----------- --------- ----------- --------- ------ ------ ------
Net income.............. $ 2,481 $ 365 $ 237 $ 385 $ 826 $ 291 $ 228 $ (829)
------------- ----------- --------- ----------- --------- ------ ------ ------
------------- ----------- --------- ----------- --------- ------ ------ ------
Weighted average shares
outstanding:
Basic................. 85,978
Diluted............... 87,824
Income per share:
Basic................. $ 0.03
Diluted............... $ 0.03
<CAPTION>
PRO FORMA
PRO FORMA OFFERING PRO FORMA
ADJUSTMENTS SUBTOTAL ADJUSTMENTS COMBINED
------------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues................ $ $ 105,362 $ $
Operating expenses...... 59,550
------------- --------- ----------- -----------
Gross profit.......... 45,812
General and
administrative
expenses.............. (5,339)(c) 34,491
741(d)
Amortization expense.... 1,514(e) 2,336
Non-recurring
acquisition costs..... 284
------------- --------- ----------- -----------
Operating income...... 3,084 8,701
Other (income) expense:
Interest expense...... 236(f) 951
Interest income....... 602(f)
Other................. 178
------------- --------- ----------- -----------
Income before provision
for income taxes...... 2,246 7,572
Provision for income
taxes................. 2,141(g) 3,483
------------- --------- ----------- -----------
Net income.............. $ 105 $ 4,089 $ $
------------- --------- ----------- -----------
------------- --------- ----------- -----------
Weighted average shares
outstanding:
Basic................. 109,895(h)
Diluted............... 109,895(h)
Income per share:
Basic................. $ 0.04
Diluted............... $ 0.04
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-28
<PAGE>
NAVIGANT INTERNATIONAL, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED APRIL 26, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
INDIVIDUALLY INDIVIDUALLY
INSIGNIFICANT INSIGNIFICANT
NAVIGANT FISCAL 1998 FISCAL 1997
INTERNATIONAL, ASSOCIATED EVANS MCGREGOR OMNI TRAVEL PURCHASE PURCHASE
INC. TRAVEL TRAVEL TRAVEL TRAVEL CONSULTANTS ACQUISITIONS ACQUISITIONS
------------- ----------- --------- ----------- --------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 57,677 $ 31,289 $ 5,662 $ 22,445 $ 6,351 $ 11,850 $ 9,077 $ 2,630
Operating expenses...... 31,541 18,098 2,948 12,443 2,346 7,347 3,785 2,005
------------- ----------- --------- ----------- --------- ----------- ------ ------
Gross profit.......... 26,136 13,191 2,714 10,002 4,005 4,503 5,292 625
General and
administrative
expenses.............. 19,684 10,999 2,007 8,103 2,792 3,650 4,831 1,446
Amortization expense.... 548 213 18 120 63 8 8
Non-recurring
acquisition costs..... 1,156
------------- ----------- --------- ----------- --------- ----------- ------ ------
Operating income...... 4,748 1,979 689 1,779 1,213 790 453 (829)
Other (income) expense:
Interest expense...... 587 95 14 127 4 105 46
Interest income....... (445) (62) (1) (45) (66) (38)
Other................. 118 194
------------- ----------- --------- ----------- --------- ----------- ------ ------
Income before provision
for income taxes...... 4,488 1,752 676 1,697 1,275 685 445 (829)
Provision for income
taxes................. 1,145 1,048 (50) 104
------------- ----------- --------- ----------- --------- ----------- ------ ------
Net income.............. $ 3,343 $ 704 $ 676 $ 1,697 $ 1,325 $ 685 $ 341 $ (829)
------------- ----------- --------- ----------- --------- ----------- ------ ------
------------- ----------- --------- ----------- --------- ----------- ------ ------
Weighted average shares
outstanding:
Basic................. 90,026
Diluted............... 91,761
Income per share:
Basic................. $ 0.04
Diluted............... $ 0.04
<CAPTION>
PRO FORMA
PRO FORMA OFFERING PRO FORMA
ADJUSTMENTS SUBTOTAL ADJUSTMENTS COMBINED
------------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues................ $ $ 146,981 $ $
Operating expenses...... 80,513
------------- --------- ----------- -----------
Gross profit.......... 66,468
General and
administrative
expenses.............. (7,119)(c) 47,261
868(d)
Amortization expense.... 2,019(e) 2,997
Non-recurring
acquisition costs..... 1,156
------------- --------- ----------- -----------
Operating income...... 4,232 15,054
Other (income) expense:
Interest expense...... 290(f) 1,268
Interest income....... 657(f)
Other................. 312
------------- --------- ----------- -----------
Income before provision
for income taxes...... 3,285 13,474
Provision for income
taxes................. 3,951(g) 6,198
------------- --------- ----------- -----------
Net income.............. $ (666) $ 7,276 $ $
------------- --------- ----------- -----------
------------- --------- ----------- -----------
Weighted average shares
outstanding:
Basic................. 109,895(h)
Diluted............... 109,895(h)
Income per share:
Basic................. $ 0.07
Diluted............... $ 0.07
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-29
<PAGE>
NAVIGANT INTERNATIONAL, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS)
1. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
(a) Adjustment to reflect purchase price adjustments associated with the
Post January 24, 1998 Purchase Acquisition. The portion of the consideration
assigned to goodwill ($529,000) in the transaction accounted for under the
purchase method represents the excess of the cost over the fair market value of
the net assets acquired. The Company amortizes goodwill over a period of 35
years. The recoverability of the unamortized goodwill will be assessed on an
ongoing basis by comparing anticipated undiscounted future cash flows from
operations to net book value.
(b) Represents payment of debt with available cash and the allocation of a
total of $15,845 of debt to the Company at the date of the Distribution. The
incremental debt allocated to the Company has been reflected as a $6,101
distribution of retained earnings and the remaining $1,285 as a reduction of
capital.
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS
(c) Adjustment to reflect reductions in executive compensation as a result
of the elimination of certain executive positions and the renegotiations of
executive compensation agreements resulting from certain acquisitions. The
Company believes that these reductions are expected to remain in place for the
foreseeable future and are not reasonably likely to affect the operating
performance of the Company.
(d) Adjustment to reflect additional corporate overhead during the period
prior to the formation of the Corporate Travel Services division by U.S. Office
Products as if the division had been formed at May 1, 1996.
(e) Adjustment to reflect the increase in amortization expense relating to
goodwill recorded in purchase accounting related to the Fiscal 1998 Purchase
Acquisitions for the periods prior to the respective dates of acquisition. The
Company has recorded goodwill amortization in the historical financial
statements from the respective dates of acquisition forward. The goodwill is
being amortized over an estimated life of 35 years.
(f) Adjustment to reflect the increase in interest expense. Interest expense
is being calculated on the debt outstanding at January 24, 1998 of $15,845 at a
weighted average interest rate of approximately 8.0%. The adjustment also
reflects a reduction in interest income to zero as the Company expects to use
all available cash to repay debt rather than for investment purposes.
(g) Adjustment to calculate the provision for income taxes on the combined
pro forma results at an effective income tax rate of approximately 46%. The
difference between the effective tax rate of 46% and the statutory tax rate of
35% relates primarily to state income taxes and non-deductible goodwill. This
adjustment assumes that all companies were taxed at 46% regardless of how they
were taxed prior to being acquired by the Company, including those companies
that previously paid no taxes due to their Subchapter S status.
(h) The pro forma weighted average shares outstanding used to calculate pro
forma earnings per share is based upon 109,895 shares of common stock
outstanding for the periods. This is based upon the most current number of
shares of common stock of U.S. Office Products outstanding of 133,042, plus
5,000 shares expected to be tendered by U.S. Office Products option holders,
plus 8,890 shares related to the conversion of U.S. Office Products debt, less
37,037 shares expected to be repurchased by U.S. Office Products in the Tender
Offer, and assumes a distribution ratio of one share of Company Common Stock
F-30
<PAGE>
NAVIGANT INTERNATIONAL, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS)
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS (CONTINUED)
for each share of U.S. Office Products Common Stock. The actual distribution
ratio will be determined prior to effectiveness of the Registration Statement of
which this Prospectus is a part, and is expected to be less than one share of
the Company's Common Stock for every one share of U.S. Office Products Common
Stock.
F-31
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of
Associated Travel Services, Inc.:
We have audited the accompanying balance sheets of Associated Travel
Services, Inc. (the "Company") as of December 31, 1995 and 1996, and the related
statements of income, shareholder's equity and cash flows for the years ended
December 31, 1994, 1995 and 1996. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Associated Travel Services, Inc. as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for the years ended December 31, 1994, 1995 and 1996, in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Costa Mesa, California
May 22, 1997
F-32
<PAGE>
ASSOCIATED TRAVEL SERVICES, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996 AND MARCH 31, 1997
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- MARCH 31,
1995 1996 1997
------------- ------------ -------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents (Note 2).................................. $ 218,192 $ 2,584,552 $ 468,041
Short-term investment (Note 2)...................................... 10,000
Investment securities available for sale, at estimated fair value
(Notes 2 and 3)................................................... 1,359,894 116,575 167,073
Trade receivables, less allowance for doubtful accounts of $41,911,
$42,203 and $42,203 (unaudited), respectively..................... 1,938,435 2,711,671 3,383,654
Other receivables (Note 8).......................................... 699,865 1,655,783 1,541,389
Note receivable (Note 8)............................................ 200,000
Prepaid expenses.................................................... 149,487 93,895 96,390
Deferred income taxes (Note 4)...................................... 175,211 458,118 510,918
------------- ------------ -------------
Total current assets.............................................. 4,741,084 7,630,594 6,167,465
Deferred income taxes (Note 4)........................................ 32,721 32,721
Property and equipment (Note 2):
Furniture, fixtures and equipment................................... 2,227,482 2,789,023 4,158,883
Leasehold improvements.............................................. 321,088 366,009 347,464
------------- ------------ -------------
2,548,570 3,155,032 4,506,347
Less accumulated depreciation and amortization.................... (1,660,671) (2,032,366) (2,159,952)
------------- ------------ -------------
Property and equipment, net....................................... 887,899 1,122,666 2,346,395
Other assets (Note 2):
Goodwill, net....................................................... 427,824 388,931 1,462,395
Covenants not-to-compete, net....................................... 255,561 39,825 368,919
Customer lists, net................................................. 41,643 26,912 1,484,231
Other, net.......................................................... 90,712 61,258 69,637
------------- ------------ -------------
Total other assets................................................ 815,740 516,926 3,385,182
------------- ------------ -------------
$ 6,444,723 $ 9,302,907 $ 11,931,763
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE>
ASSOCIATED TRAVEL SERVICES, INC.
BALANCE SHEETS (CONTINUED)
AS OF DECEMBER 31, 1995 AND 1996 AND MARCH 31, 1997
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- MARCH 31,
1995 1996 1997
------------- ------------ -------------
<S> <C> <C> <C>
(UNAUDITED)
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt (Note 7).......................... $ 235,281 $ 117,580 $ 557,579
Accounts payable.................................................... 1,125,209 1,063,485 1,550,609
Accrued expenses.................................................... 520,961 1,481,006 1,426,109
Accrued payroll and related costs................................... 937,385 1,645,706 1,650,706
Deferred revenue and customer deposits.............................. 215,013 850,015 901,515
------------- ------------ -------------
Total current liabilities......................................... 3,033,849 5,157,792 6,086,518
Deferred income taxes (Note 4)........................................ 58,474
Long-term debt (Note 7)............................................... 1,870,402 1,055,520 2,551,267
Commitments and contingencies (Note 5)
Shareholder's equity (Notes 2 and 3):
Common stock, no par value; 11,000,000 shares authorized; 10,000,088
shares issued and outstanding..................................... 682,080 682,080 682,080
Additional paid-in capital.......................................... 43,505 43,505 43,505
Retained earnings................................................... 785,433 2,355,717 2,560,100
Net unrealized gain (loss) on investment securities available for
sale, net of deferred tax of $25,079, $5,528 and $5,528
(unaudited), respectively......................................... (29,020) 8,293 8,293
------------- ------------ -------------
Total shareholder's equity........................................ 1,481,998 3,089,595 3,293,978
------------- ------------ -------------
$ 6,444,723 $ 9,302,907 $ 11,931,763
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE>
ASSOCIATED TRAVEL SERVICES, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
YEAR ENDED DECEMBER 31,
------------------------------------------- ----------------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Travel commissions and fees (Note
2).................................. $ 20,541,061 $ 22,849,253 $ 26,304,860 $ 6,022,588 $ 8,765,598
Rebates (Note 2)...................... (4,028,845) (5,976,240) (6,186,654) (1,345,466) (1,230,457)
------------- ------------- ------------- ------------- -------------
Travel commissions and fees, net...... 16,512,216 16,873,013 20,118,206 4,677,122 7,535,141
Operating Expenses--Selling, general
and administrative (Notes 5 and
9).................................. (15,231,476) (15,481,639) (17,846,826) (4,086,334) (7,165,894)
------------- ------------- ------------- ------------- -------------
Operating Income...................... 1,280,740 1,391,374 2,271,380 590,788 369,247
Other income (expense):
Interest expense...................... (188,291) (146,297) (102,539) (31,298) (50,566)
Investment income..................... 82,279 209,094 279,189 26,446 9,479
Other................................. (539,767) 93,603 197,672 16,484 35,067
------------- ------------- ------------- ------------- -------------
Other income (expense), net......... (645,779) 156,400 374,322 11,632 (6,020)
------------- ------------- ------------- ------------- -------------
Income before extraordinary item and
provision for income taxes.......... 634,961 1,547,774 2,645,702 602,420 363,227
Provision for income taxes (Notes 2
and 4).............................. (272,973) (629,995) (1,075,418) (259,758) (158,844)
------------- ------------- ------------- ------------- -------------
Net income............................ $ 361,988 $ 917,779 $ 1,570,284 $ 342,662 $ 204,383
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE>
ASSOCIATED TRAVEL SERVICES, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
NET
UNREALIZED
(LOSS) GAIN
COMMON STOCK ADDITIONAL RETAINED ON
-------------------------- PAID-IN EARNINGS INVESTMENT
SHARES AMOUNT CAPITAL (DEFICIT) SECURITIES TOTAL
------------ ------------ ---------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES,
January 1, 1994............. 10,000,088 $ 682,080 $ 43,505 $ (494,334) $ -- $ 231,251
Net income.................... 361,988 361,988
Net unrealized loss on
investment securities
available for sale
(Note 3).................... (65,333) (65,333)
------------ ------------ ---------- ------------ ------------- ------------
BALANCES,
December 31, 1994........... 10,000,088 682,080 43,505 (132,346) (65,333) 527,906
Net income.................... 917,779 917,779
Net unrealized gain on
investment securities
available for sale
(Note 3).................... 36,313 36,313
------------ ------------ ---------- ------------ ------------- ------------
BALANCES,
December 31, 1995........... 10,000,088 682,080 43,505 785,433 (29,020) 1,481,998
Net income.................... 1,570,284 1,570,284
Net unrealized gain on
investment securities
available for sale
(Note 3).................... 37,313 37,313
------------ ------------ ---------- ------------ ------------- ------------
BALANCES,
December 31, 1996........... 10,000,088 682,080 43,505 2,355,717 8,293 3,089,595
Net income (Unaudited)........ 204,383 $ 204,383
------------ ------------ ---------- ------------ ------------- ------------
BALANCES,
March 31, 1997
(Unaudited)................. 10,000,088 $ 682,080 $ 43,505 $ 2,560,100 $ 8,293 $ 3,293,978
------------ ------------ ---------- ------------ ------------- ------------
------------ ------------ ---------- ------------ ------------- ------------
</TABLE>
See accompanying notes to financial statements.
F-36
<PAGE>
ASSOCIATED TRAVEL SERVICES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- -----------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................... $ 361,988 $ 917,779 $ 1,570,284 $ 342,662 $ 204,384
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 578,431 584,465 664,718 125,527 189,276
Realized gain on disposal of investments........ (110,988) (45,698) (131,356) 0 0
Bad debt expense................................ 26,964 40,435 0 (649)
Deferred income taxes........................... (442,789) 248,067 (404,709) 116,830 (52,800)
Loss on disposal of property and equipment...... 9,643 263 2,433
Changes in assets and liabilities:
Trade receivables............................... 225,670 (1,063,805) (813,671) 172,151 (671,334)
Other receivables............................... (81,262) (162,902) (955,918) (167,727) 114,394
Prepaid expenses................................ 75,186 (34,592) 85,046 33,695 (2,495)
Income taxes receivable......................... 203,389 0 0
Accounts payable................................ 16,024 (61,724) 90,000 487,124
Accrued expenses................................ 309,348 (389,809) 960,045 131,533 (54,897)
Accrued payroll and related costs............... 32,893 20,434 708,321 17,373 5,000
Deferred revenue and customer deposits.......... 37,459 82,222 635,002 (215,013) 51,500
----------- ----------- ----------- --------- ------------
Net cash provided by operating activities....... 1,189,325 199,149 2,306,116 647,294 271,936
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities............... (2,589,105) (3,229,309) (8,079,244) (126,326) (50,498)
Proceeds from sale of investment securities..... 2,020,208 3,617,096 9,511,839 0 10,000
Acquisition of travel agency.................... (2,000,000)
(Increase) decrease in note receivable.......... (200,000) 200,000 0 0
Purchase of property and equipment.............. (261,178) (274,693) (639,768) (55,013) (368,897)
Increase in other assets........................ (52,818) (121,421) 85,203
----------- ----------- ----------- --------- ------------
Net cash (used in) provided by investing
activities.................................... (1,082,893) 113,094 992,827 (302,760) (2,324,192)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt........ 138,269 (79,251) 0
Repayments of long-term debt.................... (575,180) (485,598) (932,583) 0 (64,255)
----------- ----------- ----------- --------- ------------
Net cash used in financing activities........... (436,911) (485,598) (932,583) (79,251) (64,255)
----------- ----------- ----------- --------- ------------
Net (decrease) increase in cash and cash
equivalents................................... (330,479) (173,355) 2,366,360 265,283 (2,116,511)
Cash and cash equivalents, beginning of year.... 722,026 391,547 218,192 218,192 2,584,552
----------- ----------- ----------- --------- ------------
Cash and cash equivalents, end of year.......... $ 391,547 $ 218,192 $ 2,584,552 $ 483,475 $ 468,041
----------- ----------- ----------- --------- ------------
----------- ----------- ----------- --------- ------------
SUPPLEMENTAL INFORMATION
CASH PAID DURING THE YEAR FOR:
Interest........................................ $ 191,766 $ 179,853 $ 101,955 $ 703 $ 20,000
----------- ----------- ----------- --------- ------------
----------- ----------- ----------- --------- ------------
Income taxes.................................... $ 573,794 $ 248,745 $ 1,176,875 $ 38,259 $ 301,500
----------- ----------- ----------- --------- ------------
----------- ----------- ----------- --------- ------------
</TABLE>
F-37
<PAGE>
ASSOCIATED TRAVEL SERVICES, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
The Company purchased various assets of Sunbelt Travel, Inc., a Texas
corporation, and Sunbelt Travel of Houston, Inc., a Texas corporation,
(collectively, Sunbelt) for $2,000,000 in exchange for the issuance of a
long-term note for $2,000,000. In conjunction with the acquisition, assets and
liabilities were assumed as follows:
<TABLE>
<S> <C> <C>
Customer lists acquired..................................................... $1,461,000
Convenant not to compete.................................................... $ 400,000
Property and equipment...................................................... $ 139,000
Long-Term Debt Issued....................................................... $2,000,000
</TABLE>
See accompanying notes to financial statements.
F-38
<PAGE>
ASSOCIATED TRAVEL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
1. GENERAL
OPERATIONS--Associated Travel Services, Inc. (the "Company"), a California
corporation, was incorporated on July 24, 1979. The Company is in the travel
agency business and has offices located in several states, primarily California.
INTERIM UNAUDITED FINANCIAL INFORMATION--In the opinion of management, the
accompanying unaudited financial statements contain all adjustments (consisting
only of various normal accruals) necessary to present fairly the Company's
financial position, results of operations and cash flows. The financial position
at March 31, 1997 is not necessarily indicative of the financial position to be
expected at December 31, 1997 and the results of operations for the three months
ended March 31, 1997 are not necessarily indicative of the results of operations
to be expected for the year ending December 31, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR--The Company operates on a fiscal year ending on the Sunday
closest to December 31. For fiscal 1994, the last day was January 1, 1995. For
fiscal 1995, the last day was December 31, 1995. For fiscal 1996, the last day
was December 29, 1996. For convenience of presentation, the Company has
indicated its fiscal years end as December 31, 1994, 1995 and 1996.
CASH EQUIVALENTS--Cash equivalents include highly-liquid investments with
original maturities of 90 days or less.
SHORT-TERM INVESTMENT--Short-term investment consists of a certificate of
deposit with an original maturity of greater than three months and a remaining
maturity of less than one year. Short-term investment is stated at cost which
approximates market value.
INVESTMENT SECURITIES--The Company has classified its investment portfolio
as "available for sale." In accordance with Statement of Financial Accounting
Standards (SFAS) No. 115, investments classified as available for sale are
carried at fair value, and unrealized gains and losses, net of applicable income
taxes, are reported as a separate component of shareholder's equity.
Investments consist principally of marketable equity securities, tax-exempt
bonds and taxable bonds with maturities in excess of 90 days. Marketable equity
securities are not considered cash equivalents for purposes of the statement of
cash flows. The cost of marketable equity securities sold is based on the
average cost of all shares of each security held at the time of sale.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost. The
Company provides for depreciation and amortization of the cost of property and
equipment, principally on the straight-line method over the estimated useful
lives or lease periods, as applicable. Useful lives range from three to five
years. Depreciation and amortization expense amounted to $337,418, $352,085 and
$395,357 for the years ended December 31, 1994, 1995 and 1996, respectively.
GOODWILL--Goodwill, which relates to the acquisition of Sunbelt, is being
amortized on the straight-line method over 20 years. Accumulated amortization of
goodwill amounted to $487,864 and $526,757 at December 31, 1995 and 1996,
respectively. The Company periodically evaluates the recoverability of goodwill
by comparing the carrying value of goodwill to estimated future operating income
from the related operations.
ACQUISITIONS OF TRAVEL AGENCIES--The Company periodically buys the assets of
travel agencies in certain prime locations. These transactions are treated as
purchases of assets. Assets acquired typically include covenants not-to-compete,
customer lists, and property and equipment (Note 10).
F-39
<PAGE>
ASSOCIATED TRAVEL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (CONTINUED)
COVENANTS NOT-TO-COMPETE--In conjunction with the acquisition of certain
travel agencies, the Company has negotiated covenants not-to-compete with the
prior owners. These agreements are being amortized on the straight-line method
over the periods specified in the agreements, which range from three to five
years. Accumulated amortization of covenants not-to-compete amounted to $674,939
and $890,676 at December 31, 1995 and 1996, respectively.
CUSTOMER LISTS--Customer lists purchased in connection with the acquisition
of certain travel agencies are being amortized using the straight-line method
over the shorter of their useful lives or ten years. Accumulated amortization of
customer lists amounted to $105,257 and $119,987 at December 31, 1995 and 1996,
respectively.
REVENUE RECOGNITION--Travel commissions and fees from ticketing,
reservations and other transaction services are recognized as earned. Included
in such revenues are certain amounts based on the volume of business with
various travel vendors. The amount which the Company will receive relative to
any given fiscal year is determined by the travel vendors, generally on a
quarterly basis.
REBATES--Rebates represent a portion of the travel commissions earned by the
Company which are rebated to certain commercial customers based on business
volume and other factors. Rebates are recognized when the travel commissions are
earned from ticketing, reservations and other transaction services.
GROSS REVENUES--Gross revenues, presented for information purposes,
represent the gross amount of transportation ticket revenue generated for and on
behalf of air, ground and sea carriers and other travel-related services sold by
the Company and on which the Company earns commissions and fees.
INCOME TAXES--The Company recognizes income tax expense and deferred taxes
in accordance with SFAS No. 109.
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 at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
STOCK SPLIT--On November 30, 1996, the Company amended its Articles of
Incorporation to increase the number of authorized shares of common stock from
5,000,000 to 11,000,000 and effected a 9.905-for-one stock split of its common
stock. All share amounts included in the accompanying financial statements and
footnotes have been restated to reflect the stock split.
LONG-LIVED ASSETS--The Company accounts for the impairment and disposition
of long-lived assets in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. In
accordance with SFAS No. 121, long-lived assets to be held are reviewed for
events or changes in circumstances which indicate that their carrying value may
not be recoverable. The Company periodically reviews the carrying value of
long-lived assets to determine whether or not an impairment to such value has
occurred.
RECLASSIFICATIONS--Certain reclassifications have been made to the 1994 and
1995 financial statements to conform to the 1996 presentation.
F-40
<PAGE>
ASSOCIATED TRAVEL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (CONTINUED)
3. INVESTMENT SECURITIES AVAILABLE FOR SALE
The following table summarizes the Company's investment securities available
for sale as of December 31.
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
<CAPTION>
1995
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
Taxable bonds................................................ $ 500,388 $ 13,576 $ (900) $ 513,064
Equity securities............................................ 913,605 10,145 (76,920) 846,830
------------ ----------- ----------- ------------
Total available for sale................................... $ 1,413,993 $ 23,721 $ (77,820) $ 1,359,894
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
<CAPTION>
1996
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
Taxable bonds................................................ $ 100,599 $ 9,938 $ -- $ 110,537
Equity securities............................................ 2,155 3,883 $ -- 6,038
------------ ----------- ----------- ------------
Total available for sale................................... $ 102,754 $ 13,821 $ -- $ 116,575
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
The contractual maturities of investments at December 31 are shown below.
Expected maturities may differ from contractual maturities.
<TABLE>
<CAPTION>
1995 1996
-------------------------- ------------------------
ESTIMATED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Taxable bonds:
Due in one year or less.................................. $ 14,795 $ 14,795 $ -- $ --
Due after ten years...................................... 485,593 498,269 100,599 110,537
------------ ------------ ------------ ----------
500,388 513,064 100,599 110,537
Equity securities.......................................... 913,605 846,830 2,155 6,038
------------ ------------ ------------ ----------
$ 1,413,993 $ 1,359,894 $ 102,754 $ 116,575
------------ ------------ ------------ ----------
------------ ------------ ------------ ----------
</TABLE>
The Company determined that certain marked table securities are available
for use in current operations and, accordingly, classified such securities as
current assets without regard to the securities' contractual maturity dates.
F-41
<PAGE>
ASSOCIATED TRAVEL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (CONTINUED)
4. INCOME TAXES
Components of the provision for income taxes for the year sended December 31
are as follows:
<TABLE>
<CAPTION>
1995 1996
----------- ------------
<S> <C> <C>
Current income taxes:
Federal.............................................................................. $ 282,836 $ 1,104,936
State................................................................................ 99,092 347,934
----------- ------------
Total current income taxes....................................................... 381,928 1,452,870
Deferred income taxes:
Federal.............................................................................. 211,542 (265,674)
State................................................................................ 36,525 (111,778)
----------- ------------
Total deferred income taxes...................................................... 248,067 (377,452)
----------- ------------
Total provision for income taxes....................................................... $ 629,995 $ 1,075,418
----------- ------------
----------- ------------
</TABLE>
The following is a reconciliation of the provision for income taxes computed
by applying the federal statutory tax rate to pretax income and the recorded
provision for income taxes for the years ended December 31:
<TABLE>
<CAPTION>
1994 1995 1996
--------------------- --------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
AMOUNT % AMOUNT % AMOUNT %
---------- --- ---------- --- ------------ ---
Statutory federal income tax............................. $ 222,236 35% $ 541,721 35% $ 925,995 35%
State tax, net of federal benefit........................ 41,373 7% 89,507 6% 158,742 6%
Amortization of intangibles.............................. 13,612 2% 13,224 1% 14,911 1%
Other.................................................... (4,248) (1)% (14,457) (1)% (24,230) (1)%
---------- --- ---------- --- ------------ ---
Total provision for income taxes......................... $ 272,973 43% $ 629,995 41% $ 1,075,418 41%
---------- --- ---------- --- ------------ ---
---------- --- ---------- --- ------------ ---
</TABLE>
F-42
<PAGE>
ASSOCIATED TRAVEL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (CONTINUED)
4. INCOME TAXES (CONTINUED)
The major components of the Company's deferred income taxes are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Accrued vacation and bonuses............................................. $ 111,291 $ 109,981 $ 202,376
Deferred revenue......................................................... 259,077
State income taxes....................................................... 44,824 33,691
Allowance for doubtful accounts.......................................... 10,752 18,147 17,998
Amortization of intangibles.............................................. 81,680 123,205 213,278
Litigation settlement accrual............................................ 270,683
Other.................................................................... 49,287 13,392 26,736
----------- ----------- -----------
Total deferred tax assets............................................ 568,517 298,416 719,465
Deferred tax liabilities:
Book versus tax basis in property and equipment, after depreciation and
amortization........................................................... (203,713) (181,679) (128,418)
Unrealized gain on investment securities................................. (5,528)
State income taxes....................................................... (44,630)
Other.................................................................... (50,050)
----------- ----------- -----------
Total deferred tax liabilities....................................... (203,713) (181,679) (228,626)
----------- ----------- -----------
Deferred income taxes, net................................................. $ 364,804 $ 116,737 $ 490,839
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Management believes it is more likely than not that the Company will utilize
a portion of its deferred tax assets by applying them against taxable income to
be generated in future years. The Company estimates that the majority of its
deferred tax assets will be realized during the next three years.
5. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS--The Company has entered into operating leases for its
sales and administrative offices, certain equipment and automobiles, which
expire at various dates through 1999. At December 31, 1996, future minimum lease
payments under noncancelable operating leases which have initial or remaining
terms in excess of one year are as follows:
<TABLE>
<CAPTION>
OFFICE EQUIPMENT AND
FISCAL YEAR FACILITIES AUTOMOBILES TOTAL
- --------------------------------------------------------------------- ------------ -------------- ------------
<S> <C> <C> <C>
1997................................................................. $ 616,859 $ 46,600 $ 663,459
1998................................................................. 439,596 36,217 475,813
1999................................................................. 176,948 31,290 208,238
2000................................................................. 154,578 2,666 157,244
2001................................................................. 125,056 125,056
------------ -------------- ------------
$ 1,513,037 $ 116,773 $ 1,629,810
------------ -------------- ------------
------------ -------------- ------------
</TABLE>
Rent expense was $709,254, $622,497 and $702,008 for the years ended
December 31, 1994, 1995 and 1996, respectively.
F-43
<PAGE>
ASSOCIATED TRAVEL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
RESERVATION SYSTEM--The Company entered into an operating lease agreement
with a major airline for use of the airline's reservation system. The agreement
states that no lease payments have to be made by the Company if the Company
maintains a specified level of transactions per terminal per month. In the event
the Company does not achieve this average transaction level, it is required to
pay an amount per terminal, per month, per transaction deficiency.
LITIGATION:
(I) LITIGATION WITH DEVELOPER OF CERTAIN OF THE COMPANY'S QUALITY CONTROL
SOFTWARE--The Company has been named in a lawsuit alleging breach of an alleged
joint venture agreement, breach of fiduciary duty, breach of contract, bad faith
denial of existence of a contract and conversion. The formal lawsuit was
dismissed on May 14, 1996, concurrent with the parties entering into a
settlement agreement. Such settlement agreement specifies the manner in which
the settlement amount is to be determined. As the settlement amount has not been
finalized, the ultimate outcome of this matter cannot presently be determined.
Accordingly, no provision for any loss that may result upon resolution of this
matter has been made in the accompanying financial statements.
(II) LITIGATION WITH PRIOR OWNER OF AN ACQUIRED TRAVEL AGENCY--The Company
was party to arbitration which arose from the fiscal year 1993 termination (as
employees) of the prior owners of an acquired travel agency. The matter was
arbitrated in November and December 1994, and the Company paid approximately
$632,000 in 1995, in full payment of all amounts owing under the employment
agreement of one of said employees and all other matters related to this
litigation. Such amount was fully expensed in the fiscal 1994 financial
statements.
(III) NORMAL COURSE OF BUSINESS LITIGATION--The Company is involved in
litigation arising in the normal course of business. It is the opinion of
management that the outcome of this litigation will have no material adverse
effect on the financial position of the Company.
BONUS AGREEMENT--In February 1989, the Company entered into a deferred bonus
agreement with an officer which entitles such officer to 5% of all consideration
received in the event of a sale of the Company. Pursuant to the terms of the
agreement, the officer must be employed with the Company at the time of the sale
in order to receive such benefits. As the Company has no liability to the
officer if a sale is not consummated, no compensation expense has been
recognized as of December 31, 1996 by the Company related to this agreement.
STOCK APPRECIATION RIGHTS--In July 1992, the Company granted 100,000 stock
appreciation rights units to an officer which entitles the holder to receive a
cash payment equal to any increase between the unit's initial value and the
value upon the exercise of the units. The initial value is zero for 50,000 of
the units and $.85 per unit for the remaining 50,000 units. The rights to the
units vest over a period of seven years. The Company recorded compensation
expense of approximately $10,000 in 1996 related to such stock appreciation
rights.
6. LINE OF CREDIT
The Company has available two credit facilities with a commercial bank that
expire on March 1, 1998. Under the terms of the first facility, a line of credit
is available under which the Company may borrow up to $1,000,000 through April
15, 1997, at which time the maximum available borrowings will be reduced to
$600,000. Borrowings thereunder bear interest at the bank's prime rate plus .5%
and are collateralized by substantially all of the Company's assets. As of
December 31, 1995 and 1996, no amounts were outstanding
F-44
<PAGE>
ASSOCIATED TRAVEL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (CONTINUED)
6. LINE OF CREDIT (CONTINUED)
on the line. This facility also provides for standby letters of credit up to
$150,000. This letter of credit expires on March 2, 1997. The terms of the
second facility provide for a standby letter of credit not to exceed $1,082,500.
The maximum amount available reduces to $866,000 on February 11, 2000 and to
$433,000 on February 11, 2001. These facilities are guaranteed by the sole
shareholder. No amounts were outstanding on the letters of credit as of December
31, 1996.
7. LONG-TERM DEBT
Long-term debt at December 31 consists of the following:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
5.7% unsecured promissory note to shareholder, with interest payable in monthly
installments through November 25, 2003, principal due in full on December 1, 2003... $ 1,742,776 $ 1,042,776
Noninterest-bearing leasehold improvement loan, principal due in monthly installments
of $1,417, maturing October 1, 1998................................................. 46,747 29,744
Unsecured promissory note, subordinated to all other debt, personally guaranteed by
the sole shareholder with interest at the daily average of the bank's prime interest
rate for the preceding calendar year, principal due in October 1997................. 81,160 40,580
Unsecured promissory note, subordinated to all other debt, personally guaranteed by
the sole shareholder with interest at 6.25%, repaid in 1996......................... 15,000
8 1/2% unsecured promissory note, personally guaranteed by the sole shareholder,
principal due in fiscal 1997........................................................ 120,000 60,000
Unsecured promissory note with interest at 9% per annum through October 1995 and 12%
per annum from November 1995 through October 1996, repaid in 1996................... 100,000
------------ ------------
Total debt............................................................................ 2,105,683 1,173,100
Current portion....................................................................... (235,281) (117,580)
------------ ------------
$ 1,870,402 $ 1,055,520
------------ ------------
------------ ------------
</TABLE>
Future principal payments required on long-term debt are as follows:
<TABLE>
<CAPTION>
SUBORDINATED
PROMISSORY
FISCAL YEAR NOTE OTHER TOTAL
- ----------------------------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
1997................................................................... $ 40,580 $ 77,000 $ 117,580
1998................................................................... 12,744 12,744
1999...................................................................
2000...................................................................
2001...................................................................
Thereafter............................................................. 1,042,776 1,042,776
------------ ------------ ------------
$ 40,580 $ 1,132,520 $ 1,173,100
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-45
<PAGE>
ASSOCIATED TRAVEL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (CONTINUED)
8. RELATED-PARTY TRANSACTIONS
The Company pays certain expenses on behalf of an affiliated entity. The
Company is subsequently reimbursed by the affiliate for such amounts. Accounts
receivable from the affiliate were $687,696 and $1,399,165 at December 31, 1995
and 1996, respectively, and have been included in other receivables in the
accompanying balance sheets. The Company also had a note receivable from its
sole shareholder at December 31, 1995 in the amount of $200,000 which bore
interest at 6% and was repaid during 1996.
9. EMPLOYEE BENEFIT PLANS
The Associated Travel Services, Inc. Cash Option Profit-Sharing Plan (the
Plan) is a defined contribution plan covering substantially all employees who
have completed at least 1,000 hours of service. The Plan, which commenced
January 1, 1985, is subject to the provisions of the Employee Retirement Income
Security Act of 1974 and is qualified under Section 401(k) of the Internal
Revenue Code and, therefore, is exempt from federal and state income taxes. The
Company's contributions amounted to $55,629, $56,229 and $60,000 for the years
ended December 31, 1994, 1995 and 1996, respectively, and are included in
selling, general and administrative expenses in the accompanying financial
statements.
10. SUBSEQUENT EVENT
ACQUISITION--On January 6, 1997, the Company acquired the travel agency
business and substantially all of the related assets of Sunbelt Travel, Inc., a
Texas corporation, and Sunbelt Travel of Houston, Inc., a Texas corporation,
(collectively, Sunbelt). The aggregate purchase price of the acquisition was
$3,000,000, consisting of $2,000,000 in cash, and a $1,000,000 promissory note.
The promissory note is collateralized by an irrevocable letter of credit issued
by a bank. This acquisition was accounted for as a purchase.
In connection with the purchase, the Company entered into an employment
agreement and two consulting agreements expiring on December 31, 1998 with the
three former stockholders of Sunbelt. Minimum annual aggregate compensation
under those agreements is $91,000 plus an annual travel account of $20,000. The
Company has also agreed to additional aggregate compensation ranging from a
minimum of $300,000 to a maximum of $500,000, annually, based on the pre-tax
profit of the Company during 1997 and 1998. This compensation is due annually on
March 15, 1998 and 1999. As a condition of the purchase, the Company has pledged
280,024 shares of the Company's common stock as collateral for the additional
compensation.
POTENTIAL SALE--The Company is currently negotiating the potential sale of
the Company to outside investors. There can be no assurance that the sale will
be consummated.
F-46
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Boards of Directors and Shareholders of
Evans Travel Group, Inc. and Evans Consulting Services, Inc.
In our opinion, the accompanying combined balance sheet and the related
combined statements of income and retained earnings and of cash flows present
fairly, in all material respects, the financial position of Evans Travel Group,
Inc. and its subsidiary and Evans Consulting Services, Inc. (collectively, the
"Company") at July 25, 1997, and the results of their operations and their cash
flows for the year then ended 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 audit. We conducted our audit of these financial
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 audit provides a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Denver, Colorado
February 3, 1998
F-47
<PAGE>
EVANS TRAVEL GROUP, INC. AND EVANS CONSULTING SERVICES, INC.
COMBINED BALANCE SHEET
JULY 25, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 629,263
Receivables, less allowance for doubtful accounts of $13,328.................. 345,449
Other receivables............................................................. 637,434
Receivable from shareholder................................................... 95,816
Other current assets.......................................................... 19,359
---------
Total current assets...................................................... 1,727,321
Property and equipment, net..................................................... 128,476
Intangible assets, net of accumulated amortization of $318,865.................. 271,887
Other assets.................................................................... 1,313
---------
Total assets.............................................................. $2,128,997
---------
---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 24,592
Accrued liabilities:
Compensation................................................................ 49,427
Rebates..................................................................... 85,375
Customer deposits........................................................... 77,293
Other....................................................................... 4,508
Income taxes payable.......................................................... 41,000
Current portion of notes payable.............................................. 52,664
Current portion of deferred income............................................ 156,757
---------
Total current liabilities................................................. 491,616
Notes payable................................................................... 79,778
Deferred income................................................................. 298,670
---------
Total liabilities......................................................... 870,064
Commitments (Note 4)
Shareholders' equity:
Common stock (no par value; 300 shares authorized;
299 shares issued and outstanding)............................................
Additional paid-in capital.................................................... 91,746
Retained earnings............................................................. 1,167,187
---------
Total shareholders' equity................................................ 1,258,933
---------
Total liabilities and shareholders' equity................................ $2,128,997
---------
---------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-48
<PAGE>
EVANS TRAVEL GROUP, INC. AND EVANS CONSULTING SERVICES, INC.
COMBINED STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED JULY 25, 1997
<TABLE>
<S> <C>
Commission revenue.............................................................. $4,214,177
Other operating revenue......................................................... 1,907,971
---------
Total revenue............................................................... 6,122,148
Rebates......................................................................... 317,716
---------
Net revenue..................................................................... 5,804,432
Operating expenses:
Salaries...................................................................... 3,830,521
General and administrative.................................................... 1,670,718
---------
Total operating expenses.................................................... 5,501,239
---------
Income from operations.......................................................... 303,193
Other income (expense):
Interest income............................................................... 16,224
Interest expense.............................................................. (16,560)
---------
Total other income (expense)................................................ (336)
---------
Income before income taxes...................................................... 302,857
Income tax expense.............................................................. 19,984
---------
Net income...................................................................... 282,873
Retained earnings at beginning of year.......................................... 884,314
---------
Retained earnings at end of year................................................ $1,167,187
---------
---------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-49
<PAGE>
EVANS TRAVEL GROUP, INC. AND CONSULTING SERVICES, INC.
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JULY 25, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................................... $ 282,873
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................ 107,371
Deferred revenue............................................................. 307,427
Change in assets and liabilities:
Receivables.............................................................. (38,237)
Other receivables........................................................ (460,334)
Other assets............................................................. (4,912)
Accounts payable......................................................... (141,536)
Income taxes payable..................................................... 17,000
Accrued liabilities...................................................... (9,186)
---------
Net cash provided by operating activities................................ 60,466
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................................. (21,194)
Cash proceeds from sale of assets................................................ 42,521
---------
Net cash provided by investing activities................................ 21,327
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in receivable from shareholder............................................ 36,619
Payments on long-term debt....................................................... (131,191)
---------
Net cash used in financing activities.................................... (94,572)
---------
Net decrease in cash and cash equivalents........................................ (12,779)
Cash and cash equivalents at beginning of year................................... 642,042
---------
Cash and cash equivalents at end of year......................................... $ 629,263
---------
---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest........................................................... $ 16,558
---------
---------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-50
<PAGE>
EVANS TRAVEL GROUP, INC. AND EVANS CONSULTING SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. REPORTING ENTITY AND BASIS OF ACCOUNTING
Effective July 25, 1997, Evans Consulting Services, Inc. was contributed to
Evans Travel Group, Inc. (collectively, the "Company"), and a subsidiary of U.S.
Office Products Company, a Delaware company, merged with Evans Travel Group,
Inc. The Company is a full-service travel agency, providing reservation services
and information for travel, lodging and tours to commercial, individual and
group customers from offices throughout Louisiana and northern Florida. The
Company's operations are primarily concentrated in one market segment--airline
travel--and its customers are geographically concentrated primarily in
Louisiana; management considers a downturn in this market segment and
geographical location to be unlikely.
The Company's combined financial statements includes the balances of Evans
Travel Group, Inc. and its wholly owned subsidiary, and Evans Consulting
Services, Inc. Both companies have common ownership and operate in the same line
of business. All significant intercompany balances and transactions have been
eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Commissions from ticketing, reservations and other transportation services
are recognized when the ticket is validated or reservation utilized. Revenue
from certain incentive plans offered by major airlines are accrued as earned.
The Company sells tours sponsored by other companies. Commissions received
from the sale of tours are recognized, net of estimated cancellation
adjustments, when payment is made to the tour company. All customer receipts for
such tours are recorded as a customer deposit liability until paid.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents generally consist of money market funds, for which cost approximates
fair value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
assets, generally five to seven years. Capital leases and leasehold improvements
are amortized over the shorter of their economic useful lives or the lease term.
INTANGIBLE ASSETS
The cost of purchased companies in excess of the underlying fair value of
net assets at the date of acquisition are recorded as goodwill and amortized
over five years on a straight-line basis. Purchase price allocated to covenants
not-to-compete are amortized over the term of the agreement which is typically
five years. As of July 25, 1997, intangible assets consisted of net goodwill of
$202,000, net covenants not-to-compete of $56,000 and other intangible assets of
$13,887. The carrying value of intangible assets is assessed for recoverability
by management based on an analysis of undiscounted expected future cash flows
F-51
<PAGE>
EVANS TRAVEL GROUP, INC. AND EVANS CONSULTING SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
from the related acquired entities. The Company believes that there has been no
impairment thereof as of July 25, 1997.
DEFERRED INCOME
The Company received a one-time promotional support payment from the entity
that leases the Company its reservation system. The Company is required to
utilize the reservation system throughout the contract term and there is
substantial penalty for early termination of the contract. The Company has
deferred the payment and is recognizing income using the straight-line method
over the five year term of the contract.
INCOME TAXES
Prior to January 1, 1997, Evans Travel Group, Inc. accounted for income
taxes in accordance with the provisions of Statement of Financial Accounting
Standards No. 109. Deferred income taxes are provided for temporary differences
between the financial statement carrying amounts and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. As of January 1, 1997, there were no
deferred tax assets or liabilities.
Effective January 1, 1997, the Evans Travel Group, Inc. was granted
S-Corporation reporting status by the Internal Revenue Service. The notice of
acceptance was received in May 1997. As a result, there is no federal or state
income tax liability of Evans Travel Group, Inc. for the period from January 1,
1997 through July 25, 1997 reflected in the combined financial statements. Evans
Consulting Services, Inc. has been an S-Corporation since inception. Any
liability arising during this period is the responsibility of the shareholders
of the Company. The income tax payable of $41,000 and tax expense of $20,000
relates to tax liabilities arising prior to January 1, 1997 which were paid in
August 1997. The Company's S corporation status terminated on consummation of
the merger discussed in Note 1 above.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, receivables and payables and long-term debt, approximate
their fair values.
USE OF ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of certain assets and
liabilities. Actual results could differ from those estimates. Management
believes that the estimates used are reasonable.
F-52
<PAGE>
EVANS TRAVEL GROUP, INC. AND EVANS CONSULTING SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at July 25, 1997:
<TABLE>
<S> <C>
Furniture and fixtures............................................ $ 230,560
Computer and telephone equipment.................................. 38,512
Computer software................................................. 23,804
---------
292,876
Less: accumulated depreciation and amortization................... 164,400
---------
Net property and equipment........................................ $ 128,476
---------
---------
</TABLE>
4. COMMITMENTS
The Company leases certain office space and furniture under noncancelable
operating leases. Rent expense for the year ended July 25, 1997 was
approximately $74,000. Future minimum lease payments under these operating
leases as of July 25, 1997 are as follows:
<TABLE>
<S> <C>
1998.............................................................. $ 162,400
1999.............................................................. 150,200
2000.............................................................. 85,400
2001.............................................................. 42,600
---------
Total............................................................. $ 440,600
---------
---------
</TABLE>
5. RELATED PARTY TRANSACTIONS
The $95,816 receivable from shareholder at July 25, 1997 was paid in full
during August 1997. Additionally, immediately following the merger with U.S.
Office Products Company discussed in Note 1, real estate with a book value of
approximately $210,000 was sold to the shareholder for the assumption of a note
payable aggregating $167,479 and cash of $42,521. The book value approximated
fair market value.
6. INDEBTEDNESS
The Company's outstanding indebtedness at July 25, 1997 is comprised of the
following:
<TABLE>
<S> <C>
Promissory note to former shareholder, interest at 8%, payable
monthly installments of $376 principal plus interest through
December 1, 1999................................................ $ 9,873
Promissory note to former shareholder, noninterest bearing,
payable monthly installments of $3,150 through December 1,
1999............................................................ 90,138
Various capital lease obligations, payable in monthly installments
of principal plus interest through October 2001................. 32,431
---------
132,442
Less current maturities........................................... 52,664
---------
Long-term portion of notes payable................................ $ 79,778
---------
---------
</TABLE>
F-53
<PAGE>
EVANS TRAVEL GROUP, INC. AND EVANS CONSULTING SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. INDEBTEDNESS (CONTINUED)
Scheduled maturities at July 25, 1997 are as follows:
<TABLE>
<S> <C>
1998.............................................................. $ 52,664
1999.............................................................. 49,951
2000.............................................................. 23,663
2001.............................................................. 6,164
---------
$ 132,442
---------
---------
</TABLE>
7. EMPLOYEE BENEFIT PLAN
The Company has established a 401(k) defined contribution plan to provide
benefits based on a percentage of contributions made by eligible employees.
During the year ended July 25, 1997, the Company contributed approximately
$18,000 to this plan.
F-54
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders of
McGregor Travel Management, Inc.
We have audited the accompanying balance sheets of McGregor Travel
Management, Inc. as of December 31, 1995 and 1996, and the related statements of
income and retained earnings, and cash flows for the years then ended. 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 audit.
We conducted our audits in accordance with generally accepted auditing
standards. These standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of McGregor Travel Management,
Inc. as of December 31, 1995 and 1996, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
As discussed in Note 10 to the financial statements, certain errors
resulting in the understatement of accounts receivable, goodwill and
stockholders' equity as of December 31, 1995 and 1996, were discovered by
management in the current year. Accordingly, the 1995 and 1996 financial
statements have been restated (and an adjustment has been made to retained
earnings as of January 1, 1995) to correct these errors.
Walter J. McKeever & Company
Greenwich, Connecticut
March 6, 1997, Except for Note 10, Note 12 and the last paragraph of Note 1,
as to which the date is January 29, 1998
F-55
<PAGE>
MCGREGOR TRAVEL MANAGEMENT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996 SEPTEMBER 30, 1997
------------ ------------ ------------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current Assets
Cash and Cash Equivalents....................................... $ 785,600 $ 611,063 $ 1,909,576
Marketable Equity Securities (Cost 1995: $128,625
Note 1)....................................................... 328,500
Accounts Receivable--Trade...................................... 207,705 155,539 398,401
--Other (Note 10)......................................... 925,156 1,552,456 1,537,019
Due from Employees (Note 5)..................................... 68,250 85,858 2,002,927
Prepaid Insurance............................................... 97,007 28,816 20,982
Prepaid Expenses--Other......................................... 80,025 15,533 15,516
------------ ------------ ------------------
Total Current Assets........................................ 2,492,243 2,449,265 5,884,421
------------ ------------ ------------------
Property and Equipment
Automobiles..................................................... 251,136 75,792 181,156
Office Furniture and Equipment.................................. 360,634 641,897 1,134,769
Real Property................................................... 325,500 325,500 323,451
Leasehold Improvements.......................................... 212,263 272,925 299,742
------------ ------------ ------------------
1,149,533 1,316,114 1,939,118
Less Accumulated Depreciation................................... 314,888 358,042 461,866
------------ ------------ ------------------
Net Property and Equipment.................................. 834,645 958,072 1,477,252
------------ ------------ ------------------
Intangible Assets (Note 1)
Goodwill (Note 10).............................................. 2,437,154 2,437,154 3,387,084
Customer List................................................... 148,418 148,418 148,418
Restrictive Covenant............................................ 186,919 186,919 555,585
------------ ------------ ------------------
2,772,491 2,772,491 4,091,087
Less Accumulated Amortization............................... 503,173 641,649 765,642
------------ ------------ ------------------
Net Intangible Assets............................................. 2,269,318 2,130,842 3,325,445
Other Assets
Cash Surrender Value of Life...................................... 52,232 10,943 10,943
Insurance
Building Deposit (Note 4)....................................... 100,000
Security Deposits............................................... 7,957 7,957 7,957
Other........................................................... 1,400 1,400 24,372
------------ ------------ ------------------
Total Other Assets.......................................... 161,589 20,300 43,272
------------ ------------ ------------------
Total Assets.............................................. $ 5,757,795 $ 5,558,479 $ 10,730,390
------------ ------------ ------------------
------------ ------------ ------------------
</TABLE>
F-56
<PAGE>
MCGREGOR TRAVEL MANAGEMENT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996 SEPTEMBER 30, 1997
------------ ------------ ------------------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable................................................ $ 1,182,897 $ 1,637,395 $ 2,835,397
Accrued Taxes................................................... 16,532 37,044 1,654
Accrued Interest................................................ 43,397 30,544 30,434
Deferred Income Taxes (Note 6).................................. 418,786 713,213
Note Payable, Bank Line of Credit (Note 2)...................... 617,250 1,493,274
Notes Payable, Shareholders (Note 5)............................ 983,702 41,550 366,550
Current Portion of Long-Term Debt (Note 3)...................... 786,217 899,325 1,223,699
------------ ------------ ------------------
Total Current Liabilities................................... 3,431,531 3,976,321 5,951,008
Noncurrent Liabilities
Long-term debt, less current Portion (Note 3)................... 922,493 176,666 35,051
------------ ------------ ------------------
Total Liabilities........................................... 4,354,024 4,152,987 5,986,059
------------ ------------ ------------------
Stockholders' Equity
Common Stock, no par value......................................
5,000 shares authorized.......................................
1,000 shares issued (Note 10)................................. 165,333 165,333 165,333
Retained Earnings............................................... 1,038,563 1,240,159 4,578,998
Net unrealized gain on current
Marketable securities (Note 1)................................ 199,875
------------ ------------ ------------------
Total Stockholders' Equity.................................. 1,403,771 1,405,492 4,744,331
------------ ------------ ------------------
Total Liabilities and Stockholders' Equity.................... $ 5,757,795 $ 5,558,479 $ 10,730,390
------------ ------------ ------------------
------------ ------------ ------------------
</TABLE>
See auditor's report and accompanying notes to financial statements.
F-57
<PAGE>
MCGREGOR TRAVEL MANAGEMENT, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
NINE MONTHS ENDED:
YEAR ENDED DECEMBER 31 : ----------------------------
---------------------------- SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
INCOME
Commissions Earned................................ $ 10,257,855 $ 19,292,560 $ 15,625,051 $ 18,065,333
------------- ------------- ------------- -------------
Total Income.................................... 10,257,855 19,292,560 15,625,051 18,065,333
OPERATING EXPENSES
Salaries.......................................... 5,255,320 10,585,438 7,814,144 7,251,445
General and administrative........................ 4,227,246 8,378,982 6,934,108 8,091,213
------------- ------------- ------------- -------------
Total Operating Expenses........................ 9,482,566 18,964,420 14,748,252 15,342,658
------------- ------------- ------------- -------------
Income From Operations.......................... 775,289 328,140 876,799 2,722,675
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSES)
Interest Income................................... 37,233 43,116 26,105 65,702
Interest Expense.................................. (230,457) (179,742) (135,067) (153,716)
Gains realized on sale of marketable securities 368,858
Other, net........................................ (25,665) (16,468) (6,706) (1,415)
------------- ------------- ------------- -------------
Other Income (Expenses), Net.................... (218,889) 215,764 (115,668) (89,429)
------------- ------------- ------------- -------------
Income Before Income Taxes...................... 556,400 543,904 761,131 2,633,246
------------- ------------- ------------- -------------
PROVISION FOR TAXES
Federal (Note 6).................................. 230,918 259,325 185,470 (548,795)
State (Note 6).................................... 67,888 82,983 52,990 (156,798)
------------- ------------- ------------- -------------
Total Taxes..................................... 298,806 342,308 238,460 (705,593)
------------- ------------- ------------- -------------
Net Income.................................... 257,594 201,596 522,671 3,338,839
Retained Earnings, January 1........................ 772,710 1,038,563 1,038,563 1,240,159
Prior Period Adjustments, Net of Applicable Income
Taxes of $109,620--Note 10)....................... 8,259
------------- ------------- ------------- -------------
Retained Earnings, end of period.................... $ 1,038,563 $ 1,240,159 $ 1,561,234 $ 4,578,998
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See auditor's report and accompanying notes to financial statements.
F-58
<PAGE>
MCGREGOR TRAVEL MANAGEMENT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31: NINE MONTHS ENDED:
------------------------- ----------------------------
<S> <C> <C> <C> <C>
SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1996 1997
----------- ------------ ------------- -------------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from Operating Activities:
Net Income............................................ $ 257,594 $ 201,596 $ 522,671 $ 3,338,839
----------- ------------ ------------- -------------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and Amortization......................... 256,932 250,158 173,585 227,817
Gains realized, sales of marketable securities........ (368,858)
Loss on Disposition of Fixed Assets................... 16,426
Noncash officers' compensation (Note 5)
Marketable securities............................... 708,174
Automobiles......................................... 106,817
Building Deposit.................................... 100,000
Cash value of life insurance........................ 65,732
Decrease (Increase) in Accounts Receivable............ (93,252) 52,166 (45,814) (242,862)
Decrease (Increase) in Other Receivables.............. (573,071) (627,300) (696,036) 15,437
Increase in Due From Employees........................ (8,823) (17,608) (9,336) (1,917,069)
Decrease (Increase) in Prepaid Insurance.............. (71,313) 68,191 38,579 7,834
Decrease (Increase) in Prepaid Expenses-- Other....... (68,032) 64,492 112,421 (22,956)
Decrease in Prepaid Taxes............................. 15,375
Increase in Accounts Payable and Accrued Expenses....... 565,599 441,645 2,149,803 1,197,893
Increase (Decrease) in Accrued Taxes.................. (2,636) 20,512 33,853 (35,390)
Increase in Deferred Taxes............................ 274,512 294,427 227,641 (713,213)
----------- ------------ ------------- -------------
Total Adjustments....................................... 311,717 1,158,548 1,984,696 (1,482,509)
----------- ------------ ------------- -------------
Net Cash provided by Operating Activities............... $ 569,311 $ 1,360,144 $ 2,507,367 $ 1,856,330
----------- ------------ ------------- -------------
</TABLE>
See auditor's report and accompanying notes to financial statements.
F-59
<PAGE>
MCGREGOR TRAVEL MANAGEMENT, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31: NINE MONTHS ENDED :
------------------------ ----------------------------
<S> <C> <C> <C> <C>
SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1996 1997
----------- ----------- ------------- -------------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from Investing Activities:
Purchases of marketable securities....................... $ (117,625) $ (210,692) $ (64,625)
Purchases of property and equipment...................... (154,250) (341,926) (289,090) $ (623,004)
Increase in cash surrender value life insurance.......... (24,605) (24,443)
Proceeds on sale of fixed assets......................... 6,848
Purchase of travel agency................................ (103,000) (1,318,596)
Decrease in security deposit............................. 1,750
----------- ----------- ------------- -------------
Net cash used by Investing Activities.................... (390,882) (577,061) (353,715) (1,941,600)
----------- ----------- ------------- -------------
Cash flows from Financing Activities
Borrowing on line of credit.............................. 617,250 2,596,279
Borrowing from stockholders.............................. 983,702 325,000
Borrowing on long-term notes Payable..................... 50,000 741,728
Principal payments, loans from Stockholders.............. (452,595) (942,152) (983,702)
Principal payments on line of credit..................... (1,720,255)
Principal payments, long-term notes Payable.............. (387,898) (632,718) (383,083) (558,969)
----------- ----------- ------------- -------------
Cash (used) provided by Financing Activities............. 193,209 (957,620) (1,366,785) 1,383,783
----------- ----------- ------------- -------------
Net (decrease) increase in cash.......................... 371,638 (174,537) 786,867 1,298,513
Cash and cash equivalents, beginning of period........... 413,962 785,600 785,600 611,063
----------- ----------- ------------- -------------
Cash and cash equivalents, end of period................. $ 785,600 $ 611,063 $ 1,572,467 $ 1,909,576
----------- ----------- ------------- -------------
----------- ----------- ------------- -------------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest expense....................................... $ 148,089 $ 192,595 $ 150,186 $ 80,006
----------- ----------- ------------- -------------
----------- ----------- ------------- -------------
Income taxes........................................... $ 26,930 $ 25,533 $ 14,201 $ 25,535
----------- ----------- ------------- -------------
----------- ----------- ------------- -------------
</TABLE>
See auditor's report and accompanying notes to financial statements.
F-60
<PAGE>
MCGREGOR TRAVEL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
McGregor Travel Management, Inc., incorporated in 1977, provides travel
management services to corporate clients throughout the U.S. Its main office is
located in Stamford, Connecticut. The Company's name was changed from McGregor
Travel, Inc. in 1995.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
MARKETABLE EQUITY SECURITIES
As required by Statement of Financial Accounting Standards No. 115 for years
beginning after December 15, 1993, the Company records its investments in
marketable equity securities at market value as of the balance sheet date.
Unrealized gains are reported in the Stockholders' Equity section of the balance
sheet.
PROPERTY AND EQUIPMENT
Property and Equipment are recorded at cost. Acquisitions made prior to 1989
are depreciated under the Accelerated Cost Recovery System (as modified by the
Tax Reform Act of 1986), using the applicable recovery periods. The difference
between straight-line and accelerated methods is considered to be immaterial for
those years. Personal property acquired after December 31, 1988 is depreciated
over five to seven years using the straight-line method for financial reporting
and accelerated methods for tax purposes. Real property is depreciated over 27
1/2 to 39 years using the straight-line method for both financial statement and
tax reporting purposes.
INTANGIBLE ASSETS
Intangible assets are recorded at cost. Intangible assets acquired in the
purchase of Riis family stock in 1993 (Note 10) and in connection with the
purchases of travel agencies in 1992 and 1995, are amortized over the following
estimated useful lives:
<TABLE>
<S> <C>
Goodwill...................................................... 25--40 years
Customer Lists................................................ 5 years
Restrictive Covenant.......................................... 3 years
</TABLE>
Goodwill is not amortized for tax purposes. In years prior to 1992, goodwill
was immaterial and was not amortized for financial statement purposes.
RECLASSIFICATION OF PRIOR YEAR'S STATEMENTS
In addition to the prior period adjustments described in Note 10, certain
items previously reported have been reclassified to conform with the current
year's presentation.
F-61
<PAGE>
MCGREGOR TRAVEL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
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.
INTERIM FINANCIAL DATA
The interim financial data as of September 30, 1997 and for the nine months
ended September 30, 1996 and 1997 is unaudited; however, in the opinion of
management of the Company, the interim data includes all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
results for the interim periods presented.
Effective January 1, 1997, the Company was granted S-Corporation reporting
status by the Internal Revenue Service. As a result, there is no federal or
state income tax liability of the Company for the period subsequent to January
1, 1997. Any liability arising during this period is the responsibility of the
shareholders of the Company. As a result of the election to be taxed under the
provisions of Subchapter S of the Internal Revenue Service, deferred income
taxes of $705,593 that existed prior to the election of Subchapter S have been
eliminated and recognized as income during the nine months ended September 30,
1997.
NOTE 2. LINE OF CREDIT
On November 6, 1996 the Company obtained a line of credit from Merrill Lynch
Business Financial Services, Inc. which allows the Company to borrow up to
$1,400,000. This credit limit was increased to $1,700,000 in January 1997.
Amounts borrowed under the line of credit must be repaid November 30, 1997.
Interest at the 30-Day Commercial Paper Rate, as published in the Wall Street
Journal, plus 2.3% is payable monthly. Principal outstanding at December 31,
1996 was $617,250.
In connection with the line of credit the Company paid in advance an annual
fee of $7,000 of which $6,417 is included in prepaid expenses at December 31,
1996. An additional fee of $1,500 was paid in January 1997 when the credit limit
was increased.
The line of credit is secured by marketable securities owned by stockholders
Douglas R. Knight and Sam A. DeFranco and held in Merrill Lynch pledged
collateral accounts.
F-62
<PAGE>
MCGREGOR TRAVEL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
NOTE 3. LONG-TERM NOTES PAYABLE
Long-term notes payable are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1996
------------ -------------
<S> <C> <C>
Notes payable to former shareholders (Note 10). Interest at prime plus 2% and
principal aggregating $112,745 payable quarterly from March 31, 1994 to March 31,
1995, based on a seven-year amortization of principal. Payments of interest and
principal aggregating $174,278 payable quarterly from June 30, 1995 to March 31,
1998, based on a three-year amortization of principal. Secured by Treasury stock
and guaranteed by Douglas Knight and Sam DeFranco.
The balances of the individual notes are:
John Riis............................................................................ $ 684,135 $ 431,778
Marie-Therese Riis................................................................... 228,042 143,924
Johan Riis (in trust)................................................................ 166,470 105,064
Elise Bohner......................................................................... 166,470 105,064
Mette Riis........................................................................... 166,470 105,064
Siri Riis............................................................................ 166,470 105,064
------------ -------------
Total............................................................................ 1,578,057 995,958
Mortgage note payable to Citibank, N.A. Interest at 12.00% and principal of $2,135
are payable monthly until April, 1997 when the remaining balance of $59,045 is due.
Secured by condominium............................................................. 91,070 65,450
Note payable to Jack Skloff (Note 11) Non-interest bearing. Principal payments of
$2,083, payable monthly until July 1, 1997......................................... 39,583 14,583
------------ -------------
Total................................................................................ 1,708,710 1,075,991
Less Current Portion................................................................. (786,217) (899,325)
------------ -------------
Long-Term Notes Payable.............................................................. $ 922,493 $ 176,666
------------ -------------
------------ -------------
</TABLE>
Long-term notes are scheduled to mature as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- --------------------------------------------------------------------------------
<S> <C>
1997.......................................................................... $ 899,325
1998.......................................................................... 176,666
------------
Total....................................................................... $ 1,075,991
------------
------------
</TABLE>
NOTE 4. COMMITMENTS
On November 30, 1996, the Company began leasing its headquarters in
Stamford, Connecticut, from DeFranco & Knight, LLC (Note 5), which bought the
building from John Riis (Note 10), the former landlord. The lease calls for
annual minimum lease payments of $190,091 for five years. The Company assumed
the lease of the Washington, DC agency purchased in 1995 (Note 11). This lease
had a remaining
F-63
<PAGE>
MCGREGOR TRAVEL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
NOTE 4. COMMITMENTS (CONTINUED)
term of 8 months at December 31, 1996. The Company has also entered into several
noncancellable leases for furniture and office equipment.
Future minimum payments under the leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ----------------------------------------------------------------------------------
<S> <C>
1997............................................................................ $ 257,696
1998............................................................................ 207,939
1999............................................................................ 193,066
2000............................................................................ 174,250
----------
Total......................................................................... $ 832,951
----------
----------
</TABLE>
The Company also has several other small leases for office space at branch
locations.
<TABLE>
<CAPTION>
Total Rent Expense is:
1995 1996
--------- ---------
<S> <C> <C>
Office Space.......................................... $ 305,924 $ 384,728
Furniture & Telephone................................. 133,723 140,668
--------- ---------
$ 439,647 $ 525,396
--------- ---------
--------- ---------
</TABLE>
The Company is committed to pay the following amounts to John Riis under the
covenant not to compete described in Note 10:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ----------------------------------------------------------------------------------
<S> <C>
1997............................................................................ $ 64,599
1998............................................................................ 64,599
1999............................................................................ 64,599
----------
Total......................................................................... $ 193,797
----------
----------
</TABLE>
Non-Compete Payments are included in salary expense in the year they are
paid.
NOTE 5. RELATED PARTY TRANSACTIONS
Starting in 1996, the Company has a client support agreement with McGregor
Travel Management (UK) Limited, a United Kingdom corporation owned by Douglas
Knight and Sam DeFranco. McGregor Travel Management (UK) Limited provided travel
management services to the clients of McGregor Travel Management, Inc. In
connection with this agreement the Company paid McGregor Travel Management (UK)
Limited $377,476 for 1996 This amount is included in client support
expense-overseas in the statement of income for 1996.
F-64
<PAGE>
MCGREGOR TRAVEL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
NOTE 5. RELATED PARTY TRANSACTIONS (CONTINUED)
Amounts due to and from McGregor Travel Management (UK) Limited are included
on the Company's balance sheets as follows:
<TABLE>
<S> <C>
Payable at December 31, 1996...................................... $ 283,849
Receivable at December 31, 1995................................... 80,025
</TABLE>
1996 transactions relating to demand notes payable to Douglas Knight and Sam
DeFranco were:
<TABLE>
<CAPTION>
DOUGLAS KNIGHT SAM DEFRANCO
-------------- -------------
<S> <C> <C>
Note payable balance 12/31/95..................................................... $ 507,620 $ 476,083
Principal Repaid in 1996.......................................................... (466,070) (476,083)
-------------- -------------
Note payable balance 12/31/96..................................................... $ 41,550 $ 0
-------------- -------------
-------------- -------------
Interest paid in 1996 at 12%...................................................... $ 15,280 $ 6,961
-------------- -------------
-------------- -------------
</TABLE>
The Company also made short-term advances of $23,167 to Mr. Knight and
$42,924 to Mr. DeFranco which are included in Due from Employees on the balance
sheet at December 31, 1996
During 1996 the Company transferred certain non-cash assets to Mr. Knight
and Mr. DeFranco. These amounts were included in their 1996 salaries:
<TABLE>
<S> <C>
Marketable securities............................................. $ 708,174
Automobiles....................................................... 106,817
Building deposit.................................................. 100,000
Cash value of life insurance...................................... 65,732
</TABLE>
NOTE 6. INCOME TAXES
Federal income tax expense is calculated after adding back to income
non-deductible expenses (mainly officers' life insurance premiums and
nondeductible meals and entertainment) totaling $157,750 in 1996 and $43,094 in
1995. Financial statement net income also differs from Federal taxable income
because of timing differences in reporting certain income items (Note 10), as
well as depreciation and amortization expense. These timing differences result
in deferred tax liabilities at December 31, 1996 and 1995.
F-65
<PAGE>
MCGREGOR TRAVEL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
NOTE 6. INCOME TAXES (CONTINUED)
Federal and State income tax amounts consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1995 1996
---------- ----------
FEDERAL INCOME TAX EXPENSE
Current tax expense....................................................................... $ 14,495 $ 30,735
Deferred tax expense...................................................................... 216,423 228,590
---------- ----------
Total................................................................................. $ 230,918 $ 259,325
---------- ----------
---------- ----------
STATE INCOME TAX EXPENSE
Current tax expense....................................................................... $ 9,799 $ 17,146
Deferred tax expense...................................................................... 58,089 65,837
---------- ----------
Total................................................................................. $ 67,888 $ 82,983
---------- ----------
---------- ----------
TOTAL DEFERRED TAX LIABILITY:
Federal................................................................................... $ 329,377 $ 557,967
State..................................................................................... 89,409 155,246
---------- ----------
Total................................................................................. $ 418,786 $ 713,213
---------- ----------
---------- ----------
</TABLE>
NOTE 7. RETIREMENT PLAN
The Company adopted a 401 (k) retirement plan effective July 1, 1990. All
employees are eligible to participate in the plan on the quarterly entry date
following completion of 6 months of employment and attainment of age 18. Each
participant may elect to contribute up to 15% of base compensation to an annual
maximum of $9,240 (adjusted annually for inflation). The Company matches 50% of
the first 5% of employee contributions (up to 2.50% of base compensation) for
participants employed on the last day of the plan year. Profit-sharing expense
was $39,996 in 1995 and $59,119 in 1996.
NOTE 8. DEPRECIATION
For the year ended December 31, 1995, depreciation expense of $110,679 and
$11,835 is included in general and administrative expenses and other expenses,
respectively. For the year ended December 31, 1996, depreciation expense of
$99,850 and $11,832 is included in general and administrative expenses and other
expenses, respectively.
NOTE 9. CONCENTRATION OF CREDIT RISK
At December 31, 1996, the Company had cash deposits at one banking
institution in excess of federally insured limits. A possible loss exists for
the amount in excess of $100,000.
NOTE 10. RESTATEMENT OF FINANCIAL STATEMENTS
On April 14, 1993, the Company repurchased 3,600 shares of its common stock
in return for notes payable to former stockholders John Riis, Marie-Therese Riis
and their children totaling $2,400,000 (Note 3). Also on April 14, 1993, a total
of 800 new shares were issued to remaining stockholders Douglas Knight
F-66
<PAGE>
MCGREGOR TRAVEL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
NOTE 10. RESTATEMENT OF FINANCIAL STATEMENTS (CONTINUED)
and Sam DeFranco for a total of $105,833. Because of the resulting change of
ownership, the $2,400,000 has been reclassified as goodwill and is being
amortized over 25 years according to generally accepted accounting principles.
Previously this transaction was treated as a purchase of treasury stock.
Also, income receivable from override commissions and SABRE automation
incentives earned in the fourth quarter of each year, totaling $894,094 as of
December 31, 1995 and $1,552,456 as of December 31, 1996 was not previously
considered to be accruable at year-end. This income has now been accrued and is
included in Accounts Receivable--Other on the Balance Sheet. Deferred taxes on
these amounts were $312,932 as of December 31, 1995 and $543,358 as of December
31, 1996.
The effect of these restatements on Retained Earnings at January 1, 1995 is
as follows:
<TABLE>
<S> <C>
Additional commission income receivable........................... $ 313,200
Amortization of goodwill.......................................... (164,000)
Deferred taxes.................................................... (140,941)
---------
Prior Period Adjustment, Net...................................... $ 8,259
---------
---------
</TABLE>
NOTE 11. PURCHASE OF TRAVEL AGENCY ASSETS
On July 1, 1995, the Company purchased the assets of the Washington, D.C.
travel agency, Dimensions Travel Company, Inc., from Jack Skloff for $150,000.
The assets are recorded at cost as follows:
<TABLE>
<S> <C>
Customer List..................................................... $ 50,000
Furniture & Equipment............................................. 50,000
Restrictive Covenant.............................................. 25,000
Goodwill.......................................................... 25,000
---------
Total......................................................... $ 150,000
---------
---------
</TABLE>
The assets were purchased for $100,000 down and a $50,000, 24 month,
non-interest bearing note, with a monthly payment of $2,083.33, commencing
August 1, 1995.
NOTE 12. SUBSEQUENT EVENT
Effective October 24, 1997, the Company and its stockholders entered into a
definitive agreement with U.S. Office Products Company ("U.S. Office Products")
pursuant to which U.S. Office Products acquired all outstanding shares of the
Company's common stock in exchange for common stock of U.S. Office Products.
F-67
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Omni Travel Service, Inc.:
In our opinion, the accompanying balance sheets and the related statements
of income and retained earnings and of cash flows present fairly, in all
material respects, the financial position of Omni Travel Service, Inc. at
December 31, 1996, and the results of their operations and their cash flows for
the year ended June 30, 1996 and the six months ended December 31, 1996, 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 financial 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.
As discussed in Note 10 of the financial statements, certain adjustments
have been made to the previously issued financial statements for the year ended
June 30, 1996. These adjustments were discovered subsequent to the issuance of
the financial statements. The financial statements have been restated to reflect
these corrections.
NARDELLA & TAYLOR
Lexington, Massachusetts
August 22, 1996, except for Note 10, as to which the date is January 30,
1998, for the audited financial statements as of June 30, 1996, and January 30,
1998 for the audited financial statements as of December 31, 1996
F-68
<PAGE>
OMNI TRAVEL SERVICE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and equivalents............................................................... $1,443,151 $ 1,435,442
Accounts receivable, trade......................................................... 318,500 328,383
Prepaid expenses and other current assets.......................................... 28,491 32,674
------------ ------------
Total current assets........................................................... 1,790,142 1,796,499
------------ ------------
Property and equipment, at cost (note 4)
Office furniture and equipment..................................................... 840,862 867,808
Computer equipment................................................................. 603,422 635,245
Leasehold improvements............................................................. 440,548 448,194
Motor vehicles..................................................................... 11,434 11,434
------------ ------------
1,896,266 1,962,681
Less accumulated depreciation.................................................. 1,114,024 1,162,023
------------ ------------
Property and equipment, net.................................................. 782,242 800,658
------------ ------------
Total assets................................................................. $2,572,384 $ 2,597,157
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.............................................. $ 343,653 $ 566,367
Deferred revenue................................................................... 388,648 337,629
Current maturities of capital lease obligation (note 4)............................ 18,341 12,730
------------ ------------
Total current liabilities...................................................... 750,642 916,726
Capital lease obligation, net of current maturities (note 4)......................... 3,280 --
Deferred rent........................................................................ 206,610 208,917
Deferred income taxes (note 6)....................................................... -- --
------------ ------------
Total liabilities.............................................................. 960,532 1,125,643
------------ ------------
Commitments and contingent liabilities (note 7)
Stockholders' equity:
Common stock, no par value; 100 shares authorized, issued and outstanding.......... 55,000 55,000
Retained earnings.................................................................. 1,556,852 1,416,514
------------ ------------
Total stockholders' equity..................................................... 1,611,852 1,471,514
------------ ------------
Total liabilities and stockholders' equity..................................... $2,572,384 $ 2,597,157
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-69
<PAGE>
OMNI TRAVEL SERVICE, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
------------- -----------------------------------------------
JUNE 30, DECEMBER 31, JUNE 30, JUNE 30,
1996 1996 1996 1997
------------- ------------- ----------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenues:
Sales.......................................... $ 49,934,464 $ 26,302,520 $ 22,403,211 $ 28,795,132
Direct commissions............................. 622,953 314,694 301,748 408,057
Override commissions........................... 520,918 202,171 311,813 199,988
Administrative and management fees (note 9).... 156,566 -- -- --
------------- ------------- ----------------- -------------
51,234,901 26,819,385 23,016,772 29,403,177
Cost of revenues................................. 45,518,045 23,817,096 20,320,222 26,057,637
------------- ------------- ----------------- -------------
Net commission revenue....................... 5,716,856 3,002,289 2,696,550 3,345,540
Selling, general and administrative expenses..... 5,620,614 2,474,588 2,553,851 2,663,645
------------- ------------- ----------------- -------------
Operating income............................. 96,242 527,701 142,699 681,895
------------- ------------- ----------------- -------------
Other income (expense):
Interest income (note 8)......................... 57,812 33,608 43,407 29,753
Interest expense................................. (6,112) (2,326) (2,752) (1,986)
Other income (expense)........................... (790) -- (7,579) --
------------- ------------- ----------------- -------------
Total other income (expense)................. 50,910 31,282 33,076 27,767
------------- ------------- ----------------- -------------
Income before income taxes................... 147,152 558,983 175,775 709,662
Income tax benefit (provision) (note 6).......... (54,850) 52,961 (54,850) --
------------- ------------- ----------------- -------------
Net income................................... 92,302 611,944 120,925 709,662
------------- ------------- ----------------- -------------
Retained earnings, beginning of period, as
previously stated.............................. 900,122 992,516 871,591 1,556,852
Prior period adjustment.......................... 92 -- -- --
------------- ------------- ----------------- -------------
Retained earnings, beginning of period, as
restated....................................... 900,214 992,516 871,591 1,556,852
Distributions to stockholders.................... -- (47,608) -- (850,000)
------------- ------------- ----------------- -------------
Retained earnings, end of period................. $ 992,516 $ 1,556,852 $ 992,516 $ 1,416,514
------------- ------------- ----------------- -------------
------------- ------------- ----------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-70
<PAGE>
OMNI TRAVEL SERVICE, INC.
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
----------- -----------------------------------------
<S> <C> <C> <C> <C>
JUNE 30, DECEMBER 31, JUNE 30, JUNE 30,
1996 1996 1996 1997
----------- ------------- ----------- -------------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 92,302 $ 611,944 $ 120,925 $ 709,662
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation....................................... 78,023 42,150 42,023 48,000
Deferred income taxes.............................. 5,905 (52,961) 5,907 --
Changes in operating assets and liabilities:
Accounts receivable, trade....................... (19,634) 64,632 (11,234) (9,883)
Refundable income taxes.......................... 24,077 -- 3,503 --
Prepaid expenses and other current assets........ (6,151) (12,917) 502,018 (4,183)
Accounts payable and accrued expenses............ (139,012) (156,455) (288,715) 222,714
Deferred revenue................................. 9,615 234,437 (38,789) (51,019)
Deferred rent.................................... 35,304 12,687 12,687 2,307
----------- ------------- ----------- -------------
Net cash provided by operating activities.............. 80,429 743,517 348,325 917,598
----------- ------------- ----------- -------------
Cash flows from investing activities:
Purchase of property and equipment..................... (73,534) (73,194) (51,657) (66,417)
----------- ------------- ----------- -------------
Cash flows from financing activities:
Repayment of advances to stockholder................... 486,200 -- -- --
Distributions to stockholders.......................... -- (47,608) -- (850,000)
Repayments of capital lease obligations................ (15,272) (8,364) (7,868) (8,890)
----------- ------------- ----------- -------------
Net cash provided (used) by financing activities....... 470,928 (55,972) (7,868) (858,890)
----------- ------------- ----------- -------------
Net increase (decrease) in cash and
equivalents.................................... 477,823 614,351 288,800 (7,709)
Cash and equivalents, beginning of period................ 350,977 828,800 540,000 1,443,151
----------- ------------- ----------- -------------
Cash and equivalents, end of period...................... $ 828,800 $ 1,443,151 $ 828,800 $ 1,435,442
----------- ------------- ----------- -------------
----------- ------------- ----------- -------------
Supplemental disclosures of cash flow information:
Cash paid for: Interest..................... $ 6,112 $ 2,326 $ 2,752 $ 1,986
----------- ------------- ----------- -------------
----------- ------------- ----------- -------------
Income taxes................... $ 15,870 $ 49,165 $ 5,085 $ --
----------- ------------- ----------- -------------
----------- ------------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-71
<PAGE>
OMNI TRAVEL SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
(1) INTERIM FINANCIAL DATA
The interim financial data for the six months ended June 30, 1996 and June
30, 1997 is unaudited, however, in the opinion of management of the Company, the
interim data includes all adjustments, consisting only of normal adjustments,
necessary for a fair presentation of the results for the interim periods
presented. All data presented in these notes for such periods is unaudited.
(2) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND NATURE OF BUSINESS
Omni Travel Service, Inc. (the "Company") was incorporated in March, 1979.
The Company is a full-service travel agency, providing reservation services and
information for travel, lodging and tours to commercial, individual and group
clients from offices in Cambridge, Massachusetts. The Company's operations are
primarily concentrated in one market segment--airline travel--and the customers
are geographically concentrated primarily in Massachusetts; management considers
a downturn in this market segment and geographical location to be unlikely.
Effective September 26, 1997, the Company and its stockholders entered into
a definitive agreement with U.S. Office Products Company ("U.S. Office
Products") pursuant to which U.S. Office Products acquired all outstanding
shares of the Company's common stock in exchange for common stock of U.S. Office
Products.
(b) REVENUE RECOGNITION
Commissions from ticketing, reservations and other transportation services
are recognized when the ticket is validated or reservation utilized. Revenue
from certain incentive plans offered by major airlines are accrued as earned.
The Company sells tours sponsored by other companies. Commissions received
from the sale of tours are recognized when payment is made to the tour company.
Costs for tours which have not yet departed are recorded as a deposit in
receivables and all customer receipts for such tours are recorded as a customer
deposit liability in deferred revenue.
(c) ACCOUNTS RECEIVABLE
Management has determined that all accounts receivable are collectible and
that there is no requirement for an allowance for doubtful accounts as of
December 31, 1996.
(d) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization is
provided using straight-line and accelerated methods over the estimated useful
lives of the assets.
(e) DEFERRED REVENUE
Deferred revenue represents travel revenue received in the current year
which relates to a future reporting period.
(f) INCOME TAXES
Prior to July 1, 1996, income taxes are accounted for in accordance with the
provisions of Statement of Financial Accounting Standards No. 109. Deferred
income tax assets and liabilities are computed annually
F-72
<PAGE>
OMNI TRAVEL SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
for differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
The provision for income taxes for the year ended June 30, 1996 includes
federal and state income taxes currently payable and those deferred because of
temporary differences between financial statement and tax bases of assets and
liabilities.
Effective on July 1, 1996, the Company was granted S-Corporation reporting
status by the Internal Revenue Service. As a result, there is no federal or
state income tax liability of the Company for the period subsequent to July 1,
1996. Any liability arising during this period is the responsibility of the
shareholders of the Company.
As a result of the election to be taxed under the provisions of Subchapter S
of the Internal Revenue Code, deferred income taxes in the amount of $52,961
that existed prior to the election of Subchapter S status have been eliminated
and recognized as income during the six months ended December 31, 1996.
(g) CASH AND EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments with an original maturity of three months or less
to be cash equivalents.
(h) CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to credit risk consist
principally of temporary cash investments and trade receivables. The Company
places its temporary cash investments ($1,443,151 at December 31, 1996) with
high quality financial institutions. At times such investments may be in excess
of the FDIC limit. The Company's policy with respect to the credit risk of trade
receivables is to evaluate, prior to completion of travel reservations, each
customer's financial condition and determine the amount of open credit to be
extended.
(i) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, including cash
and equivalents, receivables and payables and the capital lease obligation,
approximates fair market value.
(j) 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 amount of assets and liabilities and
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.
(3) LINE OF CREDIT
The Company has a line of credit agreement with a bank due upon demand,
bearing interest at the bank's prime rate plus 1% per annum (9.25% at December
31, 1996). The note is secured by substantially all assets of the Company. The
agreement is subject to an Intercreditor and Subordination Agreement between and
among the bank, the Company, its stockholders and a related party, Bow Street
Properties,
F-73
<PAGE>
OMNI TRAVEL SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) LINE OF CREDIT (CONTINUED)
Inc. (note 7). The maximum borrowings allowed under this agreement are $250,000.
At December 31, 1996, no borrowings were outstanding under this agreement.
The agreement is subject to various affirmative, negative and financial
covenants including, among others, profitability and debt to net worth
covenants. At December 31, 1996, the Company was deemed by the lending
institution to be in substantial compliance with the covenants.
(4) CAPITAL LEASE OBLIGATION
The Company leases certain office equipment under a capital lease. Equipment
held under the capital lease as of December 31, 1996 is as follows:
<TABLE>
<S> <C>
Cost............................................................... $ 65,722
Accumulated amortization........................................... 26,289
---------
Net book value..................................................... $ 39,433
---------
---------
</TABLE>
Future minimum lease payments due under the capital lease and the present
value of the net minimum lease payments as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
AMOUNT
---------
<S> <C>
1997............................................................................... $ 19,985
1998............................................................................... 3,331
---------
Total minimum lease payments....................................................... 23,316
Less amount representing interest.................................................. 1,695
---------
Present value of net minimum lease payments........................................ 21,621
Less current maturities............................................................ 18,341
---------
Capital lease obligation, net of current maturities................................ $ 3,280
---------
---------
</TABLE>
(5) PROFIT-SHARING RETIREMENT PLAN
The Company has in effect a qualified profit-sharing retirement plan
covering substantially all employees. The plan includes an employee thrift
savings plan established under Internal Revenue Code Section 401(k). Each
eligible participant may elect to defer up to 15% of compensation subject to
Internal Revenue Code limitations. The Company's profit-sharing contributions to
the plan are made at the discretion of the Board of Directors, but may not
exceed the maximum allowable deduction permitted under the Internal Revenue Code
at the time of the contribution. During the six months ended December 31, 1996
and the year ended June 30, 1996, the Company made no contributions to the plan.
F-74
<PAGE>
OMNI TRAVEL SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) INCOME TAXES
The provision for income taxes for the year ended June 30, 1996 is comprised
of the following:
<TABLE>
<S> <C>
Current provision:
Federal............................................................ $ 35,151
State.............................................................. 13,792
---------
48,943
---------
Deferred provision:
Federal............................................................ 4,549
State.............................................................. 1,358
---------
5,907
---------
$ 54,850
---------
---------
</TABLE>
Temporary differences which give rise to deferred tax liabilities are
comprised of financial and tax reporting depreciation differences.
The differences between the statutory federal income tax rate of 34% and
income taxes reported in the statement of income for the year ended June 30,
1996 are as follows:
<TABLE>
<S> <C>
Statutory rate..................................................... $ 47,273
Reduction due to graduated income tax rates........................ (7,573)
State and local taxes, net of federal benefit...................... 9,999
Other.............................................................. 5,151
---------
$ 54,850
---------
---------
</TABLE>
The federal and state income tax benefit for the six months ended December
31, 1996 is the result of the Company's election to be taxed under the
provisions of Subchapter S of the Internal Revenue Code, whereby deferred income
taxes in the amount of $52,961 that existed prior to the election of Subchapter
S status have been eliminated and recognized as income during the six months
ended December 31, 1996.
As a result of the Company's election of Subchapter S, there was no income
tax provision or benefit for the six months ended December 31, 1996 other than
the reversal of the deferred income taxes as discussed above.
(7) COMMITMENTS AND CONTINGENT LIABILITIES
The Company leased a sales office facility under a noncancellable operating
lease agreement which expired in December, 1995. The agreement required the
payment of utilities, real estate taxes and insurance. The Company also leases
certain vehicles under noncancellable operating leases expiring through
September, 2000 and additional equipment on a month to month basis. Rent expense
under these operating leases amounted to $15,550 for the six months ended
December 31, 1996 and $52,696 for the year ended June 30, 1996.
In addition, the Company leases its administrative and sales office facility
from Bow Street Properties, Inc., a related party (note 8), under a long-term
noncancellable operating lease agreement expiring in
F-75
<PAGE>
OMNI TRAVEL SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
December, 2001. The agreement provides for monthly rental payments, utilities,
real estate taxes, insurance and repairs. Total rent expense, excluding
operating expenses, paid to Bow Street Properties, Inc. amounted to $208,380 for
the six months ended December 31, 1996 and $406,830 for the year ended June 30,
1996.
At December 31, 1996, future minimum annual rental payments required under
the noncancellable operating leases, are as follows:
<TABLE>
<S> <C>
1998............................................................ $ 448,440
1999............................................................ 470,880
2000............................................................ 494,400
2001............................................................ 519,000
Thereafter...................................................... 265,800
---------
$2,198,520
---------
---------
</TABLE>
In connection with the Intercreditor and Subordination Agreement, the
Company has guaranteed certain debt obligations of Bow Street Properties, Inc.,
a related party, amounting to $1,125,000 as of December 31, 1996.
(8) RELATED PARTY TRANSACTIONS
The Company leases its administration and sales office from Bow Street
Properties, Inc., a corporation owned by the Company's principal stockholder. In
addition, the Company has guaranteed certain debt obligations of Bow Street
Properties, Inc. (note 7).
The Company, from time to time, has made interest bearing advances to a
stockholder. The advances, which are unsecured, bear interest at 6% per annum.
At December 31, 1996, no amounts were due from the stockholder. Interest income
earned and accrued on these advances during the year ended June 30, 1996
amounted to $29,772.
(9) CONTRACTUAL ARRANGEMENTS
During the year ended June 30, 1996, the Company, under a five-year
contractual agreement which expired in December 1995, provided administrative
and management services to another travel agency. Under this agreement, the
Company recorded all travel revenues, and related travel operating costs of the
agency. The Company received a management fee which is included in travel
revenues in the accompanying income statement. Management fees earned, net of
certain related operating costs, amounted to approximately 22% of the Company's
net income before taxes for the year ended June 30, 1996.
F-76
<PAGE>
OMNI TRAVEL SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(10) REISSUANCE ADJUSTMENTS
Two adjustments were made to the previously issued financial statements for
the year ended June 30, 1996. The net effect of these adjustments was a $92
increase in prior period retained earnings. However, the adjustments were made
to ensure adherence to generally accepted accounting principles. Detail of the
two reissuance adjustments follows:
(a) OVERRIDE COMMISSIONS
Subsequent to the issuance of the financial statements for the year ended
June 30, 1996, it was determined that the Company was not recording revenue from
override commissions in the proper periods. Accordingly, current year and prior
period adjustments were made to properly state the related accounts receivable,
revenue, expense, and retained earnings accounts. The net effect of these
adjustments was a $43,418 increase in override commissions revenue for the year
ended June 30, 1996 and a $158,711 increase in prior period retained earnings.
(b) DEFERRED RENT
Generally accepted accounting principles require that rental expense must be
recorded on a straight-line basis over the rental term. Previously, the Company
was expensing actual rent payments. Accordingly, adjustments were made to
properly record the related expense and retained earnings accounts. The net
effect of these adjustments was a $35,304 increase in rent expense for the year
ended June 30, 1996 and a $158,619 decrease to retained earnings.
(11) SUBSEQUENT EVENTS
During September and October 1997, the airlines implemented a commission cap
of 8% on all domestic travel (maximum commission on a round trip flight remained
$50) and international travel (no maximum commission amount) which should
negatively impact the Company's operating results, although an amount cannot be
determined at this time.
On November 7, 1997, the Company was released from its guaranty obligations
relating to the entity owned by the Company's principal shareholder (note 8).
F-77
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Boards of Directors and Shareholders
of Travel Consultants, Inc. and Envisions Vacations, Inc.
In our opinion, the accompanying combined balance sheet and the related
combined statements of income and retained earnings and of cash flows present
fairly, in all material respects, the financial position of Travel Consultants,
Inc. and Envisions Vacations, Inc. (collectively, the "Company") at October 24,
1997, and the results of their operations and their cash flows for the year then
ended 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 audit. We conducted our audit of these financial 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 audit provides a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Denver, Colorado
January 23, 1998
F-78
<PAGE>
TRAVEL CONSULTANTS, INC. AND ENVISION VACATIONS, INC.
COMBINED BALANCE SHEET
OCTOBER 24, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash.......................................................................... $ 3,018
Receivables, less allowance for doubtful accounts of $20,000.................. 1,410,799
Other receivables............................................................. 741,337
Receivable from affiliates.................................................... 911,124
Receivable from shareholders.................................................. 244,365
Other current assets.......................................................... 89,267
---------
Total current assets...................................................... 3,399,910
Property and equipment, net..................................................... 1,564,496
Intangible assets, net of accumulated amortization of $404,777.................. 234,814
Investments..................................................................... 156,355
Other........................................................................... 13,835
---------
Total assets.............................................................. $5,369,410
---------
---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.......................................... $ 186,037
Line of credit................................................................ 489,908
Accounts payable.............................................................. 1,683,431
Accrued liabilities:
Compensation................................................................ 357,653
Rebates..................................................................... 287,425
Other....................................................................... 347,255
Customer deposits............................................................. 306,164
Deferred income--current portion.............................................. 195,996
---------
Total current liabilities................................................. 3,853,869
Long-term debt.................................................................. 315,637
Deferred income--long-term portion.............................................. 192,004
---------
Total liabilities......................................................... 4,361,510
Commitments (Note 5)
Shareholders' equity:
Common stock ($1 par value; 100,000 shares authorized; 38,432 shares
issued)..................................................................... 38,432
Common stock ($5 par value; 60,000 shares authorized; 2,000 shares issued).... 10,000
Additional paid-in capital.................................................... 156,906
Retained earnings............................................................. 802,562
---------
Total shareholders' equity................................................ 1,007,900
---------
Total liabilities and shareholders' equity................................ $5,369,410
---------
---------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-79
<PAGE>
TRAVEL CONSULTANTS, INC. AND ENVISIONS VACATIONS, INC.
COMBINED STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED OCTOBER 24, 1997
<TABLE>
<S> <C>
Commission revenue.............................................................. $9,163,283
Other operating revenue......................................................... 3,510,597
---------
Total revenue............................................................... 12,673,880
Rebates......................................................................... 673,123
---------
Net revenue..................................................................... 12,000,757
Operating expenses:
Salaries...................................................................... 6,462,100
General and administrative.................................................... 4,453,509
---------
Total operating expenses.................................................... 10,915,609
---------
Income from operations.......................................................... 1,085,148
Interest expense................................................................ 109,466
---------
Net income...................................................................... 975,682
Retained deficit at beginning of year........................................... (173,120)
---------
Retained earnings at end of year................................................ $ 802,562
---------
---------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-80
<PAGE>
TRAVEL CONSULTANTS, INC. AND
ENVISIONS VACATIONS, INC.
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 24, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................................... $ 975,682
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................ 473,005
Deferred revenue............................................................. 54,000
Change in assets and liabilities:
Receivables................................................................ (44,260)
Other receivables.......................................................... (265,144)
Other assets............................................................... 33,645
Accounts payable........................................................... 614,392
Accrued liabilities........................................................ 19,481
---------
Net cash provided by operating activities................................ 1,860,801
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................................. (943,239)
Purchase of investments.......................................................... (98,098)
---------
Net cash used in investing activities.................................... (1,041,337)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in receivable from shareholders and affiliates...................... (389,641)
Payments on long-term debt....................................................... (266,713)
Net proceeds on line of credit................................................... 269,908
Payment of shareholder distributions............................................. (430,000)
---------
Net cash used in financing activities.................................... (816,446)
---------
Net increase in cash............................................................. 3,018
Cash at beginning of year........................................................ 0
---------
Cash at end of year.............................................................. $ 3,018
---------
---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest........................................................... $ 106,030
---------
---------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-81
<PAGE>
TRAVEL CONSULTANTS, INC. AND
ENVISIONS VACATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. REPORTING ENTITY AND BASIS OF ACCOUNTING
Effective October 24, 1997, a subsidiary of U.S. Office Products Company, a
Delaware company, merged with Travel Consultants, Inc. and Envision Vacations,
Inc. (collectively, the "Company"). Travel Consultants, Inc. is a full-service
provider of travel reservation services and information to commercial,
individual and group customers. Envision Vacations, Inc. is a leisure travel
company servicing the needs of specific member groups and individual customers.
The Company is located in Grand Rapids, Michigan. The Company's operations are
primarily concentrated in one market segment--airline travel--and the customers
are geographically concentrated in Michigan; management considers a downturn in
this market segment and geographical location to be unlikely.
The Company's combined financial statements include the accounts of Travel
Consultants, Inc. and Envision Vacations, Inc. Both companies have common
ownership and operate in the same line of business. All significant intercompany
accounts and transactions have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Commissions from ticketing, reservations and other transportation services
are recognized when the ticket is validated or reservation utilized. Revenue
from certain incentive plans offered by major airlines are accrued as earned.
The Company sells tours sponsored by other companies. Commissions received
from the sale of tours are recognized, net of estimated cancellation
adjustments, when payment is made to the tour company. All customer receipts for
such tours are recorded as a customer deposit liability until paid.
INVESTMENTS
All investments are classified as available-for-sale and are available to
support current operations or to take advantage of other investment
opportunities. Accordingly, these investments have been recorded at cost which
approximates fair market value. There were no significant differences between
cost and estimated fair value at October 24, 1997.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
assets, generally five to seven years, and leasehold improvements are amortized
over the shorter of their economic useful lives or the lease term.
INTANGIBLE ASSETS
The cost of purchased companies in excess of the underlying fair value of
net assets at the date of acquisition are recorded as goodwill and amortized
over 15 years on a straight-line basis. Purchase price allocated to covenants
not-to-compete are amortized over the term of the agreement which is typically
five years. As of October 24, 1997, intangible assets consisted of net covenants
not-to-compete of $221,867 and other assets of $12,947. The carrying value of
intangible assets is assessed for recoverability by management based on an
analysis of undiscounted expected future cash flows from the related acquired
entities. The Company believes that there has been no impairment thereof as of
October 24, 1997.
F-82
<PAGE>
TRAVEL CONSULTANTS, INC. AND
ENVISIONS VACATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DEFERRED INCOME
The Company received a one-time promotional support payment from the entity
that leases the Company its reservation system. The Company is required to
utilize the reservation system throughout the contract term and there is
substantial penalty for early termination of the contract. The Company has
deferred the payment and is recognizing income using the straight-line method
over the five year term of the contract.
INCOME TAXES
The Company is an S corporation for income tax purposes and, accordingly,
any income tax liabilities are the responsibility of the shareholders. The
Company's S corporation status terminated on consummation of the merger
discussed in Note 1 above.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, receivables and payables and long-term debt, approximate
their fair values.
USE OF ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of certain assets and
liabilities. Actual results could differ from those estimates. Management
believes that the estimates used are reasonable.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at October 24, 1997:
<TABLE>
<S> <C>
Office and computer equipment................................... $2,437,391
Furniture and fixtures.......................................... 983,778
Leasehold improvements.......................................... 158,875
Vehicles........................................................ 24,886
---------
3,604,930
Less: accumulated depreciation and amortization................. 2,040,434
---------
Net property and equipment...................................... $1,564,496
---------
---------
</TABLE>
F-83
<PAGE>
TRAVEL CONSULTANTS, INC. AND
ENVISIONS VACATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT
<TABLE>
<S> <C>
Promissory notes, interest at 9.3%, payable in monthly
installments of $13,600 principal plus interest through
November 1, 2000................................................ $ 444,674
Non-interest bearing promissory note, payable in annual
installments of $57,000 through November 4, 1997................ 57,000
---------
501,674
Less current maturities........................................... 186,037
---------
Long-term debt.................................................... $ 315,637
---------
---------
</TABLE>
The Company's borrowed funds provided by commercial promissory notes require
maintenance of certain ratios, and are secured by substantially all assets of
the Company.
Scheduled maturities of long-term debt at October 24, 1997 are as follows:
<TABLE>
<S> <C>
1998.............................................................. $ 186,037
1999.............................................................. 141,562
2000.............................................................. 154,900
2001.............................................................. 19,175
---------
$ 501,674
---------
---------
</TABLE>
At October 24, 1997, the Company has drawn $489,908 on a $1,250,000 line of
credit with a financial institution which bears interest at the bank's prime
rate (8.5% at October 24, 1997) and expires on April 1, 1998. The line is
secured by the Company's accounts receivable and other assets. The Company also
maintains a $90,000 letter of credit which was unused at October 24, 1997.
5. COMMITMENTS
The Company leases office space under various noncancelable operating leases
for several locations. Rent expense for the year ended October 24, 1997 was
approximately $901,104. Future minimum rental payments for these leases are
summarized as follows as of October 24, 1997:
<TABLE>
<S> <C>
1998............................................................ $ 810,000
1999............................................................ 719,000
2000............................................................ 688,000
2001............................................................ 607,000
2002............................................................ 238,000
---------
$3,062,000
---------
---------
</TABLE>
The Company has guaranteed approximately $2,644,000 of outstanding debt
related to the office space leased from a related party as described in Note 7.
F-84
<PAGE>
TRAVEL CONSULTANTS, INC. AND
ENVISIONS VACATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. EMPLOYEE BENEFIT PLAN
The Company has established a 401(k) defined contribution plan to provide
benefits based on a percentage of contributions made by eligible employees.
During the year ended October 24, 1997, the Company contributed approximately
$39,000 to this plan.
7. RELATED PARTY TRANSACTIONS
The Company leases office space for its headquarters from an entity in which
the Company's shareholders are partners. Rent expense for this facility was
approximately $195,000 during the year ended October 24, 1997.
In conjunction with the merger discussed in Note 1, U.S. Office Products
Company purchased the headquarters facility for $3,125,000 in stock prior to the
assumption of related debt of $2,644,112 on October 24, 1997. Additionally,
$901,000 of receivables from shareholders and affiliates was distributed in the
form of a dividend to shareholders in conjunction with the merger discussed in
Note 1.
F-85
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the fees and expenses payable by Navigant in
connection with the issuance and distribution of the securities. All of such
expenses except the Securities and Exchange Commission registration fee are
estimated:
<TABLE>
<S> <C>
SEC Registration................................................................... $ 29,024
Nasdaq Listing Fee................................................................. $ *
Legal Fees and Expenses............................................................ $ *
Accounting Fees and Expenses....................................................... $ *
Printing Fees and Expenses......................................................... $ *
Miscellaneous...................................................................... $ *
---------
Total.............................................................................. $ *
</TABLE>
- ------------------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Nine of the Certificate of Incorporation provides that Navigant
shall indemnify its directors and officers to the fullest extent permitted by
the General Corporation Law of the State of Delaware.
Section 145 of the General Corporation Law of the State of Delaware permits
a corporation, under specified circumstances, to indemnify its directors,
officers, employees or agents against expenses (including attorney's fees),
judgments, fines and amounts paid in settlements actually and reasonably
incurred by them in connection with any action, suit or proceeding brought by
third parties by reason of the fact that they were or are directors, officers,
employees or agents of the corporation, if such directors, officers, employees
or agents acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action, i.e., one by or in the right of the
corporation, indemnification may be made only for expenses actually and
reasonably incurred by directors, officers, employees or agents in connection
with the defense or settlement of an action or suit, and only with respect to a
matter as to which they shall have acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made if such person shall
have been adjudged liable to the corporation, unless and only to the extent that
the court in which the action or suit was brought shall determine upon
application that the defendant directors, officers, employees or agents are
fairly and reasonably entitled to indemnity for such expenses despite such
adjudication of liability.
Article Eight of the Certificate of Incorporation states that directors of
Navigant will not be liable to Navigant or its stockholders for monetary damages
for any breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to Navigant or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) under Section 174 of the General
Corporation Law of the state of Delaware, which makes directors liable for
unlawful dividends or unlawful stock repurchases or redemptions or (iv) for any
transaction from which the director derived an improper personal benefit.
Article IV of the Bylaws provides that Navigant shall indemnify its officers
and directors (and those serving at the request of Navigant as an officer or
director of another corporation, partnership, joint venture, trust or other
enterprise), and may indemnify its employees and agents (and those serving at
the
II-1
<PAGE>
request of Navigant as an employee or agent of another corporation, partnership,
joint venture, trust or other enterprise), against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred, if such officer, director, employee or agent acted in good
faith and in a manner reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. In a
derivative action, indemnification shall be limited to expenses (including
attorneys' fees) actually and reasonably incurred by such officer, director,
employee or agent in the defense or settlement of such action or suit, and no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to Navigant unless and
only to the extent that the Delaware Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Delaware Court of Chancery or such other court shall deem proper.
Unless the Board of Directors of Navigant otherwise determines in a specific
case, expenses incurred by an officer or director in defending a civil or
criminal action, suit or proceeding shall be paid by Navigant in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of the officer or director to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
Navigant.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
See index to exhibits.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized in the City of
Englewood, State of Colorado, on May 4, 1998.
NAVIGANT INTERNATIONAL, INC.
BY: /S/ EDWARD S. ADAMS
-----------------------------------------
Name: Edward S. Adams
TITLE: CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
- ------------------------------ --------------------------- -------------------
/s/ EDWARD S. ADAMS Chief Executive Officer May 4, 1998
- ------------------------------ (Principal Executive
Edward S. Adams Officer); Director
Chief Financial Officer and May 4, 1998
/s/ ROBERT C. GRIFFITH Treasurer (Principal
- ------------------------------ Financial and Accounting
Robert C. Griffith Officer)
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<C> <S>
3.1* Certificate of Incorporation
3.2* Bylaws
4.1 Form of certificate representing shares of Common Stock
5* Opinion of Wilmer, Cutler & Pickering as to legality of securities being offered
8* Tax opinion of Wilmer, Cutler & Pickering
10.1* Form of Distribution Agreement among U.S. Office Products Company, Workflow Graphics, Inc., Paradigm
Concepts, Inc., Navigant International, Inc. and School Specialty, Inc.
10.2* Form of Tax Allocation Agreement among U.S. Office Products Company, Workflow Graphics, Inc., Paradigm
Concepts, Inc., Navigant International, Inc. and School Specialty, Inc.
10.3* Form of Tax Indemnification Agreement among Workflow Graphics, Inc., Paradigm Concepts, 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* Agreement dated as of January 13, 1998 between U.S. Office Products and Jonathan J. Ledecky.
10.7* Form of Employee Benefits Agreement among U.S. Office Products Company, Workflow Graphics, Inc.,
Paradigm Concepts, Inc., Navigant International, Inc. and School Specialty, Inc.
10.8 Form of Agent Reporting Agreement with Airline Reporting Company.
21* Subsidiaries of Registrant
23.1 Consent of Price Waterhouse LLP
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Deloitte & Touche LLP
23.4 Consent of Walter J. McKeever & Company
23.5 Consent of Nardella & Taylor
23.6* Consent of Jonathan Ledecky to be named as a director
23.7* Consent of Vassilios Sirpolaidis to be named as a director
23.8 Consent of Ned A. Minor to be named as a director
23.9 Consent of D. Craig Young to be named as a director
23.10* Consent of Wilmer, Cutler & Pickering contained in Exhibits 5 and 8 hereto
27 Financial data schedule
</TABLE>
- ------------------------
* To be filed by amendment.
+ Previously filed
<PAGE>
Exhibit 4.1
[NAVIGANT LOGO]
NAVIGANT INTERNATIONAL, INC. CUSIP 63935R 10 8
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
COMMON STOCK SEE REVERSE FOR
CERTAIN DEFINITIONS
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $.001 PAR VALUE PER
SHARE OF
NAVIGANT INTERNATIONAL, INC.
(the Corporation ) transferable on the books of the Corporation by the holder
hereof in person or by duly authorized attorney upon the surrender of this
Certificate properly endorsed. This Certificate and the shares represented
hereby are subject to all of the terms and conditions contained in the
Certificate of Incorporation of the Corporation and all amendments thereto.
This Certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
NAVIGANT INTERNATIONAL, INC.
CORPORATE
SEAL
1998
DELAWARE
/s/ Robert C. Griffith /s/ Edward S. Adams
TREASURER CHAIRMAN OF THE BOARD
Countersigned and Registered:
AMERICAN STOCK TRANSFER & TRUST COMPANY
New York, N.Y.
Transfer Agent and Registrar
By
Authorized Signature
<PAGE>
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common UNIF GIFT MIN ACT- Custodian
TEN ENT -- as tenants by the entireties ----- ----
JT TEN -- as joint tenants with right of (Cust) (Minor)
survivorship and not as tenants under Uniform Gifts to Minors
in common Act
----------------
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, hereby sell, assign and transfer unto
--------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
/ /
- -----------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- -----------------------------------------------------------------------Attorney
to transfer the said stock on the books of the within named Company
with full power of substitution in the premises.
Dated
---------------------
------------------------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
- -----------------------------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 10.8
AGENT REPORTING AGREEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTIONS TITLE
- --------- -------------------------------------------------------------------------------------------------
<C> <S> <C>
I PURPOSE AND SCOPE................................................................................ 2
II DEFINITIONS...................................................................................... 3
III LOCATIONS COVERED BY THIS AGREEMENT.............................................................. 5
IV QUALIFICATIONS FOR RETENTION ON THE AGENCY LIST.................................................. 5
V APPOINTMENT OF AGENT BY CARRIER.................................................................. 9
VI CHANGE OF NAME OR LOCATION....................................................................... 9
VII AGENT'S AUTHORITY, GENERAL RIGHTS AND OBLIGATIONS................................................ 10
VIII REPORTS AND SETTLEMENTS, DEFAULTS AND OTHER FINANCIAL IRREGULARITIES UNDER ASP................... 11
IX ADDITIONAL OPERATING REQUIREMENTS................................................................ 20
X REFUND OR EXCHANGE OF ARC TRAFFIC DOCUMENTS...................................................... 22
XI LIABILITY AND WAIVER OF CLAIM.................................................................... 22
XII DELIVERY AND WITHDRAWAL OF TRAFFIC DOCUMENTS AND IDENTIFICATION PLATES........................... 23
XIII CUSTODY AND SECURITY OF TRAFFIC DOCUMENTS AND IDENTIFICATION PLATES.............................. 24
XIV INSPECTION AND RETENTION OF AGENT RECORDS........................................................ 24
XV REVIEWS OF QUALIFICATIONS OF AND BREACHES BY AGENT............................................... 25
XVI ANNUAL AND APPLICATION FEES...................................................................... 27
XVII SPECIAL LOCATION EXEMPTIONS...................................................................... 27
XVIII NOTICES.......................................................................................... 29
XIX CENTRAL COLLECTION SERVICE....................................................................... 29
XX TRANSFER OR ASSIGNMENT OF AGREEMENT, DEATHS AFFECTING OWNERSHIP, ABANDONMENT OF AUTHORIZED AGENCY
LOCATION, TEMPORARY CLOSURE...................................................................... 29
XXI REDUCED RATE TRANSPORTATION FOR AGENT............................................................ 32
XXII REMUNERATION OF AGENTS........................................................................... 32
XXIII TRAVEL AGENT ARBITER............................................................................. 32
XXIV INTERPRETIVE OPINION............................................................................. 33
XXV MEMORANDUM OF AGREEMENT.......................................................................... 33
XXVI AMENDMENT OF THIS AGREEMENT...................................................................... 33
XXVII ASSURANCE OF NONDISCRIMINATION................................................................... 33
XXVIII EFFECTIVENESS.................................................................................... 33
XXIX TERMINATION...................................................................................... 33
XXX OTHER AGREEMENTS SUPERSEDED...................................................................... 34
XXXI CHOICE OF LAW.................................................................................... 34
</TABLE>
1
<PAGE>
AGENT REPORTING AGREEMENT
This agreement by and between Airlines Reporting Corporation (hereinafter
"ARC"), 1530 Wilson Boulevard, Suite 800, Arlington, VA 22209-2448, on its own
behalf and on behalf of the carriers which have or hereafter execute the ARC
Carrier Services Agreement (hereinafter "carrier" or "carriers") and which
appoint the Agent under this agreement,
and
the person who executes the memorandum of agreement, or otherwise concurs in the
adoption of this agreement, as described in section XXV hereof, agreeing to be
bound to the terms and conditions of this agreement (hereinafter called "the
Agent" ),
WITNESSETH:
WHEREAS, ARC maintains an agency list containing the names of persons who have
been found to meet certain minimum requirements and qualifications, and are
eligible to issue ARC traffic documents and to sell air transportation or
provide for ancillary services on carriers which appoint them;
WHEREAS, carriers which are parties to the ARC Carrier Services Agreement may
appoint and provide their airline identification plates to such persons for the
sale of air transportation and the issuance of ARC traffic documents on their
behalf;
WHEREAS, ARC administers and operates the agents' standard ticket and area
settlement plan (hereinafter "ASP" or "the Plan") through which persons included
on the ARC agency list report ARC traffic documents for the sale of air
transportation and ancillary services on behalf of the carriers, and make
settlement therefore;
WHEREAS, the Agent engages in the sale of air transportation to the public as
agent for and on behalf of the carriers and, upon application duly submitted,
the agent has been found qualified for inclusion on the ARC agency list;
WHEREAS, the Agent will utilize the plan to report ARC traffic documents issued
for the sales of air transportation and ancillary services on behalf of the
carriers appointing such Agent, and make settlement therefore;
NOW, THEREFORE, in consideration of these premises and the mutual covenants and
agreements hereinafter set forth, it is mutually agreed as follows:
SECTION I: PURPOSE AND SCOPE
A. The purpose of this agreement is to facilitate the issuance of ARC traffic
documents to the public by agents of carriers in a competitive and efficient
manner.
B. This agreement establishes a principal-agent relationship between the Agent
and appointing carriers, and governs the terms and conditions under which
the Agent is authorized to issue ARC traffic documents at or through its
authorized agency locations in the United States, and does not extend to the
terms and conditions under which the Agent is authorized to issue tickets
and other forms that the carrier may provide to the Agent.
C. This agreement does not constitute the entire agreement between the Agent
and a carrier, but is specifically limited to the terms and conditions
contained herein.
D. Certain sections of this agreement are labeled so as to distinguish between
those provisions which apply only to authorized locations which submit their
sales reports via Interactive Sales Reporting (ISR locations) and those
provisions which apply only to authorized locations which submit their sales
reports via paper reports (non-lSR locations). In such sections, those
provisions preceded directly by the heading "lSR Locations" shall apply only
to ISR locations, and those preceded directly by the
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<PAGE>
heading "Postal Locations" shall apply only to non-lSR locations. All other
provisions of this agreement, where this distinction is not drawn, shall
apply equally to both ISR and non-lSR locations. Because a single "Agent"
may have both ISR and non-lSR locations, in such a case both sets of
provisions shall apply to the same Agent, the "Postal Location" provisions
setting forth the Agent's requirements regarding its non-lSR locations, and
the "ISR Location" provisions determining the Agent's obligations for its
ISR locations.
SECTION II: DEFINITIONS
For the purpose of this agreement--
AGENCY LIST and LIST mean the agency list maintained by ARC, which includes the
name, address and agency code number for each authorized agency location which
has been found qualified under ARC standards, and contains the classification
under which the location was included.
AGREEMENT means the ARC Agent Reporting Agreement.
AGENT IDENTIFICATION PLATE means a plate bearing the Agent's name, city, state,
and code number, which is used in a validator machine for the validation of ARC
traffic documents (paper format).
AIRLINE IDENTIFICATION PLATE means a plate bearing the carrier's name or
authorized abbreviation, and code number, and is used in a validator machine for
the validation of ARC traffic documents (paper format).
ARBITER means the Travel Agent Arbiter established by ARC as an independent
entity (including all Associate Travel Agent Arbiters) to decide disputes
between ARC and agents and applicants.
ARC LINK means the electronic communications link between ARC and the Agent via
the Agent's system provider or via any other means ARC may authorize.
ARC TRAFFIC DOCUMENTS means agents' standard tickets, miscellaneous charges
orders, tour orders, and all other accountable forms and documents' both manual
and automated, which ARC provides to agents in paper format for issuance to
their clients, and which bear ARC-issued numbers, as well as electronic versions
thereof. Both formats, paper and electronic, are assumed throughout this
agreement; if only one format is applicable, such shall be noted. The term does
not include carriers' own ticket stock. which includes tickets, miscellaneous
charges orders, tour orders, and other accountable forms and documents of the
carriers, or electronic versions thereof.
ARC TRAFFIC DOCUMENTS (PAPER FORMAT) include both manual and automated
(transitional automated tickets and Automated Ticket and Boarding Pass forms)
ARC traffic documents.
ARC TRAFFIC DOCUMENTS (ELECTRONIC FORMAT) mean any ARC traffic documents other
than ARC traffic documents (paper format).
AREA BANK means a bank or a processing center designated to receive and process
sales reports and remittances from authorized agency locations.
AUTHORIZED AGENCY LOCATION means a place of business operated by an agent which
is included on the agency list, and includes the home office location and any
branch office location of the Agent.
CHECK; means the check, draft, or debit entry that an area bank draws or
initiates on the Agent's account designated pursuant to section VII.B of this
agreement, to charge the amount owed by such agent under section VIII hereof.
The various terms for describing the charge are used interchangeably in this
agreement.
CONTROL means the power or authority to manage, direct, superintend, restrict,
regulate, govern, administer, or oversee; and the term embraces every form of
control, actual or legal; direct or indirect; negative or affirmative;
individual, joint, several, or family, without regard to the type or number of
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<PAGE>
intervening or supervening persons involved. Two persons are under "common
control" when both are controlled by the same person or persons.
CREDIT MEMO means any written or electronically transmitted authorization from a
carrier to an agent authorizing the deduction by the agent of a specified dollar
amount from the agent's sales report.
CREDIT REQUEST MEMO means any written request from an agent to a carrier
demanding payment of any obligation arising under the agreement, and includes
any form of credit request authorized by the carrier, including the Agent Sales
Summary Adjustment Request, Form 1282.
DEBIT MEMO means any written or electronically transmitted request from a
carrier to an agent for payment of any obligation arising under this agreement.
ELECTRONIC ISSUANCE of ARC traffic documents must include, but is not limited
to, the process by which an ARC issued number is assigned to the ARC traffic
document.
IMPROPERLY REPORTED SALE MEANS THE AGENT'S SALE OF CARRIER TRANSPORTATION AND/OR
ANCILLARY SERVICES USING AN ARC FRAME DOCUMENT OR DOCUMENTS, WHICH, ALTHOUGH
REPORTED IN THE AGENT'S SALES REPORT, (A) CONTAINS FALSE OR INACCURATE DATA
(INCLUDING, BUT NOT LIMITED TO, FALSE OR INACCURATE CREDIT CARD NUMBERS, AND/OR
FORM OF PAYMENT); OR (B) IS UNAUTHORIZEDLY OR WRONGFULLY SUBMITTED FOR REFUND,
REISSUANCE, OR EXCHANGE.
INDUSTRY AGENTS' HANDBOOK or HANDBOOK means a handbook containing various rules,
regulations, and instructions of ARC covering an agent's responsibilities and
activities under the agreement, which is maintained by ARC, and updated from
time to time, and provided to all agents on a current and continuing basis.
INTERACTIVE SALES REPORTING or ISR means an optional, alternative means by which
the Agent may submit, for some or all of its authorized agency locations, the
sales information required of it hereunder, thereby fulfilling its reporting
obligations to ARC and the carriers via electronic submission, rather than
exclusively via the submission of paper documents.
ISR LOCATION means an authorized agency location which has been approved for
participation in ISR, and for which the Agent is required to submit sales
reports electronically via ISR.
PERSON includes an individual, corporation, partnership, association, company,
or firm.
POSTAL LOCATION means an authorized agency location for which the Agent is
required to mail its weekly sales reports on paper, rather than submit them
electronically via ISR.
SYSTEM PROVIDER means a person, company, or other legal entity which operates a
computerized reservations system which supplies data and/or other products
and/or services required for the imprinting of ARC traffic documents in paper
format, and/or for the issuance of ARC traffic documents in electronic format,
and/or for the submission of data via Interactive Sales Reporting (ISR), by
ARC-approved agents, and which has entered into an agreement or agreements with
ARC and with the carrier(s) regarding the above described data, products, and/or
services.
THE TRAVEL AGENT ARBITER PROGRAM, INC. is a corporation chartered in the
District of Columbia whose purpose is to oversee the Travel Agent Arbiter and
other specified programs.
UNREPORTED SALE MEANS THE AGENT'S SALE OF CARRIER TRANSPORTATION AND/OR
ANCILLARY SERVICES USING AN ARC TRAFFIC DOCUMENT OR DOCUMENTS, WHICH SALE HAS
NOT BEEN INCLUDED BY THE AGENT IN THE SALES REPORT AS REQUIRED BY THIS
AGREEMENT.
UNITED STATES includes only the fifty states and the District of Columbia.
VARIABLE REMITTANCE PLAN means an arrangement negotiated between an individual
carrier and an agent, concerning the agent's authorized postal locations, under
which the agent settles ARC traffic
4
<PAGE>
documents with ARC on a schedule other than the tenth day after the close of the
sales period, or settles directly with an individual carrier. There are four
variable remittance plan options, including Direct Form of Payment (DP), Direct
Form of Payment with Invoice (DI)' Variable Payment with Consolidated Check (PC)
and Variable Payment with Individual Check (PI).
WEEKLY SALES REPORT or SALES REPORT means the required weekly sales report as
described herein, whether in electronic (ISR) format or paper (postal) format.
SECTION III: LOCATIONS COVERED BY THIS AGREEMENT
A. The Agent may exercise the authority granted herein, only at such places of
business operated by the Agent as are included on the ARC agency list.
B. This agreement covers the home office and all branch locations of the Agent,
including any which may be added to the ARC agency list after the date of
execution hereof.
C. No branch location shall be included on the agency list unless the corporate
structure or ownership of the home office and the branch is absolute and all
inclusive as a single entity, and the home office has full legal and
financial responsibility for the administration, staff, liability,
maintenance, and operational expense of the branch location.
D. If the Agent wishes to have a place of business included on the agency list
as a branch location under the terms of this agreement, it shall submit an
application to ARC in accordance with the procedures ARC shall prescribe for
submitting and processing such applications. ARC shall not approve any
application for a branch location unless, among other things, the Agent is
properly bonded in the amount and form required by section IV.A. I of this
agreement.
SECTION IV: QUALIFICATIONS FOR RETENTION ON THE AGENCY LIST
To be retained on the agency list, the Agent must continue to meet the following
criteria:
A. FINANCIAL REQUIREMENTS
1.a. The Agent shall, without expense to ARC or any carrier. procure and
maintain for the joint and several benefit of the carriers and ARC, a bond
issued by a surety included on the current revision of Circular 570 issued
by the United States Treasury Department, entitled "Surety Companies
Acceptable on Federal Bonds." The bond shall be in the form prescribed from
time to time by ARC and shall be in the amount prescribed below. Subject to
the minimum and maximum amounts stated below. the amount of the bond shall
be equal to at least the average monthly net cash remittance as determined
for the twelve-month period ending on the last sales period ending date of
the month prior to the anniversary date of the Agent's bond. If the
Agent was approved by ARC within the preceding 12 months, the amount of the
bond shall be equal to at least the average monthly net cash remittance of
the preceding months ending on the last sales period ending date of the
month prior to the anniversary date of the Agent's bond.
(1) The minimum amount of the bond that shall be maintained by each Agent
approved by ARC for inclusion on its agency list shall be $20,000. This
requirement shall remain in force as to each such agent for two years from
the date of such approval; thereafter, the minimum shall be $10,000.
(2) In no event shall the amount of the bond required of an applicant for a
change of ownership as described in sections 1, 111, and IV of attachment G
of this agreement be less than the amount of the bond required of the Agent
prior to the approval of any such ownership change.
(3) The minimum amount of the bond that shall be maintained by each Agent as to
which a change of ownership within the scope of section 11 and section V of
attachment G of this agreement is approved by ARC shall be $20,000. This
requirement shall remain in force as to each such Agent for two years
5
<PAGE>
from the date of such approval, thereafter, the minimum shall be $10,000.
However, in no event shall the amount of the bond required of an applicant
for any change of ownership as described in sections 11 and V of attachment
G of this agreement be less than the amount of the bond required of the
Agent prior to the approval of any such ownership change, or $20,000,
whichever is greater.
(4) The maximum amount of the bond that shall be maintained by each Agent shall
be $70,000.
b. In lieu of the bond required by section IV.A.1.a of this agreement, the
Agent may provide an irrevocable bank letter of credit in the form
prescribed from time to time by ARC. The amount of the letter of credit
shall be determined at all times in the same manner as the amount of the
bond.
c. The Agent's bond or letter of credit shall cover all amounts owed by the
Agent to the carriers and ARC for tickets or other instruments of value
issued on ARC traffic documents which were supplied in trust to the Agent
in paper and electronic format, including, but not limited to: amounts
owed for tickets and other instruments of value which have been used but
not reported or paid for; amounts owed for dishonored drafts or debit
entries; and amounts owed on account of the loss, misapplication, then,
forgery, or unlawful use of ARC traffic documents unless the agent is
otherwise relieved of liability pursuant to the terms of this agreement.
2. Effective on and after May 1, 1987, each agent which has been on ARC's
agency list continuously for two years' and each agent (1) as to which ARC
has approved a change of ownership within the scope of parts II or V of
attachment G to this agreement and (2) which has been on ARC's agency list
continuously for two years, may maintain, in lieu of the bond or letter of
credit prescribed above, a bond or letter of credit in the required form in
the amount of $10.000. This option may not be exercised until the Agent has
submitted, and ARC has approved in writing, a current financial statement
which shall thereafter be updated and submitted annually to ARC for written
approval and shall at all times meet the following requirements:
a. The financial statements of the Agent must: (1) be examined or audited
in accordance with generally accepted auditing standards; and (2) be
prepared in accordance with generally accepted accounting principles; and
(3) contain a report on the examination signed by a person or firm
licensed to practice public accountancy in a state of the U.S. Financial
statements which are merely "reviewed" or "compiled," but not examined or
audited by a firm licensed to practice public accounting, do not meet
these requirements; and
b. Tangible net assets demonstrated by such statements shall be at least
$100,000; and
c. The report on the financial statements must have been prepared within
four months of the close of the period covered by the financial
statements and, together with the relevant forms. mailed to ARC within
thirty (30) days after the date of the report of the public accountant.
d. Where the Agent is not a corporation but involves one or more
individuals, personal financial statements may be accepted if prepared in
accordance with Statement of Position 82-1 as published by the American
Institute of Certified Public Accountants, and meets all other
requirements set forth above.
e. Financial statements meeting all the relevant requirements above may be
accepted on behalf of an incorporated agent from either the parent
organization, if the Agent is its subsidiary, or a stockholder of the
Agent, provided that such parent or stockholder has on file with ARC an
acceptable written guarantee of the Agent's obligations under this
agreement.
3. Any required change in form of the bond, or any required adjustment of the
amount of the Agent's bond or irrevocable bank letter of credit to provide
coverage in excess of the minimum shall be made each time it is renewed,
reinstated, or replaced. If ARC determines that the Agent's bond or
irrevocable bank letter of credit is less than the required amount, ARC will
notify the Agent at least
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ninety (90) days in advance of the anniversary date of such instrument. If,
however, the increase required is greater than $10,000, the Agent may
increase the bond or leper of credit in the amount of $10,000 per quarter,
or 25 percent of the total increase required per quarter, whichever is
higher.
Notwithstanding the above concerning the time for adjusting, and the method of
adjusting, the amount of coverage required, ARC will not approve an application
for an additional authorized agency location of an agent unless the agent's bond
or letter of credit is in the form prescribed by ARC and the amount prescribed
by section IV.A. 1 of this agreement.
4. In addition to the other financial requirements of this subsection, the
Agent shall cause to have executed on its behalf a "Personal Guaranty of
Payment and Performance," attachment C of this agreement, if:
a ARC sends the Agent a notice of financial or reporting irregularity
pursuant to section VIII.D.l.a, b, or c;
b. The Agent is subject to the additional operating requirements of section
IX.B;
c. The Agent seeks to appeal ARC's removal of its traffic documents and the
airline identification plates pursuant to section XV.A; or
d. The Agent is required by the Arbiter to do so.
B. PERSONNEL STANDARDS
1. Each authorized agency location of the Agent shall have at least one person
who is a full-time employee of the Agent at the place of business, and is
either the owner, partner, officer, manager, or supervisor who fulfills each
of the following qualifications:
a. Exercises daily supervision of, and responsibility for, the operations
of that agency location and has the authority to make management
decisions therefor;
b. Has at least two years' full-time experience in either (1) selling
general travel services to the public or (2) supervising the operation of
a business offering such services; and
c. Has demonstrated knowledge of the provisions of the Industry Agents'
Handbook.
2. Each authorized agency location of the Agent shall have at least one
full-time* employee of the Agent who has either:
a. had, within the past three years, one year's full-time* experience in
airline ticketing; or
b. Certified ARC Specialist ("CAS") status, having demonstrated knowledge
of the provisions of the Industry Agents' Handbook, including, for
example, Area Settlement Plan ("ASP") processing, ARC traffic document
preparation, refunds and exchanges, ticket security rules and procedures,
and preparation and reconciliation of weekly sales reports, through
successful completion of the Certified ARC Specialist Examination.
*"full-time" means regularly scheduled working hours at an agency location
for a minimum of 35 hours per sales reporting period.
3. Each authorized agency shall notify ARC in writing of any change in
employment status of any of the Agent's CAS qualifier(s). Such notice shall
be sent to ARC within 45 days of the CAS's change in status.
[OFFICIAL COMMENTARY: SECTION IV.B.2.B SHALL BE OPTIONAL FOR ALL AGENTS
EFFECTIVE JANUARY 1, 1998, THROUGH DECEMBER 31, 1998. THE CAS SHALL BE MANDATORY
FOR ALL NEW AGENTS, AS WELL AS NEW BRANCH LOCATIONS (INCLUDING ONSITES), AND
TYPE II AND V OWNERSHIP CHANGES, SEEDLING ARC APPROVAL ON OR AFTER JANUARY 1,
1999.]
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C. GENERAL QUALIFICATION REQUIREMENTS
1. The Agent shall be a citizen or national of the United States, or an alien
authorized employment (see 8 C.F.R. Part 274A), or a foreign corporation
authorized to do business in the jurisdiction in which the location is
situated.
2. Each authorized agency location shall be clearly identified as, and held out
to the public to be, an office for the sale of air transportation or
ancillary services on behalf of the air transportation industry.
3. The name of the Agent shall not be the same as, or misleadingly similar to,
a carrier, and not be identified as an airline office.
4. Each authorized agency location shall be open and freely accessible to the
public.
5. The office, department, or space which the Agent purports to be the
authorized agency location is engaged primarily in the retail sale of
passenger transportation.
D. OTHER REQUIREMENTS
1. The Agent is ineligible for retention on the agency list where investigation
reveals that:
a. There was a material misrepresentation or inaccuracy in any application
of the Agent for inclusion on the agency list. or for changes to its
status or listing thereon, or in any attachments thereto;
b. Any person who is involved in the day-to-day operations of the agency
and has access to monies from the sale of traffic documents, is not a
citizen, or national of the U.S., or an alien authorized employment in
the U.S.; or
c. The Agent's authorized agency location* does not have the requisite
licenses** of the jurisdiction in which located.
*For purposes of this section only, authorized agency location is limited to
all Independent, Home Office, and Branch locations, including Restricted
Access and Special Event locations. Satellite Ticket Printer (STP) and
On-Site Branch (OSB) locations are exempt from this requirement, however,
unless otherwise mandated by federal, state, or other local law or
authority.
** Requisite license includes, but is not limited to, any and all licenses
mandated by federal, state, or local legislation or authority, which enable
the Agent to lawfully conduct business at each of its authorized agency
locations. Examples include state licenses, e.g., the California Sellers of
Travel Law.
2. The Agent is ineligible for retention on the agency fist if ARC has reason
to believe that the Agent, or any person holding a financial or ownership
interest in the Agent, or any officer, director, qualifying manager, or any
person employed by it in a capacity in which that person has access to ARC
traffic documents or money held by the Agent in payment therefor:
a. Has or had a financial interest in, or a connection or affiliation with,
or was employed by, any agent previously canceled from the agency list*;
or
b. Has or had a financial interest in, or a connection or affiliation with,
or was employed by, any agent presently declared in default under the
provisions of section Vlil of the agent reporting agreement*; or
c. Has been convicted of a felony, or a misdemeanor related to financial
activities, or has been found by a court of competent jurisdiction to
have committed a breach of fiduciary duty involving the use of funds of
others, unless, based upon investigation, experience of the carriers with
such person(s), where applicable, and all information and facts
available, it is determined by ARC that
8
<PAGE>
the Agent can be relied on to adhere to the terms of this agreement. If
the conduct invoking this provision occurred more than seven years prior
to the filing of a complaint with the Arbiter, there shall be a
rebuttable presumption the Agent can be relied upon to adhere to the
terms of this agreement.
* For the purposes of this subsection, references to the ARC agency list and
the Agent Reporting Agreement include, in addition, the agency list and the
Passenger Sales Agency Agreement, and its predecessor Sales Agency
Agreement, of the Air Traffic Conference of America.
E. REAPPLICATIONS
1. Any applicant agency, including officers, owners, or shareholders thereof
which, regardless of intent, fails to disclose, falsifies, or otherwise
materially misrepresents any application information pertaining to:
a) a previous affiliation with a canceled agency or an agency currently
in default;
b) the existence of a felony conviction or financially related
misdemeanor;
c) a prior bankruptcy;
d) personal identification;
e) employment history; or
f) the true ownership of the agency,
shall be ineligible for inclusion on the Agency List for a period of twelve
( 12) consecutive months from the date of ARC's disapproval letter advising
the applicant such occurrence has been discovered.
2. Any agency or individual may appeal AKC's determination that it is subject
to the terms of this section to the Travel Agent Arbiter.
SECTION V: APPOINTMENT OF AGENT BY CARRIER
A carrier may issue an appointment to the Agent permitting the Agent to issue
ARC traffic documents on behalf of the carrier in one of two ways:
A. The Agent shall be automatically appointed by any carrier which has, or
hereafter may, deposit with ARC a general concurrence for the appointment of
all agents on the ARC agency list. From time to time ARC will publish a list
of all carriers which have deposited such a general concurrence.
B. Any carrier which has not deposited with ARC the general concurrence for the
appointment of all agents on the ARC agency list may appoint the Agent by
delivering to the Agent a written certificate of appointment.
SECTION VI: CHANGE OF NAME OR LOCATION
A. PROCEDURES TO CHANGE NAME
The Agent must provide thirty (30) days written advance notice to ARC to
change its name and names as set forth in this agreement, under which its
activities must be conducted. Within the thirty (30) day period, ARC shall
ascertain whether the proposed name violates this agreement. If approved,
ARC shall correct the agency list, notify all carriers and the system
providers, and, unless the change relates only to a branch location, execute
an amendment to the memorandum of agreement reflecting the change. If the
proposed change is disapproved, ARC shall notify the carriers and the system
providers and also advise the Agent with specific reasons, and the Agent may
obtain review of that decision by the Arbiter, in accordance with section
XXIII of this agreement. Whenever the legal name of the Agent is changed,
the Agent must provide to ARC a bond or letter of credit, in the correct
amount and form prescribed by ARC, which includes the Agent's new legal
name.
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B. PROCEDURES TO CHANGE LOCATION
The Agent must provide written advance notice to ARC to change its business
location, accompanied by a full description in the form prescribed by ARC.
If the new location is qualified under the standards set forth in section
IV.C hereof, it shall be approved and ARC shall correct the agency list and
notify all carriers and the system providers. If the location fails to
qualify, ARC shall disapprove the change and notify the carriers and the
system providers, and so advise the Agent with specific reasons. ARC shall
advise the Agent of its approval or disapproval within forty-five (45) days
of the receipt of the written notice from the Agent. The Agent may obtain
review of that decision by the Arbiter, in accordance with section XXIII of
this agreement. The Agent may, nevertheless, change the location pending the
Arbiter's decision. If the Agent does not request such review and, further,
fails to relocate to its former authorized agency location within 30 days
from ARC's notice of disapproval' ARC may file a complaint against the
Agent.
SECTION VII: AGENT'S AUTHORITY, GENERAL RIGHTS AND OBLIGATIONS
A. The Agent shall at all times maintain ethical standards of business in the
conduct of the agency and in its dealing with its clients' the public and
the carrier.
B. The Agent shall designate a bank account for the benefit of ARC and the
carrier for deposit of (1) the proceeds of the sales of air transportation
and ancillary services for which ARC traffic documents were issued, and (2)
such funds as may be required to pay any other amount which ARC is
authorized to drab from the account. The Agent recognizes that the proceeds
of the sales, less the Agent's commissions, on these ARC traffic documents
are the property of the carrier and shall be held in trust until accounted
for to the carrier.
C. In selecting the airline identification plate to be used in validating ARC
traffic documents, or in the identification of the ticketing carrier, the
Agent will follow the procedures specified in attachment F, hereto.
D. The provisions of section Vll.C above notwithstanding, no agent shall use an
airline identification plate of one carrier, or identify a carrier on an ARC
traffic document as the ticketing carrier, in connection with the sale of
air transportation offered solely by another carrier which has notified the
Agent and ARC that the Agent shall not represent that carrier.
E. In exercising its authority under this agreement, the Agent shall issue only
ARC traffic documents supplied pursuant to, or authorized by, this
agreement.
F. The Agent shall deliver to its clients the proper forms of ARC traffic
documents and/or supporting documentation as authorized from time to time by
the carrier. The information shown on any such documents shall be in
accordance with the applicable rules, regulations and instructions furnished
to the Agent by ARC by specific instruction or in the INDUSTRY AGENTS'
HANDBOOK, and by the carrier.
G. The Agent shall comply with all instructions consistent with this agreement
properly issued to him by ARC in the INDUSTRY AGENTS' HANDBOOK and other
specific instructions consistent with this agreement provided from time to
time by ARC, including, but not limited to, those instructions which the
Agent must follow regarding the electronic submission of its weekly sales
reports via ISR.
H. The Agent shall comply with all instructions of the carrier, and shall make
no representation not previously authorized by the carrier. The Agent shall
deliver to the carrier such specific instructions, requests, or particulars
in connection with a client or his transportation as may be proper to enable
the carrier to render efficient service to its passengers.
I. The Agent shall not knowingly or negligently sell or issue ARC traffic
documents covering air passenger transportation to be offered by the carrier
to persons who plan to sell, issue, or offer to sell or issue, such ARC
traffic documents, but who have not been authorized by the carrier to
represent the carrier.
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J. The Agent is not authorized by this agreement to admit, accept or receive
service of summons or any other process on behalf of the carrier or ARC.
K. In the absence of specific permission of the carrier, the Agent shall not
use any credit card which is issued in the name of the Agent, or in the name
of any of the Agent's personnel, or in the name of any third party, for the
purchase of air transportation for sale or resale to other persons, nor
report to the carrier the sale of any air transportation as a credit card
transaction where at any time the Agent bills, invoices, or receives payment
in cash from the customer for such air transportation.
L. The Agent shall identify any sales to itself and/or such other persons which
control, are controlled by, or are under common control with, the Agent, or
with the officers, directors, stockholders, members, or employees of the
Agent and/or such other persons, in accordance with the provisions of the
INDUSTRY AGENTS' HANDBOOK.
SECTION VIII: REPORTS AND SETTLEMENTS, DEFAULTS AND OTHER FINANCIAL
IRREGULARITIES UNDER ASP
A. Reports and Settlements-General
1. The Agent shall make appropriate arrangements to permit the area bank to
draw checks upon its bank account designated pursuant to section Vll.B.
of this agreement in payment for amounts owed hereunder. The Agent shall
give ARC advance notice by certified mail of its intention to change bank
accounts. Such notice must be received at least 14 days prior to the
beginning of the affected sales period, and will state the first sales
period ending date to which it applies.
POSTAL LOCATIONS
2. The Agent shall submit a weekly sales report containing the auditor's
coupon (applicable to both paper and electronic format) of all ARC
traffic documents, and other supporting documents issued and validated
during the 7-day period Monday through Sunday. The weekly sales report
shall be submitted to the designated area bank in the form prescribed.
With each report, the Agent shall submit a settlement authorization form
reflecting the maximum amount to be drawn from the Agent's account If no
air transportation or ancillary services have been sold during the 7-day
period, the Agent shall submit to the area bank a weekly sales report
reflecting "no sales."
3. The weekly sales report, with auditor's coupons and other supporting
documents, or advice of "no sales," shall be mailed by First Class mail
postage prepaid, or by Express Mail, or delivered to the designated area
bank, not later than Tuesday following the close of the report period or
by Wednesday if Monday or Tuesday is a Federal or state legal holiday,
Rosh Hashanah or Yom Kippur.
ISR LOCATIONS
4. The Agent shall submit to ARC, in the form prescribed by ARC and via the
means set forth in the INDUSTRY AGENTS' HANDBOOK or the ISR Training
Supplement, a weekly sales report accounting for all ARC traffic
documents issued and validated during the 7-day period Monday through
Sunday ("sales report period"), and confirming the accuracy of data sent
through the system provider by the Agent during this period. With each
report, the Agent shall authorize a settlement amount reflecting the
maximum amount to be drawn by ARC from the Agent's designated account. If
the Agent has sold no air transportation or ancillary services during the
7 day period, the Agent shall submit a sales report reflecting "no
sales."
5. The Agent shall submit the weekly sales report to ARC no later than
11:59 p.m., Eastern Time, on the Tuesday following the close of the
report period, or on the Wednesday following the close of the report
period if Monday or Tuesday is a Federal or state legal holiday, Rosh
Hashanah or Yom Kippur. Only those sales reports received by this
deadline shall be considered "timely received."
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The Agent shall obey all ARC and individual carrier rules and
instructions concerning the submission and retention of supporting paper
documentation, as communicated to the Agent via ARC and/or the carrier.
6. If the Agent fails to timely submit the weekly sales report to ARC in
accordance with the deadline specified above, ARC may provide the data
transmitted to ARC via ISR during the sales report period to the
carrier(s) to which such data pertains, solely for that carrier(s)
information. All sales data submitted electronically to ARC may be
reviewed by ARC at any time during or after the sales report period.
7. Upon receipt of the weekly sales report, ARC shall generate a
confirmation number for the report, and transmit this confirmation number
to the agency location from which the report was submitted. The number
thus generated shall appear on the Agent's ISR computer screen, and the
Agent shall (a) print a paper copy of this screen, which shall
hereinafter be referred to as the "confirmation screen", or (b) store the
information from the confirmation screen within a reliable database from
which a paper facsimile of the confirmation screen may be readily
generated, or (c) copy the information from the confirmation screen upon
a blank "Facsimile Confirmation Screen" form, as found within the
Industry Agents Handbook or the ISR Training Supplement. In the event the
Agent submits a sales report more than once (e.g. where the Agent recalls
a sales report and resubmits it), the Agent shall (as specified more
fully above) print, store, and/or copy the information from each and
every confirmation screen generated for the sales report.
BOTH POSTAL AND ISR LOCATIONS
8. The area bank will, based upon the sales report submitted by the Agent,
determine the amount owed the carriers for the sales period, and will
draw a check for such amount on the Agent's account. The check will not
be in excess of the settlement authorization amount provided by the
Agent, or be presented for payment earlier than the tenth day after the
close of the sales period.
The area bank will mail or otherwise send to the Agent a weekly summary
showing all transactions, and the amount of the check drawn, no later
than the tenth day after the close of the sales period. Settlement of
amounts owing will be made in official United States currency.
9. All monies and credit card billing documents, less applicable
commission, collected by the Agent for sales hereunder are property of
the carriers, and shall be held in trust by the Agent until
satisfactorily accounted for to the carriers.
POSTAL LOCATIONS
B. EXCEPTIONS TO REPORTS AND SETTLEMENTS IF AGENT HAS TEN OR MORE LOCATIONS
An agent having 1) ten or more authorized locations, or 2) a wholly owned
subsidiary with ten or more such locations, or 3) a combination of
authorized locations (branch offices) of a wholly owned subsidiary
totaling ten or more, may apply for an exception to the provision of
section Vlil.A.3 above requiring that the sales report and supporting
documents be mailed not later than the Tuesday of each week.
The exception will be granted to any agent having the requisite number of
locations, which agrees to process each of its weekly sales reports at
its central accounting office and submit them together to one designated
area bank. An agent wishing such exception must first execute with ARC a
supplementary agreement which, based upon the specific circumstances,
authorizes the multi-reporting Agent to cause its weekly reports to be
received at the area bank by noon on Thursday or Friday of each week. The
exception does not affect the schedule for settlement.
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C. OTHER SETTLEMENT ARRANGEMENTS NOT PROHIBITED
1. Nothing contained in this agreement shall preclude an agent from
proposing to a carrier which is a party to the Carrier Services
Agreement, (a) that, for transactions in which the agent has issued
and validated ARC traffic it settle its account pursuant to a
variable remittance plan, or (b) that the agent utilize the carrier's
traffic documents. If such a proposal is made, the carrier shall
consider the agent's proposal in good faith; however, a carrier's
refusal to enter into such an arrangement shall not, in and of
itself, constitute evidence of bad faith.
2. An agent shall not, without prior written consent by the carrier
concerned, submit a settlement of ARC traffic documents pursuant to a
variable remittance plan.
ISR AND POSTAL LOCATIONS
D. FINANCIAL AND REPORTING IRREGULARITIES
1. This subsection governs payment of amounts due in the event of a
dishonored check or failure to file a complete AND PROPER weekly sales
report. It does not govern any amounts settled under a variable
remittance plan, where applicable, if either the payment is made directly
to an individual carrier or ARC collects the amount expressly on behalf
of an individual carrier by means of an individual draft. In determining
such amounts, debit memos based on the following claims are not to be
included: (i) any debit memo issued prior to the date on which the Agent
fails or refuses to provide funds on demand to cover a dishonored check,
or the amount owed on UNREPORTED OR IMPROPERLY REPORTED SALES, or a
missing report, as required by, respectively, paragraphs D.l.a., D.l.b
and D.l.c of this section, which has been reasonably contested by the
Agent in writing within 60 days of the Agent's receipt of such debit
memo; and (ii) any debit memo issued on or after the date of the Agent's
failure or refusal, as described above, for a transaction that occurred
more than 60 days prior to such date; provided, however, that any debit
memo issued for either an unreported sale, AN IMPROPERLY REPORTED SALE,
or a fraudulently issued ARC traffic document, shall be includable in
determining the amounts due the carriers under this agreement.
a. ARC will immediately notify the Agent and its surety when a check
drawn by the area bank has been dishonored by the Agent's bank. If
the Agent does not immediately provide a certified check or wire
funds to cover the dishonored check, ARC will (i) withdraw from the
Agent, and from all agents under common control with the Agent, and
all authorized agency locations under common control with the Agent,
all ARC traffic documents (paper format) and airline identification
plates, (ii) notify the system providers to inhibit the transmission
of ticketing records for the printing of such onto ARC traffic
documents (paper format) by such Agent, and (iii) prohibit the use of
ARC traffic document numbers by system providers for the issuance of
ARC traffic documents (electronic format) on behalf of such Agent,
and so notify the carriers.
ARC traffic documents will be resupplied and airline identification
plates will be returned, except the identification plate of the
carrier which has expressly instructed ARC to the contrary, to the
Agent and all authorized agency locations under common control with
the Agent, and the system providers notified that the issuance of ARC
traffic documents is authorized, unless the carrier has also taken
action to terminate the Agent's appointment pursuant to section XXIX
of this agreement, when all amounts owing the carriers under this
agreement have been fully paid (including, but not limited to, all
other checks drawn by the area bank and dishonored by the Agent's
bank) unless there is an outstanding notice of cancellation of the
Agent's bond.
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A compensatory assessment shall be charged by ARC for each dishonored
check for payment of sales reports to defray processing costs
associated with the handling of dishonored checks, interest expense
and special service costs described in section Xl.H. This assessment
will be calculated and charged by ARC based on a formula approved by
the ARC Board of Directors. ARC shall notify the Agent as to the
amount of the charge and the date on which payment will be due. The
Agent hereby authorizes the area bank to collect the charge by
issuing a draft against the bank account maintained pursuant to
section Vll.B of this agreement. Alternatively, the Agent shall make
payment directly to ARC if required by the notice.
b. ARC will notify the Agent if it has failed to include in its weekly
sales report all ARC traffic documents issued through the close of
the sales report period, as provided in subsections A.2 and A.4 of
this section, OR HAS INCLUDED SALES WHICH HAVE BEEN IMPROPERLY
REPORTED. Unless the Agent immediately provides a certified check and
supporting documents to cover the UNREPORTED AND/OR IMPROPERLY
REPORTED sales, ARC will notify the carrier, and, where a clear and
present danger of substantial loss is present, (i) withdraw from the
Agent, and all authorized agency locations under common control with
the Agent, all ARC traffic documents (paper format) and airline
identification plates, (ii) notify the system providers to inhibit
the transmission of ticketing records for the printing of such onto
ARC traffic documents (paper format) by such document numbers by
system providers for the issuance of ARC traffic documents
(electronic format) on behalf of such Agent.
ARC traffic documents will be resupplied and airline identification
plates will be returned, except the identification plate of the
carrier which has expressly instructed ARC to the contrary, to the
Agent and all authorized agency locations under common control with
the Agent, and the system providers notified that the issuance of ARC
traffic documents is authorized, unless the carrier has also taken
action to terminate the Agent's appointment pursuant to section XXIX
of this agreement, when all amounts owing the carriers under this
agreement have been satisfactorily accounted for (including, but not
limited to, payment of all checks drawn by the area bank and
dishonored by the Agent's bank) unless there is an outstanding notice
of cancellation of the Agent's bond.
A compensatory assessment shall be charged by ARC for unreported AND
IMPROPERLY REPORTED sales disclosed by an inspection pursuant to
section XIV of this agreement, or otherwise disclosed, to defray
costs associated with the processing and handling of the discovery
and resolution of unreported and IMPROPERLY REPORTED SALES, and
special service costs described in section Xl.H. This assessment will
be calculated and charged by ARC based on a formula or formulas
approved by the ARC Board of Directors. ARC shall notify the Agent as
to the amount of the charge and the date on which payment will be
due. The Agent hereby authorizes the area bank to collect the charge
by issuing a draft against the bank account maintained pursuant to
section Vll.B of this agreement. Alternatively, the Agent shall make
payment directly to ARC if required by the notice.
ISR LOCATIONS
The Agent will not be liable for a compensatory fee where a malfunction or
emergency at (a) ARC, (b) the ARC link, (c) the area bank, or (d) the
Agent's system provider, prevents the Agent from reporting sales on time.
However, once such malfunction or emergency is corrected, a compensatory fee
may be charged where such sales are not reported immediately following the
correction of such malfunction.
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In order for the Agents to be relieved of a compensatory fee for unreported
sales resulting from a malfunction or emergency at the Agent's system
provider, the Agent must supply evidence from the system provider that the
failure prevented the Agent from timely reporting the sales.
For the purpose of this section, in order to demonstrate that it was
"prevented" from reporting sales on time because of a malfunction listed
above, the Agent must demonstrate that it was not possible to report its
sales timely because of the malfunction.
POSTAL LOCATIONS
c. If a weekly sales report together with auditor's coupons and supporting
documents has not been received by the area bank within eight days after
the close of the period, ARC will notify the Agent.
Evidence of timely dispatch will be limited to:
1) A Post Office postmark; or
2) Other evidence supplied by the Post Office of the mailing date; or
3) Priority service air bill or any other documentation acceptable to
ARC.
If the Agent has evidence of timely dispatch of the report, it shall,
within 96 hours of notification by ARC, send copies of such evidence to
ARC and promptly transmit to the area bank a duplicate report, a
settlement authorization form, and facsimiles of the auditor's coupons
and other supporting documents for the report. In all other
circumstances, the Agent shall, within 96 hours of notification by ARC,
provide the report, or a duplicate report, to the area bank with either
the auditor's coupons and other supporting documents if available, or
their facsimiles, and a certified check to cover the amount owed.
Unless the Agent complies with the above, ARC will (i) withdraw from the
Agent, and all authorized agency locations under common control with the
Agent, all ARC traffic documents (paper format) and airline
identification plates, (ii) notify the system providers to inhibit the
transmission of ticketing records for the printing of such Agent, and
(iii) prohibit the use of ARC traffic document numbers for the issuance
of the ARC traffic documents (electronic format) by the system providers
on behalf of such Agent, and so notify the carriers.
ARC traffic documents will be resupplied and airline identification
plates will be returned, except the identification plate of any carrier
which as expressly instructed ARC tot he contrary, to the Agent and
authorized agency locations under common control with the Agent, and the
system providers notified that the issuance of the ARC traffic documents
is authorized, unless the carrier has also taken action to terminate the
Agent's appointment pursuant to section XXIX of this agreement, when the
Agent has provided the report or duplicate report, and paid in full all
amounts owed the carriers under this agreement (including, but not
limited to, payment of all checks drawn by the area bank and dishonored
by the Agent's bank) unless there is an outstanding notice of
cancellation of the Agent's bond.
A compensatory assessment shall be charged by ARC fora missing report for
which the Agent does not have evidence of timely dispatch to defray
handling and processing costs attributable to missing reports and special
service costs described in section XI.H. This assessment will be
calculated and charged by ARC based on a formula approved by the ARC
Board of Directors. ARC shall notify the Agent as to the amount of the
charge and date on which payment will be due. The Agent hereby authorizes
the area bank to collect the charge by issuing a draft against the bank
account maintained pursuant to section VII.B of this agreement.
Alternatively, the Agent shall make payment directly to ARC if required
by the notice.
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ISR LOCATIONS
(1) WHERE WEEKLY SALES REPORT NOT RECEIVED
If ARC has not received the weekly sales report by 11:59 p.m. Eastern Time
on the Tuesday following the close of the report period, or on Wednesday if
Monday or Tuesday is a Federal or state legal holiday, Rosh Hashanah or Yom
Kippur (hereinafter such time shall be referred to as the "submission
deadline"), ARC will notify the Agent.
If the Agent has evidence of timely submission of the report, it shall,
within 96 hours of notification by ARC, send copies of such evidence to ARC
and resubmit to the area bank the report and settlement authorization. In
all other circumstances, the Agent shall, within 96 hours of notification by
ARC, submit to ARC the report and a certified check to cover the settlement
authorization amount.
For the purpose of this subsection, evidence of timely submission or
resubmission of an electronic (ISR) sales report shall be limited to a copy
or facsimile of the confirmation screen and number transmitted by ARC to the
Agent upon ARC's receipt of the weekly sales report, as described above at
paragraph VIII A.7.
[Note: The preceding section applies whenever ARC does not receive the sales
report, for any reason. Compensatory fee consequences for different scenarios
are addressed below at 5(b).]
(2) WHERE MALFUNCTION AT ARC RENDERS REPORT UNPROCESSABLE
If the Agent has timely submitted the required sales report, but, because of
a malfunction or emergency at the area bank or at ARC, the area bank is
unable to process or receive the report, ARC will promptly notify the Agent.
Thereafter, the Agent shall, immediately after such notification by ARC,
resubmit the report.
(3) WHERE WEEKLY SALES REPORT RECALLED BY AGENT
The Agent may, at any time before the submission deadline, recall a sales
report which it has already submitted, in order to enhance or correct data
contained therein. However, the Agent may not recall a previously submitted
sales report after the submission deadline for that sales report, and any
sales report recalled prior to the submission deadline must be resubmitted
by the submission deadline. If a recalled sales report is not resubmitted so
that it is received at ARC by the submission deadline, ARC will notify the
Agent. Thereafter, the Agent shall, within 96 hours of such notification by
ARC, resubmit the report.
(4) WHERE SYSTEM PROVIDER TERMINATES SERVICE
If the Agent's system provider reporting capability has been disabled
because the system provider has terminated service to the Agent, and
therefore the Agent is unable to submit electronically its required weekly
sales report(s) to ARC, the Agent must fulfill all reporting obligations via
paper ("postal location") format, or other mutually agreeable format,
whether or not this agreement has terminated. In such an event, the Agent
must meet must meet the postal location mailing deadlines as set forth in
section VIII, without regard to the time it may take the Agent to convert
its electronic records or data to paper.
(5) CONSEQUENCES OF FAILURE TO TIMELY SUBMIT OR RESUBMIT SALES REPORTS
a. Revocation of Authority to Issue ARC Traffic Documents
Unless the Agent submits or, as appropriate, resubmits the report in
accordance with the above requirements, ARC will notify the carrier and
(i) withdraw from the Agent, and all authorized agency locations under
common control with the Agent, all ARC traffic documents (paper format)
and airline identification plates, (ii) notify the system providers to
inhibit the
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transmission of ticketing records for the printing of such onto ARC
traffic documents (paper format) by such Agent, and (iii) prohibit the
use of ARC traffic document numbers for the issuance of ARC traffic
documents (electronic format) by the system providers on behalf of such
Agent.
ARC traffic documents will be resupplied and airline identification
plates will be returned, except the identification plate of any carrier
which has expressly instructed ARC to the contrary. to the Agent and
authorized agency locations under common control with the Agent, and the
system providers notified that the issuance of ARC traffic documents is
authorized, unless the carrier has also taken action to terminate the
Agent's appointment pursuant to section XXIX of this agreement, when the
Agent has submitted (or resubmitted) the sales report, it has been
received at ARC, and the Agent has paid in full all amounts owed to
carriers under this agreement (including, but not limited to, payment of
all checks drawn by the area bank and dishonored by the Agent's bank)
unless there is an outstanding notice of cancellation of the Agent's
bond.
For the purposes of this subsection, evidence of timely submission or
resubmission of an electronic (ISR) sales report shall be limited to a
copy or facsimile of the confirmation screen and number transmitted by
ARC to the Agent upon ARC's receipt of the weekly sales report, as
described above at paragraph VIII A.7.
b. Compensatory Fees
In order to defray administrative and other costs attributable to late or
missing sales reports and special service costs as described in section
Xl.H, a compensatory assessment shall be charged by ARC to the Agent in
the following instance:
The sales report is not timely received by ARC, and (whether or not the
Agent has supplied the requisite evidence regarding the timeliness of its
first submission of the sales report), after notice from ARC, the Agent
fails to timely resubmit the sales report, and the Agent has not supplied
the requisite evidence of timely resubmission of the sales report, as
described below.
Provided, however, that not more than one compensatory fee shall be
charged the Agent per any given late or missing sales report.
The assessment will be calculated and charged by ARC based on a formula
approved by the ARC Board of Directors. ARC shall notify the Agent as to
the amount of the charge and the date on which payment will be due. The
Agent hereby authorizes the area bank to collect the charge by issuing a
draft against the bank account maintained pursuant to section VII B of
the ARA. Alternatively, the Agent shall make payment directly to ARC if
required by the notice.
A compensatory fee shall not be charged where a malfunction or emergency
at (a) ARC, lb) the ARC link, (c) the area bank, or (d) the Agent s
system provider' prevents the Agent from the sales report on time.
However, once such malfunction or emergency is corrected. a compensatory
fee may be charged where the resubmission of such report is not made
within 96 hours of ARC's notice to the Agent that the report has not been
timely received.
In order for the Agent to be relieved of a compensatory fee for a missing
or late sales report resulting from a malfunction or emergency at the
Agent's system provider, the Agent must supply evidence from the system
provider that the failure prevented the Agent from timely reporting the
sales.
For the purpose of this section, in order to demonstrate that it was
"prevented" from reporting sales on time because of a malfunction listed
above, the Agent must demonstrate that it was not possible to report its
sales timely because of the malfunction.
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For the purpose of this subsection, evidence of timely submission or
resubmission of an electronic (ISR) sales report shall be limited to a
copy or facsimile of the confirmation screen and number transmitted by
ARC to the Agent upon ARC's receipt of the weekly sales report, as
described above at paragraph Vll l.A.7.
ISR AND POSTAL LOCATIONS
d. If the Agent is unable to satisfy its debts to ARC arising from
circumstances described in paragraphs D.l.a, b, and c of this section
within the prescribed time:
1) The Agent and authorized agency locations and authorized agency
locations under common control with the Agent may purchase prepaid
special value tickets to be provided by ARC;
2) In lieu of the Agent and authorized agency locations under common
control with the Agent surrendering its ARC traffic documents (paper
format) and airline identification plates, the Agent may provide a
separate bond to ARC applicable to ARC traffic documents (paper
format) remaining in the Agent's possession, the amount of which is
based on the average value of ARC traffic documents previously issued
by the Agent times the number of documents to be retained. The Agent
shall not be eligible to issue ARC traffic documents in electronic
format.
e. 1) If the Agent does not provide the required weekly sales reports and
full payment therefor, or fails to make full payment of all amounts
owed to the carrier (including, but not limited to, payment of all
checks drawn by the area bank and dishonored by the agent's bank), on
or before the 31st day after the date of ARC's written notice of a
default based on a dishonored draft, unreported sale, IMPROPERLY
REPORTED SALE, or missing sales report, this agreement shall terminate
automatically and without further notice, unless the Agent has
surrendered all ARC traffic documents (paper format) and airlines
identification plates and has ceased to issue ARC traffic documents in
electronic format and, on or before such 31st day, has provided all
missing sales reports and made a partial payment in an amount deemed
appropriate by ARC, and ARC has determined that the Agent could make
full payment if the time were extended, in which case ARC may extend
the time for the Agent to make full payment and avoid termination of
this agreement. Upon termination of the agreement pursuant to this
section, ARC shall notify the carriers and the system providers that
the Agent's agreement has been terminated, and that the issuance of
ARC traffic documents is prohibited.
2) The full amount to be paid within the 31day period described above or
any extension thereof shall include, hut not be limited to, all
amounts owed for dishonored checks, unreported AND IMPROPERLY
REPORTED sales, compensatory fees and missing reports, regardless of
whether such amounts and/or reports have been specifically identified
in the written notice.
3) In determining whether or not to extend the time for full payment,
ARC will consider the following factors, among others: the cause of
the dishonor, unreported or IMPROPERLY REPORTED, sales, or missing
report; the payment schedule proposed; the current financial
condition of the Agent; and any proposed remedial action.
4) An extension of time on the terms provided in the foregoing
paragraphs shall be available to all agents, regardless of size.
5) In conjunction with the extension of time provided paragraphs, the
Agent may obtain authority from one or more of the carriers involved
to convert the Agent's cash indebtedness to each such carrier into
individually sponsored credit plans, thereby transferring the
indebtedness from ARC to such carrier. Upon receipt of written notice
from the carrier concerned, ARC will modify or withdraw the notice of
termination, as appropriate.
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6) Upon the Agent's compliance with the foregoing paragraphs, ARC shall
resupply the Agent with traffic documents and the carriers may, in
their individual discretion, supply or authorize ARC to return to the
Agent the airline identification plates. In addition, ARC will notify
all system providers that the Agent may issue ARC traffic documents,
and the carriers may, in their individual discretion, notify the
system providers if action is to be taken pursuant to section XXIX.
f. Each Agent to whom notice of financial or reporting irregularity is sent
pursuant to section VIII.D.l.a, b or c of this agreement shall cause to
be executed and filed with ARC a "Personal Guaranty of Performance of
Agent's Agreement" as set forth in section V, attachment C to the
agreement. Such execution and filing shall be a condition precedent to an
agent's right to use ARC traffic documents and airline identification
plates in the sale of air transportation and/or ancillary services.
2. This subsection governs insufficient settlement authorization amounts.
a. If the area bank determines that the amount specified by the Agent on
the settlement authorization form is less than the amount owed the
carriers, the area bank will bill the Agent for the difference. If the
area bank bill remains unsatisfied fifteen days after the date on which
it was sent. ARC will bill the Agent for the amount owed.
b. If ARC's bill remains unsatisfied for fifteen days after the date on
which it was sent, ARC shall take such action as it deems appropriate
under the circumstances.
E. PAYMENT OF CARRIER DEBIT MEMOS
1. If the Agent fails to pay a debit memo sent to it by a carrier or is
otherwise in default to a carrier under this agreement, excluding
liability for stolen ARC traffic documents or identification plates under
section Xl hereof, the carrier may:
a. Terminate its appointment of the Agent, by notice in writing to the
Agent, with such notice taking effect on the date specified therein,
and withdraw its airline identification plate; or
b. Withdraw from the Agent its airline identification plate; or
c. Forward any uncontested debit memo to the Central Collection Service
according to the provisions of section XIX of this agreement.
2. If any carrier which has deposited a general concurrence for the
appointment of all agents invokes paragraph E.I .a of this section, it
may so notify ARC. Upon receipt of such notice, ARC will immediately
notify all carriers and the system providers.
F. FAILURE TO MAINTAIN PROPER BOND OR LETTER OF CREDIT
1. Upon cancellation of the Agent's bond or irrevocable bank letter of
credit, ARC will immediately so notify all carriers and the Agent, and
will (i) withdraw all ARC traffic documents (paper format) and airline
identification plates supplied to the Agent, (ii) notify the system
providers to inhibit the transmission of ticketing records for the
printing of such onto ARC traffic documents (paper format) by such Agent,
and (iii) prohibit the use of ARC traffic document numbers by system
providers for the issuance of ARC traffic documents (electronic format)
on behalf of such Agent provided, however, that as a temporary measure to
avoid these events, the Agent may assign, in a form acceptable to ARC, a
Certificate of Deposit in the amount required for a bond pursuant to
section IV.A.l.a of this agreement. The effective date and acceptance by
ARC of such assignment shall be no later than the date of cancellation of
the bond or letter of credit and shall be accepted by ARC as a substitute
for a period not to exceed thirty days from the date of the cancellation.
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Unless the Agent provides to ARC a proper replacement bond or irrevocable
bank letter of credit in the required form and amount, within 30 days
after the cancellation, ARC will terminate this agreement. Upon
termination of the agreement pursuant to this section, ARC shall notify
the carriers and the system providers that the Agent's agreement has been
terminated' and that the issuance of ARC traffic documents is prohibited.
2. If ARC determines that the Agent has failed to change the form, or
adjust the amount of its bond or letter of credit as required by section
IV.A.3 of this agreement, ARC may apply to the Arbiter for an emergency
authorization to (i) remove ARC traffic documents (paper format) and the
airline identification plates from the Agent. and (ii) notify the system
providers to inhibit the transmission of ticketing records for the
printing of such onto ARC traffic documents (paper format) by Agent, and
(iii) prohibit the use of ARC traffic document numbers by system
providers for the issuance of ARC traffic documents (electronic format)
on behalf of such Agent, and to so notify the carriers.
SECTION IX: ADDITIONAL OPERATING REQUIREMENTS
A. The Agent shall be subject to the requirements of this section when, during
any twelve month period,
1. Three or more of the Agent's checks for weekly sales have been
dishonored and ARC has not received immediate reimbursement for such upon
demand by ARC; or
2. Three or more of the Agent's weekly sales reports, (whether for its ISR
or postal locations) including any and all required auditor's coupons and
supporting documents, have not been provided to ARC within 96 hours of
notice to the Agent from ARC and such sales reports are ultimately
received, prior to the termination date of this agreement pursuant to
section VIII.D.I (e)l; or
3. The Agent has been declared in default pursuant to section VIII.D of
this agreement (and the default includes a failure or refusal to
surrender all ARC traffic documents (paper format) and airline
identification plates) but such declaration is withdrawn prior to the
Agent's termination.
For the purposes of section IX:
Evidence of timely dispatch of a paper (postal) sales report will be limited
to:
1) A Post Office postmark, or
2) Other evidence supplied by the Post Office of the mailing date, or
3) Priority service air bill or any other documentation acceptable to ARC.
Evidence of timely submission or resubmission of an electronic (ISR)
sales report shall be limited to a copy or facsimile of the confirmation
screen and number transmitted by ARC to the Agent upon ARC's receipt of the
weekly sales report, as described above at paragraph Vll.A.7.
A late sales report for an ISR location shall not be considered late for the
purposes of this section (i.e., count as a "section IX violation") where a
malfunction or emergency at (a) ARC, (b) the ARC link, (c) the area bank, or
(d) the Agent's system provider, prevents the Agent from timely submitting a
sales report. However, once such malfunction or emergency is corrected, the
sales report may be considered a section IX violation where the resubmission
of such report is not made within 96 hours of ARC's notice to the Agent that
the report has not been timely received. In order for the Agent to be
relieved of a section IX violation for a missing or late sales report
resulting from a malfunction or emergency at the Agent's system provider,
the Agent must supply evidence from the system provider that the failure
prevented the Agent from timely reporting the sales.
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For the purpose of this section, in order to demonstrate that it was
"prevented" from reporting sales on time because of a malfunction listed
above, the Agent must demonstrate that it was not possible to report its
sales timely because of the malfunction.
ISR AND POSTAL LOCATIONS
B. ARC will provide the Agent with 45 days advance written notice of the
effectiveness of this section, which notice shall also be provided to the
carriers. The notice will also inform the Agent that the following must be
accomplished prior to the effective date of the section:
1. The Agent must provide a bond or letter of credit, in the required form
and in an amount equal to or greater than its net cash remittances for a
current 10 week period. The instrument may be a rider to the existing
bond or letter of credit; will be calculated to take into account the
amount of the existing bond or letter of credit; and, must conform in a:'
other respects to the provisions of section IV.A.
2. a. The Agent must surrender traffic documents (paper format) to ARC,
with an accompanying inventory summary, so that it retains no more
than the highest number of ARC traffic documents issued at each of
its locations during any one month in the past twelve months, rounded
up to the next (even 100) mailing box or unit. In order to insure the
Agent's compliance with this section, ARC will inform the Agent, in
the written notice required by this section, of the number of
documents, by stock control number, that are permitted to be
retained.
b. The Agent may possess additional supplies of traffic documents (paper
format only), but in no event more than a three month supply, only if
it is able to post a bond or letter of credit as provided for in
section VIII.D.l.d.(2).
3. The Agent must discontinue the issuance of ARC traffic documents in an
electronic format and any and all use of Electronic Ticket Delivery
Network(s).
4. Any pending application(s) for an additional approved location will be
withdrawn by Agent, and ARC will reject and return to Agent any such
application submitted Agent is subject to this section.
5. The Agent must provide a "Personal Guaranty of Payment and Performance"
in accordance with section IV.A.4 and attachment C hereto.
C. If the Agent is not in compliance with the provisions of section IX.B. as of
the effective date of this section, or at any time during the period of its
effectiveness, ARC will terminate this agreement with the Agent and notify
the carriers and the system providers that the Agent's agreement has been
terminated and that the issuance of ARC traffic documents is prohibited.
D. 1. If, following the effectiveness of this section, and Agent's compliance
with the provisions of section IX.B., there are no instances of dishonored
drafts, missing reports, or defaults within a twelve month period, the
additional operating requirements of this section shall be removed, and
the carriers shall be notified.
2. Alternatively, if there is an additional dishonored draft, missing
report, or default, ARC will file a complaint pursuant to section XV.B.,
seeking the removal of the Agent from the agency list.
E. The Agent may appeal ARC's determination that it is subject to this section
to the Travel Agent Arbiter. During the pendency of the appeal, which shall
be given expedited consideration, the section will continue to apply to the
Agent unless or until removed by the Travel Agent Arbiter or the Agent's
compliance with section IX.D.1.
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SECTION X: REFUND OR EXCHANGE OF ARC TRAFFIC DOCUMENTS
A. The agent may refund any fare or charge applicable to air transportation only
if sold by the Agent hereunder and for which the Agent has issued an ARC
traffic document. The Agent shall make refund only to the person authorized
to receive the refund and in accordance with tariffs, rules, regulations,
and instructions issued by the carrier.
B. The Agent, without the authority of the ticketing carrier whose ARC traffic
document is to be issued, shall not:
1. Issue an ARC traffic document in exchange for any traffic document
previously issued by another agent or by a carrier; or
2. Issue an ARC traffic document in exchange for a traffic document
previously issued by that Agent naming another carrier as the ticketing
carrier.
SECTION XL: LIABILITY AND WAIVER OF CLAIM
A. The carrier will indemnify and hold harmless the Agent, its officers, agents
and employees from all responsibility and liability for any damage, expense,
or loss to any person or thing caused by or arising from any negligent act,
omission or misrepresentation of the carrier, its representatives. agents,
employees, or servants, relating directly or indirectly to the performance
of the duties and obligations of the carrier under this agreement.
B. The Agent will indemnify and hold harmless the carrier, its officers,
agents, and employees from all responsibility and liability for any damage,
expense, or loss to any person or thing caused by or arising from any
negligent act, omission, or misrepresentation of the Agent, its
representatives, agents, employees, or servants relating directly or
indirectly to the performance of the duties and obligations of the Agent
under this agreement.
C. Unless the Agent is relieved of liability pursuant to this section, the
proceeds of the Agent's bond or letter of credit will be applied to, and the
Agent will indemnify and hold harmless the carrier, its officers, agents and
employees, from any and all damage, expense, or loss, on account of the
loss, misapplication, theft, forgery or unlawful use of ARC traffic
documents, ARC-issued numbers or other supplies furnished by or on behalf of
the carrier to the Agent. The Agent shall be relieved of liability for
losses arising from the proven then or unlawful use, except by the Agent or
his employees, of ARC traffic documents, ARC-issued numbers or
identification plates from his premises upon a determination by ARC that the
Agent, at the time of then or unlawful use, exercised reasonable care for
the protection of such ARC traffic documents, ARC-issued numbers or airline
identification plates, and has, upon discovery, immediately reported the
then or unlawful use to the appropriate law enforcement authorities and has
promptly notified ARC of the particulars of such then or unlawful use both
by telephone and telegram.
Reasonable care, as used herein, shall include but not be limited to
compliance with the safeguards set forth in attachment B to this agreement.
In making the determination specified herein, ARC may rely on the findings
of the ARC Field Investigations and Fraud Prevention office or cooperating
security officers of carriers. However, if ARC has filed a complaint with
the Arbiter alleging the Agent failed to comply with the safeguards set
forth in attachment B of this agreement, ARC shall rely on the finding of
the Arbiter in determining whether or not reasonable care was exercised by
the Agent. If ARC determines that the Agent did not exercise reasonable
care, ARC shall inform the Agent of the specific details and exact manner in
which the Agent failed to exercise reasonable care. The Agent may appeal
ARC's determination to the Arbiter pursuant to section XXIII.
D. The Agent hereby expressly waives any and all claims, causes of action, or
rights to recovery based upon libel, slander, or defamation of character by
reason of publication of asserted grounds or reasons
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for removal from the agency list or such other action which may have been
prescribed, or of alleged violations or other charges for which review of
the Agent's eligibility is requested, as is reasonably related to the
performance of appropriate functions specified for ARC, its officers and
employees, or the Director of Field Investigations and Fraud Prevention or
the Arbiter in the performance of their duties under this agreement.
E. If ARC uses legal counsel to (i) enforce its right to possession of ARC
traffic documents (paper format) and airline identification plates, because
the Agent failed or refused to surrender them upon demand made pursuant to
this agreement, and/or (ii) to otherwise obtain compliance by the Agent with
the provisions of this section, the Agent shall reimburse ARC for all costs
incurred by it, and for the reasonable fees of its attorneys, if its action
is adjudicated or otherwise resolved in its favor. If its action is
adjudicated or otherwise resolved in favor of the Agent, ARC shall reimburse
the Agent for all costs incurred by it, and for the reasonable fees of its
attorneys, in defending itself against ARC's action. The term "costs" as
used herein shall include, but not be limited to, court costs, litigation
bond premiums, private investigator fees incurred in attempting to locate
traffic documents, and locksmith fees.
F. If ARC uses legal counsel to enforce its right to inspect the Agent's books
and records, because the Agent failed or refused to permit an inspection
upon demand made pursuant to this agreement, the Agent shall reimburse ARC
for all costs incurred by it, and for the reasonable fees of its attorneys,
if its demand is adjudicated or otherwise resolved in its favor. If its
demand is adjudicated or otherwise resolved in favor of the Agent, ARC shall
reimburse the Agent for all costs incurred by it, and for the reasonable
fees of its attorneys, in defending itself against ARC's demand. The term
"costs" as used herein shall include, but not be limited to, court costs and
litigation bond premiums.
G. The Agent hereby agrees to indemnify and hold the carrier harmless from and
against any claim arising from the failure of the Agent to refund to the
authorized refund payee the proper amount of fare or other charges
collected.
H. The Agent hereby agrees that whenever an ARC representative must go to an
agency or other location to remove ARC traffic documents (paper format
only), collect funds due hereunder, etc., the Agent will pay the
out-of-pocket special service costs incurred by ARC in conjunction with such
action.
SECTION XII: DELIVERY AND WITHDRAWAL OF TRAFFIC DOCUMENTS AND
IDENTIFICATION PLATES
A. The Agent shall procure, at no expense to ARC, one or more validator
machine(s), or ticket writer(s), of a type approved by ARC for use at each
place of business covered by this agreement in the issuance of ARC traffic
documents (paper format).
B. ARC will supply the Agent with ARC traffic documents (paper format) for
issuance to the Agent's clients to cover transportation and ancillary
services purchased, and one or more agent identification plates which the
Agent will purchase from ARC. Shipping and handling costs on ARC traffic
document (paper format) requisitions, submitted by the Agent, will be paid
by the Agent as prescribed from time to time by ARC.
C. After receipt of notice from ARC that an agency location has been included
on the agency list, any carrier may deliver to such Agent airline
identification plates for use at an authorized agency location in the
issuance of ARC traffic documents (paper format) in a validator machine or
ticket writer, and such identification plates shall not be used at any other
place of business. Such airline identification plates shall remain the
property of the carrier, and shall be returned to it upon demand or upon the
termination of this agreement as between the Agent and carrier.
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D. All ARC traffic documents (including ARC-issued numbers used in an electronic
format) supplied to the Agent shall be held in trust for ARC by the Agent
until issued to the Agent's clients to cover transportation or ancillary
services purchased, or until otherwise satisfactorily accounted for to ARC
or the carrier, and shall be surrendered upon demand, together with all
airline identification plates, to ARC pursuant to this agreement.
E. ARC traffic documents (including ARC-issued numbers used in an electronic
format) supplied for issuance at a specified place of business covered by
this agreement shall not be written up or validated at any other place of
business. ARC traffic documents (paper format) shall not be delivered to
customers at or through any other agency location outside the United States,
or customer-premises location.
F. The Agent shall not accept custody of, or deliver, blank, prevalidated, or
partially written ARC traffic documents (including ARC-issued numbers used
in an electronic format) not previously assigned to it under this agreement.
Should the Agent be approached by another agent to distribute blank,
prevalidated, or partially written, ARC traffic documents (paper format), or
to distribute ARC traffic documents not provided to it through the system
provider (electronic format), the Agent shall notify the ARC Director, Field
Investigations and Fraud Prevention.
SECTION XIII: CUSTODY AND SECURITY OF TRAFFIC DOCUMENTS AND
IDENTIFICATION PLATES
During its custody and control of ARC traffic ARC-issued numbers and airline
identification plates, the Agent shall comply with the security rules for such
as specified in attachment B of this agreement.
SECTION XIV: INSPECTION AND RETENTION OF AGENT RECORDS
A.
POSTAL LOCATIONS
The Agent shall retain his duplicate copy of each sales report and his
copies of supporting documents, as well as the weekly sales summary and his
copies of voided ARC traffic documents, for at least two years from the date
the sales report was due to be submitted to the area bank.
ISR LOCATIONS
The Agent shall retain, in a durable and readily available, accessible and
readable medium, either on paper or from which a legible paper copy may be
readily produced, for a period of at least two years from the date upon
which the sales report was due to be submitted to the area bank, a copy of
each weekly sales summary report and a copy or facsimile of each
confirmation screen. Further, the Agent shall retain, for at least two
years, its original paper copy of (1) all voided traffic documents, (2) all
Universal Credit Card Charge Forms (UCCCF's) and (3) all supporting
documentation as more expressly stated in the Industry Agents Handbook, the
ISR Training Supplement, or as otherwise indicated to the Agent by ARC. For
these documents (UCCCF's and other supporting documentation), the two year
period shall be measured from the ending date of the sales report period
during which the transaction evidenced by the documentation occurred.
Specifically regarding auditor coupons of ARC traffic documents, the Agent
shall also retain, for the amount of time specified in the INDUSTRY AGENTS'
HANDBOOK, the ISR Training Supplement. or as otherwise indicated to the
Agent by ARC, the auditor's coupon of all ARC traffic documents issued and
validated by it during the period specified in the INDUSTRY AGENTS
HANDBOOK or the ISR Training Supplement.
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The Agent must send to ARC each week all signed and imprinted UCCCF's for
sales of carrier transportation and/or ancillary services as indicated in
the INDUSTRY AGENTS' HANDBOOK,the ISR Training Supplement, or as otherwise
indicated to the Agent by ARC.
Upon request by the carrier, the Agent must send (a) any and all supporting
documents, as listed above, or (b) information derived therefrom, at the
carrier's discretion, to the carrier via the return method specified by the
carrier within 5 business days of the date the carrier sent the request.
Failure of the Agent to do so may result in the Agent being liable for the
transaction to which the documentation relates. If a return delivery method
other than fax or U.S. mail is specified by the carrier, the carrier shall
bear the cost of such delivery method.
[OFFICIAL COMMENTARY: IN THE ISR ENVIRONMENT, TRAVEL AGENTS WILL BE REQUIRED TO
STORE SUPPORTING DOCUMENTS, INCLUDING REFUNDED, REISSUED, AND EXCHANGED TRAFFIC
DOCUMENTS. BECAUSE SUCH DOCUMENTS CAN BE USED FOR CARRIER TRANSPORTATION AND
ANCILLARY SERVICES, IT IS RECOMMENDED THAT TRAVEL AGENTS EXERCISE CAUTION IN
STORING, AS WELL AS PERMITTING ACCESS TO, THESE DOCUMENTS. IT IS FURTHER URGED
THAT TRAVEL AGENTS CLEARLY MARK ALL SUCH TRAFFIC DOCUMENTS AS VOID, TO PREVENT
UNAUTHORIZED USE OR REISSUANCE THEREOF.]
[NOTE A: It is ARC's present intention to establish and maintain a sales data
base, and to make this database available to agents for a fee. Agents using this
database would no longer be required to maintain transaction records, also
[NOTE B: As of this writing, the particulars of the Agent's responsibilities
regarding the retention and submission of credit card charge forms will be in
accord with the IAR Charge Form Processing Pilot Program. Pursuant to this
program, some carriers may require ISR Agents to submit their charge forms to
ARC each week, to be processed by ARC and forwarded to the carrier, while other
carriers will not.]
BOTH ISR AND POSTAL LOCATIONS
B. The Agent recognizes and agrees that ARC and its designees, are authorized
to represent ARC and the carriers for purposes of inspecting the books and
records of the Agent pursuant to this agreement. In making such inspections,
they may seek to determine whether the Agent is in full compliance with the
provisions of the agreement. Books and records shall be opened for such
inspection upon reasonable notice and the authorized representatives shall
have authority to make such notes and copies as they deem appropriate.
C. The Agent will be apprised of the purpose or occasion for such examination,
and will be obligated to provide only those documents material and relevant
to the examination, that are requested by the authorized representative. ARC
shall upon written request by the Agent, provide a copy of any written
report prepared by the ARC representative who has completed an inspection of
the books and records of such Agent.
D. A carrier may examine the Agent's records with respect to ARC traffic
documents issued by the Agent on behalf of such carrier at any time.
SECTION XV: REVIEWS OF QUALIFICATIONS OF AND BREACHES BY AGENT
A. In situations such as the following, in which it appears to ARC that there
may be or has been fraudulent conduct on the part of the Agent and that
there is a clear and present danger of substantial loss to ARC and/or the
carriers, ARC may (i) immediately remove its traffic documents (paper format
only) and all airline identification plates from the Agent, and so notify
the carriers, (ii) notify the system providers to inhibit the transmission
of ticketing records for the printing of such onto ARC traffic documents
(paper format) by such Agent, and (iii) prohibit the use of ARC traffic
document numbers for the issuance of ARC traffic documents (electronic
format) by system providers on behalf of such Agent and all agents under
common control with the Agent:
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1. Failure to include in a report the auditor's coupon (paper or electronic
format) of all ARC traffic documents issued through the close of the
sales report period, even though payment was subsequently made upon
demand;
2. Issuance of ARC traffic documents against a credit card without the
cardholder's authority, or against a stolen or otherwise fraudulent
credit card;
3. Post-validation of ARC traffic documents; alteration of the issuance
date on ARC traffic documents; or consistent or extensive reporting of
sales in which ARC traffic documents have been issued out of numerical
sequence;
4. Failure to account for missing ARC traffic documents or for flight,
exchange, or service coupons thereof;
5. Permitting blank, prevalidated, or partially written ARC traffic
documents (paper format), or ARC-issued numbers (electronic format) to be
removed from the authorized agency location for issuance elsewhere;
6. Permitting alteration, omission, or other falsification on coupons of
original ARC traffic documents or on any reissue thereof;
7. Falsification of reports, traffic documents, or other documents;
8. Acceptance of custody of, or delivering, blank, prevalidated, or
partially written ARC traffic documents (paper format) or ARC-issued
numbers (electronic format) not previously assigned to it under this
agreement;
9. Distribution, sale or issuance of ARC traffic documents (paper format)
or ARC-issued numbers (electronic format) which the Agent knew, or
reasonably should have known, were stolen or reported as missing; or
10. Reporting cash refunds against sales made on credit cards.
11. Permitting the unlawful or unauthorized access or use of an airline or
system provider computer reservations system owned, leased or controlled
by it in connection with the issuance of ARC traffic documents.
12. Without the authority of the ticketing carrier on which the ARC traffic
document is issued, (a) issuing an ARC traffic document in exchange for
any traffic document previously issued by another agent or by a carrier,
or (b) issuing an ARC traffic document in exchange for a traffic document
previously issued by the Agent naming another carrier as the ticketing
carrier;
13. Engaging in a pattern of potential "bust-out" activity, such as a
sudden, sharp increase of sales, which, along with other relevant
information, indicates to ARC that the Agent is engaging in fraud;
14. Issuing, writing up, or otherwise producing duplicate or invalid credit
memos;
15. In the absence of specific permission of the carrier, using any credit
card which is issued in the name of the Agent, or in the name of any of
the Agent's personnel, or in the name of any third party, for the
purchase of air transportation for sale or resale to other persons, or
reporting to the carrier the sale of any air transportation as a credit
card transaction where at any time the Agent bills, invoices, or receives
payment in cash from the customer for such air transportation; or
16. Submitting for refund or reissuance an ARC traffic document or
transaction which has already been refunded or reissued.
The Agent shall thereupon have the right of appeal to the Arbiter on an
expedited basis pursuant to procedures established by the Arbiter. Unless,
within 10 calendar days after ARC's demand for ARC's
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traffic documents and the airline identification plates, (a) an appeal is
received by the Arbiter, (b) ARC has received from the Agent all ARC traffic
documents (paper format) and airline identification plates entrusted to the
Agent, and (c) ARC has received from the Agent a properly executed "Personal
Guaranty of Payment and Performance," attachment C of this agreement, the
Agent's agreement will be terminated by ARC without further notice. Upon
termination of the agreement pursuant to this section, ARC shall notify the
carriers and the system providers that the Agreement has been terminated and
that the issuance of ARC traffic documents is prohibited.
B. If there is reason to believe that the Agent has breached a provision of
this agreement, ARC may file a complaint against the Agent with the Arbiter.
C. If the Arbiter so directs, ARC shall remove from the agency list the Agent
or any branch location. ARC the Agent has been removed from the agency list,
ARC shall terminate the agreement with the Agent on behalf of all carriers.
Upon termination of the agreement pursuant to this section, ARC shall notify
the carriers and the system providers that the agreement has been terminated
and that the issuance of ARC traffic documents is prohibited.
SECTION XVI: ANNUAL AND APPLICATION FEES
A. For each calendar year the Agent agrees to pay an annual administrative fee
to ARC for each of its authorized agency locations to defray a portion of
the costs associated with the operation of the ARC program as well as half
of the costs associated with the operation of the Travel Agent Arbiter
Program, Inc. The amount of such annual fee will be determined by the ARC
Board of Directors, and ARC will notify the Agent of the amount of the fee
for the next ensuing year before the end of the previous calendar year.
1. This fee will be collected by an area bank which will draw a separate
check against the designated account of each authorized agency location
with the second sales report period ending in January for the current
calendar year.
2. If the separate check for the annual fee is not paid. and the amount
remains unpaid 14 days thereafter, the Agent or authorized agency
location involved will be removed from the agency list. Thereafter, ARC
shall terminate the agreement and withdraw from the Agent all ARC traffic
documents and airline identification plates and so notify the carriers.
ARC shall also notify the carriers and the system providers that the
agreement has been terminated and that the issuance of ARC traffic
documents is prohibited.
3. For an authorized agency location added to the agency list during a
calendar year, the annual fee will be included with the application fee.
B. An application filed by the Agent under this agreement to change its name.
location, or ownership shall include therewith a fee as prescribed from time
to time by ARC. The amount of such fee shall relate to the administrative
expenses in processing the application and expenses incurred in updating the
database.
SECTION XVII: SPECIAL LOCATION EXEMPTIONS
A. An authorized agency location that is located on the premises of a customer
of the Agent and that issues ARC traffic documents primarily to that
customer or its employees, may, upon request by the Agent, be classified as
a customer-premises location. A customer-premises location must meet all the
requirements provided in this agreement, including the qualifications in
section IV for retention on the agency list, except that:
1. The person meeting the personnel standards of section IV.B.2 may be an
employee of either the Agent or the customer; and
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2. The location need not meet the requirements of sections IV.C.2, 4, and
S; and
3. If the location is a branch location, it need not meet the requirements
of section IV.B.1.
B. An authorized agency location that is not open and freely accessible to the
public may, upon request by the Agent, be classified as a restricted-access
location. A restricted-access location must meet all the requirements
provided in this agreement, including the qualifications in section IV for
retention on the agency list, except for the requirements provided in
sections IV.C.2, 4, and 5.
C. 1. An Agent who wishes to have an authorized agency location classified as a
customer-premises or restricted-access location, or who wishes to have an
existing classification terminated, shall submit to ARC a written request
for such action. If the request is to obtain a new classification, it
shall set forth facts sufficient to show that the location is entitled to
the classification requested in accordance with the qualifications set
forth in subsection A or B above. If the request is to terminate an
existing classification, it shall set forth facts sufficient to show that
the location meets the qualifications in section IV for retention on the
agency list from which the location was exempted by virtue of its current
classification.
2. ARC shall promptly review any such request and notify the Agent whether
the request is granted or denied. If the request is denied. the
notification to the Agent shall include a statement of the reasons
therefor. The Agent may obtain review of the denial. in accordance with
section XXIII of this agreement.
D. An agency location may, upon request by the Agent, be classified as an
on-site location if it meets the following conditions:
1. The location is on the premises of a single client of the Agent for the
primary purpose of providing travel services to that client; it is not
intended to serve the general public;
[Official Commentary: It is ARC's intent that the Agent primarily serve one
client's business needs at this location (for example, one corporate client or
one government client), but not be precluded from providing that client's
employees with leisure travel counseling and ticketing or from serving other
business clients.]
2. The location complies with all requirements for a branch application,
except as otherwise noted, although it need not comply with section
IV.B.I, section IV.C.S, or section Vl.C, X.C.I. or X.A. of Attachment B;
and
[OFFICIAL COMMENTARY: ARC RECOGNIZES THAT AN ON-SITE LOCATION IS NOT ENGAGED IN
THE SALE OF AIR TRANSPORTATION TO THE GENERAL PUBLIC. ARC ALSO ENVISIONS THAT A
CUBICLE MAY BE THE ACTUAL ON-SITE LOCATION, AND RECOGNIZES THAT SUCH A LOCATION
CANNOT BE LOCKED. HENCE, THE EXCEPTIONS FROM SECTION IV.C.5 AND FROM SECTION X.A
OF ATTACHMENT B ARE PROVIDED FOR. THE OTHER EXCEPTIONS, HOWEVER, IF UTILIZED BY
THE AGENT, CARRY WITH THEM THE ASSUMPTION OF FULL AND ABSOLUTE LIABILITY FOR ANY
AND ALL DAMAGE, EXPENSE OR LOSS AT SUCH LOCATIONS. SEE, ALSO, SECTION XVII.D.6
BELOW.]
3. The location is or will be staffed by a person meeting the personnel
standards of section IV.B.2 (but that person may be employed by either
the Agent or the client of the Agent);
4. The location is not identified or advertised to the public as, or held
out to the public to be, an office for the sale of air transportation or
ancillary services on behalf of the air transportation industry. However,
signage, identifying the on-site branch location within the premises
occupied by the Agent's client, is permitted;
5. If the location is not in compliance with section VI.C of attachment B,
then the traffic documents referenced in sections Vl.A.2 and A.3 of
Attachment B must be placed in a locked steel container.
28
<PAGE>
6. If the location is staffed by a person employed by the client of the
Agent or if the location does not fully comply with section VI.C or
X..C.1 of attachment B, then the Agent assumes full and absolute
liability for any and all damage, expense, or loss experienced by any
carrier, its officers, agents, or employees on account of the loss,
misapplication, theft, or forgery of ARC traffic documents assigned to
the location.
[OFFICIAL COMMENTARY: THE AGENT WILL, CONVERSELY, BE RELIEVED FROM LIABILITY IF
THE SECURITY CONTAINER DETAILED IN SECTION VI.C AND THE TICKET PRINTER
REFERENCED IN SECTION X.C.1 ARE PLACED IN A LOCKED ROOM UNDER ITS EXCLUSIVE
CONTROL, AND THE TICKETING QUALIFIER AT THE LOCATION IS EMPLOYED BY THE AGENT.]
SECTION XVIII: NOTICES
A. Any notice which this agreement explicitly requires to be given in writing
shall be sufficient if sent by prepaid telegram, mailgram, mail, or any
government licensed delivery service which service provides a shipping
receipt. airbill, or documentation of delivery, addressed as the Agent or
ARC (as appropriate) shall have designated in writing during the term of
this agreement.
The date of such notice, for the purpose of making calculations with regard
thereto, shall be the date such notice was mailed, telegraphed, or placed in
the hand of a government licensed delivery service for delivery.
B. Any notice which this agreement does not explicitly require to be made in
writing shall be sufficient if made by any reasonable means, including, but
not limited to, telephone notice or, for ISR locations' a screen prompt over
the Agent's system provider.
SECTION XIX: CENTRAL COLLECTION SERVICE
In order to expedite the flow and payment of (1) debit memos issued by a carrier
against the Agent, and (2) credit request memos issued by the Agent against a
carrier, and to provide a uniform manner of processing such items should the
Agent or carrier fail to act upon direct submissions to them within a reasonable
time, the Agent and carriers may issue credit request memos and debit memos,
respectively, which may be submitted to the Central Collection Service, under
the terms and conditions set forth in attachment D, hereto.
SECTION XX: TRANSFER OR ASSIGNMENT OF AGREEMENT, DEATHS AFFECTING
OWNERSHIP, ABANDONMENT OF AUTHORIZED AGENCY LOCATION, TEMPORARY
CLOSURE
A. CHANGE OF OWNERSHIP
1. This agreement may not be assigned or transferred by the Agent without
the approval of ARC. Moreover, if 30 percent or more of the shares of
stock, cumulative, of the Agent have been sold or otherwise transferred
(unless such Agent is an entity whose shares are listed on a securities
exchange or are regularly traded in an over-the-counter market), ARC
approval, for purposes of retention on the ARC agency list, must be
obtained.
2. Procedures for approval of changes of ownership are set forth in
attachment G hereof. Upon receipt of a complete application for approval
of a change of ownership, ARC shall notify the carriers and the system
providers. Carriers and system providers will also be notified when such
application is approved.
3. Possession of ARC traffic (paper format) by a new owner as well as
access to such in an electronic format prior to ARC approval will be
subject to appropriate action by ARC.
4. If ARC determines that this agreement has been assigned or transferred,
or that ownership of a branch location covered by this agreement has been
assigned or transferred or that 30 percent or
29
<PAGE>
more of the stock in the agency entity has been sold or otherwise
transferred and that ARC approval for purposes of retention on the ARC
agency list has not been given, ARC may take appropriate action
consistent with section XXIII of this agreement.
5. In the event a transfer or assignment of ownership interest occurs
without ARC approval with respect to a branch location, the procedures
set forth in paragraph 4 above shall only apply to the agency location
affected by the change.
B. DISAPPROVAL OF CHANGE OF OWNERSHIP
If ARC disapproves an application for a change of ownership, the carriers and
the system providers shall be notified. The applicant may obtain a review of the
disapproval by the Arbiter, in accordance with section XXIII of this agreement.
The carriers and system providers shall also be notified when an application for
approval of change of ownership is withdrawn and/or returned to the applicant.
C. DEATH OF A SOLE PROPRIETOR
1. On receipt of information of the death of the sole proprietor of the
Agent, ARC shall notify all carriers. and may (i) withdraw all ARC
traffic documents (paper format) and airline identification plates
supplied to such Agent, and (ii) notify the system providers to inhibit
the transmission of ticketing records for the printing of such onto ARC
traffic documents (paper format) by such Agent, and (iii) prohibit the
use of ARC traffic document numbers by system providers for the issuance
of ARC traffic documents (electronic format) on behalf of such Agent. In
order to preserve the goodwill of the agency as far as possible, ARC may,
at the request of the person entitled to represent the deceased's estate,
enter into a temporary agreement with such person acting on behalf of the
estate provided that such person submits a proper bond or letter of
credit in the name of the estate. The temporary agreement shall be in the
same form and have the same effect as this agreement. ARC shall examine
the matter periodically, and, if it considers that conditions so warrant,
shall direct that the temporary agreement be terminated. ARC shall notify
all carriers and the agency accordingly, and may take appropriate action
consistent with section XXIII of this agreement. Upon termination of the
temporary agreement, ARC shall so notify the carriers and the system
providers that the issuance of ARC traffic documents, whether in paper or
electronic format, is prohibited.
2. If the person entitled to represent the estate proposes to transfer the
temporary agreement to an heir, legatee, or other person, such transfer
shall be deemed a change of ownership, and the procedures of attachment G
shall apply.
3. Subject to earlier termination under the provision set forth above, a
temporary agreement shall terminate if the representative of the estate
ceases to carry on the agency business at the location covered by such
agreement.
D. DEATH OF A PARTNER
1. In the event of a death of a member of a partnership or other
unincorporated firm, ARC will notify all carriers, and may (i) withdraw
all ARC traffic documents (paper format) and airline identification
plates supplied to such Agent and (ii) notify the system providers to
inhibit the transmission of ticketing records for the printing of such
onto ARC traffic documents (paper format) by such Agent, and (iii)
prohibit the use of ARC traffic document numbers by system providers for
the issuance of ARC traffic documents (electronic format) on behalf of
such Agent. In order to preserve the goodwill of the agency as much as
possible, ARC may enter into a temporary agreement with the
representative of the deceased's estate and/or remaining partner(s),
provided such person(s) presents a proper bond or letter of credit as
provided herein.
30
<PAGE>
The temporary agreement may be extended by ARC for good cause shown. The
temporary agreement shall be in the same form and have the same terms and
conditions as this agreement.
2. If the person(s) with whom the temporary agreement is executed proposes
to become the new owner(s), or proposes to transfer the agreement to
another person, such transfer shall be deemed a change of ownership and
the procedures of attachment G shall apply.
3. Subject to earlier termination under the provision set forth above, a
temporary agreement shall terminate if the person(s) with whom the
temporary agreement is executed ceases to carry on the agency business at
the location covered by such agreement.
E. ABANDONMENT OF AUTHORIZED AGENCY LOCATION
1. If ARC has cause to believe that the Agent has failed to keep its
authorized agency location open and freely accessible to the public in
accordance with section IV.C.4 (except as provided in section XVII of
this agreement) and/or the Agent has moved its agency location without
prior written notice to ARC (in accordance with section Vl.B of this
agreement), ARC will notify the agent in writing of such breach or
breaches. Such notice shall be sent to the address which the Agent shall
have designated in writing during the term of this Agreement, by a
delivery service which provides a shipping receipt, airbill, or
documentation of delivery. If ARC does not receive a written response to
such notice on or before the 15th day from the date of such notice, this
agreement shall terminate automatically and without further notice,
effective the 16th day from the date of such notice. ARC shall notify the
carriers and the system providers that the Agreement has been terminated
and that the issuance of ARC traffic is prohibited.
a) ARC shall have cause to believe that the Agent has closed, abandoned,
or changed its authorized agency location without notifying ARC, for
the purposes of this section, based on any reliable indicia of
abandonment, closure, or changed location, including, but not limited
to, the following: (1) the disconnection of the telephone number of
the Agent's authorized location with no indication that the number
has been changed or the telephone line has been damaged or is being
serviced; (2) an ARC representative's observations upon visiting the
Agent's authorized location, e.g., location is empty or non-existent,
no forwarding address; or, (3) two or more returned letters or
written notices sent by ARC to Agent's address of record.
F. TEMPORARY CLOSURE
1. In the event of a situation beyond the Agent's control, e.g., fire,
flood, illness, ARC may, upon written request by the Agent, permit the
Agent to temporarily close its authorized agency location(s), for a
period not to exceed 30 days. The Agent's request must be made within 10
days of the closure of the agency location. If circumstances warrant, ARC
may approve a request for temporary closure which exceeds 30 days. All
requests for temporary closure must be in the form prescribed by ARC and
approved by ARC in writing. ARC's approval shall state the temporary
closure time period. ARC shall not unreasonably deny any request for
temporary closure of an authorized agency location, and the Agent may
request the Travel Agent Arbiter to review any such denial.
2. The Agent's bond or letter of credit shall remain in full force and
effect. Agent shall, in accordance with section Vlil of this agreement,
continue to submit weekly sales reports reflecting "no sales" when the
agency location is temporarily closed unless ARC has removed all ARC
traffic documents and carrier identification plates from the Agent during
the period of closure, and notified the carriers and system providers
that issuance of ARC traffic documents is prohibited.
31
<PAGE>
3. ARC shall notify the carriers and the system providers of the temporary
closure of the Agent's authorized location(s), directing that the system
providers inhibit the transmission of ticketing records for the printing
of such onto ARC traffic documents (paper format) by such Agents, and
prohibiting the use of ARC traffic document numbers by system providers
for the issuance of ARC traffic documents (electronic format) on behalf
of such Agent. When the location(s) are reopened, the carriers and the
system providers shall be notified.
4. If the agent fails to reopen within the time period approved by ARC, the
agreement with the closed location(s) will be terminated, following 10
days advance notice to the Agent, and ARC shall notify the carriers and
the system providers, accordingly.
SECTION XXI: REDUCED RATE TRANSPORTATION FOR AGENT
The provision of free or reduced rate transportation by a carrier to the Agent
and its employees shall be in accordance with such terms, rules and regulations
as the carrier shall establish.
SECTION XXII: REMUNERATION OF AGENTS
The remuneration paid the Agent for the sale of air transportation shall be that
established by the carrier, or shall be such as may be mutually agreed between
the carrier and the Agent, and is not provided herein.
SECTION XXIII: TRAVEL AGENT ARBITER
Disputes between the Agent and ARC shall be resolved by the Arbiter in
accordance with the rules and procedures promulgated and published by the
Arbiter and the decision of the Arbiter shall be final and binding; provided,
however, that neither the Agent nor ARC is precluded from seeking judicial
relief to enforce a decision of the Arbiter, or to compel compliance with a
requirement or prohibition of this agreement prior to the filing of an answer in
a proceeding concerning such requirement or prohibition before the Arbiter.
SECTION XXIV: INTERPRETIVE OPINION PROCEDURES
A. The Agent may, by written submission, request from ARC an opinion of the
interpretation or application of an ARC resolution or a provision of an ARC
agreement which may affect travel agents in their role as agents for carrier
parties to the ARC carrier services agreement. The following guidelines will
apply to such a request:
1. ARC must answer the request within fifteen (15) days of its receipt;
2. The opinion shall relate only to the Agent and the specific question(s)
raised in the request; and
3. Unless the Agent seeks appeal of the opinion as hereinafter provided,
the request and opinion shall not be circulated to any other person.
B. The Agent seeking appeal of an opinion rendered above may by written
submission to ARC, place on the agenda of the next ARC Board of Directors
meeting, a request for the review of the opinion. The Board's decision shall
be reported in the Minutes of the meeting, and a copy of the decision shall
be promptly provided to the Agent.
SECTION XXV: MEMORANDUM OF AGREEMENT AND ALTERNATIVE
MEANS OF AGENT CONCURRENCE
ARC may prepare a memorandum of agreement, execution of which binds ARC and
the Agent, and the carriers appointing the Agent, to the terms and
conditions of this agreement. The memorandum of agreement shall be executed
in duplicate. The Agent's copy shall be attached to its copy of this
32
<PAGE>
agreement and the second copy will be returned to, and retained by, ARC.
Alternatively, the Agent's concurrence in the terms and conditions of this
agreement may be obtained through an electronic signature; may be deemed to
have occurred upon the Agent's performance under the agreement, following
advance notice, as of a fixed date; or, may be obtained or deemed to have
occurred by any other means adopted by the ARC Board of Directors, such as
via the entry of an electronic personal identification number (PIN), which
means is performed by the Agent area such adoption.
SECTION XXVI: AMENDMENT OF THIS AGREEMENT
A. ARC, in discharging the responsibility of notice, will submit each future
amendment to this agreement to the Agent not less than forty-five days prior
to the effective date of the amendment, unless otherwise specified.
In the event that, immediately prior to the effectiveness of the amendment,
this agreement is at that time subject to termination in accordance with its
terms, this agreement shall remain subject to such termination, without
regard to whether the amendment alters any provision of this agreement
related to the basis for the termination.
B. If ARC does not receive an executed amendment by the effective date thereof
or the Agent's concurrence in the Agreement cannot be demonstrated, ARC may
remove the Agent from the agency list and terminate this agreement with the
Agent. Thereupon, ARC shall notify the carriers and, also, the system
providers that the issuance of ARC traffic documents is prohibited.
SECTION XXVII: ASSURANCE OF NONDISCRIMINATION
(EFFECTIVE ONLY AS BETWEEN THE AGENT AND EACH U.S. CARRIER;
NOT EFFECTIVE AS BETWEEN THE AGENT AND ARC, ITSELF).
In accordance with the Air Carrier Access Act of 1986 and 14 C.F.R. Part 382,
the Agent shall not discriminate on the basis of handicap in performing services
for air carriers subject to said Act, and the Agent shall comply with directives
of the air carrier Complaints Resolution Officials issued pursuant to 14 C.F.R.
Part 383.
SECTION XXVIII: EFFECTIVENESS
A. This agreement shall become effective as between the Agent and ARC on the
date stated on the memorandum of agreement.
B. This agreement shall be effective as between the Agent and each carrier
which has, or hereafter may have, issued an appointment to the Agent. This
agreement shall have the same force and effect between the carrier and the
Agent as though they were both named in, and had subscribed their names to,
the memorandum on the date appearing thereon.
SECTION XXIX: TERMINATION
A. This agreement may be terminated as between the Agent and ARC, and between
the Agent and all carriers jointly, at any time by notice from the Agent to
ARC, subject to a full and complete accounting. This agreement may be
terminated as between ARC and the Agent in accordance with this agreement by
notice in writing from ARC to the Agent.
B. Whenever under the terms of this agreement ARC is required to remove the
Agent or its branch location from the agency list, ARC will terminate this
agreement with respect to the Agent or location, respectively.
C. Upon termination as between the Agent and ARC, and between the Agent and all
carriers jointly, all unused ARC traffic documents (paper format) and
airline identification plates shall be immediately
33
<PAGE>
returned, together with all monies due and payable to the carriers
hereunder, and a complete and satisfactory accounting rendered. ARC may
designate a representative to remove all ARC traffic documents (paper
format) and airline identification plates from the Agent.
ISR LOCATIONS
In addition to the above, upon termination as between the Agent and ARC, and
between the Agent and all carriers jointly. the Agent must return to ARC all
supporting documents as listed in section XIV, above, which are less than or
equal to two years of age as of the date of termination, such age to be
calculated from the ending date of the report period during which the
transaction evidenced by the supporting documents occurred. ARC may
designate a representative to remove all ARC traffic documents (paper
format) and airline identification plates from the Agent.
ISR AND POSTAL LOCATIONS
D. Whenever this agreement is terminated pursuant to paragraph A or B above, ARC
shall notify all carriers and advise them of the effective date thereof. ARC
shall also notify the system providers that the issuance of ARC traffic
documents, whether in paper or electronic format, is prohibited.
Additionally, the Agent shall cease any and all use of its code number(s)
for purposes related to the issuance of ARC traffic documents.
E. A carrier appointment may be terminated as between the Agent and any
individual carrier at any time by notice in writing from one to the other.
If a carrier which issues specific certificates of appointment under section
V hereof, elects to terminate its appointment of the Agent, it shall notify
the Agent of the termination of the certificate of appointment. A carrier
which has deposited with ARC a concurrence for appointment of all agents may
terminate its appointment of the Agent by notifying the Agent by certified
mail, with a copy to ARC's Agency Accreditation Services, such notice to be
distributed by ARC to all carrier participants, that the Agent shall not
represent that carrier. ARC shall also notify the system providers that the
Agent's agreement with the Carrie. is terminated. The system providers shall
inhibit the printing of ARC traffic documents validated with such carrier's
identifier as well the generation of such ARC traffic documents in an
electronic format. Upon receipt of notice from a carrier that the
termination of the Agent's agreement has been rescinded or revoked, ARC
shall so notify the carriers and the system providers.
F. Termination shall take effect immediately upon receipt of notice, or upon
the date indicated therein, whichever shall be later, subject to the
fulfillment by each of the parties of all obligations accrued prior to the
effective date of such termination.
G. ARC shall be considered a real party in interest in any cause of action,
suit, or arbitration (hereinafter collectively "action") to enforce the
terms of this agreement, including any action brought by ARC, after the
termination of this agreement by ARC or the Agent, to collect amounts due
the carriers by the Agent.
SECTION XXX: OTHER AGREEMENTS SUPERSEDED
This agreement shall supersede any and all prior agreements between the Agent
and any carrier party to the Carrier Services Agreement concerning the issuance
of ARC traffic documents for such party, including the Air Traffic Conference of
America Passenger Sales Agency Agreement, except with respect to rights and
liabilities thereunder existing at the date hereof.
SECTION XXXI: CHOICE OF LAW
This Agreement shall be construed in accordance with, and governed by, the laws
of the Commonwealth of Virginia.
34
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated March 27, 1998 relating
to the consolidated financial statements of Navigant International, Inc., our
report dated February 3, 1998 relating to the combined financial statements of
Evans Travel Group, Inc. and Evans Consulting Services, Inc., and our report
dated January 23, 1998 relating to the combined financial statements of Travel
Consultants, Inc. and Envisions Vacations, Inc., all of which appear in such
Prospectus. We also consent to the reference to us under the heading "Experts"
in such Prospectus.
PRICE WATERHOUSE LLP
Denver, Colorado
April 30, 1998
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the inclusion in the Prospectus, which is part of this
Registration Statement on Form S-1 of Navigant International, Inc., of our
report dated September 23, 1996 relating to the financial statements of MTA,
Inc. (not presented separately herein) as of December 31, 1995, and for the
period from January 25, 1995 (date of incorporation) to December 31, 1995, and
to the reference to us under the heading "Experts" in the Prospectus, which is
also part of this Registration Statement.
/s/ Deloitte & Touche, LLP
DELOITTE & TOUCHE LLP
Seattle, Washington
April 30, 1998
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Navigant
International, Inc. on Form S-1 of our report dated May 22, 1997 on the
financial statements of Associated Travel Services, Inc., appearing in the
Prospectus, which is a part of this Registration Statement. We also consent to
the reference to us under the heading "Experts" in such Prospectus.
/s/Deloitte & Touche LLP
Costa Mesa, California
April 30, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated March 6, 1997 (except for
Note 10, Note 12 and the last paragraph of Note 1, as to which the date is
January 29, 1998) relating to the financial statements of McGregor Travel
Management, Inc. which appears in such prospectus, and to the reference to us
under the heading "Experts" in the Prospectus, which is also part of this
Registration Statement.
Walter J. McKeever & Company
Greenwich, Connecticut
April 30, 1998
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated August 22, 1996 (except
for Note 10 as to which the date is January 30, 1998) relating to the financial
statements of Omni Travel Service, Inc., which appears in such Prospectus, and
to the reference to us under the heading "Experts" in the Prospectus, which is
also part of this Registration Statement.
Nardella & Taylor
Lexington, Massachusetts
April 30, 1998
<PAGE>
EXHIBIT 23.8
CONSENT TO BE NAMED AS A DIRECTOR
I hereby consent to be named as a person who will become a director of
Navigant International, Inc. (the "Company") in the registration statement on
Form S-1 to be filed by the Company with the Securities and Exchange Commission
relating to the distribution by U.S. Office Products Company, the sole
shareholder of the Company, of shares of common stock, par value $.001, of the
Company.
<TABLE>
<S> <C>
Dated: May 1, 1998 /s/ Ned A. Minor
---------------------------------------------
Ned Minor
</TABLE>
<PAGE>
Exhibit 23.9
CONSENT TO BE NAMED AS A DIRECTOR
I hereby consent to be named as a person who will become a director of
Navigant International, Inc. (the "Company") in the registration statement on
Form S-1 to be filed by the Company with the Securities and Exchange
Commission relating to the distribution by U.S. Office Products Company, the
sole shareholder of the Company, of shares of common stock, par value $.001,
of the Company.
Dated: May 1, 1998 /s/ D. Craig Young
--------------------------------
D. Craig Young
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY INCLUDED IN THE REGISTRATION
STATEMENT ON FORM S-1.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-26-1997
<PERIOD-START> MAY-1-1996
<PERIOD-END> APR-26-1997
<CASH> 6,952
<SECURITIES> 0
<RECEIVABLES> 6,236
<ALLOWANCES> (271)
<INVENTORY> 0
<CURRENT-ASSETS> 13,692
<PP&E> 7,954
<DEPRECIATION> 0
<TOTAL-ASSETS> 29,339
<CURRENT-LIABILITIES> 12,411
<BONDS> 2,799
0
0
<COMMON> 0
<OTHER-SE> 13,483
<TOTAL-LIABILITY-AND-EQUITY> 29,339
<SALES> 57,677
<TOTAL-REVENUES> 57,677
<CGS> 31,541
<TOTAL-COSTS> 31,541
<OTHER-EXPENSES> 21,388
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 587
<INCOME-PRETAX> 4,488
<INCOME-TAX> 1,145
<INCOME-CONTINUING> 3,343
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,343
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0
<FN>
<F1>EPS has not been presented as such amounts are not deemed meaningful
due to the significant change in the Company's capital structure that will
occur upon the consummation of the Distribution.
</FN>
</TABLE>
