<PAGE>
P R O S P E C T U S FILED PURSUANT TO
RULE 424(B)(4)
2,000,000 SHARES
[NAVIGANT INTERNATIONAL, INC. LOGO]
COMMON STOCK
---------
All of the 2,000,000 shares of common stock, $.001 par value per share (the
"Navigant Common Stock" or "Company Common Stock"), offered hereby are being
offered by Navigant International, Inc. ("Navigant"or the "Company") and will
represent approximately 15% of the outstanding Navigant Common Stock upon
completion of this offering. Prior to the offering made hereby, Navigant has
been a wholly-owned subsidiary of U.S. Office Products Company ("U.S. Office
Products"). Prior to the completion of this offering, all of the shares of
Navigant Common Stock owned by U.S. Office Products are being distributed to the
stockholders of U.S. Office Products in a spin-off.
Prior to this offering, there has not been a public market for Navigant
Common Stock. Navigant Common Stock has been approved for inclusion, subject to
notice of issuance, on the Nasdaq Stock Market's National Market System under
the symbol "FLYR".
SEE "RISK FACTORS" COMMENCING ON PAGE 7 FOR A DISCUSSION OF CERTAIN MATTERS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF NAVIGANT COMMON STOCK
OFFERED HEREBY.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) NAVIGANT(2)
Per Share $9.00 $.63 $8.37
Total(3) $18,000,000 $1,260,000 $16,740,000
</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Underwriting".
(2) Before deducting expenses estimated at $1,500,000.
(3) Navigant has granted the Underwriters a 30-day option to purchase up to
300,000 additional shares of Navigant Common Stock solely to cover
over-allotments, if any. See "Underwriting". If such option is exercised in
full, the total Price to the Public, Underwriting Discounts and Commissions,
and Proceeds to Navigant will be $20,700,000, $1,449,000 and $19,251,000,
respectively.
------------------
The shares of Navigant Common Stock are being offered by the several
Underwriters named herein, subject to prior sale, when, as and if accepted by
them and subject to certain conditions. It is expected that delivery of the
shares of Navigant Common Stock offered hereby will be made at the office of
Smith Barney Inc., 333 West 34th Street, New York, New York 10001 or through the
facilities of The Depository Trust Company, on or about June 15, 1998.
--------------
SALOMON SMITH BARNEY
NATIONSBANC MONTGOMERY SECURITIES LLC
RAYMOND JAMES & ASSOCIATES, INC.
June 9, 1998
<PAGE>
[MAP DEPICTING NAVIGANT LOCATIONS AND LOGOS]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMPANY COMMON
STOCK, INCLUDING PURCHASES OF COMPANY COMMON STOCK TO STABLIZE ITS MARKET PRICE
AND TO COVER ALL OR SOME OF ANY SHORT POSITION IN THE COMPANY COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND INCLUDING THE IMPOSITION OF PENALTY BIDS. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
--------------
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS ABOUT BUSINESS
STRATEGIES, MARKET POTENTIAL, FUTURE FINANCIAL PERFORMANCE AND OTHER MATTERS. IN
ADDITION, WHEN USED IN THIS 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.
<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 "Form S-1") pursuant to the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the offering hereby of Navigant Common Stock.
This Prospectus, while forming a part of the Form S-1, does not contain all of
the information set forth in the Form S-1. Reference is hereby made to the Form
S-1 for further information with respect to Navigant and Navigant Common Stock
offered hereby. Statements contained herein concerning the provisions of
documents filed as exhibits to the 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 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 completion of the offering made hereby, 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.
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.
3
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS
OF NAVIGANT INTERNATIONAL, INC. ("NAVIGANT" OR THE "COMPANY") AND NOTES THERETO,
THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF THE COMPANY AND THE
NOTES THERETO, AND THE FINANCIAL STATEMENTS OF CERTAIN COMPANIES ACQUIRED BY THE
COMPANY AND THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.
PROSPECTIVE PURCHASERS SHOULD READ THIS PROSPECTUS IN ITS ENTIRETY. UNLESS
OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THAT
THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED.
UNLESS THE CONTEXT REQUIRES OTHERWISE, REFERENCES TO (I) U.S. OFFICE
PRODUCTS COMPANY ("U.S. OFFICE PRODUCTS") AND NAVIGANT (OR THE COMPANY) INCLUDE
THEIR RESPECTIVE SUBSIDIARIES, AND (II) NAVIGANT (OR THE COMPANY) PRIOR TO THE
TRAVEL DISTRIBUTION 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 twelve regional corporate travel
agencies. In calendar year 1997, the travel agencies that form 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 a wide 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 as
developed in its different operating units; and (iv) achieving economies of
scale.
4
<PAGE>
U.S. Office Products began building Navigant with the acquisition of
Professional Travel Corporation in January 1997 and thereafter acquired 11
additional corporate travel management companies. Navigant currently has 129
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.
THE SPIN-OFF FROM U.S. OFFICE PRODUCTS
Prior to the completion of this offering, all of the approximately
10,968,951 shares of common stock, par value $.001 per share, of Navigant (the
"Company Common Stock" or the "Navigant Common Stock") owned by U.S. Office
Products are being distributed in a spin-off to the stockholders of record of
U.S. Office Products as of 5:00 p.m. EDT on June 9, 1998 (the "Travel
Distribution"). The Travel Distribution is part of a comprehensive restructuring
plan adopted by the U.S. Office Products Board of Directors, including
modifications the Board of Directors has made since first adopting this plan (as
so modified, the "Strategic Restructuring Plan"), in which U.S. Office Products
is spinning off the shares of the four companies (the "Spin-Off Companies") that
will conduct U.S. Office Products' current print management, technology
solutions, educational supplies and corporate travel services businesses. The
spin-offs are collectively referred to as the "Distributions." The effective
time of the Distributions is 11:59 p.m. EDT on June 9, 1998 (the "Distribution
Date"). See "The Spin-Offs From U.S. Office Products."
THE OFFERING
<TABLE>
<S> <C>
Navigant Common Stock Offered(1)............. 2,000,000 shares
Navigant Common Stock Outstanding after the
Offering(1)(2).............................. 12,968,951 shares
Use of Proceeds.............................. To repay a portion of the indebtedness
incurred to refinance debt allocated to
Navigant pursuant to the Travel
Distribution.
Nasdaq National Market Symbol................ FLYR
</TABLE>
- ------------------------
(1) Excludes 300,000 shares of Navigant Common Stock subject to the
Underwriters' over-allotment option.
(2) Excludes shares of Navigant Common Stock reserved for issuance upon the
exercise of stock options outstanding upon consummation of the Travel
Distribution.
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)(6)
--------- --------- --------- --------- ------------ --------- ----------- -----------
<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 $ 146,981
Operating expenses....... 14,244 17,153 19,692 25,836 9,491 31,541 80,513 80,513
--------- --------- --------- --------- ------------ --------- ----------- -----------
Gross profit............. 14,609 15,685 14,877 19,431 8,518 26,136 66,468 66,468
General and
administrative
expenses............... 10,588 11,647 11,651 15,221 6,660 19,684 47,261 47,261
Amortization expense..... 203 197 221 342 128 548 2,997 2,997
Non-recurring acquisition
costs.................. 1,156 1,156 1,156
--------- --------- --------- --------- ------------ --------- ----------- -----------
Operating income......... 3,818 3,841 3,005 3,868 1,730 4,748 15,054 15,054
Interest expense......... 125 139 118 515 173 587 1,424 205
Interest income.......... (173) (231) (253) (352) (109) (445)
Other (income) expense... 55 48 42 20 118 312 312
--------- --------- --------- --------- ------------ --------- ----------- -----------
Income before provision
for income taxes....... 3,866 3,878 3,092 3,663 1,646 4,488 13,318 14,537
Provision for income
taxes.................. 188 97 18 565 255 1,145 6,126 6,687
--------- --------- --------- --------- ------------ --------- ----------- -----------
Net income............... $ 3,678 $ 3,781 $ 3,074 $ 3,098 $ 1,391 $ 3,343 $ 7,192 $ 7,850
--------- --------- --------- --------- ------------ --------- ----------- -----------
--------- --------- --------- --------- ------------ --------- ----------- -----------
Net income per share:
Basic................ $ 0.83 $ 0.85 $ 0.67 $ 0.52 $ 0.18 $ 0.37 $ 0.66 $ 0.61
Diluted.............. $ 0.83 $ 0.85 $ 0.67 $ 0.52 $ 0.18 $ 0.36 $ 0.66 $ 0.61
Weighted average shares outstanding:
Basic................ 4,426 4,426 4,556 5,906 7,750 9,003 10,969(3) 12,969(4)
Diluted.............. 4,426 4,426 4,570 6,002 7,910 9,176 10,969(3) 12,969(4)
<CAPTION>
NINE MONTHS ENDED
---------------------------------------------------------------
PRO FORMA
PRO FORMA PRO FORMA AS ADJUSTED
JANUARY 25, JANUARY 24, JANUARY 25, JANUARY 24, JANUARY 24,
1997 1998 1997(2) 1998(2) 1998(2)(6)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
STATEMENT OF INCOME DATA:
Revenues................. $ 41,527 $ 80,706 $ 105,362 $ 119,693 $ 119,693
Operating expenses....... 22,656 47,172 59,550 67,869 67,869
----------- ----------- ----------- ----------- -----------
Gross profit............. 18,871 33,534 45,812 51,824 51,824
General and
administrative
expenses............... 15,011 26,274 34,491 38,608 38,608
Amortization expense..... 471 1,509 2,336 2,418 2,418
Non-recurring acquisition
costs.................. 284 284
----------- ----------- ----------- ----------- -----------
Operating income......... 3,105 5,751 8,701 10,798 10,798
Interest expense......... 415 399 1,068 1,068 154
Interest income.......... (382) (338)
Other (income) expense... 40 (71) 178 (118) (118)
----------- ----------- ----------- ----------- -----------
Income before provision
for income taxes....... 3,032 5,761 7,455 9,848 10,762
Provision for income
taxes.................. 551 2,823 3,429 4,530 4,951
----------- ----------- ----------- ----------- -----------
Net income............... $ 2,481 $ 2,938 $ 4,026 $ 5,318 $ 5,811
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net income per share:
Basic................ $ 0.29 $ 0.26 $ 0.37 $ 0.48 $ 0.45
Diluted.............. $ 0.28 $ 0.25 $ 0.37 $ 0.48 $ 0.45
Weighted average shares o
Basic................ 8,598 11,476 10,969(3) 10,969(3) 12,969(4)
Diluted.............. 8,782 11,719 10,969(3) 10,969(3) 12,969(4)
</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(5) ADJUSTED(5)(6)
--------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
BALANCE SHEET DATA:
Working capital............................................................ $ 1,281 $ 8,580 $ 3,027 $ 3,652
Total assets............................................................... 29,339 137,661 134,249 134,249
Long-term debt, less current portion....................................... 2,012 2,664 17,175 2,560
Long-term payable to U.S. Office Products.................................. 787 10,027
Stockholder's equity....................................................... 13,483 100,111 92,270 107,510
</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(j) of Notes to Pro Forma Combined
Financial Statements included herein.
(4) For calculation of the pro forma as adjusted weighted average shares
outstanding for the nine months ended January 24, 1998, see Note 2(l) of
Notes to Pro Forma Combined Financial Statements.
(5) 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.
(6) As adjusted to give effect to the sale of the shares of Navigant Common
Stock by Navigant pursuant to this offering after deducting underwriting
discounts 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 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 this 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 approximately 10,968,951 shares of Navigant Common Stock
(approximately 85% of the total outstanding shares upon completion of the Travel
Distribution and this offering) that will be freely tradeable at the time of
this offering 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. Such sales could exert downward pressure on the
price of Navigant Common Stock.
In addition, upon completion of this offering, Navigant will have
outstanding (i) 2,000,000 shares of Navigant Common Stock issued in this
offering, all of which will be freely tradeable unless held by affiliates of
Navigant and (ii) immediately exercisable options and options exercisable in the
future 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 this offering. Following
this offering and the Travel Distribution, 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. In addition, a substantial number of
additional options to acquire shares of Navigant Common Stock may be awarded by
Navigant to employees under its 1998 Stock Incentive Plan. Certain officers and
directors of Navigant who 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, subject to certain exceptions.
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 "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Navigant--Introduction." 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
7
<PAGE>
management contract with Navigant. There can be no assurance that Navigant will
be able to maintain or 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 "Management's Discussion and
Analysis of Financial Condition and Results of Operations of
Navigant--Introduction." If, during any period, Navigant fails to meet incentive
levels, revenues could decrease. There can also 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 may suffer a loss of customers and its revenues or margins may decline.
Navigant also competes with travel suppliers, including airlines, hotels and
rental car companies. Innovations in technology such as the Internet and
computer on-line services have increased the ability of travel suppliers to
distribute their travel products and services directly to consumers. Although
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
condition and results of operations of Navigant.
RISK OF RAPID GROWTH; ABSENCE OF HISTORY AS A STAND-ALONE COMPANY
Navigant has been formed through the consolidation by U.S. Office Products
of twelve separate corporate travel agency companies and expects to continue to
grow in part through acquisitions. All twelve 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
8
<PAGE>
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 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
telecommunications 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; GENERAL ECONOMIC CONDITIONS
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
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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 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, including goodwill. 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 LIABILITY FOR TAXES RELATED TO THE DISTRIBUTIONS
In connection with the Distributions, U.S. Office Products is entering into
a tax allocation agreement with Navigant and the other Spin-Off Companies (the
"Tax Allocation Agreement"), which provides 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 is also entering 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, 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 to not only the
Travel Distribution but also any of the other Distributions. See "The Spin-Offs
From U.S. Office Products--Tax Allocation Agreement and Tax Indemnification
Agreement" and "The Spin-Offs From U.S. Office Products--U.S. Federal Income Tax
Consequences of the Distributions" for a detailed discussion of the Tax
Allocation Agreement and Tax Indemnification Agreement and the U.S. federal
income tax consequences of the Distributions.
RISKS RELATED TO ALLOCATION OF CERTAIN LIABILITIES
Under the Distribution Agreement (as defined below), Navigant will be liable
for (i) any liabilities arising out of or in connection with the business
conducted by it or its subsidiaries, (ii) its liabilities under the Employee
Benefits Agreement (as defined below), Tax Allocation Agreement and related
agreements described under "The Spin-Offs From U.S. Office Products", (iii) the
U.S. Office Products debt that has been allocated to Navigant (see "The
Spin-Offs From U.S. Office Products--Distribution Agreement-- Debt"), (iv)
liabilities under the securities laws relating to this Prospectus and portions
of the Information
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Statement/Prospectus distributed to stockholders of U.S. Office Products in
connection with the Travel Distribution, as well as other securities law
liabilities related to the Navigant business that arise from information
supplied to U.S. Office Products (or that should have been supplied, but was
not) by Navigant, (v) U.S. Office Products' liabilities for earn-outs from
acquisitions in respect of Navigant and its subsidiaries, (vi) Navigant's costs
and expenses related to this offering and its bank financing, and (vii) $1.0
million of the transaction costs (including legal, accounting, investment
banking and financial advisory) and other fees incurred by U.S. Office Products
in connection with its Strategic Restructuring Plan. Each of the other Spin-Off
Companies will be similarly obligated to U.S. Office Products. Navigant and the
other Spin-Off Companies have also agreed to bear a pro rata portion of U.S.
Office Products' liabilities under the securities laws (other than claims
relating solely to a specific Spin-Off Company or relating specifically to the
continuing businesses of U.S. Office Products) and U.S. Office Products' general
corporate liabilities (other than debt, except for that specifically allocated
to the Spin-Off Companies) incurred prior to the Distribution Date (I.E.,
liabilities not related to the conduct of a particular distributed or retained
subsidiary's business) (the "Shared Liabilities"). If one of the Spin-Off
Companies defaults on an obligation owed to U.S. Office Products, the
non-defaulting Spin-Off Companies will be obligated on a pro rata basis to pay
such obligation ("Default Liability"). As a result of the Shared Liabilities and
Default Liability, Navigant could be obligated to U.S. Office Products in
respect of obligations and liabilities not related to its business or operations
and over which neither it nor its management has or has had any control or
responsibility. The aggregate of the Shared Liabilities and Default Liability
for which any Spin-Off Company may be liable is, however, limited to $1.75
million. See "--Potential Liability for Taxes Related to the Distributions" and
"The Spin-Offs From U.S. Office Products." The Company's pro rata share of
Shared Liabilities and Default Liability is described below in "The Spin-Offs
From U.S. Office Products--Distribution Agreement--Liabilities."
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 most of the acquisitions were paid for
with common stock, par value $.001 per share, of U.S. Office Products (the "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.
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
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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 financings. Prior to the Travel Distribution, Navigant was not
responsible for obtaining external sources of funding. 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 become unable to continue in his or her present
role, or if Navigant is unable to attract and retain other skilled employees,
its business could be adversely affected. 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 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 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 this offering there has been no public
market for Navigant Common Stock. The initial public offering price of Navigant
Common Stock in this offering was determined through negotiations among Navigant
and the underwriters of this offering and may not be indicative of the market
price for Navigant Common Stock after this 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 Future Sale."
MATERIAL AMOUNT OF GOODWILL
On a pro forma basis as of January 24, 1998, approximately $87.6 million, or
65.2%, of Navigant's pro forma total assets and 94.9% of Navigant's pro forma
stockholders' equity represent 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
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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 to
periodically evaluate the recoverability of goodwill by reviewing the
anticipated undiscounted future cash flows from the operations of the acquired
companies and comparing such cash flows to the carrying value of the associated
goodwill. If management determines that goodwill has become impaired in later
years, earnings in such years will be significantly adversely affected. A
reduction in net income resulting from the amortization or write down of
goodwill would currently affect financial results and could have a material and
adverse impact upon the market price of Navigant Common Stock. Navigant believes
that anticipated cash flows associated with intangible assets recognized in the
acquisitions completed during the nine months ended January 24, 1998 will
continue over the period during which the associated goodwill will be amortized,
and there is no persuasive evidence that any material portion will dissipate
during such period.
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."
POSSIBLE LIMITATIONS ON ISSUANCES OF COMMON STOCK
Section 355(e) of the Internal Revenue Code of 1986, as amended (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,
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 is entering into the Tax Allocation Agreement and the 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 "The Spin-Offs From U.S. Office Products--Tax Allocation Agreement
and Tax Indemnification Agreement."
This limitation could adversely affect the pace of Navigant's acquisitions
and its ability to issue capital stock for other purposes, including equity
offerings.
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
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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 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.
DILUTION
Purchasers of Navigant Common Stock offered hereby will incur an immediate
and substantial dilution in net tangible book value of Navigant Common Stock
from the initial public offering price. The options to acquire Navigant Common
Stock that are issued as replacements for options to acquire U.S. Office
Products Common Stock, and that will be outstanding following the Travel
Distribution, may be exercisable at prices significantly below the initial
public offering price. To the extent outstanding options to purchase Navigant
Common Stock are exercised, there will be further dilution. See "Dilution."
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. As a result of the allocation of debt to Navigant in the Travel
Distribution, immediately after the Travel Distribution, Navigant's retained
earnings will be zero, which could limit funds available for payment of
dividends. Furthermore, 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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THE SPIN-OFFS FROM U.S. OFFICE PRODUCTS
Prior to this offering, Navigant has been a wholly-owned subsidiary of U.S.
Office Products. At the time of this offering, Navigant holds all of the
business and assets of, and is responsible for substantially all of the
liabilities associated with, U.S. Office Products' Corporate Travel Services
Division. Prior to the completion of the offering made hereby, all of the
approximately 10,968,951 shares of Navigant Common Stock owned by U.S. Office
Products will be distributed to the stockholders of record of U.S. Office
Products in the Travel Distribution. U.S. Office Products is spinning off
Navigant as part of the Strategic Restructuring Plan in which U.S. Office
Products is spinning off the shares of the Spin-Off Companies that will conduct
U.S. Office Products current print management, technology solutions, educational
supplies and corporate travel services businesses. As part of its Strategic
Restructuring Plan, U.S. Office Products is repurchasing 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) in a tender offer (the "Tender
Offer") and is selling a 24.9% equity interest (the "Equity Investment") in U.S.
Office Products (but no interest in the Spin-Off Companies) to an affiliate
("CD&R") of an investment fund managed by Clayton, Dubilier & Rice, Inc. ("CD&R,
Inc.").
In connection with the Travel Distribution, Navigant is entering into a
series of agreements with U.S. Office Products and the other Spin-Off Companies
to provide mechanisms for an orderly transition and to define certain
relationships among Navigant, U.S. Office Products and the other Spin-Off
Companies after the Travel Distribution. These agreements are: a distribution
agreement (the "Distribution Agreement") among Navigant, U.S. Office Products
and the other Spin-Off Companies; the Tax Allocation Agreement among Navigant,
U.S. Office Products and the other Spin-Off Companies; an employee benefits
agreement (the "Employee Benefits Agreement") among Navigant, U.S. Office
Products and the other Spin-Off Companies; and the Tax Indemnification Agreement
among Navigant and the other Spin-Off Companies. The terms of the Distribution
Agreement, Tax Allocation Agreement, Tax Indemnification Agreement and Employee
Benefits Agreement described herein have been determined while Navigant is a
wholly-owned subsidiary of U.S. Office Products. In addition, the agreement
between U.S. Office Products and CD&R relating to CD&R's investment in U.S.
Office Products (the "Investment Agreement") specifies certain terms of these
agreements and provides that they are subject to CD&R's reasonable approval.
Therefore, these agreements are not the result of arm's-length negotiations
between independent parties.
DISTRIBUTION AGREEMENT
TRANSFER OF SUBSIDIARIES AND ASSETS. The Distribution Agreement provides
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 also provides 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
100% to Navigant. In addition, to the extent that Navigant Acquisition Indemnity
Claims are currently secured by the pledge of stock of U.S. Office Products 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 Navigant for its damages and expenses.
DEBT. The Distribution Agreement allocates a specified amount of U.S.
Office Products' debt outstanding under its credit facilities to each Spin-Off
Company and requires each Spin-Off Company, on or prior to the Distributions, to
obtain credit facilities, to borrow funds under such facilities and to use the
proceeds of such borrowing to pay off the U.S. Office Products' debt so
allocated plus any additional debt incurred by U.S. Office Products after
January 12, 1998 (the date of the Investment Agreement) in connection with the
acquisition of any entity that has become or will become a subsidiary of such
Spin-Off Company. Under the Distribution Agreement, $16.4 million of U.S. Office
Products' debt has been allocated to Navigant.
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LIABILITIES. Under the Distribution Agreement, 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
Employee Benefits Agreement, the Tax Allocation Agreement and related
agreements, (iii) the U.S. Office Products debt that has been allocated to the
Company as described above, (iv) liabilities under the securities laws relating
to this Prospectus and certain sections of the Information Statement/Prospectus
relating to the Travel Distribution, as well as securities law liabilities
related to the Navigant business that arise from information supplied to U.S.
Office Products (or that should have been supplied but was not) by Navigant, (v)
any liabilities of U.S. Office Products relating to earn-out or bonus payments
in respect of Navigant or its subsidiaries, (vi) the Company's costs and
expenses related to this offering and its bank credit facility, and (vii) $1.0
million of transaction 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. Each of the other Spin-Off
Companies will be similarly obligated to U.S. Office Products. Navigant and the
other Spin-Off Companies have also agreed to bear a pro rata share of (i) any
liabilities of U.S. Office Products under the securities laws (other than claims
relating solely to a specific Spin-Off Company or relating specifically to the
continuing businesses of U.S. Office Products), and (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 Distribution Date
(I.E., liabilities not related to the conduct of a particular distributed or
retained subsidiary's business) (the "Shared Liabilities"). If one of the
Spin-Off Companies defaults on an obligation owed to U.S. Office Products, the
non-defaulting Spin-Off Companies will be obligated, on a pro rata basis, to pay
such obligation ("Default Liability"). The aggregate of the Shared Liabilities
and Default Liability for which any Spin-Off Company may be liable is, however,
limited to $1.75 million.
The Spin-Off Companies' pro rata share of Shared Liabilities will be, based
upon the fiscal year ended April 25, 1998, the average of (a) their revenues
relative to those of U.S. Office Products and (b) their operating income
relative to that of U.S. Office Products; the residual will be U.S. Office
Products' pro rata share. Based upon financial data for the nine-month period
ended January 24, 1998, the Company's pro rata share of Shared Liabilites would
have been 5.2%, the other Spin-Off Companies' pro rata share would have
aggregated 29.2% and U.S. Office Products' pro rata share would have been 65.6%.
As to any Default Liability, each non-defaulting Spin-Off Company's pro rata
share will be increased to include a portion of the defaulting Spin-Off
Company's pro rata share.
The Distribution Agreement provides 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 will 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 provides 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 provides for sharing, where appropriate, of state, local and
foreign taxes attributable to periods prior to the Distributions.
The Tax Allocation Agreement further provides 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
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or all of the Distributions are taxable. Navigant is also entering 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. 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 to not only the
Travel Distribution but also any of the other Distributions. The liabilities of
Navigant under the Tax Allocation Agreement and the Tax Indemnification
Agreement are not subject to any limits.
EMPLOYEE BENEFITS AGREEMENT
In connection with the Distributions, U.S. Office Products is entering 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 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 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 Date.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTIONS
Pursuant to the Tax Allocation Agreement and Tax Indemnification Agreement,
see "--Tax Allocation Agreement and Tax Indemnification Agreement," Navigant
could be liable for Distribution Taxes if any or all of the Distributions fail
to qualify as tax-free spin-offs under Section 355 of the Code or are taxable
under Section 355(e) of the Code.
THE TAX OPINION. Wilmer, Cutler & Pickering has delivered an opinion (the
"Tax Opinion") stating that for U.S. federal income tax purposes the
Distributions 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. The Tax Opinion is
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 that
Wilmer, Cutler & Pickering has deemed necessary.
The Tax Opinion represents 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 Distributions.
Assuming the Distributions qualify as tax-free spin-offs under Section 355
and are not taxable under Section 355(e), no gain or loss will be recognized by
U.S. Office Products as a result of the Distributions.
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. Prospective
stockholders 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
17
<PAGE>
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 Distributions.
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 a 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 corporate business purposes. U.S. Office Products represented
that the Distributions were motivated, in whole or substantial part, to 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 stages
of growth; to allow the Spin-Off Companies to pursue independent acquisition
programs with a more focused use of resources and, where stock is used as
consideration, to allow the Spin-Off Companies 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 the Spin-Off Companies 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, Inc. Based on these representations and certain other
information, data, documentation and other materials, Wilmer, Cutler & Pickering
has delivered the Tax Opinion stating that each 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 assurance
that the IRS will not assert that the business purpose requirement is not
satisfied.
ACTIVE TRADE OR BUSINESS. In order for the distribution of the stock of a
Spin-Off Company (other than Navigant) to qualify as a tax-free spin-off under
Section 355, both the Spin-Off Company 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 Distributions, taking into account only
businesses that have been acquired in transactions in which no gain or loss was
recognized. In order for the distribution of the stock of Navigant 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 meet the requirements described in the
preceding sentence. 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 the Spin-Off
Companies, Wilmer, Cutler & Pickering has delivered the Tax Opinion stating that
each Distribution satisfies 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. A
Distribution will not qualify as a tax-free spin-off under Section 355 if the
Distribution was used principally as a device for the distribution of the
earnings and profits of U.S. Office Products or the Spin-Off Company. 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
Treasury 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 the Spin-Off Companies, Wilmer,
Cutler & Pickering has delivered the Tax Opinion stating that none of the
Distributions is a transaction used principally as a device for the distribution
of earnings and profits of either U.S. Office Products or any of the Spin-Off
Companies. However, because of the inherently subjective nature of 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 &
18
<PAGE>
Pickering relies, there can be no assurance that the IRS will not assert that
any or all of the Distributions are transactions used principally as a device
for the distribution of earnings and profits.
EFFECT OF POST-DISTRIBUTION TRANSACTIONS. Section 355(e), 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 a 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 a series of related transactions. Based on the representations of
U.S. Office Products, the Spin-Off Companies and CD&R, and the assumption that
no Distribution is part of a plan that is outside the knowledge of U.S. Office
Products and the Spin-Off Companies 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 of any Spin-Off Company, Wilmer, Cutler & Pickering
has delivered the Tax Opinion stating that the Distributions will not be taxable
under Section 355(e). However, there can be no assurance that the IRS will not
assert that any or all of the Distributions are taxable under Section 355(e).
If a Distribution fails to qualify as a tax-free spin-off or is taxable
under Section 355(e), U.S. Office Products will recognize gain equal to the
difference between the fair market value of the common stock of the Spin-Off
Company and U.S. Office Products' adjusted tax basis in the common stock of the
Spin-Off Company (on the Distribution Date). If U.S. Office Products were to
recognize gain on one or more Distributions, such gain would likely be
substantial.
USE OF PROCEEDS
The proceeds to Navigant from this offering as contemplated hereby (net of
underwriting discounts and commissions and the estimated expenses of this
offering) are estimated to be approximately $15,240,000 ($17,751,000 if the
Underwriters' over-allotment option is exercised in full). The net proceeds to
Navigant from this offering will be used to repay a portion of the $16.4 million
of indebtedness under a $60.0 million revolving credit facility which Navigant
expects to obtain from NationsBank, N.A. The $16.4 million of indebtedness is
being incurred at the time of the Travel Distribution to refinance intercompany
indebtedness to U.S. Office Products. The indebtedness to NationsBank, N.A. will
bear interest at a rate of, at the Company's option, either (i) LIBOR plus a
margin of between 1.0% and 2.0%, depending upon Navigant's funded debt to EBITDA
ratio, or (ii) the Alternate Base Rate (defined as the higher of (x) the
NationsBank, N.A. prime rate and (y) the Federal Funds rate plus .50%) plus a
margin of between 0% and .75%, depending on Navigant's funded debt to EBITDA
ratio. The indebtedness to NationsBank, N.A. will mature five years from the
effective date of the credit facility. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations of Navigant--Liquidity and
Capital Resources." The indebtedness to U.S. Office Products bears interest at
7% and matures at the time of the Distributions.
DIVIDEND POLICY
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 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. As a result of the allocation
of debt to Navigant in the Travel Distribution, immediately after the Travel
Distribution, Navigant's retained earnings will be zero, which could limit funds
available for payment of dividends. Furthermore, Navigant's ability to pay
dividends may be restricted from time to time by financial covenants in its
credit agreements.
19
<PAGE>
DILUTION
The pro forma net tangible book value of Navigant at January 24, 1998 was
$4.7 million, or $0.43 per share of Navigant Common Stock. Pro forma net
tangible book value per share is determined by dividing the pro forma net
tangible book value (total pro forma tangible assets less total liabilities) of
Navigant (after giving effect to the Travel Distribution, the allocation of debt
by U.S. Office Products and the purchase acquisition completed subsequent to
January 24, 1998) by the number of shares of Navigant Common Stock outstanding.
Without taking into account any changes in the pro forma net tangible book value
of Navigant, other than to give effect to the sale of the shares of Navigant
Common Stock offered hereby and the receipt of the net proceeds therefrom, the
adjusted pro forma net tangible book value of Navigant at January 24, 1998 would
have been $20.0 million, or $1.54 per share of Navigant Common Stock. This
represents an immediate dilution in pro forma net tangible book value of $7.46
per share to new investors purchasing shares in this offering. The following
table illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Initial public offering price per share....................................... $ 9.00
Pro forma net tangible book value per share at January 24, 1998............. $ 0.43
Increase per share attributable to new investors (1)........................ 1.11
---------
Pro forma net tangible book value per share after this offering............... 1.54
---------
Dilution per share to new investors (2)(3).................................... $ 7.46
---------
---------
</TABLE>
- ------------------------
(1) After deduction of underwriting discounts and commissions and estimated
offering expenses to be paid by Navigant.
(2) Determined by subtracting the adjusted pro forma net tangible book value per
share after the offering from the amount of cash paid by a new investor for
one share of Navigant Common Stock.
(3) The foregoing information does not give effect to the issuance of shares of
Navigant Common Stock pursuant to stock options granted or to be granted.
See "Management of Navigant--Executive Compensation" and "--Replacement of
Outstanding U.S. Office Products Options."
20
<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 debt by U.S. Office Products and the purchase
acquisition to be completed subsequent to January 24, 1998; and (iii) on a pro
forma as adjusted basis to give effect to the sale of the 2,000,000 shares of
Navigant Common Stock being offered hereby after deduction of the 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 "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
Prospectus.
<TABLE>
<CAPTION>
JANUARY 24, 1998
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED(2)
---------- ----------- --------------
<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 $ 17,175 $ 2,560
Long-term payable to U.S. Office Products................................. 10,027
Stockholder's equity:
Preferred Stock, $.001 par value, 5,000,000 shares authorized and no
shares issued and outstanding.........................................
Common Stock, $.001 par value, 150,000,000 shares authorized; 10,968,951
shares pro forma; and 12,968,951 shares pro forma as adjusted(1)...... 11 13
Additional paid-in capital.............................................. 92,389 107,627
Divisional equity....................................................... 94,140
Cumulative translation adjustment....................................... (130) (130) (130)
Retained earnings....................................................... 6,101
---------- ----------- --------------
Total stockholder's equity.......................................... 100,111 92,270 107,510
---------- ----------- --------------
Total capitalization................................................ $ 112,802 $ 109,445 $ 110,070
---------- ----------- --------------
---------- ----------- --------------
</TABLE>
- ------------------------
(1) Excludes shares of Navigant Common Stock to be reserved for issuance upon
exercise of options. See "Management of Navigant--1998 Stock Incentive
Plan." The approximately 11.0 million shares of Navigant Common Stock
outstanding on a pro forma basis was calculated by dividing the
approximately 109.7 million shares of U.S. Office Products Common Stock
expected to be outstanding on the Distribution Date by ten (the
"Distribution Ratio"). The approximately 13.0 million shares of Navigant
Common Stock outstanding on a pro forma basis, as adjusted, was calculated
by adding to the approximately 11.0 million shares the 2.0 million shares
offered hereby.
(2) The net proceeds of this offering are estimated to be $15,240,000
($17,751,000 if the Underwriters' over-allotment option is exercised in
full). Those net proceeds will be used to repay a portion of the
indebtedness incurred by the Company to refinance debt allocated to Navigant
by U.S. Office Products in connection with the Travel Distribution.
21
<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 only 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 "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Navigant" that appear elsewhere in this Prospectus.
22
<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)(6)
--------- --------- --------- --------- ------------ --------- ----------- -----------
<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 $ 146,981
Operating Expenses........ 14,244 17,153 19,692 25,836 9,491 31,541 80,513 80,513
--------- --------- --------- --------- ------------ --------- ----------- -----------
Gross profit.............. 14,609 15,685 14,877 19,431 8,518 26,136 66,468 66,468
General and administrative
expenses................ 10,588 11,647 11,651 15,221 6,660 19,684 47,261 47,261
Amortization expense...... 203 197 221 342 128 548 2,997 2,997
Non-recurring acquisition
costs................... 1,156 1,156 1,156
--------- --------- --------- --------- ------------ --------- ----------- -----------
Operating income.......... 3,818 3,841 3,005 3,868 1,730 4,748 15,054 15,054
Interest expense.......... 125 139 118 515 173 587 1,424 205
Interest income........... (173) (231) (253) (352) (109) (445)
Other (income) expense.... 55 48 42 20 118 312 312
--------- --------- --------- --------- ------------ --------- ----------- -----------
Income before provision
for income taxes........ 3,866 3,878 3,092 3,663 1,646 4,488 13,318 14,537
Provision for income
taxes................... 188 97 18 565 255 1,145 6,126 6,687
--------- --------- --------- --------- ------------ --------- ----------- -----------
Net income................ $ 3,678 $ 3,781 $ 3,074 $ 3,098 $ 1,391 $ 3,343 $ 7,192 $ 7,850
--------- --------- --------- --------- ------------ --------- ----------- -----------
--------- --------- --------- --------- ------------ --------- ----------- -----------
Net income per share:
Basic................... $ 0.83 $ 0.85 $ 0.67 $ 0.52 $ 0.18 $ 0.37 $ 0.66 $ 0.61
Diluted................. $ 0.83 $ 0.85 $ 0.67 $ 0.52 $ 0.18 $ 0.36 $ 0.66 $ 0.61
Weighted average common
shares outstanding:
Basic................... 4,426 4,426 4,556 5,906 7,750 9,003 10,969(3) 12,969(4)
Diluted................. 4,426 4,426 4,570 6,002 7,910 9,176 10,969(3) 12,969(4)
<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)(6)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
STATEMENT OF INCOME DATA:
Revenues.................. $ 41,527 $ 80,706 $ 105,362 $ 119,693 $ 119,693
Operating Expenses........ 22,656 47,172 59,550 67,869 67,869
----------- ----------- ----------- ----------- -----------
Gross profit.............. 18,871 33,534 45,812 51,824 51,824
General and administrative
expenses................ 15,011 26,274 34,491 38,608 38,608
Amortization expense...... 471 1,509 2,336 2,418 2,418
Non-recurring acquisition
costs................... 284 284
----------- ----------- ----------- ----------- -----------
Operating income.......... 3,105 5,751 8,701 10,798 10,798
Interest expense.......... 415 399 1,068 1,068 154
Interest income........... (382) (338)
Other (income) expense.... 40 (71) 178 (118) (118)
----------- ----------- ----------- ----------- -----------
Income before provision
for income taxes........ 3,032 5,761 7,455 9,848 10,762
Provision for income
taxes................... 551 2,823 3,429 4,530 4,951
----------- ----------- ----------- ----------- -----------
Net income................ $ 2,481 $ 2,938 $ 4,026 $ 5,318 $ 5,811
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net income per share:
Basic................... $ 0.29 $ 0.26 $ 0.37 $ 0.48 $ 0.45
Diluted................. $ 0.28 $ 0.25 $ 0.37 $ 0.48 $ 0.45
Weighted average common
shares outstanding:
Basic................... 8,598 11,476 10,969(3) 10,969(3) 12,969(4)
Diluted................. 8,782 11,719 10,969(3) 10,969(3) 12,969(4)
</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(5) ADJUSTED(5)(6)
--------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
BALANCE SHEET DATA:
Working capital......................................................... $ 1,281 $ 8,580 $ 3,027 $ 3,652
Total assets............................................................ 29,339 137,661 134,249 134,249
Long-term debt, less current portion.................................... 2,012 2,664 17,175 2,560
Long-term payable to U.S. Office Products............................... 787 10,027
Stockholder's equity.................................................... 13,483 100,111 92,270 107,510
</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(j) of Notes to Pro Forma Combined
Financial Statements included herein.
(4) For calculation of the pro forma as adjusted weighted average shares
outstanding for the nine months ended January 24, 1998, see Note 2(l) of
Notes to Pro Forma Combined Financial Statements.
(5) 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.
(6) As adjusted to give effect to the sale of the shares of Navigant Common
Stock by Navigant pursuant to this offering after deducting underwriting
discounts and estimated offering expenses payable by Navigant and the use of
the estimated net proceeds therefrom.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF NAVIGANT
INTRODUCTION
Navigant, which combines twelve 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
24
<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 to a centralized management
structure at one of its locations. This switch to a centralized management
structure from a regional structure at this location is consistent with the
existing structure at the other regional travel agencies acquired. 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.
25
<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>
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
26
<PAGE>
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.
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
27
<PAGE>
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
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.
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 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
28
<PAGE>
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 GAAP, 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.
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 $109.4 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-Offs 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
29
<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 Distribution Agreement with U.S. Office Products will call for an
allocation of $16.4 million of debt by U.S. Office Products resulting in
incremental debt of $7.8 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 the net proceeds of this offering to repay a portion of such
debt. See "Use of Proceeds."
Under the Distribution Agreement, the Company is required, on or prior to
the Travel Distribution, to obtain a credit facility, to borrow funds under such
facility and to use the proceeds of such borrowings to pay off the approximately
$16.4 million of U.S. Office Products' debt to be allocated to the Company, as
described under "The Spin-Offs From U.S. Office Products--Distribution
Agreement--Debt". The Company expects to obtain a secured $60.0 million
revolving credit facility from NationsBank, N.A. as Administrative Agent.
NationsBanc Montgomery Securities LLC, one of the Underwriters and an affiliate
of NationsBank, N.A., is the Arranger and Syndication Agent. The credit facility
will terminate five years from the effective date of the credit facility.
Interest on borrowings under the credit facility will accrue at a rate of, at
the Company's option, either (i) LIBOR plus a margin of between 1.00% and 2.00%,
depending on the Company's funded debt to EBITDA ratio, or (ii) the Alternative
Base Rate (defined as the higher of (x) the NationsBank, N.A. prime rate and (y)
the Federal Funds rate plus .50%) plus a margin of between 0% and .75%,
depending on the Company's funded debt to EBITDA ratio. Indebtedness under the
credit facility will be secured by substantially all of the assets of the
Company. The credit facility will be subject to terms and conditions typical of
facilities of such size and will include certain financial covenants. The
Company will borrow under the credit facility to repay the U.S. Office Products'
debt which it is obligated under the Distribution Agreement to repay. The
balance of the credit facility will be available for working capital, capital
expenditures and acquisitions, subject to compliance with the applicable
covenants.
Navigant intends to use the net proceeds from this offering to repay a
portion of the approximately $16.4 million it expects to borrow under the $60.0
million credit facility to refinance all amounts payable to U.S. Office
Products. After such repayment, approximately $58.8 million will be available
under the credit facility. See "Use of Proceeds".
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
30
<PAGE>
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.
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.
31
<PAGE>
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 twelve regional corporate travel
agencies. In calendar year 1997, the travel agencies that form 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 a wide 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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<PAGE>
Navigant employs approximately 2,460 people at 129 offices and 219 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 eleven 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 Arrangements, 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
(Travel Guide) Baltimore, Maryland 1951
TravelCorp, Inc. Edina, Minnesota 1974
</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
33
<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
the Company'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 the 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. The Company 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."
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 intends 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 believes that it can benefit from greater
purchasing power in such key expense areas as telecommunications,
advertising, insurance, courier expenses and employee benefits. Navigant
also believes that it can reduce total operating expenses by eliminating or
consolidating certain duplicative
34
<PAGE>
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.
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, on a pro forma basis, 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 business through its
existing corporate customer base. Certain of Navigant's regional offices also
actively advertise in the leisure travel market.
35
<PAGE>
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 129 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
password-protected corporate travel data, find restaurants and automatic teller
machines, and access the latest currency conversions.
36
<PAGE>
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 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.
37
<PAGE>
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 the Company'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 the Company'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.
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
38
<PAGE>
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 the Company'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 the Company'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 May 31, 1998, Navigant had approximately 2,460 full time employees,
none of which are subject to collective bargaining agreements. The Company
believes that it enjoys good relations with its employees.
PROPERTIES
As of May 31, 1998, Navigant operated at 129 travel agency facilities, three
of which are owned and 126 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 portions of the office building owned by Navigant and located at 112
Prospect Street, Stamford, Connecticut are subject to a mortgage securing
payment of a Promissory Note payable to First County Bank, in the principal
amount of $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.
39
<PAGE>
MANAGEMENT OF NAVIGANT
EXECUTIVE OFFICERS AND DIRECTORS
It is anticipated that the executive officers and directors of Navigant
following the closing of this offering 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 (3)
Robert C. Griffith........................ 48 Chief Financial Officer and Treasurer
Douglas R. Knight......................... 40 Chief Operating Officer
Eugene A. Over, Jr........................ 40 General Counsel and Secretary
Jonathan J. Ledecky....................... 40 Director (1)
Vassilios Sirpolaidis..................... 50 Director (3)
Ned A. Minor.............................. 52 Director (2)
D. Craig Young............................ 44 Director (2)
</TABLE>
- ------------------------
(1) Term expires in 1999.
(2) Term expires in 2000.
(3) Term expires in 2001.
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 has served as Chief Operating Officer of Navigant since
May 1998. Mr. Knight has served as President of McGregor Travel Management,
Inc., a subsidiary of Navigant ("McGregor"), since April 1993 and as chairman of
McGregor since October 1997. Mr. Knight joined McGregor in 1987 as Controller
and became Vice President of Finance in 1989. From 1984 to 1987, Mr. Knight
worked for American Airlines and was responsible for implementing and
maintaining American Airline's travel agency accounting system, ADS, in travel
agencies across the United States.
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.
40
<PAGE>
JONATHAN J. LEDECKY will serve as a Director and employee of Navigant and
each of the other Spin-Off Companies. 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 a director 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. 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 and as
President of Arizona Office Products, a subsidiary of U.S. Office Products,
since May 1997.
NED A. MINOR will serve as a Director of Navigant. 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. 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 fiscal year ended April 25, 1998 to the Chief Executive Officer and
to the other most highly compensated officers of Navigant (the "Named
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS COMPENSATION(2)
- ------------------------------------------------------------------ --------- ---------- --------- ----------------
<S> <C> <C> <C> <C>
Edward S. Adams................................................... 1998 $ 250,000 -- $ 8,554
Chairman of the Board, Chief Executive Officer, President and
Director
Robert C. Griffith................................................ 1998 150,000 -- 5,256
Chief Financial Officer and
Treasurer
Douglas R. Knight................................................. 1998 382,000 -- 3,563
Chief Operating Officer
</TABLE>
(1) Upon the completion of the Travel Distribution, the annual salaries of the
named executives will be: Mr. Adams--$300,000, Mr. Griffith--$200,000 and
Mr. Knight--$250,000.
(2) Represents automobile expenses paid by Navigant.
41
<PAGE>
The following table sets forth certain information regarding options to
acquire U.S. Office Products Common Stock ("U.S. Office Products Options")
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 being replaced with options to acquire Navigant Common
Stock ("Navigant Options") in connection with the Travel Distribution. See
"--Replacement of Outstanding U.S. Office Products Options Held by Navigant
Employees."
OPTIONS GRANTED IN FISCAL YEAR 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
OPTIONS GRANTED IN ANNUAL RATE OF
FISCAL YEAR 1998 STOCK PRICE
------------------------------------ APPRECIATION FOR
PERCENT OF OPTION TERM
OPTIONS TOTAL OPTIONS EXERCISE EXPIRATION --------------------------
NAME GRANTED(1) GRANTED IN FISCAL YEAR PRICE(1) DATE 5% 10%
- ------------------------- ----------- ----------------------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Edward S. Adams.......... 22,500 2.1% $ 15.17 4/28/2007 $ 214,657 $ 543,984
480,000 44.8 18.50 3/20/2008 5,584,584 14,152,433
Robert C. Griffith....... 15,000 1.4 15.17 4/28/2007 143,105 362,656
120,000 10.0 18.50 3/20/2008 1,396,146 3,538,108
Douglas R. Knight........ -- -- -- -- --
</TABLE>
- ------------------------
(1) The number of U.S. Office Products 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
The exercise price of U.S. Office Products Options 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
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 (a) ten business days preceding the
Distribution Date or (b) the number of business days falling between the
expiration of the Tender Offer and the Distribution Date.
42
<PAGE>
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 U.S. Office Products Options
and are being replaced with Navigant Options in connection with the Travel
Distribution. See "--Replacement of 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 APRIL 25, 1998
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................ -- -- 5,625 496,875 $ 9,591 $ 28,772
Robert C. Griffith............. -- -- 3,750 131,250 6,394 19,181
Douglas R. Knight.............. -- -- -- -- -- --
</TABLE>
- ------------------------
(1) The number of U.S. Office Products 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
The exercise price of U.S. Office Products Options 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
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 (a) ten business days preceding the
Distribution Date, or (b) the number of 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.
REPLACEMENT OF OUTSTANDING U.S. OFFICE PRODUCTS OPTIONS HELD BY NAVIGANT
EMPLOYEES
All or substantially all vested and unvested U.S. Office Products Options
that are held by Navigant employees on the Distribution Date are being replaced
with Navigant Options. As of the Distribution Date, approximately 975,332 U.S.
Office Products Options will be held by employees of Navigant (assuming all
option holders tendered all the shares underlying their options in the Tender
Offer).
The number and exercise price 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 this 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 formulas set forth above will
be used to determine the number and exercise price of Navigant Options resulting
from conversion of U.S. Office Products Options. Such formulas will adjust
solely for the Travel Distribution and not for other events, such as the Tender
Offer.
Such formula adjustments are intended to preserve for the holder of U.S.
Office Products Options the intrinsic value per option, measured as the
difference between the market value of one share of U.S. Office
43
<PAGE>
Products Common Stock at the time of the Travel Distribution and the exercise
price of such option. The intrinsic value of the Navigant Options will be no
greater than the intrinsic value of the U.S. Office Products Options immediately
before the Distributions, and the ratio of exercise price to market price will
be not less than the ratio immediately before the Distributions. As a result of
the foregoing adjustments, 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.
It is anticipated that all other terms of the Navigant Options will be the
same as the terms of the U.S. Office Products Options they replace.
1998 STOCK INCENTIVE PLAN
Navigant has adopted the 1998 Stock Incentive Plan (the "Plan"). The purpose
of the Plan is to promote the long-term growth and profitability of 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 25% of the outstanding
Navigant Common Stock following the Travel Distribution and this 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 1,100,000 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 is receiving a stock option for Navigant Common Stock 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 covers 7.5% of
the outstanding Navigant Common Stock determined as of the Distribution Date,
without regard to this offering. The option will have a per share exercise price
equal to the initial public offering price of Navigant Common Stock. The
estimated value of this option depends on its exercise price and the trading
volatility of the Navigant Common Stock. Based on an exercise price of $9.00 per
share and an assumed trading volatility index of the Navigant Common Stock of
45%, the estimated value of the option is approximately $1.6 million, net of
taxes at an assumed 40% rate.
Mr. Ledecky's option is 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. The estimated value
of the Adams Option depends on its exercise price and the trading volatility of
the Navigant Common Stock. Based on an exercise price of $9.00 per share and an
assumed trading volatility index of the Navigant Common Stock of 45%, the
estimated value of the Adams Option is approximately $860,000, net of taxes at
an assumed 40% rate. In addition, management currently expects to recommend
option grants to certain executive officers and directors of the Company for
approximately 3.5% of the outstanding Navigant Common Stock
44
<PAGE>
following 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 has created an Audit Committee consisting of Messrs.
Sirpolaidis, Minor and Young. The Audit Committee is charged with reviewing
Navigant's annual audit and meeting with Navigant's independent accountants to
review Navigant's internal control and financial management practice.
The Board of Directors has created a Compensation Committee consisting of
Messrs. Sirpolaidis, Minor and Young. The Compensation Committee is charged with
determining the compensation of executive officers of Navigant and administering
any stock option plan Navigant may adopt.
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 and may be granted Navigant Options
under the Plan. Non-management directors will also be reimbursed for all
out-of-pocket expenses related to their service as directors.
LEDECKY SERVICES AGREEMENT
Jonathan J. Ledecky entered into the Ledecky Services Agreement with U.S.
Office Products on January 13, 1998, effective on the Distribution Date and
contingent on the consummation of the Distributions, which agreement has been
amended as of June 8, 1998. 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 the Ledecky Services Agreement, as 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. Office Products at an
annual salary of $48,000 through June 30, 2001. Mr. Ledecky will also retain his
existing U.S. Office Products Options; the number of shares subject to these
options, and their exercise price, will be adjusted to take account of the
Distributions. As a continuing employee, Mr. Ledecky is entitled to retain his
options despite his reduction in services to U.S. Office Products. 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
demonstrably and materially injurious to U.S. Office Products or (ii) his
violation of the noncompetition provision 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 Options and will have 90 days to exercise any vested options (as
under his existing options).
Navigant is entering into an employment agreement with Mr. Ledecky,
effective as of June 10, 1998 that will implement its assigned portion of the
Ledecky Services Agreement. Under the employment agreement, Mr. Ledecky will
report to the Board of Directors and senior management of Navigant. In such
capacity, Mr. Ledecky will provide high-level acquisition negotiations services
and strategic business advice. Navigant can require Mr. Ledecky's performance of
such services, consistent with his other contractual obligations to
Consolidation Capital Corporation, U.S. Office Products and the other Spin-Off
Companies. As an employee, Mr. Ledecky will also be subject to the generally
applicable personnel policies of Navigant and will be eligible for such benefit
plans in accordance with their terms. Navigant will
45
<PAGE>
pay Mr. Ledecky an annual salary of $48,000, for up to two years. The Company
may terminate Mr. Ledecky's employment with "cause," where cause has the same
definition as in the Ledecky Services Agreement, as modified to refer to
Navigant.
The Ledecky Services Agreement provides for non-competition and
non-solicitation restrictions that continue until the end of the specified
restricted period, which, for Navigant, means the later of June 10, 2000 or the
date one year after Mr. Ledecky leaves Navigant's employ. These provisions
generally restrict Mr. Ledecky from, among other things, investing in or working
for or on behalf of any business selling any products or services in direct
competition with U.S. Office Products or the Spin-Off Companies (collectively,
the "U.S. Office Products Companies"), within 100 miles of any location where
the relevant U.S. Office Products Company regularly maintains an office with
employees. (For this purpose, "products or services" are those that U.S. Office
Products offered on January 13, 1998.) Notwithstanding this prohibition, Mr.
Ledecky may serve in a policy making role (but not engage in direct personal
competition) with respect to the following businesses: (i) certain businesses
potentially competitive with Aztec Technology Partners, Inc.; (ii) businesses
selling, supplying, or distributing janitorial or sanitary products or services;
(iii) businesses managing or servicing office equipment (other than computers);
(iv) businesses providing internet access services; (v) UniCapital Corporation's
current businesses (which include equipment leasing); or (vi) U.S. Marketing
Services' shelf-stocking and merchandising, point-of-purchase display creation,
and incentive marketing businesses (as currently publicly described to include
travel incentives), but Mr. Ledecky must cease serving as a director and be
solely an investor after that company is public. The Ledecky Services Agreement
prohibits Mr. Ledecky from trying to hire away managerial employees of the U.S.
Office Products Companies or calling upon customers of the U.S. Office Products
Companies to solicit or sell products or services in direct competition with the
U.S. Office Products Companies. 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-competion provision 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.
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), all perquisites and benefits customarily provided by PTC to its
employees and reimbursement for the actual cost of leasing an automobile for
business use (not to exceed $712 per month). The agreement also provides for the
issuance of options to purchase 60,000 shares of U.S. Office Products Common
Stock for every $10 million increase in commission revenue earned by U.S. Office
Products after the date of the agreement (up to a maximum of 600,000 shares). As
of the date of this Prospectus, 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, subject to a right of offset if Mr.
Adams secures other employment during the period that payment is continuing
under the agreement. The employment agreement also prohibits Mr. Adams from
engaging in certain activities deemed competitive with 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.
46
<PAGE>
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), all perquisites and benefits customarily provided by PTC to its
employees and reimbursement for the actual cost of leasing an automobile for
business use (not to exceed $438 per month). In the event that Mr. Griffith's
employment is terminated for any reason other than cause, Mr. Griffith's
employment agreement provides that Mr. Griffith is entitled to receive his base
salary and benefits for the longer of (i) four months from the date of
termination, or (ii) the remaining time under the initial term of the employment
agreement, subject to a right of offset if Mr. Griffith secures other employment
during the period that payment is continuing under the agreement. The employment
agreement also prohibits Mr. Griffith from engaging in certain activities deemed
competitive with 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.
In October 1997, McGregor entered into an employment agreement with Douglas
R. Knight, its President. The agreement provides for a two year term, with a
base salary of $250,000 per year, all perquisites and benefits customarily
provided by McGregor to its employees and reimbursement for the actual cost of
leasing an automobile for business use (not to exceed $550 per month). If
McGregor terminates Mr. Knight's employment without cause, Mr. Knight is
entitled to compensation at the rate of $250,000 per year for the time period
remaining under the term of the employment agreement, subject to a right of
offset if Mr. Knight secures other employment during the period that payment is
continuing under the agreement. The employment agreement also prohibits Mr.
Knight from engaging in certain activities deemed competitive with McGregor or
its affiliates during the duration his employment with McGregor or its
affiliates and for the longer of (i) a period of one year thereafter or (ii) as
long as Mr. Knight continues to receive severance payments from McGregor.
Effective as of the Distribution Date, PTC will assign Messrs. Adams' and
Griffith's employment agreements and McGregor will assign Mr. Knight's
employment agreement to Navigant and, thereafter, all decisions formerly made by
PTC's or McGregor's Board of Directors (and approved by the U.S. Office Products
Board of Directors) will be made by Navigant's Board of Directors. After the
Distribution Date, Navigant's Board of Directors may consider amending these
employment agreements or entering into separate severance agreements with these
and other officers to provide for additional compensation if their employment is
terminated following a change of control of Navigant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors has created a Compensation Committee consisting of
Messrs. Sirpolaidis, Minor and Young. The Compensation Committee is charged with
determining the compensation of all executive officers. No member of the
Compensation Committee has ever been an officer of Navigant or any of its
subsidiaries.
47
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 24, 1997, U.S. Office Products acquired PTC, which will be a
wholly-owned subsidiary of Navigant following the Travel 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 (the "PTC Acquisition"). In connection with the PTC
Acquisition, PTC also entered into an employment agreement with Mr. Adams at an
annual base salary of $250,000 per year and employment agreement with Robert C.
Griffith, Navigant's Chief Financial Officer and Treasurer, at an annual base
salary of $150,000 per year. The Company believes that the terms of this
transaction are as favorable as could be negotiated with third parties. See
"Management of Navigant--Employment Contracts and Related Matters."
On January 24, 1997, in a transaction related to the PTC Acquisition, PTC
acquired a commercial office building at 84 Inverness Circle East, Englewood,
Colorado from Marcono LLC ("Marcono"), a Colorado limited liability company, for
an aggregate purchase price of approximately $3.4 million, consisting of 68,154
shares of U.S. Office Products Common Stock valued at $22.725 per share and
PTC's assumption of certain notes from Marcono in the aggregate amount of
$1,846,721. Marcono is owned as follows: 2% by Edward S. Adams, 2% by Mr. Adams'
wife and 48% by each of two trusts established for the benefit of Mr. Adams' two
children. Vassilios Sirpolaidis, 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 PTC, PTC leased the office building from Marcono for approximately $22,000
per month. The office building purchased by PTC is used as its headquarters. 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 1,273,432 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 portions 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 McGregor.
One of McGregor's beneficial owners was Douglas R. Knight, who will be
Navigant's Chief Operating Officer following the Travel Distribution. In
connection with the McGregor Acquisition, Mr. Knight received approximately
676,293 shares of U.S. Office Products Common Stock and DeFranco & Knight, LLC,
of which Mr. Knight is a 50% owner, received approximately 18,336 shares of 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. See
"Management of Navigant--Employment Contracts and Related Matters."
DeFranco & Knight, LLC owns a portion of a property in Stamford,
Connecticut, which is leased to McGregor for approximately $142,000 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 at a rate of $12.00 per emergency call. During the fiscal year ended
April 25, 1998, McGregor paid approximately $472,000 to such emergency travel
service provider.
Mr. Minor, who will serve as a director of Navigant at the Effective Date,
has, since 1977, served as Director, President and Vice-President of Minor &
Brown, P.C., a law firm that PTC has retained from time to time during the
previous three fiscal years.
For a discussion of matters related to the spin-off of Navigant from U.S.
Office Products, see "The Spin-Offs From U.S. Office Products."
For a discussion of transactions between Navigant and Mr. Ledecky, see
"Management of Navigant-- Ledecky Services Agreement."
48
<PAGE>
PRINCIPAL STOCKHOLDERS OF NAVIGANT
The following table sets forth the number and percentage of outstanding
shares of the U.S. Office Products Common Stock beneficially owned as of May 15,
1998, and the number and percentage of outstanding shares of Navigant Common
Stock as adjusted to reflect the sale of the shares of Navigant Common Stock
offered hereby (assuming no exercise of the Underwriters' over-allotment
option), by (i) all persons known by Navigant to own beneficially more than 5%
of U.S. Office Products Common Stock, (ii) each director and each Named Officer
of Navigant who is a stockholder of U.S. Office Products, and (iii) all
directors and executive officers of Navigant as a group. All persons listed
below have sole voting and investment power with respect to their shares of U.S.
Office Products Common Stock unless otherwise indicated.
<TABLE>
<CAPTION>
PERCENT OF NUMBER OF
NUMBER OF SHARES OF U.S. OFFICE SHARES OF PERCENT OF
U.S. OFFICE PRODUCTS NAVIGANT NAVIGANT COMMON
NAME AND ADDRESS OF PRODUCTS COMMON STOCK COMMON STOCK, STOCK
BENEFICIAL OWNER COMMON STOCK PRIOR TO OFFERING AS ADJUSTED(1) AFTER OFFERING
- ----------------------------------- ------------------- ------------------ -------------- ------------------
<S> <C> <C> <C> <C>
Edward S. Adams.................... 699,702(2) * 53,279 *
Robert C. Griffith................. 3,750(3) * 0 0.0%
Douglas R. Knight(4)............... 694,629 * 53,322 *
Jonathan J. Ledecky(5)............. 2,428,125 1.8% 186,390 1.4%
Vassilios Sirpolaidis(6)........... 1,182,724(7) * 90,070 *
All current executive officers and
directors as a group (7
persons)......................... 5,008,930 3.6% 383,061 3.0%
5% STOCKHOLDERS
FMR Corp.(8)....................... 15,754,406 11.7% 1,209,355 9.3%
82 Devonshire Street
Boston, MA 02109
Massachusetts Financial Services
Company(8)....................... 8,262,886 6.1% 634,284 4.9%
500 Boylston Street
Boston, MA 02116
</TABLE>
- ------------------------
* Less than 1%.
(1) Reflects the results of the Tender Offer (assuming each person tendered all
his shares of U.S. Office Products Common Stock and all shares underlying
his options therefor in the Tender Offer), the application of the
Distribution Ratio and this offering, and assumes no options are exercisable
within 60 days following the Travel Distribution.
(2) Includes 5,625 shares of U.S. Office Products Common Stock which may be
acquired upon exercise of options exercisable within 60 days following the
Travel Distribution. Also excludes Mr. Adams' option for 4.5% of the
Navigant Common Stock that the Company expects to grant under the 1998 Stock
Incentive Plan, which will not be exercisable until the 12-month anniversary
of the Travel Distribution. See "Management of Navigant--1998 Stock
Incentive Plan."
(3) Includes 3,750 shares of U.S. Office Products Common Stock which may be
acquired upon exercise of options exercisable within 60 days following the
Travel Distribution.
(4) Includes 18,336 shares of U.S. Office Products Common Stock with respect to
which Mr. Knight shares investment and voting power.
(5) Excludes U.S. Office Products Options that will not be converted into
Navigant Options at the time of the Travel Distribution. Also excludes Mr.
Ledecky's option for 7.5% of the Navigant Common Stock that will be granted
under the Company's 1998 Stock Incentive Plan, which will not be exercisable
49
<PAGE>
until the 12-month anniversary of the Travel Distribution. See "Management
of Navigant--Ledecky Services Agreement."
(6) Includes 48,000 shares of U.S. Office Products Common Stock held by Mr.
Sirpolaidis' wife.
(7) Includes 9,375 shares of U.S. Office Products Common Stock which may be
acquired upon exercise of options exercisable within 60 days following the
Travel Distribution.
(8) Based upon a Schedule 13G filed with the SEC with respect to U.S. Office
Products Common Stock.
50
<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 this offering, Navigant's authorized capital
stock is expected to consist of 150,000,000 shares of Navigant Common Stock, par
value $.001 per share, and 5,000,000 shares of preferred stock, par value $.001
per share (the "Preferred Stock"). Immediately following the Travel Distribution
and this offering, Navigant is expected to have outstanding approximately
12,968,951 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
51
<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 has adopted certain provisions in the Certificate of
Incorporation or Bylaws that may provide the 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 the Bylaws.
CLASSIFIED BOARD
The Certificate of Incorporation includes 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, without
diminishing
52
<PAGE>
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 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 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 requires 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.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Navigant Common Stock will be
American Stock Transfer & Trust Company.
53
<PAGE>
UNDERWRITING
Upon the terms and subject to the conditions set forth in the Underwriting
Agreement, Navigant has agreed to sell to each of the Underwriters named below
(the "Underwriters"), for whom Smith Barney Inc., NationsBanc Montgomery
Securities LLC and Raymond James & Associates, Inc. are acting as
representatives (the "Representatives"), and each of such Underwriters has
severally agreed to purchase
from Navigant the respective number of shares of Navigant Common Stock set forth
opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Smith Barney Inc. ......................................................... 755,000
NationsBanc Montgomery Securities LLC...................................... 453,500
Raymond James & Associates, Inc............................................ 301,500
BancAmerica Robertson Stephens............................................. 85,000
Credit Lyonnais Securities (USA) Inc....................................... 85,000
Lehman Brothers Inc. ...................................................... 85,000
Morgan Stanley & Co. Incorporated.......................................... 85,000
The Robinson-Humphrey Company, LLC......................................... 50,000
Sanders Morris Mundy Inc. ................................................. 50,000
Sands Brothers & Co., Ltd. ................................................ 50,000
-----------------
Total.................................................................... 2,000,000
-----------------
-----------------
</TABLE>
In the Underwriting Agreement, the several Underwriters have agreed, subject
to the terms and conditions set forth therein, to purchase all of the shares of
Navigant Common Stock offered hereby (other than those covered by the
over-allotment option described below) if any such shares of Navigant Common
Stock are purchased. In the event of a default by any Underwriter, the
Underwriting Agreement provides that, in certain circumstances, purchase
commitments of the non-defaulting Underwriters may be increased or the
Underwriting Agreement may be terminated. Navigant has been advised by the
Representatives that the several Underwriters propose initially to offer such
shares of Navigant Common Stock at the public offering price set forth on the
cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of $.37 per share of Navigant Common Stock. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $.10 per share of Navigant Common Stock to other dealers. After the initial
offering, the public offering price and such concessions may be changed.
Navigant has granted to the Underwriters an option, exercisable during the
30-day period after the date of this Prospectus, to purchase up to 300,000
additional shares of Navigant Common Stock, at the public offering price less
the Underwriting Discounts set forth on the cover page of this Prospectus. The
Underwriters may exercise such option only to cover over-allotments in the sale
of the shares of Navigant Common Stock that the Underwriters have agreed to
purchase. To the extent that the Underwriters exercise such option, each
Underwriter will have a firm commitment, subject to certain conditions, to
purchase a number of option shares proportionate to such Underwriter's initial
commitment.
The Representatives have informed Navigant that they do not intend to
confirm sales to any account over which they exercise discretionary authority.
In connection with this offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of Navigant Common
Stock. Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M, pursuant to which such persons may bid
for or purchase Navigant Common Stock for the purpose of stabilizing its market
price. The Underwriters also may create a short position for the account of the
Underwriters by selling more Navigant Common Stock in connection with
54
<PAGE>
this offering than they are committed to purchase from Navigant, and in such
case may purchase Navigant Common Stock in the open market following completion
of the offering to cover all or a portion of such short position. The
Underwriters may also cover all or a portion of such short position, up to
300,000 shares of Navigant Common Stock, by exercising the Underwriters'
over-allotment option referred to above. In addition, Smith Barney Inc., on
behalf of the Underwriters, may impose "penalty bids" under contractual
arrangements with the Underwriters whereby it may reclaim from an Underwriter
(or dealer participating in the offering) for the account of the other
Underwriters, the selling concession with respect to Navigant Common Stock that
is distributed in the offering but subsequently purchased for the account of the
Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of Navigant Common Stock at
a level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
Certain of Navigant's officers and directors will agree that they will not,
without the prior written consent of Smith Barney Inc., offer, sell, pledge or
otherwise dispose of, or file (or participate in the filing of) a registration
statement with the SEC in respect of, or establish or increase a put equivalent
position or liquidate or decrease a call equivalent position within the meaning
of Section 16 of the Securities Exchange Act of 1934, as amended, with respect
to, any shares of capital stock of Navigant or any securities convertible into
or exercisable or exchangeable for such capital stock, or publicly announce an
intention to effect any such transaction, for a period of 180 days after the
date of the Underwriting Agreement, subject to certain exceptions. Navigant has
agreed that it will not, for a period of 180 days following the date of the
Underwriting Agreement, without the prior written consent of Smith Barney Inc.,
offer, sell or contract to sell, or otherwise dispose of (or enter into any
transaction which is designed to, or might reasonably be expected to, result in
the disposition (whether by actual disposition or effective economic disposition
due to cash settlement or otherwise) by Navigant or any affiliate of Navigant or
any person in privity with Navigant or any affiliate of Navigant) directly or
indirectly, or announce the offering of, any other shares of Navigant Common
Stock or any securities convertible into, or exchangeable for, shares of
Navigant Common Stock, except that Navigant may issue and sell Navigant Common
Stock pursuant to any employee stock option plan, stock ownership plan or
dividend reinvestment plan of Navigant in effect on the date of the Underwriting
Agreement, and subject to certain other exceptions.
The Underwriting Agreement provides that Navigant will indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act, or contribute to payments the Underwriters may be required to
make in respect thereof. In the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
NationsBanc Montgomery Securities LLC is the Arranger and Syndication Agent
for a $60.0 million revolving credit facility being provided by its affilate,
NationsBank, N.A., to the Company. NationsBank, N.A. will be repaid
approximately $15.2 million of borrowings by the Company under the credit
facility from the net proceeds of this offering. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Navigant-- Liquidity and Capital Resources." Because more than 10%
of the net proceeds of this offering will be paid to NationsBank, N.A., the
offering is being conducted in accordance with Rule 2710(c)(8) and Rule 2720
("Rule 2720") of the Conduct Rules of the National Association of Securities
Dealers, Inc., Smith Barney Inc. will serve as a "qualified independent
underwriter" in the offering and, in such capacity, will recommend a price in
compliance with Rule 2720 and has performed due diligence investigations in
accordance with Rule 2720.
Prior to the Travel Distribution and this offering, there has been no public
market for Navigant Common Stock. The price to the public for the shares of
Navigant Common Stock was determined through negotiations between Navigant and
the Representatives and is based on, among other things, Navigant's financial
and operating history and condition, the prospects of Navigant and its industry
in general, the management of Navigant and the market prices of securities of
companies engaged in businesses similar to those of Navigant. There can,
however, be no assurance that the prices at which the shares of Navigant Common
Stock will sell in the public market after this offering will not be lower than
the price at which the shares of Navigant Common Stock are sold by the
Underwriters.
55
<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 (except for the first paragraph of Note 1 and the last paragraph
of Note 3, which are as of May 14, 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 given on the authority of said
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. Certain legal
matters will be passed upon for the Underwriters by Cleary, Gottlieb, Steen &
Hamilton, New York, New York.
56
<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-26
Pro Forma Combined Balance Sheet as of January 24, 1998 (unaudited)...................................... F-28
Pro Forma Combined Statement of Income for the nine months ended January 24, 1998 (unaudited)............ F-29
Pro Forma Combined Statement of Income for the nine months ended January 25, 1997 (unaudited)............ F-30
Pro Forma Combined Statement of Income for the fiscal year ended April 26, 1997 (unaudited).............. F-31
Notes to Pro Forma Combined Financial Statements (unaudited)............................................. F-32
ASSOCIATED TRAVEL SERVICES, INC.
Report of Deloitte and Touche LLP, Independent Auditors.................................................. F-34
Balance Sheets as of December 31, 1995 and 1996 and March 31, 1997 (unaudited)........................... F-35
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-37
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-38
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-39
Notes to Financial Statements............................................................................ F-41
EVANS TRAVEL GROUP, INC. AND EVANS CONSULTING SERVICES, INC.
Report of Price Waterhouse LLP, Independent Accountants.................................................. F-49
Combined Balance Sheet as of July 25, 1997............................................................... F-50
Combined Statement of Income and Retained Earnings for the year ended July 25, 1997...................... F-51
Combined Statement of Cash Flows for the year ended July 25, 1997........................................ F-52
Notes to Combined Financial Statements................................................................... F-53
</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-57
Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997 (unaudited)....................... F-58
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-60
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-61
Notes to Financial Statements............................................................................ F-63
OMNI TRAVEL SERVICE, INC.
Report of Nardella & Taylor, Independent Accountants..................................................... F-70
Balance Sheets as of December 31, 1996 and June 30, 1997 (unaudited)..................................... F-71
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-72
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-73
Notes to Financial Statements............................................................................ F-74
TRAVEL CONSULTANTS, INC. AND ENVISIONS VACATIONS, INC.
Report of Price Waterhouse LLP, Independent Accountants.................................................. F-80
Combined Balance Sheet as of October 24, 1997............................................................ F-81
Combined Statement of Income and Retained Earnings for the year ended October 24, 1997................... F-82
Combined Statement of Cash Flows for the year ended October 24, 1997..................................... F-83
Notes to Combined Financial Statements................................................................... F-84
</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, except for the first paragraph of Note 1
and the last paragraph of Note 3, which are as of May 14, 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
--------- --------- ----------- PRO FORMA
(NOTE 3)
JANUARY 24,
1998
-----------
(UNAUDITED)
<S> <C> <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 24,171
Prepaid expenses and other current assets...................... 655 775 1,638 1,638
--------- --------- ----------- -----------
Total current assets....................................... 11,750 13,692 31,728 25,809
Property and equipment, net...................................... 7,947 7,954 19,406 19,406
Intangible assets, net........................................... 5,456 7,112 85,525 85,525
Other assets..................................................... 539 581 1,002 1,002
--------- --------- ----------- -----------
Total assets............................................... $ 25,692 $ 29,339 $ 137,661 $ 131,742
--------- --------- ----------- -----------
--------- --------- ----------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term debt................................................ $ 2,059 $ 456 $ 625 $ 625
Short-term payable to U.S. Office Products..................... 4,221 217 217
Accounts payable............................................... 2,385 3,226 5,918 5,918
Accrued compensation........................................... 1,508 1,085 4,916 4,916
Other accrued liabilities...................................... 1,460 3,423 11,472 11,472
--------- --------- ----------- -----------
Total current liabilities.................................. 7,412 12,411 23,148 23,148
Long-term debt................................................... 6,366 2,012 2,664 2,664
Long-term payable to U.S. Office Products........................ 787 10,027 11,494
Deferred income taxes............................................ 190 196
Other long-term liabilities...................................... 503 450 1,711 1,711
--------- --------- ----------- -----------
Total liabilities.......................................... 14,471 15,856 37,550 39,017
--------- --------- ----------- -----------
Commitments and contingencies
Stockholder's equity:
Divisional equity.............................................. 4,093 10,320 94,140 92,855
Cumulative translation adjustment.............................. (130) (130)
Retained earnings.............................................. 7,128 3,163 6,101
--------- --------- ----------- -----------
Total stockholder's equity................................. 11,221 13,483 100,111 92,725
--------- --------- ----------- -----------
Total liabilities and stockholder's equity................. $ 25,692 $ 29,339 $ 137,661 $ 131,742
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</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............................... 4,556 5,906 7,750 9,003 8,598 11,476
Diluted............................. 4,570 6,002 7,910 9,176 8,782 11,719
Income per share:
Basic............................... $ 0.67 $ 0.52 $ 0.18 $ 0.37 $ 0.29 $ 0.26
Diluted............................. $ 0.67 $ 0.52 $ 0.18 $ 0.36 $ 0.28 $ 0.25
Unaudited pro forma net income (see
Note 9)............................. $ 2,289 $ 1,546 $ 2,938
------------- ----------- -----------
------------- ----------- -----------
Unaudited pro forma income per share:
Basic............................... $ 0.25 $ 0.18 $ 0.26
Diluted............................. $ 0.25 $ 0.18 $ 0.25
</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>
See accompanying notes to consolidated financial statements.
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.
See accompanying notes to consolidated financial statements.
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
June 9, 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. At the date of Distribution, U.S.
Office Products has agreed to allocate $15,000 in debt plus any additional debt
incurred by U.S. Office Products for acquisitions through the date of
Distribution to the Company. The debt payable to U.S. Office Products will be
payable upon the completion of the Distribution. Additionally, in connection
with the Distribution, the Company anticipates selling 2.0 million shares of the
Company's common stock (2.3 million shares if the Underwriters' over-allotment
is sold) in an initial public offering ("IPO").
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. 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
F-10
<PAGE>
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 2--BASIS OF PRESENTATION (CONTINUED)
includes an allocation of interest expense on all debt allocated to the Company.
See Note 8 for further discussion of interest expense.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CHANGE IN FISCAL YEAR
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.
F-11
<PAGE>
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Intangible assets consist of goodwill, which represents the excess of cost
over the fair value of assets acquired in business combinations accounted for
under the purchase method. Substantially all goodwill is amortized on a straight
line basis over an estimated useful life of 35 years. Management periodically
evaluates the recoverability of 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 stockholder's 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.
F-12
<PAGE>
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OPERATING EXPENSES
Operating expenses include travel agent commissions, salaries,
communications and other costs associated with the selling and processing of
travel reservations.
ADVERTISING COSTS
The Company expenses advertising costs when the advertisement occurs.
Advertising costs are included in the consolidated statement of income as a
component of general and administrative expenses.
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.
F-13
<PAGE>
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTERIM FINANCIAL DATA (UNAUDITED)
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.
PRO FORMA INFORMATION (UNAUDITED)
The pro forma balance sheet at January 24, 1998 adjusts the historical
January 24, 1998 balances to give effect to the payment of debt with available
cash and the allocation of a total of $15,000 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. See additional discussion in Note 1.
DISTRIBUTION RATIO
On May 14, 1998, the U.S. Office Products Board of Directors approved the
distribution ratio for the Company in connection with the Distribution. At the
date of Distribution, the Company will issue to U.S. Office Products
shareholders one share of its common stock for every ten shares of U.S. Office
Products common stock held by each respective shareholder. The share data
reflected in the accompanying financial statements represents the historical
share data for U.S. Office Products for the period or as of the date indicated,
and retroactively adjusted to give effect to the one for ten distribution ratio.
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.
F-14
<PAGE>
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 4--BUSINESS COMBINATIONS (CONTINUED)
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>
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
F-15
<PAGE>
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 4--BUSINESS COMBINATIONS (CONTINUED)
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 $7,100 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.
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.
F-16
<PAGE>
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
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>
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>
F-17
<PAGE>
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 8--CREDIT FACILITIES (CONTINUED)
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 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.
F-18
<PAGE>
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 8--CREDIT FACILITIES (CONTINUED)
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.
The debt payable to U.S. Office Products will be payable upon the completion
of the Distribution.
F-19
<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-20
<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-21
<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 are expected to
contain customary covenants including financial covenants. See additional
discussion in Note 15. 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-22
<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-23
<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 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 IPO price.
Immediately following the effective date of the registration statements
filed in connection with the IPO and the Distribution, the Company's Board of
Directors is expected to grant options covering 15.0% of the outstanding shares
of the Company's common stock, immediately following the Distribution, to
certain executive management personnel and non-employee directors. The options
will be granted under the 1998 Stock Incentive Plan (the "Plan") and will have a
per share exercise price equal to the IPO price, with other terms to be
determined by the Company's Board of Directors. Total options available for
grant under the Plan will be 25.0% of the outstanding shares of the Company's
common stock immediately following the Distribution and the IPO, including the
options to be granted to Mr. Ledecky on that date.
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>
F-24
<PAGE>
NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 15--SUBSEQUENT EVENTS
NON-RECURRING CHARGE
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 to net operating income. The Company has approximately $635 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.
PROPOSED CREDIT FACILITY (UNAUDITED)
The Company has received a commitment letter with NationsBank, N.A. for a
$60,000 Proposed Credit Facility. The Proposed Credit Facility will mature five
years from the effective date of the credit facility; will be secured by all
material assets of the Company; and will be subject to terms and conditions
customary for facilities of this kind, including certain financial covenants.
Interest rate options will be available to the Company depending upon the
satisfaction of certain specified financial ratios.
F-25
<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-26
<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-27
<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
INC. ACQUISITION ADJUSTMENTS SUBTOTAL ADJUSTMENTS COMBINED
------------- ----------------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash Equivalents........... $ 5,919 $ 622 $ (5,141)(b) $ $ 15,240(d) $
(1,400)(a) (15,240)(d)
Accounts receivable, net............ 24,171 252 24,423 24,423
Prepaid and other current assets.... 1,638 46 1,684 1,684
------------- ------ ----------- --------- ----------- -----------
Total current assets.............. 31,728 920 (6,541) 26,107 26,107
Property and equipment, net........... 19,406 62 19,468 19,468
Intangible assets, net................ 85,525 2,029(a) 87,554 87,554
Other assets.......................... 1,002 118 1,120 1,120
------------- ------ ----------- --------- ----------- -----------
Total assets...................... $ 137,661 $ 1,100 $ (4,512) $ 134,249 $ 134,249
------------- ------ ----------- --------- ----------- -----------
------------- ------ ----------- --------- ----------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short term debt..................... $ 625 $ $ $ 625 $ (625)(d) $
Short term payable to U.S. Office
Products.......................... 217 (217)(b)
Accounts payable.................... 5,918 17 5,935 5,935
Accrued compensation................ 4,916 127 5,043 5,043
Other accrued liabilities........... 11,472 5 11,477 11,477
------------- ------ ----------- --------- ----------- -----------
Total current liabilities......... 23,148 149 (217) 23,080 (625) 22,455
Long-term debt........................ 2,664 167 1,400(a) 17,175 (14,615)(d) 2,560
12,944(b)
Long-term payable to U.S. Office
Products............................ 10,027 (10,027)(b)
Deferred income taxes................. 13 13 13
Other long-term liabilities........... 1,711 1,711 1,711
------------- ------ ----------- --------- ----------- -----------
Total liabilities................. 37,550 329 4,100 41,979 (15,240) 26,739
Stockholder's Equity:
Common stock 11(c) 11 2(d) 13
Additional paid-in capital (1,740)(b) 92,389 15,238(d) 107,627
94,129(c)
Divisional equity................... 94,140 (94,140)(c)
Cumulative translation adjustment... (130) (130) (130)
Retained earnings................... 6,101 (6,101)(b)
Equity in purchased company......... 771 (771)(a)
------------- ------ ----------- --------- ----------- -----------
Total stockholder's equity........ 100,111 771 (8,612) 92,270 15,240 107,510
------------- ------ ----------- --------- ----------- -----------
Total liabilities and
stockholder's equity............ $ 137,661 $ 1,100 $ (4,512) $ 134,249 $ $ 134,249
------------- ------ ----------- --------- ----------- -----------
------------- ------ ----------- --------- ----------- -----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-28
<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............................. 11,476
Diluted........................... 11,719
Income per share:
Basic............................. $ 0.26
Diluted........................... $ 0.25
<CAPTION>
PRO FORMA
PRO FORMA OFFERING PRO FORMA
ADJUSTMENTS SUBTOTAL ADJUSTMENTS COMBINED
------------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues............................ $ $ 119,693 $ $ 119,693
Operating expenses.................. 67,869 67,869
------------- --------- ----------- -----------
Gross profit...................... 51,824 51,824
General and administrative
expenses.......................... (265)(e) 38,608 38,608
Amortization expense................ 798(g) 2,418 2,418
------------- --------- ----------- -----------
Operating income.................. (533) 10,798 10,798
Other (income) expense:
Interest expense.................. 490(h) 1,068 (914)(k) 154
Interest income................... 488(h)
Other............................. (118) (118)
------------- --------- ----------- -----------
Income before provision for income
taxes............................. (1,511) 9,848 914 10,762
Provision for income taxes.......... 1,311(i) 4,530 421(i) 4,951
------------- --------- ----------- -----------
Net income.......................... $ (2,822) $ 5,318 $ 493 $ 5,811
------------- --------- ----------- -----------
------------- --------- ----------- -----------
Weighted average shares outstanding:
Basic............................. 10,969(j) 12,969(l)
Diluted........................... 10,969(j) 12,969(l)
Income per share:
Basic............................. $ 0.48 $ 0.45
Diluted........................... $ 0.48 $ 0.45
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-29
<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................. 8,598
Diluted............... 8,782
Income per share:
Basic................. $ 0.29
Diluted............... $ 0.28
<CAPTION>
PRO FORMA
PRO FORMA OFFERING PRO FORMA
ADJUSTMENTS SUBTOTAL ADJUSTMENTS COMBINED
------------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues................ $ $ 105,362 $ $ 105,362
Operating expenses...... 59,550 59,550
------------- --------- ----------- -----------
Gross profit.......... 45,812 45,812
General and
administrative
expenses.............. (5,339)(e) 34,491 34,491
741(f)
Amortization expense.... 1,514(g) 2,336 2,336
Non-recurring
acquisition costs..... 284 284
------------- --------- ----------- -----------
Operating income...... 3,084 8,701 8,701
Other (income) expense:
Interest expense...... 353(h) 1,068 (914)(k) 154
Interest income....... 602(h)
Other................. 178 178
------------- --------- ----------- -----------
Income before provision
for income taxes...... 2,129 7,455 914 8,369
Provision for income
taxes................. 2,087(i) 3,429 421(i) 3,850
------------- --------- ----------- -----------
Net income.............. $ 42 $ 4,026 $ 493 $ 4,519
------------- --------- ----------- -----------
------------- --------- ----------- -----------
Weighted average shares
outstanding:
Basic................. 10,969(j) 12,969(l)
Diluted............... 10,969(j) 12,969(l)
Income per share:
Basic................. $ 0.37 $ 0.35
Diluted............... $ 0.37 $ 0.35
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-30
<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................. 9,003
Diluted............... 9,176
Income per share:
Basic................. $ 0.37
Diluted............... $ 0.36
<CAPTION>
PRO FORMA
PRO FORMA OFFERING PRO FORMA
ADJUSTMENTS SUBTOTAL ADJUSTMENTS COMBINED
------------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues................ $ $ 146,981 $ $ 146,981
Operating expenses...... 80,513 80,513
------------- --------- ----------- -----------
Gross profit.......... 66,468 66,468
General and
administrative
expenses.............. (7,119)(e) 47,261 47,261
868(f)
Amortization expense.... 2,019(g) 2,997 2,997
Non-recurring
acquisition costs..... 1,156 1,156
------------- --------- ----------- -----------
Operating income...... 4,232 15,054 15,054
Other (income) expense:
Interest expense...... 446(h) 1,424 (1,219)(k) 205
Interest income....... 657(h)
Other................. 312 312
------------- --------- ----------- -----------
Income before provision
for income taxes...... 3,129 13,318 1,219 14,537
Provision for income
taxes................. 3,879(i) 6,126 561(i) 6,687
------------- --------- ----------- -----------
Net income.............. $ (750) $ 7,192 $ 658 $ 7,850
------------- --------- ----------- -----------
------------- --------- ----------- -----------
Weighted average shares
outstanding:
Basic................. 10,969(j) 12,969(l)
Diluted............... 10,969(j) 12,969(l)
Income per share:
Basic................. $ 0.66 $ 0.61
Diluted............... $ 0.66 $ 0.61
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-31
<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 ($2,029) 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 $16,400 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 $1,740 as a reduction of
capital.
(c) Adjustment to reflect the reclassification of divisional equity to
common stock and additional paid-in-capital as a result of the Navigant
Distribution. The Navigant Distribution will result in the issuance of 10,969
shares of Common Stock.
(d) Adjustment to reflect $15,240 of net proceeds from the sale of 2,000
shares of Common Stock as part of the Offering (net of expenses and underwriting
discount) and the utilization of $15,240 of the proceeds to repay debt.
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS
(e) 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.
(f) 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.
(g) 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.
(h) Adjustment to reflect the increase in interest expense. Interest expense
is being calculated on the debt outstanding at January 24, 1998 of $17,800 at a
weighted average interest rate of approximately 8.0%. Pro forma interest expense
will fluctuate $22 on an annual basis for each 0.125% change in the interest
rate. 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.
(i) 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
F-32
<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)
acquired by the Company, including those companies that previously paid no taxes
due to their Subchapter S status.
(j) The weighted average shares outstanding used to calculate pro forma
earnings per share of 10,969 is calculated based upon approximately 109,690
shares of U.S. Office Products common stock outstanding on the date of the
Travel Distribution divided by ten, which is the Distribution Ratio.
(k) Adjustment to reflect a decrease in interest expense as a result of the
utilization of a portion of the net proceeds from the Offering of $15,240 to
repay debt at an an annual interest rate of 8.0%
(l) The weighted average shares outstanding used to calculate pro forma as
adjusted earnings per share of 12,969 is based upon the 10,969 shares of common
stock issued as a result of the Navigant Distribution and 2,000 shares issued in
the Offering.
F-33
<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-34
<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-35
<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-36
<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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<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-47
<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-48
<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-49
<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-50
<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-51
<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-52
<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-53
<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-54
<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-55
<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-56
<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-57
<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-58
<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-59
<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-60
<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-61
<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-62
<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-63
<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-64
<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-65
<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-66
<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-67
<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-68
<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-69
<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-70
<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-71
<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-72
<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-73
<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-74
<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-75
<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-76
<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-77
<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-78
<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-79
<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-80
<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-81
<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-82
<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-83
<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-84
<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-85
<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-86
<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-87
<PAGE>
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- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY NAVIGANT OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT RELATES
IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH
STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Additional Information.............................. 3
Summary............................................. 4
Risk Factors........................................ 7
The Spin-Offs From U.S. Office Products............. 15
Use of Proceeds..................................... 19
Dividend Policy..................................... 19
Dilution............................................ 20
Capitalization...................................... 21
Selected Financial Data............................. 22
Management's Discussion and Analysis of Financial
Condition and Results of Operations of Navigant... 24
Industry Overview................................... 32
Business............................................ 32
Management of Navigant.............................. 40
Certain Relationships and Related Transactions...... 48
Principal Stockholders of Navigant.................. 49
Description of Navigant Capital Stock............... 51
Underwriting........................................ 54
Experts............................................. 56
Legal Matters....................................... 56
Index to Financial Statements....................... F-1
</TABLE>
------------------------
Until July 4, 1998 (25 days after the commencement of the offering), all
dealers effecting transactions in the Navigant Common Stock, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
2,000,000 SHARES
NAVIGANT
INTERNATIONAL, INC.
COMMON STOCK
[LOGO]
---------
PROSPECTUS
JUNE 9, 1998
---------
SALOMON SMITH BARNEY
NATIONSBANC MONTGOMERY
SECURITIES LLC
RAYMOND JAMES & ASSOCIATES, INC.
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