1
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 000-22935
PEGASUS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2605174
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3811 TURTLE CREEK BOULEVARD, SUITE 1100 75219
DALLAS, TEXAS (ZIP CODE)
(Address of principal executive offices)
Registrant's telephone number, including area code: (214) 528-5656
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $0.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value on March 26, 1998 of the registrant's
voting securities held by non-affiliates was $246,113,033.
-------------
Number of shares of registrant's Common Stock, par value $0.01 per
share, outstanding as of March 26, 1998: 10,484,654.
-------------
DOCUMENTS INCORPORATED BY REFERENCE
(a) Selected portions of the Registrant's Annual Report to Stockholders
for the fiscal year ended December 31, 1997.-Part II
(b) Selected portions of the Registrant's definitive Proxy Statement
for the 1998 Annual Meeting of Stockholders.-Part III
===============================================================================
2
PART I
ITEM 1. BUSINESS.
Unless the context otherwise requires, the term "Company" or "Pegasus"
when used in this report refers to Pegasus Systems, Inc., a Delaware
corporation, and its predecessors and consolidated subsidiaries. This report
contains certain forward-looking statements within the meaning of the federal
securities laws. Actual results and the timing of certain events could differ
materially from those projected in or contemplated by the forward-looking
statements due to a number of factors, including without limitation those listed
herein under "Risk Factors".
Pegasus is a provider of transaction processing services to the hotel
industry worldwide. The Company's THISCO and its TravelWeb and other
Internet-based hotel room reservation services improve the efficiency and
effectiveness of the hotel reservation process by enabling travel agents and
individual travelers to electronically access hotel room inventory information
and conduct reservation transactions. The Company's HCC service improves the
efficiency and effectiveness of the commission payment process for participating
hotels and travel agencies by consolidating payments and providing comprehensive
transaction reports. In addition, the Company is developing an information
service to provide hotel industry participants with transaction specific
information on industry trends and guest behavior. The Company's services
benefit many of the participants in the hotel room distribution process,
including hotels, hotel representation firms, Global Distribution Systems
("GDSs"), travel agencies, convention and other large meeting organizers,
corporate travel departments and Web sites with travel-related features. For the
fiscal year ending December 31, 1997, approximately 47.2% of the Company's
consolidated revenues was derived from its electronic hotel reservation
processing services, including approximately 41.0% from the THISCO service and
approximately 6.2% from the TravelWeb and other Internet-based services, and
approximately 52.8% of the Company's consolidated revenues was derived from its
HCC service.
SERVICES
The Company's services generally fall into three categories: electronic
hotel room reservations services, commission payment processing services and
information services.
HOTEL ROOM RESERVATION SERVICES
THISCO.
The Company's THISCO service is an electronic hotel room reservation
processing service that interfaces communications concerning hotel reservation
information between all major GDSs and hotel central reservation systems. THISCO
enables a hotel to connect to all major GDSs without having to build and
maintain a separate interface for each GDS. Without THISCO or a similar service,
hotel chains that desire their room inventory to be accessible to travel
agencies electronically on a GDS must develop protocols and message formats
compatible with each GDS, a process that entails significant time and expense.
Alternatively, hotels may rely more heavily on less-automated means, such as
traditional toll-free telephone reservation centers with higher processing
costs. THISCO enables the processing of hotel room reservations and also
transmits daily millions of electronic status messages, which are used to update
room rates, features and availability on GDS databases. Many participating
hotels also have chosen to utilize the Company's UltraSelect service, which
provides travel agencies using GDSs with direct access through THISCO to a
hotel's central reservation system bypassing the GDS databases to obtain the
most complete and up-to-date hotel room information available.
3
Internet-based Services.
TravelWeb. Located at www.travelweb.com, TravelWeb provides individual
travelers direct access to online hotel information and the ability to make
reservations electronically over the Internet. Individual travelers
traditionally obtain information or reserve a room by contacting a hotel
directly by telephone or fax or indirectly through intermediaries, such as
travel agencies, convention and other large meeting organizers and corporate
travel departments. As a result, an individual traveler cannot easily obtain
information from a wide range of hotel properties in a timely manner. TravelWeb
provides travelers with detailed information regarding a wide array of hotel
properties and, through its connection to the Company's THISCO service, allows
travelers to reserve a hotel room and receive a confirmation in seconds. In
addition to hotel room reservations, the TravelWeb service offers airline
booking capability through Internet Travel Network, Inc. Additionally, TravelWeb
offers "The Resources Center" which provides information and links for a variety
of travel-related services, such as food, shopping, area attractions and
business services. The Company also began to sell advertising space on TravelWeb
during 1996, focusing on advertisers that target travelers.
NetBooker. NetBooker is a service provided to other Web sites which
combines TravelWeb's hotel information database and THISCO's electronic
interface capability to make hotel room reservations. To conduct Internet-based
electronic commerce successfully, Web site operators must offer a content set
which is sufficiently broad, accurate, up-to-date, graphically appealing and
useful to attract buyers to the Web site. Typically, the development of such a
content set is expensive and time consuming. Furthermore, in addition to
providing individual travelers with access to useful and graphically appealing
information, the operator of a Web site must offer individual travelers the
capability to effect a transaction in order to generate a transaction fee. The
Company's NetBooker service provides Web sites with the same information
contained on TravelWeb and simple and fast method of making a hotel room
reservation online. The Company's NetBooker service utilizes advanced technology
applications to customize the TravelWeb hotel database so that it appears to the
user to be the database and booking capability of the third-party Web site. In
connection with this service, there is an interface to the Company's THISCO
service, which enables users of the Web site to shop and query room
availability, electronically make a reservation and receive a confirmation in
seconds.
UltraRes. The Company's UltraRes service automates the processing of
hotel room reservations for conventions and large meetings. The manual process
traditionally used to reserve hotel rooms for these events is information-
intensive and inefficient and frequently leads to inaccurate and delayed
information and overbooking or underbooking. With the Company's UltraRes
service, convention and other large meeting organizers are able to transfer
reservation requests to the THISCO service, which electronically delivers the
information to each hotel central reservation system. The UltraRes service
eliminates the need to manually transmit and enter rooming lists and allows
hotels to deliver reservations and confirmations electronically in a fast and
reliable manner.
UltraDirect. The Company's UltraDirect service provides the corporate
travel management industry with a direct real-time link to the Company's THISCO
service through corporate intranet travel management software. With the
UltraDirect service, corporate travelers are able to check availability and make
hotel reservations within seconds at hotel chains or properties with which the
traveler's employer has negotiated rates. The UltraDirect service enables
corporate travel departments of companies to have access to the customized
information negotiated with hotel chains and properties to facilitate hotel room
reservations. Furthermore, this information can be fully integrated into other
components of the intranet site and facilitate the creation of passenger name
records and detailed profile information.
Corporate TravelWeb. The Company is developing its Corporate TravelWeb
service to provide corporate travel departments with Web-based electronic hotel
room and car reservation capabilities. This service is intended to benefit
corporate travel departments by providing low-cost access to comprehensive
travel information and on-line reservation functionality, reducing the time and
effort required in making travel reservations, and improving travel information
reporting, the enforcement of corporate travel policies and the use of
negotiated or preferred rates.
The Company has not received a material amount of revenues for certain
of these electronic hotel room reservation services to date, and there can be no
assurance that such services will produce material revenues to the Company in
the future. See "Risk Factors -- Impact of Technological Advances; Delays in
Introduction of New Services."
-2-
4
COMMISSION PROCESSING SERVICES
The Company's HCC service gathers commission payment information,
processes that information and transmits to travel agencies one consolidated
check in the travel agency's currency of choice, together with an information
statement that enables the travel agency to reconcile its hotel commission
activity. Typically, a hotel pays to the travel agency that made the hotel
reservation a commission of approximately 10% of the room rate paid by a hotel
guest. However, the payment process related to these commissions historically
has been costly and inefficient, consisting of numerous checks in small amounts
and little information regarding the basis from which the commission was
calculated. The HCC service streamlines the commission payment process and
consolidates into a single payment the aggregate commission owed by a
participating hotel to all participating travel agencies. Additionally, the HCC
service provides an incentive to travel agencies to make reservations at
HCC-participating hotels in countries other than their own because the HCC
service disburses checks denominated in each travel agency's currency of choice,
saving costly exchange fees. Furthermore, the monthly and quarterly marketing
reports and statistics prepared for the hotel by the HCC service allow the hotel
to identify and market more effectively to those travel agencies that provide
the hotel with the majority of its guests. The hotel also benefits from HCC's
Customer Relations Center, which allows travel agency inquiries regarding
commissions to be addressed by HCC rather than by the hotel itself.
INFORMATION SERVICES
The Company's Pegasus IQ service is being developed to provide hotel
information to a wide variety of audiences in the travel and travel-related
industries, from hotel chains to travel industry marketing groups to
travel-related service companies. The service intends to compile data regarding
hotel guests and their use of hotels in transaction-specific detail and to
organize that data into meaningful information. The Pegasus IQ service intends
to provide industry trend reports and guest behavior data in an automated,
timely format for hotels and hotel marketing companies. The Pegasus IQ service
also is intended to provide benchmark information services that compare a
hotel's daily room and occupancy rates with that of its competition.
Furthermore, Pegasus IQ intends to provide data in an electronic format to
individual travelers, corporate travel departments or other travel service
providers regarding a particular stay at a hotel, together with information
provided by payment card companies, to facilitate automated expense reporting or
to ensure travel policy adherence.
INDUSTRY
The room reservation and commission payment processes in the hotel
industry are complex and information intensive. Making a hotel room reservation
requires significant amounts of data, such as room rates, features and
availability. This complexity is compounded by the need to confirm, revise or
cancel room reservations, which generally requires multiple parties to have
ongoing access to real-time reservation information. Similarly, the process of
reconciling and paying hotel commissions to travel agencies is based on
transaction-specific hotel data and consists of a number of relatively small
payments to travel agencies, often including payments in multiple currencies. In
addition, information regarding guest cancellations and "no-shows" needs to be
accurately communicated between hotels and travel agencies in order to reconcile
commission payments.
Reservations for hotel rooms are made either directly by individual
travelers or indirectly through intermediaries. Individual travelers typically
make direct reservations by telephoning or faxing a hotel to ascertain room
rates, features and availability and to make reservations. Increasingly,
individual travelers can conduct all aspects of this transaction through hotel
and travel-related Web sites. Intermediaries for hotel room reservations,
including travel agencies, convention and other large meeting organizers and
corporate travel departments, access hotel information either by telephone or
fax or through a GDS. GDS's maintain databases of room rate, feature and
availability information provided by hotels to which they are connected. Because
each GDS has a unique electronic interface to hotel reservation systems, each
GDS can obtain room information and book rooms only at hotels that have
developed protocols and message formats compatible with that particular GDS.
A number of current trends are affecting the hotel industry. First, the
hotel industry has been shifting from manual to electronic means of making hotel
room reservations. As more hotels become electronically bookable, the Company
expects that electronic hotel room reservations will grow substantially in the
United States and internationally over the
-3-
5
next several years. Second, a small but growing number of individual travelers
are making hotel room reservations electronically on the Internet. Third,
smaller hotel chains and independent hotels increasingly have affiliated with
large hotel chains through a process known in the industry as "branding" or
"reflagging." This global consolidation process produces economies of scale and
increases the global penetration of larger hotel chains, many of whom are the
Company's stockholders and customers. Fourth, hotel commissions are becoming
increasingly important to travel agencies as a source of revenue. Travel
agencies are looking to increase their revenue by making more hotel room
reservations to offset the effects of increased competition among travel
agencies, new competition from emerging travel service distribution channels and
caps on commissions for airline reservations, which historically have been the
leading revenue source for travel agencies.
COMPETITION
The Company faces significant competition in connection with its THISCO
hotel room reservation processing service. The principal competitor of the
Company's THISCO service is WizCom International, Ltd. ("Wizcom"), which was a
wholly owned indirect subsidiary of Avis, Inc. ("Avis"). As a result of the
acquisition of Avis by HFS Incorporated ("HFS"), in September 1996, WizCom
became a wholly owned indirect subsidiary of HFS. While HFS utilized the
Company's THISCO service through 1997, HFS has moved its electronic hotel room
reservation processing from THISCO to WizCom in 1998. There can be no assurance
that any additional customers will not change their electronic reservation
interface to WizCom or to another similar service. Also, hotels can choose to
connect directly to one or more GDSs, thereby bypassing THISCO and eliminating
the need to pay fees to the Company. In addition, one or more GDSs can choose to
bypass the THISCO service and develop and operate a new common electronic
interface to hotel central reservation systems. Such competitors or their
affiliates may have greater financial and other resources than the Company.
Factors affecting competitive success of the electronic hotel room reservation
processing service include reliability, levels of fees, number of hotel
properties on the system, ability to provide a neutral, comprehensive interface
between hotels and other participants in the distribution of hotel rooms and
ability to develop new technological solutions. There can be no assurance that
another participant in the hotel room distribution process or a new competitor
will not create services with features that would reduce the attractiveness of
the Company's services. The Company's inability to compete effectively with
respect to these services could have a material adverse effect on the Company's
financial condition and results of operations.
The market for the Company's TravelWeb, NetBooker and other
Internet-based services is highly competitive. Current competition includes
traditional telephone or travel agency reservation methods and other
Internet-based travel reservation services. There are a large number of
Internet-based travel-related services offered by the Company's competitors,
and many of these competitors are larger and have significantly greater
financial resources and name recognition than the Company. Several competitive
Web sites such as Travelocity (a site operated by The SABRE Group Holdings,
Inc.) and Expedia.com (a site operated by Microsoft Corporation) offer a more
comprehensive range of travel services than those provided by the Company. The
Company faces competition in the hotel room reservation business not only from
its current competitors but also from possible new entrants including other Web
sites. The costs of entry into the Internet-based hotel room reservation
business is relatively low. There can be no assurance that the Company's
Internet-based hotel room reservation services will compete successfully. The
failure of these services to compete successfully could have a material adverse
effect on the Company's financial condition and results of operations.
The market for the Company's HCC service is competitive. The Company's
competitors in the commission processing business include National Processing
Company ("NPC"), WizCom and Citicorp. NPC, a company that has traditionally
provided car rental and cruise line commission processing services, recently
began offering its services to hotels and travel agencies as well. WizCom
recently announced that it is introducing a commissions payment service that may
be competitive with the HCC service. Citicorp provides commission consolidation
services to hotel chains. In addition, hotels that are current or prospective
customers of the HCC service could decide to process commission payments
without, or in competition with, the HCC service. Some of these current or
potential competitors have substantially greater financial and other resources
than the Company. Furthermore, while the Company has agreements with all of its
hotel customers for the HCC service, many of the Company's travel agency
customers are not obligated by any long-term agreement with the Company. If a
significant percentage of these travel agencies were to cease using the HCC
commission processing service, the Company's financial condition and results
of operations could be materially adversely affected.
-4-
6
INTELLECTUAL PROPERTY
The Company is constantly developing new processing technology and
enhancing existing proprietary technology. The Company has no patents. The
Company primarily relies on a combination of copyright, trade secrets,
confidentiality procedures and contractual provisions to protect its technology.
Despite these protections, it may be possible for unauthorized parties to copy,
obtain or use certain portions of the Company's proprietary technology. While
any misappropriation of the Company's intellectual property could have a
material adverse effect on the Company's competitive position, the Company
believes that protection of proprietary rights is less significant to the
Company's business than the continued pursuit of its operating strategies and
other factors, such as the Company's relationship with industry participants and
the experience and abilities of its key personnel.
The Company has registered "UltraSwitch," "TravelWeb," "UltraAccess,"
"HCC Hotel Clearing Corporation," "HCC Link," "HCC Cash" and "Chain Link" as
United States federal trademarks and applications to register "UltraRes,"
"Click-It" and "Pegasus" are pending with the United States Patent and Trademark
Office. Trademark applications for "TravelWeb" also have been filed in Canada
and Europe.
RESEARCH AND DEVELOPMENT
The Company's research and development activities primarily consist of
software development, development of enhanced communication protocols and custom
user interfaces and database design and enhancement. As of February 28, 1998,
the Company employed 59 people in its Information Technology Group and from time
to time, supplements their efforts with the use of independent consultants and
contractors. This group is comprised of information technology, services
development, technical services and product support personnel. The Company's
total research and development expense was $2.1 million, $2.2 million and $2.5
million for 1995, 1996 and 1997, respectively.
EMPLOYEES
At February 28, 1998, the Company had 104 employees, 99 of which were
located in the United States, with 59 persons in the Information Technology
Group, 30 persons performing sales and marketing, customer relations and
business development functions and the remainder performing corporate, finance
and administrative functions. The Company has five employees in England
performing international sales activities. The Company has no unionized
employees. The Company believes that its employee relations are satisfactory.
RISK FACTORS
SUBSTANTIAL NET LOSSES. The Company has experienced substantial net losses,
including a net loss of $3.5 million in 1996. The Company's HCC and THISCO
services have accounted for the majority of the Company's revenues to date.
Any decrease in the revenues from the HCC or THISCO services, or any
increase in expenses related to any of the Company's services substantially
above the amounts budgeted therefor, could have a material adverse effect on
the Company's financial condition and results of operations. The Company
anticipates that its budgeted operating expenses will increase in the
foreseeable future as it continues to develop its services, increase its sales
and marketing activities and expand its distribution channels. To achieve
continued profitability, the Company must successfully implement its business
strategy and increase its revenues while controlling expenses.
COMPETITION.
Electronic Hotel Room Reservation Processing Service. The Company faces
significant competition in connection with its THISCO hotel room reservation
processing service. The principal competitor of the Company's THISCO service is
WizCom, which was a wholly owned indirect subsidiary of Avis. As a result of
the acquisition of Avis by
-5-
7
HFS, a stockholder and customer of the Company, in September 1996, WizCom
became a wholly owned indirect subsidiary of HFS. While HFS utilized the
Company's THISCO's service through 1997, HFS has moved its electronic hotel room
reservation processing from THISCO to WizCom in 1998. There can be no assurance
that any additional customers will not change their electronic reservation
interface to WizCom or to another similar service. Also, hotels can choose to
connect directly to one or more GDSs, thereby bypassing the THISCO service and
eliminating the need to pay fees to the Company. Such competitors or their
affiliates may have greater financial and other resources than the Company.
Factors affecting the competitive success of an electronic hotel room
reservation processing service include reliability, levels of fees, number of
hotel properties on the system, ability to provide a neutral comprehensive
interface between hotels and other participants in the distribution of hotel
rooms and ability to develop new technological solutions. There can be no
assurance that another participant in the hotel room distribution process or a
new competitor will not create services with features that would reduce the
attractiveness of the Company's services. The Company's inability to compete
effectively with respect to these services could have a material adverse effect
on the Company's financial condition and results of operations.
Internet Hotel Room Reservation Service. The market for the Company's
TravelWeb, NetBooker and other Internet-based services is highly competitive.
Current competition includes traditional telephone or travel agency reservation
methods and other Internet-based travel reservation services. There are a large
number of Internet based travel-related services offered by the Company's
competitors, and many of these competitors are larger and have significantly
greater financial resources and name recognition than the Company. Several
competitive Web sites such as Travelocity (a site operated by The SABRE Group
Holdings, Inc.) and Expedia (a site operated by Microsoft Corporation) offer a
more comprehensive range of travel services than TravelWeb or NetBooker. The
Company faces competition in the online hotel room reservation business not
only from its current competitors but also from possible new entrants,
including other Web sites. The costs of entry into the Internet-based hotel
room reservation business are relatively low. There can be no assurance that
the Company's Internet-based hotel room reservation services will compete
successfully. The failure of these services to compete successfully could have
a material adverse effect on the Company's financial condition and results of
operations.
Commission Processing Service. The market for the Company's HCC service
is competitive. The Company's competitors in the commission processing business
include NPC, WizCom and Citicorp. NPC, a company that has traditionally provided
car rental and cruise line commission processing services, recently began
offering its services to hotels and travel agencies. WizCom has recently
announced its intention to offer a service that may be competitive with the
Company's HCC service. Citicorp provides commission consolidation services to
hotel chains. In addition, hotels that are current or prospective customers of
the HCC service can decide to process commission payments without, or in
competition with, the HCC service. Some of these current or potential
competitors have substantially greater financial and other resources than the
Company. Furthermore, while the Company has agreements with all of its hotel
customers for the HCC service, many of the Company's travel agency customers are
not obligated by any long-term agreement with the Company. If a significant
percentage of these travel agencies were to cease using the HCC commission
processing service, the Company's financial condition and results of
operations could be materially adversely affected.
DEPENDENCE ON HOTEL INDUSTRY; CONSOLIDATION TRENDS. The Company derives
substantially all of its revenues directly and indirectly from the hotel
industry. The hotel industry is sensitive to changes in economic conditions that
affect business and leisure travel and is highly susceptible to unforeseen
events, such as political instability, regional hostilities, recession, gasoline
price escalation, inflation or other adverse occurrences that result in a
significant decline in the utilization of hotel rooms. Any event that results in
decreased travel or increased competition among hotels may lower hotel room
reservation volumes, the average daily rates for hotel rooms or both and could
have a material adverse effect on the Company's financial condition and results
of operations.
The hotel industry recently has witnessed a period of consolidation in
which hotel chains have acquired or merged with other chains. Such activities
may reduce the Company's customer base. Similar consolidation trends have
occurred in the GDS industry. After the recent merger between Amadeus and System
One, the GDS industry has consolidated to four major GDSs. If further
consolidation were to take place, the value provided by the Company to
participants in the hotel room distribution process and the benefits to hotel
operators of utilizing the THISCO service would be reduced. The Company
typically offers volume-based discounting of its fees, which could result in a
higher percentage of discounted fees if the consolidation trends in the hotel
and GDS industries continue. There can be no assurance that any potential
-6-
8
decrease in the Company's customer base or any potential increase in the
percentage of discounted fees will not have a material adverse effect on the
Company's financial condition and results of operations.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company has experienced in the
past and expects to experience in the future significant fluctuations in
quarterly operating results. Such fluctuations may be caused by many factors,
including but not limited to the introduction of new or enhanced services by the
Company or its competitors, the degree of customer acceptance of new services,
competitive conditions in the industry, seasonal factors, reduction in client
base, changes in pricing, the extent of international expansion, the mix of
international and domestic sales and general economic conditions. Because the
Company's expense budget is set early in a fiscal year and a significant portion
of the Company's operating expenses are relatively fixed in nature, fluctuations
in revenues may cause substantial variation in the Company's results of
operations from quarter to quarter. Due to the foregoing factors, many of which
are beyond the Company's control, quarterly revenues and operating results are
difficult to forecast, and the Company believes that period-to-period
comparisons of its operating results will not necessarily be meaningful and
should not be relied upon as any indication of future performance. It is likely
that the Company's future quarterly operating results from time to time will not
meet the expectations of securities analysts or investors, which could have a
material adverse effect on the market price of the Company's Common Stock.
POTENTIAL ADVERSE CHANGES IN HOTEL COMMISSION PAYMENTS. Absent any express
arrangement in individual cases, hotels currently are under no contractual
obligation to pay room reservation commissions to travel agencies. Hotels could
elect to reduce the current industry customary commission rate of 10%, limit the
maximum commission generally paid for a hotel room reservation or eliminate
commissions entirely. In 1995, the airline industry placed a maximum limit on
the amount of commissions payable to travel agencies for any domestic airline
ticket issued. Recently, certain airlines have capped the dollar amount that
they will pay to travel agencies for airline reservations made online. In
addition, hotels increasingly are utilizing other direct distribution channels,
such as the Internet, or offering negotiated rates to major corporate customers
that are non-commissionable to travel agencies. Because a substantial portion of
the Company's revenues are dependent on the dollar volume of travel agency
commissions paid by hotels, any change in the hotel commission payment system
that reduces the commissions payable to travel agencies and any acceleration of
the trend towards direct distribution of rooms by hotels could have a material
adverse effect on the Company's financial condition and results of operations.
DEPENDENCE ON GROWTH OF INTERNET COMMERCE. The market for electronic hotel
reservation services over the Internet is rapidly evolving and depends upon
market acceptance of novel methods for distributing services and products, which
involves a high degree of uncertainty. The success of the Company's TravelWeb,
NetBooker and other Internet based services will depend upon the adoption of the
Internet by consumers as a widely used medium for commerce. The Internet may not
prove to be a viable commercial marketplace for any number of reasons, including
inadequate development of the necessary infrastructure or the lack of
complementary services and products, such as high speed modems and high speed
communication lines. The Internet has experienced, and is expected to continue
to experience, significant growth in the number of users and amount of traffic.
There can be no assurance that the Internet infrastructure will continue to be
able to support the demands placed on it by this continued growth. Moreover,
critical issues concerning the commercial use of the Internet (including
security, reliability, cost, ease of use, accessibility and quality of service)
remain unresolved and may negatively affect the growth or attractiveness of
commerce conducted on the Internet. If critical issues concerning the commercial
use of the Internet are not favorably resolved, if the necessary infrastructure
is not developed or if the Internet does not become a viable commercial
marketplace, the Company's financial condition and results of operations could
be materially adversely affected.
SYSTEM INTERRUPTION AND SECURITY RISKS. The Company's operations are dependent
on its ability to protect its computer systems and databases against damage or
system interruptions from natural disasters, power loss, telecommunications
failure, unauthorized entry or other events beyond the Company's control. A
significant amount of the Company's computer equipment is located at a single
site in Phoenix, Arizona. There can be no assurance that unanticipated problems
will not cause a significant system outage or data loss. Despite the
implementation of security measures, the Company's infrastructure may also be
vulnerable to break-ins, computer viruses or other disruptions caused by its
customers or others. Any damage to the Company's databases, failure of
communication links or security breach or other loss that causes
-7-
9
interruptions in the Company's operations could have a material adverse effect
on the Company's financial condition and results of operations.
IMPACT OF TECHNOLOGICAL ADVANCES; DELAYS IN INTRODUCTION OF NEW SERVICES. The
Company's future success will depend, in part, on its ability to develop leading
technology, enhance its existing services, develop and introduce new services
that address the increasingly sophisticated and varied needs of its current and
prospective customers and respond to technological advances and emerging
industry standards and practices on a timely and cost effective basis. Although
the Company strives to be a technological leader, there can be no assurance that
future advances in technology will be beneficial to, or compatible with, the
Company's business or that the Company will be able to economically incorporate
such advances into its business. In addition, keeping abreast of technological
advances in the Company's business may require substantial expenditures and lead
time. There can be no assurance that the Company will be successful in
effectively using new technologies, adapting its services to emerging industry
standards or developing, introducing and marketing service enhancements or new
services, or that it will not experience difficulties that could delay or
prevent the successful development, introduction or marketing of these services.
If the Company incurs increased costs or is unable, for technical or other
reasons, to develop and introduce new services or enhancements of existing
services in a timely manner in response to changing market conditions or
customer requirements, or if new services do not achieve market acceptance, the
Company's financial condition and results of operations could be materially
adversely affected.
DEPENDENCE ON KEY CUSTOMERS AND THIRD-PARTY SERVICE ARRANGEMENTS. The Company's
business is dependent upon customer arrangements with its hotel stockholders or
their affiliates, other hotel chains and hotel representation firms, travel
agencies, travel agency consortia and GDSs. The Company has not entered into
written agreements with certain travel agencies relating to the HCC service.
There can be no assurance that the Company will be able to continue or renew
these arrangements on equal or better terms or initiate new arrangements. Any
cancellation or non-renewal of these arrangements that results in a significant
reduction in the Company's customer base or revenue sources could materially
adversely affect the Company's financial condition and results of operations. In
addition, the Company relies on third parties to provide consolidation,
remittance and worldwide currency exchange services for its HCC service and
facility maintenance and disaster recovery services for computer and
communications systems used in all of the Company's services. There can be no
assurance that these service contracts will be successfully extended upon
expiration or that Pegasus can enter into contracts with alternate service
providers at the same or lower cost. Any failure by the Company to extend these
contracts or to secure alternate service providers could have a material adverse
effect on the Company's financial condition and results of operations.
GOVERNMENT REGULATION. The Company's primary customers are hotel chains and
hotel representation firms. The Company currently has as its stockholders many
of the leading hotel chains in the world based on revenues. While the Company
believes that it has been acting since its inception as an entity independent of
its stockholders, and its stockholders have not engaged in any anti-competitive
activities through or in connection with the Company, there can be no assurance
that federal, state or foreign governmental authorities, the Company's
competitors or its consumers will not raise anti-competitive concerns regarding
the Company's close relationship with its hotel stockholders. Any such action by
federal, state or foreign governmental authorities or allegations by third
parties could have a material adverse effect on the Company's financial
condition and results of operations. While certain aspects of the travel
industry are heavily regulated by the United States Government, the services
currently offered by the Company, including electronic room reservation
processing services, commission processing services and online reservation
services, have not been subject to any material industry-specific government
regulation. However, there can be no assurance that federal, state or foreign
governmental authorities will not attempt to regulate one or more of the
Company's current or future services. Due to the increasing popularity of the
Internet, it is possible that laws and regulations may be adopted with respect
to the Internet, covering issues such as privacy, pricing, content and quality
of products and services. The adoption of laws or regulations affecting the
Company's lines of business could reduce the rate of growth of the Company or
could otherwise have a material adverse effect on the Company's financial
condition and results of operations.
RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH. The Company has in recent years
experienced significant growth and anticipates that significant expansion will
continue to be required in order to address potential market opportunities.
There
-8-
10
can be no assurance that if the Company continues to expand, management
will be effective in attracting and retaining additional qualified personnel,
expanding the Company's physical facilities, integrating acquired businesses or
otherwise managing growth. In addition, there can be no assurance that the
Company's systems, procedures or controls will be adequate to support any
expansion of the Company's operations. The Company's inability to manage growth
effectively could have a material adverse effect on the Company's financial
condition and results of operations.
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION AND OPERATIONS. Pursuit of
international growth opportunities may require significant investments for an
extended period before returns on such investments, if any, are realized. There
can be no assurance as to the extent, if at all, that the Company's plans to
expand in international markets will be successful. The Company's current
international activities and prospects may be adversely affected by factors such
as policies of the United States and foreign governments affecting foreign
trade, privacy issues, investment and taxation, exchange controls, political
risks and currency risks. One or more of these factors could materially
adversely affect the Company's financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL. The Company believes that its success will continue
to be dependent upon its ability to attract and retain skilled managers and
other key personnel, including its President, John F. Davis, III, its Chief
Information Officer, Joseph W. Nicholson, and its other present officers. The
loss of the services of any of its present officers could have a material
adverse effect on the Company's financial condition and results of operations.
Although the Company currently has "key-man" insurance covering Messrs. Davis
and Nicholson, there can be no assurance that the amount of such insurance would
be adequate to compensate for the loss of the services of the insured officers.
The Company believes that its future business results will also depend in
significant part upon its ability to identify, attract, motivate and retain
additional highly skilled technical personnel. Competition for such personnel in
the information technology industry is intense. There can be no assurance that
the Company will be successful in identifying, attracting, motivating and
retaining such personnel, and the failure to do so could have a material adverse
effect on the Company's financial condition and results of operations.
DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISK OF INFRINGEMENT. The Company's
success depends upon its proprietary technology, consisting of both its software
and its hardware designs. The Company relies upon a combination of copyright,
trade secrets, confidentiality procedures and contractual provisions to protect
its proprietary technology. There can be no assurance that the Company's present
protective measures will be enforceable or adequate to prevent misappropriation
of its technology or independent third-party development of the same or similar
technology. Many foreign jurisdictions offer less protection of intellectual
property rights than the United States, and there can be no assurance that the
protection provided to the Company's proprietary technology by the laws of the
United States or foreign jurisdictions will be sufficient to protect the
Company's technology. In addition, litigation may be necessary in the future to
enforce the Company's intellectual property rights, to protect the Company's
trade secrets, to determine the validity and scope of the proprietary rights of
others, or to defend against claims of infringement or invalidity. Such
litigation, whether successful or unsuccessful, could result in substantial cost
and diversion of management resources, and a successful claim could effectively
block the Company's ability to use or license its technology in the United
States or abroad or otherwise have a material adverse effect on the Company's
financial condition and results of operations.
The Company has found and may in the future find it necessary or
desirable to procure licenses from third parties relating to current or future
services or technology, but there can be no assurance that the Company will
continue to be able to obtain such licenses or other rights or, if it is able to
obtain them, that it will be able to do so on commercially acceptable terms. The
Company could be placed at a disadvantage if its competitors obtain licenses
with lower royalty fee payments or other terms more favorable than those
received by the Company. If the Company or its suppliers were unable to obtain
licenses relating to current or future services or technology, the Company could
be forced to market services without certain technological features. The
Company's inability to obtain licenses necessary to use certain technology or
its inability to obtain such licenses on competitive terms could have a material
adverse effect on the Company's financial condition and results of operations.
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS. While the Company has no current
agreements or negotiations underway with respect to any potential acquisitions,
-9-
11
the Company regularly evaluates such opportunities and may make acquisitions of
other companies or technologies in the future. Acquisitions involve numerous
risks, including difficulties in assimilating acquired operations and products,
diversion of management's attention from other business concerns, amortization
of acquired intangible assets and potential loss of key employees of acquired
companies. The Company has no experience in assimilating acquired nonaffiliated
organizations into the Company's operations. There can be no assurance as to the
ability of the Company to integrate successfully any operations, personnel or
services that might be acquired in the future, and a failure by the Company to
do so could have a material adverse effect on the Company's financial condition
and results of operations.
YEAR 2000 COMPLIANCE. The Company has implemented a program designed to ensure
that all software used in connection with the Company's services will manage and
manipulate data involving the transition of dates from 1999 to 2000 without
functional or data abnormality and without inaccurate results related to such
dates. However, other participants in the travel industry have announced that
their software may experience such abnormalities unless significant resources
are devoted to the problem. Any failure on the part of the Company, or its
travel-related customers to ensure that any such software complies with year
2000 requirements, regardless of when such travel reservations occur, could have
a material adverse effect on the financial condition and results of operations
of the Company.
ANTI-TAKEOVER MATTERS. The Company's Second Amended and Restated Certificate of
Incorporation ("Certificate") and Second Amended and Restated By-laws
("By-laws") contain provisions that may have the effect of delaying, deterring
or preventing a potential takeover of the Company that stockholders purchasing
shares in this offering may consider to be in their best interests. The
Certificate and By-laws provide for a classified Board of Directors serving
staggered terms of three years, prevent stockholders from calling a special
meeting of stockholders and prohibit stockholder action by written consent. The
Certificate also authorizes only the Board of Directors to fill vacancies,
including newly created directorships and states that directors of the Company
may be removed only for cause and only by the affirmative vote of holders of at
least two-thirds of the outstanding shares of the voting stock, voting together
as a single class. In addition, the Certificate grants the Board of Directors
the authority to issue up to 2,000,000 shares of preferred stock, having such
rights, preferences and privileges as designated by the Board of Directors,
without stockholder approval. Section 203 of the Delaware General Corporation
Law, which is applicable to the Company, contains provisions that restrict
certain business combinations with interested stockholders, which may have the
effect of inhibiting a non-negotiated merger or other business combination
involving the Company.
POTENTIAL VOLATILITY OF STOCK PRICE. The market price for the Common Stock may
be highly volatile. The Company believes that factors such as quarterly
fluctuations in financial results or announcements by the Company or by its
competitors, travel agencies, hotel operators or other hotel industry
participants could cause the market price of the Common Stock to fluctuate
substantially. In addition, the stock market may experience extreme price and
volume fluctuations which often are unrelated to the operating performance of
specific companies. Market fluctuations or perceptions regarding the hotel
industry, as well as general economic or political conditions, may adversely
affect the market price of the Common Stock. In the past, following periods of
volatility in the market price for a company's securities, securities class
action litigation has often been instituted. Such litigation could result in
substantial costs and a diversion of management attention and resources, which
could have a material adverse effect on the Company's financial condition and
results of operations.
ITEM 2. PROPERTIES.
The Company's principal executive office is a leased facility with
approximately 29,800 square feet of space in Dallas, Texas. The Company leases
this space under a lease agreement that expires December 2002. The Company also
maintains an administrative and sales office in a leased facility with
approximately 3,300 square feet of space near London, England. The lease
agreement for the current office in England expires in May 1998. The Company
expects to move its England office during the second quarter of 1998 to another
leased facility consisting of approximately 2,200 square feet. The Company has
signed a lease agreement for the new office space in England, which extends
through February 2006. Under an agreement with REZsolutions, Inc. certain of the
equipment owned by the Company is housed at a site owned by REZsolutions, Inc.
in Phoenix, Arizona. The Company believes that its existing facilities are well
maintained and in good operating condition and are adequate for its present and
anticipated levels of operations.
-10-
12
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party from time to time to certain routine legal
proceedings arising in the ordinary course of its business. Although the outcome
of any such proceedings cannot be predicted accurately, the Company does not
believe any liability that might result from such proceedings could have a
material adverse effect on the Company's financial condition and results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the Company's stockholders during
the fourth quarter of fiscal 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has traded on the Nasdaq National Market
under the symbol "PEGS" since August 7, 1997. At February 28, 1998, there were
approximately 26 record holders of the Company's Common Stock, although the
Company believes that the number of beneficial owners of its Common Stock is
substantially greater. The table below sets forth for the fiscal quarters
indicated the high and low sale prices for the Common Stock.
HIGH LOW
---- ---
Fiscal 1997
Fourth quarter................................... $20.75 $12.50
Third quarter (from August 7, 1997).............. $19.25 $15.50
The Company intends to retain any future earnings for use in its
business and does not intend to pay cash dividends in the foreseeable future.
The payment of future dividends, if any, will be at the discretion of the
Company's Board of Directors and will depend, among other things, upon future
earnings, operations, capital requirements, restrictions in future financing
agreements, the general financial condition of the Company and general business
conditions.
The following information relates to all securities issued or sold by
the Company within the past three years and not registered under the Securities
Act.
Effective in July 1995, the Company issued 4,934,667 shares of Common
Stock in exchange for all of the outstanding capital stock of The Hotel Industry
Switch Company ("THISCO") and 83.3% of the outstanding capital stock of The
Hotel Clearing Corporation ("HCC") (the "Reorganization") in accordance with
Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act").
In connection with the Reorganization, the Company granted to Lodging Network,
Inc. ("LNI") an option (the "LNI Option") to exchange the remaining 16.7% of
capital stock of HCC, which was held by LNI, for 448,667 shares of the Company's
Common Stock. In addition, certain members of HCC management agreed to forfeit
their rights to participate in a special HCC bonus plan in return for a cash
payment and the opportunity to purchase an aggregate of 283,333 shares of Common
Stock for $570,874. These shares were issued in accordance with Section 4(2) of
the Securities Act.
In June 1996, the Company issued to Information Associates, L.P. and
Information Associates, C.V. an aggregate of 1,538,462 shares of Series A
Preferred Stock for $4.88 per share in accordance with Section 4(2) of the
Securities Act. In June 1996, the Company issued in accordance with Section 4(2)
of the Securities Act 89,733 shares of the Common Stock and paid $2.0 million to
LNI for the remaining outstanding capital stock of HCC held by LNI, and in
connection therewith, the LNI Option was cancelled. In May 1997, the Company
issued in accordance with Section 4(2) of the Securities Act warrants to
purchase 345,723 shares of the Common Stock to Holiday Inn in connection with
the Distribution Services Agreement between the Company and Holiday Inn.
In June 1996, the Company adopted its 1996 Stock Option Plan, and the
Company has issued to participants in such plan under Section 4(2) of the
Securities Act and Rule 701 of the Securities Act options to purchase an
aggregate
-11-
13
of 771,740 shares of Common Stock. A Registration Statement on Form S-8
covering the 1996 Stock Option Plan has been filed with the Securities and
Exchange Commission (the "Commission").
In August 1997, the Company completed the initial public offering of
its Common Stock (the "IPO"). The Commission declared the Registration Statement
(File No. 333-28595) relating to the IPO effective on August 6, 1997. In the
IPO, the Company issued and sold 3,450,000 shares for an aggregate price to the
public of $44,850,000 and certain selling stockholders sold 659,000 shares of
Common Stock for an aggregate offering price of $8,567,000. The IPO was a firm
commitment underwriting, and the managing underwriters of the IPO were Hambrecht
& Quist LLC, NationsBanc Montgomery Securities LLC and Volpe Brown Whelan &
Company, LLC. The underwriting discount incurred by the Company relating to the
IPO was $3,139,500, and as of December 31, 1997 other expenses incurred by the
Company relating to the IPO were approximately $1.2 million. Net offering
proceeds received by the Company from the IPO were approximately $40.5 million.
Approximately $5.2 million of the proceeds received by the Company from the IPO
were used to repay certain loans to stockholders and to repay certain lease
obligations. Certain of the Company's current directors, including William C.
Hammett, Jr., I. Malcolm Highet, Paul J. Travers, Mark C. Wells and Bruce Wolff,
serve as officers or directors or both of certain of the stockholders whose
loans were repaid. Pending final application, the Company has invested the
proceeds received by it from the IPO (other than the proceeds used to repay the
stockholder loans described above) in short term marketable securities.
ITEM 6. SELECTED FINANCIAL DATA.
This information is set forth under the caption "Selected Consolidated
Financial Data" for each of the five years in the period ended December 31,
1997, of the Company's 1997 Annual Report to Stockholders, which portion of such
Annual Report is filed herein as Exhibit 13.1 and incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This information is set forth under the caption "Management's
Discussion and Analysis" of the Company's 1997 Annual Report to Stockholders,
which portion of such Annual Report is filed herein as Exhibit 13.1 and
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company including the independent
accountant's report thereon of the Company's 1997 Annual Report to Stockholders,
which financial statements are filed herein as Exhibit 13.1, are incorporated
herein by reference.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth under the captions "Election of Directors"
and "Executive Officers of the Company" of the Company's definitive Proxy
Statement for the Company's 1998 Annual Meeting of Stockholders is incorporated
herein by reference.
-12-
14
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the caption "Executive Compensation and
Other Matters" of the Company's definitive Proxy Statement for the Company's
1998 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption "Outstanding Capital Stock
and Stock Ownership of Directors, Certain Executive Officers and Principal
Stockholders" of the Company's definitive Proxy Statement for the Company's 1998
Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the caption "Certain Transactions" of
the Company's definitive Proxy Statement for the Company's 1998 Annual Meeting
of Stockholders is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. The following financial statements are incorporated by
reference from the Company's 1997 Annual Report to
Stockholders, which financial statements are filed herein as
Exhibit 13.1:
Report of Independent Accountants.
Consolidated Balance Sheets dated December
31, 1997 and 1996.
Consolidated Statements of Operations for the
three years ended December 31, 1997.
Consolidated Statements of Changes in Shareholders'
Equity (Deficit) for the three years ended
December 31, 1997.
Consolidated Statements of Cash Flows for the three years
ended December 31, 1997.
Notes to Consolidated Financial Statements.
PAGE
----
2. Consolidated Financial Statement Schedule
Report of Independent Accountants on Financial Statement Schedule. S-1
Consolidated Valuation and Qualifying Accounts. S-2
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable and therefore have been omitted.
3. The following documents are filed or incorporated by reference as
exhibits to this Report:
2.1 Contribution and Restructuring Agreement dated effective as of
July 21, 1995 by and among the Company and all of the stockholders
of the Company
3.1 Second Amended and Restated Certificate of Incorporation
3.2 Second Amended and Restated Bylaws
4.1 Specimen of Common Stock Certificate
4.2 Second Amended and Restated Certificate of Incorporation and
Second Amended and Restated Bylaws (see Exhibits 3.1 and 3.2)
4.3 Rights Agreement dated June 25, 1996 by and among the
Company and certain holders of capital stock of the Company
named therein
4.4 Common Stock Purchase Warrant issued to Holiday Hospitality
Corporation
-13-
15
*10.1 Employment Agreement dated June 25, 1996 between the
Company and John F. Davis, III
*10.2 Employment Agreement dated June 25, 1996 between the Company and
Joseph W. Nicholson
*10.3 Employment Agreement dated August 29, 1996 between the Company and
Jerome L. Galant
*10.4 Employment Agreement dated May 18, 1997 between the Company and
Michael R. Donahue
*10.5 1996 Stock Option Plan, as amended (incorporated by reference to
Exhibit 99.1 of Registration Statement on Form S-8 (File No. 333-
40039) filed with the Commission on November 12, 1997)
*10.6 1997 Stock Option Plan, as amended (incorporated by reference
to Exhibit 99.1 of Registration Statement on Form S-8 (File No.
333-40033) filed with the Commission on November 12, 1997)
10.7 Client Service Agreement, as amended, between the Company and
Citibank, N.A.
10.8 Facilities Management Agreement dated January 1,
1996 between the Company and Anasazi, Inc., currently known as
REZsolutions, Inc.
10.9 Service Agreement dated December 13, 1996 between the Company and
Comdisco, Inc.
10.10 Service Agreement dated January 17, 1997 between the Company and
Genuity, Inc.
*10.11 1997 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 99.1 of Registration Statement on Form S-8 (File No.
333-40035) filed with the Commission on November 12, 1997)
10.13 Office Lease dated October 1, 1995 between the Company and the
Utah State Retirement Investment fund relating to property
located at 3811 Turtle Creek Blvd., Suite 1100, Dallas, Texas
75219
+13.1 Selected portions of the Company's Annual Report to Stockholders
for fiscal year ended December 31, 1997
16.1 Letter regarding Change in Certifying Accountant
21.1 Subsidiaries of the Company (incorporated by reference to the
Company's Registration Statement on Form S-1 (Registration No.
333-44927))
+23.1 Consent of Price Waterhouse LLP
+23.2 Consent of Belew Averitt LLP
+24.1 Power of Attorney (included on signature page)
+27.1 Financial Data Schedule
- ----------------
Unless otherwise indicated, exhibits are incorporated by reference to the
Company's Registration Statement (File No. 333-28595) on Form S-1 declared
effective by the Commission on August 6, 1997.
+ Filed herewith.
* Management contract or compensatory plan or arrangement. The Company
will furnish a copy of any exhibit listed above to any shareholder without
charge upon written request to Mr. Ric L. Floyd, Secretary, 3811 Turtle Creek
Blvd., Suite 1100, Dallas, Texas 75219.
(b) No reports on Form 8-K were filed during the last quarter of the period
covered by this Report.
-14-
16
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Dallas, State of Texas, on this 31st day of March, 1998.
PEGASUS SYSTEMS, INC.
By: /s/ JOHN F. DAVIS, III
-----------------------------------------------
John F. Davis, III
Chief Executive Officer, President and Director
POWER OF ATTORNEY
KNOW ALL MEN AND WOMEN BY THESE PRESENTS that each person whose
signature appears below constitutes and appoints John F. Davis, III, Jerome L.
Galant and Ric L. Floyd, and each of them, such individual's true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for such individual and in his or her name, place and stead, in
any and all capacities, to sign any and all amendments to this Report, with all
exhibits thereto, and to file the same with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises as fully and to intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ JOHN F. DAVIS, III Chief Executive Officer, March 31, 1998
------------------------------- President and Director
John F. Davis, III (Principal Executive Officer)
/s/ JEROME L. GALANT Chief Financial Officer March 31, 1998
------------------------------- (Principal Financial and
Jerome L. Galant Accounting Officer)
/s/ JOHN W. BIGGS Director March 31, 1998
-------------------------------
John W. Biggs
/s/ DONALD R. DIXON Director March 31, 1998
-------------------------------
Donald R. Dixon
/s/ WILLIAM C. HAMMETT, JR. Director March 31, 1998
-------------------------------
William C. Hammett, Jr.
/s/ IAN MALCOLM HIGHET Director March 31, 1998
-------------------------------
Ian Malcolm Highet
/s/ ROCKWELL A. SCHNABEL Director March 31, 1998
-------------------------------
Rockwell A. Schnabel
/s/ PAUL J. TRAVERS Director March 31, 1998
-------------------------------
Paul J. Travers
/s/ MARK C. WELLS Director March 31, 1998
-------------------------------
Mark C. Wells
/s/ BRUCE WOLFF Director March 31, 1998
-------------------------------
Bruce Wolff
-15-
17
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Pegasus Systems, Inc.
Our audits of the consolidated financial statements referred to in our
report dated March 12, 1998 appearing in the 1997 Annual Report to Shareholders
of Pegasus Systems, Inc. (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K) also included an
audit of the Financial Statement Schedule, for the years ended December 31,
1996 and 1997, listed in Item 14(a) of this Form 10-K. In our opinion, this
Financial Statement Schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
PRICE WATERHOUSE LLP
Dallas, Texas
March 12, 1998
To the Board of Directors
of Pegasus Systems, Inc.
Our audit of the consolidated financial statements referred to in our report
dated March 2, 1996, except for Note 8, as to which the date is August 6, 1997
and Note 15, as to which the date is January 26, 1998 appearing in the 1997
Annual Report to Shareholders of Pegasus, Systems, Inc. (which report and
consolidated financial statements are incorporated by reference in this Annual
Report on Form 10-K) also included an audit of the Financial Statement
Schedule, for the year ended December 31, 1995, listed under Item 14(a) of this
Form 10-K. In our opinion, this Financial Statement Schedule, when considered
in relation to the consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information stated therein.
BELEW AVERITT LLP
Dallas, Texas
March 2, 1996
S-1
18
SCHEDULE II
PEGASUS SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1995, 1996 and 1997
(In thousands)
Additions Additions
Balance at Charged to from Balance
Beginning Costs and Acquired at End
Classification of Period Expenses Companies Deduction of Period
-------------- ----------- ----------- --------- --------- ---------
December 31, 1995
Allowance for doubtful accounts $ -- $ 20 $ -- $ -- $ 20
Income tax valuation allowances $ 2,532 $ 289 $ 707 $ -- $ 3,528
------- ------- ----- ------ -------
Total reserves and allowances $ 2,532 $ 309 $ 707 $ -- $ 3,548
======= ======= ===== ====== =======
December 31, 1996
Allowance for doubtful accounts $ 20 $ 25 $ -- $ -- $ 45
Income tax valuation allowances $ 3,528 $ 1,060 $ -- $ (39) $ 4,549
------- ------- ----- ------ -------
Total reserves and allowances $ 3,548 $ 1,085 $ -- $ (39) $ 4,594
======= ======= ===== ====== =======
December 31, 1997
Allowance for doubtful accounts $ 45 $ 81 $ -- $ (48) $ 78
Income tax valuation allowances $ 4,549 $ -- $ -- $ (237) $ 4,312
------- ------- ----- ------ -------
Total reserves and allowances $ 4,594 $ 81 $ -- $ (285) $ 4,390
======= ======= ===== ====== =======
- ----------------
(a) This schedule should be read in conjunction with the Company's audited
consolidated financial statements and related notes thereto.
S-2
19
EXHIBIT INDEX
2.1 Contribution and restructuring Agreement dated effective as
of July 21, 1995 by and among the Company and all of the
stockholders of the Company
3.1 Second Amended and Restated Certificate of Incorporation
3.2 Second Amended and Restated Bylaws
4.1 Specimen of Common Stock Certificate
4.2 Second Amended and Restated Certificate of Incorporation
and Second Amended and Restated Bylaws (see Exhibits 3.1
and 3.2)
4.3 Rights Agreement dated June 25, 1996 by and among the
Company and certain holders of capital stock of the Company
named therein
4.4 Common Stock Purchase Warrant issued to Holiday Hospitality
Corporation
*10.1 Employment Agreement dated June 25, 1996 between the
Company and John F. Davis, III
*10.2 Employment Agreement dated June 25, 1996 between the
Company and Joseph W. Nicholson
*10.3 Employment Agreement dated August 29, 1996 between the
Company and Jerome L. Galant
*10.4 Employment Agreement dated May 18, 1997 between the
Company and Michael R. Donahue
*10.5 1996 Stock Option Plan, as amended (incorporated by reference to Exhibit 99.1 of Registration Statement on Form
S-8 (File No. 333-40039) filed with the Commission on November 12, 1997)
*10.6 1997 Stock Option Plan, as amended (incorporated by reference to Exhibit 99.1 of Registration Statement on Form
S-8 (File No. 333-40033) filed with the Commission on November 12, 1997)
10.7 Client Service Agreement, as amended, between the Company
and Citibank, N.A.
10.8 Facilities Management Agreement dated January 1, 1996
between the Company and Anasazi, Inc., currently known as
REZsolutions, Inc.
10.9 Service Agreement dated December 13, 1996 between the
Company and Comdisco, Inc.
10.10 Service Agreement dated January 17, 1997 between the
Company and Genuity, Inc.
*10.11 1997 Employee Stock Purchase Plan (incorporated by reference
to Exhibit 99.1 of Registration Statement on Form S-8 (File
No. 333-40035) filed with the Commission on November 12,
1997)
10.13 Office Lease dated October 1, 1995 between the Company and
the Utah State Retirement Investment fund relating to
property located at 3811 Turtle Creek Blvd., Suite 1100,
Dallas, Texas 75219
+13.1 Selected portions of the Company's Annual Report to
Stockholders for fiscal year ended December 31, 1997
16.1 Letter regarding Change in Certifying Accountant
21.1 Subsidiaries of the Company (incorporated by reference to
the Company's Registration Statement on Form S-1
(Registration No. 333-44927))
+23.1 Consent of Price Waterhouse LLP
+23.2 Consent of Belew Averitt LLP
+24.1 Power of Attorney (included on signature page)
+27.1 Financial Data Schedule
Unless otherwise indicated, exhibits are incorporated by reference to the
Company's Registration Statement (File No. 333-28595) on Form S-1 declared
effective by the Commission on August 6, 1997.
+ Filed herewith.
* Management contract or compensatory plan or arrangement. The Company
will furnish a copy of any exhibit listed above to any shareholder without
charge upon written request to Mr. Ric L. Floyd, Secretary, 3811 Turtle Creek
Blvd., Suite 1100, Dallas, Texas 75219.