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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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(MARK ONE) FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ___________
Commission file number 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
Rights to Purchase Series A Preferred Stock
(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
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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 15, 1999 of voting stock held by
non-affiliates of the registrant was $454,626,984.
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The number of shares of the registrant's common stock, par value $0.01
per share, outstanding as of March 15, 1999 was 10,606,160.
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DOCUMENTS INCORPORATED BY REFERENCE
1. Selected portions of the Registrant's Annual Report to Stockholders
for the fiscal year ended December 31, 1998 are incorporated by reference into
Part II of this Form 10-K.
2. Selected portions of the Registrant's definitive Proxy Statement for
the 1999 Annual Meeting of Stockholders to be held on May 13, 1999 are
incorporated by reference into Part III of this Form 10-K.
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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 those listed herein under
"Risk Factors".
GENERAL
Pegasus is a provider of transaction processing services to the hotel
industry worldwide. The Company's services are currently divided into three
operating segments: Pegasus Electronic Distribution, Pegasus Commission
Processing and Pegasus Business Intelligence. Pegasus Electronic Distribution
improves 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. Pegasus
Electronic Distribution includes what was historically referred to as THISCO's
UltraSwitch service, and the Company's Internet-based services known as
TravelWeb, NetBooker and UltraRes. Pegasus Commission Processing improves the
efficiency and effectiveness of the commission payment process for participating
hotels and travel agencies by consolidating payments and providing comprehensive
transaction reports. Pegasus Commission Processing includes what historically
was referred to as The Hotel Clearing Corporation or "HCC". In addition, Pegasus
Business Intelligence began providing information services to 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, 1998,
approximately 42% of the Company's consolidated revenues was derived from
Electronic Distribution services, approximately 55% of the Company's
consolidated revenues was derived from Commission Processing services and
approximately 3% of the Company's consolidated revenue was derived from Business
Intelligence services.
In August 1998, the Company supplemented its Business Intelligence
services by acquiring all of the equity interest in Driving Revenue L.L.C., a
hotel database marketing and consulting firm, for approximately $6 million. In
addition, in June 1998 the Company purchased a minority interest in Customer
Analytics, Inc., a new venture aimed at providing services to companies in the
fields of data warehousing and data mining. The Company also purchased in
September 1998 a minority interest in Intermezzo, Inc., a developer of hotel
reservation and property management systems and software.
The Company was incorporated in Delaware in 1995, and holds directly or
indirectly all of the outstanding equity securities of (i) The Hotel Industry
Switch Company ("THISCO"), a Delaware corporation formed in 1988 to operate the
electronic distribution business ; (ii) The Hotel Clearing Corporation ("HCC"),
a Delaware corporation formed in 1991 to operate the commission processing
business; (iii) TravelWeb, Inc., a Delaware corporation formed in 1995 to
operate the online electronic distribution business; (iv) Pegasus IQ, Inc., a
Delaware corporation formed in 1997 to operate Pegasus Business Intelligence
services and (v) Driving Revenue L.L.C., a Maryland limited liability company
acquired in August 1998 that operates a hotel database and marketing business
and constitutes part of Pegasus Business Intelligence.
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SERVICES
PEGASUS ELECTRONIC DISTRIBUTION
GDS Interfaces.
Pegasus Electronic Distribution provides an electronic hotel room
reservation processing service that interfaces communications concerning hotel
reservation information between all major GDSs and hotel central reservation
systems. The interface, which is referred to as the "UltraSwitch", enables a
hotel to connect to all major GDSs without having to build and maintain a
separate interface for each GDS. Without the UltraSwitch interface 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. The UltraSwitch 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 the UltraSwitch to a hotel's central reservation system
bypassing the GDS databases to obtain the most complete and up-to-date hotel
room information available.
Internet-based Electronic Distribution Services.
TravelWeb. Located at www.travelweb.com, TravelWeb provides individual
travelers direct access to online hotel information and the ability to make
reservations electronically. 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 UltraSwitch interface, 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 through Microsoft's
Expedia.com. Additionally, TravelWeb offers "The Resources Center", which
provides information and links for a variety of travel-related services, such as
weather, food, shopping, area attractions and business services, and "Click-It!
Weekends"(R), a section offering special rates on hotels for each upcoming
weekend.
NetBooker. NetBooker is a service for the operators of third-party Web
sites which combines the Company's hotel information database and the
UltraSwitch 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 offers operators of
Web sites an extensive and comprehensive set of hotel information and a simple
and fast method of making a hotel room reservation online. The Company's
NetBooker service utilizes advanced technology applications to customize the
hotel database so that it appears to the user to be an integral part of the
third-party Web site. In connection with this service, the operator of the
third-party Web site establishes an interface to the Company's UltraSwitch,
which enables users of the Web site to shop and query room availability,
electronically make a reservation and receive a confirmation in seconds.
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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 UltraSwitch, which translates the
information to electronically book a room in each hotel central reservation
system. The UltraRes service eliminates the need to transfer rooming lists for
manual entry at the hotel 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
UltraSwitch 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.
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."
PEGASUS COMMISSION PROCESSING
Pegasus Commission Processing 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. Pegasus Commission Processing 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 service provides an incentive to travel agencies to make
reservations at hotels participating in the service in countries other than
their own because Pegasus Commission Processing disburses checks denominated in
each travel agency's currency of choice. Furthermore, the monthly and quarterly
marketing reports and statistics prepared for the hotel as part of the
Company's 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 the Customer Relations Center, which allows travel
agency inquiries regarding commissions to be resolved by the Company rather
than by the hotel itself.
PEGASUS BUSINESS INTELLIGENCE
Pegasus Business Intelligence provides hotel database marketing and
consulting and is being expanded to provide hotel information to a wide variety
of audiences in the global hotel industry, from hotel chains to travel industry
marketing groups to corporate travel departments. The service compiles data
regarding hotel guests and their use of hotels and organizes that data into
meaningful information. Pegasus Business Intelligence intends to provide
industry trend reports and guest behavior data in an automated,
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timely format for hotels and hotel marketing companies. The 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
Business Intelligence intends to provide data in an electronic format to
individual travelers or corporate travel departments 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 next several years. Second, a
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
electronic distribution service. The principal competitor of Pegasus Electronic
Distribution is WizCom International, Ltd. ("WizCom"), which is a wholly owned
indirect subsidiary of HFS Incorporated ("HFS"). Although HFS has continued its
participation in Pegasus Commission Processing, HFS currently uses WizCom for
its electronic hotel room
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reservation processing. 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 UltraSwitch and eliminating the need to pay fees to
the Company. In addition, one or more GDSs can choose to bypass the UltraSwitch
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
travel reservation services. There are a large number of Internet
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 hotel room reservation business is relatively
low. There can be no assurance that the Company's Internet 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 Commission Processing service is
competitive. The Company's competitors in the Commission Processing business
include National Processing Company ("NPC"), WizCom and Citicorp. NPC is a
company that has traditionally provided car rental and cruise line commission
processing services. Citicorp provides commission consolidation services to
hotel chains. In addition, hotels that are current or prospective customers of
the Company's Commission Processing service could decide to process commission
payments without, or in competition with, the Company's Commission Processing
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 Company's
Commission Processing service, most of the Company's travel agency customers
are not obligated by any agreement with the Company. If a significant
percentage of these travel agencies were to cease using the Company's
Commission Processing service, the Company's financial condition and results of
operations could be materially adversely affected.
The Company faces significant competition in connection with its
Business Intelligence service. The Company's principal competitor is Smith
Travel Research ("Smith"). Smith currently provides information services to
hotels. Accounting firms and other businesses do currently or may in the future
provide information services similar to the Company's current or future service
offerings. Such competitors or their affiliates may have existing customer
relationships that create an impediment to the Company acquiring new customers.
Such competitors may also have greater financial resources than the Company.
There can be no assurance that current or future information service offerings
of such competitors or new competitors will not 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.
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INTELLECTUAL PROPERTY
The Company is continually 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", "UltraRes,"
"Click-It," "Pegasus" and "Chain Link" as United States federal trademarks, and
an application to register "Powered by Pegasus" is pending with the United
States Patent and Trademark Office. Trademark applications for "TravelWeb" and
"Powered by Pegasus" 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 26,
1999, the Company employed 83 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 $2.2 million, $2.5 million
and $4.2 million for 1996, 1997 and 1998, respectively. The research and
development expenses for 1998 included a $1.5 million write down for in process
research and development.
EMPLOYEES
At February 26, 1999, the Company had 137 employees, 132 of which were
located in the United States, with 83 persons in the Information Technology
Group, 22 persons performing sales and marketing, customer relations and
business development functions and the remainder performing corporate, finance
and administrative functions. The Company had 5 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. In years before fiscal 1997, the Company
experienced substantial net losses. Pegasus Commission Processing and Pegasus
Electronic Distribution services have accounted for the majority of the
Company's revenues to date, and the Company expects no significant revenues in
1999 from many of its other services, which are relatively new in their
respective markets. Any decrease in the revenues from Pegasus Commission
Processing or Pegasus Electronic Distribution, 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
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develop its services, increase its sales and marketing activities and expand
its distribution channels. To continue its profitability, the Company must
continue to successfully implement its business strategy and increase its
revenues while controlling expenses. The Company can give no assurances
regarding the successful completion of these measures.
COMPETITION. Pegasus Electronic Distribution. The Company faces
significant competition in connection with its electronic distribution service.
The principal competitor of Pegasus Electronic Distribution is WizCom, which is
a wholly owned indirect subsidiary of HFS. Although HFS has continued its
participation in Pegasus Commission Processing, HFS currently uses Wizcom for
its electronic hotel room reservation processing. 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 UltraSwitch 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.
The market for the Company's TravelWeb, NetBooker and other Internet
services is highly competitive. Current competition includes traditional
telephone or travel agency reservation methods and other Internet travel
reservation services. There are a large number of Internet 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 hotel room reservation business are relatively low.
There can be no assurance that the Company's Internet 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.
Pegasus Commission Processing. The market for Pegasus Commission
Processing is competitive. The Company's competitors in the commission
processing business include NPC, WizCom and Citicorp. NPC is a company that has
traditionally provided car rental and cruise line commission processing
services. Citicorp provides commission consolidation services to hotel chains.
In addition, hotels that are current or prospective customers of Pegasus
Commission Processing can decide to process commission payments without, or in
competition with, Pegasus Commission Processing. 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 Pegasus Commission Processing, most of the Company's travel
agency customers are not obligated by any agreement with the Company. If a
significant percentage of these travel agencies were to cease using Pegasus
Commission Processing, the Company's financial condition and results of
operations could be materially adversely affected.
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Pegasus Business Intelligence. The Company faces significant
competition in connection with its Business Intelligence service. The Company's
principal competitor is Smith. Smith currently provides information services to
hotels. Accounting firms and other businesses do currently or may in the future
provide information services similar to the Company's current or future service
offerings. Such competitors or their affiliates may have existing customer
relationships that create an impediment to the Company acquiring new customers.
Such competitors may also have greater financial resources than the Company.
There can be no assurance that current or future information service offerings
of such competitors or new competitors will not 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.
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. 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 UltraSwitch 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
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
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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 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 fire, earthquake, 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 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 technologies, 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
11
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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 Pegasus Commission
Processing. 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
Pegasus Commission Processing 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 the Company 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 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.
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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 Operating 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.
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14
RISKS ASSOCIATED WITH YEAR 2000 COMPLIANCE. The Company utilizes a significant
number of computer software programs and operating systems in its internal
operations. If these programs or systems are unable to appropriately interpret
dates occurring in the upcoming calendar year 2000, some level of modification
or replacement of such software may be necessary. The Company is currently
evaluating its information technology ("IT") and non-IT Systems for year 2000
compliance. This evaluation includes reviewing what actions are required to
make such systems year 2000 compliant as well as actions necessary to make the
Company less vulnerable to year 2000 compliance problems associated with third
parties' systems.
Even though the Company has implemented a program designed to ensure
that all software used in connection with the Company's services are year 2000
compliant, the Company may fail to identify all year 2000 problems or correct
such problems in a timely manner. Since the Company derives nearly all of its
revenues from processing electronic reservations or consolidating hotel
commissions electronically, the inability or limitation of its ability to
process electronic hotel reservations or consolidate hotel commissions as a
result of year 2000 problems would have a material adverse impact on the
Company's revenues and cash flow.
The Company has no control over services, functions and data provided
by third party vendors and others which may result in the inability for the
Company to provide services. The Company has contacted and is working with its
material customers and vendors to verify their degree of year 2000 compliance.
However, the Company has no control over third parties and if they will be year
2000 compliant. The extent to which third party customers and vendors do not
become year 2000 compliant on a timely basis may have a material adverse effect
on the Company's cash flow and results of operations.
RISKS ASSOCIATED WITH ACQUISITIONS. The Company regularly evaluates acquisition
opportunities and has made and may in the future make acquisitions of other
companies or technologies. 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. In
August 1998, the Company acquired all of the equity interest in Driving
Revenue L.L.C. Otherwise, the Company has little 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.
RISKS ASSOCIATED WITH MINORITY INVESTMENTS IN OTHER BUSINESSES. In June 1998,
the Company purchased a minority interest in Customer Analytics, Inc. a new
venture aimed at providing services to companies in the field of data
warehousing and data mining. In September 1998, the Company also purchased a
minority interest in Intermezzo, Inc., a developer of hotel reservation and
property management systems and software. The Company has little or no control
over the success of Customer Analytics, Inc. or Intermezzo, Inc., and there can
be no assurance of the success of either of these investments. The failure of
either of these companies could have a material adverse effect on the Company's
financial condition and results of operations.
ANTI-TAKEOVER MATTERS. The Company's Third 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. 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
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15
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. The issuance of preferred stock could,
among other things, adversely affect the voting power or other rights of the
holders of common stock and, under certain circumstances, make it more
difficult for a third party to acquire, or discourage a third party from
acquiring, control of the Company. 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.
On September 28, 1998, the Board of Directors of the Company adopted a
stockholder rights plan (the "Rights Plan") and declared a dividend
distribution of one right (the "Right") for each outstanding share of the
Company's common stock to stockholders of record at the close of business on
October 13, 1998. Each Right entitles the registered holder to purchase from
the Company one-thousandth of a share of the Company's Series A Preferred Stock
for each share of the Company's common stock held, at a price of $90. The
Rights are exercisable only if a person or group of affiliated persons
acquires, or has announced the intent to acquire, 20% or more of the Company's
common stock. These Rights could make it more difficult for a third party to
acquire, or discourage a third party from acquiring, control of 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 39,750 square feet of space in Dallas, Texas as of February 26,
1999. 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 2,255 square feet of space near London,
England. The lease agreement for the office in England expires in 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.
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 legal proceeding 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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the stockholders of the Company
during the fourth quarter of the fiscal year ending December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) The Company's common stock has traded on the Nasdaq National Market
under the symbol "PEGS" since August 7, 1997. At February 26, 1999, there were
approximately 76 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.
Fiscal Year Ending December 31, 1998 HIGH LOW
- ------------------------------------ --------- ----------
Fourth quarter ......................... $ 36.25 $ 8.88
Third quarter .......................... $ 26.88 $ 10.75
Second Quarter ......................... $ 31.00 $ 22.00
First Quarter .......................... $ 27.13 $ 13.63
Fiscal Year Ending December 31, 1997 HIGH LOW
- ------------------------------------ --------- ----------
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. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
On September 28, 1998, the Board of Directors of the Company declared
a dividend distribution of one right (the "Right") for each outstanding share
of the Company's common stock to stockholders of record at the close of
business on October 13, 1998. Each Right entitles the registered holder to
purchase from the Company one-thousandth of a share of the Company's series A
Preferred Stock for each share of the Company's common stock held, at a price
of $90. The Rights are exercisable only if a person or group of affiliated
persons acquires, or has announced the intent to acquire, 20% or more of the
Company's common stock.
(b) The Securities and Exchange Commission on August 6, 1997 declared
effective the Registration Statement on Form S-1 (File No. 333-28595) relating
to the initial public offering (IPO) of the Company's common stock.
16
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ITEM 6. SELECTED FINANCIAL DATA.
This information required by this item is set forth under the caption
"Selected Consolidated Financial Data" of the Company's 1998 Annual Report to
Stockholders, which portion of such Annual Report is filed herewith 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 required by this item is set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of the Company's 1998 Annual Report to Stockholders, which portion
of such Annual Report is filed herewith as Exhibit 13.1 and incorporated herein
by reference.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company including the independent
accountant's report thereon of the Company's 1998 Annual Report to
Stockholders, which financial statements are filed herewith as Exhibit 13.1,
are incorporated herein by reference.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item appears in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Stockholders under
the captions "Election of Directors" and "Executive Officers of the Company,"
which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item appears in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Stockholders under
the caption "Executive Compensation and Other Matters," which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item appears in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Stockholders under
the caption "Outstanding Capital Stock and Stock Ownership of Directors,
Certain Executive Officers and Principal Stockholders," which information is
incorporated herein by reference.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item appears in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Stockholders under
the caption "Certain Transactions," which information 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 1998 Annual Report to Stockholders, which financial
statements are filed herein as Exhibit 13.1 and incorporated herein by
reference:
Report of Independent Accountants.
Consolidated Balance Sheets as of December 31, 1998 and 1997.
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996.
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the years ended December 31, 1998, 1997
and 1996.
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
2. The following Financial Statement Schedules of the Company are filed
as part of this Report:
Consolidated Financial Statement Schedule Page
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.
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3. The following documents are filed or incorporated by reference as
exhibits to this Report:
EXHIBIT NO. DESCRIPTION
- ----------- -----------
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 Third Amended and Restated Certificate of Incorporation, as
amended
3.2 Second Amended and Restated Bylaws
3.3 Form of Certification of Designation, Preferences and Rights of
Series A Preferred Stock of Pegasus Systems, Inc. (incorporated
by reference from Exhibit 2 of the Company's Form 8-A filed with
the Commission on October 9, 1998).
4.1 Specimen of Common Stock Certificate
4.2 Third 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
4.5 Rights Agreement dated as of September 28, 1998 by and between
the Company and American Securities Transfer & Trust, Inc.
(incorporated by reference from Exhibit 4 of the Company's
Current Report on Form 8-K filed with the Commission on October
9, 1998)
4.6 Form of Rights Certificate (incorporated by reference from
Exhibit 3 of the Company's Form 8-A filed with the Commission on
October 9, 1998)
*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, 1996 between the Company and
Michael R. Donahue
+*10.5 1996 Stock Option Plan, as amended
+*10.6 1997 Stock Option Plan, as amended
10.7 Citibank Global Payments Service Agreement dated July 24, 1998
between the Hotel Clearing Corporation and Citibank, N.A.
(incorporated by reference to Exhibit 10.1 of the Company's 10-Q
for the quarter ended October 31, 1998, filed with the Commission
on November 16, 1998)
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, as amended
+10.12 Office Lease dated October 1, 1995, First Amendment to Office
Lease dated February 25, 1998 and Second Amendment to Office
Lease dated November 2, 1998 between the Company and the Utah
State Retirement Investment Fund relating to property located at
3811 Turtle Creek Blvd., Suite 1100, Dallas, Texas 75219
19
20
+13.1 Selected portions of the Company's Annual Report to Stockholders
for fiscal year ended December 31, 1998
16.1 Letter regarding Change in Certifying Accountant
+21.1 Subsidiaries of the Company
+23.1 Consent of PricewaterhouseCoopers 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) REPORTS ON FORM 8-K
The following report on Form 8-K was filed during the quarter ended
December 31, 1998:
Financial Statements
Item Description Filing Date Filed
- ---- ----------- ----------- -------------------
7 A report announcing a dividend distribution October 9, 1998 No
declared by the Board of Directors relating to the
Company's Stockholder Rights Plan.
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21
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 30th day of March, 1999.
PEGASUS SYSTEMS, INC.
By: /s/ John F. Davis, III
--------------------------------------
John F. Davis, III
Chief Executive Officer, President
and Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
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, President March 30, 1999
---------------------------------- and Director (Principal Executive
John F. Davis, III Officer)
/s/ JEROME L. GALANT Chief Financial Officer March 30, 1999
----------------------------------
Jerome L. Galant (Principal Financial and Accounting
Officer)
/s/ MICHAEL A. BARNETT Director March 30, 1999
----------------------------------
Michael A. Barnett
/s/ ROBERT B. COLLIER Director March 30, 1999
----------------------------------
Robert B. Collier
/s/ WILLIAM C. HAMMETT, JR. Director March 30, 1999
----------------------------------
William C. Hammett, Jr.
/s/ THOMAS F. O'TOOLE Director March 30, 1999
----------------------------------
Thomas F. O'Toole
/s/ MARK C. WELLS Director March 30, 1999
----------------------------------
Mark C. Wells
/s/ BRUCE W.WOLFF Director March 30, 1999
----------------------------------
Bruce W. Wolff
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22
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 February 2, 1999 appearing in the 1998 Annual Report to Stockholders 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 each of the three years in the
period ended December 31, 1998, 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.
PricewaterhouseCoopers LLP
Dallas, Texas
February 2, 1999
S-1
23
SCHEDULE II
PEGASUS SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1996, 1997 and 1998
(In thousands)
Additions Additions
Balance at Charged to from Balance
Beginning Costs and Acquired at End
Classification of Period Expenses Companies Deductions of Period
--------- ---------- --------- ---------- ---------
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
======= ======= ======= ======= =======
December 31, 1998
Allowance for doubtful accounts $ 78 $ 35 $ 7 $ (21) $ 99
Income tax valuation allowances $ 4,312 $ 270 $ -- $(4,312) $ 270
------- ------- ----- ------- -------
Total reserves and allowances $ 4,390 $ 305 $ 7 $(4,333) $ 369
======= ======= ======= ======= =======
- --------------
(a) This schedule should be read in conjunction with the Company's audited
consolidated financial statements and related notes thereto.
24
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
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 Third Amended and Restated Certificate of Incorporation, as
amended
3.2 Second Amended and Restated Bylaws
3.3 Form of Certification of Designation, Preferences and Rights of
Series A Preferred Stock of Pegasus Systems, Inc. (incorporated
by reference from Exhibit 2 of the Company's Form 8-A filed with
the Commission on October 9, 1998).
4.1 Specimen of Common Stock Certificate
4.2 Third 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
4.5 Rights Agreement dated as of September 28, 1998 by and between
the Company and American Securities Transfer & Trust, Inc.
(incorporated by reference from Exhibit 4 of the Company's
Current Report on Form 8-K filed with the Commission on October
9, 1998)
4.6 Form of Rights Certificate (incorporated by reference from
Exhibit 3 of the Company's Form 8-A filed with the Commission on
October 9, 1998)
*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, 1996 between the Company and
Michael R. Donahue
+*10.5 1996 Stock Option Plan, as amended
+*10.6 1997 Stock Option Plan, as amended
10.7 Citibank Global Payments Service Agreement dated July 24, 1998
between the Hotel Clearing Corporation and Citibank, N.A.
(incorporated by reference to Exhibit 10.1 of the Company's 10-Q
for the quarter ended October 31, 1998, filed with the Commission
on November 16, 1998)
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, as amended
+10.12 Office Lease dated October 1, 1995, First Amendment to Office
Lease dated February 25, 1998 and Second Amendment to Office
Lease dated November 2, 1998 between the Company and the Utah
State Retirement Investment Fund relating to property located at
3811 Turtle Creek Blvd., Suite 1100, Dallas, Texas 75219
25
+13.1 Selected portions of the Company's Annual Report to Stockholders
for fiscal year ended December 31, 1998
16.1 Letter regarding Change in Certifying Accountant
+21.1 Subsidiaries of the Company
+23.1 Consent of PricewaterhouseCoopers 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.