1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 5, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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PEGASUS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 7389 75-2605174
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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3811 TURTLE CREEK BOULEVARD, SUITE 1100
DALLAS, TEXAS 75219
(214) 528-5656
(Address, including zip code, telephone number,
including area code, of registrant's principal executive office)
JOHN F. DAVIS, III
PEGASUS SYSTEMS, INC.
3811 TURTLE CREEK BOULEVARD, SUITE 1100
DALLAS, TEXAS 75219
(214) 528-5656
(Name, address, including zip code, telephone number,
including area code, of agent for service)
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COPIES TO:
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GUY KERR KENNETH L. GUERNSEY
WHIT ROBERTS JAMIE E. CHUNG
Locke Purnell Rain Harrell MITCHELL R. TRUELOCK
(A Professional Corporation) Cooley Godward LLP
2200 Ross Avenue, Suite 2200 One Maritime Plaza, 20th Floor
Dallas, Texas 75201 San Francisco, California 94111
(214) 740-8000 (415) 693-2000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED SHARE PRICE FEE
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Common Stock, $.01 par
value per share.......... 3,416,995(1) $12.00 $41,003,940(2) $12,426
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(1) Includes 445,695 shares issuable upon exercise of the underwriters'
overallotment option.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY
NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN
WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 5, 1997
PROSPECTUS
2,971,300 SHARES
[LOGO]
PEGASUS SYSTEMS, INC.
COMMON STOCK
Of the 2,971,300 shares of Common Stock offered hereby, 2,700,000 shares
are being sold by the Company and 271,300 shares are being sold by the Selling
Stockholders. The Company will not receive any of the proceeds from the sale of
shares by the Selling Stockholders. See "Principal and Selling Stockholders."
Prior to this offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price will be between $10.00 and $12.00 per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The Company has applied to have the Common Stock approved for
quotation on the Nasdaq National Market under the symbol PEGS.
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THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 7.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS
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Per Share.............. $ $ $ $
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Total(3)............... $ $ $ $
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(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $750,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 445,695 additional shares of Common Stock solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
-----------------------
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be made
available for delivery on or about , 1997, at the office of the agent
of Hambrecht & Quist LLC in New York, New York.
HAMBRECHT & QUIST
MONTGOMERY SECURITIES
VOLPE BROWN WHELAN & COMPANY
, 1997
3
[GRAPHIC]
Pegasus Systems Inc. logo with caption reading:
Created by the hotel industry for the hotel industry.
Logos of the following stockholders and customers:
Inter-continental Hotels
Best Western
Hilton Hotels and Resorts
Forte Hotels
Marriot
Choice Hotels International
La Quinta Inn
TTT Sheraton
Hyatt Hotels & Resorts
Utell International
Reed Travel Group
Anasazi
HFS Incorporated
Promus Hotel Corporation
Westin Hotels & Resorts
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
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[GRAPHIC]
Caption reading:
Leading worldwide provider of hotel reservation and commission processing
services.
Pegasus Systems, Inc. logo with caption reading:
Through its services and systems - TravelWeb, THISCO, HCC, Netbooker,
UltraDirect and UltraRes-Pegasus Systems provides the technology that
facilitates the electronic booking of hundreds of thousands of hotel rooms
worldwide. Regardless of whether the reservation comes from a travel
agent, a corporate travel department, a meeting planner or conventions and
visitors bureau, or directly from the individual traveler via the Internet,
it's likely that Pegasus' systems have touched the transactions.
Pictures and logos depicting the following transaction flows:
1. Consumer to Travel Agent to Global Distribution System ("GDS") to
UltraSwitch-THISCO to Hotel.
2. Consumer to GDS Internet Travel Sites to GDS to UltraSwitch-THISCO to
Hotel.
3. Consumer to TravelWeb to UltraSwitch-THISCO to Hotel.
4. Consumer to Partner Web Sites to Pegasus Systems NetBooker to
UltraSwitch-THISCO to Hotel.
5. Consumer to Corporate Travel to Pegasus Systems-UltraDirect to
UltraSwitch-THISCO to Hotel.
6. Consumer to Conventions, Meetings, Housing to Pegasus Systems-UltraRes
to UltraSwitch-THISCO to Hotel.
7. Hotel to HCC-Hotel Clearing Corporation to Travel Agent.
THISCO logo with caption reading:
THISCO's service is a gateway to more than 25,000 hotels around the world.
When a reservation is made via any of the distribution vehicles shown
above, THISCO translates the reservation request into the hotel's unique
computer format and queries the hotel's database. A confirmed reservation
is then transmitted back through THISCO's service and sent to the traveler
via the distribution channel. This entire process occurs in a matter of
seconds.
TravelWeb logo with caption reading:
TravelWeb is a leading Internet travel booking service that has quickly
established its niche as the largest, interactive site in which consumers
can freely research and reserve hotel rooms around the world. Connecting
to approximately 15,000 hotels via the THISCO service, TravelWeb enables
travelers to directly access hotel central reservation systems to check
room rates, features and availability, and to make reservations. Other
features on the site, including airline flight reservations, hotel photos,
maps, weather and special discount programs, make TravelWeb the "one-stop"
travel site for both the leisure and business traveler.
HCC logo with caption reading:
HCC completes the room reservation transaction for more than 64,000
participating travel agencies, by collecting and consolidating hotel
booking commissions due to each agency from more than 11,000 participating
hotel properties worldwide. The value-added consolidation and reporting
services that HCC provides to both its hotel and travel agency participants
help both parties operate more efficiently and effectively.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus. The Common Stock offered hereby involves
a high degree of risk. See "Risk Factors." The terms "Company" and "Pegasus"
when used in this Prospectus refer to Pegasus Systems, Inc., a Delaware
corporation, and, unless the context requires otherwise, its predecessors and
consolidated subsidiaries.
THE COMPANY
Pegasus is a leading provider of transaction processing services to the
hotel industry worldwide. The Company's THISCO(TM) and TravelWeb(R) hotel room
reservation services improve the efficiency and effectiveness of the 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, the global leader in hotel commission payment
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.
The Company's electronic interface business for hotel room reservations was
established in 1988 by 16 leading hotel and travel-related companies to address
the need for a neutral, reliable third-party source of hotel reservation
information and transaction processing services. The Company's commission
processing business was founded by substantially the same stockholder group in
1991. Today, the Company's stockholders include 11 of the 15 leading hotel
chains in the world based on 1996 total revenues as reported by Business Travel
News. The Company's strategic position as a gateway in the hotel room
distribution chain, transaction processing capabilities and reputation for
reliability and neutrality enable it to offer a range of services delivering
industry-wide benefits that would be difficult for any of the participants to
achieve individually.
The Company's THISCO service provides an electronic interface from hotel
central reservation systems to travel agencies through Global Distribution
Systems ("GDSs"), which are electronic travel information and reservation
systems such as SABRE. Over 25,000 hotel properties worldwide, including
those of 13 of the 15 leading hotel chains based on 1996 total revenues,
utilize the THISCO service.
The Company's TravelWeb service provides individual travelers direct access
to more than 40,000 dynamically served pages of online hotel information
and the ability to make reservations electronically at approximately 15,000
hotel properties in 140 countries. In January 1997, TravelWeb was ranked
the second most popular travel-related Web site, according to PC Meter,
L.P., a market research service. In April 1997, a daily average of
approximately 20,000 Internet users visited the TravelWeb site, located at
www.travelweb.com. In addition, through its recently introduced NetBooker
service, the Company offers TravelWeb's comprehensive hotel database and
Internet hotel reservation capabilities to third-party Web sites.
The Company's HCC service consolidates commissions paid by participating
hotels to a participating travel agency into a single monthly payment and
provides participants with comprehensive transaction reports. Over 11,000
hotel properties and 64,000 travel agencies worldwide utilize the HCC
service to increase the efficiency and reduce costs associated with
preparing, paying and reconciling hotel room reservation commissions.
Pegasus has structured its service offerings so that it has the opportunity
to process and gain fee revenues from most electronic hotel room reservation and
commission transactions. The Company derives THISCO and TravelWeb revenues by
charging its hotel participants a fee based on the number of net reservations
made. The Company derives HCC revenues by charging its travel agency customers a
percentage of the dollar amount of commissions paid to the travel agencies and
by generally charging hotels a transaction fee. The Company's revenues have
grown at a compound annual rate of 54.4% to $15.9 million in 1996 from $2.8
million in 1992, excluding 1992 revenues from the HCC service which was acquired
in 1995. The
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Company has entered into contracts with terms generally ranging from two to five
years with most of its THISCO, HCC and TravelWeb hotel customers, many of which
are Company stockholders.
The operations of the global hotel industry include a wide variety of
participants and a series of complex information and transaction flows.
According to the International Hotel Association, the global hotel industry
generated $247 billion in revenues in 1994. The Company believes that costs
associated with reserving and distributing hotel rooms, including commissions
and fees paid to intermediaries such as travel agencies and GDSs, hotel
reservation-related staffing costs and reservation system information technology
expenses, represent a significant proportion of total operating costs. The
Company's services simplify the complexity of room reservation information and
transaction flows, thereby reducing the distribution costs of rooms for the
hotel industry.
The Company believes that it will benefit from four significant trends in
the global hotel industry. First, as hotels and travel agencies increasingly
shift from manual to electronic means of making room reservations, the Company
can provide them with reservation and commission processing services. Second, as
individual travelers increasingly make their hotel reservations over the
Internet, the Company is positioned to process these reservations through its
own TravelWeb site or through third-party Web sites that use the Company's
NetBooker hotel room reservation service, including Web sites operated by
Preview Travel, Inc. and Internet Travel Network. Third, as independent hotels
and smaller hotel chains increasingly affiliate with large chains, many of which
are the Company's customers, the number of hotel properties for which Pegasus
processes electronic reservations and commissions increases. Fourth, as travel
agencies recognize the importance of hotel reservation commission revenues, the
Company believes that travel agencies will generate an increasing volume of
electronic hotel room reservations and will increasingly rely on the Company to
process hotel commissions.
The Company's objective is to capitalize on its central position in the
hotel industry information and transaction flow in order to become the leading
provider of services and technology that enable the efficient and effective
distribution of hotel rooms. To achieve this objective, the Company intends to
employ a strategy that includes the following key elements: (i) expanding its
customer base; (ii) expanding its service offerings to include virtually all of
the electronic hotel room distribution channels; (iii) developing an information
service to provide hotels and other industry participants with hotel transaction
information for use in strategic analysis, market tracking, improved target
marketing and revenue optimization; and (iv) building strategic alliances and
pursuing acquisition opportunities.
The Company was incorporated in Delaware in 1995, and holds directly or
indirectly all of the outstanding capital stock of (i) The Hotel Industry Switch
Company ("THISCO"), a Delaware corporation formed in 1988 to operate the
electronic interface business between hotel reservation systems and major GDSs;
(ii) The Hotel Clearing Corporation ("HCC"), a Delaware corporation formed in
1991 to operate the commission payment processing business; and (iii) TravelWeb,
Inc., a Delaware corporation formed in 1995 to operate the online hotel
reservation business. The Company's principal executive office is located at
3811 Turtle Creek Boulevard, Suite 1100, Dallas, Texas 75219. Its telephone
number is (214) 528-5656.
RECENT DEVELOPMENTS
In March 1997, the Company entered into an agreement with Marriott
International, Inc. ("Marriott") under which Marriott, currently a customer of
the Company's THISCO and TravelWeb services, will become a customer of the
Company's HCC service commencing in the third quarter of 1997.
In May 1997, HFS, Inc. ("HFS") renewed its participation in the Company's
HCC service by entering into a new long-term agreement with the Company.
In May 1997, the Company entered into a Distribution Services Agreement
with Holiday Inn Worldwide ("Holiday Inn") under which Holiday Inn, currently a
customer of the Company's HCC service, also will become a customer of the
Company's THISCO, TravelWeb, NetBooker, UltraDirect and UltraRes services
commencing in 1998.
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7
THE OFFERING
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Common Stock offered by the Company........................ 2,700,000 shares
Common Stock offered by the Selling Stockholders........... 271,300 shares
Common Stock to be outstanding after the offering.......... 9,429,712 shares(1)
Use of proceeds............................................ To repay indebtedness payable to certain
stockholders of the Company and for
working capital and other general
corporate purposes. See "Use of Proceeds"
and "Certain Transactions."
Proposed Nasdaq National Market symbol..................... PEGS
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
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CONSOLIDATED STATEMENT OF
OPERATIONS DATA(2):
Net revenues.......................... $ 2,792 $ 3,938 $ 4,666 $ 9,296 $15,869 $ 3,803 $ 4,377
Operating income (loss)............... (613) 198 168 (2,809) (2,585) (707) (232)
Net loss.............................. $(1,179) $ (398) $ (423) $(3,571) $(3,485) $ (967) $ (388)
Pro forma net loss per share(3)....... $ (0.48) $ (0.05)
Shares used in pro forma net loss per
share calculation(3)............... 7,203 7,481
OTHER OPERATING DATA:
EBITDA(4)............................. $ 601 $ 1,550 $ 1,687 $ (279) $ 848 $ 154 $ 531
Depreciation and amortization......... 1,212 1,351 1,519 2,477 3,426 909 707
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MARCH 31, 1997
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ACTUAL AS ADJUSTED(5)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............. $ 2,441 $ 24,090
Working capital....................... 1,405 23,859
Total assets.......................... 13,601 35,249
Long-term obligations, net of current
portion............................ 5,957 1,540
Accumulated deficit................... (14,959) (14,959)
Total stockholders' equity............ 1,600 28,471
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(1) Based on the number of shares outstanding as of March 31, 1997. Excludes as
of March 31, 1997 (i) 866,667 shares of Common Stock reserved for issuance
under the Company's 1996 Stock Option Plan (the "1996 Plan"), of which
options to purchase 771,733 shares of Common Stock were outstanding at a
weighted average exercise price of $2.39 per share and (ii) 333,333 shares
of Common Stock reserved for issuance under the Company's 1997 Stock Option
Plan (the "1997 Plan"), which will become effective upon the completion of
this offering. In May 1997, the Company issued to Holiday Inn warrants to
purchase up to 345,723 shares of Common Stock at an exercise price of $7.20
per share, assuming an initial public offering price of $11.00 per share.
See "Business -- Recent Developments" and "Management -- 1996 and 1997 Stock
Option Plans."
(2) The Company's statement of operations data for 1992, 1993 and 1994 consist
of the accounts of THISCO. Statement of operations data for periods
thereafter reflect the operations of the Company, including the acquisition
of 83.3% of the outstanding capital stock of HCC in July 1995 and the
acquisition of the remaining 16.7% of the outstanding capital stock of HCC
in June 1996, together with the depreciation and amortization applicable to
such acquisitions. Amortization applicable to the acquisition of HCC totaled
$645,419, $1,412,499 and $383,511 in 1995, 1996 and the three months ended
March 31, 1997, respectively. See Notes 1, 2 and 3 of Notes to Consolidated
Financial Statements.
(3) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the calculation of pro forma net loss per share.
(4) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization expense. Management believes EBITDA is a
relevant measure of financial performance of the Company. EBITDA does not
represent cash flows as defined by generally accepted accounting principles
and does not necessarily indicate that cash flows are sufficient to fund all
of the Company's
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cash needs. EBITDA should not be considered in isolation or as a substitute
for net income, cash from operating activities or other measures of
liquidity determined in accordance with generally accepted accounting
principles. The calculation of EBITDA is not necessarily consistent among
reporting companies.
(5) Adjusted to reflect the sale of the 2,700,000 shares of Common Stock offered
by the Company hereby at an assumed initial public offering price of $11.00
per share and application of the estimated net proceeds. See "Use of
Proceeds" and "Capitalization."
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Except as set forth in the Consolidated Financial Statements and the Notes
thereto or as otherwise indicated, the information contained in this Prospectus
assumes no exercise of the Underwriters' over-allotment option and gives effect,
concurrently with this offering, to (i) a 4-for-3 split of the Company's
outstanding Common Stock and Series A Preferred Stock, (ii) the conversion of
all outstanding shares of Series A Preferred Stock into shares of Common Stock
and (iii) certain amendments to the Company's Certificate of Incorporation and
By-laws. This Prospectus contains forward-looking statements that involve risks
and uncertainties. The Company's actual results and the timing of certain events
could differ materially from those discussed in the forward-looking statements
as a result of certain factors, including those set forth under "Risk Factors"
and elsewhere in this Prospectus.
UltraSwitch(R), TravelWeb(R) and HCC Hotel Clearing Corporation(R) are
registered trademarks of the Company. This Prospectus also includes trademarks
and tradenames of companies other than the Company, which are the property of
their respective owners.
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RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results and the timing of certain events
could differ materially from those discussed in the forward-looking statements
as a result of certain factors, including those set forth below and elsewhere in
this Prospectus. The following risk factors should be considered carefully in
evaluating the Company and an investment in the Common Stock offered hereby.
Substantial Net Losses. The Company has experienced substantial net losses,
including a net loss of $3.5 million in 1996, and had an accumulated deficit of
approximately $14.6 million as of December 31, 1996. The Company's HCC and
THISCO services have accounted for the majority of the Company's revenues to
date, and the Company expects no significant revenues in 1997 from its other
services, which are relatively new in their respective markets. 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 profitability, the Company must
successfully implement its business strategy and increase its revenues while
controlling expenses. There can be no assurance as to when or if the Company
will achieve profitability. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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 International, Ltd. ("WizCom"), which is owned by Avis Rent A Car
Systems, Inc. ("Avis"). As a result of the acquisition of Avis by HFS, a
stockholder and customer of the Company, in September 1996, WizCom became a
wholly owned subsidiary of HFS. Although HFS has recently renewed its
participation in the Company's HCC service, HFS has notified the Company that it
is moving its electronic hotel room reservation processing from THISCO to
WizCom. The Company has an agreement with HFS which requires HFS to pay for a
certain minimum level of THISCO processing services annually for the life of the
agreement. In 1996, revenues from HFS for electronic hotel room processing
services were $512,424 above the annual minimum fee. HFS currently uses and in
the future could use the WizCom technology to compete with certain of the
Company's current and future services. 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business -- Recent Developments" and " -- Competition."
The Company charges hotel participants certain fees for processing status
messages from hotel central reservation systems to GDSs. Status messages are
electronic messages sent by hotels to GDSs to update room rates, features and
availability information in GDS databases. The Company intends to reduce certain
status message fees in July 1997. In addition, a hotel participant can choose to
use the Company's UltraSelect service to provide travel agencies direct access
through GDSs to its central reservation system, thereby reducing the need to
send status messages through the Company's THISCO service. There can be no
assurance that the volume of, and fees generated from, status message processing
will remain at the same or a
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10
higher level in the future. Any significant decrease in the volume of status
messages processed or in the amount of status message fees generated could have
a material adverse effect on the Company's financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Services."
-- Internet Hotel Room Reservation Service. The market for the Company's
TravelWeb and NetBooker 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. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business -- Competition."
-- Commission Processing Service. 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.
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, 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 HCC
commission processing service, the Company's financial condition and results of
operations could be materially adversely affected. See "Management Discussion
and Analysis of Financial Condition and Results of Operations" and
"Business -- Competition."
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
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.
8
11
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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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 10.0%, 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.
See "Business -- Services."
Control by Existing Stockholders; Conflicts of Interest. Prior to this
offering, a substantial majority of the outstanding shares of the Company's
Common Stock was owned by certain hotel industry companies that are customers of
the Company. Upon the completion of this offering, the stockholders of the
Company before this offering will beneficially own approximately 71.4% of the
outstanding Common Stock, including 44.0% that will be owned either by hotel
companies or hotel representation firms. As a result, these stockholders, if
they act together, will be able to exercise significant influence over all
matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. Such concentration of ownership
could have the effect of delaying, preventing or deferring a change in control
of the Company. The Company's interest in achieving profitability from its
services to the hotel industry conflicts with the interests of some of its
existing stockholders or their affiliates to lower their costs of utilizing the
Company's services. In 1996, services provided by Pegasus to its stockholders
directly and indirectly accounted for 75.4% of the Company's revenues. See Note
14 of Notes to Consolidated Financial Statements. Additionally, to the extent
TravelWeb and other Web-based services, including the third-party Web sites
using the Company's NetBooker service, are successful in causing consumers to
shop for and reserve hotel rooms directly, such success could adversely affect
the role of travel agencies and correspondingly could materially adversely
affect future HCC revenues of the Company. Reed Travel Group, a division of Reed
Elsevier Inc. and a stockholder of the Company ("Reed"), holds certain license
rights to use the Company's UltraSwitch technology for applications unrelated to
the hotel industry, which may limit or otherwise conflict with the Company's
ability to expand its service offerings. Any of these conflicts could result in
a material adverse effect on the Company's financial condition and results of
operations. See "Business -- Technology and Operations," "Certain Transactions"
and "Principal and Selling Stockholders."
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
9
12
and products, which involves a high degree of uncertainty. The success of the
Company's TravelWeb and NetBooker 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. See "Business -- Industry Background" and
"-- Services."
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. See
"Business -- Systems Maintenance and Disaster Recovery."
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, 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. See "Business -- Services"
and "-- Technology and Operations."
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 cancelation 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
10
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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. See "Business -- Services," "-- Customers,"
"-- Technology and Operations" and "-- Systems Maintenance and Disaster
Recovery."
Government Regulation. The Company's primary customers are hotel chains and
hotel representation firms. The Company currently has as its stockholders 11 of
the 15 leading hotel chains in the world based on 1996 total 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. See "Business -- Government Regulation."
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. The
Company anticipates significantly increasing the size of its Information
Technology Group and sales and marketing staff following the completion of this
offering. 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.
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.
See "Business -- Strategy."
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
11
14
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. See "Management."
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. See
"Business -- Proprietary Rights."
Risks Associated with Potential Acquisitions. While the Company has no
current agreements or negotiations underway with respect to any potential
acquisitions, 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. See
"Business -- Strategy."
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, with regard to travel reservations beginning in the year
2000, any failure on the part of the Company, or its travel vendor 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.
Management's Discretion as to Use of Unallocated Net Proceeds; Benefits to
Existing Stockholders. The Company has designated only limited specific use for
the net proceeds to the Company from the sale of Common Stock in this offering.
The Company expects to use approximately $5.2 million of such net proceeds to
retire outstanding indebtedness to certain existing stockholders of the Company
and the remainder for working capital and other general corporate purposes.
Consequently, the Board of Directors and management
12
15
of the Company will have broad discretion in allocating a significant portion of
the net proceeds to the Company from this offering. In addition to the repayment
of outstanding indebtedness, existing stockholders will benefit from this
offering as a result of an increase in the market value and liquidity of their
investments in the Company. See "Use of Proceeds," "Certain Transactions" and
"Principal and Selling Stockholders."
Future Capital Needs; Uncertainty of Additional Financing. The Company
currently anticipates that its available cash resources combined with the net
proceeds to the Company from this offering will be sufficient to meet its
presently anticipated working capital and capital expenditure requirements for
at least the next 12 months. However, the Company may need or choose to raise
additional funds in order to support more rapid expansion, develop new or
enhanced services, respond to competitive pressures, acquire complementary
businesses or technologies or respond to unanticipated requirements. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of the stockholders of the Company will be reduced,
stockholders may experience additional dilution in net book value per share, and
such equity securities may have rights, preferences or privileges senior or
similar to those of the holders of the Company's Common Stock. There can be no
assurance that additional financing will be available when needed on terms
favorable to the Company, if at all. If adequate funds are not available on
acceptable terms, the Company may be unable to develop or enhance its services,
take advantage of future opportunities or respond to competitive pressures or
unanticipated requirements, any of which could have a material adverse effect on
the Company's financial condition and results of operations. See "Dilution" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Shares Eligible for Future Sale. Sales of substantial amounts of shares in
the public market following this offering could materially adversely affect the
market price of the Common Stock. Immediately following the offering, the
Company will have 9,429,712 shares of Common Stock outstanding. Of these shares,
6,458,412 shares will be "restricted securities" as defined by Rule 144 ("Rule
144") adopted under the Securities Act of 1933, as amended (the "Securities
Act"). These shares may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rule 144 or Rule 701
("Rule 701") adopted under the Securities Act. The Company is unable to predict
the effect that future sales made under Rule 144, Rule 701 or otherwise will
have on the market price of the Common Stock prevailing at that time. The
Company, its executive officers and directors who are stockholders, and certain
other stockholders including the Selling Stockholders have agreed, subject to
certain limited exceptions, not to offer, sell, contract to sell, grant any
option to purchase or otherwise dispose of any shares of Common Stock for a
period of 180 days after the date of this Prospectus, without the prior written
consent of Hambrecht & Quist LLC. Any shares subject to these lock-up agreements
may be released at any time by Hambrecht & Quist LLC with or without notice.
Pursuant to an agreement between the Company and the holders (or their permitted
transferees) of approximately 6,458,412 shares of Common Stock, these holders
will be entitled to certain registration rights with respect to such shares. In
addition, the Company intends to register the shares of Common Stock reserved
for issuance under the Company's 1996 Plan and 1997 Plan. See
"Management -- 1996 and 1997 Stock Option Plans," "Description of Capital
Stock -- Registration Rights," "Shares Eligible for Future Sale" and
"Underwriting."
Immediate and Substantial Dilution. Purchasers of Common Stock in this
offering will incur immediate and substantial dilution. To the extent that
outstanding options or warrants to purchase the Common Stock are exercised,
there will be further dilution. See "Dilution."
Anti-Takeover Matters. The Company's Second Amended and Restated
Certificate of Incorporation ("Certificate") and Amended and Restated By-laws
("By-laws"), each of which become effective contemporaneously with the
completion of this offering, 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,
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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. See "Description of Capital Stock -- Anti-Takeover Provisions."
Absence of a Prior Public Market; Potential Volatility of Stock
Price. Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or be sustained. The initial public offering price of the Common Stock will be
determined through negotiations between the Company, the Selling Stockholders
and the Underwriters and may not be indicative of the market price for the
Common Stock after this offering. See "Underwriting" for a discussion of the
factors considered in determining the initial public offering 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.
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,700,000 shares of
Common Stock offered by the Company hereby at an assumed initial public offering
price of $11.00 per share are estimated to be $26,871,000 ($31,430,460 if the
Underwriters' over-allotment option is exercised in full), after deducting the
underwriting discount and estimated offering expenses payable by the Company.
The Company will not receive any of the proceeds from the sale of Common Stock
by the Selling Stockholders. See "Principal and Selling Stockholders."
The Company anticipates that, of such net proceeds, approximately $5.2
million will be used to repay indebtedness outstanding under notes payable to
certain stockholders of the Company (the "Stockholder Debt"). The Stockholder
Debt bears interest at such rates and matures on such dates as are set forth in
"Certain Transactions."
The Company expects that the remainder of the net proceeds to the Company
from this offering will be used for general corporate purposes, including
working capital, increased staffing expenses, increased promotional expenses and
the purchase of additional equipment. Pending application of the net proceeds as
described above, the Company intends to invest such proceeds in short-term
marketable securities. See "Risk Factors -- Management's Discretion as to Use of
Unallocated Net Proceeds; Benefits to Existing Stockholders," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Certain Transactions."
DIVIDEND POLICY
To date, the Company has neither declared nor paid any cash dividends on
shares of its Common Stock. The Company currently intends to retain its earnings
in the future to support operations and finance its growth and, therefore, does
not intend to pay cash dividends on the Common Stock in the foreseeable future.
The payment of cash dividends in the future will be at the discretion of the
Board of Directors and subject to certain limitations under the Delaware General
Corporation Law and will depend upon factors such as the Company's earnings
levels, capital requirements, financial condition and other factors deemed
relevant by the Board of Directors. There can be no assurance that the Company
will pay any dividends in the future.
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CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1997 (i) on an actual basis, (ii) on a pro forma basis adjusted to
reflect the conversion of all shares of outstanding Series A Preferred Stock
into shares of Common Stock and (iii) as adjusted to give effect to the sale by
the Company of the 2,700,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $11.00 per share and the application of the
estimated net proceeds therefrom as set forth in "Use of Proceeds." This table
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------------
PRO AS
ACTUAL FORMA ADJUSTED
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term obligations(1)................. $ 1,896 $ 1,896 $ 1,090
======== ======== ========
Long-term obligations, net of current portion(1)............ 5,957 5,957 1,540
-------- -------- --------
Stockholders' equity:
Preferred Stock, $.01 par value, 2,000,000 shares
authorized; 1,538,463 shares issued and outstanding
(actual); no shares outstanding (pro forma and as
adjusted).............................................. 15 -- --
Common Stock, $.01 par value, 100,000,000 shares
authorized; 5,191,249 shares issued and outstanding
(actual); 6,729,712 shares issued and outstanding (pro
forma); 9,429,712 shares issued and outstanding (as
adjusted)(2)........................................... 53 68 95
Additional paid-in capital................................ 16,968 16,968 43,812
Unearned compensation expense............................. (451) (451) (451)
Accumulated deficit....................................... (14,959) (14,959) (14,959)
Less treasury stock (116,484 shares, at cost)............. (26) (26) (26)
-------- -------- --------
Total stockholders' equity........................... 1,600 1,600 28,471
-------- -------- --------
Total capitalization.............................. $ 7,557 $ 7,557 $ 30,011
======== ======== ========
</TABLE>
------------------------------
(1) See "Certain Transactions" and Notes 6 and 7 of Notes to Consolidated
Financial Statements.
(2) Excludes as of March 31, 1997 (i) 866,667 shares of Common Stock reserved
for issuance under the Company's 1996 Plan, of which options to purchase
771,733 shares of Common Stock were outstanding at a weighted average
exercise price of $2.39 per share and (ii) 333,333 shares of Common Stock
reserved for issuance under the Company's 1997 Plan, which will become
effective upon the completion of this offering. In May 1997, the Company
issued to Holiday Inn warrants to purchase 345,723 shares of Common Stock at
an exercise price of $7.20 per share, assuming an initial public offering
price of $11.00 per share. See "Business -- Recent Developments" and
"Management -- 1996 and 1997 Stock Option Plans."
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DILUTION
As of March 31, 1997, the Company had a net tangible book deficiency of
approximately $1.8 million or $0.27 per share on a pro forma basis. Pro forma
net tangible book deficiency per share is determined by dividing the net
tangible book deficiency (tangible assets less liabilities) of the Company by
the number of shares of Common Stock outstanding on a pro forma basis, after
giving effect to (i) a 4-for-3 split of the Company's outstanding Common Stock
and Series A Preferred Stock to be effected concurrently with this offering and
(ii) the conversion of all shares of outstanding Series A Preferred Stock into
an equal number of shares of the Company's Common Stock. After giving effect to
the issuance and sale of the 2,700,000 shares of Common Stock offered by the
Company hereby (at an assumed initial public offering price of $11.00 per
share), after deduction of the underwriting discounts and estimated offering
expenses payable by the Company and the application of the estimated net
proceeds therefrom as set forth in "Use of Proceeds," the adjusted net tangible
book value of the Company as of March 31, 1997 would have been approximately
$25.1 million or $2.66 per share. This represents an immediate increase in net
tangible book value of $2.93 per share to existing stockholders and an immediate
dilution of $8.34 per share to new investors purchasing shares of Common Stock
in this offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Pro forma net tangible book deficiency per share as of
March 31, 1997......................................... $(0.27)
Increase per share attributable to new investors.......... 2.93
------
Adjusted net tangible book value per share after the
offering.................................................. 2.66
------
Dilution per share to new investors......................... $ 8.34
======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1997,
the differences between the number of shares of Common Stock purchased from the
Company, the aggregate consideration paid and the average price per share paid
by existing stockholders and new investors purchasing shares of Common Stock in
this offering (based upon an assumed initial public offering price of $11.00 per
share):
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(2).... 6,729,712 71.4% $17,010,488 36.4% $ 2.53
New investors(2)............ 2,700,000 28.6 29,700,000 63.6 11.00
--------- ----- ----------- -----
Total............. 9,429,712 100.0% $46,710,488 100.0%
========= ===== =========== =====
</TABLE>
------------------------------
(1) The foregoing computations assume no exercise of stock options or warrants.
As of March 31, 1997, options to purchase 771,733 shares of Common Stock
were outstanding under the Company's 1996 Plan at a weighted average
exercise price of $2.39 per share. In May 1997, the Company issued to
Holiday Inn warrants to purchase 345,723 shares of Common Stock at an
exercise price of $7.20 per share, assuming an initial public offering price
of $11.00 per share. To the extent these options or warrants are exercised,
there will be further dilution to new investors. See "Business -- Recent
Developments" and "Management -- 1996 and 1997 Stock Option Plans."
(2) Sales by the Selling Stockholders in this offering will reduce the number of
shares held by existing stockholders to 6,458,412 shares, or approximately
68.5% of the total shares of Common Stock outstanding after this offering,
and will increase the number of shares held by new investors to 2,971,300,
or approximately 31.5% of the total shares of Common Stock outstanding after
this offering. See "Principal and Selling Stockholders."
17
20
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of and for the year
ended December 31, 1996 are derived from the Consolidated Financial Statements
of the Company that have been audited by Price Waterhouse LLP, independent
accountants, and are included elsewhere in this Prospectus. The financial data
as of and for the years ended December 31, 1995 and the consolidated financial
data as of and for the year ended December 31, 1994 are derived from the
financial statements of the Company that have been audited by Belew Averitt LLP,
independent accountants, and are included elsewhere in this Prospectus. The
financial data as of and for the year ended December 31, 1993 are derived from
the Company's financial statements that have been audited by Belew Averitt LLP,
but are not included herein. The financial data as of and for the year ended
December 31, 1992 are derived from the Company's financial statements that were
audited by other independent accountants, but are not included herein.
The selected consolidated financial data for the three months ended March
31, 1996 and 1997 are derived from unaudited consolidated financial statements.
The unaudited consolidated financial statements include all adjustments,
consisting of normal recurring accruals, which the Company considers necessary
for a fair presentation of the financial position and the results of operations
for these periods. Operating results for the three months ended March 31, 1997
are not necessarily indicative of the results that may be expected for all of
1997. The data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and with the
Company's Consolidated Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------- ---------------
1992 1993 1994 1995 1996 1996 1997
------- ------ ------ ------- ------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA(1):
Net revenues................................. $ 2,792 $3,938 $4,666 $ 9,296 $15,869 $3,803 $4,377
Operating expenses:
Cost of services........................... 1,172 1,266 1,546 3,883 6,199 1,638 1,558
Research and development................... 303 397 238 2,063 2,206 627 623
General and administrative expenses........ 652 709 1,065 2,770 3,799 692 856
Marketing and promotion expenses........... 66 17 130 912 2,824 644 865
Depreciation and amortization.............. 1,212 1,351 1,519 2,477 3,426 909 707
------- ------ ------ ------- ------- ------ ------
Total operating expenses.............. 3,405 3,740 4,498 12,105 18,454 4,510 4,609
------- ------ ------ ------- ------- ------ ------
Operating income (loss)...................... (613) 198 168 (2,809) (2,585) (707) (232)
Other (income) expense:
Interest expense........................... 568 597 591 815 893 212 212
Interest income............................ (2) (1) -- -- (114) -- (56)
------- ------ ------ ------- ------- ------ ------
Loss before income taxes and minority
interest................................... (1,179) (398) (423) (3,624) (3,364) (919) (388)
Income taxes................................. -- -- -- -- 15 -- --
------- ------ ------ ------- ------- ------ ------
Loss before minority interest................ (1,179) (398) (423) (3,624) (3,379) (919) (388)
Minority interest............................ -- -- -- 53 (106) (48) --
------- ------ ------ ------- ------- ------ ------
Net loss..................................... $(1,179) $ (398) $ (423) $(3,571) $(3,485) $ (967) $ (388)
======= ====== ====== ======= ======= ====== ======
Pro forma net loss per share(2).............. $ (0.48) $(0.05)
======= ======
Weighted average shares used in the pro forma
net loss per share calculation(2).......... 7,203 7,481
Supplemental pro forma net loss per
share(2)................................... $ (0.38) $(0.03)
======= ======
Weighted average shares used in the
supplemental pro forma net loss per share
calculation(2)............................. 7,744 8,006
</TABLE>
18
21
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------------------ --------------------------
1992 1993 1994 1995 1996 1997 AS ADJUSTED(3)
------- ------- ------- ------- -------- -------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Working capital
(deficit).............. $ (103) $ (126) $ (844) $(1,560) $ 2,068 $ 1,405 $ 23,859
Total assets............. 5,490 4,872 4,150 10,316 13,892 13,601 35,249
Accounts payable and
accrued liabilities.... 423 415 690 1,941 2,689 2,640 2,640
Short-term borrowings,
including current
portion of long-term
debt................... 407 459 1,392 1,049 1,834 1,896 1,090
Long-term obligations,
net of current
portion................ 6,488 6,224 4,718 6,994 6,353 5,957 1,540
Minority interest........ -- -- -- 1,340 -- -- --
Accumulated deficit...... (6,693) (7,091) (7,514) (11,085) (14,570) (14,959) (14,959)
Total stockholders'
equity (deficit)....... (1,828) (2,226) (2,649) (2,380) 1,954 1,600 28,471
</TABLE>
------------------------------
(1) The Company's statement of operations data for 1992, 1993 and 1994 consist
of the accounts of THISCO. Statement of operations data for periods
thereafter reflect the operations of the Company, including the acquisition
of 83.3% of the outstanding capital stock of HCC in July 1995 and the
acquisition of the remaining 16.7% of the outstanding capital stock of HCC
in June 1996, together with the depreciation and amortization applicable to
such acquisitions. Amortization applicable to the acquisition of HCC totaled
$645,419, $1,412,499 and $383,511 in 1995, 1996 and the three months ended
March 31, 1997, respectively. See Notes 1, 2 and 3 of Notes to Consolidated
Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the calculation of pro forma net loss per share and supplemental
pro forma net loss per share.
(3) Adjusted to reflect the sale of 2,700,000 shares of Common Stock offered by
the Company hereby at an assumed offering price of $11.00 per share and the
application of the estimated net proceeds therefrom. See "Use of Proceeds"
and "Capitalization."
19
22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Consolidated Financial Statements
and Notes thereto included elsewhere in this Prospectus. This Prospectus
contains certain forward-looking statements that involve risks and
uncertainties. The Company's actual results and the timing of certain events
could differ materially from those discussed in the forward-looking statements
as a result of certain factors including those set forth under "Risk Factors"
and elsewhere in this Prospectus.
OVERVIEW
Pegasus is a leading provider of transaction processing services to the
hotel industry worldwide. The Company's THISCO and TravelWeb 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, the global leader in hotel commission
payment 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. Historically, the
Company has derived a majority of its revenues from its THISCO and HCC services.
In 1996, approximately 51.3% of the Company's consolidated revenues was derived
from its electronic hotel reservation processing services, including 42.5% from
the THISCO service and 8.8% from the TravelWeb service, and approximately 48.7%
of the Company's consolidated revenues was derived from its HCC service. The
Company has experienced substantial growth since its inception. Revenues
increased at a compound annual rate of 54.4% to $15.9 million in 1996 from $2.8
million in 1992, excluding 1992 revenues from the HCC service which was acquired
in 1995. However, there can be no assurance that the Company will experience the
same rate of revenue growth in the future. Any significant decrease in the rate
of revenue growth could have a material adverse effect on the Company's
financial condition and results of operations.
Of the hotel customers for the Company's THISCO and HCC services in 1995,
all continued to be customers in 1996. Hotels generally enter into long-term
contracts for the Company's THISCO service that specify minimum annual
transaction and payment commitments.
The Company's revenues are predominantly transaction-based. The Company
derives its revenues from its THISCO service by charging its hotel participants
a fee based on the number of reservations made, less the number canceled ("net
reservations"), and a fee for "status messages" processed through the THISCO
service. Status messages are electronic messages sent by hotels to GDSs to
update room rates, features and availability information in GDS databases. As a
hotel's cumulative volume of net reservations increases during the course of the
calendar year, its fee per transaction decreases after predetermined transaction
volume hurdles have been met. As a result, for higher volume customers, unit
transaction fees are higher at the beginning of the year, when cumulative
transactions are lower. The Company recognizes revenues based on the expected
fee per transaction to be earned for services to be provided to the customer
during the entire year. This process of recognizing revenues results in a
deferred revenue balance being created during early periods of the year, which
will be reflected in interim balance sheets and be fully utilized and eliminated
by the end of each year. Additionally, Pegasus generally charges new
participants in the THISCO service a one-time set-up fee for work associated
with the implementation of the interface with the THISCO service. The Company
also charges certain GDSs a fee based on the number of net reservations to
compensate for the management and consolidation of multiple interfaces. In July
1997, the Company intends to reduce certain of the fees that it charges hotels
for transmitting status messages. See "Risk Factors -- Competition --Electronic
Hotel Room Reservation Processing Service."
Pegasus derives its revenues from its HCC service by charging a
participating travel agency a fee based on a percentage of the dollar amount of
commissions paid to that agency through the HCC service. The Company also
generally charges a participating hotel a fee based on the number of
commissionable transactions arising from that hotel. Revenues from HCC travel
agency fees can vary substantially from period
20
23
to period based on the fluctuations of the average daily room rates. Pegasus
recognizes revenues from its HCC service in the month in which the hotel stay
occurs and collects and pays commissions to travel agencies by the 15th business
day of the following month. If a hotel fails to deliver funds to the Company,
the Company is not obligated to deliver commission payments on behalf of the
hotel to travel agencies. HCC revenues also include amortization of a $2.0
million payment received by the Company in June 1993 in exchange for a five-year
noncancelable data processing contract. This payment was initially recorded as
unearned income and is being recognized as revenue over the life of the
contract. The amount recognized in 1996 was $431,000. See Note 11 of Notes to
Consolidated Financial Statements.
The Company offers two services, TravelWeb and NetBooker, that provide
hotel reservation capability to individual travelers through the Internet.
During 1996, Pegasus derived the substantial majority of its TravelWeb revenues
from fees related to the creation of Web pages for hotels and for maintaining
these pages on the TravelWeb site. During 1997, the Company is transitioning its
fee structure to begin charging participating hotels subscription fees based on
the number of their properties included in the database and transaction fees
based on the number of net reservations made at their properties through the
TravelWeb service. The Company is not in a position to forecast the effect that
this change in fee structure will have on its TravelWeb revenues. There can be
no assurance that such a change will not have a material adverse effect on the
Company's financial condition and results of operations. The Company also
derives revenues through the sale of advertising space on the TravelWeb site.
Pegasus realizes revenues from NetBooker, the Company's hotel room reservation
service provided to third-party Web sites, by charging third-party Web sites an
initial development and licensing fee and by charging hotels a fee based on the
number of net reservations made through the NetBooker service. The Company has
not received a material amount of revenues for the TravelWeb service or the
NetBooker service to date, and there can be no assurance that either of these
services will produce a material amount of revenues in the future. See "Risk
Factors -- Competition" and "-- Dependence on Growth of Internet Commerce."
The Company has developed or is in the process of developing several new
services, including UltraRes, UltraDirect and Pegasus Travel Information
Services, to capitalize on its existing technology and customer base to provide
additional electronic hotel reservation capabilities and information services to
existing Pegasus customers and to other participants in the hotel room
distribution process. The Company intends to derive revenues from UltraRes, a
service that automates the processing of hotel bookings for large meetings and
conventions, by charging participating hotels and meeting organizers
transaction-based fees for net reservations made. The Company intends to derive
revenues from UltraDirect, a service that automates the hotel room reservation
process for corporate travelers, by charging hotels transaction-based fees for
net reservations. The Company has not received any material revenues for any of
these services, and there can be no assurance that any of these services will
produce a material amount of revenues in the future. See "Risk Factors --
Competition" and "-- 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 or products to emerging industry standards, 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. See "Risk Factors -- Impact
of Technological Advances; Delays in Introduction of New Services."
21
24
The Company's cost of services consists principally of: (i) personnel costs
relating to information technology; (ii) facilities and equipment maintenance
costs and (iii) fees paid to Citicorp for the processing of travel agency
commissions. Research and development costs consist principally of personnel
costs, related overhead costs and fees paid to outside consultants. General and
administrative expenses are primarily personnel, office, legal and accounting
related. Most of these expenses, by their nature, do not fluctuate directly with
net revenues on a short-term basis. Marketing and promotion expenses consist
primarily of personnel costs, advertising, public relations and participation in
trade shows and other industry events. The Company anticipates that it will
incur substantially higher marketing costs in the foreseeable future due to the
Company's plan to spend heavily on promotional activities in support of its
TravelWeb service. Depreciation and amortization expense includes: (i) computer
equipment depreciation; (ii) office furniture, equipment and leasehold
improvement depreciation expense; (iii) amortization of software, including
software acquired as part of the acquisition of HCC and (iv) goodwill
amortization. Interest expense includes notes payable to certain stockholders of
the Company and payments made under capital equipment leases. Minority interest
represents certain former minority interests in subsidiaries that have been
wholly owned by the Company since June 1996. See Notes 1, 2, 3 and 7 of Notes to
Consolidated Financial Statements.
All costs incurred in the internal development of computer software used in
the delivery of the Company's services are expensed until a product design and a
working model of the software have been tested and completed. Thereafter, any
further development or production costs are capitalized. Maintenance and
customer support costs are expensed as incurred. Prior to 1996, the capitalized
development costs were being amortized over three to five years using the
straight-line method. However, in 1996 the Company changed the estimated life of
all internally and externally developed computer software to three years. The
result of such change in estimated life was to increase net losses for 1996 by
approximately $292,000. See Note 1 of Notes to Consolidated Financial
Statements.
On July 21, 1995, the Company acquired 83.3% of outstanding capital stock
of HCC in exchange for 2,242,800 shares of the Common Stock for an aggregate
purchase price of $2.7 million, resulting in a $6.5 million excess of purchase
price over net assets acquired. At the time of the acquisition, $1.2 million was
allocated to research and development that had not reached technological
feasibility and had no probable alternative future use, and this amount was
expensed in the quarter ending September 30, 1995. At the time of the
acquisition, $3.5 million was allocated to software which is being amortized
over a three year period ending June 30, 1998, and the balance of the purchase
price, $1.7 million, was recorded as excess of cost over the fair value of net
assets acquired (goodwill) and is being amortized on a straight line basis
through June 2010. On June 25, 1996, the Company purchased the remaining 16.7%
of outstanding capital stock of HCC in exchange for $2.0 million and 89,733
shares of Common Stock, resulting in a $833,000 excess of purchase price over
net assets acquired. At the time of the acquisition of this minority interest,
$245,000 was allocated to research and development that had not reached
technological feasibility and had no probable alternative future use, and this
amount was expensed in the quarter ending June 30, 1996. At the time of the
acquisition of the 16.7% interest in June 1996, $470,000 was allocated to
software which is being amortized over a two year period ending June 30, 1998 to
correspond to the amortization period of the software relating to the
acquisition that occurred in July 1995, and the balance of the purchase price,
$119,000, was recorded as excess of cost over the fair value of net assets
acquired (goodwill) and is being amortized on a straight line basis through June
2010 to correspond to the amortization period of the goodwill relating to the
acquisition that occurred in July 1995. See Notes 1, 2 and 3 of Notes to
Consolidated Financial Statements.
The Company has recorded unearned compensation and compensation expense for
the difference between the exercise price and the deemed fair value of the
Company's Common Stock with respect to 503,333 shares issuable upon exercise of
options granted in 1996. These amounts are initially recorded as unearned
compensation and amortized to cost of services and general and administrative
expense over the vesting periods of the options, generally four years. Unearned
compensation amortized to expense in 1996 was $65,000. Amortization of unearned
compensation will adversely affect the Company's reported operating results
through the third quarter of 2000. See Note 9 of Notes to Consolidated Financial
Statements.
As of December 31, 1996, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $14.6 million, which expire in
various years beginning in 2003. The net deferred tax
22
25
asset is fully reserved because of uncertainty regarding its realizability. See
Note 10 of Notes to Consolidated Financial Statements.
In connection with its efforts to continue its growth, in both its
traditional and recently introduced service offerings, the Company anticipates
significantly increasing the size of its information technology and sales and
marketing organizations. Because certain of the costs related to the
introduction of such new service offerings are largely fixed in nature, and as a
result of spending on development and marketing of such new service offerings,
the Company has not realized in the past, and anticipates that it will not
realize in the foreseeable future, gross margins on the provision of such
recently introduced services comparable to the gross margins it realizes on its
THISCO and HCC service offerings. Such lower gross margin contribution from
newly introduced service offerings and the associated marketing and development
expenses have been significant components of the losses incurred by the Company
and are expected to continue to have a detrimental effect on the Company's
operating results for the foreseeable future. The Company has experienced
substantial net losses, including a net loss of $3.5 million in 1996, and had an
accumulated deficit of approximately $14.6 million as of December 31, 1996. The
Company anticipates that its operating expenses will increase substantially in
the foreseeable future as it continues the development of its services,
increases its sales and marketing activities and expands its distribution
channels. To achieve profitability, the Company must successfully implement its
business strategy and increase its revenues while controlling expenses. There
can be no assurance as to when or if the Company will achieve profitability.
There also 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 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. See "Risk Factors -- Substantial Net Losses" and " -- Risks
Associated with Management of Growth."
All statements contained in this Prospectus other than statements of
historical fact, including statements in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" concerning the
Company's financial position and liquidity, results of operations, prospects for
continued growth, ability to maintain or improve transaction volumes, net sales
or profit margins and other matters are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, no assurance can be given that such expectations will
prove correct. Factors that could cause the Company's results to differ
materially from the results discussed in or contemplated by such forward-looking
statements include the risks described under "Risk Factors," including without
limitation substantial net losses, competition, dependence on the hotel
industry, consolidation trends, fluctuations in quarterly operating results,
potential adverse changes in hotel commission payments, control by existing
stockholders, conflicts of interest, dependence on growth of Internet commerce,
system interruption and security risks, impact of technological advances, delays
in introduction of new services, dependence on key customers and third-party
service arrangements, government regulation, management of growth, international
expansion and operations, dependence on key personnel, dependence on proprietary
technology, infringement, potential acquisitions, year 2000 compliance,
management's discretion as to use of unallocated net proceeds, benefits to
existing stockholders, future capital needs, uncertainty of additional
financing, shares eligible for future sale, immediate and substantial dilution,
anti-takeover matters, absence of a prior public market and potential volatility
of stock price. All forward-looking statements in this Prospectus are expressly
qualified in their entirety by the cautionary statements in this paragraph, in
"Risk Factors" and elsewhere in this Prospectus.
23
26
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain items from the Company's statement of operations to net
revenues:
<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUES
-----------------------------------------
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
----------------------- --------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net revenues............................ 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of services...................... 33.1 41.8 39.1 43.1 35.6
Research and development.............. 5.1 22.2 13.9 16.5 14.2
General and administrative expenses... 22.8 29.8 23.9 18.2 19.5
Marketing and promotion expenses...... 2.8 9.8 17.8 16.9 19.8
Depreciation and amortization......... 32.6 26.6 21.6 23.9 16.2
----- ----- ----- ----- -----
Total operating expenses...... 96.4 130.2 116.3 118.6 105.3
----- ----- ----- ----- -----
Operating income (loss)................. 3.6 (30.2) (16.3) (18.6) (5.3)
Other (income) expense:
Interest expense...................... 12.7 8.8 5.6 5.6 4.9
Interest income....................... -- -- (0.7) -- (1.3)
----- ----- ----- ----- -----
Loss before income taxes and minority
interest.............................. (9.1) (39.0) (21.2) (24.2) (8.9)
Income taxes............................ -- -- 0.1 -- --
----- ----- ----- ----- -----
Loss before minority interest........... (9.1) (39.0) (21.3) (24.2) (8.9)
Minority interest....................... -- 0.6 (0.7) (1.2) --
----- ----- ----- ----- -----
Net loss................................ (9.1)% (38.4)% (22.0)% (25.4)% (8.9)%
===== ===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1996 AND 1997
Net revenues. Net revenues increased by $573,000, or 15.1%, to $4.4 million
in the three months ended March 31, 1997 from $3.8 million in the three months
ended March 31, 1996. THISCO revenues increased as a result of a 17.8% increase
in net reservations made in the three months ended March 31, 1997 as compared to
the three months ended March 31, 1996. Additionally, the average fee paid by
hotels using the THISCO service increased during the three months ended March
31, 1997 as a result of an increase in total status messages processed. HCC
revenues grew as a result of a 12.3% increase in hotel commission transactions
processed during the three months ended March 31, 1997 as compared to the three
months ended March 31, 1996 due in part to the addition of hotel properties and
travel agencies participating in the HCC service. The net revenues to the
Company per commissionable transaction increased in the three months ended March
31, 1997 because of an increase in overall hotel average daily rates. Revenues
contributed by the TravelWeb service declined 51.5% in the three months ended
March 31, 1997 as compared to the three months ended March 31, 1996. This
decrease resulted primarily from the Company's transitioning its hotels
participating in the TravelWeb service to a subscription fee arrangement and the
Company's increasing reliance on subscription fees and recurring transaction
fees rather than page building and set-up fees.
Cost of services. Cost of services was consistent at $1.6 million in the
three months ended March 31, 1997 compared to the three months ended March 31,
1996. Costs of services related to the Company's THISCO and HCC services did not
change materially for the period, reflecting the relatively high fixed-cost
component of providing these services.
Research and development. Research and development expenses decreased
$4,000, or 0.7%, to $623,000 in the three months ended March 31, 1997 from
$627,000 in the three months ended March 31, 1996.
24
27
General and administrative expenses. General and administrative expenses
increased $164,000, or 23.6%, to $856,000 in the three months ended March 31,
1997 from $692,000 in the three months ended March 31, 1996. This increase was
due to greater office related costs and personnel costs.
Marketing and promotion expenses. Marketing and promotion expenses
increased $221,000, or 34.4%, to $865,000 in the three months ended March 31,
1997 from $644,000 in the three months ended March 31, 1996. Marketing and
promotion expenses grew primarily due to the promotion of the TravelWeb service
and to a lesser degree the promotion of the THISCO and HCC services.
Depreciation and amortization. Depreciation and amortization expenses
decreased $202,000, or 22.2%, to $707,000 in the three months ended March 31,
1997 from $909,000 in the three months ended March 31, 1996. This decrease was
primarily due to the completion in 1996 of the amortization of previously
capitalized software.
Interest expense. Interest expense remained unchanged at $212,000. The
expense reflects interest accrued on promissory notes payable to certain
stockholders of the Company and payments made under capital equipment leases.
Interest income. During the three months ended March 31, 1997 the Company
realized $56,000 in interest income as a result of short term investments of
operating cash balances on the proceeds from the sale of shares of the Company's
Series A Preferred Stock in June 1996.
YEARS ENDED DECEMBER 31, 1995 AND 1996
Net revenues. Net revenues increased by $6.6 million, or 70.7%, to $15.9
million in 1996 from $9.3 million in 1995. THISCO revenues increased as a result
of a 27.0% increase in net reservations made in 1996 as compared to 1995.
Additionally, the average fee paid by hotels using the THISCO service increased
during 1996 as a result of an increase in total status messages processed. HCC
revenues grew as a result of the acquisition by the Company of HCC in July 1995
and the subsequent growth in hotel commission transactions processed due, in
part, to the addition of hotel properties and travel agencies participating in
the HCC service. The net revenues to the Company per commissionable transaction
increased in 1996 because of a change in the hotel customer mix and an increase
in overall hotel average daily rates. To the extent that the total volume of
commissions processed by the HCC service increases, the average ratio of net
revenue to total commissions collected will decrease. Revenues contributed by
the TravelWeb service increased 57.6% in 1996 as compared to 1995, which
resulted primarily from amounts charged to hotels for Web page building and
maintenance fees and less significantly from advertising and promotions and from
fees charged to hotels for net reservations processed through the TravelWeb
service. Beginning in 1997, Pegasus is transitioning its hotels participating in
the TravelWeb service to a subscription fee arrangement, whereby, in addition to
paying fees for net reservations made through this service, participating hotels
will remit monthly fees per property listing in the TravelWeb service. See
"-- Overview."
Cost of services. Cost of services increased $2.3 million, or 59.7%, to
$6.2 million in 1996 from $3.9 million in 1995. This increase was due to the
acquisition by the Company of HCC in July 1995 and operating expenses for
TravelWeb, including expenses for contract Web site page building, software
development and the employment of additional technical personnel.
Research and development. Research and development expenses increased
$143,000, or 6.9%, to $2.2 million in 1996 from $2.1 million in 1995. After
eliminating the effect of the one-time charges taken in 1995 and 1996 for
research and development expenses relating to the acquisition of HCC, research
and development expenses increased $1.2 million, or 133%, to $2.0 million in
1996 from $840,000 in 1995. This increase was due to increased development
expenses primarily related to TravelWeb.
General and administrative expenses. General and administrative expenses
increased $1.0 million, or 37.1%, to $3.8 million in 1996 from $2.8 million in
1995. This increase was due to greater office-related costs, personnel costs,
legal and accounting fees and travel-related costs.
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Marketing and promotion expenses. Marketing and promotion expenses
increased $1.9 million, or 209.6%, to $2.8 million in 1996 from $912,000 in
1995. As a percentage of net revenues, marketing and promotion expense increased
to 17.8% in 1996 from 9.8% in 1995. Marketing and promotion expenses grew
primarily due to the promotion of the TravelWeb service and to a lesser degree
the promotion of the THISCO and HCC services.
Depreciation and amortization. Depreciation and amortization expenses
increased $949,000, or 38.3%, to $3.4 million in 1996 from $2.5 million in 1995.
In 1996, the Company changed the estimated life of capitalized software from
five years to three years. The effect of this change was to increase
depreciation by $292,000 in 1996. Also, in 1996 the Company recognized a full
year of amortization of software and goodwill relating to the Company's
acquisition in July 1995 of 83.3% of the outstanding capital stock of HCC and
began to amortize software and goodwill that resulted from the purchase by the
Company in June 1996 of the remaining 16.7% of the outstanding capital stock of
HCC.
Interest expense. Interest expense increased $77,000, or 9.5%, to $893,000
in 1996 from $816,000 in 1995. The expense includes interest accrued on
promissory notes payable to certain stockholders of the Company and payments
made under capital equipment leases.
Interest income. During 1996, the Company realized $114,000 in interest
income as a result of short term investments of operating cash balances on the
proceeds from the sale of shares of the Company's Series A Preferred Stock in
June 1996.
Income taxes. Income taxes reflect foreign income taxes payable with
respect to the taxable earnings of the Company's United Kingdom subsidiary,
which reports earnings on a cost-plus basis. Currently, the United Kingdom
office reports taxable earnings equal to 10.0% of the total operating cost of
the office.
YEARS ENDED DECEMBER 31, 1994 AND 1995
Net revenues. Net revenues increased $4.6 million, or 99.2%, to $9.3
million in 1995 from $4.7 million in 1994. This increase was due in part to the
acquisition by the Company of HCC in July 1995 and its subsequent growth and to
the growth in the THISCO service. Revenues from the THISCO service increased
approximately 15.5% primarily as a result of growth in net reservations, which
was due to increased use of the service by the Company's existing customer base
and the addition of new customers. During 1995, the average fee paid per THISCO
transaction by hotels decreased as a result of a 15% reduction (effective July
1, 1994) in net reservation fees charged to hotels. Revenues for the TravelWeb
service increased primarily as a result of Web page building and maintenance
fees charged to hotels in connection with the commencement of the TravelWeb
service in July 1994.
Cost of services. Cost of services increased $2.4 million, or 151.1%, to
$3.9 million in 1995 from $1.5 million in 1994. Operating expense as a
percentage of sales increased to 41.8% in 1995 from 33.1% in 1994. This increase
was due to the acquisition by the Company of HCC in July 1995 greater personnel
costs from the growth in the number of technical personnel employed by Pegasus,
costs incurred in connection with an upgrade of hardware used in the Company's
UltraSwitch technology, expenses incurred with respect to Web page building and
costs related to the acquisition by the Company of HCC and other organizational
matters. See Note 2 of Notes to Consolidated Financial Statements.
Research and development. Research and development expenses increased $1.8
million, or 766.2%, to $2.1 million in 1995 from $238,000 in 1994. This increase
was due to a $1.2 million write-off of in-process research and development
related to the Company's acquisition of 83.3% of the outstanding capital stock
of HCC and to THISCO, TravelWeb and HCC software development.
General and administrative expenses. General and administrative expenses
increased $1.7 million, or 160.1%, to $2.8 million in 1995 from $1.1 million in
1994. This increase was due to acquisition by the Company of HCC and other
organizational matters, higher office costs and greater personnel costs arising
from increases in number of personnel.
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Marketing and promotion expenses. Marketing and promotion expenses
increased $782,000, or 599.2%, to $912,000 in 1995 from $130,000 in 1994.
Marketing and promotion expenses grew primarily due to the promotion of the
TravelWeb service.
Depreciation and amortization. Depreciation and amortization increased
$958,000, or 63.1%, to $2.5 million in 1995 from $1.5 million in 1994. As a
percentage of sales, depreciation and amortization decreased to 26.6% in 1995
from 32.6% in 1994. The increase in depreciation and amortization is related to
new hardware purchased for the Company's UltraSwitch technology in 1995 and
amortization of software and goodwill related to the Company's acquisition of
83.3% of the outstanding capital stock of HCC in 1995.
Interest expense. Interest expense increased $225,000, or 38.0%, to
$816,000 in 1995 from $591,000 in 1994. Interest expense includes interest
accrued on certain promissory notes payable to stockholders of the Company and
payments made under capital equipment leases. The increase in interest expense
also was primarily related to the new hardware purchased for the Company's
UltraSwitch technology, which was financed through a lease in 1995.
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SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited statement of operations
data for each of the Company's last eight quarters ended March 31, 1997, as well
as such data expressed as a percentage of the Company's total net revenues for
the periods indicated. This data has been derived from the Company's unaudited
financial statements that, in management's opinion, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such information when read in conjunction with the audited
Consolidated Financial Statements of the Company and the Notes thereto appearing
elsewhere in this Prospectus. The Company believes that quarter-to-quarter
comparisons of its financial results are not necessarily meaningful and should
not be relied upon as any indication of future performance. See "Risk
Factors -- Fluctuations in Quarterly Operating Results."
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1995 1995 1995 1996 1996 1996 1996 1997
-------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............................ $1,556 $ 2,966 $ 3,337 $3,803 $ 4,005 $3,976 $ 4,085 $4,377
Operating expenses:
Cost of services...................... 535 1,237 1,644 1,638 1,483 1,564 1,514 1,558
Research and development.............. 196 1,504 243 627 565 399 615 623
General and administrative expenses... 442 1,009 1,008 692 1,120 913 1,074 856
Marketing and promotion expenses...... 34 426 387 644 693 647 840 865
Depreciation and amortization......... 445 797 849 909 924 769 824 707
------ ------- ------- ------ ------- ------ ------- ------
Total operating expenses........ 1,652 4,973 4,131 4,510 4,785 4,292 4,867 4,609
------ ------- ------- ------ ------- ------ ------- ------
Loss from operations.................... (96) (2,007) (794) (707) (780) (316) (782) (232)
Other (income) expense:
Interest expense...................... 217 195 218 212 188 221 272 212
Interest income....................... -- -- -- -- (4) (55) (55) (56)
------ ------- ------- ------ ------- ------ ------- ------
Loss before income taxes and minority
interest.............................. (313) (2,202) (1,012) (919) (964) (482) (999) (388)
Income taxes............................ -- -- -- -- -- -- 15 --
------ ------- ------- ------ ------- ------ ------- ------
Loss before minority interest........... (313) (2,202) (1,012) (919) (964) (482) (1,014) (388)
Minority interest....................... -- 65 (11) (48) (58) -- -- --
------ ------- ------- ------ ------- ------ ------- ------
Net loss................................ $ (313) $(2,137) $(1,023) $ (967) $(1,022) $ (482) $(1,014) $ (388)
====== ======= ======= ====== ======= ====== ======= ======
Pro forma net loss per share............ $(0.14) $ (0.15) $(0.06) $ (0.13) $(0.05)
====== ======= ====== ======= ======
Weighted average shares used in the pro
forma net loss per share
calculation........................... 6,826 6,834 7,572 7,572 7,481
Supplemental pro forma net loss per
share(1).............................. $(0.11) $ (0.12) $(0.04) $ (0.11) $(0.03)
====== ======= ====== ======= ======
Weighted average shares used in the
supplemental pro forma net loss per
share calculation(1).................. 7,360 7,371 8,111 8,113 8,006
</TABLE>
<TABLE>
<CAPTION>
Percentage of Net Revenues
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of services...................... 34.4 41.7 49.3 43.1 37.0 39.3 37.0 35.6
Research and development.............. 12.6 50.7 7.3 16.5 14.1 10.0 15.0 14.2
General and administrative expenses... 28.4 34.0 30.2 18.2 28.0 23.0 26.3 19.6
Marketing and promotion expenses...... 2.2 14.3 11.6 16.9 17.3 16.3 20.6 19.8
Depreciation and amortization......... 28.6 26.9 25.4 23.9 23.1 19.3 20.2 16.1
------ ------- ------- ------ ------- ------ ------- ------
Total operating expenses........ 106.2 167.6 123.8 118.6 119.5 107.9 119.1 105.3
------ ------- ------- ------ ------- ------ ------- ------
Loss from operations.................... (6.2) (67.6) (23.8) (18.6) (19.5) (7.9) (19.1) (5.3)
Other (income) expense:
Interest expense...................... 13.9 6.6 6.5 5.6 4.7 5.6 6.7 4.8
Interest income....................... -- -- -- -- (0.1) (1.4) (1.3) (1.2)
------ ------- ------- ------ ------- ------ ------- ------
Loss before income taxes and minority
interest.............................. (20.1) (74.2) (30.3) (24.2) (24.1) (12.1) (24.5) (8.9)
Income taxes............................ -- -- -- -- -- -- 0.3 --
------ ------- ------- ------ ------- ------ ------- ------
Loss before minority interest........... (20.1) (74.2) (30.3) (24.2) (24.1) (12.1) (24.8) (8.9)
Minority interest....................... -- 2.2 (0.3) (1.2) (1.4) -- -- --
------ ------- ------- ------ ------- ------ ------- ------
Net loss................................ (20.1)% (72.0)% (30.6)% (25.4)% (25.5)% (12.1)% (24.8)% (8.9)%
====== ======= ======= ====== ======= ====== ======= ======
</TABLE>
------------------------------
See footnote on following page.
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---------------
(1) Supplemental pro forma net loss per share is based on the weighted average
number of shares of Common Stock used in the calculation of pro forma net
loss per share, plus the shares that the Company would have had to issue in
the offering to repay indebtedness outstanding under notes payable to
certain stockholders of the Company. For purposes of computing supplemental
pro forma net loss per share, the pro forma net loss was reduced by the
elimination of related interest expense on such notes payable. See "Use of
Proceeds," Note 1 of Notes to Consolidated Financial Statements and Note 4
of Notes to Consolidated Interim Financial Statements (Unaudited).
The Company does not believe that inflation has materially impacted results
of operations during the past three years. Substantial increases in costs and
expenses could have a significant impact on the Company's results of operations
to the extent such increases are not passed along to customers.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its cash requirements for operations and
investments in equipment primarily through private sales of capital stock,
borrowings from stockholders and capital lease financing. Cash flows from the
sale of capital stock amounted to $7.5 million in 1996, of which $2.0 million
was used to purchase a minority interest in a subsidiary and $235,000 was used
to repay notes payable to stockholders. Cash flows from the sale of capital
stock amounted to $571,000 in 1995.
Net cash provided by operating activities amounted to $979,000, $496,000,
$410,000 and $213,000 in 1994, 1995, 1996 and the quarter ended March 31, 1997,
respectively. Net cash used in investing activities for the purchase of
software, furniture and equipment amounted to $185,000, $639,000, $362,000 and
$407,000 in 1994, 1995 and 1996 and the quarter ended March 31, 1997,
respectively. In addition, the Company purchased $2.7 million of marketable
securities in 1996 and realized net proceeds of $1.3 million in the three months
ended March 31, 1997 from the purchase and sale of marketable securities.
The Company's principal sources of liquidity at December 31, 1996 included
cash and cash equivalents of $1.8 million, short term investments of $2.7
million and restricted cash of $690,000, which represents funds for travel
agency commission checks that have not cleared HCC's processing bank and are
returned to HCC. Any of such amounts which are not remitted to travel agencies
will be escheated to the appropriate state, as required.
The Company believes that the net proceeds from this offering, along with
current cash and cash equivalents, will be sufficient to fund its working
capital and capital expenditure requirements for at least the next twelve
months. Thereafter, if cash generated from operations is insufficient to satisfy
the Company's liquidity requirements, the Company may seek to issue additional
equity or debt securities or establish a credit facility. The issuance of
additional equity or convertible debt securities could result in additional
dilution to the Company's stockholders. There can be no assurance that financing
will be available to the Company in amounts or on terms acceptable to the
Company. Although the Company has no material commitments for capital
expenditures, it anticipates purchasing approximately $1.5 million of property
and equipment in 1997, primarily for computer equipment, furniture and fixtures.
Some portion of these capital expenditures may be financed through capital
leases. See "Risk Factors -- Future Capital Needs; Uncertainty of Additional
Financing."
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (FAS 123), encourages, but does not require, companies
to record compensation cost for stock-based employee compensation plans at fair
value. The Company has elected to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25), and related Interpretations. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the fair market value of the
Company's stock at the date of the grant over the amount the employee must pay
to acquire the stock.
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In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (FAS 128), was issued. FAS 128 specifies the computation,
presentation and disclosure requirements for earnings per share ("EPS") for
entities with publicly held common stock or potential common stock. FAS 128
simplifies the standards for computing EPS previously found in Accounting
Principles Board Opinion No. 15, "Earnings per Share" (APB 15), and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the statement of operations for all
entities with complex capital structures and requires a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. FAS 128 is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods; earlier application is not permitted. FAS 128 requires restatement of
all prior-period EPS data presented. The Company will adopt FAS 128 in its
consolidated financial statements as of and for the year ending December 31,
1997 and, based on current circumstances, does not believe the effect of
adoption will be material.
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BUSINESS
OVERVIEW
Pegasus is a leading provider of transaction processing services to the
hotel industry worldwide. The Company's THISCO and TravelWeb 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, the global leader in hotel commission
payment 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. 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. In 1996
approximately 51.3% of the Company's consolidated revenues was derived from its
hotel reservation processing services, including 42.5% from the THISCO service
and 8.8% from the TravelWeb service, and approximately 48.7% was derived from
its HCC service.
The Company's electronic interface business for hotel room reservations was
established in 1988 by 16 leading hotel and travel-related companies to address
the need for a neutral, reliable third-party source of hotel reservation
information and transaction processing services. The Company's commission
processing business was founded by substantially the same stockholder group in
1991. Today, the Company's stockholders include 11 of the 15 leading hotel
chains in the world based on 1996 total revenues. The Company's strategic
position as a gateway in the hotel room distribution chain, transaction
processing capabilities and reputation for reliability and neutrality enable it
to offer a range of services delivering industry-wide benefits that would be
difficult for any of the participants to achieve individually. Over the past
several years, the Company has expanded its services to include virtually all
electronic distribution channels through which hotel room reservations are made.
Over 25,000 hotel properties worldwide, including those of 13 of the 15
leading hotel chains in the world based on 1996 total revenues, currently
participate in the Company's THISCO service. The number of net reservations
booked through the THISCO service has increased to approximately 13.9 million in
1996 from 1.1 million in 1990.
TravelWeb provides individual travelers direct access to more than 40,000
dynamically served pages of online hotel information and the ability to make
reservations at approximately 15,000 hotel properties in 140 countries. In April
1997, a daily average of approximately 20,000 Internet users visited the
TravelWeb site. The Company's NetBooker service offers operators of third-party
Web sites the same comprehensive information contained on TravelWeb and a simple
and fast method of making a hotel reservation online.
The THISCO and TravelWeb services utilize the Company's UltraSwitch
technology. This technology can facilitate the distribution of hotel rooms
through virtually all of the automated distribution channels by offering hotels
a single, seamless electronic interface to:
- over 120,000 travel agencies through all of the leading GDSs;
- individual travelers directly through the Internet;
- third-party Web sites;
- convention and other large meeting organizers; and
- corporate travel departments through travel management software and
service providers.
Pegasus provides the HCC commission processing service to over 64,000
travel agencies and 11,000 hotel properties worldwide. In 1996, the Company
processed over $111.7 million in gross commission payments, an increase of 49.9%
as compared to 1995, including commission payments made in 1995 prior to the
acquisition of HCC by Pegasus.
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The Company charges for its services generally on a per-transaction or
commission basis. The Company has increased its revenue at a compound annual
growth rate of 54.4% to $15.9 million in 1996 from $2.8 million in 1992,
excluding 1992 revenues from the HCC service which was acquired in 1995. The
revenue growth has reflected growth in the THISCO service, the introduction of
the TravelWeb service and the acquisition and growth of the HCC service. The
revenue growth in the THISCO service reflects the increasing number of
participating hotels and travel agencies that made reservations through the
THISCO service, the shift from manual to electronic hotel reservations and the
overall health in the hotel industry. The revenue growth in the HCC service
principally reflects growth in the dollar amount of hotel commission payments
processed by the Company as a result of an increase in the number of hotels and
travel agencies using the HCC service and higher average daily hotel room rates.
The Company believes it has numerous opportunities to continue its growth,
including: (i) adding members of the hotel and travel agency industries as
customers, in particular internationally where the Company's market share is
lower; (ii) addressing all of the emerging electronic distribution channels for
hotel rooms; (iii) providing customers access to comprehensive hotel industry
information and (iv) pursuing strategic relationships and acquisition
opportunities.
RECENT DEVELOPMENTS
In March 1997, the Company entered into an agreement with Marriott, under
which Marriott, currently a customer of the Company's THISCO and TravelWeb
services, will become a customer in the Company's HCC service commencing in
third quarter 1997.
In May 1997, HFS renewed its participation in the Company's HCC service by
entering into a new long-term agreement with the Company.
In May 1997, the Company entered into a Distribution Services Agreement
with Holiday Inn, under which Holiday Inn, currently a customer in the Company's
HCC service, also will become a customer of the Company's THISCO, TravelWeb,
NetBooker, UltraDirect, and UltraRes services commencing in 1998. See "Certain
Transactions."
INDUSTRY BACKGROUND
The operations of the global hotel industry include a wide variety of
participants and a series of complex information and transaction flows.
According to the International Hotel Association, the global hotel industry
generated $247 billion in revenues in 1994. The Company believes that costs
associated with reserving and distributing hotel rooms, including commissions
paid to intermediaries, such as travel agencies and GDSs, hotel
reservation-related staffing costs and reservation system information technology
expenses, represent a significant proportion of total operating costs. The
Company's services simplify the complexity of room reservation information and
transaction flows, thereby reducing the distribution costs of rooms for the
hotel industry. The Company believes that revenues derived from electronically
booked hotel reservations will grow at a higher rate than overall hotel industry
revenues, as a greater number of hotels and travel agencies acquire electronic
booking capabilities.
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 cancelations 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
32
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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 such as SABRE, Galileo, System One or
Worldspan. GDSs are global electronic travel information and reservation systems
that, among other things, 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. According to a survey done for the Hotel Electronic
Distribution Network Association ("HEDNA") by Hospitality Technology Consulting,
30 million hotel room reservations were made electronically through GDSs in
1996. 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 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.
Because of the information-intensive and complex nature of the hotel room
reservation and commission payment processes, the Company believes a substantial
opportunity exists for an intermediary that can provide services to manage hotel
industry information and transaction flows among multiple parties. Effective,
neutral, third-party management of information and transaction flows improves
the ability of all participants in the hotel room distribution process to
conduct business on a seamless and automated basis by providing efficient and
real-time access to hotel information. To be effective in addressing the hotel
industry's needs, the provider of such services must have: (i) an in-depth
understanding of the business processes of participants involved in the
distribution of hotel rooms; (ii) a reputation for reliability and trusted
neutrality in the industry to bring otherwise competing constituencies together
for industry-wide benefits; (iii) participation by a critical mass of hotels and
participants in the electronic hotel room distribution process and (iv)
expertise in leading technology applications. By acting as a gateway for
information and transaction flows, such a provider of services would be well
positioned to improve the efficiency and effectiveness of the distribution of
hotel rooms, the processing of travel agency commission payments and the
gathering and distribution of hotel industry information.
THE PEGASUS SOLUTION
The Company provides information and transaction processing services that
improve the efficiency and effectiveness of the hotel room reservation and
commission payment processes. The Company's THISCO and TravelWeb services
enhance the electronic hotel room reservation process by providing a standard,
common electronic interface that enables individual travelers and intermediaries
to 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 hotels and travel agencies by consolidating
commissions into one payment in the travel agency's currency of choice and
providing comprehensive transaction reports. The Company has developed an
in-depth understanding of the technical and business processes involved in hotel
room reservations and commission payment processing. The Company's strategic
position as a gateway in the hotel room distribution chain, transaction
processing capabilities and reputation for reliability and neutrality enable it
to offer a range of services delivering industry-wide benefits that would be
difficult for any of the participants to achieve individually.
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The Company's current services and services in development generally fall
into three categories: electronic hotel room reservation services, commission
payment processing services and information services. Depicted in the following
diagram are the Company's electronic hotel room reservation services and
commission payment processing services that are currently offered or in
development.
[PRODUCT DIAGRAM]
Pictures and logos depicting the following transaction flows:
1. Consumer to Travel Agent to Global Distribution System ("GDS") to
UltraSwitch-THISCO to Hotel.
2. Consumer to GDS Internet Travel Sites to GDS to UltraSwitch-THISCO to
Hotel.
3. Consumer to TravelWeb to UltraSwitch-THISCO to Hotel.
4. Consumer to Partner Web Sites to Pegasus Systems NetBooker to
UltraSwitch-THISCO to Hotel.
5. Consumer to Corporate Travel to Pegasus Systems-UltraDirect to
UltraSwitch-THISCO to Hotel.
6. Consumer to Conventions, Meetings, Housing to Pegasus Systems-UltraRes
to UltraSwitch-THISCO to Hotel.
7. Hotel to HCC-Hotel Clearing Corporation to Travel Agent.
The Company's THISCO service is a leading provider of room reservation
processing services that electronically connect hotel central reservation
systems with other participants in the hotel room distribution process. Over
25,000 hotel properties worldwide, including those of 13 of the 15 leading hotel
chains based on 1996 total revenues currently utilize the THISCO service.
Furthermore, because the THISCO service provides a connection to each major GDS,
and through them over 120,000 travel agencies worldwide, as well as with
convention and other large meeting organizers, corporate travel departments and
emerging Internet travel services, the Company offers hotels an effective and
low cost single point of contact with all the major participants in the hotel
room distribution process. The THISCO service provides travel agencies greater
and easier access to real-time hotel information and the ability to make a
reservation and receive a confirmation in seconds. The THISCO service also
allows GDSs to offer fast confirmation for hotel room reservations made through
their systems, improved efficiency because of a single interface, access to
25,000 hotel properties worldwide and real-time availability of information.
Convention and other large meeting organizers, corporate travel departments and
others also are able to utilize the THISCO service to automate their hotel room
reservation process. Additionally, individual travelers can shop in real-time
and reserve hotel rooms directly by using either TravelWeb, the Company's own
Web site, or through a Web site that utilizes NetBooker, the Company's hotel
reservation service provided to third-party Web sites.
The Company's HCC commission processing service simplifies the payment of
travel agency hotel room commissions by over 11,000 participating hotel
properties to over 64,000 participating travel agencies worldwide. By
consolidating the payment of commissions and providing comprehensive transaction
reports, HCC enables hotels and travel agencies to increase efficiency and
reduce costs associated with preparing, paying and reconciling commissions.
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The Company generally charges for its services on a per-transaction or
commission basis. The Company has the opportunity to earn revenue by processing
transactions through virtually all of the means by which electronic hotel room
reservations occur, whether or not a GDS is involved in the transaction.
STRATEGY
The Company's objective is to capitalize on its central position in the
hotel industry information and transaction flow in order to become the leading
provider of services and technology that enable the efficient and effective
electronic distribution of hotel rooms. To achieve this objective, the Company
intends to employ a strategy that includes the following key elements:
Expand Customer Base. The Company's established customer base includes
hotels, hotel representation firms, travel agencies, GDSs and third-party Web
sites. The Company intends to expand its customer base domestically and
internationally by adding customers and by cross-selling its new and existing
services to its current and future customers. Because of the fixed nature of
many of the Company's costs, the addition of new customers and the increase in
transaction volumes with new and existing customers enhances the profitability
of all of the Company's services.
Expand Hotel Room Distribution Channels. The Company is expanding its
service offerings to include additional distribution channels, such as hotel
room reservation services for individual travelers over the Internet, for
convention and other large meeting organizers and for corporate travel
departments through corporate intranets. The Company is addressing this online
distribution opportunity through increasing the capability and consumer
awareness of its TravelWeb site, expanding the use by third-party Web sites of
the Company's NetBooker service and providing services to corporate travel
departments through its UltraDirect service. The Company plans to capitalize on
the opportunity with convention and other large meeting organizers by providing
these distribution participants electronic access to hotel central reservation
systems through its UltraRes service. The Company's services are intended to
provide transaction fee revenue opportunities through virtually all of the
distribution channels by which electronic hotel room reservations occur.
Develop Hotel Industry Information Service. The Company intends to develop
an information service which will provide hotels and other industry participants
with hotel transaction information for use in strategic analysis, market
tracking and improved target marketing and revenue optimization. The Company's
proposed service is intended to utilize both information to which it currently
has access through the other services it provides and information it would
compile using its network of hotel industry relationships.
Build Strategic Alliances and Pursue Acquisition Opportunities. The Company
intends to build strategic alliances with other participants in the hotel
industry, as well as members of the financial information services, Internet and
information technology industries, to enhance the functionality and market
presence of the Company's services. The Company believes that these
relationships will increase brand recognition of its services and help to expand
its customer base. The Company will also seek to acquire assets, technology and
businesses that provide complementary services or access to new markets and
customers.
SERVICES
The Company's current services and services in development generally fall
into three categories: electronic hotel room reservation services, commission
payment processing services and information services. In 1996 approximately
51.3% of the Company's consolidated revenues was derived from its hotel
reservation services, including 42.5% from the THISCO service and 8.8% from the
TravelWeb service, and approximately 48.7% was derived from its HCC service.
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Hotel Room Reservation Services
The following table summarizes the hotel room reservation services the
Company has developed or is developing (including year of introduction):
<TABLE>
<S> <C> <C>
HOTEL ROOM RESERVATION SERVICES
----------------------------------------------------------------------------------------------------------------
Services Users Benefits
--------------------------------
THISCO (1988) - Hotels and hotel - Improved efficiency because of single
representation firms interface
- Single interface between hotel - Improved customer service due to
central reservation systems frequent hotel room inventory updates
and GDSs utilized by travel - Improved accessibility to wide
audience of travel agencies via GDSs
- GDSs and participating travel - Improved efficiency because of single
agencies interface
- Rapid confirmations
- Access to over 25,000 hotel properties
worldwide
- Real-time availability of information
TravelWeb - Hotels and hotel - Access to emerging low cost electronic
representation firms distribution channel
- Electronic hotel property - Reduced distribution costs
catalog (1994) - Inexpensive publication and
- Web-based hotel room distribution of comprehensive and up-to-
reservations (1995) date hotel information and promotions
- More attractive presentation of hotel
information
- Individual travelers - Around the clock electronic access to
hotel reservation capability
- Ability to shop and gain convenient
access to approximately 15,000 hotel
properties with rich information
content, including rate, feature and
availability information
- Access to special promotional offers
NetBooker (1997 -- in - Hotels and hotel - Access to emerging low cost electronic
development) representation firms distribution channel
- Comprehensive hotel database - Reduced distribution costs
and hotel room reservation - Inexpensive publication and
capability tailored and fully distribution of comprehensive and up-to-
integrated into third-party date hotel information and promotions
Web sites - More attractive presentation of hotel
information
- Wider distribution of hotel
information and access to individual
travelers through presence on multiple
Web sites
- Third-party Web sites - Low cost access to comprehensive hotel
information and proven online hotel
reservation functionality
- Increased site value due to wider
scope of services provided
- Advertising and transaction-based
revenue opportunities
UltraRes (1996) - Hotels and hotel - Improved accuracy of convention and
representation firms large meeting reservations
- Electronic hotel room - Reduced costs by eliminating manual
reservation connectivity for reservation process
convention and other large group - Improved tracking of room inventory
bookings
- Convention and visitors - Improved reservation and cancellation
bureaus tracking and reporting capabilities
- Meeting planners - Single connection to multiple hotel
- Group housing reservation properties
providers - Reduced costs by eliminating manual
reservation process
UltraDirect (1997 -- in - Hotels and hotel - Target marketing
development) representation firms - Broadened distribution channel
- Improved ability to update corporate
- Direct electronic hotel room rate and availability information and
reservation capability for respond to reservation requests
corporate travel departments - Reduced distribution costs for
corporate room sales
- Corporate travel departments - Reduced time and effort in making
hotel reservations
- Enforcement of corporate travel
policies and utilization of preferred
rates
- Improved travel information reporting
- Corporate travel agencies and - Account retention
related Web sites - Low cost access to hotel information
and online booking functionality
- Reduced time and effort in making
hotel reservations
- Enforcement of corporate travel
policies and utilization of preferred
rates
- Improved travel information reporting
</TABLE>
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THISCO. The Company's THISCO service is a leading electronic hotel room
reservation processing service that interfaces communications concerning hotel
reservation information between all major GDSs and hotel central reservation
systems. According to HEDNA, approximately 30.0 million hotel room reservations
were made electronically through GDSs during 1996. During 1996, approximately
13.9 million hotel room reservations were made through THISCO. THISCO currently
connects central reservation systems representing over 25,000 participating
hotel properties to each major GDS and through them over 120,000 travel agencies
worldwide. The following table sets forth the number of THISCO net reservations
in each of the years 1990 through 1996.
THISCO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net reservations............ 1,145 3,498 5,012 6,481 8,373 10,963 13,947
Year-over-year growth
rate...................... 206% 43% 29% 29% 31% 27%
</TABLE>
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 millions of status messages sent by participating hotels every
day 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. See
"-- Technology and Operations."
Hotels using THISCO improve the efficiency of their central reservation
systems and reduce costs by not having to develop and maintain separate
communications circuits and translation software for each GDS. Through THISCO,
participating hotels are able to gain improved access to a wide audience of
travel agencies worldwide that are connected to GDSs and to provide better
customer service due to the ability to frequently update hotel room information
on GDS databases in a fast and reliable manner. THISCO benefits travel agencies
that use GDSs by providing real-time access to comprehensive hotel room
information and enabling them to make reservations and receive confirmations in
seconds from over 25,000 hotel properties worldwide.
Pegasus charges its hotel customers a fee based on the number of net
reservations processed through THISCO. In addition, hotels pay certain fees for
status messages sent to GDSs through THISCO. New participants in THISCO may be
charged one-time set-up fees for work associated with the implementation of the
interface with THISCO. The Company also charges certain GDSs a fee based on the
number of net reservations to compensate for the management and consolidation of
multiple interfaces. The technology used by THISCO also enables the Company to
enhance its revenue base by providing the information and reservation interface
for its other hotel reservation services, including TravelWeb, NetBooker,
UltraRes and UltraDirect.
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TravelWeb. Located at www.travelweb.com, TravelWeb provides individual
travelers direct access to more than 40,000 dynamically served pages of online
hotel information and the ability to make reservations at approximately 15,000
hotel properties in 140 countries. In January 1997, TravelWeb was ranked as the
second most popular travel-related Web site, according to the P.C. Meter, L.P.,
a market research service. In April 1997, a daily average of approximately
20,000 Internet users visited the TravelWeb site. The following table sets forth
the number of net reservations made using the TravelWeb service in each of the
past four quarters since the Company introduced online reservation capabilities
in December 1995.
TRAVELWEB
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1996 1996 1997
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Net reservations..................... 1,782 5,557 10,294 14,571 23,571
Quarter-over-quarter growth rate..... 212% 85% 44% 62%
</TABLE>
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 detailed information regarding a wide array of
hotel properties and, through its connection to the Company's THISCO service,
allows individual travelers to reserve a hotel room and receive a confirmation
in seconds. See "-- Technology and Operations."
TravelWeb benefits hotels, hotel representation firms and individual
travelers. TravelWeb reduces distribution costs for hotels and hotel
representation firms. TravelWeb also enables access to an emerging low cost
electronic distribution channel. In addition, TravelWeb provides an inexpensive
method of publishing and distributing comprehensive and up-to-date hotel
marketing information with an attractive presentation format featuring visual
images and graphics. Hotels can easily add, delete and update such information
using the Company's "remote author" feature. Additionally, the "Click-it!
Weekends" feature highlights weekend specials, enabling hotels to take advantage
of the real-time nature of the Internet to offer flexible pricing and to reach
individual travelers on a world-wide basis quickly and inexpensively. TravelWeb
benefits individual travelers by providing electronic access, 24 hours a day,
seven days a week, to shop for and reserve a hotel room in one or more of the
thousands of hotel properties online. Furthermore, individual travelers are able
to gain detailed information about a hotel property and its special promotional
offers through the rich information content available on TravelWeb.
In addition to hotel room reservations, TravelWeb offers airline booking
capability through a GDS. TravelWeb allows users to check air fares, flight
times and availability and purchase airline tickets while online. All TravelWeb
air bookings are routed to a partner travel agency and ticketed and shipped by
FedEx at no extra cost to the traveler. TravelWeb also 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.
Hotel participants in TravelWeb pay the Company a monthly subscription fee
based on the number of their properties included in the database and a fee based
on the number of net reservations made through TravelWeb. The Company also began
to sell advertising space on TravelWeb during 1996, focusing on advertisers that
cater to travelers. The Company has not received a material amount of
transaction-based revenues for the TravelWeb service to date, and there can be
no assurance that this service will produce a material amount of revenues in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
NetBooker. The Company recently introduced a service for the operators of
third-party 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
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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
the same information contained on TravelWeb 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 TravelWeb 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 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. In February 1997, the Company
entered into a NetBooker distribution agreement with Preview Travel Inc. to
provide its America Online users, as well as its Web site users, direct access
to the TravelWeb database and direct connections to hotel central reservation
systems. Recently, the Company entered into a NetBooker Distribution Agreement
with Internet Travel Network. See "-- Technology and Operations."
The Company's hotel customers benefit from its NetBooker service because it
enables a broader dissemination through the emerging, low cost Internet
distribution channel of the same marketing information supplied to TravelWeb. As
a result, hotels need only incur the effort and expense of creating and
maintaining their information on a single site to reach multiple Internet
distribution points and achieve increased overall visibility. Furthermore, the
NetBooker service provides hotel customers an inexpensive means to distribute
and publish visually attractive marketing information and Internet-specific
promotions. Hotels offering their own brand-specific Web sites also can have
their own content delivered to their sites from TravelWeb's database and process
reservation requests from their Web sites through the THISCO service. Users and
operators of third-party Web sites benefit from the NetBooker service through
immediate access to the rich content of TravelWeb. Furthermore, because users of
the third-party Web sites can book hotel rooms and receive confirmations in
seconds through the THISCO service, the Company's service affords the operators
of third-party Web sites the opportunity to generate a transaction fee revenue
stream.
The Company charges third-party Web sites an initial development and
licensing fee for the NetBooker service. For reservations made through the
NetBooker third-party Web sites, hotels pay the Company the same fee per net
reservation as for reservations made through TravelWeb. The Company has not
received a material amount of revenues for this service to date, and there can
be no assurance that this service will produce a material amount of revenues in
the future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
UltraRes. The Company recently introduced its UltraRes service, which
automates the processing of hotel room reservations for conventions and large
meetings. The process traditionally used to reserve hotel rooms for these events
is information-intensive and inefficient. Typically, convention and meeting
organizers request hotel reservations for blocks of rooms by fax, mail or
telephone. Hotels manually enter these reservations into their central
reservation systems and send confirmation numbers to the convention or meeting
organizers, and the meeting organizers manually enter the confirmation and
reservation information into their own systems. This process 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 electronically,
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. In
January 1997, the Company's UltraRes service was endorsed by the International
Association of Convention and Visitors Bureaus as the preferred standard for
electronic transmission of convention hotel reservations. See "-- Technology and
Operations."
The Company's UltraRes service can benefit all parties involved in the
distribution of hotel rooms for conventions and other large meetings. Since
reservations are made through the Company's THISCO service rather than manually,
reservations, modifications and cancellations can be received earlier and
updated more frequently and efficiently. The Company's UltraRes service provides
convention and other large meeting
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organizers a single connection to multiple hotel properties and enables fast,
accurate and reliable reservation and confirmation of hotel rooms at reduced
cost. The Company's UltraRes service also assists hotels in controlling their
room inventory by reducing the risk of overbooking or underbooking and allows
hotels to reduce the cost of booking related to convention reservations. The
Company estimates that the majority of these types of reservations were made at
five major hotel chains (Hilton, Hyatt, Marriott, Sheraton and Westin) whose
facilities are designed for and cater to large conventions and meetings. Because
all five of these chains are THISCO customers, the Company is positioned to take
advantage of the existing connectivity with these chains to facilitate the
development and marketing of the UltraRes service.
The Company will charge participating hotels and convention and other large
meeting organizers fees based on the number of net reservations made using the
UltraRes service. The Company introduced the UltraRes service in 1996 and since
then has processed approximately 30,000 hotel room reservations using this
service. The Company has not received a material amount of revenues for this
service to date, and there can be no assurance that this service will produce a
material amount of revenues in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
UltraDirect. The Company is developing its UltraDirect service for the
corporate travel management industry to provide a direct real-time link to the
Company's THISCO service through corporate intranet travel management software.
With the UltraDirect service, corporate travelers will be able to check
availability and make hotel reservations within seconds at hotel chains or
properties with which the traveler's employer has negotiated rates.
Traditionally, large companies have negotiated discounted hotel room rates with
hotel chains and properties to control their travel costs. However, because this
information at times is not available to a GDS, these rates frequently can only
be requested by a travel agency over the telephone. The UltraDirect service will
enable 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 UltraDirect service will benefit hotels by providing an additional
hotel room distribution channel and enabling targeted marketing efforts directed
at corporate travel departments. Hotels will also be able to reduce distribution
costs for corporate room sales and better update information and respond to
reservation requests from corporate travelers. Pegasus markets this service to
developers of corporate travel software programs and to travel agencies that
operate intranet travel management services. UltraDirect is intended to provide
benefits to travel agencies and companies by decreasing the amount of time
necessary to arrange a business trip, improving travel information reporting and
helping to ensure that employees comply with company travel policies and utilize
hotels with whom the Company has negotiated rates.
The Company intends to charge hotels fees based on the number of net
reservations made using the UltraDirect service. The Company has reached an
agreement with TravelNet, Inc. (a division of Reed) that is designed to allow
users of TravelNet's Voyager travel management software system to access
UltraDirect for the purpose of making hotel reservations. When a corporate
traveler uses Voyager to make hotel arrangements, the Voyager system accesses
the UltraDirect service, which in turn connects to hotel central reservation
systems through the THISCO service. The Company has not received a material
amount of revenues for this service to date, and there can be no assurance that
this service will produce material revenues to the Company in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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Commission Processing Services
HCC. The Company's HCC service began operations in 1992 to process the
payment of hotel commissions to travel agencies. The following table summarizes
the commission processing and payment services offered by HCC:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
COMMISSION PROCESSING SERVICE
----------------------------------------------------------------------------------------------------------------------
Service Users Benefits
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HCC (1992) - Travel agencies - Improved efficiency in reconciliation of commission
payments
- Commission processing
service: aggregates, - Reduced bookkeeping and banking costs
reports and disburses hotel
room reservation - Payment in preferred currency
commissions from hotels to
travel agencies - Improved information on customer reservation habits
- Assistance in reconciling commissions through
customer relation centers
- Hotels and hotel - Streamlined commission payment process
representation firms
- Reduced accounting, processing and bookkeeping costs
- Improved information regarding travel agency bookings
- Encouragement of travel agency bookings at hotels
</TABLE>
The HCC service is the largest provider of travel agency commission and
processing services in the hotel industry. The Company has registered over
11,000 properties and over 64,000 travel agencies as HCC participants. During
1996, the Company processed more than six million commissionable transactions
using the HCC service, and the dollar amount of the commissions processed during
this period totaled approximately $111.7 million. The following table sets forth
the dollar amount of commissions processed during the year indicated:
HCC
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Gross commissions processed......... $ 5,156 $ 23,559 $ 36,394 $ 74,547 $111,714
Year-over-year growth rate.......... 357% 54% 105% 50%
</TABLE>
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. Furthermore, communication between hotels and travel agencies
regarding payable commissions generally has not been effective because guest
cancellations or "no-shows" would frequently not be reported and travel agencies
would expect a commission when in fact none was due. As a result, travel
agencies lacked the necessary resources to reconcile commission payments
effectively. In response to this problem, the Company developed the HCC service
to gather commission payment information, process that information and transmit
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. See "-- Technology and Operations."
The Company's HCC service reduces a hotel's cost by streamlining the
commission payment process and consolidating 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. 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 travel agencies that provide the hotel with its
guests. The hotel also benefits from HCC's
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Customer Relations Center, which allows travel agency inquiries regarding
commissions to be resolved by HCC rather than with the hotel itself.
The Company's HCC service also provides benefits to its travel agency
participants. The consolidated check that the HCC service delivers in the travel
agency's currency of choice reduces the staff time spent processing multiple
checks and deposit slips, eliminates bank fees for multiple deposits and
currency exchanges and is designed to improve the travel agency's ability to
manage cash flow. The monthly report delivered by the HCC service allows the
travel agency to confirm commissions paid, follow customers' reservation habits
and reduce a travel agency's expenses for collection activity and for tracking
bookings that result in cancellations or "no-shows." The HCC Customer Relations
Center provides prompt responses to agency inquiries and can substantially
reduce the time and cost of reconciling outstanding commissions. The Company's
optional HCC Electronic service for electronic payment and reconciliation of
commissions enables travel agencies to reduce commission reconciliation costs
and provides travel agencies with immediate access to funds. Pegasus maintains a
Web site, HCCnet, that provides a comprehensive description of HCC services.
HCCnet provides a complete listing of all of the hotels that have committed to
paying hotel commissions through the HCC service. Moreover, travel agencies can
subscribe to receive an executive summary report that can be used to evaluate
the travel agency's activity with a particular hotel to assist with volume
negotiations, among other matters.
The Company charges each participating travel agency a service fee based on
the amount of commissions paid to the travel agency. The Company also generally
charges hotels a fee based on the number of commissionable transactions
processed.
Pegasus Travel Information Services
The Company intends to develop a service to provide hotel information to a
wide variety of audiences in the global hotel industry, from hotel guests to
travel industry marketing groups to hotel chains. The Company believes that the
hotel industry has limited sources that provide transaction-specific hotel data
in a timely manner. Leveraging the existing databases used in its THISCO,
TravelWeb and HCC services and utilizing other data available through hotel
property management systems, the Company intends the new service to be able to
compile data regarding hotel guests and their use of hotels in
transaction-specific detail and to organize that data into meaningful
information, which will be made available in forms that protect an individual
traveler's privacy. The Company also intends to be able to produce data
regarding a hotel company's average daily room rate and occupancy rate to be
used by a hotel company to compare itself with its competitors in a manner
consistent with legal limitations. Furthermore, the Company intends that the new
service will be able to provide data in an electronic format to individual
travelers or corporate travel departments regarding a particular stay at a hotel
to facilitate automated expense reporting or to ensure travel policy adherence.
The Company believes that numerous participants in the travel industry will
desire the Company's data services, including hotel companies, travel agencies,
individual travelers, convention and other large meeting organizers, corporate
travel departments, hotel developers and hotel industry consultants.
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, 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. The services that the Company is in
the process of developing may require substantial expenditures. If the Company
incurs increased costs or is unable, for technical or other reasons, to develop
and introduce new
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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. See "Risk Factors -- Impact
of Technological Advances; Delays in Introduction of New Services."
CUSTOMERS
The Company markets and provides its services to a wide range of customers,
including but not limited to hotels, large travel agencies, travel agency
consortia comprised of smaller travel agencies, GDSs and independent hotels
represented by hotel representation firms such as Anasazi, Inc., Utell
International and Lexington Services Corporation. During 1996, no one customer
accounted for as much as 6% of the Company's revenues.
Pegasus includes as its customers 14 of the 15 largest hotel chains in the
world based on 1996 total revenues. As of May 31, 1997, the Company's customers
include the following hotels and hotel representation firms which have a minimum
of 10 properties, with stockholders (or affiliates thereof) of the Company
indicated by an asterisk:
ADAM'S MARK HOTELS & RESORTS
AMERIHOST INN HOTELS
*ANASAZI, INC.
-- Anasazi Travel Resources
-- AmeriSuites
-- ARCOTEL Hotels & Resorts
-- Camberely Hotels
-- Copthorne Hotels
-- Fairmont Hotels
-- Four Seasons Hotels & Resorts
-- Grand Bay Hotels & Resorts
-- Grand Heritage
-- Grand Traditions
-- LRI
-- Loews Hotels
-- Millineum Hotels
-- New Otani Hotels
-- Nikko Hotels
-- Regent International Hotels
-- Registry Hotels
-- Rihga Royal Hotels
-- Shangri-La Hotels
-- Sonesta International
-- Station Casinos
-- Sterling International Hotels
-- Wellesley Inns
-- World Hotels & Resorts
-- Vacation Break Hotels
BENCHMARK HOSPITALITY
*BEST WESTERN INTERNATIONAL
*CHOICE HOTELS INTERNATIONAL
-- Clarion Inns
-- Comfort Inns
-- EconoLodge
-- Friendship Inns
-- Mainstay Suites
-- Quality Inns
-- Rodeway Inns
-- Sleep Inns
COASTAL HOTELS
DOUBLETREE HOTELS
-- Red Lion Hotels & Inns
*FORTE
-- Forte Hotels
-- Meridien
GLOBAL RESOURCES, INC.
-- Global Resources Hotels
-- SCANRES
-- World Class Hotels
HAWTHORN SUITES
*HILTON HOTELS CORPORATION
HILTON INTERNATIONAL
HOLIDAY INN WORLDWIDE
*HFS, INC.
-- Days Inns of America
-- Howard Johnson
-- Knights Inn
-- Ramada Hotels & Inns
-- Super 8 Motels
-- Travelodge
-- Villager Lodge
-- Wingate Inn
HOTEL OKURA
HOTKEY INTERNATIONAL
-- Regal Hotel Group U.K.
-- Romantik Hotels
*HYATT HOTELS
HYATT INTERNATIONAL
*INTER-CONTINENTAL HOTELS
-- Inter-Continental Hotels and Resorts
-- Forum Hotels by Inter-Continental
-- Global Partner Hotels & Resorts
*ITT SHERATON
-- Four Points
-- Global Connections
-- ITT Sheraton Hotels & Resorts
-- Sheraton Luxury Collection
KIMPTON HOTELS
*LA QUINTA INNS
LEXINGTON SERVICES CORPORATION
-- Bartells Hotels
-- Design Hotels
-- Harvey Hotels
-- Lexington Hotels & Suites
-- Suite Connection
-- Summerfield Suites
MANDARIN ORIENTAL HOTEL
MARITIM HOTELS
*MARRIOTT CORPORATION
-- Courtyard Inns
-- Fairfield Inns
-- Marriott Hotels, Resorts and Suites
-- Marriott Vacation Club International
-- Residence Inns
-- Ritz-Carlton
OBEROI GROUP OF HOTELS
ORBIS HOTELS
PAN PACIFIC HOTELS & RESORTS
POSADAS
-- Fiesta Americana
-- Fiesta Inns
PREFERRED HOTELS & RESORTS WORLDWIDE
*PROMUS HOTELS CORPORATION
-- Embassy Suites
-- Embassy Vacation Resorts
-- Hampton Inn & Suites
-- Hampton Inns
-- Hampton Vacation Resorts
-- Homewood Suites
RCI MANAGEMENT, INC.
RED ROOF INNS
*REED TRAVEL GROUP
REGAL HOTELS
RENAISSANCE HOTELS & RESORTS
SCEPTRE HOTELS
SILVER MANOTEL MARKETING
SOL MELIA HOTELS
SOUTHERN PACIFIC
SWISSOTEL
TAJ GROUP OF HOTELS
TOKYU HOTELS
TRUST INTERNATIONAL
TRYP HOTELS
*UTELL INTERNATIONAL
-- ANA Hotels
-- Airco
-- Beresford Hotels
-- Disneyland Paris
-- Golden Tulip Hotels
-- Helmsley/Harley Hotels
-- Ian Schrager
-- Insignia Resorts
-- Omni Hotels
-- Queens Moat Houses Hotels
-- Scandic Hotels
-- Summit International
-- Thistle/Mt. Charlotte Hotels
-- Tops International Hotels
-- Warwick Hotels
-- West Coast Hotels
VIP INTERNATIONAL
WALT DISNEY WORLD RESORTS & THEME
PARKS
*WESTIN HOTELS & RESORTS
WESTMARK HOTELS
WYNDHAM HOTELS & RESORTS
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The Company has registered approximately 64,000 travel agencies as
participants in the HCC service. Of the top 100 largest travel agencies in the
United States, according to Travel Weekly, a publication owned by a stockholder
of the Company, sixty-six are customers of the Company's HCC service. The
following travel agencies represent the 15 largest HCC customers based on 1996
revenues to the Company:
<TABLE>
<S> <C> <C>
AMERICAN EXPRESS FIRST TRAVELCORP TRAVEL AND TRANSPORT
ASSOCIATED TRAVEL SERVICES MARITZ TRAVEL TRAVEL ONE
BTI AMERICAS MUTUAL TRAVEL TRAVEL TRUST INTERNATIONAL
CARLSON WAGONLIT OMEGA WORLD TRAVEL VTS TRAVEL ENTERPRISES
CUC TRAVEL PROFESSIONAL TRAVEL WORLD TRAVEL PARTNERS
</TABLE>
The Company's business is dependent upon customer arrangements with its
hotel stockholders or their affiliates, other hotel chains and hotel properties
and hotel representation firms, travel agencies, travel agency consortia and
GDSs. There can be no assurance that the Company will be able to continue or
renew these arrangements on equal or better terms. 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. See "Risk
Factors -- Dependence on Key Customers and Third-Party Service Arrangements."
SALES AND MARKETING
The Company sells all of its services to hotels through a direct sales
force in the Americas and in Europe and sells its HCC services directly to
travel agencies and through relationships with travel agency consortia and
franchisors. Additionally, as of May 31, 1997, the Company has a team of 20
technical support staff to supplement the efforts of the sales force and provide
comprehensive customer support services. The Company has a Chief Marketing
Officer, a Vice President for domestic sales and four salespersons based in
Dallas responsible for sales in the Americas and a Vice President for
international sales and a salesperson based in London responsible for sales
outside of the Americas. The Company organizes its hotel sales force in the
Americas into three geographic territories, each targeting hotels and UltraRes
service users. Each hotel salesperson seeks to establish ongoing relationships
with the reservations and marketing management personnel of hotels in that
representative's designated territory and to assist the hotels in achieving
increased efficiency and cost reduction in their hotel reservation systems
through the use of the Company's services. The Company's travel agency sales
force sells HCC services directly to large travel agencies. Additionally, the
Company offers its HCC service to smaller travel agencies organized in consortia
and to travel agency franchisees through preferred supplier programs. The terms
of these programs are set at the consortium or franchisor level, and the HCC
service is promoted to travel agency members of these organizations through
trade shows and consortium newsletters and magazines. The Company has made
arrangements with two of the four major GDSs to offer the HCC service to their
participating travel agencies in Europe through a joint promotional program. The
Company's London-based international sales personnel focus on both travel
agencies and hotels in different regions throughout the world. The Company also
has a salesperson devoted to promoting the UltraRes service to convention and
other large meeting organizers and hotels. The Company uses the services of a
third-party marketing organization to sell advertising on the TravelWeb site.
The Company believes that the THISCO, HCC and TravelWeb brand names are
important assets of the Company, signifying the quality and reliability of the
Company's services. A separate brand manager is responsible for marketing each
brand. Each brand manager is responsible for product development and
enhancement, customer sales support, development of promotional and other
collateral materials, identification and optimization of revenue sources, market
research and establishment of relationships with key vendors. The THISCO service
is marketed primarily through establishing contacts and relationships with hotel
management, GDSs and other major users of the services. In addition,
participation in industry organizations and trade conventions increases brand
recognition of the Company's services. The Company also has sought to market its
UltraDirect service to corporate travel management software developers so that
they will include an automatic connection to the THISCO service in their hotel
reservation system software. In marketing the TravelWeb service, brand managers
focus their efforts on site development and establishing links to existing
third-party Web sites and related Internet content providers and aggregators.
Marketing efforts for the HCC
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service primarily are directed towards participation in travel agency industry
trade shows and promotion through travel agency consortia and franchisors.
TECHNOLOGY AND OPERATIONS
THISCO. The THISCO service utilizes the Company's UltraSwitch technology to
automate hotel reservation transaction processing between a GDS and a hotel
chain's central reservation system. UltraSwitch utilizes a UNIX-based,
client/server architecture. GDSs are connected to UltraSwitch through either
point-to-point telecommunications lines or a multi-protocol frame relay network,
both of which are managed by the Company. Communication processors running
proprietary, UNIX-based software perform protocol conversions. The transaction
processing engine within UltraSwitch, which contains its own proprietary,
UNIX-based software, performs message formatting and field translation functions
between GDSs and hotels' central reservation systems. UltraSwitch also contains
an Informix relational database that stores transaction-specific information for
billing and marketing and translates specific hotel property information. For a
hotel to change from THISCO to another service, the hotel would be required to
change the protocol used by its central reservation system, as well as
substantially convert the message formats used by its central reservation
system. If a hotel desired to bypass UltraSwitch and connect its central
reservation system directly to one or more GDSs, the hotel would be required to
develop protocols and message formats compatible with each GDS with which it
established such a connection and bear the recurring costs required to maintain
each system. The Company believes that these costs may discourage a hotel from
changing to a competitor or to a direct connection with a GDS. See
"-- Competition."
When using the THISCO service, hotels provide and update room rates,
features and availability information in two ways: (i) by transmitting
information to GDS databases through status messages and (ii) by offering
continuous, direct access to the hotel central reservation system through
UltraSelect. Hotel status messages transmitted through UltraSwitch are processed
within seconds. UltraSwitch processed an average of 42 million status messages
per month during 1996. A GDS database, however, stores only a limited amount of
room rate, feature and availability information for a hotel, which may not be
synchronized with the hotel's central reservation system. The Company's
UltraSelect service allows travel agencies that use GDSs direct access through
UltraSwitch into a hotel's central reservation system to shop and browse for all
room types and room rates with the most complete and updated hotel room
information. To accomplish this process, UltraSwitch receives proprietary direct
access transaction requests from each GDS, translates those into one or more
UltraSelect transaction requests and forwards them to the hotels' central
reservation systems. To utilize the UltraSelect service, the hotel's central
reservation system must be modified to accept the transmission of transactions
and allow for the electronic processing of these transactions through
UltraSwitch in real-time. Approximately 50% of hotels that subscribe to the
THISCO service provide this type of access to their central reservation systems
through the Company's UltraSelect service.
Using the information provided through the UltraSwitch technology, a travel
agent is able to shop or browse for a hotel room that fits particular
specifications, such as location, room rates and features. Once a travel agent
determines the desired hotel and type of room, UltraSwitch enables the travel
agent to inquire about availability of the room. The UltraSwitch technology
interfaces the request from the travel agent through a GDS with the information
available in the hotel's central reservation system. If a hotel room fitting the
inquiry is available, UltraSwitch enables the travel agent to book the room and
receive a confirmation within a matter of seconds. In 1996, the average
UltraSwitch processing time for interactive transactions, such as reservations
and inquiry messages, was 0.22 seconds and the average uptime across the 81
distinct connections to UltraSwitch was 99.6%, including as downtime all
scheduled and emergency downtime.
Utilizing the existing technology of UltraSwitch, the Company has developed
UltraRes and UltraDirect, services that provide customized technological
interfaces for convention and other large meeting organizers and corporate
travel departments to enable direct access into the extensive database of
hotels' central reservation systems and reservation and confirmation of hotel
bookings in seconds.
In connection with the development of the UltraSwitch technology and
related financing provided by Reed, the Company licensed certain rights to Reed
to use the UltraSwitch technology on an exclusive, royalty
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48
free basis, for applications not related in any way to the operations of the
hotel industry. In connection therewith, Reed agreed not to compete with the
Company and its use of the UltraSwitch technology in the hotel industry. See
"Certain Transactions."
TravelWeb. The Company has created its TravelWeb service using a scalable
architecture that presents user-friendly hotel and travel information to
individual travelers. The TravelWeb service stores detailed information on
approximately 15,000 hotel properties on an Informix relational database. To
add, delete and update information on their properties, hotels can access the
information in the TravelWeb database either through electronic batch transfers
or using a standard Web browser through the Company's proprietary "remote
author" feature. The Company's secured server software prevents unauthorized use
of the "remote author" feature, and the Company's quality assurance personnel
review any updated information to assure consistency. TravelWeb communication
engines (called Web engines) manipulate the information contained in the
Informix database. TravelWeb's scalable architecture allows the TravelWeb
service to access and manipulate the information contained in its database using
multiple Web engines. A Web engine currently consists of a Sun UltraSparcII,
Netscape Enterprise server software and a Javascript application. Although the
Informix database currently resides on a single Sun E 3000 database server, the
architecture allows the addition of more database servers as demand requires.
This advanced technology enables the TravelWeb service to format data to appear
as part of the Web site on which the information is viewed. The TravelWeb
service connects its information database to the Company's UltraSwitch
technology, which allows a user of the TravelWeb service who has found a desired
hotel room to secure a hotel reservation and a confirmation. The Company's
proprietary software contains a number of features to protect reservation
systems from abusive booking practices and allows hotels to control and maintain
the number of reservations made through the TravelWeb service allowed at any
hotel property.
To assure a high level of Internet connectivity, the Company has entered
into an arrangement with Genuity, Inc., a "Tier 1" Internet service provider, to
connect the TravelWeb service to the Internet. Genuity is responsible for
maintaining the speed and reliability of communications conducted through the
TravelWeb service. Genuity also provides message routing assistance and dynamic
load balancing of communications to minimize bottlenecks in Internet
communications. Furthermore, the Company's databases and Web engines used with
the TravelWeb service are located at sites operated by Genuity.
NetBooker. The Company's NetBooker reservation service provides third-party
Web sites direct access to the extensive TravelWeb hotel database and
UltraSwitch's hotel reservation and confirmation capabilities. The technology
used in the NetBooker service is similar to the TravelWeb service technology.
The scalable architecture utilized by the TravelWeb service and the use of the
Javascript application create a template environment in which a Web engine can
manipulate information in the Informix database and present such information
under the distinct front-end format of the customer Web site. In addition, the
NetBooker reservation service allows a customer Web site to establish an
interface to the Company's UltraSwitch technology, which enables users of the
Web site to shop and query room availability and to electronically book a
reservation in seconds. As a result, users of the third-party Web site have full
access to TravelWeb's database and booking capabilities while visiting that
site.
HCC. The HCC service captures information derived from hotel property
management systems to process commission payments for travel agencies. The HCC
service provides a connection for hotels through the same communication network
that the Company provides for its THISCO service. Communication engines perform
protocol conversions. The Company's UNIX-based processing engine for the HCC
service uses proprietary software to process commission information. The
Company's Customer Relations Center can access the processing engine to answer
questions regarding commissions from travel agencies. The HCC service also
utilizes an Informix database that stores transaction-specific information
regarding hotel stays and information regarding required currency conversions,
cleared checks, the source of reservations and hotel and travel agency profiles.
The HCC service gathers information from hotels monthly to process
commission payments and information statements. Participating hotels use the
Company's proprietary HCC software to either collect the data derived from a
hotel's property management system or compile data from each hotel property. In
some
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instances, hotels using an outside party's commission payment consolidation
service will pass on the information from the outside party to the HCC service.
As the information is gathered, the HCC service continually updates the
commissions payable and interfaces with Citibank regarding any required currency
conversions. The HCC service notifies participating hotels of the amount of
commissions payable generally on the tenth business day of each month. Those
hotels are required under contract to deliver funds to the Company within 48
hours, and Pegasus delivers the funds to Citicorp to process checks or
electronic wires to travel agencies. If a hotel fails to deliver funds to
Pegasus, Pegasus is not obligated to deliver commission payments on behalf of
the hotel to travel agencies. Citicorp and Perot Systems prepare payments and
information statements for travel agencies, and the payments and information
statements generally are sent out on the 15th business day of each month.
Under its arrangement with Citicorp and Perot Systems, Citicorp performs
currency conversions, prepares checks and electronic wires and delivers funds
and information statements to travel agencies. Perot Systems prepares the
information statements that are sent by Citicorp on behalf of the Company. This
arrangement expires in December 1998. See "Risk Factors -- Dependence on Key
Customers and Third-Party Service Arrangements."
SYSTEMS MAINTENANCE AND DISASTER RECOVERY
Because large numbers of travel agencies, hotels and other customers depend
on the Company for real-time transaction processing services, system reliability
and uptime are critical to the Company's success. In 1996, the average uptime
across the 81 distinct connections to UltraSwitch was 99.6%, including as
downtime all scheduled and emergency downtime. The Company has entered into an
arrangement with Anasazi, Inc. ("Anasazi") a stockholder of the Company, to
manage and operate certain equipment owned by Pegasus, which is located at a
site owned by Anasazi in Phoenix, Arizona. An employee of the Company oversees
the services provided by Anasazi, such as equipment monitoring, assurance of
power supply and communications link back up support. The Company has entered
into an agreement with Pyramid Technologies Corporation for the provision of
computer hardware maintenance and replacement and mitigation of the potential
effects of system downtime. In addition, the Company has entered into an
agreement under which Comdisco, Inc. will provide disaster recovery services for
the restoration of the Company's services as soon as practicable. In connection
with this agreement, Comdisco, Inc. is making arrangements to provide full
system redundancy within 24 hours in the event of a site disaster. See "Risk
Factors -- System Interruption and Security Risks."
RESEARCH AND DEVELOPMENT
The Company recognizes that its ability to maintain its position and grow
depends upon continued expansion of its services. Investments in development are
crucial to obtaining new customers and retaining existing customers. 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. In its research and development
process, the Company works in close collaboration with its customers to address
their specific needs. As of May 31, 1997, the Company employed 55 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
$238,000, $2.1 million and $2.2 million for 1994, 1995 and 1996, respectively.
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, which is owned by Avis. As a result of the
acquisition of Avis by HFS, a stockholder and customer of the Company, in
September 1996, WizCom became a wholly owned subsidiary of HFS. Although HFS has
recently renewed its participation in the Company's HCC service, HFS has
notified the Company that it is moving its electronic hotel room reservation
processing from THISCO to WizCom. The Company has an agreement with HFS which
requires HFS to pay for a certain minimum level of THISCO processing services
annually for the life of
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the agreement. In 1996, revenues from HFS for electronic hotel room processing
services were $512,424 above the annual minimum fee. HFS currently uses and in
the future could use the technology utilized by WizCom to compete with certain
of the Company's current and future services. 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. See "Risk Factors -- Competition."
The Company charges hotel participants certain fees for processing status
messages from hotel central reservation systems to GDSs. The Company intends to
reduce certain status message fees in July 1997. In addition, a hotel
participant can choose to use the Company's UltraSelect service to provide
travel agencies direct access through GDSs to its central reservation system,
thereby reducing the need to send status messages through the Company's THISCO
service. There is no assurance that the volume of and fees generated from status
messages processing will remain at the same or a higher level in the future. Any
significant decrease in the volume of status messages processed or in the amount
of status message fees generated could have a material adverse effect on the
Company's financial condition and results of operations. See
"Business -- Services."
The Company believes that the costs involved in a hotel switching from
THISCO to another service would discourage any such decision. WizCom, the
Company's principal competitor in the provision of interfaces between hotel
reservation systems and GDSs, uses a single protocol that is different from the
multiple protocols employed by THISCO. Consequently, to connect to WizCom, a
hotel would be required to change the protocol used by its central reservation
system, as well as substantially convert the message formats used by the hotel
reservation system. If a hotel desired to connect directly with GDSs, the
protocols and the message formats of the hotel's central reservation system
would have to be revised to conform with each separate GDS to which the hotel
reservation system is connected. In addition, the hotel would be responsible for
the ongoing maintenance and updating costs necessary to continue a direct
connection with each GDS and would have to absorb the costs to maintain a
network with each GDS.
The market for the Company's TravelWeb and NetBooker 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 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. See "Risk
Factors -- Competition."
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 as well. WizCom recently announced that it is
introducing a commissions payment service
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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, 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 HCC
commission processing service, the Company's financial condition and results of
operations could be materially adversely affected. See "Risk
Factors -- Competition."
GOVERNMENT REGULATION
The Company's primary customers are hotel chains and hotel representation
firms. The Company currently has as its stockholders 11 of the 15 leading hotel
chains in the world based on 1996 total 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 Internet-based
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. See "Risk Factors -- Government
Regulation."
PROPRIETARY RIGHTS
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," "UltraAcess" and
"HCC Hotel Clearing Corporation" as United States federal trademarks and
applications to register "HCCLink," "ChainLink," "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. There can be no assurance that the Company's applications to register
such trademarks will be successful. The Company has no knowledge of any
infringement to or any prior claims of ownership of trademarks that would
materially adversely affect the Company's current operation. The Company pursues
and intends to continue to pursue registration of its trademarks whenever
possible and to vigorously defend its proprietary rights against infringement or
other threats to the greatest extent practicable under the laws of the United
States and other countries. See "Risk Factors -- Dependence on Proprietary
Technology; Risk of Infringement."
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EMPLOYEES
At May 31, 1997, the Company had 100 employees, 95 of which were located in
the United States, with 55 persons in the Information Technology Group, 25
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.
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 office in England expires in May 1998. Under an agreement with
Anasazi, certain of the equipment owned by the Company is housed at a site owned
by Anasazi 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.
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.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
Executive officers, directors and other key employees of the Company, and
their ages as of May 31, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John F. Davis, III........................ 44 President, Chief Executive Officer, and
Director
Joseph W. Nicholson....................... 36 Chief Information Officer
Jerome L. Galant.......................... 47 Chief Financial Officer
Michael R. Donahue........................ 43 Chief Marketing Officer
Phillip A. Mytom-Hart..................... 43 Vice President, International Sales and
Marketing
M. Nicholas Jent.......................... 55 Vice President, Sales and Marketing
William S. Lush........................... 55 Vice President, Business Development
John W. Biggs(1).......................... 52 Director
Donald R. Dixon........................... 49 Director
William C. Hammett, Jr.(2)................ 50 Vice Chairman of the Board of Directors
I. Malcolm Highet(2)...................... 46 Director
Rockwell A. Schnabel(1)................... 60 Director
Paul J. Travers(1)(2)..................... 44 Chairman of the Board of Directors
Mark C. Wells............................. 47 Director
Bruce Wolff............................... 54 Director
</TABLE>
---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
John F. Davis, III has served as the President and Chief Executive Officer
of the Company since February 1989 and as a director of the Company since July
1995. Before joining Pegasus, Mr. Davis was the founder, President and director
of Advanced Telemarketing Company, a provider of inbound and outbound
telemarketing services. He was also one of the founders of 1-800-Flowers,
Limited, a company offering quality floral arrangements by telephone.
Joseph W. Nicholson has served as the Chief Information Officer of the
Company since 1989. Prior to joining Pegasus, he spent ten years at Texas
Instruments in various positions, including Systems Analyst and Systems Manager.
Jerome L. Galant has served as the Chief Financial Officer of the Company
since September 1996. From April 1996 to September 1996, Mr. Galant served as
the Chief Financial Officer of Personnel Security & Safety Systems, Inc., a
technology development company. From 1990 to February 1996, Mr. Galant served in
a variety of positions for The SABRE Group, including Managing Director,
Finance.
Michael R. Donahue has served as Chief Marketing Officer of the Company
since May 1997. From 1988 to May 1997, Mr. Donahue served as Vice President of
Marketing and Development for Lane Hospitality, a hotel management firm.
Phillip A. Mytom-Hart has served as the Vice President, International Sales
and Marketing of the Company since September 1993. From 1991 to September 1993,
Mr. Hart served as Vice President, Sales and Marketing for Hilton International.
M. Nicholas Jent has served as the Vice President, Sales and Marketing of
the Company since August 1992. From 1988 to March 1991, Mr. Jent served as
Senior Vice President, Sales and Marketing for Telesphere Communications, Inc.,
a long distance communications company.
51
54
William S. Lush has served as Vice President, Business Development of the
Company since May 1995. From 1990 to May 1995, Mr. Lush served as Vice
President, Service Development in the travel management services group of
American Express Travel Related Services.
John W. Biggs has served as a director of the Company since October 1995.
Mr. Biggs has served as Vice President, Travel and Hospitality for Computer
Sciences Corporation, a consulting firm, since August 1996. From April 1994 to
July 1996, Mr. Biggs served as Chief Operations Officer for Regency Systems
Solutions, an affiliate of Hyatt Hotels Corporation ("Hyatt"). From 1984 to
April 1994, Mr. Biggs served as Senior Vice President, Hotel Accounting and
Administration at Hyatt. Hyatt is a stockholder of the Company.
Donald R. Dixon has served as a director of the Company since June 1996.
Since 1993, Mr. Dixon has been associated with Trident Capital, L.P., a venture
capital firm ("Trident"), which he helped found. From 1988 to 1993, Mr. Dixon
served as Co-President of Partech International, a private equity fund manager
associated with Banque Paribas. Mr. Dixon serves on the Board of Directors of
Bank America Merchant Services, Inc., Platinum Software Corporation, Unison
Software, Inc. and several privately held companies. Trident manages Information
Associates, L.P. and Information Associates, C.V., both of which are
stockholders of the Company.
William C. Hammett, Jr. has served as a director and Vice Chairman of the
Board of the Company since October 1995. Since August 1996, Mr. Hammett has
served as Senior Vice President and Chief Financial Officer of La Quinta Inns,
Inc., which is a stockholder of the Company. From June 1992 to August 1996, Mr.
Hammett has served as Senior Vice President, Accounting and Administration of La
Quinta Inns, Inc.
I. Malcolm Highet has served as a director of the Company since October
1995. Mr. Highet has served as Executive Vice President, Corporate Development
for Reed Elsevier Inc. since October 1996. From 1989 through October 1996, Mr.
Highet served as Chief Financial Officer and later as Chief Operations Officer
for a major division of Reed. Reed and Utell International are both divisions of
Reed Elsevier Inc. and stockholders of the Company.
Rockwell A. Schnabel has served as a director of the Company since June
1996. Since 1993, Mr. Schnabel has been associated with Trident, which he helped
found. From 1989 to 1992, Mr. Schnabel served as acting Secretary of Commerce
and the Deputy Secretary of Commerce during the Bush Administration. Mr.
Schnabel serves on the Board of Directors of Cyprus Amax Minerals Company,
International Game Technology, Inc., CSG Systems, Inc., and Anasazi. Anasazi is
a stockholder of the Company. Trident manages Information Associates, L.P. and
Information Associates C.V., both of which are stockholders of the Company.
Paul J. Travers has served as a director and Chairman of the Board of the
Company since October 1995. Mr. Travers has served as the Senior Vice President,
Property Management for Inter-Continental Hotels Corporation
("Inter-Continental") since 1994. From 1990 to 1994. Mr. Travers served as Vice
President, Finance and Group Controller of Inter-Continental. Inter-Continental
is a stockholder of the Company.
Mark C. Wells has served as a director of the Company since September 1996.
Mr. Wells has served as Senior Vice President, Franchise Services for Promus
Hotel Corporation ("Promus") since February 1996. From April 1995 to February
1996, Mr. Wells served as Senior Vice President, Marketing for Promus. Promus is
a stockholder of the Company.
Bruce Wolff has served as a director of the Company since October 1995. Mr.
Wolff has served as Vice President, Distribution Sales and Marketing for
Marriott Lodging since 1986. Marriott Lodging is an affiliate of Marriott
International, Inc., which is a stockholder of the Company.
The Company currently has authorized nine directors. The current directors
were elected pursuant to the provisions of the Company's Amended and Restated
Certificate of Incorporation in effect prior to this offering, and pursuant to a
voting agreement that will expire upon the closing of this offering. Upon the
closing of this offering, the Second Amended and Restated Certificate of
Incorporation will provide for a classified Board of Directors. The terms of
office of the Board of Directors will be divided into three classes: Class I,
which will consist of Messrs. Biggs, Dixon and Hammett, will expire at the
annual meeting of stockholders to be held in
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1998; Class II, which will consist of Messrs. Highet, Wells and Wolff, will
expire at the annual meeting of stockholders to be held in 1999; and Class III,
which will consist of Messrs. Davis, Schnabel and Travers, will expire at the
annual meeting of stockholders to be held in 2000. At each annual meeting of
stockholders beginning with the 1998 annual meeting, the successors to directors
whose terms will then expire will be elected to serve from the time of election
and qualification until the third annual meeting following election and until
their successors have been duly elected and qualified, or until their earlier
resignation or removal. The officers of the Company are appointed by and serve
at the discretion of the Board of Directors. There are no family relationships
among the current directors and officers of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has a Compensation Committee, consisting of Messrs.
Biggs, Schnabel and Travers, and an Audit Committee, consisting of Messrs.
Hammett, Highet and Travers. The Compensation Committee makes recommendations to
the Board of Directors concerning salaries and incentive compensation for the
Company's officers and employees and administers the Company's 1996 Plan and
1997 Plan (when it comes into effect upon completion of this offering). Prior to
November 1996, decisions concerning the compensation of officers, including that
of Mr. Davis, were made by the Board of Directors as a whole. The Audit
Committee makes recommendations to the Board of Directors regarding the
selection of independent auditors, reviews the results and scope of the audit
and other accounting related services and reviews and evaluates the Company's
internal control functions.
DIRECTORS' COMPENSATION
Directors currently do not receive any cash compensation from the Company
for their service as members of the Board of Directors, although they are
reimbursed for all reasonable expenses incurred in connection with the
performance of their duties as directors of the Company.
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EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by the Company's
Chief Executive Officer and the five other most highly compensated executive
officers (collectively, the "Named Executive Officers") whose salary and bonus
for the fiscal year ended December 31, 1996 were in excess of $100,000 for
services rendered in all capacities to the Company for that year:
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
1996 ANNUAL LONG-TERM
COMPENSATION AWARDS
----------------------------------------- ---------------------
OTHER ANNUAL SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($)(2) OPTIONS(#)
--------------------------- --------- -------- ------------------ ---------------------
<S> <C> <C> <C> <C>
John F. Davis, III(3)............... $261,708 $302,208 $7,500 300,000
President and Chief Executive
Officer
Joseph W. Nicholson(3).............. 164,000 56,292 7,500 150,000
Chief Information Officer
Jerome L. Galant(4)................. 45,313 14,014 1,889 53,333
Chief Financial Officer
M. Nicholas Jent.................... 145,000 38,667 7,500 9,333
Vice President, Sales and
Marketing
William S. Lush..................... 115,838 32,000 5,677 46,666
Vice President, Business
Development
Phillip A. Mytom-Hart............... 134,655 38,577 6,739 12,133
Vice President, Sales and
Marketing, International
</TABLE>
---------------
(1) In accordance with the rules of the Securities and Exchange Commission (the
"Commission") the compensation described in this table does not include
medical, group life insurance or other benefits received by the Named
Executive Officers that are available generally to all salaried employees of
the Company, and certain perquisites and other personal benefits received by
the Named Executive Officers that do not exceed the lesser of $50,000 or 10%
of any such officer's salary and bonus disclosed in the table.
(2) Reflects for 1996 matching contributions made by the Company pursuant to its
401(k) Savings Plan.
(3) The salaries of Messrs. Davis and Nicholson were paid in accordance with the
terms of their respective employment agreements. The bonus of Mr. Davis
includes a one time $200,000 employment agreement signing bonus. See
"-- Employment Agreements."
(4) The salary of Mr. Galant represents remuneration paid to him from September
1996 to December 1996. Mr. Galant commenced employment with the Company in
September 1996.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options made during the
fiscal year ended December 31, 1996 to each of the Named Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------------
NUMBER OF SECURITIES % OF TOTAL EXERCISE GRANT DATE
UNDERLYING OPTIONS OPTIONS GRANTED PRICE PER EXPIRATION PRESENT VALUE
NAME GRANTED(1) IN 1996(2) SHARE(3) DATE(4) ($)(5)
---- --------------------- ---------------- --------- ---------- --------------
<S> <C> <C> <C> <C> <C>
John F. Davis, III..... 300,000 38.9% $2.01 12/31/05 $465,750
Joseph W. Nicholson.... 150,000 19.4 2.01 12/31/05 232,875
Jerome L. Galant....... 53,333 6.9 2.01 12/31/05 82,799
M. Nicholas Jent....... 9,333 1.2 3.11 12/31/05 6,650
William S. Lush........ 46,666 6.0 3.11 12/31/05 33,250
Phillip A.
Mytom-Hart........... 12,133 1.6 3.11 12/31/05 8,645
</TABLE>
---------------
See footnotes on following page
54
57
(1) Options were granted under the 1996 Plan. The options held by Messrs. Davis
and Nicholson vest over a four-year period, with 25% of the shares vesting
after one year and 1/48th of the shares vesting each month for the next 36
months. The options held by Messrs. Galant, Jent, Lush and Hart vest over a
four-year period with 25% of the shares vesting after one year and 1/16th of
the shares vesting each quarter for the next 12 quarters.
(2) Based on an aggregate of 771,733 shares subject to options granted in 1996.
(3) The exercise price of the options held by Messrs. Davis, Nicholson and
Galant are established by each of their employment agreements with the
Company. The exercise price for the options held by Messrs. Jent, Lush and
Hart is equal to 100% of the estimated fair market value of the Common Stock
on the date of the grant based upon an appraisal performed by an independent
consulting firm engaged by the Company.
(4) Options may terminate before their expiration date upon the death,
disability or termination of employment of the optionee.
(5) These values are determined using the Black-Scholes Option Pricing Model.
The Black-Scholes Option Pricing Model is one of the methods permitted by
the Commission for estimating the present value of options. The
Black-Scholes Option Pricing Model is based on assumptions as to certain
variables as described below and it is not intended to estimate, and has no
direct correlation to, the value of stock options that an individual will
actually realize. The actual value of the stock options that a Named
Executive Officer may realize, if any, will depend on the excess of the
market price on the date of exercise over the exercise price. The values
listed above were based on the following assumptions: volatility -- 0.0;
risk free rate of return -- 6.5%; dividend yield -- 0.0%; and expected
life -- 4 years.
AGGREGATE FISCAL YEAR-END OPTION VALUES
The following table sets forth, for each of the Named Executive Officers,
information concerning the number and value of securities underlying unexercised
options held on December 31, 1996. No options were exercised by such persons
during 1996.
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING OPTIONS OPTIONS AT
AT YEAR END YEAR-END (1)
-------------------- ------------
NAME UNEXERCISED UNEXERCISED
---- ----------- -----------
<S> <C> <C>
John F. Davis, III................................... 300,000 $2,697,000
Joseph W. Nicholson.................................. 150,000 1,348,500
Jerome L. Galant..................................... 53,333 479,464
M. Nicholas Jent..................................... 9,333 73,637
William S. Lush...................................... 46,666 368,194
Phillip A. Mytom-Hart................................ 12,133 95,729
</TABLE>
---------------
(1) There was no public trading market for the Common Stock as of December 31,
1996. Accordingly, these values have been calculated in accordance with the
rules of the Commission on the basis of an assumed initial public offering
price of $11.00 per share of the Common Stock, minus the exercise price,
multiplied by the number of shares underlying the option.
1996 AND 1997 STOCK OPTION PLANS
Scope. The Company has a 1996 Stock Option Plan (the "1996 Plan"). The
Company has recently approved the creation of the 1997 Stock Option Plan (the
"1997 Plan") and an amendment (the "Amendment") to the 1996 Plan. The 1997 Plan
and the Amendment will take effect upon the completion of this offering. The
1996 Plan, as amended, and the 1997 Plan (collectively, the "Plans") are
designed to attract and retain qualified and competent personnel for positions
of substantial responsibility and to provide additional incentive to employees
and consultants of the Company. The Plans have substantially the same
provisions, which are set forth herein. Options granted under the Plans may be
Incentive Stock Options or Nonstatutory Stock Options, as determined by the
Administrator (as hereinafter defined) at the time of grant and subject to the
applicable provisions of the Internal Revenue Code of 1986, as amended (the
"Code"). The 1996 and 1997 Plans have reserved for issuance 866,667 shares and
333,333 shares of Common Stock,
55
58
respectively. As of March 31, 1997, options covering 771,733 shares of Common
Stock have been granted under the 1996 Plan. No option has been granted under
the 1997 Plan. If an option granted under the Plans expires or becomes
unexercisable without having been exercised in full, or is surrendered pursuant
to an option exchange program, the unpurchased shares may be available for
future grants or sale under the Plans. The 1996 and 1997 Plans will terminate on
June 24, 2006 and March 25, 2007, respectively.
Eligibility. Persons eligible to participate in the Plans include all
employees and all consultants of the Company. For purposes of describing the
Plans, the term employee means any person employed by the Company or any parent
or subsidiary of the Company. For purposes of describing the Plans, the term
consultant means any person who is engaged by the Company or any parent or
subsidiary of the Company to render consulting or advisory services and is
compensated for such services, and any director of the Company who is not
compensated for his or her services or is paid only a director's fee by the
Company. Non-Statutory Stock Options may be granted to employees and
consultants. Incentive Stock Options may be granted only to employees.
Administration. The Plans are administered by the Board of Directors or the
Committee appointed by the Board (the "Administrator"). The Administrator has
the authority to grant options under the Plans and to determine the vesting
schedule and the exercise price of the options. The Administrator also has full
power and authority to construe, interpret and administer the Plans.
Option Exercise Price. The exercise price per share for the shares to be
issued pursuant to exercise of an option under the Plans shall be such price as
is determined by the Administrator. In the case of an Incentive Stock Option
granted to an employee, who at the time of the grant owns stock representing
more than 10% of the voting power of all classes of stock of the Company or any
parent or subsidiary, the exercise price per share shall be no less than 110% of
the fair market value per share on the date of grant. In the case of an
Incentive Stock Option granted to any employee other than an employee described
in the foregoing sentence, the per share exercise price shall be no less than
100% of the fair market value per share on the date of grant. In the case of a
Non-Statutory Stock Option, the per-share exercise price shall be determined by
the Administrator and shall be no less than 50% of the fair market value.
Adjustments, Terminations and Amendment. In the event of any change in the
Company's capitalization, including any stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of issued shares of Common Stock effected
without receipt of consideration by the Company, appropriate adjustments will be
made to the number of shares available under the Plans as well as the price per
share of Common Stock covered by each outstanding option. Upon the occurrence of
an acquisition event ("Acquisition Event") which shall mean (i) certain mergers
or consolidations of the Company with or into another corporation; (ii) the sale
of substantially all of the assets of the Company; (iii) the complete
liquidation of the Company; or (iv) the acquisition by another entity of
beneficial ownership of the Company's securities representing 50% or more of the
combined voting power of the Company's then outstanding securities, the Board of
Directors of the Company may (i) provide that each outstanding option shall be
assumed and/or an equivalent option be substituted by the successor corporation
or an affiliate thereof; (ii) upon written notice to the optionees, provide that
all options then unexercised will become exercisable in full as of a specified
date prior to the Acquisition Event and will terminate immediately prior to the
consummation of such Acquisition Event; or (iii) in the event of an Acquisition
Event under the terms of which holders of Common Stock will receive a cash
payment for each share of Common Stock surrendered, provide that all outstanding
options shall terminate upon consummation of such Acquisition Event, and each
optionee shall receive, in exchange therefor, a cash payment equal to the amount
(if any) by which the acquisition price multiplied by the number of shares of
Common Stock subject to such outstanding Options (whether or not then
exercisable), exceeds the aggregate exercise price of such options. The Plans
may be suspended, terminated, altered or amended in any way by the Board of
Directors, provided that, stockholder approval of any plan amendment will be
required to the extent necessary and desirable to comply with applicable
provisions of the Exchange Act, the Code or other legal requirements. No
suspension, termination, alteration or amendment of the Plans may alter or
impair the rights of any optionee under options previously granted.
56
59
401(k) SAVINGS PLAN
The Company sponsors a qualified defined contribution retirement plan,
called the Pegasus Systems, Inc. 401(k) Savings Plan (the "401(k) Savings Plan")
under which eligible employees may elect to defer their current compensation by
up to certain statutorily prescribed annual limits ($9,500 in 1997) and to
contribute such amount to the 401(k) Savings Plan. The 401(k) Savings Plan
permits, but does not require, additional matching contributions by the Company
on behalf of all participants in the 401(k) Savings Plan. In 1996, the Company
made matching contributions of approximately $160,000. The 401(k) Savings Plan
is intended to qualify under Section 401 of the Code, so that contributions by
employees or by the Company to the 401(k) Savings Plan, and income earned on
such contributions, are not taxable to employees until withdrawn, and so that
contributions by the Company will be deductible by the Company when made. The
trustee for the 401(k) Savings Plan is Standard Insurance Company. The 401(k)
Savings Plan permits employees to direct investment of their accounts in the
401(k) Savings Plan among a selection of five mutual funds.
EMPLOYMENT AGREEMENTS
The Company is a party to employment agreements with each of Messrs. Davis
and Nicholson. Each agreement has a term extending through June 25, 2000, and
automatically renews for additional one year terms if neither the Company nor
the employee has notified the other party 60 days prior to the date of renewal
of its intention to terminate the agreement. The agreements provide that Messrs.
Davis and Nicholson will receive base annual salaries of $275,000 and $175,000,
respectively, and will be eligible to receive incentive compensation determined
by the Compensation Committee of the Board of Directors based on the achievement
of performance objectives established by the Compensation Committee from time to
time. The base annual salaries are subject to increase annually at the
discretion of the Compensation Committee. The agreements also provide that
Messrs. Davis and Nicholson will receive options for a total of 300,000 and
150,000 shares of Common Stock, respectively, at an exercise price of $2.01 per
share. These options were granted on June 25, 1996. The options will fully vest
no later than June 25, 2000. Each agreement obligates the Company to the extent
commercially practicable to maintain life insurance with respect to Messrs.
Davis and Nicholson in the amounts of $3,000,000 and $2,000,000, respectively.
Under the coverage provided with respect to Mr. Davis, the Company will be the
beneficiary in the amount of $2,000,000 and Mr. Davis' estate will be the
beneficiary in the amount of $1,000,000. Under the coverage provided with
respect to Mr. Nicholson, the Company will be the beneficiary in the amount of
$1,333,000 and Mr. Nicholson's estate will be the beneficiary in the amount of
$667,000.
Each employment agreement provides that either the Company or the employee
has the right to terminate the employment at any time during the term of the
agreement with or without cause by delivering written notice of termination to
the other 30 days prior to the date of termination. Each agreement provides for
a severance payment if the agreement is terminated by the Company without cause.
Under such circumstances, Messrs. Davis and Nicholson would receive their base
annual salary for a period of 12 months following the date of termination,
payable over such 12-month period at such times as executives of the Company
receive their regular salary payments; all accrued salary, any benefits under
any plans of the Company in which the employee is a participant to the full
extent of such employee's rights under such plans and any appropriate
out-of-pocket business expense reimbursements; and, vesting of the options
granted under the applicable employment agreement shall accelerate so that (i)
if termination of employment occurs prior to July 25, 1999, such employee's
options shall vest for an additional 75,000 and 37,500 shares of Common Stock,
respectively (in addition to shares vested as of the date of termination), or
(ii) if termination of employment occurs on or after July 25, 1999, such
employee's options shall fully vest. If the agreements are terminated
voluntarily either by the employee or by the Company with cause, or by reason of
death or disability, then Mr. Davis or Mr. Nicholson, as the case may be, or
their respective estate will be entitled to payment of all accrued salary,
vesting of the options granted through the date of termination only, any further
benefits under any plans of the Company in which such person is a participant to
the full extent of such person's rights under such plans through the date of
termination only, and any appropriate out-of-pocket business expense
reimbursements.
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60
The Company has entered into a letter agreement with Jerome L. Galant,
Chief Financial Officer. The agreement provides that Mr. Galant will receive
annual base salary of $145,000, plus a bonus of up to 30% of such annual base
salary. Pursuant to this agreement, Mr. Galant has been granted options to
purchase up to 53,333 shares of Common Stock at an exercise price of $2.01 per
share.
The Company has entered into a letter agreement with Michael R. Donahue,
Chief Marketing Officer. The agreement provides that Mr. Donahue will receive
annual base salary of $165,000, and will be eligible to receive incentive
compensation based on the achievement of certain performance objectives.
Pursuant to this agreement, Mr. Donahue has been granted options to purchase up
to 53,333 shares of Common Stock at an exercise price of $5.25 per share. These
options will vest over four years. In addition, under certain circumstances Mr.
Donahue will receive a severance payment equal to (i) six-months base salary if
the employment terminates after 12 months; (ii) nine-months base salary if
employment terminates after 24 months; and (iii) twelve-months base salary if
employment terminates after 36 months.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the Delaware General Corporation Law, the Company's Second
Amended and Restated Certificate of Incorporation, which becomes effective upon
completion of this offering, provides that no director of the Company will be
personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for (i) any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of the law, (iii) unlawful payments of dividends or unlawful stock
repurchases or redemptions, or (iv) any transaction from which the director
derived an improper personal benefit. In addition, the Company maintains
directors' and officers' liability insurance. There is no pending litigation or
proceeding involving a director, officer or employee of the Company regarding
which indemnification is sought, nor is the Company aware of any threatened
litigation that may result in claims for indemnification.
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61
CERTAIN TRANSACTIONS
Since its inception, the Company has relied in part on stockholder loans to
fund its capital needs. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources." The
following table sets forth certain information concerning the outstanding loans
made by each stockholder named therein and the amount of principal and interest
paid to such stockholders during the periods indicated.
<TABLE>
<CAPTION>
AMOUNT OF PRINCIPAL
LARGEST AMOUNT AND INTEREST PAID IN AMOUNT OF PRINCIPAL
OF LOANS YEAR ENDED DEC. 31, AND INTEREST PAID IN
OUTSTANDING (INCLUDING INTEREST ------------------------------ THREE MONTHS ENDED
STOCKHOLDERS/LENDERS ACCRUED INTEREST)(1) RATE(2) 1994 1995 1996 MARCH 31, 1997
-------------------- ---------------------- ---------- -------- -------- -------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Reed Travel Group(3)................ $4,536,482 Prime + 2% $588,426 $463,363 $441,241 $296,524
Best Western International, Inc..... 185,878 Prime + 1% -- -- -- --
Choice Hotels International, Inc.... 91,541 Prime + 1% -- -- -- --
Forte, Inc.......................... 90,976 Prime + 1% -- -- -- --
HFS, Inc............................ 174,337 Prime + 1% 12,710 36,574 -- --
Hilton Hotels Corporation........... 86,093 Prime + 1% 3,116 10,263 -- --
Hyatt Hotels Corporation............ 180,790 Prime + 1% -- 22,628 -- --
Inter-Continental Hotels
Corporation....................... 174,248 Prime + 1% 2,653 9,267 -- --
La Quinta Inns, Inc................. 173,006 Prime + 1% 2,682 7,967 -- --
Marriott Corporation................ 86,044 Prime + 1% 6,012 23,629 -- --
Promus Hotels, Inc.................. 167,504 Prime + 1% -- -- -- --
ITT Sheraton Corporation............ 185,311 Prime + 1% -- -- -- --
Utell International(3).............. 94,148 Prime + 1% -- -- -- --
Utell International(3)(4)........... 215,503 Prime + 3% -- 16,151 205,514 --
Westin Hotels & Resorts............. 184,215 Prime + 1% -- -- -- --
</TABLE>
---------------
(1) The maturity date for the loan from Reed is June 30, 2001. The maturity date
for each of the remaining loans is July 21, 2000.
(2) "Prime" means the prime rate of interest published in the Wall Street
Journal.
(3) Reed and Utell International are divisions of Reed Elsevier Inc. In
connection with the development of the UltraSwitch technology and related
financing provided by Reed, the Company licensed Reed certain rights to use
the UltraSwitch technology for applications unrelated to the hotel industry.
See "Business -- Technology and Operations."
(4) Note was paid in full on March 28, 1996.
The Company derives a substantial portion of its revenue from stockholders
and their affiliated companies. See Note 14 of Notes to Consolidated Financial
Statements for information concerning related party transactions. The following
table sets forth the amount of revenues the Company received in 1994, 1995 and
1996 and the three months ended March 31, 1997 from its stockholders and their
affiliates with respect to services rendered by the Company in connection with
the THISCO, HCC and TravelWeb services:
<TABLE>
<CAPTION>
YEAR ENDED DEC. 31,
-------------------------------- THREE MONTHS ENDED
STOCKHOLDERS 1994 1995 1996 MARCH 31, 1997
------------ -------- -------- -------- ------------------
<S> <C> <C> <C> <C>
Anasazi, Inc............................ $120,560 $117,798 $169,190 $101,993
Best Western International, Inc......... 395,208 425,022 577,894 193,239
Choice Hotels International, Inc........ 349,943 397,340 516,666 130,994
Forte, Inc.............................. 155,766 217,563 429,098 70,399
HFS, Inc................................ 574,401 902,377 741,549 222,042
Hilton Hotels Corporation............... 178,595 265,305 410,844 56,693
Hyatt Hotels Corporation................ 380,149 535,983 633,818 217,439
Inter-Continental Hotels Corporation.... 121,751 275,284 380,287 76,033
La Quinta Inns, Inc..................... 122,662 218,782 208,037 64,014
Marriott Corporation.................... 164,590 205,664 425,673 84,201
Promus Hotels, Inc...................... 451,901 533,629 644,815 215,851
ITT Sheraton Corporation................ 468,800 487,783 623,985 178,319
Utell International..................... 174,052 194,159 243,505 61,805
Westin Hotels & Resorts................. 114,080 173,576 453,020 71,552
</TABLE>
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Effective in July 1995, the Company issued 4,934,667 shares of Common Stock
in exchange for all of the outstanding capital stock of THISCO and 83.3% of the
outstanding capital stock of HCC (the "Reorganization"). Lodging Network, Inc.
("LNI"), a stockholder of the Company, retained certain shares of HCC preferred
stock, representing 16.7% of the outstanding capital stock of HCC. In
conjunction with the Reorganization, LNI was granted an option (the "LNI
Option") expiring in July 1998 to exchange its interest in HCC for 448,667
shares of the Company's Common Stock. In June 1996, the Company purchased the
shares of HCC preferred stock held by LNI for $2.0 million and 89,733 shares of
Common Stock, and the LNI Option was canceled. See Notes 2 and 3 of Notes to the
Consolidated Financial Statements.
Prior to the 1995 Reorganization, HCC offered a special bonus plan for
management of HCC, including Messrs. Davis, Nicholson, Jent and Hart. As part of
the Reorganization in 1995, HCC management agreed to forfeit their rights to
participate in the bonus plan to HCC in return for a cash payment and the
opportunity to purchase an aggregate of 283,333 shares of the Company's Common
Stock for $570,874.
In June 1996, Information Associates, L.P. and Information Associates, C.V.
purchased 1,538,463 shares of the Company's Series A Preferred Stock for $4.88
per share or $7,500,005, representing 22.5% of the shares of the Company's
capital stock outstanding after the purchase. Information Associates, L.P. and
Information Associates, C.V. are affiliates of Trident. Donald R. Dixon and
Rockwell A. Schnabel, two directors of the Company, are associated with Trident.
See "Management" and Note 8 of Notes to the Consolidated Financial Statements.
Anasazi, a stockholder of the Company, provides services to the Company
which include facility management and maintenance, consulting and software
development. During 1994, 1995 and 1996 and during the three months ended March
31, 1997, the Company paid to Anasazi $526,641, $578,469 and $716,870 and
$103,143, respectively, for these services.
In the past three fiscal years, the Company has purchased furniture and
interior design items from Right Angle, a company owned by Mrs. Leah Davis, the
spouse of Mr. John F. Davis, III, the Chief Executive Officer, President and a
director of the Company. Mrs. Davis received commissions not in excess of 15% of
the amount of such purchases. The total payments made to Right Angle and Mrs.
Davis for furniture, decorative items and commissions in 1994, 1995 and 1996
were $88,149, $16,908 and $121,425, respectively.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of May 31, 1997 and as adjusted to
reflect the sale of shares in this offering by (i) each person known by the
Company to own beneficially more than 5% of the outstanding Common Stock, (ii)
each of the Company's directors, (iii) each of the Named Executive Officers,
(iv) all directors and executive officers of the Company as a group and (v) each
Selling Stockholder.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER THE
THE OFFERING(1) NUMBER OF OFFERING(1)(2)
------------------- SHARES -------------------
NAME NUMBER PERCENT BEING OFFERED NUMBER PERCENT
---- --------- ------- ------------- --------- -------
<S> <C> <C> <C> <C> <C>
Entities affiliated with Trident Capital, L.P.(3)... 1,538,463 22.9% -- 1,538,463 16.3%
Reed Travel Group (A division of Reed
Elsevier Inc.)(4)..................... 642,800 9.6 128,600 514,200 5.5
HFS, Inc.(5)............................ 507,200 7.5 101,500 405,700 4.3
Promus Hotels, Inc.(6).................. 493,364 7.3 -- 493,364 5.2
Best Western International(7)........... 426,204 6.3 -- 426,204 4.5
Hyatt Hotels Corporation(8)............. 420,607 6.3 -- 420,607 4.5
ITT Sheraton Corporation(9)............. 336,267 5.0 -- 336,267 3.6
Utell International (A division of Reed
Elsevier Inc.)(4)..................... 115,920 1.7 23,200 92,720 1.0
Lodging Network, Inc. .................. 89,733 1.3 18,000 71,733 *
John F. Davis, III(10).................. 241,000 3.5 -- 241,000 2.5
Joseph W. Nicholson(10)................. 82,833 1.2 -- 82,833 *
M. Nicholas Jent........................ 34,000 * -- 34,000 *
Phillip A. Mytom-Hart................... 31,200 * -- 31,200 *
Michael Donahue......................... -- * -- -- *
Jerome L. Galant........................ -- * -- -- *
William S. Lush......................... -- * -- -- *
John W. Biggs........................... -- * -- -- *
Donald R. Dixon(3)...................... -- * -- -- *
William C. Hammett, Jr. ................ -- * -- -- *
I. Malcolm Highet(4).................... -- * -- -- *
Rockwell A. Schnabel(3)................. -- * -- -- *
Paul J. Travers......................... -- * -- -- *
Mark C. Wells(6)........................ -- * -- -- *
Bruce Wolff............................. -- * -- -- *
Directors and executive officers as a
group (15 persons)(10)................ 389,033 5.7 -- 389,033 4.1
</TABLE>
---------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities. Except as indicated by footnote and subject to community
property law where applicable, the Company believes, based on information
furnished by such persons, that the persons named in the table above have
sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them. Percentage of beneficial ownership is
based on 6,729,712 shares of Common Stock outstanding as of May 31, 1997,
and 9,429,712 shares of Common Stock outstanding after the completion of
this offering. In computing the number of shares of Common Stock subject to
options held by that person that are exercisable within 60 days of May 31,
1997 are deemed outstanding. Such shares, however, are not deemed
outstanding for the purpose of computing the percentage ownership of any
other person.
(2) Assumes no exercise of the underwriters' over-allotment option.
(3) Of the total shares indicated as beneficially owned by entities affiliated
with Trident Capital, Information Associates, L.P. owns 1,496,693 shares
and Information Associates, C.V. owns
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41,769 shares. Information Associates, C.V. is a Netherlands Antilles
limited partnership and Information Associates, L.P. is a Delaware limited
partnership. The general partner of each of these entities is Trident
Capital Management, L.L.C., a Delaware limited liability company ("Trident
Capital"), the members of which include Donald R. Dixon and Rockwell A.
Schnabel, directors of the Company. The address of Trident Capital is 2480
Sand Hill Road, Suite 100, Menlo Park, California 94025.
(4) Reed and Utell International are divisions of Reed Elsevier Inc. The
address of Reed Elsevier Inc. is 200 Park Avenue, 17th Floor, New York, NY
10166. Mr. Highet, a director of the Company, is affiliated with Reed
Elsevier Inc.
(5) The address of HFS, Inc. is 3838 E. Van Buren, Phoenix, Arizona 85008.
(6) The address of Promus Hotels, Inc. is 755 Crossover Lane, Memphis,
Tennessee 38117. Mr. Wells, a director of the Company, is affiliated with
Promus Hotels, Inc.
(7) The address of Best Western International is 6201 N. 24th Parkway, Phoenix,
Arizona 85016.
(8) The address of Hyatt Hotels Corporation is 200 West Madison, Chicago,
Illinois 60606.
(9) The address of ITT Sheraton Corporation is Sixty State Street, World
Headquarters, Boston, Massachusetts 02109.
(10) Includes options exercisable within 60 days of May 31, 1997 held by Mr.
Davis and Mr. Nicholson to purchase 75,000 and 37,500 shares of Common
Stock, respectively.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 100,000,000 shares of
Common Stock, $.01 par value per share ("Common Stock"), and 2,000,000 shares of
Preferred Stock, $.01 par value per share (the "Preferred Stock"), issuable in
series. As of May 31, 1997, there were outstanding 6,729,712 shares of Common
Stock held of record by 29 stockholders assuming the conversion of all
outstanding shares of Preferred Stock into Common Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. The holders of
Common Stock are not entitled to cumulate voting rights with respect to the
election of directors, and as a consequence, minority stockholders will not be
able to elect directors on the basis of their votes alone. Subject to
preferences that may be applicable to any then outstanding shares of Preferred
Stock, holders of Common Stock are entitled to receive ratably such dividends as
may be declared by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of the Company, holders of the Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and the liquidation
preference of any then outstanding Preferred Stock. Holders of Common Stock have
no preemptive, conversion or other rights to subscribe for additional securities
of the Company. There are no redemption or sinking fund provisions applicable to
the Common Stock. All outstanding shares of Common Stock are, and all shares of
Common Stock to be outstanding upon completion of this offering will be, validly
issued, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 2,000,000 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of such series, without any further
vote or action by stockholders. The issuance of Preferred Stock could adversely
affect the voting power of holders of Common Stock and the likelihood that such
holders will receive dividend payments and payments upon liquidation and could
have the effect of delaying, deferring or preventing a change in control of the
Company. Upon completion of this offering, there will be no shares of Preferred
Stock outstanding and the Company has no present plan to issue any shares of
Preferred Stock.
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WARRANTS
In connection with the Distribution Services Agreement entered into in May
1997 between the Company and Holiday Inn, the Company issued to Holiday Inn
warrants for the purchase of up to 345,723 shares of the Company Common Stock.
These warrants are immediately exercisable at an exercise price of $7.20 per
share, assuming an initial public offering of $11.00 per share.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
Delaware Anti-Takeover Statute. The Company is subject to the provisions of
Section 203 of the Delaware General Corporation Law, an anti-takeover law. In
general, the statute prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. For purposes of Section 203, a "business combination"
includes a merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholder, and an "interested stockholder" is a
person who, together with affiliates and associates, owns (or within three years
prior, did own) 15% or more of the corporation's voting stock.
Certificate of Incorporation. The Certificate of Incorporation to be
effective concurrently with this offering (the "Certificate") provides (i) for
the authorization of the Board of Directors to issue, without further action by
the stockholders, up to 2,000,000 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
(ii) that any action required or permitted to be taken by stockholders of the
Company must be effected at a duly called annual or special meeting of the
stockholders and may not be effected by a consent in writing, (iii) that special
meetings of stockholders of the Company may be called only by the Chairman of
the Board, the Chief Executive Officer or a majority of the members of the Board
of Directors, (iv) for a classified Board of Directors, (v) that vacancies on
the Board of Directors, including newly created directorships, can be filled
only by a majority of the directors then in office, and (vi) 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 voting stock, voting
together as a single class.
These provisions are intended to enhance the likelihood of continuity and
stability in the composition of the Board of Directors and in the policies
formulated by the Board of Directors and to discourage certain types of
transactions that may involve an actual or threatened change of control of the
Company. These provisions are designed to reduce the vulnerability of the
Company to an unsolicited proposal for a takeover of the Company that does not
contemplate the acquisition of all of its outstanding shares, or an unsolicited
proposal for the restructuring or sale of all or part of the Company. Such
provisions, however, could discourage potential acquisition proposals and could
delay or prevent a change in control of the Company. Such provisions may also
have the effect of preventing changes in the management of the Company. See
"Risk Factors -- Anti-Takeover Matters."
LIMITATIONS ON DIRECTOR LIABILITY
The Certificate provides that, to the fullest extent permitted by the
General Corporation Law of the State of Delaware as the same exists or as may
hereafter be amended, directors of the Company will not be liable to the Company
or its stockholders for monetary damages for breach of fiduciary duty as a
director.
REGISTRATION RIGHTS
Pursuant to an agreement between the Company and the holders (the
"Holders") of approximately 6,458,412 shares of Common Stock (the "Registrable
Securities"), the Holders are entitled to certain rights with respect to the
registration of such shares under the Securities Act. If the Company proposes to
register any of its securities under the Securities Act (other than a
registration on a Form S-3 or any successor form), either for its own account or
for the account of other Holders exercising registration rights, the Holders are
entitled to notice of such registration and are entitled, subject to certain
limitations, to include shares of Registrable Securities therein. Additionally,
the Holders are entitled to certain demand registration rights pursuant to which
they may require the Company to file a registration statement under the
Securities Act
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(other than a registration on a Form S-3 or any successor forms) at the
Company's expense with respect to their shares of Registrable Securities, and
the Company is required to use its best efforts to effect such registration.
Subject to certain limitations, the Holders may also require the Company to
register their shares on Form S-3 when such form becomes available to the
Company. Generally, the Company is required to bear all registration and selling
expenses incurred in connection with any such registrations. The rights are
subject to certain conditions and limitations, among them the right of the
underwriters of an offering to limit the number of shares included in such
registration. Such registration rights terminate as to any Holder at such time
as the Holder holds less then one percent (1%) of the Company's outstanding
capital stock and may sell all of such Holder's shares under rule 144
promulgated under the Securities Act within a three-month period.
TRADING MARKET, TRANSFER AGENT AND REGISTRAR
The Company has applied to have the Common Stock quoted on the Nasdaq
National Market under the symbol PEGS. The Transfer Agent and Registrar for the
Common Stock will be engaged prior to the date of this Prospectus.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding an
aggregate of 9,429,712 shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options. Of
these shares, all of the shares sold in the offering will be freely tradeable by
persons other than "affiliates" or persons deemed to be acting as "underwriters"
(as such terms are defined under the Securities Act) of the Company. The
remaining 6,458,412 shares of Common Stock are "restricted shares" within the
meaning of Rule 144 under the Securities Act and may be sold only if they are
registered under the Securities Act or are sold pursuant to an applicable
exemption from registration, including pursuant to Rule 144. The Company has
granted certain registration rights to the holders of such shares. See
"Description of Capital Stock -- Registration Rights."
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned, for at
least one year, shares of Common Stock that have not been registered under the
Securities Act or that were acquired from an "affiliate" of the Company is
entitled to sell within any three-month period the number of shares of Common
Stock which does not exceed the greater of one percent of the number of then
outstanding shares or the average weekly reported trading volume during the four
calendar weeks preceding the sale. Sales under Rule 144 are also subject to
certain notice and manner of sale requirements and to the availability of
current public information about the Company and must be made in unsolicited
brokers' transactions or to a market maker. A person (or persons whose shares
are aggregated) who is not an "affiliate" of the Company under the Securities
Act during the three months preceding a sale and who has beneficially owned such
shares for at least two years is entitled to sell such shares under Rule 144
without regard to the volume, notice, information and manner of sale provisions
of such rule. Rule 144 does not require the same person to have held the
securities for the applicable periods.
Any employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 under the Securities Act, which permits affiliates and
non-affiliates to sell such shares without having to comply with the holding
period restrictions of Rule 144, in each case commencing 90 days after the date
of this Prospectus. In addition, non-affiliates may sell such shares without
complying with the public information, volume and notice provisions of Rule 144.
Rule 701 is available for optionholders of the Company as to all shares issued
pursuant to the exercise of options granted prior to this offering.
After the offering, the Company intends to file a registration statement on
Form S-8 to register the shares of Common Stock issuable upon exercise of
options granted or to be granted pursuant to the Plans. Accordingly, shares
issued upon exercise of such options will be freely tradeable by holders who are
not affiliates of the Company and, subject to the volume and other limitations
of Rule 144, by holders who are affiliates of the Company.
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The Company, its executive officers and directors who are stockholders,
certain holders of options to purchase Common Stock under the Plans and certain
other stockholders of the Company, all of which hold an aggregate of 6,458,412
shares of Common Stock, have agreed that, for a period of 180 days from the date
of this Prospectus, they will not offer, sell or otherwise dispose of any shares
of Common Stock or options to acquire Common Stock without the prior written
consent of Hambrecht & Quist LLC, except for the issuance by the Company of
options to purchase Common Stock or shares of Common Stock issuable upon the
exercise thereof, provided that such options shall not become exercisable and
such shares issuable upon exercise of options or pursuant to acquisitions shall
not be transferable prior to the end of the 180-day period and for certain
transfers by individuals signing such agreements to their immediate family
members.
Prior to the offering, there has been no market for the Common Stock. No
predictions can be made of the effect, if any, that market sales of shares of
Common Stock or the availability of such shares for sale will have on the market
price prevailing from time to time. Nevertheless, sales of significant amounts
of Common Stock could adversely affect the prevailing market price of the Common
Stock, as well as impair the ability of the Company to raise capital through the
issuance of additional equity securities. See "Risk Factors -- Absence of Prior
Public Market; Potential Volatility of Stock Price."
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their representatives,
Hambrecht & Quist LLC, Montgomery Securities and Volpe Brown Whelan & Company
LLC (the "Representatives"), have severally agreed to purchase from the Company
and the Selling Stockholders the following respective numbers of shares of
Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Hambrecht & Quist LLC.......................................
Montgomery Securities.......................................
Volpe Brown Whelan & Company LLC............................
-------
Total.............................................
=======
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company, its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow and such dealers may
reallow a concession not in excess of $ per share to certain other
dealers. After the offering, the offering price and other selling terms may be
changed by the Representatives. The Representatives have informed the Company
that the Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to 445,695
additional shares of Common Stock at the offering price, less the underwriting
discount set forth on the cover page of this Prospectus. To the extent the
Underwriters exercise this option, each of the Underwriters will have a firm
commitment to purchase approximately the same percentage thereof which the
number of shares of Common Stock to be purchased by it shown in the above table
bears to the total number of shares of Common Stock offered hereby. The Company
will be obligated, pursuant to the option, to sell such shares to the
Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of shares of Common Stock offered hereby.
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The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.
The officers and directors who are stockholders of the Company and certain
of the other stockholders and optionholders, who will own in the aggregate
6,458,412 shares of Common Stock after the offering, have agreed, subject to
certain exceptions, that they will not, without the prior written consent of
Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of Common
Stock, options or warrants to acquire shares of Common Stock or securities
exchangeable for or convertible into shares of common Stock owned by them during
the 180-day period following the date of this Prospectus. The Company has agreed
that it will not, without the prior written consent of Hambrecht & Quist LLC,
offer, sell or otherwise dispose of any shares of Common Stock, options or
warrants to acquire shares of Common Stock or securities exchangeable for or
convertible into shares of Common Stock during the 180-day period following the
date of this Prospectus, except that the Company may issue shares upon the
exercise of options granted prior to the date hereof, and may grant additional
options under its Plans, provided that, without the prior written consent of
Hambrecht & Quist LLC, such additional options shall not be exercisable during
such 180-day period.
Prior to the offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be determined
by negotiations among the Company, the Selling Stockholders and the
Representatives. Among the factors to be considered in determining the initial
public offering price are prevailing market and economic conditions, revenues
and earnings of the Company, market valuations of other companies engaged in
activities similar to the Company, estimates of the business potential and
prospects of the Company, the present state of the Company's business
operations, the Company's management and other factors deemed relevant. The
estimated initial public offering price range set forth on the cover of this
preliminary prospectus is subject to change as a result of market conditions and
other factors.
Certain persons participating in this offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the Common Stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the Underwriters
to reclaim a selling concession from a syndicate member in connection with the
offering when shares of Common Stock sold by the syndicate member are purchased
in syndicate covering transactions. Such tranactions may be effected on the
Nasdaq Stock Market, in the over-the-counter market, or otherwise. Such
stabilizing, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered by this
Prospectus will be passed upon for the Company by Locke Purnell Rain Harrell (A
Professional Corporation), Dallas, Texas. Cooley Godward LLP, San Francisco,
California, will pass upon certain legal matters for the Underwriters.
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EXPERTS
The consolidated financial statements of Pegasus Systems, Inc. as of
December 31, 1996 and for the year ended December 31, 1996 included in this
Prospectus and the related financial statement schedule for the year ended
December 31, 1996 included elsewhere in the Registration Statement have been so
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The consolidated financial statements of Pegasus Systems, Inc. (formerly
The Hotel Industry Switch Company in 1994) as of December 31, 1994 and 1995 and
for each of the two years in the period ended December 31, 1995 and the
consolidated financial statements of The Hotel Clearing Corporation as of
December 31, 1993 and 1994 and for each of the two years in the period ended
December 31, 1994 included in this Prospectus and the related financial
statement schedule for the years ended December 31, 1994 and 1995 included
elsewhere in the Registration Statement have been so included in reliance on the
reports of Belew Averitt LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
In January 1997, the Company advised Belew Averitt LLP ("Belew Averitt")
that it would no longer retain the firm as independent accountants. The reports
of Belew Averitt on the Company, formerly The Hotel Industry Switch Company, and
The Hotel Clearing Corporation for the previous years (1993, 1994 and 1995) did
not contain an adverse opinion or a disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope or accounting principles.
The decision to change accountants was precipitated by the Company's plan to
complete an initial public offering in 1997 and was approved by the Board of
Directors on January 7, 1997. During the periods audited by Belew Averitt and
through January 7, 1997 there were no disagreements with Belew Averitt on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreement(s) if not resolved to the
satisfaction of Belew Averitt, would have caused it to make reference to the
subject matter of the disagreements in connection with its reports. Price
Waterhouse LLP was engaged by the Company as its independent accountants on
January 7, 1997.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549 (the "Commission"), a Registration Statement on Form S-1
under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the shares offered by this
Prospectus, reference is made to the Registration Statement, including the
exhibits and schedules filed thereto. Statements contained in this Prospectus as
to the contents of any agreement, contract or other document referred to are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement or
such other document, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement may be inspected by anyone
without charge at the Commission's principal office in Washington, D.C. and
copies of all or any part thereof may be obtained upon payment of certain fees
prescribed by the Commission from the Public Reference Section of the Commission
at the Commission's principal office, 450 Fifth Street, N.W., Washington, D.C.
20549, or at the Commission's Regional Offices in New York, located at 7 World
Trade Center, Suite 1300, New York, New York 10048, or in Chicago, located at
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The Commission
maintains a World Wide Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of the Commission's World Wide Web site is
http://www.sec.gov.
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PEGASUS SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PEGASUS SYSTEMS, INC.:
Consolidated Annual Financial Statements:
Reports of Independent Accountants........................ F-2
Consolidated Balance Sheets as of December 31, 1995 and
1996................................................... F-4
Consolidated Statements of Operations for the Years Ended
December 31, 1994, 1995 and 1996....................... F-5
Consolidated Statements of Changes in Shareholders' Equity
(Deficit) for the Years Ended December 31, 1994, 1995
and 1996............................................... F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996....................... F-7
Notes to Consolidated Financial Statements................ F-8
Consolidated Interim Financial Statements (Unaudited):
Consolidated Balance Sheets as of March 31, 1997.......... F-22
Consolidated Statements of Operations for the Three Months
Ended March 31, 1996 and 1997.......................... F-23
Consolidated Statement of Changes in Shareholders' Equity
for the Three Months Ended March 31, 1997.............. F-24
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1996 and 1997.......................... F-25
Notes to Consolidated Interim Financial Statements........ F-26
THE HOTEL CLEARING CORPORATION:
Consolidated Annual Financial Statements:
Report of Independent Accountants......................... F-28
Consolidated Balance Sheets as of December 31, 1993 and
1994................................................... F-29
Consolidated Statements of Operations for the Years Ended
December 31, 1993 and 1994............................. F-31
Consolidated Statements of Shareholders' Deficit for the
Years Ended December 31, 1993 and 1994................. F-32
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1993 and 1994............................. F-33
Notes to Consolidated Financial Statements................ F-35
Consolidated Interim Financial Statements (Unaudited):
Consolidated Balance Sheet as of June 30, 1995............ F-39
Consolidated Statements of Operations for the Six Months
Ended June 30, 1994 and 1995........................... F-40
Consolidated Statement of Shareholders' Deficit for the
Six Months Ended June 30, 1995......................... F-41
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1994 and 1995........................... F-42
Notes to Consolidated Interim Financial Statements........ F-43
</TABLE>
F-1
71
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Pegasus Systems, Inc.
The stock split described in Note 15 to the financial statements has not been
consummated at June 5, 1997. When it has been consummated, we will be in a
position to furnish the following report:
"In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations and changes in
shareholders' equity (deficit) and of cash flows present fairly, in all
material respects, the financial position of Pegasus Systems, Inc. and
its subsidiaries at December 31, 1996, and the results of their
operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements
based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for the opinion expressed
above."
PRICE WATERHOUSE LLP
Dallas, Texas
February 21, 1997
F-2
72
INDEPENDENT AUDITOR'S REPORT
To the Shareholders
Pegasus Systems, Inc.
The stock split described in Note 15 to the financial statements has not been
consummated at June 5, 1997. When it has been consummated, we will be in a
position to furnish the following report:
We have audited the accompanying consolidated balance sheet of Pegasus
Systems, Inc. (formerly The Hotel Industry Switch Company in 1994) and
its subsidiaries (Company) as of December 31, 1995, and the related
consolidated statements of operations, changes in shareholders' equity
(deficit) and cash flows for the years ended December 31, 1994 and 1995.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Company as of December 31, 1995, and the results of its operations and
its cash flows for the years ended December 31, 1994 and 1995 in
conformity with generally accepted accounting principles.
BELEW AVERITT LLP
Dallas, Texas
March 2, 1996
F-3
73
PEGASUS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
ASSETS
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Cash and cash equivalents................................... $ 93,831 $ 1,796,311
Restricted cash............................................. 330,177 690,206
Short-term investments...................................... -- 2,705,076
Accounts receivable, net of allowance for doubtful accounts
of $20,000 and $44,805, respectively...................... 739,496 924,951
Accounts receivable from affiliates......................... 655,756 754,405
Other current assets........................................ 41,990 190,976
------------ ------------
Total current assets.............................. 1,861,250 7,061,925
Software development costs.................................. 4,085,501 2,113,758
Property and equipment, net................................. 2,660,467 3,001,012
Goodwill, net of accumulated amortization of $58,219 and
$178,943, respectively.................................... 1,687,452 1,685,772
Other noncurrent assets..................................... 21,324 29,269
------------ ------------
Total assets...................................... $ 10,315,994 $ 13,891,736
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Accounts payable and accrued liabilities.................... $ 1,736,564 $ 2,574,186
Accounts payable to affiliates.............................. 204,188 115,049
Unearned income............................................. 431,373 470,588
Current portion of capital lease obligations................ 814,490 1,048,238
Current portion of notes payable to affiliates.............. 235,000 785,517
------------ ------------
Total current liabilities......................... 3,421,615 4,993,578
Capital lease obligations, net of current portion........... 1,696,570 1,749,899
Notes payable to affiliates, net of current portion......... 5,297,158 4,603,568
Unearned income............................................. 941,176 470,588
Other noncurrent liabilities................................ -- 119,709
Minority interest........................................... 1,339,682 --
Commitments and contingencies (Note 11)..................... -- --
Shareholders' equity (deficit):
Preferred stock, $.01 par value; 2,000,000 shares
authorized; zero and 1,538,463 shares issued and
outstanding, respectively.............................. -- 15,385
Common stock, $.01 par value; 100,000,000 shares
authorized, 5,218,000 and 5,307,733 shares issued,
respectively........................................... 52,180 53,077
Additional paid-in capital................................ 8,652,969 16,968,364
Unearned compensation..................................... -- (485,937)
Accumulated deficit....................................... (11,085,356) (14,570,157)
Less treasury stock (116,484 shares, at cost)............. -- (26,338)
------------ ------------
Total shareholders' equity (deficit).............. (2,380,207) 1,954,394
------------ ------------
Total liabilities and shareholders' equity
(deficit)....................................... $ 10,315,994 $ 13,891,736
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
74
PEGASUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
---------- ----------- -----------
<S> <C> <C> <C>
Net revenues (Notes 1 and 14)
Shareholder........................... $4,491,985 $ 7,400,592 $11,961,445
Nonshareholder........................ 174,466 1,895,136 3,907,567
---------- ----------- -----------
Total revenues................ 4,666,451 9,295,728 15,869,012
Cost of services........................ 1,546,065 3,882,496 6,199,058
Research and development................ 238,116 2,062,588 2,205,655
General and administrative expenses..... 1,065,345 2,770,474 3,799,199
Marketing and promotion expenses........ 130,474 912,230 2,824,633
Depreciation and amortization........... 1,518,588 2,476,812 3,425,678
---------- ----------- -----------
Operating income (loss)................. 167,863 (2,808,872) (2,585,211)
Other (income) expense:
Interest expense...................... 591,076 815,560 893,177
Interest income....................... -- -- (114,150)
---------- ----------- -----------
Loss before income taxes and minority
interest.............................. (423,213) (3,624,432) (3,364,238)
Income taxes............................ -- -- 15,000
---------- ----------- -----------
Loss before minority interest........... (423,213) (3,624,432) (3,379,238)
Minority interest....................... -- 53,528 (105,563)
---------- ----------- -----------
Net loss................................ $ (423,213) $(3,570,904) $(3,484,801)
========== =========== ===========
Unaudited pro forma data (Note 1):
Pro forma net loss per share............ $ (0.48)
===========
Weighted average shares outstanding used
in the pro forma net loss per share
calculation........................... 7,202,992
===========
Supplemental pro forma net loss per
share................................. $ (0.38)
===========
Weighted average shares used in the
supplemental pro forma net loss per
share calculation..................... 7,744,488
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
75
PEGASUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK TREASURY STOCK
------------------- ------------------- ADDITIONAL --------------------
NUMBER OF NUMBER OF PAID-IN UNEARNED NUMBER OF
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION SHARES AMOUNT
--------- ------- --------- ------- ----------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance of THISCO at
December 31, 1993...... -- -- 762,000 $7,620 $ 4,857,478 -- -- --
Net loss................ -- -- -- -- -- -- -- --
--------- ------- --------- ------- ----------- --------- -------- --------
Balance of THISCO at
December 31, 1994...... -- -- 762,000 7,620 4,857,478 -- --
========= ======= ========= ======= =========== ========= ======== ========
Conversion of
shareholder loans...... -- -- -- -- 525,000 -- -- --
Formation of Pegasus.... -- -- 1,929,867 19,299 (19,299) -- -- --
Acquisition of HCC...... -- -- 2,242,800 22,428 2,721,749 -- -- --
Issuance of restricted
shares to management... -- -- 283,333 2,833 568,041 -- -- --
Net loss................ -- -- -- -- -- -- -- --
--------- ------- --------- ------- ----------- --------- -------- --------
Balance at December 31,
1995................... -- -- 5,218,000 52,180 8,652,969 -- -- --
========= ======= ========= ======= =========== ========= ======== ========
Issuance of Pegasus
preferred stock to
Information Associates,
L.P. and Information
Associates, C.V........ 1,538,463 $15,385 -- -- 7,484,620 -- -- --
Issuance of Pegasus
common stock for
purchase of minority
interest............... -- -- 89,733 897 277,725 -- -- --
Purchase of treasury
stock.................. -- -- -- -- -- -- (116,484) $(26,338)
Issuance of compensatory
stock options.......... -- -- -- -- 551,150 $(485,937) -- --
Proceeds from stock
subscription........... -- -- -- -- 1,900 -- -- --
Net loss................ -- -- -- -- -- -- -- --
--------- ------- --------- ------- ----------- --------- -------- --------
Balance at December 31,
1996................... 1,538,463 $15,385 5,307,733 $53,077 $16,968,364 $(485,937) (116,484) $(26,338)
========= ======= ========= ======= =========== ========= ======== ========
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
------------ -----------
<S> <C> <C>
Balance of THISCO at
December 31, 1993...... $ (7,091,239) $(2,226,141)
Net loss................ (423,213) (423,213)
------------ -----------
Balance of THISCO at
December 31, 1994...... (7,514,452) (2,649,354)
============ ===========
Conversion of
shareholder loans...... -- 525,000
Formation of Pegasus.... -- --
Acquisition of HCC...... -- 2,744,177
Issuance of restricted
shares to management... -- 570,874
Net loss................ (3,570,904) (3,570,904)
------------ -----------
Balance at December 31,
1995................... (11,085,356) (2,380,207)
============ ===========
Issuance of Pegasus
preferred stock to
Information Associates,
L.P. and Information
Associates, C.V........ -- 7,500,005
Issuance of Pegasus
common stock for
purchase of minority
interest............... -- 278,622
Purchase of treasury
stock.................. -- (26,338)
Issuance of compensatory
stock options.......... -- 65,213
Proceeds from stock
subscription........... -- 1,900
Net loss................ (3,484,801) (3,484,801)
------------ -----------
Balance at December 31,
1996................... $(14,570,157) $ 1,954,394
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
76
PEGASUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
--------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(423,213) $(3,570,904) $(3,484,801)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Minority interest....................................... -- (53,528) 105,563
Accrued interest reclassified to notes payable.......... -- 43,496 91,927
Reclassification of accrued interest to notes payable to
affiliates............................................ -- 255,203 --
Loss on write-down of equipment......................... -- 246,000 --
Write off of in-process research and development
costs................................................. -- 1,223,000 244,600
Adjustment for discontinued software projects........... -- -- 316,698
Loss (gain) on sale of equipment........................ (7,620) (14,553) 9,564
Depreciation and amortization........................... 1,518,588 2,476,812 3,425,678
Recognition of stock option compensation................ -- -- 65,213
Changes in assets and liabilities:
Restricted cash....................................... -- (157,307) (360,029)
Accounts receivable................................... (50,197) (182,998) (185,455)
Accounts receivable from affiliates................... (331,980) 80,785 (98,649)
Other current and noncurrent assets................... (1,966) (24,032) (156,931)
Accounts payable and accrued liabilities.............. 295,342 586,483 837,620
Accounts payable to affiliates........................ (20,403) (202,230) (89,139)
Unearned income....................................... -- (210,036) (431,373)
Other noncurrent liabilities.......................... -- -- 119,709
--------- ----------- -----------
Net cash provided by operating activities........... 978,551 496,191 410,195
--------- ----------- -----------
Cash flows from investing activities:
Purchase of software, property and equipment.............. (256,656) (639,461) (495,100)
Proceeds from sale of software, property and equipment.... 71,337 -- 133,134
Purchase of marketable securities......................... -- -- (2,705,076)
--------- ----------- -----------
Net cash used in investing activities............... (185,319) (639,461) (3,067,042)
--------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of stock........................... -- 570,874 7,500,005
Purchase of minority interest............................. -- -- (2,000,000)
Repayments on notes payable to affiliates................. (234,165) (103,337) (235,000)
Repayments of capital leases.............................. (459,398) (578,271) (974,969)
Purchase of treasury stock................................ -- -- (26,338)
Proceeds from stock subscription.......................... -- -- 1,900
Proceeds from line of credit.............................. -- -- 175,000
Repayment of line of credit............................... -- -- (175,000)
Proceeds from capital leases.............................. -- -- 93,729
--------- ----------- -----------
Net cash provided (used) by financing activities........ (693,563) (110,734) 4,359,327
--------- ----------- -----------
Net increase (decrease) in cash and cash equivalents........ 99,669 (254,004) 1,702,480
Cash and cash equivalents, beginning year................... 248,166 347,835 93,831
--------- ----------- -----------
Cash and cash equivalents, end of year...................... $ 347,835 $ 93,831 $ 1,796,311
========= =========== ===========
Supplemental disclosure of cash flow information:
Interest paid............................................. $ 509,722 $ 706,842 $ 858,017
Income taxes paid......................................... -- -- --
--------- ----------- -----------
Supplemental schedule of noncash investing and financing
activities:
Acquisition of equipment under capital leases............. $ 120,252 $ 2,083,365 $ 1,045,988
========= =========== ===========
Conversion of notes payable to affiliates to additional
paid-in capital (Note 7)................................ $ -- $ 525,000 $ --
========= =========== ===========
Issuance of common stock for acquisitions (Notes 2, 3 and
8)...................................................... $ -- $ 2,744,177 $ 278,622
========= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
77
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BACKGROUND
In July 1995, Pegasus Systems, Inc. (Pegasus or the Company) was formed as
a Delaware holding company to combine the operations of two existing companies
operating in the same industry, The Hotel Industry Switch Company (THISCO) and
The Hotel Clearing Corporation (HCC), as discussed in Note 2 below. For
accounting purposes, the combination was recorded as a purchase of HCC, as
discussed in Note 3 below.
CONSOLIDATION
The accompanying financial statements include the historical accounts of
THISCO for 1994. The financial statements for 1995 reflect the consolidated
balance sheets of THISCO and HCC and the consolidated operations of THISCO for
the year ended 1995 and HCC from the date of acquisition to December 31, 1995.
The 1996 consolidated financial statements include the accounts of Pegasus and
its wholly owned subsidiaries, THISCO and HCC. THISCO is consolidated with its
wholly owned subsidiary, TravelWeb, Inc. (TravelWeb), and HCC is consolidated
with its wholly owned subsidiary, Pegasus Systems Inc. (UK) Limited (Pegasus UK,
formerly The Hotel Clearing Corporation (UK) Limited), (collectively, the
Company). All significant intercompany balances have been eliminated in
consolidation.
THISCO was formed in September 1988 as a Delaware corporation. The
Company's THISCO service provides an electronic interface from hotel central
reservation systems to travel agencies through Global Distribution Systems
(GDSs), which are electronic travel information and reservation systems such as
SABRE.
HCC, acquired by the Company in July 1995 (see Note 3), was formed in July
1991 as a Delaware corporation. The Company's HCC service consolidates
commissions paid by participating hotels to a participating travel agency into a
single monthly payment and provides participants with comprehensive transaction
reports. Hotel properties and travel agencies worldwide utilize the HCC service
to increase the efficiency and reduce costs associated with preparing, paying
and reconciling hotel room reservation commissions.
TravelWeb was formed in October 1995 as a Delaware corporation. The
Company's TravelWeb service provides individual travelers direct access to
online hotel information and the ability to make reservations electronically at
hotel properties. In addition, through its recently introduced NetBooker
service, the Company offers TravelWeb's comprehensive hotel database and
Internet hotel reservation capabilities to third-party Web sites.
Pegasus UK, a wholly-owned subsidiary of HCC, was formed in September 1993
in England to market and provide services for travel agents and hotel chains
operating in Europe, Africa and Asia.
MANAGEMENT ESTIMATES
In preparing the consolidated financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, and expenses. Actual results may differ from those
estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less from the date of purchase, to be cash equivalents.
F-8
78
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESTRICTED CASH
Funds for travel agency commission checks which have not cleared HCC's
processing bank after certain time periods are returned to HCC. Any amounts
which are not remitted to travel agents will be escheated to the appropriate
state, as required.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
In 1996, the Company adopted Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (FAS
115). In accordance with this Statement, prior period financial statements have
not been restated to reflect the change in accounting principle. The cumulative
effect of the adoption of FAS 115 did not have a material effect on the
Company's financial condition or results of operations.
As of December 31, 1994, 1995 and 1996, the status of the securities
accounted for under FAS 115, was as follows:
<TABLE>
<CAPTION>
AMORTIZED COST
------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Held to maturity:
Corporate debt................................... $ -- $ -- $ 992,621
U.S. government agencies......................... -- -- 1,712,455
---------- ---------- ----------
$ -- $ -- $2,705,076
========== ========== ==========
</TABLE>
As of December 31, 1994, 1995 and 1996, the aggregate fair market value of
the held-to-maturity securities was $0, $0 and $2,705,076, respectively. The
gross unrealized gains and losses by type of security were not material.
The contract maturities of the held-to-maturity securities are less than
one year.
SOFTWARE DEVELOPMENT COSTS
All costs incurred in the internal development of computer software used in
delivery of the Company's services are expensed until a product design and a
working model of the software have been tested and completed. Thereafter, any
further development or production costs are capitalized. Maintenance and
customer support costs are expensed when incurred. Prior to 1996, capitalized
costs were being amortized over three to five years using the straightline
method. However, in 1996 the Company changed the estimated life of all
capitalized software costs to three years. The effect of this change was to
increase the net loss during 1996 by approximately $292,000 or $0.04 per share
on a pro forma basis. During 1996, the Company recorded a charge of $316,698
resulting from discontinued software development projects. During 1995 and 1996,
the Company capitalized a total of approximately $3,840,000 and $470,000,
respectively, of software development costs, including the software acquired in
connection with the acquisition of HCC (See Note 3). During 1994, 1995 and 1996,
the Company amortized approximately $970,000, $1,532,000 and $2,125,000,
respectively, of capitalized software costs. Accumulated amortization of
software development costs was $4,614,686 and $6,739,465 at December 31, 1995
and 1996, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated over their
estimated useful lives, ranging from three to seven years. Leasehold
improvements are amortized over the life of the lease using the straight-line
method. Expenditures for maintenance and repairs, as well as minor renewals, are
charged to operations as incurred. Betterments and major renewals are
capitalized. Upon retirement or sale of an asset, the cost of the
F-9
79
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
asset and the related accumulated depreciation or amortization are removed from
the accounts and any resulting gain or loss is credited or charged to
operations.
GOODWILL
Goodwill represents the excess of the purchase price of acquisitions over
the fair value of the net assets acquired. Such excess costs are being amortized
on a straight-line basis over 15 years. Unamortized goodwill at December 31,
1995 and 1996, was $1,687,452 and $1,685,772, respectively. The carrying value
of goodwill is evaluated periodically in relation to the operating performance
and anticipated future undiscounted net cash flows of the related business.
Based on its most recent analysis, the Company believes that no impairment of
goodwill existed at December 31, 1996. Amortization of goodwill was $0, $58,219
and $120,724 in 1994, 1995 and 1996, respectively.
REVENUES
The Company primarily derives its revenues from transaction fees and
commissions charged to participating hotels and travel agencies. A substantial
portion of Company revenue is derived from shareholders and shareholder-owned
companies (see Note 14).
The Company's revenues are predominantly transaction-based. The Company
derives its revenues from its THISCO service by charging its hotel participants
a fee based on the number of reservations made, less the number cancelled ("net
reservations"), and a fee for "status messages" processed through the THISCO
service. Status messages are electronic messages sent by hotels to GDSs to
update room rates, features and availability information in GDS databases. As
cumulative volumes of net reservations increase during the course of the
calendar year, the fee per transaction decreases after predetermined transaction
volume hurdles have been met. As a result, for higher volume customers, unit
transaction fees are higher at the beginning of the year, when cumulative
transactions are lower. The Company recognizes revenues based on the expected
fee per transaction to be earned for services to be provided to the customer
during the entire year. Because the Company's customer contracts are based on
calendar year terms, this process of recognizing revenues results in a deferred
revenue balance being created during early periods of the year, which will be
reflected in interim balance sheets and be fully utilized by the end of each
year. Additionally, Pegasus generally charges new participants in the THISCO
service a one-time set-up fee for work associated with the implementation of the
interface with the THISCO service. The Company also charges certain GDSs a fee
based on the number of net reservations to compensate for the management and
consolidation of multiple interfaces. The Company intends to reduce certain of
the fees that it charges hotels for transmitting status messages.
Pegasus derives its revenues from its HCC service by charging a
participating travel agency a fee based on a percentage of the dollar amount of
commissions paid to that agency through the HCC service. The Company also
generally charges a participating hotel a fee based on the number of
commissionable transactions arising from that hotel. Revenues from HCC travel
agency fees can vary substantially from period to period based on the types of
hotels at which reservations are made and overall room rates. Pegasus recognizes
revenues from its HCC service in the month in which the hotel stay occurs and
collects and pays commissions to travel agencies by the 15th business day of the
following month. If a hotel fails to deliver funds to the Company, the Company
is not obligated to deliver commission payments on behalf of the hotel to travel
agencies. HCC revenues also include amortization of a $2.0 million payment
received by the Company in June 1993 in exchange for a five-year noncancelable
data processing contract. This payment was initially recorded as unearned income
and is being recognized as revenue over the life of the contract. The amount of
revenue recognized in 1996 was $431,000 (See Note 11). For the period from
acquisition to December 31, 1995 and the year ended December 31, 1996, HCC
revenues from hotels are presented net of commission payments to travel agencies
of approximately $39,820,000 and $105,000,000, respectively.
F-10
80
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company offers two services, TravelWeb and NetBooker, that provide
hotel reservation capability to individual travelers through the Internet.
During 1996, Pegasus derived the substantial majority of its TravelWeb revenues
from fees related to the creation of Web site pages for hotels and for
maintaining these pages on the TravelWeb site. During 1997, the Company is
transitioning its fee structure to begin charging participating hotels
subscription fees based on the number of their properties included in the
database and transaction fees based on the number of net reservations made at
their properties through the TravelWeb service. The Company is not in a position
to forecast the effect that this change in fee structure will have on its
TravelWeb revenues. There can be no assurance that such a change will not have a
material adverse effect on the Company's financial condition and results of
operations. The Company also derives revenues through the sale of advertising
space on the TravelWeb site. Pegasus realizes revenues from NetBooker, the
Company's hotel room reservation service provided to third-party Web sites, by
charging third-party Web sites an initial development and licensing fee and by
charging hotels a fee based on the number of net reservations made through the
NetBooker service. The Company has not received a material amount of revenues
for the TravelWeb service or the NetBooker service to date, and there can be no
assurance that either of these services will produce a material amount of
revenues in the future.
INCOME TAXES
The Company presents income taxes pursuant to Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," (FAS 109). FAS 109
uses an asset and liability approach to account for income taxes. In the event
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities result in deferred tax assets, an evaluation of
the probability of being able to realize the future benefits indicated by such
assets is required. A valuation allowance is provided for a portion or all of
the deferred tax assets when there is sufficient uncertainty regarding the
Company's ability to recognize the benefits of the assets in future years.
ADVERTISING COSTS
Advertising and promotion-related expenses are charged to operations when
incurred. Advertising expense for 1994, 1995 and 1996 was approximately $84,000,
$173,000 and $613,000, respectively.
FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments reflected in
the consolidated balance sheets at December 31, 1995 and 1996 approximate their
respective fair values.
CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments exposed to concentrations of credit
risk consist primarily of cash and receivables. Cash balances, exceeding the
federally insured limits, are maintained in financial institutions; however,
management believes the institutions are of high credit quality. The majority of
receivables are due from companies which are well-established entities in the
travel industry. As a consequence, management considers any exposure from
concentrations of credit risks to be limited.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (FAS 123), encourages, but does not require, companies
to record compensation cost for stock-based employee compensation plans at fair
value. The Company has elected to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25), and related Interpretations. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the fair market value of the
Company's stock at
F-11
81
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the date of grant over the amount the employee must pay to acquire the stock.
Pro forma disclosure of net loss based on the provisions of FAS 123 is discussed
at Note 9.
STOCK SPLITS
A one hundred-for-one stock split was effected in June 1996. All references
in the consolidated financial statements to shares, share prices, per share
amounts and stock plans have been adjusted retroactively for the one
hundred-for-one stock split. Additional information is presented in Note 8.
In May 1997, the board of directors approved a four-for-three stock split
to be effective concurrent with the effectiveness of the Registration Statement
on Form S-1. All references in the consolidated financial statements to shares,
share prices, per share amounts and stock plans have been adjusted retroactively
for the four-for-three stock split.
FOREIGN CURRENCY TRANSLATION
The U.S. dollar is the functional currency for the Company's foreign
operations. Gains and losses on the translation into U.S. dollars of amounts
denominated in foreign currencies are included in net income.
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Historical loss per share has been excluded from the Company's statements
of operations on the basis that it is irrelevant due to the planned conversion
of all outstanding Series A preferred stock to common stock on a one-for-one
basis concurrent with the effectiveness of the Company's initial public offering
(IPO). Pro forma net loss per share has been computed using the weighted average
number of common shares outstanding after giving retroactive effect to the
four-for-three stock split to be effected upon effectiveness of the Company's
Registration Statement on Form S-1 (see Note 15) and assuming that (i) all
shares of Series A preferred stock have been converted to shares of common stock
as of the date of issuance and (ii) all shares, options and warrants issued
subsequent to June 1, 1996 at an exercise price less than the IPO price have
been included in the calculation as if they were outstanding for the entire
period presented using the treasury stock method and the IPO price.
SUPPLEMENTAL PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Supplemental pro forma net loss per share is based on the weighted average
number of shares of common stock used in the calculation of pro forma net loss
per share, plus the number of shares (541,496 for the year ended December 31,
1996) that the Company would need to repay $5,389,085 of indebtedness
outstanding under notes payable to certain stockholders of the Company at
December 31, 1996. For purposes of computing supplemental pro forma net loss per
share (unaudited), the pro forma net loss for the year ended December 31, 1996
was reduced by $539,213, representing elimination of the related interest
expense on such notes payable.
EARNINGS PER SHARE
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (FAS 128), was issued. FAS 128 specifies the computation,
presentation and disclosure requirements for earnings per share (EPS) for
entities with publicly held common stock or potential common stock. FAS 128
simplifies the standards for computing EPS previously found in Accounting
Principles Board Opinion No. 15, "Earnings per Share" (APB 15), and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the statement of operations for all
entities with complex capital structures and requires a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator
F-12
82
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and denominator of the diluted EPS computation. FAS 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods; earlier application is not permitted. FAS 128
requires restatement of all prior-period EPS data presented. The Company will
adopt FAS 128 in its consolidated financial statements as of and for the year
ending December 31, 1997 and, based on current circumstances, does not believe
the effect of adoption will be material.
2. REORGANIZATION
Effective in July 1995, the Company issued 4,934,667 shares of its common
stock in exchange for all of the outstanding capital stock of THISCO and 83.3%
of the outstanding capital stock of HCC (the Reorganization). Lodging Network,
Inc. (LNI) retained 210 shares of HCC preferred stock, representing a 16.7%
minority ownership interest in HCC. In conjunction with the Reorganization, LNI
was granted an option (LNI Option), expiring in July 1998, to exchange its 16.7%
ownership interest in HCC for 448,667 shares of the Company's common stock. The
LNI Option was subsequently canceled in June 1996, as part of the purchase of
all of LNI's minority interest ownership in HCC by the Company (see Note 3). The
Company incurred expenses of approximately $194,000 related to the
Reorganization. Such expenses have been included in the general and
administrative expenses in the Company's statement of operations for the year
ended December 31, 1995.
The Reorganization brought THISCO and HCC together under the control of
Pegasus and was initiated to integrate and expand the existing businesses of
THISCO and HCC. Pegasus was formed immediately prior to the transaction for the
purpose of combining the two operations into a single operating entity. Prior to
the Reorganization, THISCO and HCC were primarily controlled by a common (though
not identical) group of shareholders and a common management group. For
accounting purposes, the Reorganization was treated as an acquisition of HCC and
accounted for as a purchase business combination. Accordingly, the HCC assets
acquired and liabilities assumed have been recorded at their fair values at the
date of acquisition. The amount of the purchase price ($2.7 million) in excess
of the fair value of net assets acquired has been recorded as goodwill and will
be amortized on a straight-line basis over 15 years (see Note 3). The Company's
consolidated financial statements include the consolidated accounts and
operations of THISCO and HCC for all periods subsequent to the July 1995
acquisition date.
Prior to the Reorganization, HCC had a special bonus plan for the
management of HCC. As part of the Reorganization, management of HCC agreed to
forfeit its rights to participate in the bonus plan to HCC in return for a cash
payment and the opportunity to purchase an aggregate of 283,333 shares of the
Company's common stock for $570,874. Compensation expense in the amount of
$570,874 related to this transaction has been included in the net loss for the
year ended December 31, 1995. These shares are restricted and are subject to
repurchase upon termination of employment (see Note 8).
3. ACQUISITION
In July 1995, the Company acquired 83.3% of HCC (the Acquisition) in
exchange for 2,242,800 shares of the Company's common stock. HCC markets and
operates an automated commission payment service which settles electronic
bookings for travel agencies and hotel chains. HCC acts as a clearinghouse to
consolidate, collect and pay member travel agent commissions for participating
hotels.
F-13
83
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Acquisition was recorded under the purchase method of accounting, and
accordingly, the results of operations of HCC for all periods subsequent to the
Acquisition date are included in the accompanying consolidated financial
statements. The purchase price has been allocated to assets acquired and
liabilities assumed based on estimated fair value at the date of the
Acquisition. The approximate fair value of assets acquired and liabilities
assumed at the date of acquisition, after giving effect to the write off of
certain purchased research and development, is summarized as follows:
<TABLE>
<S> <C>
Current assets.............................................. $ 505,000
Software.................................................... $ 3,523,000
Property and equipment...................................... $ 245,000
Goodwill.................................................... $ 1,746,000
Other noncurrent assets..................................... $ 18,000
Current liabilities......................................... $(1,034,000)
Long-term liabilities....................................... $(2,089,000)
Minority interest........................................... $(1,393,000)
</TABLE>
Approximately $1,223,000 was allocated to in-process research and
development projects that at the time of the Acquisition had not reached
technological feasibility and had no probable alternative future use. Such
amount of in-process research and development was charged to expense at the date
of acquisition. In addition, as indicated above, $3,523,000 was allocated to
software and is being amortized over a three year period ending June 1998. The
balance of the purchase price paid, approximately $1,746,000, was recorded as
the excess of cost over the fair value of net assets acquired (goodwill) and is
being amortized on a straight-line basis over a 15 year period ending June 2010.
In June 1996, the Company purchased 210 shares of HCC preferred stock from
LNI for $2,000,000 cash and 89,733 shares of Pegasus common stock. The 210 HCC
preferred shares purchased represented a 16.7% minority ownership of HCC. After
the purchase, Pegasus owned 100% of the outstanding shares of HCC. The
transaction was accounted for as a purchase. The price paid in excess of the
minority interest value of $1,445,245 on the date of purchase was approximately
$833,000 and was accounted for as $119,000 of goodwill to be amortized ratably
over a 15 year period with the remaining excess allocated to $245,000 of
in-process research and development costs and $469,000 of step-up in the fair
value of capitalized software costs. Such amount of in-process research and
development was charged to expense at the date of acquisition. The fair value of
the Company's common stock given as consideration was determined using an
independent valuation.
4. ACCOUNTS RECEIVABLE
HCC collects travel agents' commissions from hotel chains and, after
retaining a portion of these commissions as a fee for services, remits the net
commissions to the travel agents. At December 31, 1995 and 1996, trade accounts
receivable were stated net of commissions of $6,059,362 and $8,149,815,
respectively.
Net accounts receivable from affiliates included in the accompanying
consolidated balance sheets were as follows at December 31:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Amounts due to HCC from hotel chains........................ $ 27,813 $ 34,606
Amounts due to THISCO from hotel chains..................... 380,573 702,612
Amounts due to TravelWeb from hotel chains.................. 239,002 11,152
Employee travel advances.................................... 8,368 6,035
-------- --------
Accounts receivable from affiliates......................... $655,756 $754,405
======== ========
</TABLE>
F-14
84
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consisted of the following:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Computer equipment.......................................... $4,657,439 $4,261,482
Furniture and equipment..................................... 363,801 640,507
Office equipment............................................ 394,055 712,245
Leasehold improvements...................................... 87,061 93,777
---------- ----------
5,502,356 5,708,011
Less: accumulated depreciation.............................. (2,841,889) (2,706,999)
---------- ----------
Property and equipment, net................................. $2,660,467 $3,001,012
========== ==========
</TABLE>
In 1995, the Company purchased assets previously recorded as capital
leases. These capitalized assets were being amortized over the life of the
lease, which was due to expire in the first quarter of 1996. The Company
financed the purchase of the assets and extended the assets' estimated lives by
one year. The effect of these changes was to decrease the net loss during 1995
by approximately $108,000 and increase the net loss during 1996 by $72,000.
6. CAPITAL LEASES
Assets recorded under capital leases are recorded at the lower of the
present value of future minimum lease payments or the fair value of the asset.
In 1995, the Company charged off $246,000 related to switch equipment which was
considered obsolete. The assets were written down to the estimated salvage value
of approximately $20,000. Total assets recorded under capital leases in 1995 and
1996 were approximately $4,664,000 and $3,829,000, respectively, net of
accumulated amortization of $2,392,000 and $1,591,000, respectively.
Amortization of assets under capital leases is included in depreciation and
amortization expense.
Future minimum lease payments and related interest are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1997..................................................... $ 1,322,130
1998..................................................... 1,203,738
1999..................................................... 644,825
2000..................................................... 86,680
-----------
Aggregate minimum lease payments............................ 3,257,373
Less: amount representing interest.......................... (459,236)
-----------
2,798,137
Less current portion........................................ (1,048,238)
-----------
$ 1,749,899
===========
</TABLE>
Interest rates on capital leases range from approximately 7% to 15%.
Interest expense on capital leases for the years ended December 31, 1994, 1995
and 1996 was approximately $123,000, $238,000 and $351,000, respectively.
F-15
85
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. NOTES PAYABLE TO AFFILIATES
Notes payable to affiliates at December 31 consisted of the following:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Note payable to shareholder, bearing interest at prime plus
2.0% on the last day of the previous quarter (the prime
rate at September 30, 1995 and 1996 was 8.75% and 8.25%,
respectively); principal and accrued interest due in full
June 30, 2001 (see Note 13)............................... $4,261,482 $4,261,482
Notes and accrued interest payable to shareholders, bearing
interest at prime plus 1.0%; principal and accrued
interest due in full July 21, 2000, (the prime rate at
December 31, 1995 and 1996 was 8.5% and 8.25%,
respectively)............................................. 509,261 554,474
Notes and accrued interest payable to shareholders, bearing
interest at prime plus 1.0%; principal and accrued
interest due in full July 21, 2000 (the prime rate at
December 31, 1995 and 1996 was 8.5% and 8.25%,
respectively)............................................. 526,415 573,129
Note payable to shareholder, bearing interest at prime plus
2.0%; due March 29, 1996; uncollateralized; beginning
December 31, 1995 the interest rate increased to prime
plus 3.0%; paid in full in 1996........................... 200,000 --
Note payable to shareholder, bearing interest at prime plus
2.0%; due December 31, 1995; paid-in-full in 1996......... 35,000 --
---------- ----------
5,532,158 5,389,085
Less current portion........................................ (235,000) (785,517)
---------- ----------
$5,297,158 $4,603,568
========== ==========
</TABLE>
In 1995 and 1996, no principal or interest payments were due on the note
payable to shareholder of $4,261,482, according to the terms of the agreement,
as THISCO had not reported a consolidated net income. During 1995 and 1996, the
Company elected to make certain payments of interest totaling $465,000 and
$478,000, respectively. Interest expense related to these notes was
approximately $537,000, $614,000 and $539,000 during the years ended December
31, 1994, 1995 and 1996.
In July 1995, simultaneous with the Acquisition, the Company negotiated new
note agreements with all but one shareholder. The new note agreements,
representing obligations of subsidiaries guaranteed by Pegasus, converted
$450,000 in principal to additional paid-in capital, financed $255,203 of unpaid
interest, reduced the interest rate from prime plus two percent to prime plus
one percent and extended the due dates from December 31, 1995 to July 21, 2000.
The note agreement related to the one shareholder which was not renegotiated was
reduced in principal by $75,000 in exchange for Pegasus agreeing to guarantee
the remaining THISCO debt. The reduction of principal was recorded as a capital
contribution.
8. SHAREHOLDERS' EQUITY (DEFICIT)
During 1995, the Company issued 283,333 shares of restricted common stock
to certain members of management in connection with the termination of the HCC
special bonus plan (see Note 2). A compensation charge was recorded in 1995 for
the fair value of the shares issued. For a period of three years from date of
issuance, these shares cannot be sold. If an employee leaves the Company, the
Company has the right to repurchase the shares at the lesser of fifty percent of
the original purchase price or the current market value. During 1996, the
Company repurchased 25,467 shares from a terminated employee.
F-16
86
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a result of the Reorganization effective July 1995, certain shareholders
exchanged shares of THISCO for shares of Pegasus. Additionally, in order to
effect the purchase of HCC, the Company issued Pegasus shares to HCC
shareholders in exchange for 83.3% of the outstanding capital stock of HCC. Some
of the Pegasus shares exchanged for HCC shares were subject to repurchase. The
repurchase was based upon an agreement by the HCC shareholders that some value
for the HCC shares exchanged should be assigned based upon the number of
transactions that an HCC shareholder committed to process through HCC in 1996.
If a shareholder did not fulfill its commitment by processing the agreed number
of transactions through HCC in 1996, the Company had the option to repurchase
such shares for $0.01 per share. The total number of shares repurchased from
each shareholder is based upon the percentage of their transaction commitment
actually processed by HCC during 1996. Effective December 31, 1996, the Company
repurchased 91,017 shares of the 477,733 shares subject to repurchase.
In June 1996, the Company declared a one hundred-for-one stock split
effected in the form of a stock dividend to stockholders of record on that date.
The number of common shares the Company is authorized to issue was also
increased from 100,000 to 20 million and the number of authorized preferred
shares was increased from 10,000 to 2 million.
In June 1996, Information Associates, L.P. and Information Associates, C.V.
purchased 1,538,463 shares of the Company's Series A preferred stock (par value
$0.01) for $4.88 per share or $7,500,005. Total shares outstanding increased
from 5,191,249 (including the 89,733 issued to LNI as part of the purchase of
minority interest in HCC) to 6,729,712 shares, with the Information Associates,
L.P. and Information Associates, C.V. ownership representing 22.9% of the total
shares outstanding after the purchase. Additionally, the Company has reserved
866,667 shares as part of the Company's 1996 Stock Option Plan which after
issuance would reduce the 1,538,463 Series A preferred shares to 20.3% of the
total shares outstanding. The Series A preferred shares carry special provisions
which include: conversion rights to exchange one share of Series A preferred
stock for one share of Pegasus common stock; the right to elect two of nine
persons to the board of directors; preferred status as to the payment of any
dividends that are declared by the board of directors; and preferred status in
the event of any liquidation, dissolution or winding up of the corporation.
9. STOCK-BASED COMPENSATION
The Company's 1996 stock option plan was approved by the board of directors
in June 1996 and authorizes the grant of up to 866,667 shares of the Company's
common stock in the form of incentive stock options (ISOs) and nonqualified
stock options. The plan is administered and grant prices are determined by the
Stock Option Committee of the board of directors (Committee). Options normally
extend for a period of 10 years, and under Committee policy become exercisable
in installments of 25% per year commencing one year from the date of grant, or
over a vesting period determined by the Committee. Shares granted come from the
Company's authorized but unissued or reacquired common stock. In 1996, the
Company issued to executives and employees options to purchase an aggregate of
771,733 shares of common stock. These options will become exercisable over a
period of four years.
The Company's 1997 stock option plan was approved by the board of directors
in March 1997 and authorizes the grant of up to 333,333 shares of the Company's
common stock in the form of incentive stock options (ISOs) and nonqualified
stock options. The plan is administered and grant prices are determined by the
Committee. Options normally extend for a period of 10 years, and under Committee
policy become exercisable in installments of 25% per year commencing one year
from the date of grant, or over a vesting period determined by the Committee.
Shares granted come from the Company's authorized but unissued or reacquired
common stock. These options will become exercisable over a period of four years.
The Company has adopted the disclosure-only provisions of FAS 123. As
discussed in Note 1, the Company has elected to continue to account for
stock-based compensation using the intrinsic value method prescribed in APB 25.
Accordingly, unearned compensation of $551,150 related to options is being
recognized
F-17
87
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ratably over the vesting period for stock option grants with exercise prices
which are less than fair market value of the stock at the date of grant.
Compensation expense of $65,213 was charged to operations in 1996.
There were no stock option awards granted prior to 1996; however, had
compensation cost for the Company's stock option plan been determined based on
the fair value at the grant date for awards issued in 1996 consistent with the
provisions of FAS 123, the Company's net loss would have been increased to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Net loss - as reported...................................... $(3,484,801)
Net loss - pro forma........................................ $(3,511,531)
Pro forma net loss per share -- as reported................. $ (0.48)
Pro forma net loss per share -- as adjusted for pro forma
impact of FAS 123......................................... $ (0.49)
</TABLE>
The weighted average fair value at date of grant for options granted during
1996 was $1.22 per option. The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used:
<TABLE>
<S> <C>
Dividend yield.............................................. --
Expected volatility......................................... 0.0%
Risk-free rate of return.................................... 6.5%
Expected life............................................... 4 years
</TABLE>
The following table summarizes activity under the Company's stock option
plan during the year ended December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED
EXERCISE AVERAGE
PRICE EXERCISE
OPTIONS PER SHARE PRICE PER SHARE
-------- ----------- ---------------
<S> <C> <C> <C>
Outstanding at December 31, 1995................. -- -- --
Granted........................................ 771,733 $2.01-$3.11 $2.39
Canceled....................................... -- -- --
-------- ----------- -----
Outstanding at December 31, 1996................. 771,733 $2.01-$3.11 $2.39
======== =========== =====
Options exercisable at December 31, 1996......... -- -- --
</TABLE>
<TABLE>
<CAPTION>
OPTIONS
OUTSTANDING AT REMAINING
EXERCISE PRICES DECEMBER 31, 1996 CONTRACTUAL LIFE
--------------- ----------------- ----------------
<C> <C> <C>
$2.01 503,333 9.5 years
$3.11 268,400 9.8 years
</TABLE>
In conjunction with the Reorganization described in Note 2, LNI was granted
an option, expiring in July 1998, to exchange its 210 shares of HCC preferred
stock for 448,667 shares of the Company's common stock. The option was canceled
in June 1996 in conjunction with the Company's purchase of LNI's minority
interest in HCC.
F-18
88
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES
Pretax income (loss) from continuing operations for the years ended
December 31 was taxed under the following jurisdictions:
<TABLE>
<CAPTION>
1994 1995 1996
--------- ----------- -----------
<S> <C> <C> <C>
Domestic..................................... $(423,213) $(3,527,122) $(3,528,503)
Foreign...................................... -- (43,782) 58,702
--------- ----------- -----------
$(423,213) $(3,570,904) $(3,469,801)
========= =========== ===========
</TABLE>
Deferred taxes consisted of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward......................... $ 4,475,200 $ 4,975,949
Bad debt reserves....................................... 6,800 15,234
Depreciation and amortization........................... 36,623 1,896
Stock option compensation expense....................... -- 22,172
Rent expense............................................ -- 37,213
Various expense accruals................................ 7,248 53,793
Other................................................... 573 2,164
----------- -----------
Total gross deferred tax assets................. 4,526,444 5,108,421
Valuation allowance..................................... (3,528,272) (4,549,452)
Deferred tax liability:
Software amortization................................... (998,172) (558,969)
----------- -----------
Net deferred tax assets................................... $ -- $ --
=========== ===========
</TABLE>
The net deferred tax asset is fully reserved because of uncertainty
regarding the Company's ability to recognize the benefit of the asset in future
years. At December 31, 1994, 1995 and 1996, the Company had net operating loss
carryforwards of approximately $7,538,000, $13,162,000 and $14,635,000,
respectively, which begin to expire in 2003, if not previously utilized.
Utilization of the net operating loss carryforwards may be limited by the
separate return loss year rules and could be affected by ownership changes which
have occurred or could occur in the future.
The components of the income tax provision for the years ended December 31
were as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Current provision:
Federal............................................. $ -- $ -- $ --
State............................................... -- -- --
Foreign............................................. -- -- 15,000
------- ------- -------
$ -- $ -- $15,000
======= ======= =======
Deferred provision (benefit):
Federal............................................. $ -- $ -- $ --
State............................................... -- -- --
------- ------- -------
Provision for income taxes............................ $ -- $ -- $15,000
======= ======= =======
</TABLE>
F-19
89
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of taxes based on the federal statutory rate of 34.0% and
the provision for income taxes is summarized as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Income taxes at the federal statutory rate.................. (34.0%) (34.0%) (34.0%)
Valuation allowance......................................... 31.8% 19.8% 29.4%
Permanent differences....................................... 2.2% 14.3% 5.1%
Other, net.................................................. 0.0% (0.1%) (0.5%)
----- ----- -----
Provision for income taxes.................................. 0.0% 0.0% 0.0%
===== ===== =====
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
The Company leases its corporate office space and certain office equipment
under noncancelable operating leases. The Company incurred rent expense of
approximately $146,000, $318,000 and $697,000 in 1994, 1995 and 1996,
respectively.
Approximate future minimum lease payments at December 31, 1996, under
noncancelable operating leases with original terms exceeding one year, including
the Pegasus UK operating lease translated at the rate in effect at December 31,
1996, were as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C> <C>
1997............................................................. $ 673,000
1998............................................................. 621,000
1999............................................................. 597,000
2000............................................................. 567,000
2001............................................................. 557,000
Thereafter.......................................................... 552,000
----------
$3,567,000
==========
</TABLE>
In June 1993, HCC received $2,000,000 from Citicorp in exchange for a
five-year noncancelable data processing contract and recorded the amount as
deferred income. The noncancelable contract requires Citicorp to process
transactions and generate various reports in exchange for a processing fee. The
contract requires HCC to maintain an annual minimum volume of transactions. If
the annual minimum volume is not attained, HCC is required to pay Citicorp an
additional processing fee for each transaction under the minimum volume. At the
date of the Acquisition there was approximately $1,583,000 of deferred income to
be amortized over the remaining life of the contract according to the volume of
guaranteed transactions, as defined by the contract. During 1995 and 1996, the
Company recognized approximately $210,000 and $431,000, respectively, of the
deferred income. However, because the Company did not meet its annual minimum
volume of transactions during 1995, it also recorded an additional processing
fee of approximately $44,700 for the year ended December 31, 1995. In 1996, the
Company exceeded the annual minimum volume requirement.
12. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) defined contribution retirement plan (401(k)
Plan) covering full-time employees who have completed one year of service and
attained the age of twenty-one.
Effective January 1, 1995, the 401(k) Plan was amended to change the pro
rata vesting schedule from two to five years. The sponsor can make discretionary
matching contributions up to five percent of employees' annual contributions.
During 1994, 1995 and 1996, the Company contributed approximately $34,000,
$101,000 and $160,000, respectively, to the 401(k) Plan.
F-20
90
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Prior to the Acquisition of HCC by THISCO, both companies participated in
the 401(k) Plan. Accordingly, prior to the Acquisition, HCC contributed $20,000
and $18,000 in 1994 and 1995, respectively.
13. SUBSEQUENT EVENT
The Company has a note payable to a shareholder with a principal balance
outstanding of $4,261,482 at December 31, 1995 and 1996. The original terms of
the note called for five equal payments of principal and interest beginning in
the year that THISCO generated a net profit, but due in full no later than June
30, 2001. Effective January 1997, the Company began remitting equal monthly
payments of principal and interest.
In May, 1997, the Company issued a warrant to a customer for the purchase
of 345,723 shares of the Company's common stock. The warrants are exercisable
during the two year period ended May 12, 1999 at an exercise price equal to the
lower of $7.20 per share or 85.0% of the IPO price per share.
14. RELATED PARTIES
As explained in Note 1, the Company derives a substantial portion of its
revenue from shareholders and shareholder-owned companies through the operation
of its international automated interface called Ultraswitch. Also, as a result
of the Acquisition of HCC in July 1995, a significant portion of the Company's
revenue is generated indirectly by shareholders as a function of the Company's
role as the consolidator and payor of commissions to travel agencies. The
Company receives a fee from hotels for consolidating and remitting commission
payments to travel agencies on behalf of the hotel properties and receives a fee
from travel agencies through the retention of a percentage of commission
payments remitted to travel agencies. A summary of revenues is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------------------ ------------------ -------------------
SOURCE OF REVENUE AMOUNT % AMOUNT % AMOUNT %
----------------- ---------- ----- ---------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Shareholders -- direct......... $3,772,458 80.9% $4,950,266 53.2% $ 6,458,380 40.7%
Shareholders -- indirect....... 719,527 15.4% 2,450,326 26.4% 5,503,065 34.7%
---------- ----- ---------- ----- ----------- -----
Total generated by shareholders
directly and indirectly...... 4,491,985 96.3% 7,400,592 79.6% 11,961,445 75.4%
All other revenue.............. 174,466 3.7% 1,895,136 20.4% 3,907,567 24.6%
---------- ----- ---------- ----- ----------- -----
Total................ $4,666,451 100.0% $9,295,728 100.0% $15,869,012 100.0%
========== ===== ========== ===== =========== =====
</TABLE>
A shareholder provides services to the Company, including facility
management, consulting and software development. During 1994, 1995 and 1996, the
Company recognized expense in the amount of approximately $454,000, $495,000 and
$774,000, respectively, for those services. Further, the Company capitalized
$42,000 and $210,000 related to software development and property and equipment
during 1994 and 1995, respectively.
Persons related to an officer of the Company have provided printing, design
and procurement services to the Company. During 1994, 1995 and 1996, the Company
paid approximately $95,000, $48,000 and $143,000, respectively, relating to
these services, the majority of which related to capitalized furniture
purchases.
15. STOCK SPLIT
The Company plans to proceed with an IPO in 1997. Consequently, the Company
approved the declaration of a four-for-three stock split of the outstanding
common and preferred stock effected in the form of a dividend to shareholders of
record on the effective date of the Registration Statement on Form S-1 with
respect to the IPO. The number of shares of common stock the Company is
authorized to issue will increase from 20 million to 100 million and the number
of authorized shares of preferred stock will remain 2.0 million. As stated in
Note 1, the financial statements have been adjusted retroactively for the
four-for-three split.
F-21
91
PEGASUS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, PRO FORMA
1997 (NOTE 7)
------------ ------------
<S> <C> <C>
Cash and cash equivalents................................... $ 2,441,474 $ 2,441,474
Restricted cash............................................. 845,665 845,665
Short-term investments...................................... 983,604 983,604
Accounts receivable, net of allowance for doubtful accounts
of $61,262................................................ 1,189,889 1,189,889
Accounts receivable from affiliates......................... 1,261,241 1,261,241
Other current assets........................................ 248,199 248,199
------------ ------------
Total current assets.............................. 6,970,072 6,970,072
Software development costs.................................. 1,761,465 1,761,465
Property and equipment, net................................. 3,163,499 3,163,499
Goodwill, net of accumulated depreciation of $210,161....... 1,654,554 1,654,554
Other noncurrent assets..................................... 51,074 51,074
------------ ------------
Total assets...................................... $ 13,600,664 $ 13,600,664
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities.................... $ 2,499,065 $ 2,499,065
Accounts payable to affiliates.............................. 140,729 140,729
Unearned income............................................. 1,029,107 1,029,107
Current portion of capital lease obligations................ 1,090,121 1,090,121
Current portion of notes payable to affiliates.............. 805,818 805,818
------------ ------------
Total current liabilities......................... 5,564,840 5,564,840
Capital lease obligations, net of current portion........... 1,539,710 1,539,710
Notes payable to affiliates, net of current portion......... 4,417,010 4,417,010
Unearned income............................................. 352,941 352,941
Other noncurrent liabilities................................ 125,684 125,684
Minority interest........................................... -- --
Shareholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares
authorized; 1,538,463 shares issued and outstanding
(actual); no shares outstanding (pro forma)............... 15,385 --
Common stock, $.01 par value; 100,000,000 shares authorized,
5,307,733 shares issued (actual); 6,846,196 shares issued
(pro forma)............................................... 53,077 68,462
Additional paid-in capital.................................. 16,968,364 16,968,364
Unearned compensation....................................... (451,488) (451,488)
Accumulated deficit......................................... (14,958,521) (14,958,521)
Less treasury stock (116,484, at cost)...................... (26,338) (26,338)
------------ ------------
Total shareholders' equity........................ 1,600,479 1,600,479
------------ ------------
Total liabilities and shareholders' equity........ $ 13,600,664 $ 13,600,664
============ ============
</TABLE>
See accompanying notes to consolidated interim financial statements.
F-22
92
PEGASUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
Net revenues
Shareholder............................................... $3,052,212 $3,120,692
Nonshareholder............................................ 750,955 1,255,871
---------- ----------
Total revenues.................................... 3,803,167 4,376,563
Cost of services............................................ 1,637,870 1,557,656
Research and development.................................... 627,112 622,727
General and administrative expenses......................... 692,071 855,531
Marketing and promotion expenses............................ 643,884 865,307
Depreciation and amortization............................... 909,493 707,458
---------- ----------
Operating income (loss)..................................... (707,263) (232,116)
Other (income) expense:
Interest expense.......................................... 211,573 212,150
Interest income........................................... -- (55,902)
---------- ----------
Loss before income taxes and minority interest.............. (918,836) (388,364)
Income taxes................................................ -- --
---------- ----------
Loss before minority interest............................... (918,836) (388,364)
Minority interest........................................... (47,961) --
---------- ----------
Net loss.................................................... $ (966,797) $ (388,364)
========== ==========
Unaudited pro forma data (Notes 3 and 4):
Pro forma net loss per share................................ $ (0.05)
==========
Weighted average shares outstanding used in the pro forma
net loss per share calculation............................ 7,480,899
==========
Supplemental pro forma net loss per share................... $ (0.03)
==========
Weighted average shares used in the supplemental pro forma
net loss per share calculation............................ 8,005,689
==========
</TABLE>
See accompanying notes to consolidated interim financial statements.
F-23
93
PEGASUS SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
-------------------------------------------------- ------------------- ADDITIONAL
NUMBER OF NUMBER OF PAID-IN UNEARNED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
---------------------------------------- ------- --------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December
31,
1996............... 1,538,463 $15,385 5,307,733 $53,077 $16,968,364 $(485,937)
Compensation expense
for vesting of
stock options...... 34,449
Net loss............. -- -- -- -- -- --
---------- ------- --------- ------- ----------- ---------
Balance at March 31,
1997............... 1,538,463 $15,385 5,307,733 $53,077 $16,968,364 $(451,488)
========== ======= ========= ======= =========== =========
<CAPTION>
TREASURY STOCK
--------------------
NUMBER OF ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
--------- -------- ------------ ----------
<S> <C> <C> <C> <C>
Balance at December
31,
1996............... (116,484) $(26,338) $(14,570,157) $1,954,394
Compensation expense
for vesting of
stock options...... 34,449
Net loss............. -- -- (388,364) (388,364)
-------- -------- ------------ ----------
Balance at March 31,
1997............... (116,484) $(26,338) $(14,958,521) $1,600,479
======== ======== ============ ==========
</TABLE>
See accompanying notes to consolidated interim financial statements.
F-24
94
PEGASUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1996 1997
--------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(966,797) $ (388,364)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Minority share of net gain (loss)...................... 47,961 --
Loss (gain) on sale of equipment....................... 9,988 --
Depreciation and amortization.......................... 909,493 707,458
Adjustment for discontinued software................... 316,698 --
Proceeds from increase in long-term notes payable
accrued interest...................................... 21,229 22,671
Changes in assets and liabilities:
Restricted cash...................................... 1,254 (155,459)
Accounts receivable.................................. 59,349 (264,938)
Accounts receivable from affiliates.................. (777,980) (506,836)
Short-term investments............................... -- 446,040
Other current and noncurrent assets.................. (41,083) (79,028)
Accounts payable and accrued liabilities............. 676,004 (75,121)
Accounts payable to affiliates....................... 393,668 25,680
Unearned income...................................... (102,847) 440,872
Unearned compensation................................ -- 34,449
Other noncurrent liabilities......................... 25,867 5,976
--------- -----------
Net cash provided by operating activities......... $ 572,804 $ 213,400
========= ===========
Cash flows from investing activities:
Purchase of software, property and equipment.............. $(158,441) $ (407,291)
Proceeds from sale of software, property and equipment.... 132,328 --
Purchase of marketable securities......................... -- (1,429,645)
Proceeds from sale of marketable securities............... -- 2,705,076
--------- -----------
Net cash provided by (used in) investing
activities....................................... (26,113) 868,140
--------- -----------
Cash flows from financing activities:
Repayments of notes payable............................... (235,000) (188,928)
Repayments of capital leases.............................. (168,833) (251,362)
Proceeds from capital leases.............................. -- 3,913
--------- -----------
Net cash used in financing activities............. (403,833) (436,377)
--------- -----------
Net increase in cash and cash equivalents................... 142,858 645,163
Cash and cash equivalents, beginning year................... 93,831 1,796,311
--------- -----------
Cash and cash equivalents, end of year...................... $ 236,689 $ 2,441,474
========= ===========
Supplemental schedule of noncash investing and financing
activities:
Acquisition of equipment under capital leases............. $ -- $ 79,144
========= ===========
</TABLE>
See accompanying notes to consolidated interim financial statements.
F-25
95
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
In July 1995, Pegasus Systems, Inc. (Pegasus or the Company) was formed as
a Delaware holding company to combine the operations of two existing companies
operating in the same industry, The Hotel Industry Switch Company, Inc. (THISCO)
and The Hotel Clearing Corporation (HCC). For accounting purposes, the
combination was recorded as a purchase of HCC.
The accompanying financial statements include the consolidated accounts of
Pegasus and its wholly owned subsidiaries, THISCO and HCC. THISCO is
consolidated with its wholly owned subsidiary, TravelWeb, Inc. (TravelWeb), and
HCC is consolidated with its wholly owned subsidiary, Pegasus Systems Inc. (UK)
Limited (Pegasus UK, formerly The Hotel Clearing Corporation (UK) Limited),
(collectively, the Company). All significant intercompany balances have been
eliminated in consolidation.
THISCO was formed in September 1988 as a Delaware corporation. The
Company's THISCO service provides an electronic interface from hotel central
reservation systems to travel agencies through Global Distribution Systems
("GDSs"), which are electronic travel information and reservation systems such
as SABRE.
HCC, acquired by the Company in July 1995 (see Note 3), was formed in July
1991 as a Delaware corporation. The Company's HCC service consolidates
commissions paid by participating hotels to a participating travel agency into a
single monthly payment and provides participants with comprehensive transaction
reports. Hotel properties and travel agencies worldwide utilize the HCC service
to increase the efficiency and reduce costs associated with preparing, paying
and reconciling hotel room reservation commissions.
TravelWeb was formed in October 1995 as a Delaware corporation. The
Company's TravelWeb service provides individual travelers direct access to
online hotel information and the ability to make reservations electronically at
hotel properties. In addition, through its recently introduced NetBooker
service, the Company offers TravelWeb's comprehensive hotel database and
Internet hotel reservation capabilities to third-party Web sites.
Pegasus UK, a wholly-owned subsidiary of HCC, was formed in September 1993
in England to market and provide services for travel agents and hotel chains
operating in Europe, Africa and Asia.
The financial information presented herein should be read in conjunction
with the Company's annual consolidated financial statements for the year ended
December 31, 1996. The foregoing unaudited interim consolidated financial
statements reflect all adjustments (all of which are of a normal recurring
nature) which are, in the opinion of management, necessary for a fair
presentation of the results of the interim periods. The results for interim
periods are not necessarily indicative of results to be expected for the year.
2. STOCK SPLITS
A one hundred-for-one stock split was effected in June 1996. All references
in the consolidated financial statements to shares, share prices, per share
amounts and stock plans have been adjusted retroactively for the one
hundred-for-one stock split.
The Company plans to proceed with an IPO in 1997. Consequently, in May 1977
the Board of Directors approved the declaration of a four-for-three stock split
of the outstanding common and preferred stock effected in the form of a dividend
to stockholders of record on the effective date of the Registration Statement on
Form S-1 with respect to the IPO. The number of shares of common stock the
Company is authorized to issue will increase from 20 million to 100,000,000 and
the number of authorized shares of preferred stock will remain two million. All
references in the consolidated financial statements to shares, share prices, per
share amounts and stock plans have been adjusted retroactively for the
four-for-three stock split.
F-26
96
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
3. PRO FORMA NET LOSS PER SHARE
Historical loss per share has been excluded from the Company's statements
of operations on the basis that it is irrelevant due to the planned conversion
of all outstanding Series A preferred stock to common stock on a one-for-one
basis concurrent with the effectiveness of the Company's initial public
offering. Pro forma net loss per share has been computed using the weighted
average number of common shares outstanding after giving retroactive effect to
the four-for-three stock split to be effected upon effectiveness of the
Company's Registration Statement on Form S-1 (see Note 7) and assuming that (i)
all shares of Series A preferred stock have been converted to shares of common
stock as of the date of issuance (see Note 8) and (ii) all shares, options and
warrants issued subsequent to June 1, 1996, at an exercise price less the
initial public offering (IPO) price have been included in the calculation as if
they were outstanding for the entire period presented using the treasury stock
method and the IPO price.
4. SUPPLEMENTAL PRO FORMA NET LOSS PER SHARE
Supplemental pro forma net loss per share is based on the weighted average
number of shares of common stock used in the calculation of pro forma net loss
per share, plus the number of shares (524,790 for the three months ended March
31, 1997) that the Company would need to repay $5,222,828 of indebtedness
outstanding under notes payable to certain stockholders of the Company at March
31, 1997. For purposes of computing supplemental pro forma net loss per share
(unaudited), the pro forma net loss for the three months ended March 31, 1997
was reduced by $130,639, representing elimination of the related interest
expense on such notes payable.
5. EARNINGS PER SHARE
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (FAS 128), was issued. FAS 128 specifies the computation,
presentation and disclosure requirements for earnings per share (EPS) for
entities with publicly held common stock or potential common stock. FAS 128
simplifies the standards for computing EPS previously found in Accounting
Principles Board Opinion No. 15, "Earnings per Share" (APB 15), and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the statement of operations for all
entities with complex capital structures and requires a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. FAS 128 is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods; earlier application is not permitted. FAS 128 requires restatement of
all prior-period EPS data presented. The Company will adopt FAS 128 in the year
ending December 31, 1997 and, based on current circumstances, does not believe
the effect of adoption will be material.
6. SUBSEQUENT EVENT
In May 1997, the Company issued a warrant to a customer for the purchase of
345,723 shares of the Company's common stock. The warrants are exercisable
during the two year period ended May 12, 1999 at an exercise price equal to the
lower of $7.20 per share or 85.0% of the IPO price per share.
7. PRO FORMA BALANCE SHEET
In conjunction with the Company's planned IPO, all outstanding shares of
Series A preferred stock will be converted on a one-for-one basis to common
stock concurrent with the effectiveness of the Company's Registration Statement
on Form S-1. Accordingly, the pro forma balance sheet at March 31, 1997 gives
effect to the conversion of the 1,538,463 shares of Series A preferred stock to
1,538,463 shares of Series A common stock as if such conversion had occurred as
of the balance sheet date.
F-27
97
INDEPENDENT AUDITOR'S REPORT
To the Shareholders
The Hotel Clearing Corporation
We have audited the accompanying consolidated balance sheets of The Hotel
Clearing Corporation and its subsidiary as of December 31, 1993 and 1994, and
the related consolidated statements of operations, shareholders' deficit and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Hotel
Clearing Corporation as of December 31, 1993 and 1994, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
Belew Averitt LLP
Dallas, Texas
April 4, 1995, except for
Note 12, as to which the
date is August 21, 1995
F-28
98
THE HOTEL CLEARING CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1993 AND 1994
ASSETS
<TABLE>
<CAPTION>
1993 1994
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 37,835 $ 7,612
Accounts receivable, net (Note 3)......................... 215,382 194,493
Accounts receivable from affiliates....................... 14,496 17,732
Prepaid expenses.......................................... 21,230 15,923
----------- -----------
Total current assets.............................. 288,943 235,760
Property and equipment, net (Note 4)........................ 210,445 209,640
----------- -----------
Total assets...................................... $ 499,388 $ 445,400
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities.................. $ 368,920 $ 601,177
Accounts payable to affiliates............................ 29,126 187,472
Current portion of unearned income........................ 274,510 352,941
Line-of-credit (Note 6)................................... 180,000 --
Current portion of notes payable to affiliates (Note 6)... -- 786,478
Current portion of capital lease obligations (Note 5)..... 33,500 52,528
----------- -----------
Total current liabilities......................... 886,056 1,980,596
Capital lease obligations, net of current portion (Note
5)........................................................ 58,381 48,929
Notes payable to affiliates (Note 6)........................ 747,139 --
Unearned income, net of current portion (Note 12)........... 1,725,490 1,372,549
----------- -----------
Total liabilities................................. 3,417,066 3,402,074
Commitments and contingencies (Notes 8 and 12).............. -- --
Shareholders' deficit (Note 7):
Preferred stock:
Series A............................................... 2 2
Series B............................................... 1 1
Common stock.............................................. 10 10
Additional paid-in capital................................ 1,702,885 1,702,885
Accumulated deficit....................................... (4,620,576) (4,659,572)
----------- -----------
Total shareholders' deficit....................... (2,917,678) (2,956,674)
----------- -----------
Total liabilities and shareholders' deficit....... $ 499,388 $ 445,400
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-29
99
THE HOTEL CLEARING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993 AND 1994
<TABLE>
<CAPTION>
1993 1994
----------- ----------
<S> <C> <C>
Net revenues (Note 8):
Shareholder............................................... $ 1,515,686 $2,397,236
Nonshareholder............................................ 8,691 349,255
----------- ----------
1,524,377 2,746,491
Operating expenses:
General and administrative expenses....................... 2,215,356 1,763,754
Other operating expenses.................................. 531,345 878,444
Depreciation and amortization............................. 113,064 65,216
----------- ----------
Total operating expenses.......................... 2,859,765 2,707,414
----------- ----------
Operating income (loss)..................................... (1,335,388) 39,077
Interest expense............................................ 97,448 78,073
----------- ----------
Loss before income taxes and extraordinary gain............. (1,432,836) (38,996)
Income taxes (Note 9)....................................... -- --
----------- ----------
Loss before extraordinary gain.............................. (1,432,836) (38,996)
Extraordinary gain (Note 11)................................ 269,310 --
----------- ----------
Net loss.................................................... $(1,163,526) $ (38,996)
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
100
THE HOTEL CLEARING CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1993 AND 1994
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------ ------------------ ADDITIONAL
NUMBER OF NUMBER OF PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------ --------- ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992............. -- $-- 9 $ 1 $ 550,997 $(3,457,050) $(2,906,052)
105-for-1 stock split.................. -- -- 936 9 (9) -- --
Preferred stock issuance:
Series A............................. 210 2 -- -- 1,049,998 -- 1,050,000
Series B............................. 20 1 -- -- 1,899 -- 1,900
Conversion of note payable into common
stock................................ -- -- 105 -- 100,000 -- 100,000
Net loss............................... -- -- -- -- -- (1,163,526) (1,163,526)
--- --- ----- --- ---------- ----------- -----------
Balance, December 31, 1993............. 230 3 1,050 10 1,702,885 (4,620,576) (2,917,678)
Net loss............................... -- -- -- -- -- (38,996) (38,996)
--- --- ----- --- ---------- ----------- -----------
Balance, December 31, 1994............. 230 $ 3 1,050 $10 $1,702,885 $(4,659,572) $(2,956,674)
=== === ===== === ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-31
101
THE HOTEL CLEARING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993 AND 1994
<TABLE>
<CAPTION>
1993 1994
----------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(1,163,526) $ (38,996)
Adjustments to reconcile net loss to cash provided (used)
by operating activities:
Loss on sale of equipment.............................. -- 125
Depreciation and amortization.......................... 113,064 65,216
Reclassification of accrued interest to notes payable
to affiliates......................................... 56,107 58,614
Gain on extinguishment of debt......................... (269,310) --
Deferred income recognition............................ -- (274,510)
(Increase) decrease in:
Accounts receivable, net............................. (166,190) 20,889
Accounts receivable from affiliates.................. (14,496) (3,236)
Prepaid expenses..................................... (6,230) 5,307
Increase (decrease) in:
Accounts payable and accrued liabilities............. (55,410) 232,257
Accounts payable to affiliate........................ (14,163) 158,346
----------- ---------
Net cash provided (used) by operating
activities...................................... (1,520,154) 224,012
Cash flows from investing activities:
Purchase of property and equipment........................ (34,266) (42,612)
Proceeds from sale of equipment........................... -- 21,152
----------- ---------
Net cash used by investing activities............. (34,266) (21,460)
Cash flows from financing activities:
Proceeds from issuance of stock........................... 1,900 --
Proceeds from installment payments on stock purchase...... 1,050,000 --
Proceeds from contract commitment -- deferred income...... 2,000,000 --
Proceeds (repayment) of line-of-credit.................... 180,000 (180,000)
Repayment of notes payable................................ (1,640,000) (19,275)
Repayment of capital leases............................... (14,437) (33,500)
----------- ---------
Net cash provided (used) by financing
activities...................................... 1,577,463 (232,775)
----------- ---------
Net increase (decrease) in cash and cash equivalents........ 23,043 (30,223)
Cash and cash equivalents, beginning of period.............. 14,792 37,835
----------- ---------
Cash and cash equivalents, end of period.................... $ 37,835 $ 7,612
=========== =========
Supplemental disclosures of cash flow information --Interest
paid...................................................... $ 70,789 $ 19,458
=========== =========
Supplemental schedule of noncash investing and financing
activities:
Issuance of capital lease obligation for computer
equipment.............................................. $ 106,318 $ 43,076
=========== =========
Conversion of note payable to common stock................ $ 100,000 $ --
=========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-32
102
THE HOTEL CLEARING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND 1994
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and background -- The Hotel Clearing Corporation (HCC) was
incorporated as a Delaware corporation on July 25, 1991, to market and operate
an automated commission payment processing service that consolidates commissions
paid by participating hotels to a participating travel agency into a single
monthly payment and provides participants with comprehensive transaction
reports. HCC collects commissions from participating hotel chains and remits
these commissions to participating travel agents.
Consolidation -- The consolidated financial statements include the accounts
of HCC and its wholly-owned subsidiary, The Hotel Clearing Corporation (U.K.)
Limited (HCC U.K.) (collectively, the Company). HCC U.K. commenced operations in
England on September 2, 1993 to market and provide related services for travel
agents and hotel chains operating in Europe. All significant intercompany
balances and transactions have been eliminated.
Cash and cash equivalents -- The Company considers all highly-liquid
investments with an original maturity of three months or less when purchased to
be cash equivalents.
Software development costs -- All costs incurred in the internal
development of computer software used in delivery of the Company's services are
expensed until a product design and a working model of the software have been
tested and completed. Thereafter, any further development or production costs
are capitalized. Maintenance and customer support costs are expensed when
incurred. Capitalized costs are being amortized over three to five years using
the straightline method. During 1993, the Company amortized approximately
$78,000 of capitalized software costs. No software development costs were
capitalized in 1993 or 1994.
Property and equipment -- Property and equipment are recorded at cost and
are depreciated using the straight-line method over their estimated useful
lives, ranging from five to seven years. Expenditures for maintenance and
repairs, as well as minor renewals, are charged to operations as incurred.
Betterments and major renewals are capitalized. Upon retirement or sale of an
asset, the cost of the asset and the related accumulated depreciation and
amortization are removed from the accounts and any resulting gain or loss is
credited or charged to operations.
Leasehold improvements -- Leasehold improvements are recorded at cost and
are amortized using the straight-line method over four years, which is the life
of the lease.
Revenues -- HCC's revenues are derived primarily from travel agencies. HCC
processes commission payments to travel agencies on behalf of both shareholder
and nonshareholder hotels. HCC also provides transaction detail reports and
hotel booking reconciliation services to travel agencies. For these services,
HCC receives a percentage of the travel agencies' commissions paid through HCC.
HCC also earns transaction fees from the participating hotels. These revenues
are recorded as earned throughout the year. Revenue related to term contracts
are deferred and amortized into income over the life of the contracts. For the
years ended December 31, 1993 and 1994, HCC's revenues from hotels are presented
net of commission payments to travel agencies of $22,211,781 and $34,218,496,
respectively.
Federal income taxes -- Effective January 1, 1993, the Company adopted
Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for
Income Taxes" which requires an asset and liability approach to financial
accounting for income taxes. In the event differences between the financial
reporting basis and the tax basis of HCC's assets and liabilities result in
deferred tax assets, SFAS 109 requires an evaluation of the probability of being
able to realize the future benefits indicated by such assets. A valuation
allowance is provided for a portion or all of the deferred tax assets when there
is an uncertainty regarding the Company's ability to recognize the benefits of
the assets in future years.
F-33
103
THE HOTEL CLEARING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of credit risk -- The Company's financial instruments exposed
to concentration of credit risk consist primarily of its trade receivables. The
majority of receivables are due from shareholders who are well-established
entities in the travel industry. As a result, credit risk is considered limited.
Reclassifications -- Certain 1993 balances have been reclassified to
conform to the 1994 presentation.
2. OPERATIONS
During 1994, the Company increased revenues $1,222,114 to $2,746,491,
reduced operating expenses $152,351 to $2,707,414 and generated positive cash
flows of $224,012 from operations, yet the Company incurred a net loss of
$38,996 and has a shareholders' deficit of $2,956,674 at December 31, 1994. The
Company's business plan contemplates additional revenue increases through the
addition of more hotels and travel agents to its commission payment services
sufficient to meet current working capital needs to nonshareholders.
In addition, the Company has plans to negotiate an extension of payment
terms on existing short-term debt to shareholders of $655,725 and accrued
interest of $130,756. However, the Company may continue to require additional
capital contributions and borrowings from shareholders. Common stock agreements
contain provisions whereby the shareholders are required, as defined, to
contribute additional capital and lend additional amounts to the Company. There
can be no guarantee, however, that funds from these sources or any other source
will be available to the Company (see Note 13).
3. ACCOUNTS RECEIVABLE
The Company collects travel agents' commissions from hotel chains and,
after retaining a portion of these commissions, remits net commissions to the
travel agents. Net accounts receivable included in the accompanying consolidated
balance sheets were as follows:
<TABLE>
<CAPTION>
1993 1994
----------- -----------
<S> <C> <C>
Amounts due from hotel chains........... $ 2,256,086 $ 3,021,542
Net commissions due to travel agents.... (2,040,704) (2,827,049)
----------- -----------
$ 215,382 $ 194,493
=========== ===========
</TABLE>
The accounts receivable from affiliates results from transaction fees
charged to shareholder hotels.
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consisted of the following:
<TABLE>
<CAPTION>
1993 1994
----------- -----------
<S> <C> <C>
Computer equipment...................... $ 111,587 $ 129,031
Furniture and equipment................. 85,105 112,697
Office equipment........................ 58,022 75,359
Leasehold improvements.................. 1,724 1,724
----------- -----------
256,438 318,811
Less accumulated depreciation........... (45,993) (109,171)
----------- -----------
$ 210,445 $ 209,640
=========== ===========
</TABLE>
F-34
104
THE HOTEL CLEARING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. CAPITAL LEASES
Assets recorded under capital leases are recorded at the lower of present
value of future minimum lease payments or the fair value of the asset. Total
assets recorded under capital leases at December 31, 1993 and 1994 were $106,318
and $149,394, respectively, net of accumulated amortization of $11,375 and
$51,615, respectively. The assets are amortized using the straight-line method
over the shorter of their useful lives or the term of the related leases.
Amortization of assets under capital leases are included in depreciation and
amortization expense.
Future minimum lease payments and related interest are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1995.................................. $ 62,937
1996.................................. 37,404
1997.................................. 15,828
--------
Total minimum lease payments............ 116,169
Less interest........................... 14,712
--------
101,457
Less current portion.................... 52,528
--------
$ 48,929
========
</TABLE>
The interest rates on the capital leases range from 11.0% to 12.1%, which
were imputed at the inception of the leases.
6. NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
1993 1994
--------- ---------
<S> <C> <C>
Notes payable to shareholders, bearing interest at the prime
rate plus 2.0% due December 31, 1995; the prime rate at
December 31, 1994 was 8.5%; uncollateralized.............. $ 747,139 $ 786,478
Convertible line-of-credit to a preferred stock shareholder;
accruing interest at the prime rate plus 2.0%; expires
June 1, 1994; uncollateralized; paid on June 1, 1994...... 180,000 --
--------- ---------
927,139 786,478
Less current portion........................................ (180,000) (786,478)
--------- ---------
$ 747,139 $ --
========= =========
</TABLE>
7. SHAREHOLDERS' DEFICIT
In October, 1992, the Company entered into a non-refundable agreement with
an investment group to purchase 210 shares of the Company's preferred stock for
$1,500,000. The purchase was to be made in monthly installments of $150,000
which began October 1, 1992. On August 10, 1993, the investment group completed
the funding of $1,500,000, at which time the 210 shares of preferred stock were
issued.
On August 10, 1993, the Board of Directors amended the Articles of
Incorporation to increase the authorized number of common shares from 105,000 to
210,000 shares. In addition, the Board of Directors established a Series A and
Series B preferred stock with 52,500 shares authorized for each series at a par
value
F-35
105
THE HOTEL CLEARING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of $.01 per share. Such shares have preferential dividend rights. The Board of
Directors' declared stock split of 105-for-1 for both common and preferred
shares has been reflected in the financial statements. In August, 1993, the
Company sold 20 shares of the Series B preferred stock to an officer of the
Company for $95 per share.
On December 31, 1993, a $100,000 note payable to a company was converted to
105 shares of common stock. The conversion did not result in a gain or loss.
At December 31, 1994, the Company had the following shares issued and
outstanding:
<TABLE>
<CAPTION>
STOCK STOCK PAR
AUTHORIZED ISSUED VALUE
---------- ------ -----
<S> <C> <C> <C>
Common stock.............................................. 210,000 1,050 $.01
Preferred stock:
Series A................................................ 52,500 210 $.01
Series B................................................ 52,500 20 $.01
</TABLE>
The Company has agreements with its common shareholders whereby it can
require them to make additional capital contributions. Also under the provisions
of the agreements, the Company can require all common shareholders to lend
additional funds to the Company in such amounts as determined by the Board of
Directors. In the event a shareholder fails to contribute capital or lend funds
to the Company, the Company can acquire the shareholder's shares at $.01 per
share.
8. RELATED PARTIES
The Company derives a substantial portion of its revenue from
shareholder-owned companies. Also, much of the revenue is generated indirectly
by shareholders as a function of HCC's role as the consolidator and payor of
commissions to travel agencies. HCC makes commission payments to travel agencies
on behalf of hotel properties and receives a percentage of the commission
payment from the travel agent for this service. A summary of revenues is as
follows:
<TABLE>
<CAPTION>
1993 1994
------------------- -------------------
REVENUES AMOUNT % AMOUNT %
-------- ---------- ----- ---------- -----
<S> <C> <C> <C> <C>
Shareholders -- direct.................. $ 168,749 11.0% $ 232,173 8.5%
Shareholders -- indirect................ 1,346,937 88.4% 2,165,063 78.8%
---------- ----- ---------- -----
Total generated by shareholders directly
and indirectly........................ 1,515,686 99.4% 2,397,236 87.3%
All other revenue....................... 8,691 0.6% 349,255 12.7%
---------- ----- ---------- -----
Total......................... $1,524,377 100.0% $2,746,491 100.0%
========== ===== ========== =====
</TABLE>
The Company and The Hotel Industry Switch Company (THISCO) have management
and certain shareholders in common. The Company pays a management fee to THISCO,
which represents a portion of THISCO's management salaries and related benefits
attributable to the Company's operations. Management fees paid to THISCO during
1993 and 1994 were $156,928 and $290,465, respectively.
The Company utilizes THISCO's telecommunications network and various
equipment. During 1993 and 1994, the Company paid THISCO $101,490 and $46,096,
respectively, for the use of the network and this equipment. In 1993, THISCO
also transferred $22,537 of furniture and equipment and the related capital
lease obligation to HCC.
F-36
106
THE HOTEL CLEARING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A shareholder provided services to the Company, including facility
management, consulting and software development. During 1993 and 1994, the
Company recognized expense in the amount of approximately $30,000 and $33,000,
respectively, for those services.
Persons related to an officer of the Company have provided printing, design
and procurement services to the Company. During 1993 and 1994, the Company paid
approximately $17,000 and $11,000, respectively, relating to these services.
The Company has an agreement to sublease office space from THISCO for a
four-year period under an operating lease agreement. Amounts paid to THISCO
under this agreement during 1993 and 1994 were $106,454 and $105,863,
respectively. Estimated future minimum lease payments due to THISCO at December
31, 1994 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1995............................................ $119,000
1996............................................ 126,000
1997............................................ 21,000
--------
$266,000
========
</TABLE>
9. INCOME TAXES
During 1994, the Company recorded a long-term deferred tax asset of
approximately $1,514,000, derived from net operating loss carryforwards and
excess book depreciation over tax depreciation. The deferred tax asset is fully
reserved because of uncertainty regarding the Company's ability to recognize the
benefit of the asset in future years.
The components of deferred income tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
1993 1994
----------- -----------
<S> <C> <C>
Net operating loss carryforward........................... $ 1,542,591 $ 1,509,551
Depreciation and amortization............................. (4,619) 4,391
Valuation allowance....................................... (1,537,972) (1,513,942)
----------- -----------
Net deferred tax asset.................................... $ -- $ --
=========== ===========
</TABLE>
At December 31, 1994, the Company had net operating loss carryforwards for
tax reporting purposes of approximately $4,440,000. The net operating loss
carryforwards will expire beginning in the year 2006, if not previously
utilized.
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
1993 1994
-------- --------
<S> <C> <C>
Current:
Federal................................................... $ -- $ --
State..................................................... -- --
-------- --------
Deferred.................................................... -- --
-------- --------
$ --
======== ========
</TABLE>
F-37
107
THE HOTEL CLEARING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation between the statutory Federal income tax rate and the
effective income tax rates is as follows:
<TABLE>
<CAPTION>
1993 1994
------ ------
<S> <C> <C>
Statutory Federal income tax rate........................... 34.0% 34.0%
Valuation allowance......................................... (34.0%) (34.0%)
Provision for income taxes.................................. 0.0% 0.0%
</TABLE>
10. EMPLOYEE BENEFIT PLAN
The Company co-sponsors, with THISCO, a 401(k) defined contribution
retirement plan covering full-time employees who have completed one year of
service and obtained the age of twenty-one. According to the plan agreement, the
Company has committed to match employee contributions up to 3.0% of the
employee's qualified salary through December 31, 1994 and 5.0% thereafter. The
Company contributed $20,904 and $19,791 to the Plan during 1993 and 1994,
respectively.
11. EXTRAORDINARY GAIN
The 1993 extraordinary gain of $269,310 represents the Company's net gain
on the settlement of a note payable to a vendor.
12. CONTINGENCIES AND COMMITMENTS
In June, 1993, HCC received $2,000,000 from Citicorp in exchange for a
five-year non-cancelable data processing contract and recorded the amount as
deferred income. The non-cancelable contract requires Citicorp to process
transactions and generate various reports in exchange for a processing fee. The
contract requires HCC to maintain an annual minimum volume of transactions. If
the annual minimum volume is not attained, HCC is required to pay Citicorp an
additional processing fee for each transaction under the minimum volume. HCC is
recognizing the $2,000,000 of deferred income over the life of the contract,
according to the volume of guaranteed transactions, as defined by the contract.
During 1994, HCC recognized $274,510 of the $2,000,000 deferred income. However,
because HCC did not meet its annual minimum volume of transactions, it also
recorded an additional processing fee of $215,351.
13. SUBSEQUENT EVENTS
Subsequent to December 31, 1994, the Company issued an additional 105
shares of common stock for $250,000 and obtained a short-term loan from a
shareholder in the amount of $200,000. The short-term loan accrues interest at
the prime rate plus 2.0% and is due on or before December 30, 1995. In August,
1995 the Company repurchased the 105 shares for $250,000.
Pegasus Systems, Inc. (Pegasus) was formed to combine the operations of HCC
and THISCO. For accounting purposes, the combination was recorded as a purchase
of HCC. In July, 1995, Pegasus issued 4,934,667 shares of its common stock in
exchange for all of the outstanding capital stock of THISCO and 83.3% of the
ownership of HCC (the Reorganization). Lodging Network, Inc. (LNI) retained 210
shares of HCC preferred stock, representing a 16.7% minority ownership interest
in HCC. In conjunction with the Reorganization, LNI was granted an option (LNI
Option), expiring in July 1998, to exchange its 16.67% ownership interest in HCC
for 448,667 shares of Pegasus' common stock.
Also as part of this Reorganization, certain shareholders of the Company
agreed to contribute outstanding debt totaling $337,500 to capital, effective
immediately prior to closing. The remaining debt, after these contributions were
renewed and extended, expires five years from the Agreement's closing date at an
interest rate of prime plus 1.0%.
F-38
108
THE HOTEL CLEARING CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
1995
-----------
<S> <C>
Current assets:
Cash and cash equivalents................................. $ 88,102
Accounts receivable, net.................................. 297,890
Accounts receivable from affiliates....................... 25,853
Prepaid expenses.......................................... 2,842
-----------
Total current assets.............................. 414,687
Property and equipment, net................................. 245,082
Other non-current assets.................................... 18,432
-----------
Total assets...................................... $ 678,201
===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities.................. $ 454,136
Accounts payable to affiliates............................ 244,020
Current portion of unearned income........................ 425,722
Current portion of notes payable to affiliates............ 855,725
Current portion of capital lease obligations.............. 51,727
-----------
Total current liabilities......................... 2,031,330
Capital lease obligations, net of current portion........... 21,793
Unearned income, net of current portion..................... 1,156,863
-----------
Total liabilities................................. 3,209,986
Shareholders' deficit:
Preferred stock:
Series A............................................... 2
Series B............................................... 1
Common stock.............................................. 11
Additional paid-in capital................................ 1,953,834
Accumulated deficit....................................... (4,485,633)
-----------
Total shareholders' deficit....................... (2,531,785)
-----------
Total liabilities and shareholders' deficit....... $ 678,201
===========
</TABLE>
See accompanying notes to consolidated interim financial statements.
F-39
109
THE HOTEL CLEARING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1994 1995
---------- ----------
<S> <C> <C>
Net revenues:
Shareholder............................................... $1,122,007 $1,481,282
Nonshareholder............................................ 144,303 677,993
---------- ----------
Total revenues.................................... 1,266,310 2,159,275
Cost of services............................................ 245,760 674,880
Research and development.................................... 205,694 356,439
General and administrative expenses......................... 256,229 372,779
Marketing and promotion expenses............................ 406,199 486,555
Depreciation and amortization............................... 31,093 44,103
---------- ----------
Operating income............................................ 121,335 224,519
Other expense:
Interest expense............................................ 40,562 50,580
---------- ----------
Income before income taxes.................................. 80,773 173,939
Income taxes................................................ -- --
---------- ----------
Net income.................................................. $ 80,773 $ 173,939
========== ==========
</TABLE>
See accompanying notes to consolidated interim financial statements.
F-40
110
THE HOTEL CLEARING CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
(UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------ ------------------ ADDITIONAL
NUMBER OF NUMBER OF PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------ --------- ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994.......... 230 $ 3 1,050 $10 $1,702,885 $(4,659,572) $(2,956,674)
Issuance of common stock.............. -- -- 105 1 249,999 -- 250,000
Issuance of series B preferred stock,
par value $.01...................... 10 -- -- -- 950 -- 950
Net income............................ -- -- -- -- -- 173,939 173,939
--- --- ----- --- ---------- ----------- -----------
Balance at June 30, 1995.............. 240 $ 3 1,155 $11 $1,953,834 $(4,485,633) $(2,531,785)
=== === ===== === ========== =========== ===========
</TABLE>
See accompanying notes to consolidated interim financial statements.
F-41
111
THE HOTEL CLEARING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1994 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income............................ $ 80,773 $ 173,939
Adjustments to reconcile net income to
cash provided (used) by operating
activities:
Depreciation and amortization...... 31,093 44,103
Proceeds from increase in long-term
note payable accrued interest..... 27,109 --
Deferred income recognition........ (81,483) (142,905)
(Increase) decrease in:
Accounts receivable, net......... 15,087 (103,397)
Accounts receivable from
affiliates...................... (1,488) (8,121)
Prepaid expenses................. 21,230 (5,351)
Increase (decrease) in:
Accounts payable and accrued
liabilities..................... (190,688) (277,794)
Accounts payable to affiliates... 220,575 56,548
--------- ---------
Net cash provided (used) by
operating activities........ 122,208 (262,978)
--------- ---------
Cash flows used by investing
activities --
Purchase of property and equipment.... (3,060) (79,545)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of stock....... -- 250,950
Proceeds from line-of-credit.......... 120,000 200,000
Repayment of line-of-credit........... (250,000) --
Repayment of notes payable............ (10,732) --
Repayment of capital leases........... (16,251) (27,937)
--------- ---------
Net cash provided (used) by
financing activities........ (156,983) 423,013
--------- ---------
Net increase (decrease) in cash and cash
equivalents........................... (37,835) 80,490
Cash and cash equivalents, beginning of
period................................ 37,835 7,612
--------- ---------
Cash and cash equivalents, end of
period................................ $ -- $ 88,102
========= =========
</TABLE>
See accompanying notes to consolidated interim financial statements.
F-42
112
THE HOTEL CLEARING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying financial statements include the consolidated accounts of
The Hotel Clearing Corporation (HCC) and its wholly owned subsidiary, The Hotel
Clearing Corporation (U.K.) Limited (HCC U.K.) (collectively, the Company). All
significant intercompany balances have been eliminated in consolidation.
HCC was formed in July 1991 as a Delaware corporation to market and operate
an international automated commission payment processing service that
consolidates commissions paid by participating hotels to a participating travel
agency into a single monthly payment and provides participants with
comprehensive transaction reports. HCC collects commissions from participating
hotel chains and remits these commissions to participating travel agents.
HCC U.K., a wholly-owned subsidiary of HCC, was formed in September 1993 in
England to market and provide services for travel agents and hotel chains
operating in Europe, Africa and Asia.
The financial information presented herein should be read in conjunction
with the Company's consolidated financial statements as of and for the year
ended December 31, 1994. The foregoing unaudited interim consolidated financial
statements have been prepared to comply with the format of Pegasus Systems, Inc.
(see Note 2) and reflect all adjustments (of a normal recurring nature) which
are, in the opinion of management, necessary for a fair presentation of the
results of the interim periods. The results for interim periods are not
necessarily indicative of results to be expected for the year.
2. SUBSEQUENT EVENTS
The accompanying unaudited interim consolidated financial statements
present the operations of HCC for the period from January 1, 1995 through June
30, 1995. In July 1995, Pegasus Systems, Inc. (Pegasus) was formed as a Delaware
holding company to combine the operations of HCC and The Hotel Industry Switch
Company (THISCO). THISCO was formed in September 1988 to market and operate an
international automated interface between travel agency, hotel and global travel
reservation systems.
Effective in July 1995, Pegasus issued 4,934,667 shares of its common stock
in exchange for all of the outstanding capital stock of THISCO and 83.3% of the
ownership of HCC (the Reorganization). Lodging Network, Inc. (LNI) retained 210
shares of HCC preferred stock, representing a 16.7% minority ownership interest
in HCC.
The Reorganization brought THISCO and HCC together under the control of
Pegasus and was initiated to integrate and expand the existing businesses of
THISCO and HCC. Pegasus was formed immediately prior to the transaction for the
purpose of combining the two operations into a single operating entity. Prior to
the Reorganization, THISCO and HCC were primarily controlled by a common (though
not identical) group of shareholders and a common management group. For
accounting purposes, the Reorganization was treated as an acquisition of HCC and
accounted for as a purchase business combination. Accordingly, the HCC assets
acquired and liabilities assumed were acquired at their fair values. The amount
of the purchase price ($2.7 million) in excess of the fair value of net assets
acquired has been recorded as goodwill and will be amortized on a straight-line
basis over 15 years.
Subsequent to June 30, 1995, the 105 shares issued during the six months
ended June 30, 1995 were reacquired and retired by the Company at the original
issuance price.
F-43
113
DESCRIPTION OF INSIDE BACK COVER
Pegasus Systems Inc. logo.
THISCO logo.
Depiction of computer screens showing pages from the TravelWeb site. Pages
show a hotel's information and picture, resource information available from
TravelWeb, TravelWeb home page and information for Click-it! Weekends.
TravelWeb logo.
HCC logo.
114
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER
OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Prospectus Summary................ 3
Risk Factors...................... 7
Use of Proceeds................... 14
Dividend Policy................... 14
Capitalization.................... 15
Dilution.......................... 16
Selected Consolidated Financial
Data........................... 17
Management's Discussion and
Analysis of Financial Condition
and Results of Operations...... 20
Business.......................... 30
Management........................ 50
Certain Transactions.............. 57
Principal and Selling
Stockholders................... 59
Description of Capital Stock...... 60
Shares Eligible for Future Sale... 62
Underwriting...................... 63
Legal Matters..................... 64
Experts........................... 64
Additional Information............ 65
Index to Consolidated Financial
Statements..................... F-1
------------------
UNTIL , 1997 (25 DAYS AFTER
THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
</TABLE>
2,971,300 SHARES
[LOGO]
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
HAMBRECHT & QUIST
MONTGOMERY SECURITIES
VOLPE BROWN WHELAN &
COMPANY
, 1997
------------------------------------------------------
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------------------------------------------------------
------------------------------------------------------
115
PART II
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following fees are estimated, except for the SEC and NASD filing fees:
<TABLE>
<S> <C>
SEC filing fee.............................................. $ 12,426
NASD filing fee............................................. 4,601
Blue Sky fees and expenses.................................. 5,000
Printing and engraving fees................................. *
Accountants' fees and expenses.............................. *
Legal fees and expenses..................................... *
Transfer Agent's fees and expenses.......................... *
Miscellaneous............................................... *
--------
Total............................................. $750,000
========
</TABLE>
---------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL") provides,
in effect, that any person made a party to any action by reason of the fact that
he is or was a director, officer, employee or agent of the Company may and, in
certain cases, must be indemnified by the Company against, in the case of a non-
derivative action, judgments, fines, amounts paid in settlement and reasonable
expenses (including attorney's fees) incurred by him as a result of such action,
and in the case of a derivative action, against expenses (including attorney's
fees), if in either type of action he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company. This indemnification does not apply, in a derivative action, to matters
as to which it is adjudged that the director, officer, employee or agent is
liable to the Company, unless upon court order it is determined that, despite
such adjudication of liability, but in view of all the circumstances of the
case, he is fairly and reasonably entitled to indemnity for expenses, and, in a
non-derivative action, to any criminal proceeding in which such person had
reasonable cause to believe his conduct was unlawful.
Article Eight of the Company's Second Amended and Restated Certificate of
Incorporation provides that no director of the Company shall be liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty as
a director to the fullest extent permitted by the DGCL.
Article Eight of the Company's Second Amended and Restated Certificate of
Incorporation also provides that the Company may indemnify to the fullest extent
permitted by Delaware law any and all of its directors and officers, or former
directors and officers, or any person who may have served at the Company's
request as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise. In addition, Section 7.7 of the Company's
Amended and Restated Bylaws provides that the Company shall indemnify to the
fullest extent permitted by Delaware law any and all of its directors and
officers, or former directors and officers, or any person who may have served at
the Company's request as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise and may indemnify to the
fullest extent permitted by Delaware law any employees and agents of the
Company.
Reference is made to the Underwriting Agreement filed as part of Exhibit
1.1 hereto, pursuant to which the Company has agreed to indemnify the
underwriters against certain liabilities under the Securities Act. Reference is
also made to the Rights Agreement filed as Exhibit 4.3 hereto, pursuant to which
certain holders of capital stock of the Company named therein have agreed to
indemnify officers and directors of the Company against certain liabilities
under the Securities Act or the Exchange Act in the event Registrable Securities
(as defined therein) held by such holders are included in the securities to be
registered pursuant to a public offering by the Company.
II-1
116
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
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. 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 1,538,463 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 of 771,733 shares of Common Stock.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
+1.1 -- Form of Underwriting Agreement by and among the Company,
the Selling Stockholders named therein and the
Underwriters
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 -- Amended and Restated Certificate of Incorporation
3.2 -- Amended and Restated Bylaws
3.3 -- Second Amended and Restated Certificate of Incorporation
3.4 -- Second Amended and Restated Bylaws
+4.1 -- Specimen of Common Stock Certificate
4.2 -- Amended and Restated Certificate of Incorporation,
Amended and Restated Bylaws, Second Amended and Restated
Certificate of Incorporation and Second Amended and
Restated Bylaws (see Exhibits 3.1, 3.2, 3.3 and 3.4)
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
+5.1 -- Opinion of Locke Purnell Rain Harrell (A Professional
Corporation)
10.1 -- Employment Agreement dated June 25, 1996 between the
Company and John F. Davis, III
</TABLE>
II-2
117
<TABLE>
<C> <S>
10.2 -- Employment Agreement dated June 25, 1996 between the Company and Joseph W. Nicholson
10.3 -- Employment Letter Agreement dated August 29, 1996 between the Company and Jerome L.
Galant
10.4 -- Employment Letter Agreement dated May 18, 1997 between the Company and Michael R.
Donahue
10.5 -- 1996 Stock Option Plan, as amended
10.6 -- 1997 Stock Option Plan
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.
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 -- Intentionally Omitted
10.12 -- TravelWeb Participant Agreement dated January 17, 1996 between the Company and Hyatt
Corporation
10.13 -- TravelWeb Participant Agreement dated July 15, 1995 between the Company and
Inter-Continental Hotels Corporation
10.14 -- TravelWeb Participant Agreement dated April 27, 1995 between the Company and Hilton
Hotels Corporation
10.15 -- TravelWeb Participant Agreement dated May 30, 1995 between the Company and Hilton
International Co.
10.16 -- TravelWeb Participant Agreement dated September 3, 1996 between the Company and Choice
Hotels International, Inc.
10.17 -- TravelWeb Participant Agreement dated April 18, 1996 between the Company and La Quinta
Inns, Inc.
10.18 -- TravelWeb Participant Agreement dated May 31, 1996 between the Company and HFS
Incorporated
10.19 -- TravelWeb Participation Agreement dated April 18, 1996 between the Company and ITT
Sheraton Corporation
10.20 -- Letter Agreement relating to the TravelWeb service dated December 20, 1995 between the
Company and Marriott International, Inc.
*10.21 -- HCC Participant Agreement, as amended, between the Company and Hyatt Hotels Corporation
*10.22 -- HCC Participant Agreement, as amended, between the Company and Inter-Continental Hotel
Corp.
*10.23 -- HCC Participant Agreement between Company and ITT Sheraton Corporation
*10.24 -- HCC Participant Agreement between the Company and La Quinta Inns, Inc.
*10.25 -- HCC Participant Agreement between the Company and HFS Incorporated
*10.26 -- HCC Participant Agreement, as amended, between the Company and Westin Hotels Company
</TABLE>
II-3
118
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------------------------ ------------------------------------------------------------------------------------------
<C> <S>
*10.27 -- HCC Participant Agreement, as amended between the Company and Best Western
International, Ltd.
*10.28 -- HCC Participant Agreement, as amended, between the Company and Utell International,
Inc.
*10.29 -- HCC Participant Agreement between the Company and Anasazi Service Corporation
*10.30 -- HCC Participant Agreement between the Company and Marriott International, Inc.
*10.31 -- HCC Participation Agreement, as amended, between the Company and Choice Hotels
International, Inc.
*10.32 -- HCC Participation Agreement, as amended, between the Company and Forte Hotels, Inc.
*10.33 -- HCC Participation Agreement, as amended, between the Company and Promus Hotels, Inc.
*10.34 -- UltraSwitch User Agreement dated November 17, 1995 between the Company and Westin
Hotels & Resorts
*10.35 -- UltraSwitch User Agreement dated February 23, 1996 between the Company and Best Western
International
*10.36 -- UltraSwitch User Agreement dated February 13, 1996 between the Company and
Inter-Continental Hotels Corporation
*10.37 -- UltraSwitch User Agreement dated January 4, 1996 between the Company and HFS
Incorporated
*10.38 -- UltraSwitch User Agreement dated February 1, 1996 between the Company and Hyatt Hotels
Corporation
*10.39 -- UltraSwitch User Agreement dated December 15, 1995 between the Company and Promus
Hotels, Inc.
*10.40 -- UltraSwitch User Agreement dated February 23, 1996 between the Company and La Quinta
Inns, Inc.
*10.41 -- UltraSwitch User Agreement dated January 8, 1997 between the Company and ITT Sheraton
Corporation
*10.42 -- UltraSwitch User Agreement dated April 25, 1996 between the Company and Hilton Hotels
Corporation
*10.43 -- UltraSwitch User Agreement dated August 16, 1995 between the Company and Choice Hotels
International, Inc.
*10.44 -- UltraSwitch User Agreement dated February 10, 1996 between the Company and Utell
International Ltd.
10.45 -- Intentionally Omitted
*10.46 -- UltraSwitch User Agreement dated December 31, 1995 between the Company and Marriott
International, Inc.
*10.47 -- UltraSwitch User Agreement dated February 23, 1996 between the Company and Forte
Hotels, Inc.
*10.48 -- Property Information Distribution Agreement dated March 7, 1997 between the Company and
Anasazi, Inc.
*10.49 -- Property Information Distribution Agreement dated March 4, 1997 between the Company and
La Quinta Inns, Inc.
</TABLE>
II-4
119
<TABLE>
<C> <S>
*10.50 -- Property Information Distribution Agreement, as amended, dated April 2, 1997, between
the Company and HFS Incorporated
*10.51 -- Property Information Distribution Agreement dated June 2, 1997 between the Company and
Promus Hotels, Inc.
*10.52 -- Property Information Distribution Agreement dated May 2, 1997 between the Company and
Best Western International, Inc.
*10.53 -- Property Information Distribution Agreement dated March 11, 1997 between the Company
and Hyatt Hotels Corporation
*10.54 -- United States Subscriber Agreement dated October 12, 1993 between the Company and
American Express Travel Related Services Company, Inc.
*10.55 -- Distribution Services Agreement dated May 12, 1997 between the Company and Holiday
Hospitality Corporation.
10.56 -- 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.
11.1 -- Computation of Per Share Loss
16.1 -- Letter regarding Change in Certifying Accountant
21.1 -- Subsidiaries of the Company
23.1 -- Consent of Price Waterhouse LLP
23.2 -- Consent of Belew Averitt LLP
+23.3 -- Consent of Locke Purnell Rain Harrell (A Professional Corporation) (included in its
opinion filed as Exhibit 5.1)
24.1 -- Power of Attorney (See Page II-7)
27.1 -- Financial Data Schedule
</TABLE>
---------------
+ To be filed by amendment.
* Subject to request for confidentiality.
(b) Financial Statement Schedules.
<TABLE>
<S> <C>
Schedule II -- Valuation and Qualifying
Accounts
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission have been
omitted because they are not required under the related instructions, are not
applicable or the information has been provided in the Consolidated Financial
Statements or the Notes thereto.
II-5
120
ITEM 17. UNDERTAKINGS.
The undersigned Company hereby undertakes to provide the representatives of
the Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Company, the Company has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Company of expenses incurred or paid by a director,
officer or controlling person of the Company in the successful defense of any
action, suit or proceeding) is asserted by any director, officer or controlling
person in connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
121
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on this 5th day of June, 1997.
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 (including post-effective
amendments) to this Registration Statement and any registration statement
related to the offering contemplated by this registration statement that is to
be effective upon filing pursuant to Rule 462(b) under the Securities Act of
1933, 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.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ JOHN F. DAVIS, III Chief Executive Officer, June 5, 1997
----------------------------------------------------- President and Director
John F. Davis, III (Principal Executive
Officer)
/s/ JEROME L. GALANT Chief Financial Officer June 5, 1997
----------------------------------------------------- (Principal Financial
Jerome L. Galant and Accounting
Officer)
/s/ JOHN W. BIGGS Director June 5, 1997
-----------------------------------------------------
John W. Biggs
/s/ DONALD R. DIXON Director June 5, 1997
-----------------------------------------------------
Donald R. Dixon
/s/ WILLIAM C. HAMMETT, JR. Director June 5, 1997
-----------------------------------------------------
William C. Hammett, Jr.
/s/ IAN MALCOLM HIGHET Director June 5, 1997
-----------------------------------------------------
Ian Malcolm Highet
</TABLE>
II-7
122
<TABLE>
<C> <S> <C>
/s/ ROCKWELL A. SCHNABEL Director June 5, 1997
------------------------------------------------------
Rockwell A. Schnabel
/s/ PAUL J. TRAVERS Director June 5, 1997
------------------------------------------------------
Paul J. Travers
/s/ MARK C. WELLS Director June 5, 1997
------------------------------------------------------
Mark C. Wells
/s/ BRUCE WOLFF Director June 5, 1997
------------------------------------------------------
Bruce Wolff
</TABLE>
II-8
123
SCHEDULE II
PEGASUS SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO FROM BALANCE
BEGINNING COSTS AND ACQUIRED AT END
CLASSIFICATION OF PERIOD EXPENSES COMPANIES DEDUCTIONS OF PERIOD
-------------- ---------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
December 31, 1994:
Allowance for doubtful accounts........ $ -- $ -- $ -- $ -- $ --
Income tax valuation allowance......... 2,400 132 -- -- 2,532
------ ------ ---- ------- ------
Total reserves and
allowances................... $2,400 $ 132 $ -- $ -- $2,532
====== ====== ==== ======= ======
December 31, 1995:
Allowance for doubtful accounts........ $ -- $ 20 $ -- $ -- $ 20
Income tax valuation allowance......... 2,532 589 407 -- 3,528
------ ------ ---- ------- ------
Total reserves and
allowances................... $2,532 $ 609 $407 $ -- $3,548
====== ====== ==== ======= ======
December 31, 1996:
Allowance for doubtful accounts........ $ 20 $ 25 $ -- $ -- $ 45
Income tax valuation allowance......... 3,528 1,060 -- (39) 4,549
------ ------ ---- ------- ------
Total reserves and
allowances................... $3,548 $1,085 $ -- $ (39) $4,594
====== ====== ==== ======= ======
</TABLE>
---------------
(a) This schedule should be read in conjunction with the Company's audited
consolidated financial statements and related notes thereto.
S-1
124
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
+1.1 -- Form of Underwriting Agreement by and among the Company,
the Selling Stockholders named therein and the
Underwriters
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 -- Amended and Restated Certificate of Incorporation
3.2 -- Amended and Restated Bylaws
3.3 -- Second Amended and Restated Certificate of Incorporation
3.4 -- Second Amended and Restated Bylaws
+4.1 -- Specimen of Common Stock Certificate
4.2 -- Amended and Restated Certificate of Incorporation,
Amended and Restated Bylaws, Second Amended and Restated
Certificate of Incorporation and Second Amended and
Restated Bylaws (see Exhibits 3.1, 3.2, 3.3 and 3.4)
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
+5.1 -- Opinion of Locke Purnell Rain Harrell (A Professional
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 Letter Agreement dated August 29, 1996 between
the Company and Jerome L. Galant
10.4 -- Employment Letter Agreement dated May 18, 1997 between
the Company and Michael R. Donahue
10.5 -- 1996 Stock Option Plan, as amended
10.6 -- 1997 Stock Option Plan
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.
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 -- Intentionally Omitted
10.12 -- TravelWeb Participant Agreement dated January 17, 1996
between the Company and Hyatt Corporation
10.13 -- TravelWeb Participant Agreement dated July 15, 1995
between the Company and Inter-Continental Hotels
Corporation
10.14 -- TravelWeb Participant Agreement dated April 27, 1995
between the Company and Hilton Hotels Corporation
10.15 -- TravelWeb Participant Agreement dated May 30, 1995
between the Company and Hilton International Co.
10.16 -- TravelWeb Participant Agreement dated September 3, 1996
between the Company and Choice Hotels International, Inc.
10.17 -- TravelWeb Participant Agreement dated April 18, 1996
between the Company and La Quinta Inns, Inc.
</TABLE>
125
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
10.18 -- TravelWeb Participant Agreement dated May 31, 1996
between the Company and HFS Incorporated
10.19 -- TravelWeb Participation Agreement dated April 18, 1996
between the Company and ITT Sheraton Corporation
10.20 -- Letter Agreement relating to the TravelWeb service dated
December 20, 1995 between the Company and Marriott
International, Inc.
*10.21 -- HCC Participant Agreement, as amended, between the
Company and Hyatt Hotels Corporation
*10.22 -- HCC Participant Agreement, as amended, between the
Company and Inter-Continental Hotel Corp.
*10.23 -- HCC Participant Agreement between Company and ITT
Sheraton Corporation
*10.24 -- HCC Participant Agreement between the Company and La
Quinta Inns, Inc.
*10.25 -- HCC Participant Agreement between the Company and HFS
Incorporated
*10.26 -- HCC Participant Agreement, as amended, between the
Company and Westin Hotels Company
*10.27 -- HCC Participant Agreement, as amended between the Company
and Best Western International, Ltd.
*10.28 -- HCC Participant Agreement, as amended, between the
Company and Utell International, Inc.
*10.29 -- HCC Participant Agreement between the Company and Anasazi
Service Corporation
*10.30 -- HCC Participant Agreement between the Company and
Marriott International, Inc.
*10.31 -- HCC Participation Agreement, as amended, between the
Company and Choice Hotels International, Inc.
*10.32 -- HCC Participation Agreement, as amended, between the
Company and Forte Hotels, Inc.
*10.33 -- HCC Participation Agreement, as amended, between the
Company and Promus Hotels, Inc.
*10.34 -- UltraSwitch User Agreement dated November 17, 1995
between the Company and Westin Hotels & Resorts
*10.35 -- UltraSwitch User Agreement dated February 23, 1996
between the Company and Best Western International
*10.36 -- UltraSwitch User Agreement dated February 13, 1996
between the Company and Inter-Continental Hotels
Corporation
*10.37 -- UltraSwitch User Agreement dated January 4, 1996 between
the Company and HFS Incorporated
*10.38 -- UltraSwitch User Agreement dated February 1, 1996 between
the Company and Hyatt Hotels Corporation
*10.39 -- UltraSwitch User Agreement dated December 15, 1995
between the Company and Promus Hotels, Inc.
*10.40 -- UltraSwitch User Agreement dated February 23, 1996
between the Company and La Quinta Inns, Inc.
*10.41 -- UltraSwitch User Agreement dated January 8, 1997 between
the Company and ITT Sheraton Corporation
*10.42 -- UltraSwitch User Agreement dated April 25, 1996 between
the Company and Hilton Hotels Corporation
*10.43 -- UltraSwitch User Agreement dated August 16, 1995 between
the Company and Choice Hotels International, Inc.
</TABLE>
126
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
*10.44 -- UltraSwitch User Agreement dated February 10, 1996
between the Company and Utell International Ltd.
10.45 -- Intentionally Omitted
*10.46 -- UltraSwitch User Agreement dated December 31, 1995
between the Company and Marriott International, Inc.
*10.47 -- UltraSwitch User Agreement dated February 23, 1996
between the Company and Forte Hotels, Inc.
*10.48 -- Property Information Distribution Agreement dated March
7, 1997 between the Company and Anasazi, Inc.
*10.49 -- Property Information Distribution Agreement dated March
4, 1997 between the Company and La Quinta Inns, Inc.
*10.50 -- Property Information Distribution Agreement, as amended,
dated April 2, 1997, between the Company and HFS
Incorporated
*10.51 -- Property Information Distribution Agreement dated June 2,
1997 between the Company and Promus Hotels, Inc.
*10.52 -- Property Information Distribution Agreement dated May 2,
1997 between the Company and Best Western International,
Inc.
*10.53 -- Property Information Distribution Agreement dated March
11, 1997 between the Company and Hyatt Hotels Corporation
*10.54 -- United States Subscriber Agreement dated October 12, 1993
between the Company and American Express Travel Related
Services Company, Inc.
*10.55 -- Distribution Services Agreement dated May 12, 1997
between the Company and Holiday Hospitality Corporation.
10.56 -- 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.
11.1 -- Computation of Per Share Loss
16.1 -- Letter regarding Change in Certifying Accountant
21.1 -- Subsidiaries of the Company
23.1 -- Consent of Price Waterhouse LLP (included on Page S-
of the Registration Statement)
23.2 -- Consent of Belew Averitt LLP (included on Page S- of
the Registration Statement)
+23.3 -- Consent of Locke Purnell Rain Harrell (A Professional
Corporation) (included in its opinion filed as Exhibit
5.1)
24.1 -- Power of Attorney (See Page II-7)
27.1 -- Financial Data Schedule
</TABLE>
---------------
+ To be filed by amendment.
* Subject to request for confidentiality.
1
EXHIBIT 2.1
CONFIDENTIAL
CONTRIBUTION AND RESTRUCTURING AGREEMENT
This Contribution and Restructuring Agreement (this "Agreement"), dated
effective as of July 21, 1995, among Pegasus Systems, Inc., a Delaware
corporation (the "Company"), and all of the stockholders of The Hotel Clearing
Corporation, a Delaware corporation ("HCC"), and all of the stockholders of The
Hotel Industry Switch Company, a Delaware corporation ("THISCO"), set forth in
Schedule A attached hereto (collectively referred to herein as the
"Stockholders").
WITNESSETH:
WHEREAS, the Stockholders, as the only stockholders of HCC and/or
THISCO, desire to combine the businesses of HCC and THISCO as subsidiaries of a
common parent corporation pursuant to the terms of this Agreement; and
WHEREAS, the Company has been formed to serve as the parent corporation
in connection with such restructuring; and
WHEREAS, as part of a single plan to be effectuated pursuant to this
Agreement, the Stockholders, other than Lodging Network, Inc. ("LNI"), agree to
contribute all of their respective shares of capital stock (whether preferred
or common) and any other stock interests in HCC and THISCO (collectively, the
"Stock") to the Company in exchange for Company Common Stock as part of a
transaction intended to qualify as a tax free transaction under Section 351 of
the Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the Company has agreed to grant LNI an option to exchange its
entire stock interest in HCC for shares of Company Common Stock and LNI has
agreed to join in this Agreement on the terms herein specified.
NOW, THEREFORE, for and in consideration of the mutual covenants,
agreements and provisions contained herein, the parties hereto hereby agree as
follows:
ARTICLE I
TRANSACTIONS
1.1 Closing Transactions. Subject to and upon the terms and conditions
contained herein, the closing pursuant to this Agreement (the "Closing") shall
take place at the Company's address at 3811 Turtle Creek Blvd., Suite 1100,
Dallas, Texas 75219, at 10:00 a.m., local time, on July 21, 1995, or at such
other time as shall be agreed to by the parties (the "Closing Date"). The
parties hereto (as applicable) shall simultaneously take the following actions
and execute and deliver the following documents:
2
(a) HCC Stock Contribution. Each HCC stockholder, other than LNI,
shall contribute all of such stockholder's Stock of HCC to the Company
by delivering to the Company all necessary stock certificates, stock
powers or other documents as may be necessary to effect the transfer of
the Stock to the Company. In exchange, the Company shall issue and
deliver to each of them a certificate for the number of shares of
Company Common Stock as specified in Schedules A and C attached hereto.
(b) THISCO Stock Contribution. Each THISCO stockholder shall
contribute all of such stockholder's shares of THISCO to the Company by
delivering to the Company all necessary stock certificates, stock powers
or other documents as may be necessary to effect the transfer of the
Stock to the Company. In exchange, the Company shall issue and deliver
to each of them a certificate for the number of shares of Company Common
Stock as specified in Schedule A attached hereto.
(c) Stockholders Agreement. The Company and each Stockholder,
other than LNI, shall execute and deliver to one another the
Stockholders Agreement (herein so called) dated the Closing Date in
substantially the form of Exhibit 1 to this Agreement.
(d) HCC Debt. Each HCC stockholder who previously made one or
more loans to HCC hereby elects to contribute to the capital of HCC,
effective immediately prior to the Closing, the amount of such debt owed
by HCC to such stockholder as and to the extent indicated on Schedule
B-1 attached hereto. These capital contributions are reflected in the
number of shares of Company Common Stock in Schedule A which are to be
issued to such stockholders at the Closing. The amount of debt remaining
after these capital contributions (as set forth on Schedule B-1 hereto)
shall be renewed and extended and evidenced by new promissory notes to
be executed and delivered by HCC to the applicable stockholders, which
notes shall mature upon the expiration of five (5) years from the
Closing Date and bear interest at the prime rate published daily in the
Wall Street Journal plus 1% per annum. Such notes shall be guaranteed by
the Company.
(e) THISCO Debt. Each THISCO stockholder who previously made one
or more loans to THISCO hereby elects to contribute to the capital of
THISCO, effective immediately prior to the Closing, the amount of such
debt owed by THISCO to such stockholder as and to the extent indicated
on Schedule B-2 attached hereto. These capital contributions are
reflected in the number of shares of Company Common Stock in Schedule A
which are to be issued to such stockholders at the Closing. The amount
of debt remaining after these capital contributions (as set forth on
Schedule B-2 hereto) shall be renewed and extended and evidenced by new
promissory notes to be executed and delivered by THISCO to the
applicable stockholders, which notes shall mature upon the expiration of
five (5) years from the
-2-
3
Closing Date and shall bear interest at the prime rate published daily
in the Wall Street Journal plus 1% per annum. Such notes shall be
guaranteed by the Company.
(f) Reed Accommodation. Reed Travel Group, a division of Reed
Elsevier Inc. ("Reed") agrees to forgive $75,000 of outstanding debt
owed by THISCO to Reed and the Company agrees to guaranty up to
$4,261,482 of the remaining outstanding debt owed by THISCO to Reed,
such guaranty to be in form and substance satisfactory to Reed and the
Company.
(g) Delivery of Company Guarantees. The Company shall execute and
deliver the guarantees contemplated within Subsections (d), (e) and (f)
of this Section 1.1.
(h) HCC Projected Volume Shares. In addition to the shares of
Company Common Stock to be issued as reflected on Schedule A, each HCC
stockholder, other than LNI, shall also receive the number of shares of
Company Common Stock specified on Schedule C attached hereto. In
connection therewith, the Company shall cause HCC to prepare and deliver
to each such HCC stockholder at the Closing a written confirmation of,
and each such HCC stockholder shall deliver to the Company at the
Closing a written acceptance of, the number of commissionable
reservation transactions that such holder projects it will process
through HCC from January 1, 1996 through December 31, 1996 ("Projected
Volume Confirmation"). The shares specified in Schedule C, referred to
herein as the "Projected Volume Shares," shall, in addition to any other
purchase rights set forth in the Stockholders Agreement, be subject to
purchase by the Company as follows: As soon as reasonably practicable
after December 31, 1996, the Company shall determine and certify to each
holder of Projected Volume Shares the actual number of commissionable
reservation transactions that were processed through HCC ("Actual
Transactions") by such holder from January 1, 1996 through December 31,
1996, compared to such holder's projected number of transactions
("Projected Transactions") set forth in its Projected Volume
Confirmation. With respect to each holder of Projected Volume Shares,
if such holder's Actual Transactions exceeds its Projected Transactions,
then the Projected Volume Shares held by such holder shall not be
subject to the purchase option contemplated by this paragraph. If the
Actual Transactions by any holder of Projected Volume Shares are less
than its Projected Transactions, then the Company may, at its option,
purchase, at a purchase price of $1.00 per share, the percentage of such
holder's Projected Volume Shares (rounded to the nearest whole share)
equal to the corresponding percentage by which such holder's Actual
Transactions were less than its Projected Transactions. For example, if
stockholder X's Actual Transactions for 1996 were 97.5% of its Projected
Transactions, then 2.5% of stockholder X's Projected Volume Shares would
be subject to purchase in accordance with the Stockholders Agreement.
-3-
4
(i) Participant and User Agreements. As specified by Article V
of the Stockholders Agreement, each HCC stockholder and each THISCO
stockholder, as the case may be, shall execute and deliver the HCC
Participant Agreement and/or Ultra Switch User Agreement applicable to
it.
(j) LNI Stock Purchase Option. The Company and LNI shall
execute and deliver to one another the Stock Purchase Option dated the
Closing Date in substantially the form of Exhibit 2 to this Agreement
(the "LNI Option").
(k) Management Stock Purchase. At or within 30 days of the
Closing, management of the Company, HCC and/or THISCO shall purchase an
aggregate of 2,125 restricted shares of Common Stock, representing five
percent (5%) of the shares of the Company's Common Stock to be
outstanding as of the Closing (assuming the LNI Option were fully
exercised as of the Closing). The aggregate purchase price for these
shares shall be $570,874, which price reflects a discounted value based
on the restrictions imposed on such shares as outlined in Section 3 of
the Arthur Andersen report entitled "Pegasus Systems, Inc. Long-Term
Compensation Strategy" delivered to each of the parties hereto and such
shares are being purchased in exchange for management's rights to a five
percent (5%) preferred dividend as set forth in the Arthur Andersen
Report. These shares shall be in addition to any other shares which may
be reserved for the management of the Company under any future
compensation or ownership plan adopted by the Company.
1.2 Compliance with Section 351. The transactions contemplated by
this Agreement, to the extent subject thereto, are intended to qualify under
Section 351 of the Code.
1.3 Amendment or Waiver of Conflicting Provisions. Notwithstanding any
representation or warranty herein to the contrary, the parties to this
Agreement hereby acknowledge that the transactions contemplated by this
Agreement, including but not limited to the LNI Option, may conflict with or
violate certain provisions of the respective certificate of incorporation,
bylaws and stockholders agreement of HCC and THISCO or may now or hereafter
have an effect upon the capital structure of the Company. Accordingly, the
parties hereby agree to execute and deliver, or cause to be executed and
delivered, any required approvals, waivers, consents or amendments and to take,
or cause to be taken, any other action necessary to complete the transactions
contemplated herein in a timely fashion and in a manner which does not conflict
with or violate any documents or agreements binding upon or applicable to HCC,
THISCO and/or the Company.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 Representations and Warranties of the Company. The Company hereby
represents and warrants to the Stockholders, effective upon the Closing, as
follows:
(a) Organization. The Company is a corporation duly organized,
validly and in good standing under the laws of the State of Delaware and
has full corporate power and authority to conduct its business as it is
now being conducted.
-4-
5
(b) Authority. The Company has all requisite corporate power and
authority to enter into and perform its obligations under this
Agreement, the Stockholders Agreement and the transactions contemplated
hereby and thereby and to carry out its obligations hereunder and
thereunder. The execution, delivery and performance of this Agreement
and the Stockholders Agreement and the consummation of the transactions
contemplated hereby and thereby have been duly authorized by all
necessary corporate action on the part of the Company, and no other
corporate proceedings on the part of the Company are necessary to
authorize this Agreement, the Stockholders Agreement and the
transactions contemplated hereby and thereby, other than as provided or
contemplated herein. This Agreement constitutes, and the Stockholders
Agreement, when executed and delivered by the parties thereto will
constitute, valid and binding obligations of the Company, enforceable
against it in accordance with its terms, except as such enforceability
may be limited by bankruptcy, insolvency or other laws affecting
creditors generally or by general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or
at law).
(c) No Conflict. No filing with and no permit, authorization,
consent or approval of, any public body or authority is necessary for
the execution, delivery or performance by the Company of this Agreement
or the consummation by the Company of the transactions contemplated
hereby that has not already been made or obtained, which if not made or
obtained would have an adverse effect on its ability to consummate the
transactions contemplated hereby. Neither the execution, delivery or
performance by the Company of this Agreement nor the consummation by it
of the transactions contemplated hereby, nor compliance by it with any
of the provisions hereof will (i) conflict with or result in any breach
of any provision of its Certificate of Incorporation or Bylaws, (ii)
result in a violation or breach of, or constitute (with or without due
notice or lapse of time or both) a default (or give rise to any right of
termination, cancellation or acceleration) under any note, bond,
mortgage, license, agreement or other instrument or obligation to which
it is a party or by which it or any of its properties may be bound or
(iii) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to it or any of its properties.
(d) Title. The shares of Company Common Stock to be issued to the
Stockholders (as specified in Schedule A attached hereto), when issued,
will be duly authorized, legally and validly issued, fully paid and
non-assessable. The Company has the requisite legal right, power and
authority to issue such shares. The issuance of such shares and the
delivery of certificates representing such shares to such Stockholders
pursuant to the provisions of this Agreement will transfer to each of
such persons good and marketable title to the shares issuable to each of
such persons, free and clear of any pledge, lien, security interest,
encumbrance, claim or restriction on transferability, except for such
restrictions on resale as are set forth in
-5-
6
this Agreement or the Stockholders Agreement, Certificate of
Incorporation or Bylaws and any applicable state and federal securities
laws.
2.2 Representations and Warranties of Certain Stockholders. Each of the
Stockholders, other than LNI, (as set forth on Schedule A attached hereto)
hereby severally represents and warrants to the Company and the other
Stockholders, effective upon the Closing, as follows:
(a) Authority. Such Stockholder has full legal right, power,
authority and capacity to enter into and perform this Agreement and the
Stockholders Agreement, and the consent, agreement or concurrence of no
other person or entity is required for such Stockholder to execute,
deliver and perform this Agreement, the Stockholders Agreement and the
transactions contemplated hereby and thereby. This Agreement and the
Stockholders Agreement constitute the valid and binding obligations of
such Stockholder; enforceable against such Stockholders in accordance
with their terms, except as such enforceability may be limited by
bankruptcy, insolvency or other laws affecting creditors' rights
generally or by general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
(b) No Conflict. No filing with, and no permit, authorization,
consent or approval of, any public body or authority is necessary for
the execution, delivery or performance by such Stockholder of this
Agreement or the Stockholders Agreement or for the consummation by such
Stockholder of the transactions contemplated hereby or thereby that has
not been made or obtained, which if not made or obtained would have an
adverse effect on the ability of such Stockholder to consummate the
transactions contemplated hereby or thereby. Neither the execution,
delivery or performance by such Stockholder of this Agreement or the
Stockholders Agreement nor the consummation by any such Stockholder of
the transactions contemplated hereby or thereby, nor compliance by such
Stockholder with any of the provisions hereof or thereof will (i) result
in a violation or breach of, or constitute (with or without due notice
or lapse of time or both) a default (or give rise to any fight of
termination, cancellation or acceleration) under, any note, bond,
mortgage, license, agreement or other instrument or obligation to which
such Stockholder is a party or (ii) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to such Stockholder.
(c) Title. Such Stockholder has the requisite legal right,
power and authority to transfer such Stockholder's shares of Stock. The
delivery of certificates representing such Stock to the Company pursuant
to the provisions of this Agreement will transfer to the Company good
and marketable tide to all of the Stock owned by such Stockholder, free
and clear of any pledge, lien, security interest, encumbrance, claim or
restriction on transferability, except for such restrictions on resale
as are
-6-
7
provided for under (i) the certificate of incorporation, bylaws and
stockholders agreement of HCC and THISCO, as the case may be, and (ii)
any applicable state and federal securities laws.
(d) Investment Representations. Such Stockholder acknowledges
that the Company has relied upon, and each such Stockholder makes,
effective upon the Closing, the following investment representations:
(i) Such Stockholder is acquiring the shares of Company
Common Stock for such Stockholder's own account and not with a
view to or for sale in connection with any distribution thereof
in violation of the Securities Act of 1933, as amended (the "1933
Act");
(ii) Such shares of Company Common Stock are "restricted
securities" as that term is defined in Rule 144 promulgated under
the 1933 Act and may not be sold, transferred, pledged,
distributed or otherwise disposed of except in compliance with
applicable federal and state securities laws and the Stockholders
Agreement;
(iii) Such Stockholder has such knowledge and experience
in business matters that such Stockholder is capable of
evaluating, and has evaluated, the merits and risks of the
proposed investment;
(iv) Such Stockholder is an "accredited investor" within
the meaning of Rule 501(a) of Regulation D promulgated under the
1933 Act;
(v) Such Stockholder has been furnished all materials
relating to the Company, the Company Common Stock and the
proposed transaction which such Stockholder has requested and has
been afforded the opportunity to obtain additional information;
and
(vi) Such Stockholder has reviewed the following legend
and acknowledges, but does not represent or warrant, that the
Company will affix the following legend or a similar legend to
all certificates and other documents evidencing or representing
the Company Common Stock:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended,
or any state securities laws, and neither such shares nor
any interest therein may be sold, assigned, pledged,
transferred, hypothecated, encumbered or in any other
manner transferred or disposed of, or be subject to
execution, attachment or similar process, in whole or in
part, except in compliance therewith and with all other
applicable federal and state securities and
-7-
8
other laws and regulations, and unless an opinion of
counsel or other evidence relating to compliance with such
laws, in form and substance satisfactory to the Company,
is delivered to the Company in advance of any such
transfer. Further, the shares represented by this
certificate are subject to the conditions, restrictions
and obligations specified in that certain Stockholders
Agreement dated 1995, and any amendments thereto (the
"Stockholders Agreement"), among the Company and certain
of its Stockholders, including conditions and restrictions
with respect to voting rights and powers, disposition,
stock ownership rights and prerequisites, transfer, the
composition of the Company's Board of Directors; stock
repurchase rights, and otherwise, and no transfer of the
shares represented by this certificate shall be valid or
effective unless and until such conditions and
restrictions have been complied with in all respects, in
the determination of the Company's Board of Directors. A
copy of the Stockholders Agreement is on file with the
Secretary of the Company. The holder of this certificate,
by acceptance of this certificate, agrees to be bound by
the provisions of the Stockholders Agreement and to
indemnify and hold the Company harmless against loss or
liability arising from the disposition of the shares
represented by this certificate in violation of such
provisions or in violation of any of the aforementioned
laws or regulations."
2.3 Representations and Warranties of LNI. LNI hereby represents and
warrants to the Company and the other Stockholders, effective upon the Closing,
as follows:
(a) Authority. LNI has full legal right, power, authority and
capacity to enter into and perform this Agreement, and the consent,
agreement or concurrence of no other person or entity is required for
LNI to execute, deliver and perform this Agreement and the transactions
contemplated hereby. This Agreement constitutes the valid and binding
obligation of LNI, enforceable against LNI in accordance with its terms,
except as such enforceability may be limited by bankruptcy, insolvency
or other laws affecting creditors' rights generally or by general
principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
(b) No Conflict. No filing with, and no permit, authorization,
consent or approval of, any public body or authority is necessary for
the execution, delivery or performance by LNI of this Agreement or for
the consummation by LNI of the transactions contemplated hereby that has
not been made or obtained, which if not made or obtained would have an
adverse effect on the ability of LNI to consummate the transactions
contemplated hereby. Neither the execution, delivery or performance by
LNI of this Agreement nor the consummation by LNI of the
-8-
9
transactions contemplated hereby, nor compliance by LNI with any of the
provisions hereof or thereof will (i) result in a violation or breach
of, or constitute (with or without due notice or lapse of time or both)
a default (or give rise to any right of termination, cancellation or
acceleration) under, any note, bond, mortgage, license, agreement or
other instrument or obligation to which LNI is a party or (ii) violate
any order, writ, injunction, decree, statute, rule or regulation
applicable to LNI.
(c) Investment Representations. LNI acknowledges that the Company
has relied upon, and LNI makes, effective upon the Closing, the
following investment representations:
(i) LNI is acquiring the LNI Option for its own account
and not with a view to or for sale in connection with any
distribution thereof in violation of the 1933 Act;
(ii) The LNI Option may not be sold, transferred,
pledged, distributed or otherwise disposed of except in
compliance with its terms and with applicable federal and state
securities laws;
(iii) LNI has such knowledge and experience in business
matters that LNI is capable of evaluating, and has evaluated, the
merits and risks of The LNI Option;
(iv) LNI has been furnished all materials relating to
The Company, and the proposed transaction which LNI has requested
and has been afforded the opportunity to obtain additional
information.
ARTICLE III
MISCELLANEOUS
3.1 Notices. All notices, requests, approvals and other communications
provided for herein to any person named hereunder shall be in writing
(including wire, facsimile or similar writing) and shall be given, if in
writing and delivered personally, by telegram or facsimile, or sent by
registered mail, postage prepaid, to such person at his address or facsimile,
number set number as such person may hereafter specify by forth below or such
other address or notice to the other person.
If to the Stockholders, at the addresses set forth on Schedule A.
-9-
10
If to the Company: Pegasus Systems, Inc.
3811 Turtle Creek Blvd., Suite 1100
Dallas, Texas 75219
Attention: President
Fax No.: (214) 52&5675
Each such notice shall be effective (i) if given by facsimile, when such
facsimile is transmitted to the facsimile number specified in this subsection
and the appropriate answer back is received or (ii) if given by other means,
when actually received at the address specified in this section; provided,
however, that a notice given other than during normal business hours or on a
business day at the place of receipt shall not be effective until the opening
of business on the next business day.
3.2 Further Assurances. Each party hereto agrees that, from time to
time, upon request, it will execute and deliver, or cause to be executed and
delivered, such other instruments and take such other action as such other
party reasonably may require to evidence more effectively the transactions
effected pursuant hereto.
3.3 Integration. This Agreement, and any other schedule, exhibit,
agreement, document or instrument attached hereto or referred to herein,
integrates all of the terms and conditions mentioned herein or incidental
hereto, and supersedes all other negotiations and prior writings in respect of
the subject matter hereof.
3.4 Governing Law. This Agreement shall be deemed to be a contract
made under the laws of the State of Delaware, and for all purposes shall be
governed by and construed in accordance with the laws of said State, without
regard to principles of conflicts of law.
3.5 Execution in Counterparts. This Agreement may be executed in any
number of counterparts and by the different parties in separate counterparts,
and each such counterpart shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same Agreement
3.6 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns; provided, however, that no party hereto shall assign any of
its rights or delegate any of its duties hereunder without the prior written
consent of the other party hereto. Neither this Agreement nor any other
agreement contemplated hereby shall be deemed to confer upon any person not a
party hereto or thereto any rights or remedies hereunder or thereunder.
3.7 Amendment. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
-10-
11
3.8 Waived Any term or provision of this Agreement may be waived in
writing (or the time for performance of any of the obligations or other acts of
the parties hereto may be extended) by any party.
3.9 Headings. All headings contained in this Agreement are intended
for convenience only and shall not control or affect the meaning, construction
or effect of this Agreement or any of the provisions thereof.
3.10 Survival of Representations, Warranties and Covenants. The
representations, warranties and covenants contained herein shall survive the
Closing.
[Balance of page intentionally left blank]
-11-
12
IN WITNESS WHEREOF, this Agreement is executed by the parties on the
respective dates set forth below to be effective as of the date first above
written.
COMPANY:
PEGASUS SYSTEMS, INC.
By: JOHN F. DAVIS, III
------------------------------------
Its: President
-----------------------------------
Date: August 31, 1995
----------------------------------
---------------------------------------
ANASAZI, INC.
By: [ILLEGIBLE]
------------------------------------
Its:
-----------------------------------
Date:
----------------------------------
---------------------------------------
BEST WESTERN INTERNATIONAL
By: [ILLEGIBLE]
------------------------------------
Its: Sr. VP Worldwide Marketing
-----------------------------------
Date: July 18th 1995
----------------------------------
---------------------------------------
-12-
13
CHOICE HOTELS INTERNATIONAL
By: [ILLEGIBLE]
-------------------------------------
Its: Senior Vice President and Secretary
------------------------------------
Date: August 16, 1995
-----------------------------------
----------------------------------------
TRUSTHOUSE FORTE CALIFORNIA INC.
By: William J. Hanley
------------------------------------
Its: Exec. V.P. Sales & Marketing
-----------------------------------
Date: July 20, 1995
----------------------------------
/s/ WILLIAM J. HANLEY
---------------------------------------
HILTON HOTELS CORPORATION
By: RoSat E. Dirks
-------------------------------------
Its: Sr. VP Mktg - HHC
------------------------------------
Date: 7/20/95
-----------------------------------
/s/ ROSAT E. DIRKS
----------------------------------------
HOSPITALITY FRANCHISE SYSTEMS, INC.
By: [ILLEGIBLE]
-------------------------------------
Its: Senior Vice President
------------------------------------
Date: 8/28/95
-----------------------------------
----------------------------------------
-13-
14
REED TRAVEL GROUP, A DIVISION OF REED
ELSEVIER INC.
By: [ILLEGIBLE]
------------------------------------
Its: [ILLEGIBLE]
-----------------------------------
Date: July 21, 1995
----------------------------------
---------------------------------------
HYATT HOTELS CORPORATION
By: John W. Biggs
----------------------------------------------
Its: Ex. V. P.
---------------------------------------------
Date: 8/8/95
--------------------------------------------
/s/ JOHN W. BIGGS
-------------------------------------------------
INTER-CONTINENTAL HOTELS CORPORATION
By: Paul J. Travels
----------------------------------------------
Its: Senior Vice President- Property Management
--------------------------------------------
Date: 1st August 1995
--------------------------------------------
/s/ PAUL J. TRAVELS
-------------------------------------------------
ITT SHERATON CORPORATION
By: [ILLEGIBLE]
----------------------------------------------
Its: SVP
---------------------------------------------
Date: 7-28-95
--------------------------------------------
-------------------------------------------------
-14-
15
LA QUINTA INNS, INC.
By: WC Hammer Jr.
------------------------------------
Its: Sr. VP Accounting & Administration
-----------------------------------
Date: 7/19/95
----------------------------------
---------------------------------------
LODGING NETWORK, INC.
By: [ILLEGIBLE]
------------------------------------
Its: Vice President
-----------------------------------
Date: July 14, 1995
----------------------------------
---------------------------------------
MARRIOTT INTERNATIONAL, INC.
By: Bruce W. Wolf
------------------------------------
Its: Vice President, Distribution Sales
-----------------------------------
Date: August 16, 1995
----------------------------------
---------------------------------------
PROMUS HOTELS INC.
By: [ILLEGIBLE]
------------------------------------
Its: V.P. Reservations
-----------------------------------
Date: 7-18-95
----------------------------------
---------------------------------------
-15-
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UTELL INTERNATIONAL LTD.
By: [ILLEGIBLE]
------------------------------------
Its: President
-----------------------------------
Date:
----------------------------------
---------------------------------------
WESTIN HOTELS COMPANY
By: [ILLEGIBLE]
------------------------------------
Its: Sr. V.P., Sales and Marketing
-----------------------------------
Date: July 25, 1995
----------------------------------
---------------------------------------
/s/ JOHN F. DAVIS, III
---------------------------------------
John F. Davis, III
Date: August 31, 1995
----------------------------------
---------------------------------------
-16-
17
SCHEDULE A
<TABLE>
<CAPTION>
SHARES OF COMPANY
COMMON STOCK TO BE ISSUED
STOCKHOLDERS AND ADDRESSES TO HCC AND/OR THISCO STOCKHOLDERS
-------------------------- ---------------------------------
<S> <C>
ANASAZI SERVICE CORPORATION 842
7500 N. Dreamy Draw Drive
Suite 120
Phoenix, Arizona 85020
Attention: Tom Castleberry
Fax No.: (602) 861-7687
BEST WESTERN INTERNATIONAL 2,726
6201 N. 24th Parkway
Phoenix, AZ 85016
Attention: William S. Watson
Fax No.: (602) 957-5966
CHOICE HOTELS INTERNATIONAL 1,281
4225 E. Windrose Dr.
Phoenix, AZ 85032
Attention: James R. Yoakum
Fax No.: (602) 996-0192
FORTE HOTELS 1,618
1973 Friendship Drive
El Cajon, CA 92020
Attention: William Hanley
Fax No.: (619) 562-0901
HILTON HOTELS CORPORATION 1,281
9336 Civic Center Drive
Beverly Hills, CA 90210
Attention: Mike Ing
Fax No.: (310) 859-2513
HOSPITALITY FRANCHISE SYSTEMS, INC. 3,101
3838 E. Van Buren
Phoenix, AZ 85008
Attention: Douglas L. Patterson
Fax No.: (602) 389-3909
</TABLE>
-17-
18
<TABLE>
<CAPTION>
SHARES OF COMPANY
COMMON STOCK TO BE ISSUED
STOCKHOLDERS AND ADDRESSES TO HCC AND/OR THISCO STOCKHOLDERS
-------------------------- ---------------------------------
<S> <C>
REED TRAVEL GROUP, A DIVISION OF 4,821
REED ELSEVIER INC
500 Plaza Drive
Secaucus, NJ 07096
Attention: Malcolm Highet
Fax No.: (201) 319-1643
HYATT HOTELS CORPORATION 2,725
200 W. Madison Avenue, #39
Chicago, IL 60606
Attention: John Biggs
Fax No.: (708) 990-6357
INTER-CONTINENTAL HOTELS CORPORATION 2,185
Devonshire House
Mayfair Place
London, England W1X 5FH
Attention: Paul Travers
Fax No.: 011 44 71 355 6591
ITT SHERATON CORPORATION 2,307
Sixty State Street
World Headquarters
Boston, MA 02109
Attention: Richard Nauman
Fax No.: (617) 367-5182
LA QUINTA INNS, INC. 2,311
112 E. Pecan St.
P.O. Box 2636
San Antonio, TX 78299
Attention: W.C. Hammett, Jr.
Fax No.: (210) 302-6016
LODGING NETWORK, INC. *
8235 Douglas Avenue, LB 77
Suite 200
Dallas, Texas 75225
Attention: Michael Barnett
Fax No.: (214) 363-1615
</TABLE>
-18-
19
<TABLE>
<CAPTION>
SHARES OF COMPANY
COMMON STOCK TO BE ISSUED
STOCKHOLDERS AND ADDRESSES TO HCC AND/OR THISCO STOCKHOLDERS
-------------------------- ---------------------------------
<S> <C>
MARRIOTT INTERNATIONAL, INC. 1,281
One Marriott Drive, Dept. 939.07
Washington, D.C. 20058
Attention: Bruce W. Wolff
Fax No.: (301) 380-6094
PROMUS HOTELS INC. 2,955
3239 Players Cub Parkway
Memphis, TN 38125
Attention: Donald M. Kolodz
Fax No.: (901) 748-8102
UTELL INTERNATIONAL LTD. 844
2 Kew Bridge Road
Brentford, London TW8 0JF
Attention: Mike Hope
Fax No.: 011 44 81 490 5855
WESTIN HOTELS & RESORTS 2,265
2001 6th Avenue, 13th Floor
Seattle, WA 98121
Attention: Marc Pujalet
Fax No.: (206) 443-8997
JOHN F. DAVIS, III 884
3811 Turtle Creek Blvd., Suite 1100
Dallas, Texas 75219
Fax No.: (214) 528-5675
------
Total Schedule A Shares 33,427
Total Schedule C Shares 3,583
Total Management Shares 2,125
*Shares subject to LNI Option 3,365
------
MAXIMUM TOTAL SHARES SUBJECT
TO ISSUANCE PURSUANT TO
CONTRIBUTION AND RESTRUCTURING
AGREEMENT 42,500
======
</TABLE>
-19-
20
SCHEDULE B-1
<TABLE>
<CAPTION>
DEBT
HCC CONTRIBUTED HCC
TOTAL TO EQUITY REMAINING
P&I* CAPITAL DEBT
--- ------- ----
<S> <C> <C> <C>
BEST WESTERN INTERNATIONAL $ 94,009.01 $ 37,500.00 $ 56,509.01
HYATT HOTELS CORPORATION 93,325.61 37,500.00 55,825.61
INTER-CONTINENTAL HOTELS 93,910.31 37,500.00 56,410.31
ITT SHERATON CORPORATION 93,666.46 37,500.00 56,166.46
IA QUINTA INNS, INC. 92,661.69 37,500.00 55,161.69
PROMUS HOTELS INC. 72,697.27 37,500.00 35,197.27
HOSPITALITY FRANCHISE
SYSTEMS, INC 93,846.44 37,500.00 56,346.44
UTELL INTERNATIONAL 93,695.48 37,500.00 56,195.48
WESTIN HOTELS & RESORTS 93,637.42 37,500.00 56,137.42
----------- ----------- -----------
TOTAL $821,449.69 $337,500.00 $483,949.69
</TABLE>
*HCC TOTAL P&I INCLUDES INTEREST THROUGH JUNE 30, 1995.
INTEREST WILL BE ACCRUED THROUGH CLOSING DATE OF PEGASUS TRANSACTION.
-20-
21
SCHEDULE B-2
<TABLE>
<CAPTION>
DEBT
THISCO CONTRIBUTED THISCO
TOTAL TO EQUITY REMAINING
P&I* CAPITAL DEBT
--- ------- ----
<S> <C> <C> <C>
BEST WESTERN INTERNATIONAL $ 90,994.59 $ 37,500.00 $ 53,494.59
CHOICE HOTELS INTERNATIONAL 91,118.76 37,500.00 53,618.76
FORTE HOTELS 90,554.46 37,500.00 53,054.46
HILTON HOTELS CORPORATION 81,168.91 37,500.00 43,668.91
HYATT HOTELS CORPORATION 77,191.71 37,500.00 39,691.71
INTER-CONTINENTAL HOTELS 82,306.98 37,500.00 44,806.98
ITT SHERATON CORPORATION 90,770.15 37,500.00 53,270.15
LA QUINTA INNS, INC. 82,900.62 37,500.00 45,400.62
MARRIOTT INTERNATIONAL, INC. 69,338.49 37,500.00 31,838.49
PROMUS HOTELS INC. 91,207.39 37,500.00 53,707.39
HOSPITALITY FRANCHISE
SYSTEMS, INC. 54,931.14 37,500.00 17,432.14
WESTIN HOTELS & RESORTS 89,703.55 37,500.00 52.203.55
----------- ----------- -----------
TOTAL $992,187.75 $450,000.00 $542,187.75
</TABLE>
*THISCO TOTAL P&I INCLUDES INTEREST THROUGH JUNE 30, 1995.
INTEREST WILL BE ACCRUED THROUGH CLOSING DATE OF PEGASUS TRANSACTION.
-21-
22
SCHEDULE C
<TABLE>
<CAPTION>
NUMBER OF PEGASUS
-----------------
HCC STOCKHOLDER SHARES SUBJECT TO REPURCHASE
--------------- ----------------------------
<S> <C>
Anasazi Service Corporation 87
Best Western International 544
Forte Hotels 303
Hospitality Franchise Systems, Inc. 703
Hyatt Hotels Corporation 455
Inter-Continental Hotels Corporation 165
ITT Sheraton Corporation 215
La Quinta Inns, Inc. 142
Promus Hotels Inc. 769
Utell International Ltd. 78
Westin Hotels & Resorts 122
-----
Total 3,583
</TABLE>
-22-
23
EXHIBIT 1
Stockholders Agreement
-23-
24
CONFIDENTIAL
STOCKHOLDERS AGREEMENT
This Stockholders Agreement (the "Agreement"), dated effective as of
July __, 1995, among Pegasus Systems, Inc., a Delaware corporation (the
"Company"), and all of the holders of Common Stock, $.01 par value, of the
Company (collectively referred to herein as the "Stock") set forth on Schedule
A hereto. The holders of Stock are collectively referred to as the
"Stockholders."
WITNESSETH:
WHEREAS, the Company is a corporation duly organized and validly
existing under the laws of the State of Delaware with authorized capital of One
Hundred Thousand (100,000) shares of Common Stock and Ten Thousand (10,000)
shares of Preferred Stock; and
WHEREAS, the Company and the Stockholders wish to enter into an
agreement respecting future sales of shares of the Stock, certain limitations
on the transfer of shares of the Stock, the election and voting power of
directors, and certain other matters;
NOW, THEREFORE, in consideration of the promises and mutual covenants,
conditions and agreements herein contained, the parties hereto, intending to be
legally bound, do hereby agree as follows:
ARTICLE I
RESTRICTIONS AND OBLIGATIONS RELATING TO
DISPOSITION AND OWNERSHIP OF STOCK
Except as permitted below, no Stockholder shall sell, assign, devise,
bequeath, transfer, give, pledge, encumber, hypothecate, or in any manner
dispose of, or part with, any or all of its right, title or interest in any
share or shares of Stock of the Company now or at any time hereafter held by it
(any such action being referred to herein as a "Transfer"), or attempt to make
such a Transfer without the prior written consent of the Company (which consent
may be withheld by the Company in its sole discretion). A merger, sale of all
or substantially all assets or other business combination by a Stockholder
shall not be considered a "Transfer" hereunder. The Company, by its execution
of this Agreement, agrees that it will not cause or permit the Transfer of any
shares of Stock held by the Stockholders to be made on its books except in
accordance with the terms of this Agreement.
Notwithstanding the foregoing, any Stockholder may freely Transfer its
share of Stock to any one (1) of its affiliates provided that, such
Stockholder, with its affiliates, will not on
EXHIBIT 1
25
account of such Transfer beneficially hold more than twenty-five percent (25%)
of the issued Stock of the Company and provided further that such affiliate
agrees in writing to be bound by the terms of this Agreement. The term
"affiliate" as used in this Agreement shall have the meaning ascribed to it
under Rule 12b-2, promulgated under the Securities Exchange Act of 1934, as in
effect on June 1, 1995.
Any Transfer or attempted Transfer by any Stockholder other than as
permitted by this Agreement shall be void ab initio and be deemed to be a
breach of this Agreement.
Within three years of the date of the Corporation's Certificate of
Incorporation, no Stockholder, together with its affiliates, may at any time be
the beneficial holder of more than twenty-five percent (25%) of the issued
Stock of the Company.
ARTICLE II
RIGHT OF FIRST REFUSAL
Subject to the provisions of Article I, should any Stockholder receive a
bona fide offer from an unaffiliated party or wish to enter into any agreement
relating to the Transfer of any or all of the Stock held by such Stockholder,
the Company shall have a right of first refusal to purchase the Stock which is
the subject of such bona fide offer or agreement (the "Subject Stock").
Pursuant to this right of first refusal, the Stockholder receiving the offer or
wishing to enter into any such Agreement shall notify the Board of Directors of
the Company, in writing, of the offer or agreement and all of the terms
thereof, including, without limitation, the name and address of the proposed
purchaser, the exact number of shares that are the subject of the proposed
Transfer, the offered purchase price or other consideration, any terms and
conditions of payment, and whether the selling Stockholder intends to accept
the offer on the offered terms. If the Stockholder receiving the offer or
wishing to enter into any such agreement has decided to accept the offer
subject to the provisions hereof, the Board of Directors of the Company, within
thirty (30) days after such notice of the proposed sale by such Stockholder,
shall notify the selling Stockholder whether the Company wishes to purchase all
of the Subject Stock on substantially the same terms and conditions as those
set forth in the notice; and if the Company does wish to so purchase all such
shares, such Stockholder shall sell such shares as the Company desires to the
Company, on a timely basis, and shall cooperate in all such respects. If the
Board of Directors of the Company declines to undertake to so purchase all of
the Subject Stock, the Stockholder receiving the offer or wishing to enter into
any such agreement may proceed to sell such Subject Stock on the same terms and
conditions as proposed in the notice. If no such sale of the Subject Stock is
consummated within a ninety (90) day period following the expiration of the
thirty (30) day period during which the Company may accept the offer to
undertake the transaction, the sale of the Subject Stock shall again become
subject to this Article II.
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26
Notwithstanding the foregoing, any Stockholder may Transfer shares of
Stock pursuant to the second paragraph of Article I hereof without such
Transfer being subject to the above right of first refusal.
ARTICLE III
BUY BACK OF PROJECTED VOLUME SHARES
(a) Attached hereto as Schedule B is a list of certain shares of
Stock, referred to herein as the "Projected Volume Shares", and the holders
thereof. In addition to any other purchase rights set forth in this Agreement,
the Projected Volume Shares held by such holders shall be subject to purchase
by the Company as follows: As soon as reasonably practicable after December 31,
1996, the Company shall determine and certify to each holder the actual number
of commissionable reservation transactions that were processed through The
Hotel Clearing Corporation ("HCC") ("Actual Transactions") by such holder of
the Projected Volume Shares from January 1, 1996 through December 31, 1996,
compared to such holder's projected number of transactions ("Projected
Transactions") set forth in the Projected Volume Confirmation (herein so
called) delivered by such holder to the Company and accepted as of the date of
this Agreement. With respect to each holder of Projected Volume Shares, if such
holder's Actual Transactions equal or exceed its Projected Transactions, then
the Projected Volume Shares held by such person shall not be subject to the
purchase option provided for in this paragraph. If the Actual Transactions by
any holder of Projected Volume Shares are less than its Projected Transactions,
then the Company may, at its option, purchase, at a purchase price of one
dollar ($1.00) per share, the percentage of such holder's Projected Volume
Shares (rounded to the nearest whole share) equal to the corresponding
percentage by which such holder's Actual Transactions were less than its
Projected Transactions. If this purchase option is exercised, the holder of any
Projected Volume Shares subject thereto shall be required to, and shall, sell
the required percentage of its Projected Volume Shares (rounded to the nearest
whole share) to the Company and shall cooperate with the Company in all
respects. The Company shall have one hundred and eighty (180) days after
delivery of the required certification regarding Actual Transactions to
exercise this purchase right by notifying any affected Stockholder of such
exercise and tendering payment of the required purchase price to the affected
Stockholder(s). Each such affected Stockholder (i) shall cooperate in all
respects with such purchase and (ii) hereby irrevocably appoints the Company as
its agent and attorney-in-fact to transfer such shares as provided above and to
do all things necessary or appropriate to accomplish such transfer.
ARTICLE IV
DIRECTORS
(a) Each holder of record of at least one and one-half percent (1.5%)
of the shares of the Company's issued and outstanding Stock entitled to vote
shall be entitled to
3
27
designate and nominate one (1) person for election to the Company's Board of
Directors by the Stockholders. For such calculation, the percentage of the
shares of the Company's issued and outstanding Stock held by any Stockholder
shall be inclusive of the shares held by all affiliates of such Stockholder;
provided, however that Reed Travel Group, a division of Reed Elsevier Inc.
("Reed") and Utell International Ltd. ("Utell") shall each be entitled to
designate and nominate one (1) person for election to the Board notwithstanding
that they are affiliates of each other, as long as each of Reed and Utell hold
at least 1.5% of the shares of Stock entitled to vote in the election of
directors. The person so nominated must be an officer or employee of such
holder of such share of Stock designating or nominating such person. As
required by the Bylaws of the Company, in the event that management is not
represented by at least one member of the Board of Directors through such
director's ownership of at least one and one-half percent (1.5%) of the shares
of the capital stock, the number of directors shall be increased by one (1).
The President of the Company, with the advice of the Chairman of the Board,
shall designate and nominate one (1) person for election to the Company's Board
of Directors as the representative of the management of the Company. All
nominations for directors shall be submitted to the Board of Directors at such
time and in such manner as is determined by the Board of Directors,
(b) All holders of Stock entitled to vote shall vote for, and shall
take all necessary steps to accomplish, the election of each of the respective
person(s) appropriately designated and nominated by a holder of Stock and/or by
the management of the Company for a seat on the Company's Board of Directors in
accordance with foregoing paragraph, and shall cooperate and act in accordance
therewith, in a timely manner and in good faith, to the maximum extent
possible.
(c) If a Stockholder or Stockholders wish(es) to remove or proposes
the removal of the director(s) that it or they had designated or nominated to
the Board of Directors, all of the Stockholders entitled to vote shall vote
for, and shall take all necessary steps to accomplish, the removal of such
director. Except in cases where a director is being removed for cause, each
Stockholder entitled to vote hereby agrees to refrain from voting in favor of
the removal of any director who had been elected by the Stockholders, unless
the Stockholder that had designated and nominated such director also votes in
favor of such removal.
(d) If any director is removed from office, resigns, dies or
otherwise leaves the Board of Directors (except as provided in the following
paragraphs, the Stockholder or Stockholders that had designated or nominated
such director in accordance with paragraph (a) of this Article IV shall be
entitled to designate and nominate a new director to fill the vacancy so
created in the Company's Board of Directors, and the other Stockholders
entitled to vote shall act in the manner provided in paragraph (b) of this
Article IV.
(e) If the Company purchases the Stock of any Stockholder entitled to
vote, or if a Stockholder surrenders its Stock to the Company as provided for
in Article XI(b) hereof, such Stockholder's representative on the Board of
Directors shall immediately be terminated as a director and, as provided in the
Bylaws of the Company, the seat on the Board of Directors previously held by
such director shall be eliminated, reducing the total number of directors by
one and creating no vacancy on the Board of Directors by reason of such
termination.
4
28
ARTICLE V
UTILIZATION OF SUBSIDIARY COMPANIES' SERVICES
Each Stockholder listed on Schedule A hereto shall execute the HCC
Participant Agreement and/or UltraSwitch User Agreement listed next to its name
on Schedule A and comply with all obligations set forth in each such agreement.
ARTICLE VI
CONFIDENTIAL INFORMATION; RESTRICTIONS ON THE COMPANY
The Company shall, and shall cause its officers, directors, employees,
consultants and agents (collectively, "Company Representatives") to, keep
secret and retain in strictest confidence any and all confidential matters
relating to the business of any Stockholder or affiliate thereof (including,
but not limited to, all confidential data provided by the Stockholders to the
Company) that are (i) not otherwise in the public domain, (ii) not otherwise in
the rightful possession of the Company from third parties having no obligation
of confidentiality to a Stockholder, (iii) not required under compulsion of law
to be disclosed by the Company or Company Representatives (through oral
question, interrogatory, subpoena, civil investigative demands, or similar
process), or (iv) not edited, masked, aggregated, summarized, compiled or
otherwise modified in such a way as to delete or obscure references or data
directly identifying any Stockholder, and shall not disclose them, and shall
cause the Company Representatives not to disclose them, to anyone outside such
Stockholder, such Stockholder's affiliates, the Company or Company
Representatives; nor may the Company or any Company Representatives exploit
such confidential matters for its or their respective benefit or the benefit of
other relationships with customers of the Company; and all such confidential
information that is proprietary in nature shall remain the sole property of the
Stockholder that furnished such information to the Company. The confidentiality
obligations hereunder shall continue in perpetuity. For purposes of this
Article VI, information furnished by any Stockholder to the Company shall be
deemed to be confidential only if, in addition to the above, the information in
question is clearly designated as being confidential by the Stockholder or
other person furnishing such information to the Company.
If the Company or any Company Representative breaches, or threatens to
commit a breach of, any of the provisions of this Article VI, the Stockholder
furnishing such confidential information shall have the right and remedy to
have this Article VI specifically enforced by any court having jurisdiction, it
being acknowledged and agreed that any such breach or threatened breach will
cause irreparable injury to such Stockholder and that money damages will not
provide an adequate remedy to such Stockholder. Nothing in this Article VI
shall be construed to limit the right of any such Stockholder to collect money
damages in the event of a breach of this Article VI.
5
29
Notwithstanding the above, the provisions of this Article VI shall not
apply in the case of any information furnished by any Stockholder (or affiliate
thereof who has entered into an agreement with the Company specifically
providing that this Article VI's provisions shall not apply to the extent they
are inconsistent with such other agreement.
ARTICLE VII
CONFIDENTIAL INFORMATION; RESTRICTIONS ON STOCKHOLDERS
Each Stockholder and its affiliates shall, and each Stockholder shall
cause its and its affiliates' officers, directors, stockholders, employees,
consultants and agents (collectively, "Stockholder Representatives") to, keep
secret and retain in strictest confidence any and all confidential matters
relating to the business of the Company and any other Stockholder or affiliate
thereof (including, but not limited to, all information provided by the other
Stockholders to the Company, the technology and design of the clearinghouse
service system developed by the Company and, to the extent that it is released
to them by the Company, all data and information generated by the Company's
clearinghouse service system) that are (i) not otherwise in the public domain,
(ii) not otherwise in the rightful possession of such Stockholder (or
affiliate) from third parties having no obligation of confidentiality to a
Stockholder or the Company, or (iii) not required under compulsion of law to be
disclosed by such Stockholder, its affiliates or Stockholder Representatives
(through oral question, interrogatory, subpoena, civil investigative demands,
or similar process), and shall not disclose them, and shall cause the
Stockholder Representatives not to disclose them, to anyone outside such
Stockholder, such affiliates, or the Company and its agents, except as
otherwise determined by the Board of Directors, nor may a Stockholder or its
affiliates or any Stockholder Representative exploit such confidential matters
for its or their respective benefit or the benefit of other relationships with
customers of such Stockholder and its affiliates, except as otherwise
determined by the Board of Directors. The confidentiality obligations hereunder
shall continue in perpetuity. For purposes of this Article VII, information
furnished by any Stockholder to the Company shall be deemed to be confidential
only if, in addition to the above, the information in question is clearly
designated as being confidential by the Stockholder or other person furnishing
such information to the Company.
If a Stockholder or any of its affiliates or Stockholder Representative
breaches, or threatens to commit a breach of, any of the provisions of this
Article VII, any of the other Stockholders and/or the Company shall have the
right and remedy to have this Article VII specifically enforced by any court
having jurisdiction, it being acknowledged and agreed that any such breach or
threatened breach will cause irreparable injury to such other Stockholders and
the Company and that money damages will not provide an adequate remedy to such
other Stockholders or the Company. Nothing in this Article VII shall be
construed to limit the right of any Stockholder or the Company to collect money
damages in the event of a breach of this Article VII.
6
30
Notwithstanding the above, the provisions of this Article VII shall not
apply in the case of any information furnished by any Stockholder (or affiliate
thereof) who has entered into an agreement with the Company specifically
providing that this Article VII's provision shall not apply to the extent they
are inconsistent with such other agreement.
ARTICLE VIII
LEGENDS ON STOCK CERTIFICATES
The certificates for all shares of the Stock of the Company are
concurrently with the issuance thereof to be endorsed with the legends in
substantially the form below:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, or any state securities
laws, and neither such shares nor any interest therein may be sold,
assigned, pledged, transferred, hypothecated, encumbered or in any other
manner transferred or disposed of, or be subject to execution,
attachment or similar process, in whole or in part, except in compliance
therewith and with all other applicable federal and state securities and
other laws and regulations, and unless an opinion of counsel or other
evidence relating to compliance with such laws, in form and substance
satisfactory to the Company, is delivered to the Company in advance of
any such transfer. Further, the shares represented by this certificate
are subject to the conditions, restrictions and obligations specified in
that certain Stockholders Agreement dated __,1995, and any amendments
thereto (the "Stockholders Agreement"), among the Company and certain of
its Stockholders, including conditions and restrictions with respect to
voting rights and powers, disposition, stock ownership rights and
prerequisites, transfer, the composition of the Company's Board of
Directors, stock repurchase rights, and otherwise, and no transfer of
the shares represented by this certificate shall be valid or effective
unless and until such conditions and restrictions have been complied
with in all respects, in the determination of the Company's Board of
Directors. A copy of the Stockholders Agreement is on file with the
Secretary of the Company. The holder of this certificate, by acceptance
of this certificate, agrees to be bound by the provisions of the
Stockholders Agreement and to indemnify and hold the Company harmless
against loss or liability arising from the disposition of the shares
represented by this certificate in violation of such provisions or in
violation of any of the aforementioned laws or regulations."
Said certificates, and all certificates representing shares of the Stock of the
Company at any time hereafter issued or transferred, shall include similar
endorsements. Any transfer of any shares of Stock of the Company shall be made
upon the books of the Company only in accordance with this provision.
7
31
ARTICLE IX
NOTICES
All notices, requests, consents, payments and other communications
contemplated hereby shall be in writing and (a) personally delivered, (b)
deposited in the United States mail, first-class, registered or certified mail,
return receipt requested, with postage prepaid, or (c) sent by overnight
courier service (for next business day delivery), shipping prepaid, as follows:
If to the Stockholders, at the addresses set forth on Schedule A.
If to the Company:
Pegasus Systems, Inc.
3811 Turtle Creek Blvd., Suite 1100
Dallas, Tx 75219
Attention: President
or such persons or addresses as any party may request by notice duly given
hereunder. Except as otherwise specified herein, notices shall be deemed given
and received at the time of personal delivery or, if sent by U.S. mail, three
(3) business days after mailing, or, if sent by overnight courier, one (1)
business day after such sending. The foregoing notice provision shall apply
equally with respect to any process which either party may desire to serve on
the other party, pursuant to judicial process or otherwise, it being expressly
understood and agreed that such mode of service shall be in addition to and not
in derogation of any other valid forms of service provided by law.
ARTICLE X
ADDITIONAL STOCKHOLDERS
No persons or entity other than those listed on Schedule A may be a
stockholder of the Company's Stock unless and until such person or entity
agrees in writing as a condition to their ownership of the Stock to become a
party to this Agreement, by executing and delivering to the Company a letter
substantially in the following form, in form and substance satisfactory to the
Company:
8
32
"To Pegasus Systems, Inc.:
The undersigned hereby agrees to become a party to the
Stockholders Agreement dated as of, 1995, among Pegasus Systems,
Inc. and the stockholders named in such agreement, and agrees to
be bound by all of the terms and provisions thereof in all
respects. This election shall be binding upon the heirs,
executors, administrators, successors, and assigns of the
undersigned.
Very truly yours,
------------------------------
Dated: "
-----------------
ARTICLE XI
TERMINATION
(a) Except as otherwise provided in Articles VI and VII hereof, all
provisions in this Agreement shall continue until the earliest to occur of the
following: (i) such time as the parties and the Company mutually agree in
writing to terminate this Agreement; (ii) such time as the Board of Directors
shall determine in connection with a public offering, if any, of the Company's
securities; or (ii) ten (10) years from the date hereof unless this Agreement
is extended as provided in Article XIX hereof.
(b) Notwithstanding any other provision hereof except for the
provisions of Articles VI and VII, any Stockholder may at any time surrender
(for no consideration) to the Company all of its shares of the Company's Stock,
and in such event, such Stockholder shall no longer be deemed to be a
Stockholder and shall have no further obligations hereunder, except to abide by
the perpetual confidentiality provisions of Articles VI and VII hereof.
ARTICLE XII
BENEFIT, USE OF TERMS
This Agreement and each of its provisions, whether so expressed or not,
shall be binding upon the parties and their heirs, executors, administrators,
successors and assigns. This Agreement shall inure to the benefit of each of
the foregoing but rights and interests under this Agreement shall be assignable
only in accordance with this Agreement and to the extent expressly permitted
herein.
9
33
Terms used in the singular shall be read in the plural, and vice versa,
and terms used in the masculine gender shall be read in the feminine or neuter
gender, when the context so requires. The term "person" as used herein refers
to a natural person, a corporation, or any other entity or association, as the
context requires.
ARTICLE XIII
APPLICABLE LAW
This Agreement shall be governed by, and construed according to, the
laws of the State of Delaware, without giving effect to the choice of law
principles thereof.
ARTICLE XIV
ARBITRATION
Any controversy or claim arising out of, or relating to, this Agreement,
or the breach thereof, shall be settled by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association, and
judgment upon the award rendered by a single Arbitrator may be entered in any
Court having jurisdiction thereof. The place of arbitration shall be Dallas
County, Texas or as otherwise agreed by the parties.
ARTICLE XV
SEVERABILITY
The provisions of this Agreement shall be deemed severable, and if any
part of any provision is held to be illegal, void, voidable, invalid, non-
binding or unenforceable in its entirety or partially or as to any party, for
any reason, such provision may be changed, consistent with the intent of the
parties hereto, to the extent reasonably necessary to make the provision, as so
changed, legal, valid, binding and enforceable. If any provision of this
Agreement is held to be legal, void, voidable, invalid, non-binding or
unenforceable in its entirely or partially or as to any party, for any reason,
and if such provision cannot be changed consistent with intent of the parties
hereto to make it fully legal, valid, binding and enforceable, then such
provisions shall be stricken from this Agreement, and the remaining provisions
of this Agreement shall not in any way be affected or impaired, but shall
remain in full force and effect.
ARTICLE XVI
NO PARTNERSHIP
Notwithstanding anything to the contrary in this Agreement, the parties
agree that nothing contained or provided for herein creates a partnership or
joint venture.
10
34
ARTICLE XVII
ENTIRE AGREEMENT
This Agreement and all Schedules hereto set forth the entire
understanding of the parties with respect to the subject matter hereof, and
incorporate and merges any and all previous communications, understandings,
oral or written.
ARTICLE XVIII
COUNTERPARTS
This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same agreement binding on all of the parties, notwithstanding that
all parties are not signatories to the original or the same counterpart. It is
expressly contemplated that such counterparts may be executed at different
times and from time to time; each party shall become bound by this Agreement
immediately upon affixing its signature hereto, independently of the signature
of any other party.
ARTICLE XIX
RENEWAL OF VOTING AGREEMENT
The parties acknowledge and understand that the Stockholders' covenants
contained in Article IV hereof to vote their stock in accordance with the
provisions thereof are permitted to remain in effect only for a ten (10) year
period, unless renewed, as provided herein. Therefore, the Company may, prior
to such expiration and the expiration of any renewed terms, request that all
Stockholders agree to an additional ten (10) year extension of such voting
provisions. Each Stockholder agrees to use its best efforts to accomplish each
such extension.
ARTICLE XX
REPRESENTATIONS AND WARRANTIES
Each Stockholder hereby represents and warrants to the other parties
hereto, as of the date on which it becomes a party hereto, and as of any other
dates on which such Stockholder contributes additional capital to, makes a loan
to, or purchases securities from, the Company (or agrees to do any of the
foregoing), as follows:
(a) The Stockholder has the full and entire right, power, and authority
and has taken all necessary action, including without limitation requisite
approval of its board of Directors, required to authorize (i) the execution and
delivery of this Agreement; (ii) the
11
35
receipt of a stock certificate for the number and class of shares owned by such
Stockholder; (iii) the tendering of full payment of the purchase price for such
stock; and (iv) the performances of all other acts and obligations required in
order to carry out in full this Agreement. The Stockholder will not, by
becoming a stockholder of the Company, by entering into this Agreement or by
taking any action contemplated hereunder, default under, breach or otherwise be
in conflict with any other agreement, document or instrument to which the
Stockholder is subject or by which the Stockholder is bound.
(b) The Stockholder is acquiring the shares of the Company's stock
(the "Share(s)") for its own account for investment, and not with a view to, or
for offering it for sale in connection with, the transfer, distribution or
resale thereof, and agrees not to sell, transfer, assign, pledge, hypothecate,
or otherwise dispose or attempt to dispose of its Share(s) (i) unless the
Shares represented thereby has been registered under the Securities Act of
1933, as amended (the "Act"), and applicable state securities laws or, in the
opinion of counsel acceptable to the Company and its counsel, an exemption from
the registration requirements of the Act and such laws is available, or (ii) in
any manner which would either result in such Stockholder being deemed under the
Act to be an underwriter of such Share(s) within the meaning of the Act or
result in the loss to the Company of its exemption from registration under the
Act relating to the issuance of such Share(s) to the Stockholder or to any
other person. The Stockholder acknowledges that registration of Share(s) for
resale under the Act and such other laws is unlikely at any time in the future.
(c) The Stockholder has a sufficient degree of sophistication,
knowledge and experience in financial affairs to understand and evaluate the
merits and risks associated with investment in the Share(s) and in the Company,
and (i) its overall commitment to investments that are not readily marketable
is not disproportionate to its net worth and if so investment in the Share(s)
will not cause such overall commitment to become excessive; (ii) it has
adequate net worth and means of providing for any current needs and
contingencies such that it is able to sustain a complete loss of its investment
in the Share(s), and it has no need for liquidity in this investment; and (iii)
it has evaluated the risk of investing in Share(s) and the Company.
(d) The Stockholder recognizes that investment in the Share(s) and
the Company involves certain risks, and it has taken full cognizance of and
understands all of the risk factors related to an investment in the Share(s).
(e) The Stockholder has been provided with ample opportunities to
discuss and raise questions with the Company and its founders, promoters,
officers and directors, concerning the detailed operations and business plans
of the Company.
(f) The Stockholder shall indemnify and hold the Company harmless
from and against any and all damage (including, without limitation, any
liability, cost, or expense, including, without limitation, attorney's fees and
disbursements) arising out of any breach of any of the representations,
warranties, covenants, or provisions contained in this Agreement.
12
36
ARTICLE XXI
POWER OF DECISIONS
It is understood and agreed that, except as otherwise provided herein or
in the Company's Certificate of Incorporation or Bylaws, as amended from time
to time, all actions and decisions which the Company may or must take or make
hereunder shall be taken or made by the Company's Board of Directors acting in
accordance with the quorum and voting power provisions set forth in the
Company's Certificate of Incorporation and Bylaws, as amended from time to
time.
ARTICLE XXII
AMENDMENTS
This Agreement may be amended, modified, or repealed, or a new Agreement
may be adopted, only by, in addition to all applicable requirements of law, a
writing executed and delivered by the Company and by Stockholders holding of
record at least two-thirds (2/3) of the then outstanding shares of Stock;
provided, however, that no provision of this Agreement may be amended,
modified, repealed or replaced without the Company and all holders of all of
the then outstanding shares of Stock agreeing in writing thereto, if such
amendment, modification, repeal or replacement would in any manner increase or
expand the Company's or any other person's or entity's ability to force, compel
or require any holder of shares of Stock to sell any such shares of Stock to
the Company or to any other person or entity under any circumstance not
otherwise permitted by this Agreement, the Bylaws or the Certificate of
Incorporation.
13
37
IN WITNESS WHEREOF, this Agreement is executed by the parties on the
respective dates set forth below to be effective as of the date first above
written.
COMPANY:
PEGASUS SYSTEMS, INC.
By:
-----------------------------
Its:
----------------------------
Date:
---------------------------
--------------------------------
ANASAZI, INC.
By:
-----------------------------
Its:
----------------------------
Date:
---------------------------
--------------------------------
BEST WESTERN INTERNATIONAL
By:
-----------------------------
Its:
----------------------------
Date:
---------------------------
--------------------------------
14
38
CHOICE HOTELS INTERNATIONAL
By:
-----------------------------
Its:
----------------------------
Date:
---------------------------
--------------------------------
FORTE HOTELS
By:
-----------------------------
Its:
----------------------------
Date:
---------------------------
--------------------------------
HILTON HOTELS CORPORATION
By:
-----------------------------
Its:
----------------------------
Date:
---------------------------
--------------------------------
HOSPITALITY FRANCHISE SYSTEMS,
INC.
By:
-----------------------------
Its:
----------------------------
Date:
---------------------------
--------------------------------
15
39
REED TRAVEL GROUP, A DIVISION OF
REED ELSEVIER INC.
By:
-----------------------------
Its:
----------------------------
Date:
---------------------------
--------------------------------
HYATT HOTELS CORPORATION
By:
-----------------------------
Its:
----------------------------
Date:
---------------------------
--------------------------------
INTER-CONTINENTAL HOTELS
By:
-----------------------------
Its:
----------------------------
Date:
---------------------------
--------------------------------
ITT SHERATON CORPORATION
By:
-----------------------------
Its:
----------------------------
Date:
---------------------------
--------------------------------
16
40
LA QUINTA INNS, INC.
By:
-----------------------------
Its:
----------------------------
Date:
---------------------------
--------------------------------
MARRIOTT INTERNATIONAL, INC.
By:
-----------------------------
Its:
----------------------------
Date:
---------------------------
--------------------------------
PROMUS HOTELS INC.
By:
-----------------------------
Its:
----------------------------
Date:
---------------------------
--------------------------------
UTELL INTERNATIONAL LTD.
By:
-----------------------------
Its:
----------------------------
Date:
---------------------------
--------------------------------
17
41
WESTIN HOTELS & RESORTS
By:
-----------------------------
Its:
----------------------------
Date:
---------------------------
--------------------------------
--------------------------------
John F. Davis, III
Date:
---------------------------
--------------------------------
18
42
SCHEDULE A
APPLICABLE AGREEMENT TO BE
STOCKHOLDERS AND ADDRESSES EXECUTED PURSUANT TO ARTICLE V
-------------------------- ------------------------------
ANASAZI SERVICE CORPORATION HCC Participant Agreement
7500 N. Dreamy Draw Drive
Suite 120
Phoenix, Arizona 85020
Attention: Tom Castleberry
Fax No.: (602) 861-7687
BEST WESTERN INTERNATIONAL HCC Participant Agreement/
6201 N. 24th Parkway THISCO UltraSwitch User
Phoenix, AZ 85016
Attention: William S. Watson
Fax No.: (602) 957-5966
CHOICE HOTELS INTERNATIONAL THISCO UltraSwitch User
4225 E. Windrose Dr.
Phoenix, AZ 85032
Attention: James R. Yoakum
Fax No.: (602) 996-0192
FORTE HOTELS HCC Participant Agreement/
1973 Friendship Drive THISCO UltraSwitch User
El Cajon, CA 92020
Attention: William Hanley
Fax No.: (619) 562-0901
HILTON HOTELS CORPORATION THISCO Ultraswitch User
9336 Civic Center Drive
Beverly Hills, CA 90210
Attention: Mike Ing
Fax No.: (310) 859-2513
HOSPITALITY FRANCHISE SYSTEMS, INC. HCC Participant Agreement/
3838 E. Van Buren THISCO UltraSwitch User
Phoenix, AZ 85008
Attention: Douglas L. Patterson
Fax No.: (602) 389-3909
19
43
APPLICABLE AGREEMENT TO BE
STOCKHOLDERS AND ADDRESSES EXECUTED PURSUANT TO ARTICLE V
-------------------------- ------------------------------
REED TRAVEL GROUP, A DIVISION OF Not Applicable
REED ELSEVIER INC.
500 Plaza Drive
Secaucus, NJ 07096
Attention: Malcolm Highet
Fax No.: (201) 319-1643
HYATT HOTELS CORPORATION HCC Participant Agreement/
200 W. Madison Avenue #39 THISCO UltraSwitch User
Chicago, IL 60606
Attention: John Biggs
Fax No.: (708) 990-6357
INTER-CONTINENTAL HOTELS HCC Participant Agreement/
Devonshire House THISCO UltraSwitch User
Mayfair Place
London, England W1X 5FH
Attention: Paul Travers
Fax No.: 011 44 71 355 6591
ITT SHERATON CORPORATION HCC Participant Agreement/
Sixty State Street, THISCO UltraSwitch User
World Headquarters
Boston, MA 02109
Attention: Richard Nauman
Fax No.: (617) 367-5182
LA QUINTA INNS, INC. HCC Participant Agreement/
112 E. Pecan St. THISCO UltraSwitch User
P.O. Box 2636
San Antonio, Tx 78299
Attention: W.C. Hammett, Jr.
Fax No.: (210) 302-6016
MARRIOTT INTERNATIONAL, INC. THISCO UltraSwitch User
One Marriott Drive, Dept. 939.07
Washington, D.C. 20058
Attention: Bruce W. Wolff
Fax No.: (301) 380-6094
20
44
APPLICABLE AGREEMENT TO BE
STOCKHOLDERS AND ADDRESSES EXECUTED PURSUANT TO ARTICLE V
-------------------------- ------------------------------
PROMUS HOTELS INC. HCC Participant Agreement/
3239 Players Club Parkway THISCO UltraSwitch User
Memphis, TN 38125
Attention: Donald M. Kolodz
Fax No.: (901) 748-8102
UTELL INTERNATIONAL LTD. HCC Participant Agreement/
2 Kew Bridge Road THISCO UltraSwitch User
Brentford, London TW8 0JF
Attention: Mike Hope
Fax No.: 011 44 81 490 5855
WESTIN HOTELS & RESORTS HCC Participant Agreement/
2001 6th Avenue, 13th Floor THISCO UltraSwitch User
Seattle, WA 98121
Attention: Marc Pujalet
Fax No.: (206) 443-8997
JOHN F. DAVIS, III Not Applicable
3811 Turtle Creek Blvd., Suite 1100
Dallas, Texas 75219
Fax No.: (214) 528-5675
21
45
SCHEDULE B TO STOCKHOLDERS AGREEMENT
<TABLE>
<CAPTION>
HOLDER OF PROJECTED VOLUME SHARES NUMBER OF PROJECTED VOLUME SHARES
--------------------------------- ---------------------------------
<S> <C>
Anasazi Service Corporation 87
Best Western International 544
Forte Hotels 303
Hospitality Franchise Systems, Inc. 703
Hyatt Hotels Corporation 455
Inter-Continental Hotels Corporation 165
ITT Sheraton Corporation 215
La Quinta Inns, Inc. 142
Promus Hotels Inc. 769
Utell International Ltd. 78
Westin Hotels & Resorts 122
-----
Total 3,583
</TABLE>
22
46
EXHIBIT 2
STOCK PURCHASE OPTION
-24-
47
STOCK PURCHASE OPTION
This document certifies that LODGING NETWORK, INC. ("LODGING") is,
subject to the terms and conditions set forth herein below, entitled to Three
Thousand Three Hundred Sixty Five (3,365) shares of fully paid and non
assessable Common Stock of Pegasus System, Inc. (hereinafter referred to as
"Pegasus") (the "Pegasus Stock"), upon exercise of this Option and the timely,
full and complete satisfaction of the terms set forth herein.
TERMS AND CONDITIONS
The exercise of this Option is conditioned upon and subject to the below
stated terms and conditions:
1. This Option may only be exercised during a period beginning on
the Effective Date hereof and expiring on the last day of the
thirty sixth (36th) month after the Effective Date hereof (the
"Option Term"). LODGING must take all action required by this
Option for the issuance of the stock during the Option Term.
2. To exercise this Option, LODGING shall deliver to Pegasus the
original of this document and the original of Stock Certificate
No. 002 of The Hotel Clearing Corporation representing Two
Hundred Ten (210) shares of Preferred Stock issued to Lodging
Network, Inc. dated August 10,1993 (the "HCC Stock") and any and
all other Stock Certificates of The Hotel Clearing Corporation
and any other document evidencing any right, title or interest in
or to any current or future ownership of The Hotel Clearing
Corporation in the possession of LODGING. Upon satisfaction by
LODGING of the requirements set forth herein to exercise this
Option, Pegasus shall issue the Pegasus Stock to LODGING.
3. This Option is non-transferable, non assignable, non negotiable
and may not be encumbered, pledged or given as security for any
purpose.
4. This Option shall be fully protected from dilution resulting from
a reverse split of the Common Stock of Pegasus and shall be
entitled to the benefits of any split of the shares of common
stock of Pegasus. Any split or reverse split of the Common Stock
of Pegasus shall result in the proportionate adjustment of the
Pegasus Stock hereunder.
5. LODGING represents and warrants to Pegasus that it is the sole
true and lawful owner of the HCC Stock with full right, title and
interest in and to the HCC Stock as provided herein and with the
full and unencumbered right to sell, transfer, assign and convey
the HCC Stock as provided herein and
EXHIBIT 2 - PAGE 1 OF 3
48
that the HCC Stock is free and clear of any and all debts, liens,
restrictions (except as restricted by the terms and provisions of
the Amended and Restated Stockholders' Agreement for The Hotel
Clearing Corporation dated February 9, 1994) or other
encumbrances and shall remain so during the term of this Option.
The above and foregoing warranties and representations shall be
affirmed upon the exercise of this Option and the transfer of the
HCC Stock as provided herein.
6. As a prospective purchaser of stock of Pegasus, LODGING
acknowledges represents and warrants that the stock is being
purchased as an investment for its own account and without any
present intention of dividing the interest with others,
reselling, or otherwise distributing the stock. In making this
warranty, LODGING acknowledges that representatives of Pegasus
have advised LODGING that (1) the stock is not being registered
under the Federal Securities Act of 1933 on the ground that this
transaction does not involve any public offering, and is
therefore, exempt under Section 4(2) of the Act; (2) Pegasus'
reliance on such exemption is predicated in pad on LODGING's
representation that LODGING has no present intention of dividing
the stock with others or of reselling or otherwise disposing of
it; and (3) although LODGING has the right to dispose of its own
property when and as it sees fit, in the view of the United
States Securities and Exchange Commission, the exemption under
Section 4(2) of the Act is not available to Pegasus if LODGING is
merely acquiring the stock for resale on the occurrence or
nonoccurrence of some predetermined event such as the passage of
one year, a market rise, if the market does not rise, or any
other fixed or determinable event.
7. Following the merger of one or more entities into Pegasus, or any
consolidation of Pegasus and one or more entities in which
Pegasus is the surviving corporation, the exercise of this Option
shall apply to the shares of the surviving corporation.
8. By accepting this Option LODGING agrees, upon exercise of this
Option, to execute and abide by the Stockholders' Agreement
binding upon the stockholders of Pegasus and agrees to be bound
by all other restrictions and agreements generally applicable to
owners of Pegasus Common Stock.
9. Pegasus agrees that it will not hereafter cause or permit The
Hotel Clearing Corporation ("HCC") to merge with The Hotel
Industry Switch Company without the prior written consent of
LODGING (which shall not be unreasonably withheld), for so long
as LODGING holds the HCC Stock.
10. Pegasus agrees to provide LODGING with monthly financial
statements, including a balance sheet and statement of income and
expenses, for each of Pegasus, HCC, and any other subsidiaries of
Pegasus for so long as this Option is outstanding.
EXHIBIT 2 - PAGE 2 OF 3
49
11. Pegasus confirms that LODGING, as the holder of the HCC Stock,
has the rights of the Series A Preferred Stockholder of HCC as
set forth in the HCC Stockholders' Agreement. Upon the exercise
of this Option and the issuance of the Pegasus Stock all of
LODGING's rights as set forth in the Stockholder Agreement for
HCC shall be assigned to Pegasus.
12. Pegasus agrees to act in good faith with respect to the future
operation of the business of HCC, and specifically agrees not to
divert business opportunities or income away from HCC in any
manner inconsistent with the current business plan for HCC and
Pegasus.
13. Notwithstanding any provision hereof to the contrary, this Option
may be assigned by LODGING to a purchaser of the HCC Stock
provided the sale of the HCC Stock is in compliance with the HCC
Stockholders' Agreement.
14. Pegasus agrees to cause the amendment of Article l of the HCC
Stockholders' Agreement to provide that company approval of any
proposed sale of company stock shall not be unreasonably
withheld.
15. Pegasus agrees that it will not cause or permit HCC to make any
cash loans to Pegasus in excess of Two Hundred Fifty Thousand
Dollars ($250,000.00) (in the aggregate) without written consent
of LODGING for so long as LODGING remains a Series A Preferred
Stockholder of HCC.
The corporation has caused this Option to be executed by its duly authorized
officer and the corporate seal is affixed hereto.
PEGASUS SYSTEMS INC.
By:
--------------------------------
John F. Davis, III
President
Effective Date:
--------------------
AGREED:
LODGING NETWORK, INC.
By:
------------------------------
Its:
------------------------------
EXHIBIT 2 - PAGE 3 OF 3
1
EXHIBIT 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF PEGASUS SYSTEMS, INC.
This Amended and Restated Certificate of Incorporation amends and
restates the Certificate of Incorporation, as amended to date, of Pegasus
Systems, Inc., a corporation originally incorporated in Delaware as "Pegasus
Systems, Inc." on July 10, 1995. This Amended and Restated Certificate of
Incorporation has been duly adopted pursuant to Section 245 of the Delaware
General Corporation Law,
ARTICLE I
The name of this corporation is Pegasus Systems, Inc. (the
"Corporation").
ARTICLE II
The address of the registered office of the Corporation in the State
of Delaware is 1013 Centre Road, New Castle County, Wilmington, Delaware
19805-1297, The name of the registered agent of the Corporation at that address
is The Prentice-Hall Corporation Systems, Inc.
ARTICLE III
The nature of the business or purposes to be conducted or promoted by
the Corporation is to engage in any lawful business, act or activity for which
Corporations may be organized under the General Corporation Law of the State of
Delaware. The private property of the stockholders shall not be subject to the
payment of corporate debts to any extent whatsoever.
ARTICLE IV
This Corporation is authorized to issue two classes of stock,
designated "Common Stock" and "Preferred Stock". The total number of shares
which this Corporation is authorized to issue is 22,000,000 shares. The number
of shares of Common Stock which this Corporation is authorized to issue is
20,000,000 shares, par value $0.01 per share. The number of shares of Preferred
Stock which this Corporation is authorized to issue is 2,000,000 shares, par
value $0.01 per share, of which 1,153,847 shall be designated Series A
Preferred Stock (the "Series A Preferred") and 846,153 shall initially be
undesignated as to series.
Any Preferred Stock not previously designated as to series may be
issued from time to time in one or more series pursuant to a resolution or
resolutions providing for such issue duly adopted by the Board of Directors
(authority to do so being hereby expressly vested in the Board), and such
resolution or resolutions shall also set forth the voting powers, full or
limited or none, of each such series of Preferred Stock and shall fix the
designations, preferences and relative, participating, optional or other
special rights and qualifications, limitations or restrictions of each such
series of Preferred Stock. The Board of Directors is authorized to alter
2
the designation, rights, preferences, privileges and restrictions granted to or
imposed upon any wholly unissued series of Preferred Stock and, within the
limits and restrictions stated in any resolution or resolutions of the Board of
Directors originally fixing the number of shares constituting any series of
Preferred Stock, to increase or decrease (but not below the number of shares of
any such series then outstanding) the number of shares of any such series
subsequent to the issue of shares of that series.
Each share of Preferred Stock issued by the Corporation, if reacquired
by the Corporation (whether by redemption, repurchase, conversion to Common
Stock or other means), shall upon such reacquisition resume the status of
authorized and unissued shares of Preferred Stock, undesignated as to series
and available for designation and issuance by the Corporation in accordance
with the immediately preceding paragraph.
The relative rights, preferences, privileges and restrictions granted
to or imposed upon the respective classes of Common Stock and Series A
Preferred Stock or the holders thereof are as follows:
Section 1. Dividends.
(a) The holders of Series A Preferred shall be entitled
to receive, when and as declared by the Board of Directors, out of funds
legally available therefor, dividends at the rate of $0.39 per annum for each
share of Series A Preferred (as adjusted for stock splits, stock dividends,
reclassifications and like events) held by them, payable in preference and
priority to any payment of any dividend or other distribution on Common Stock
of the Corporation. In each year in which any shares of Series A Preferred are
outstanding, no cash dividends shall be declared on the Common Stock unless or
until a cash dividend in an amount equal to or greater than the dividend
declared on the Common Stock shall have been paid to, or declared and a sum
sufficient for payment thereof set apart for the Series A Preferred. Such
dividends on the Series A Preferred shall be cumulative whether or not earned
or declared so that if such dividends in respect of any previous or current
annual dividend period, at the annual rate specified above, shall not be paid
or declared, the deficiency shall be fully paid to the holders of Series A
Preferred before any dividend or other distribution shall be paid on or
declared and set apart for the holders of the Common Stock.
(b) For purposes of this Section 1, unless the context
otherwise requires, a "distribution" shall mean the transfer of cash or other
property without consideration whether by way of dividend or otherwise, payable
other than in Common Stock, or the purchase or redemption of shares of the
Corporation for cash or property. For purposes of this Section 1, a
"distribution" shall not mean (i) a repurchase of Common Stock issued to or
held by employees, officers, directors or consultants of the Corporation or its
subsidiaries upon termination of their employment or services pursuant to
agreements providing for the right of said repurchase, (ii) a repurchase of any
"Projected Volume Shares" as contemplated by the Stockholders Agreement dated
July 21, 1995 among the Company and certain holders of Common Stock or (iii)
the repurchase of certain outstanding shares of capital stock of The Hotel
-2-
3
Clearing Corporation ("HCC"), a subsidiary of the Corporation, held by Lodging
Network Inc., in exchange for $2,000,000 in cash and the conversion of the
balance of the shares of HCC owned by LNI into 67,300 shares of Common Stock of
the Corporation, as contemplated by the Series A Preferred Stock Purchase
Agreement of the Corporation entered into in June 1996.
Section 2. Liquidation Preference.
In the event of any liquidation, dissolution, or winding up of the
Corporation, either voluntary or involuntary, distributions to the shareholders
of the Corporation shall be made in the following manner:
(a) The holders of Series A Preferred shall be entitled
to receive, prior and in preference to any distribution of any of the assets or
surplus funds of the Corporation to the holders of the Common Stock by reason
of their ownership of such stock, the amount of $6.50 for each share of Series
A Preferred then held by them (as adjusted for all stock splits, dividends,
combinations, reclassifications, and the like with respect to such shares) and,
in addition, an amount equal to all declared but unpaid dividends, if any, on
the shares of Series A Preferred then held by them. If the assets and funds
thus distributed among the holders of Series A Preferred shall be insufficient
to permit the payment to such holders of the full aforesaid preferential
amount, then the entire assets and funds of the Corporation legally available
for distribution shall be distributed ratably among the holders of Series A
Preferred in a manner that the amount distributed to each holder of Series A
Preferred shall equal the amount obtained by multiplying the entire assets and
funds of the Corporation legally available for distribution hereunder by a
fraction, the numerator of which shall be the number of shares of Series A
Preferred then held by the holder and the denominator of which shall be the
total number of shares of Series A Preferred then outstanding.
(b) After payment has been made to or set apart for the
holders of Series A Preferred of the full amounts to which they shall be
entitled as set forth in Section 2(a) above, then the entire remaining assets
and funds of the Corporation legally available for distribution, if any, shall
be distributed ratably among the holders of Common Stock in a manner such that
the amount distributed to each such holder shall equal the amount obtained by
multiplying the entire remaining assets and funds of the Corporation legally
available for distribution hereunder by a fraction, the numerator of which
shall be the number of shares of Common Stock then held by such holder and the
denominator of which shall be the total number of shares of Common Stock then
outstanding.
(c) (i) A merger or consolidation of the Corporation with
or into any other corporation or corporations, (ii) the merger of any other
corporation or corporations into the Corporation, in which consolidation or
merger the shareholders of the Corporation receive distributions in cash or
securities of another corporation or corporations as a result of such
consolidation or merger, and (iii) a sale of all or substantially all of the
assets of the Corporation, shall be treated as a liquidation, dissolution or
winding up of the Corporation for purposes of this Section 2, unless the
shareholders of the Corporation immediately prior to such
-3-
4
transaction are holders (by virtue of shares held in the Corporation) of at
least a majority of the voting securities of the surviving or successor
corporation to the business of the Corporation immediately following such
transaction.
(d) Notwithstanding Sections 2(a) through 2(c) hereof,
the Corporation may at any time, out of funds legally available therefor, (i)
repurchase Common Stock issued to or held by employees, officers, directors or
consultants of the Corporation or its subsidiaries upon termination of their
employment or services pursuant to agreements providing for the right of said
repurchase, (ii) repurchase any "Projected Volume Shares" as contemplated by
the Amended and Restated Stockholders Agreement entered into in June 1996 among
the Company and certain holders of Common Stock, or (iii) repurchase of certain
outstanding shares of capital stock of The Hotel Clearing Corporation ("HCC"),
a subsidiary of the Corporation, held by Lodging Network, Inc., in exchange for
$2,000,000 in cash and the conversion of the balance of the shares of HCC owned
by LNI into 67,300 shares of Common Stock, as contemplated by the Series A
Preferred Stock Purchase Agreement of the Corporation entered into in June
1996.
Section 3. Conversion.
The holders of Series A Preferred Stock shall have conversion rights
as follows (the "CONVERSION RIGHTS"):
(a) Right to Convert. Each share of Series A Preferred
shall be convertible, at the option of the holder thereof, at any time after
the date of issuance of such share, at the office of the Corporation or any
transfer agent for the Series A Preferred, into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing $6.50 by the
Series A Conversion Price, determined as hereinafter provided, in effect at the
time of conversion. The price at which shares of Common Stock shall be
deliverable upon conversion of shares of Series A Preferred (the "SERIES A
CONVERSION PRICE") shall initially be $6.50 per share of Common Stock and shall
be subject to adjustment as hereinafter provided.
Upon any conversion into Common Stock, all accumulated and unpaid
dividends on the shares of Series A Preferred so converted shall terminate
without any requirement of payment.
(b) Automatic Conversion. Each share of Series A
Preferred shall automatically be converted into one share of Common Stock upon
the earlier to occur of (i) the closing of a firmly underwritten public
offering pursuant to an effective registration statement under the Securities
Act of 1933, as amended, relating to the offer and sale of Common Stock for the
account of the Corporation to the public at a price per share (prior to
underwriter commissions and discounts and offering expenses) of not less than
$13.00 (as adjusted for stock splits, stock dividends, reclassifications and
like events) and in which the Corporation receives aggregate gross proceeds of
not less than $10,000,000 (A "QUALIFIED IPO"), or (ii) such effective date as
the Corporation shall set no more than ten (10) days following the affirmative
vote at a duly noticed meeting or by duly solicited written consent, of the
holders of more than sixty-six and two-thirds percent (66-2/3%) of the then
outstanding shares of Series A Preferred,
-4-
5
in favor of the conversion of all outstanding shares of Series A Preferred into
Common Stock. Prior to the closing of a Qualified IPO, upon the closing of an
offering pursuant to which any holder of Series A Preferred has exercised
registration rights pursuant to the Rights Agreement originally entered into by
and among the Corporation and the Purchasers named therein in June 1996, each
share of Series A Preferred for which such registration rights were exercised
shall automatically be converted into one share of Common Stock. In the event
of the automatic conversion of the Series A Preferred upon a Qualified IPO, the
person(s) entitled to receive the Common Stock issuable upon such conversion of
Series A Preferred shall not be deemed to have converted such Series A
Preferred until immediately prior to the closing of such transaction.
(c) Mechanics of Conversion. No fractional shares of
Common Stock shall be issued upon conversion of Series A Preferred. In lieu of
any fractional shares to which the holder would otherwise be entitled, the
Corporation shall pay cash equal to such fraction multiplied by the then
effective Conversion Price. Before any holder of Series A Preferred shall be
entitled to convert the same into full shares of Common Stock and to receive
certificates therefor, he shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Corporation or of any transfer
agent for the Series A Preferred, and shall give written notice to the
Corporation at such office that he elects to convert the same; provide,
however, that in the event of an automatic conversion pursuant to Section 3(b),
the outstanding shares of Series A Preferred shall be converted automatically
without any further action by the holders of such shares and whether or not the
certificates representing such shares are surrendered to the Corporation or its
transfer agent; provided, further, that the Corporation shall not be obligated
to issue certificates evidencing the shares of Common Stock issuable upon such
automatic conversion unless the certificates evidencing such shares of Series A
Preferred are either delivered to the Corporation or its transfer agent as
provided above, or the holder notifies the Corporation or its transfer agent
that such certificates have been lost, stolen or destroyed and executes an
agreement satisfactory to the Corporation to indemnify the Corporation from any
loss incurred by it in connection with such certificates. The Corporation
shall, as soon as practicable after such delivery, or such agreement and
indemnification in the case of a lost certificate, issue and deliver at such
office to such holder of Series A Preferred, a certificate or certificates for
the number of shares of Common Stock to which he shall be entitled as aforesaid
and a check payable to the holder in the amount of any cash amounts payable as
the result of a conversion into fractional shares of Common Stock. Such
conversion shall be deemed to have been made immediately prior to the close of
business on the date of such surrender of the shares of Series A Preferred to
be converted, or in the case of automatic conversion on the date of closing of
the public offering or the effective date set by the Corporation as provided in
paragraph 3(b) following the requisite stockholder approval, and the person or
persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders of
such shares of Common Stock on such date.
(d) Adjustments to Series A Conversion Price for Dilutive
Issues.
(i) Special Definitions. For purposes of this
Section 3(d), the following definitions shall apply:
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(1) "OPTIONS" shall mean rights, options
or warrants to subscribe for, purchase or otherwise acquire either Common Stock
or Convertible Securities.
(2) "CONVERTIBLE SECURITIES" shall mean
any evidences of indebtedness, Preferred Stock (other than Series A Preferred)
or other securities convertible into or exchangeable for Common Stock.
(3) "ADDITIONAL SHARES OF COMMON" shall
mean all shares of Common Stock issued (or, pursuant to Section 3(d)(iii),
deemed to be issued) by the Corporation after the Series A Original Issue Date,
other than shares of Common Stock issued, issuable or, pursuant to Section
3(d)(iii), deemed to be issued:
(A) upon conversion of shares of
the Series A Preferred;
(B) to officers, directors or
employees of, or consultants to, the Corporation or any subsidiary pursuant to
a stock grant, option plan or purchase plan or other employee stock incentive
program or arrangement approved by the Board of Directors, but not exceeding an
aggregate of 600,000 shares of Common Stock (net of any repurchases of such
shares or any other shares of Common Stock originally issued to officers,
directors, employees or consultants to the Corporation, and net of cancellation
or expiration of options), subject to appropriate adjustment for all stock
splits, dividends, subdivisions, combinations, recapitalizations and the like;
(C) as a dividend or distribution
on the Series A Preferred;
(D) in connection with any
transaction for which adjustment is made pursuant to Section 3(e)(i), (ii) and
(iii) hereof,
(E) shares of Common Stock issued
to reacquire shares from existing stockholders, provided such shares of Common
Stock are issued at a substantially identical price to the shares being
reacquired.
(F) any shares of Common Stock
issued or issuable, if the holders of more than sixty-six and two-thirds
percent (66-2/3%) of the Series A Preferred then outstanding agree in writing
that such shares shall not constitute Additional Shares of Common Stock; or
(G) up to an aggregate of 50,000
additional shares of Common Stock issued by the Corporation from time to time.
(ii) No Adjustment of Series A Conversion Price.
No adjustment in the Series A Conversion Price shall be made in respect of the
issuance of Additional Shares of Common unless the consideration per share
(determined pursuant to Section 3(d)(v) hereof) for
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an Additional Share of Common issued or deemed to be issued by the Corporation
is less than the Series A Conversion Price in effect on the date of, and
immediately prior to such issue.
(iii) Options add Convertible Securities. In the
event that the Corporation at any time or from time to time after the Series A
Original Issue Date shall issue any Options or Convertible Securities or shall
fix a record date for the determination of holders of any class of securities
entitled to receive any such Options or Convertible Securities, then the
maximum number of shares of Common Stock issuable upon the exercise of such
Options or, in the case of Convertible Securities and Options therefor, the
conversion or exchange of such Convertible Securities, shall be deemed to be
Additional Shares of Common issued as of the time of such issue or, in case
such a record date shall have been fixed, as of the close of business on such
record date; provided, however, that Additional Shares of Common shall not be
deemed to have been issued unless the consideration per share (determined
pursuant to Section 3(d)(v) hereof) for such Additional Shares of Common would
be less than the Series A Conversion Price in effect on the date of and
immediately prior to such issue, or such record date, as the case may be, and
provided further that in any such case in which Additional Shares of Common are
deemed to be issued:
(1) no further adjustment in the Series
A Conversion Price shall be made upon the subsequent issue of such Convertible
Securities or shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities, in each case, pursuant
to their respective terms;
(2) if such Options or Convertible
Securities by their terms provide, with the passage of time or otherwise, for
any increase in the consideration payable to the Corporation, or decrease in
the number of shares of Common Stock issuable, upon the exercise, conversion or
exchange thereof, the Series A Conversion Price computed upon the original
issue thereof (or upon the occurrence of a record date with respect thereto),
and any subsequent adjustments based thereon, shall, upon any such increase or
decrease becoming effective, be recomputed to reflect such increase or decrease
insofar as it affects such Options or the rights of conversion or exchange
under such Convertible Securities;
(3) upon the expiration of any such
Options or any rights of conversion or exchange under such Convertible
Securities which shall not have been exercised, the Series A Conversion Price
computed upon the original issue thereof (or upon the occurrence of a record
date with respect thereto), and any subsequent adjustments based thereon,
shall, upon such expiration, be recomputed as if:
(A) in the case of Convertible
Securities or Options for Common Stock, the only Additional Shares of Common
issued were shares of Common Stock, if any, actually issued upon the exercise
of such Options or the conversion or exchange of such Convertible Securities
and the consideration received therefor was the consideration actually received
by the Corporation for the issue of all such Options, whether or not exercised,
plus the consideration actually received by the Corporation upon such exercise,
or for the issue of all
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such Convertible Securities which were actually converted upon or exchanged,
plus the additional consideration, if any, actually received by the Corporation
upon such conversion or exchange, and
(B) in the case of Options for
Convertible Securities, only the Convertible Securities, if any, actually
issued upon the exercise thereof were issued at the time of issue of such
Options, and the consideration received by the Corporation for the Additional
Shares of Common deemed to have been then issued was the consideration actually
received by the Corporation for the issue of all such Options, whether or not
exercised, plus the consideration deemed to have been received by the
Corporation upon the issue of the Convertible Securities with respect to which
such Options were actually exercised;
(4) no readjustment pursuant to clauses
(2) or (3) above shall have the effect of increasing the Series A Conversion
Price to an amount which exceeds the lower of (i) the Series A Conversion Price
on the original adjustment date, or (ii) the Series A Conversion Price that
would have resulted from any issuance of Additional Shares of Common between
the original adjustment date and such readjustment date; and
(5) in the case of an Option which
expires by its terms not more than 30 days after the date of issue thereof, no
adjustment of the Series A Conversion Price shall be made until the expiration
or exercise of such Option, whereupon such adjustment shall be made in the same
manner provided in clause (3) above.
(iv) Adjustment of Series A Conversion Price Upon
Issuance of Additional Shares of Common. In the event that this Corporation
shall issue Additional Shares of Common (including Additional Shares of Common
deemed to be issued pursuant to Section 3(d)(iii)) without consideration or for
a consideration per share less than the Series A Conversion Price in effect on
the date of and immediately prior to such issue, then and in such event such
Series A Conversion Price shall be reduced, concurrently with such issue, to a
price (calculated to the nearest cent) determined by multiplying such Series A
Conversion Price theretofore in effect by a fraction, the numerator of which
shall be the number of shares of Common Stock outstanding immediately prior to
such issue plus the number of shares of Common Stock which the aggregate
consideration received by the Corporation for the total number of Additional
Shares of Common so issued would purchase at such Series A Conversion Price in
effect immediately prior to such issue, and the denominator of which shall be
the number of shares of Common Stock outstanding immediately prior to such
issue plus the number of such Additional Shares of Common so issued; provided,
however, that, for the purposes of this Section 3(d)(iv), all shares of Common
Stock issuable upon exercise, conversion or exchange of outstanding Options or
Convertible Securities, as the case may be, shall be deemed to be outstanding,
and immediately after any Additional Shares of Common are deemed issued
pursuant to Section 3(d)(iii), such Additional Shares of Common shall be deemed
to be outstanding.
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(v) Determination of Consideration. For purposes
of this Section 3(d), the consideration received by the Corporation for the
issue of any Additional Shares of Common shall be computed as follows:
(1) Cash and Property. Such consideration
shall:
(A) insofar as it consists of cash,
be computed at the aggregate amount of cash received by the Corporation
excluding amounts paid or payable for accrued interest or accrued dividends;
(B) insofar as it consists of
property other than cash, be computed at the fair value thereof at the time of
such issue, as determined in good faith by the Board; and
(C) in the event Additional Shares
of Common are issued together with other shares or securities or other assets
of the Corporation for consideration which covers both, be the proportion of
such consideration so received, computed as provided in clauses (A) and (B)
above, as determined in good faith by the Board.
(2) Options and Convertible Securities.
The consideration per share received by the Corporation for Additional Shares
of Common deemed to have been issued pursuant to Section 3(d)(iii), relating to
Options and Convertible Securities, shall be determined by dividing
(x) the total amount if any,
received or receivable by the Corporation as consideration for the issue of
such Options or Convertible Securities, plus the minimum aggregate amount of
additional consideration payable to the Corporation upon the exercise of such
Options or the conversion or exchange of such Convertible Securities, or in the
case of Options for Convertible Securities, the exercise of such Options for
Convertible Securities and the conversion or exchange of such Convertible
Securities by
(y) the maximum number of shares of
Common Stock issuable upon the exercise of such Options or the conversion or
exchange of such Convertible Securities, as determined in Section 3(d)(iii)
hereof.
(e) Adjustments to Conversion Price for Other Dilutive
Events.
(i) Adjustments for Subdivisions, Stock
Dividends, Combinations or Consolidations of Common Stock. In the event that
the Corporation at any time or from time to time shall declare or pay, without
consideration, any dividend on Common Stock payable in Common Stock or in any
right to acquire Common Stock for no consideration, or effects a subdivision or
combination of its outstanding shares of Common Stock into a greater or smaller
number of shares without a proportionate and corresponding subdivision or
combination of its
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outstanding shares of Series A Preferred, then and in each such event the
Series A Conversion Price shall be appropriately increased or decreased
proportionally.
(ii) Adjustments for Reclassification, Exchange
and Substitution. If the Common Stock issuable upon conversion of the Preferred
Stock shall be changed into the same or a different number of shares of any
other class or classes of stock, whether by capital reorganization,
reclassification or otherwise (other than in an event provided for in Section
3(e)(i) above), the Series A Conversion Price then in effect shall,
concurrently with the effectiveness of such reorganization or reclassification,
be proportionately adjusted such that the shares of Series A Preferred shall be
convertible into, in lieu of the number of shares of Common Stock which the
holders would otherwise have been entitled to receive, a number of shares of
such other class or classes of stock equivalent to the number of shares of
Common Stock that would have been subject to receipt by the holders upon
conversion of shares of such Series A Preferred immediately before that change.
(iii) Adjustments for Other Dividends and
Distributions. In the event that the Corporation shall declare a distribution
payable in securities of other issuers, evidences of indebtedness issued by
this Corporation or other issuers, assets (excluding cash dividends) or options
or rights not referred to in subsection 2(d)(iii) and for which no adjustment
is made pursuant to Section 3(e)(i) or Section 3(e)(ii), the holders of Series
A Preferred shall be entitled to a proportionate share of any such distribution
as though they were the holders of the number of shares of Common Stock of the
Corporation into which their shares of Series A Preferred are convertible as of
the record date fixed for the determination of the holders of Common Stock of
the Corporation entitled to receive such distribution.
(f) No Impairment. Except as provided in Sections 5 and 6
hereof, the Corporation will not, by amendment of its Certificate of
incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Corporation but will at all times in
good faith assist in the carrying out of all the provisions of this Section 3
and in the taking of all such action as may be necessary or appropriate in
order to protect the conversion rights of the holders of Series A Preferred
against impairment.
(g) Certificate as to Adjustments. Upon the occurrence of
each adjustment or readjustment of the Conversion Price of any Series A
Preferred pursuant to this Section 3, the Corporation at its expense shall
promptly compute such adjustment or readjustment in accordance with the terms
hereof and furnish to each holder of Series A Preferred a certificate setting
forth such adjustment or readjustment and showing in detail the facts upon
which such adjustment or readjustment is based. The Corporation shall, upon the
written request at any time of any holder of such Series A Preferred, furnish
or cause to be furnished to such holder a like certificate setting forth (i)
such adjustments and readjustments, (ii) the Series A Conversion Price at the
time in effect, and (iii) the number of shares of Common Stock and the amount,
if any,
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of other property which at the time would be received upon the conversion of
such holder's shares of Series A Preferred.
(h) Notices of Record Date. In the event that this
Corporation shall propose at any time:
(i) to declare any dividend or distribution upon
its Common Stock, whether in cash, property, stock or other securities, whether
or not a regular cash dividend and whether or not out of earnings or earned
surplus;
(ii) to offer for subscription pro rata to the
holders of any class or series of its stock any additional shares of stock of
any class or series or other rights;
(iii) to effect any reclassification or
recapitalization of its Common Stock outstanding involving a change in the
Common Stock; or
(iv) to merge or consolidate with or into any
other corporation, or sell, lease or convey all or substantially all its
property or business, or to liquidate, dissolve or wind up; then, in connection
with each such event, this Corporation shall send to the holders of Series A
Preferred:
(A) at least 20 days' prior written
notice of the date on which a record shall be taken for such dividend,
distribution or subscription rights (and specifying the date on which the
holders of Common Stock shall be entitled thereto) or for determining rights to
vote in respect of the matters referred to in (iii) and (iv) above; and
(B) in the case of the matters
referred to in (iii) and (iv) above, at least 20 days' prior written notice of
the date when the same shall take place (and specifying the date on which the
holders of Common Stock shall be entitled to exchange their Common Stock for
securities or other property deliverable upon the occurrence of such event).
Each such written notice shall be delivered personally or given by
first class mail, postage prepaid, addressed to the holders of Series A
Preferred at the address for each such holder as shown on the books of this
Corporation.
(i) Reservation of Shares. The Corporation shall at all
times reserve and keep available, out of its authorized but unissued Common
Stock, solely for the purpose of effecting the conversion of the Series A
Preferred, the full number of shares of Common Stock deliverable upon the
conversion of all Series A Preferred from time to time outstanding. The
Corporation shall from time to time (subject to obtaining necessary director
and stockholder consent), in accordance with the laws of the State of Delaware,
increase the number of authorized shares of Common Stock if at any time the
authorized number of shares of its Common Stock remaining unissued shall not be
sufficient to permit the conversion of all of the shares of Series A Preferred
at the time outstanding.
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(j) Issuance Taxes. The Corporation shall pay any and all
issue and other taxes that may be payable in respect of any issue or delivery
of shares of Common Stock on conversion of Series A Preferred pursuant to this
Section 3.
Section 4. Redemption of Series A Preferred.
(a) On each of the fifth, sixth, seventh and eighth
anniversaries of the date of the initial sale of Series A Preferred (the
"Series A Original Issue Date"), to the extent the shares of Series A Preferred
have not been redeemed or converted prior to such date and to the extent
requested by any holder thereof, the Corporation shall redeem, subject to the
proviso at the end of the third sentence of this paragraph, at the Redemption
Price, as defined below, an amount equal to up to one-quarter, one-half,
three-quarters and all (respectively) of the issued, outstanding, and
unconverted shares of Series A Preferred held by such holder, from any source
of funds legally available therefor. Not less than 30 and not more than 60
days before the fifth, sixth, seventh and eighth anniversaries of the Series A
Original Issue Date (and each anniversary thereafter so long as any shares of
Series A Preferred remain unredeemed and unconverted), the Corporation shall
send to each holder of Series A Preferred the audited financial statements of
the Corporation for the prior fiscal year (unless previously furnished to such
holder) together with a notice advising such holders of their rights under this
subsection. Each such holder shall have until each such anniversary date to
request redemption of all or part of such shares which may as of such
anniversary date be redeemed; provided, however, that no redemption shall be
made on such anniversary date unless holders of more than sixty-six and
two-thirds percent (66-2/3%) of the then outstanding shares of Series A
Preferred request redemption pursuant to such notice. If no funds or
insufficient funds are available to the Corporation at any time to meet the
Corporation's redemption obligations pursuant to this subsection, or if any
holder does not request the Corporation to redeem such holder's shares of
Series A Preferred to the full extent permitted by this subsection, then the
Corporation's obligations to redeem such shares shall in both cases be carried
over to the succeeding year (subject to the same limitations on payment as set
forth above) until all shares entitled to be redeemed pursuant to this
subsection have been redeemed, and such holders shall have similar rights
during the corresponding 30 to 60 day period of each succeeding year; provided,
however, that the shares of Series A Preferred which were not redeemed on the
anniversary on which such shares were initially eligible for redemption
hereunder (that is, on the applicable fifth, sixth or seventh anniversary of
the Series A Original Issue Date, without regard to whether the Corporation had
sufficient funds available on such dates for such redemption hereunder) shall
be (i) redeemed at the Redemption Price, as defined below and (ii) entitled to
the dividend, conversion and other rights, preferences, privileges and
restrictions of the Series A Preferred until such shares have been redeemed.
(b) The redemption price for Series A Preferred
repurchased pursuant to this Section 4 (the "REDEMPTION PRICE") shall be an
amount equal to the sum of (i) $6.50 per share, plus (ii) $0.39 per share for
each full year from the Series A Original Issue Date to the date of actual
redemption plus a pro rata fraction thereof for any additional portion of a
full year to the date of redemption (each such full year or such additional
portion of a full year being referred to as a "Dividend Period"), provided that
the amount payable under this clause (ii) in respect
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of any Dividend Period shall be reduced by an amount equal to the difference,
if any, between (x) the amount of dividends declared and paid or set aside for
payment on each share of Series A Preferred during such Dividend Period, less
(y) the amount of dividends declared and paid or set aside for payment during
such Dividend Period on the number of shares of Common Stock into which such
share of Series A Preferred shall then be convertible, plus (iii) any dividends
declared but not paid or set aside for payment on such share of Series A
Preferred.
(c) In the event insufficient funds are available to
redeem all shares of Series A Preferred entitled and electing to be redeemed
pursuant to Section 4(a), the Corporation shall effect each such redemption pro
rata among the holders of the Series A Preferred based upon the number of
shares of Series A Preferred then held by each holder and electing to be
redeemed.
(d) At least 30 but not more than 60 days' previous
notice by certified mail, postage prepaid, shall be given to the holders of
record of the Series A Preferred for any redemption pursuant to this
subsection, such notice to be addressed to each holder at the address shown in
the Corporation's records and which shall specify the date of redemption, the
number of shares of the holder to be redeemed and the date at which conversion
rights terminate which date shall be no earlier than five days prior to the
date fixed for redemption. Subject to approval by more than sixty- six and
two-thirds percent (66-2/3%) of the outstanding shares of Series A Preferred
pursuant to Section 4(a), on or after the date of redemption as specified in
such notice, each holder shall surrender his certificate for the number of
shares to be redeemed as stated in the notice (except that such number of
shares shall be reduced by the number of shares which have been converted
pursuant to Section 3 hereof between the date of notice and the date on which
conversion rights terminate) to this Corporation at the place specified in such
notice. Provided such notice is duly given, and provided that on the redemption
date specified there shall be a source of funds legally available for such
redemption, and funds necessary for the redemption shall have been paid or made
available at the place fixed for redemption, then all rights with respect to
such shares shall, after the specified redemption date, terminate whether or
not said certificates have been surrendered, excepting only that in the latter
instance the right of the holder to receive the redemption price thereof,
without interest, upon such surrender will not terminate.
Section 5. Voting.
Except as otherwise required by law or by Section 6 hereof, the holder
of each share of Common Stock issued and outstanding shall have one vote with
respect to such share and the holder of each share of Series A Preferred shall
be entitled with respect to such share to a number of votes equal to the number
of shares of Common Stock into which such share of Series A Preferred could be
converted at the record date for determination of the stockholders entitled to
vote on such matters, or, if no such record date is established, at the date
such vote is taken or any written consent of stockholders is solicited, such
votes to be counted together with all other shares of stock of the Corporation
having general voting power and not separately as a class. All holders of
Series A Preferred shall have full voting rights and powers equal to the
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voting rights and powers of the holders of Common Stock, and shall be entitled
to vote, together with the holders of Common Stock, with respect to any
question upon which holders of Common Stock have the right to vote. Holders of
Common Stock and Series A Preferred shall be entitled to notice of any
stockholders' meeting in accordance with the Bylaws of the Corporation.
Fractional votes by the holders of Series A Preferred shall not, however, be
permitted and any fractional voting rights shall (after aggregating all shares
into which shares of Series A Preferred held by each holder could be converted)
be rounded to the nearest whole number.
Section 6. Covenants.
(a) Required Consent of Series A Preferred. In addition
to any other rights provided by law, so long as at least 180,000 shares of
Series A Preferred shall be outstanding (as appropriately adjusted for all
stock splits, dividends, combinations, recapitalizations and the like), this
Corporation shall not, without first obtaining the affirmative vote or written
consent of the holders of not less than a majority of such outstanding shares
of the Series A Preferred, voting together as a single class:
(i) amend or repeal any provision of, or add any
provision to, this Corporation's Amended and Restated Certificate of
Incorporation or Bylaws;
(ii) designate any new series of Preferred Stock,
or increase the authorized number of shares of any series or Preferred Stock;
(iii) authorize (or increase the authorized number
of) any class or series of capital stock or any other security convertible into
or exchangeable for shares of any class or series of capital stock having
rights, preferences or privileges senior to or on parity with the Series A
Preferred;
(iv) increase or decrease (other than by
redemption or conversion) the total number of authorized shares of Series A
Preferred or change the existing rights, preferences or privileges of the
Series A Preferred,
(v) authorize (A) a liquidation or dissolution of
the Corporation, or (B) a recapitalization or reorganization of the
Corporation, sale or transfer of all or substantially all of the assets of the
Corporation or merger or consolidation of the Corporation if, as a result of
such recapitalization, reorganization, sale, transfer, merger or consolidation,
the stockholders of the Corporation immediately prior to the closing of such
recapitalization, reorganization, sale, transfer, merger or consolidation (and
prior to any related transfers of shares and other transactions) shall own less
than [75%] of the voting securities of the successor corporation to the
business of the Corporation;
(vi) sell, transfer, or grant an exclusive license
to, any material, patents, copyrights, trademarks, or applications therefor,
proprietary or confidential information of the Corporation or any other
material asset, except for licenses or sublicenses granted by the
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Corporation in the ordinary course of its business, and other than to a direct
or indirect subsidiary of the Corporation;
(vii) approve the repurchase, redemption or other
acquisition of any Common Stock of the Corporation, other than (A) repurchases
pursuant to agreements approved by the Board of Directors that grant to the
Corporation a right to repurchase such Common Stock upon the termination of the
service or employment of a consultant, director or employee, or (B) repurchases
of any "Projected Volume Shares" as contemplated by the Stockholders Agreement
dated July 21, 1995 among the Company and certain holders of Common Stock; or
(viii) authorize the payment of a cash dividend to
any holders of any class or series of capital stock of the Corporation.
Section 7. Common Stock.
(a) Dividend Rights. Subject to the prior rights of
holders of all classes of stock at the time outstanding having prior rights as
to dividends, the holders of the Common Stock shall be entitled to receive,
when and as declared by the Board of Directors, out of any assets of the
Corporation legally available therefor, such dividends as may be declared from
time to time by the Board of Directors.
(b) Liquidation Rights. Upon the liquidation, dissolution
or winding up of the Corporation, the assets of the Corporation shall be
distributed as provided in Section 2 of this Article IV.
(c) Redemption. The Common Stock is not redeemable.
(d) Voting Rights. The holder of each share of Common
Stock shall have the right to one vote, and shall be entitled to notice of any
shareholders' meeting in accordance with the Bylaws of this Corporation, and
shall be entitled to vote upon such matters and in such manner as may be
provided by law.
Section 8. Residual Rights.
All rights accruing to the outstanding shares of this Corporation not
expressly provided for to the contrary herein shall be vested in the Common
Stock.
ARTICLE V
The Corporation is to have perpetual existence.
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ARTICLE VI
Elections of directors need not be by written ballot unless a
stockholder demands election by written ballot at the meeting and before voting
begins or unless the Bylaws of the Corporation shall so provide.
ARTICLE VII
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors of the Corporation is expressly authorized to
make, alter, amend or repeal the Bylaws of the Corporation.
ARTICLE VIII
(a) To the fullest extent permitted by the General
Corporation Law of the State of Delaware as the same exists or as may hereafter
be amended, a director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director.
(b) The Corporation may indemnify to the fullest extent
permitted by law any person made or threatened to be made a party to an action
or proceeding, whether criminal, civil, administrative or investigative, by
reason of the fact that he, his estate or legal representative is or was a
director, officer, employee or agent of the Corporation or any predecessor of
the Corporation or serves or served at any other enterprise as a director,
officer, employee or agent at the request of the Corporation or any other
predecessor to the Corporation.
(c) No amendment nor repeal of this Article VIII, nor the
adoption of any provision of this Corporation's Certificate of Incorporation
inconsistent with this Article VIII, shall eliminate or reduce the effect of
this Article VIII, in respect of any matter occurring, or any action or
proceeding accruing or arising or that, but for this Article VIII, would accrue
or arise, prior to such amendment, repeal or adoption of an inconsistent
provision.
ARTICLE IX
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
ARTICLE X
Vacancies created by newly created directorships, created in
accordance with the Bylaws of this Corporation, may be filled by the vote of a
majority, although less than a quorum, of the directors then in office, or by a
sole remaining director.
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Advance notice of new business and stockholder nominations for the
election of directors shall be given in the manner and to the extent provided
in the Bylaws of the Corporation.
ARTICLE XI
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
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IN WITNESS WHEREOF, the Corporation has caused this Amended and
Restated of Certificate to be duly executed this ____ day of ___________, 1997.
By:
-------------------------------------
John F. Davis, III
President and Chief Executive Officer
ATTEST:
----------------------------------
Ric L. Floyd, Secretary
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EXHIBIT 3.2
CONFIDENTIAL
------------
AS OF JUNE 25, 1996
AMENDED AND RESTATED BYLAWS
OF
PEGASUS SYSTEMS, INC.
(A DELAWARE CORPORATION)
ARTICLE I
OFFICES AND FISCAL YEAR
SECTION 1.01. REGISTERED OFFICE. The registered office of the
Corporation shall be as stated in the Certificate of Incorporation until a
change in such office is established by resolution of the Board of Directors
and a statement of such change is filed in the manner provided by applicable
law.
SECTION 1.02. OTHER OFFICES. The Corporation may also have offices
and keep its books, documents, and records at such other places within or
without the State of Delaware as the Board of Directors may from time to time
determine or the business of the Corporation may require.
SECTION 1.03. FISCAL YEAR. The fiscal year of the Corporation shall
end on the 31st day of December in each year or on such other date as the Board
of Directors may designate by resolution.
ARTICLE II
THE STOCKHOLDERS
SECTION 2.01. TYPES OF STOCK.
(a) The Corporation's Certificate of Incorporation, as
amended (the "Certificate of Incorporation") currently authorizes two classes
of capital stock - Common Stock and Series A Preferred Stock ("Series A
Preferred"). The aggregate number of shares of Common Stock and Series A
Preferred which the Corporation has authority to issue is set forth in the
Certificate of Incorporation. Unless otherwise specified, references in these
Bylaws to the issued and outstanding shares of capital stock of the Corporation
shall mean the issued and outstanding shares of Common Stock as if all issued
and outstanding shares of Series A Preferred had been converted to Common
Stock.
(b) Except as provided herein or in the Certificate of
Incorporation, or except as may be provided by the laws of the State of
Delaware, the holders of Common Stock and Series A Preferred shall have
exclusively all rights of stockholders. Each holder of Common Stock or Series A
Preferred shall be entitled to one (1) vote per share of stock owned by such
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holder, except as otherwise provided or limited herein or in the Certificate of
Incorporation, or as otherwise provided or limited in (i) that certain Amended
and Restated Stockholders Agreement dated as of June 25, 1996 to which the
Corporation is a party (as it may be amended, the "Stockholders Agreement") and
(ii) that certain Rights Agreement dated as of June 25, 1996 to which the
Corporation is a party (as it may be amended, the "Rights Agreement"). Any
holder of stock may enter into an agreement with the Corporation whereby such
holder agrees not to vote such stock in all or certain circumstances; and in
such case such shares held by such holder as to which such an agreement applies
shall, for all purposes, not be considered to be entitled to vote on any
matters as to which such holder has agreed not to vote such shares. No person
or entity, together with all "affiliates" (as that term is defined in Rule
12b-2 under the Securities Exchange Act of 1934, as in effect as of June 1,
1995) of that person or entity, may beneficially own more than twenty-five
percent (25%) of the issued stock. The limitation in the preceding sentence
shall terminate on the earliest to occur of (x) the termination of the
Stockholders Agreement, (y) July 21, 1998 or (z) the closing of a Qualified
Public Offering. A "Qualified Public Offering" shall mean any underwritten
public offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended, relating to the offering and sale of Common
Stock for the account of the Corporation to the public at a price per share
(prior to underwriter commissions and offering expenses) of not less than
$13.00 (as adjusted for stock splits, stock dividends, reclassifications and
like events) and in which the Corporation receives aggregate gross proceeds of
not less than $10,000,000.
(c) Neither the Corporation nor any other stockholder
shall have any power or authority (i) to require any stockholder to unwillingly
resell his or its stock to the Corporation or to any other person or entity, or
(ii) to force the purchase of any stockholder's stock, except in the case of
(i) or (ii) as part of a merger or sale of the Corporation approved by the
Board of Directors or as set forth herein, in the Corporation's Certificate of
Incorporation or the Stockholders Agreement.
SECTION 2.02. PLACE OF MEETING; ANNUAL MEETING. All meetings of the
stockholders of the Corporation shall be held at the principal offices of the
Corporation, or at such other place within or without the State of Delaware as
shall be designated by the Board of Directors in the notice of such meeting.
The Board of Directors may fix by resolution the date and time of the annual
meeting of the stockholders, and at said meeting the stockholders then entitled
to vote shall elect directors to serve until the next annual meeting of
stockholders and until their successors are duly nominated, qualified and
elected, and shall transact such other business as may properly be brought
before the meeting.
SECTION 2.03. SPECIAL MEETINGS. Except as otherwise provided by
applicable law, the Certificate of Incorporation, or these Bylaws, a special
meeting of the stockholders of the Corporation entitled to vote may be called
at any time only by the affirmative vote of at least two of the directors then
in office, or the President. Except for actions relating to the conduct of the
meeting under Section 2.05 of these Bylaws or the appointment of judges under
Section 2.10 of these Bylaws, at a special meeting of the stockholders, no
business shall be transacted and no corporate action shall be taken other than
that stated in the notice of the meeting unless all of the stockholders of
record entitled to vote for or against such an action are present in person or
by proxy in which case any and all business may be transacted at the meeting
even if the meeting is held without notice.
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SECTION 2.04. NOTICE OF MEETINGS. Unless otherwise provided by
applicable law, the Certificate of Incorporation, or these Bylaws, written
notice of the place, date, and hour of every meeting of the stockholders,
whether annual or special, shall be given to each stockholder of record
entitled to vote at the meeting at the address of such stockholder as it
appears on the records of the Corporation, not less than ten (10) nor more than
sixty (60) calendar days before the date of the meeting. Every notice of a
special meeting shall state the purpose or purposes thereof.
SECTION 2.05 QUORUM. MANNER OF ACTING AND ADJOURNMENT. (a) Except
as otherwise provided by the Certificate of Incorporation or these Bylaws, the
record holders of at least two-thirds (2/3) of the shares of capital stock of
the Corporation issued and outstanding and entitled to vote thereat, must be
present in person or represented by proxy to constitute a quorum at any annual
or special meeting of the stockholders. Whether or not a quorum is present or
represented at any meeting of the stockholders, the record holders of
two-thirds (2/3) of the shares of capital stock present or so represented shall
have the power to adjourn the meeting from time to time. When a meeting is
adjourned to another time or place, no notice need be given of the adjourned
meeting if the time and place thereof are announced at the meeting at which the
adjournment is taken. At any adjourned meeting at which a quorum shall be
present or represented, any business may be transacted which might have been
transacted at the original meeting. If an adjournment is for more than thirty
(30) calendar days, or if after an adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the adjourned meeting. Except as
otherwise provided by the Certificate of Incorporation or these Bylaws, the
affirmative vote of the record holders of two-thirds (2/3) of the shares of
capital stock of the Corporation present in person or represented by proxy and
entitled to vote on the subject matter at a meeting duly called and held with
the necessary quorum, shall be the act of the stockholders at any annual or
special meeting of stockholders. At any meeting at which amendment of the
Certificate of Incorporation, or a merger, consolidation, sale of all or
substantially all the assets, dissolution or liquidation of the Corporation, or
any other matter requiring under applicable law a vote different than that set
forth in the immediately preceding sentence for the taking of such action, is
to be voted upon, then, in addition to the vote required under applicable law
at the meeting in question, such matter or action, in order to be approved,
must also be approved at such meeting by the affirmative vote of the record
holders of at least two-thirds (2/3) of the shares of stock present in person
or represented by proxy and entitled to vote thereon at such a meeting at which
the record holders of at least two-thirds (2/3) of the shares of stock then
issued and outstanding and entitled to vote thereat are present in person or by
proxy. Except as otherwise required by applicable law or provided by the
Certificate of Incorporation or these Bylaws, the stockholders present in
person or by proxy at a meeting duly called and held can continue to do
business with respect to any matters properly brought before the meeting, until
adjournment, notwithstanding withdrawal of enough stockholders to leave less
than a quorum.
(b) Shares of its own capital stock belonging to the Corporation,
or to another corporation if a majority of the shares entitled to vote in the
election of directors of such other corporation is held directly or indirectly
by the Corporation, shall not be entitled to vote and shall not be counted for
quorum purposes.
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(c) Notwithstanding the requirements of paragraph (a) of this
Section 2.05, the following corporate actions shall require the affirmative
vote of the record holders of two-thirds (2/3) or more of the issued and
outstanding shares of capital stock of the Corporation: (i) the transfer and/or
assumption of all or substantially all of the assets or liabilities of, or the
dissolution of, the Corporation, The Hotel Industry Switch Company, and/or The
Hotel Clearing Corporation; (ii) any material acquisition, disposition,
consolidation, or merger effected by the Corporation; (iii) the execution of
any contract by the Corporation involving a liability or obligation to the
Corporation in excess of five million dollars ($5,000,000.00) other than in
connection with a public offering of securities; (iv) the incurrence of debt in
excess of one million dollars ($1,000,000.00) other than in connection with a
public offering of securities; and (vii) the liquidation, dissolution or
declaration of bankruptcy by the Corporation. This Subsection (c) shall
terminate upon a Qualified Public Offering of the Corporation's stock.
SECTION 2.06. ORGANIZATION. At every meeting of the stockholders,
the Chairman of the Board, or in the case of a vacancy in the office or absence
of the Chairman of the Board, one of the following persons present in the order
stated: the Vice Chairmen in their order of rank, the President, the
Vice-Presidents in their order of rank, a chairman designated by the Board of
Directors, or a chairman chosen by the stockholders entitled to cast two-thirds
(2/3) of the votes that all stockholders present in person or by proxy are
entitled to cast, shall act as chairman of the meeting, and the Secretary, or,
in such person's absence, an Assistant Secretary, if any, or any person
appointed by the chairman of the meeting, shall act as secretary of the
meeting.
SECTION 2.07. PROXIES. Each stockholder entitled to vote at a
meeting of stockholders or to express consent or dissent to corporate action in
writing without a meeting may authorize another person or persons to act for
such stockholder by proxy, but no such proxy shall be voted or acted upon after
three (3) years from its date, unless the proxy provides for a longer period.
Every proxy shall be executed in writing by the stockholder, or by the
stockholder's duly authorized attorney-in-fact, and shall be filed with the
Secretary of the Corporation. A duly executed proxy shall be irrevocable if it
states that it is irrevocable and if, and only as long as, it is coupled with
an interest sufficient in law to support an irrevocable power. A proxy may be
made irrevocable regardless of whether the interest with which it is coupled is
an interest in the stock itself or an interest in the Corporation generally.
SECTION 2.08. CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. Except
as otherwise provided by statute, any action that may be taken at a meeting of
stockholders by a vote of the stockholders may be taken with the written
consent of stockholders owning (and by such written consent, voting) in the
aggregate not less than the minimum percentage of the total number of shares
that by statute, the Certificate of Incorporation or these Bylaws are required
to be voted with respect to such proposed corporate action; provided, however,
that the written consent of a stockholder who would not have been entitled to
vote upon the action if a meeting were held shall not be counted; and further
provided, that prompt notice shall be given to all stockholders of the taking
of such corporate action without a meeting if less than unanimous written
consent of all stockholders who would have been entitled to vote on the action
if a meeting were held is obtained.
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SECTION 2.09. VOTING LISTS. The officer who has charge of the stock
ledger of the Corporation shall prepare and make, at least ten (10) calendar
days before every meeting of stockholders, a complete list of the stockholders
entitled to vote at the meeting. The list shall be arranged in alphabetical
order showing the address of each stockholder and the number of shares
registered in the name of such stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least (10) calendar days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present. The stock
ledger of the Corporation shall be the only evidence as to who are the
stockholders entitled to examine the stock ledger, the list required by this
section, or the books of the Corporation or are entitled to vote in person or
by proxy at any annual or special meeting of the stockholders.
SECTION 2.10. VOTING PROCEDURES; JUDGES OF ELECTION. Except as
otherwise provided by applicable law, the Certificate of Incorporation, or
these Bylaws, or as directed by the chairman of the meeting, the election of
directors and the vote upon any other matter need not be by written ballot. In
advance of any meeting of stockholders, the Board of Directors may appoint one
or more judges of election, who need not be stockholders, to act at such
meeting or any adjournment thereof. If judges of election are not so appointed,
the chairman of any such meeting may, and, upon the demand of any stockholder
entitled to vote or such stockholder's proxy, at the meeting and before voting
begins, shall appoint judges of election. In the case of judges appointed upon
demand of a stockholder, the number of judges shall be either one (1) or three
(3), as determined by the stockholders present or represented by proxy,
entitled to cast a majority of votes that all stockholders present or so
represented are entitled to cast thereon. No person who is a candidate for
office shall act as a judge. In case any person appointed as judge fails to
appear or refuses to act, the vacancy may be filled by appointment made by the
Board of Directors in advance of the convening of the meeting, or at the
meeting by the chairman of the meeting.
Except as provided in the Certificate of Incorporation, if judges of
election are appointed as aforesaid, they shall (a) determine the number of
shares outstanding and the voting power of each, the shares represented at the
meeting, the existence of a quorum, and the authenticity, validity, and effect
of proxies; (b) receive votes or ballots; (c) hear and determine all challenges
and questions in any way arising in connection with the right to vote; (d)
count and tabulate all votes; (e) determine the results of the election or
other vote; and (f) do such acts as may be proper to conduct the election or
vote with fairness to all stockholders. If there be three (3) or more judges of
election, the decision, act, or certificate of a majority shall be effective in
all respects as the decision, act, or certificate of all.
On request of the chairman of the meeting or of any stockholder
entitled to vote or such stockholder's proxy, the judges shall make a report in
writing of any challenge, question, or other matter determined by them, and
shall execute a certificate of any fact found by them.
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ARTICLE III
BOARD OF DIRECTORS
SECTION 3.01. POWERS. The Board of Directors shall have full power
to manage the business and affairs of the Corporation, and all powers of the
Corporation, except those specifically reserved or granted to the stockholders
by applicable law, the Certificate of Incorporation, these Bylaws, the
Stockholders Agreement or the Rights Agreement, are hereby granted to and
vested in the Board of Directors. Without limiting the foregoing, the Board of
Directors may, if it so desires, appoint one or more advisory councils to the
Board of Directors, consisting of such numbers and with such duties as the
Board may deem appropriate.
SECTION 3.02. NUMBER, NOMINATIONS, ELECTION, TERM OF OFFICE,
REMOVAL, TERMINATION AND VACANCIES. The Board of Directors of the Company shall
consist of nine (9) members, (i) one (1) of whom shall be the Chief Executive
Officer of the Corporation, (ii) six (6) of whom shall be designated by the
holders (the "Existing Stockholders") from time to time of Common Stock (other
than any holders who acquired Common Stock upon conversion or exchange of
Series A Preferred), and (iii) two (2) of whom shall be designated by the
holders from time to time of Series A Preferred or Common Stock issued upon
conversion or otherwise in respect of Series A Preferred (the "Preferred
Holders"). If the number of directors serving on the Board of Directors shall
be increased or decreased, the Preferred Holders shall be entitled to designate
a minimum of twenty percent (20%) of the total number of directors elected to
serve on the Board of Directors. All nominations for directors shall be
submitted to the Board of Directors prior to each annual meeting of
stockholders of the Corporation and any other meeting of stockholders at which
directors are to be elected (or prior to the circulation of any written consent
of stockholders in lieu of such meeting(s)). The designated nominees of the
Existing Stockholders (the "Designees") shall be determined as follows: Each
Existing Stockholder shall be requested to nominate one individual. This list
of nominees shall be submitted to the Existing Stockholders who shall then
select the requisite number of Designees by voting their shares of Common Stock
on a non-cumulative basis for the number of Designees to be selected. The
individual(s) receiving a plurality of votes shall be the Designee(s).
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Elections of directors need not be by written ballot. Each director
shall serve for the term for which he or she is elected and until his or her
successor shall have been duly nominated, elected and qualified (except in the
event of his or her earlier death, resignation or removal).
If the Existing Stockholders or the Preferred Holders wish to cause
the removal of the director(s) which they had designated for the Board of
Directors, the other stockholders entitled to vote shall vote in favor of such
removal, as provided in the Stockholders Agreement and the Rights Agreement.
Any vacancies on the Board of Directors resulting from death,
resignation, termination, removal by the stockholders or from any increase in
the number of directors may be filled by the stockholders at the next annual
meeting thereof or at a special meeting called for that purpose in accordance
with Section 2.03 of Article II of these Bylaws. In such event, the
stockholder(s) that had designated such director(s) shall be entitled to
designate and nominate as provided herein a successor to fill the vacancy so
created, and in such instance the stockholder(s) shall vote in favor of such
designee or nominee as provided herein. Any director elected in accordance with
the two preceding sentences of this Section 3.02 shall hold office for the
remainder of the full term of the directorship being filled by such director
and until a successor shall have been elected and qualified. This Section 3.02
shall terminate upon a Qualified Public Offering of the Corporation's stock.
SECTION 3.03. QUALIFICATIONS. All directors of the Corporation
shall be natural persons, but need not be residents of Delaware or stockholders
of the Corporation.
SECTION 3.04. RESIGNATIONS. Any director of the Corporation may
resign at any time by giving written notice to the Chairman of the Board, the
President, or the Secretary of the Corporation. Such resignation shall take
effect at the date of the receipt of such notice or at any later time specified
therein and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective. Upon the effectiveness
of such resignation, the vacancy created thereby shall be filled in the manner
provided in Section 3.02 hereof.
SECTION 3.05. ORGANIZATION. At every meeting of the Board of
Directors, the Chairman of the Board, or in the case of a vacancy in the office
or absence of the Chairman of the Board, one of the following officers present
in the order stated: the President, the Vice Presidents in their order of rank,
or a chairman chosen by the affirmative vote of the directors holding
two-thirds (2/3) of the votes of the Board of Directors present, shall act as
chairman of the meeting, and the Secretary, or, in the absence of the
Secretary, an Assistant Secretary, if any, or any other person appointed by the
chairman of the meeting, shall act as secretary of the meeting.
SECTION 3.06. PLACE OF MEETING. All meetings of the Board of
Directors of the Corporation shall be held at the principal offices of the
Corporation, or at such other place within or without the State of Delaware as
shall be designated in a notice of such meeting or otherwise.
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SECTION 3.07. REGULAR MEETINGS. Regular meetings of the Board of
Directors may be held without notice at such time and place as shall be
designated from time to time by the Board of Directors. At such meetings, the
directors shall transact such business as may properly be brought before the
meeting.
SECTION 3.08. SPECIAL MEETINGS. Special meetings of the Board of
Directors may be held whenever called by the Chairman of the Board, the
President or by the affirmative vote of twenty percent (20%) or more of the
directors then in office. Except as otherwise provided by applicable law, the
Certificate of Incorporation, or these Bylaws, notice of each such meeting
shall be given to each director by telephone or in writing at least three (3)
calendar days (in the case of notice by telephone, telegram, cable, or
facsimile transmission) or seven (7) calendar days (in the case of notice by
mail) before the time at which the meeting is to be held. Each such notice
shall state the time and place of the meeting to be so held, and shall be
deemed to be given at the time when so made by telephone, sent by telegram,
cable, or facsimile transmission, or deposited in the U.S. mail. Unless
otherwise indicated in the notice thereof, any and all business may be
transacted at any special meeting.
SECTION 3.09. QUORUM, MANNER OF ACTING, AND ADJOURNMENT. (a) Each
director shall have one (1) vote on any matter voted upon by the Board of
Directors. The voting and other rights of the Corporation's directors and
stockholders are further defined and limited by the Certificate of
Incorporation, the Stockholders Agreement and the Rights Agreement.
(b) Except as otherwise provided by applicable law, the
Certificate of Incorporation, the Stockholders Agreement, the Rights Agreement
or these Bylaws, as amended from time to time, two-thirds (2/3) of the total
number of directors then in office shall constitute a quorum for the
transaction of business at all meetings of the Board of Directors, and the act
of two-thirds (2/3) or more of the directors present at any meeting at which
there is a quorum shall be the act of the Board. If a quorum shall not be
present at any meeting of the Board of Directors, the directors present thereat
may adjourn the meeting to another date and time by giving notice to each
director not less than five (5) calendar days before the time at which said
adjourned meeting is to be held, in the manner set forth in Section 3.08
hereof. Following any Qualified Public Offering of the Corporation's stock, a
majority of the total number of directors then in office shall constitute a
quorum for the transaction of business at all meetings of the Board of
Directors, and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board.
(c) Notwithstanding paragraph (b) above, (i) the appointment or
removal of the Chairman of the Board or the President; (ii) the approval of
annual business plans, budgets, or strategic plans, (iii) any material change
in the scope of the business of the Corporation; (iv) the approval of policies
concerning the payment of dividends or other distributions; (v) the approval of
capital expenditures in excess of one million dollars ($1,000,000.00); and (vi)
the approval of changes in the Corporation's accounting or tax policies
inconsistent with generally accepted accounting principles shall require the
affirmative vote of three-fourths (3/4) or more of the directors present at any
meeting at which there is a quorum. This Subsection (c) shall terminate upon a
qualified public offering of the Corporation's stock and shall not apply with
respect to any action required to effectuate such public offering.
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SECTION 3.10. CONSENT IN LIEU OF MEETING. Except as otherwise
provided by applicable law, the Certificate of Incorporation, or these Bylaws,
and notwithstanding Section 3.08 hereof, any action required or permitted to be
taken at any meeting of the Board of Directors, or of any committee thereof,
may be taken without a meeting if all members of the Board or the committee, as
the case may be, consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the Board or the committee, as the
case may be.
SECTION 3.11. CONFERENCE TELEPHONE MEETINGS. Except as otherwise
provided by applicable law, the Certificate of Incorporation, or these Bylaws,
one or more directors may participate in a meeting of the Board of Directors,
or of any committee thereof, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other. Participation in a meeting pursuant to this
section shall constitute presence in person at such meeting.
SECTION 3.12. EXECUTIVE AND OTHER COMMITTEES. The Board of
Directors may, by resolution adopted by the affirmative vote of a majority of
the whole Board of Directors, designate and name an Executive Committee and one
or more other committees, each committee to consist of one (1) or more
directors, provided that any Executive Committee shall have at least three (3)
directors. The Board may designate one (1) or more directors as alternate
members of any committee to replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of a member (and
the alternate or alternates, if any, designated for such member) of any
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not such member or members constitute a
quorum, may unanimously appoint another director to act at the meeting in the
place of any such absent or disqualified member.
Any such committee (to the extent provided in the resolution
establishing such committee) shall conduct itself, including with respect to
provisions for votes of its members, as set forth in resolutions adopted by the
Board of Directors, and shall have and may exercise all the powers and
authority of the Board of Directors in the management of the business and
affairs of the Corporation, expressly including the power and authority to
declare a dividend, to adopt a certificate of ownership and merger pursuant to
Section 253 of the Delaware General Corporation Law (the "GCL"), and to
authorize the seal of the Corporation to be affixed to all papers which may
require it. Notwithstanding the foregoing, no such committee shall have the
power or authority (a) to amend the Certificate of Incorporation or to fix the
designations and any of the preferences or rights of such shares relating to
dividends, redemption, dissolution, any distribution of assets of the
Corporation, or the conversion into, or the exchange of such shares of any
other class or classes or any other series of the same or any other class or
classes of stock of the Corporation, or to fix the number of shares of any
series of stock, or to authorize the increase or decrease of the shares of any
series; (b) to adopt an agreement of merger or consolidation under Sections 251
or 252 of the GCL; (c) to recommend to the stockholders the sale, lease, or
exchange of all or substantially all of the Corporation's property and assets;
(d) to recommend to the stockholders a dissolution of the Corporation or a
revocation of a dissolution; (e) to amend the Bylaws of the Corporation; or (f)
to authorize the issuance of stock.
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Each committee designated pursuant to this section shall keep regular
minutes of its meetings and report the same to the Board of Directors when
required.
SECTION 3.13. COMPENSATION OF DIRECTORS. The Board of Directors
shall have the authority to fix the compensation of directors. The directors
may be paid their expenses, if any, of attendance at each meeting of the Board
of Directors and may be paid a fixed sum for attendance at each meeting of the
Board of Directors or a stated salary as director. No such payment shall
preclude any director from serving the Corporation in any other capacity and
receiving compensation therefor; provided that, the Board, in its discretion,
may reduce the compensation of any director who is concurrently receiving
compensation for services rendered to the Corporation as an officer thereof.
Members of special or standing committees may be paid like compensation for
attending committee meetings.
SECTION 3.14. INTERESTED DIRECTORS. No contract or transaction
between the Corporation and one (1) or more of its directors or officers, or
between the Corporation and any other corporation, partnership, association, or
other organization in which one or more of its directors or officers are
directors or officers, or have a financial interest, shall be void or voidable
solely for this reason, or solely because the director or officer is present at
or participates in the meeting of the Board or of a committee thereof which
authorizes the contract or transaction, or solely because his, her or their
votes are counted for such purpose, if:
(a) The material facts as to his or her relationship or
interest and as to the contract or transaction are
disclosed or are known to the Board of Directors or
the committee, and the Board or committee in good
faith authorizes the contract or transaction by the
affirmative vote of a majority of the disinterested
directors, even though the disinterested directors
comprise less than a quorum;
(b) The material facts as to his or her relationship or
interest and as to the contract or transaction are
disclosed or are known to the stockholders entitled
to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the
stockholders; or
(c) the contract or transaction is fair to the
Corporation as of the time it is authorized, approved
or ratified by the Board of Directors, a committee
thereof, or the stockholders.
Common or interested directors may be counted in determining the presence of a
quorum at a meeting of the Board of Directors or of a committee which
authorizes the contract or transaction.
ARTICLE IV
NOTICE-WAIVERS
SECTION 4.01. NOTICE. WHAT CONSTITUTES. Except as otherwise
provided in the Bylaws, any provision of applicable law, the Certificate of
Incorporation or these Bylaws which
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requires notice to be given to any director or stockholder of the Corporation
shall not be deemed or constituted to require personal notice (unless otherwise
expressly provided therein), but rather such notice may be given via telephone,
facsimile or first class mail addressed to such director or stockholder at his
or her address as it appears on the records of the Corporation, with postage
thereon prepaid, and such notice shall be deemed to be given at the time when
the same is deposited in the U.S. mail.
SECTION 4.02. WAIVERS OF NOTICE. Whenever any notice is required to
be given under applicable law, the Certificate of Incorporation or these
Bylaws, a written waiver hereof, signed by the person or persons entitled to
such notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Except as otherwise provided by applicable law, the
Certificate of Incorporation or these Bylaws, neither the business to be
transacted at nor the purposes of, any regular or special meeting of the
stockholders, directors, or a committee of directors need be specified in any
written waiver of notice of such meeting.
Attendance of a person, either in person or by proxy, at any meeting
shall constitute a waiver of notice of such meeting, except when a person
attends a meeting for the express purpose of objecting at the beginning of the
meeting to the transaction of any business because the meeting has not been
lawfully called or convened.
Notwithstanding any of the foregoing, except in the case of written
consents of less than all of the stockholders as provided in Section 2.08 of
these Bylaws, no waiver of notice shall be valid or shall be deemed equivalent
to notice unless all directors or stockholders entitled to vote on any matters
which are a subject of the meeting in question shall give such a waiver of
notice, whether before, at or after the meeting.
ARTICLE V
OFFICERS
SECTION 5.01. NUMBER, QUALIFICATIONS AND DESIGNATION. The officers
of the Corporation shall be chosen by the Board of Directors and shall be a
President and a Secretary, and may include one or more Vice Presidents, a
Treasurer, and such other officers as may be elected in accordance with the
provisions of Section 5.03 of this Article V. One person may hold more than one
(1) office. Except as provided below with respect to the Chairman of the Board,
and Vice Chairmen of the Board, officers may, but need not be, directors or
stockholders of the Corporation. The Board of Directors shall also elect, from
among the members of the Board, a Chairman of the Board, and one or more Vice
Chairmen of the Board, each of which shall be deemed to be an officer of the
Corporation.
SECTION 5.02. ELECTION, TERM OF OFFICE, RESIGNATION, AND REMOVAL.
The officers of the Corporation, except those elected by delegated authority
pursuant to Section 5.03 of this Article V, shall be elected annually by the
Board of Directors, and each such officer shall hold his or her office until
his or her successor shall have been duly elected and qualified, or until his
or her earlier death, resignation or removal. Any officer may resign at any
time upon written notice to the Corporation. Subject to the terms of any
applicable employment or service agreement, all officers, agents, and employees
shall be subject to removal, with or without
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cause, at any time by the Board of Directors. The election or appointment of an
officer shall not of itself create contract rights. Any vacancy caused by the
death, resignation, or removal of any officer, or otherwise, may be filled by
the Board of Directors or pursuant to delegated authority as provided in
Section 5.03 hereof.
SECTION 5.03. OTHER OFFICERS, COMMITTEES, AND AGENTS. The Board of
Directors may from time to time elect such other officers, including Assistant
Secretaries and Assistant Treasurers, and appoint such committees, employees,
or other agents as it deems necessary. Such officers, committee members,
employees, or other agents shall hold their offices for such terms and shall
exercise such powers and perform such duties as are provided in these Bylaws or
as the Board of Directors may from time to time determine by resolution. By
resolution, the Board of Directors may delegate to any officer or committee the
power to elect subordinate officers and to retain or appoint employees or other
agents, or committees thereof, and to prescribe the authority and duties of
such subordinate officers, committees, employees, or other agents. Subject to
the terms of any applicable employment or service agreement, all such
subordinate officers, agents, and employees shall also be subject to removal,
with or without cause, at any time by the officers or committee appointing
them.
SECTION 5.04. THE CHAIRMAN OF THE BOARD. The Chairman of the Board
shall preside at meetings of the Board of Directors and at meetings of the
stockholders. The Chairman of the Board shall counsel with and advise the
President and perform such other duties as may be from time to time assigned to
the Chairman of the Board of Directors. Except as otherwise provided by
resolution of the Board, the Chairman of the Board shall be ex-officio a member
of all committees of the Board.
SECTION 5.05. THE VICE CHAIRMEN OF THE BOARD. The Vice Chairmen of
the Board shall perform the duties of the Chairman of the Board in the
Chairman's absence (in their order of rank) and such other duties as may from
time to time be assigned to them by the Board of Directors, the Chairman of the
Board, or the President.
SECTION 5.06. THE PRESIDENT. The President shall perform all of the
duties usually incident to such office, and such other duties as may from time
to time be assigned to the President by the Board of Directors. In the absence
of the Chairman of the Board and any Vice Chairmen of the Board, the President
shall preside at all meetings of the stockholders and of the Board of
Directors.
SECTION 5.07. THE SECRETARY. The Secretary, or in the Secretary's
absence an Assistant Secretary, (a) shall attend all meetings of the
stockholders and of the Board of Directors and shall record the proceedings of
the meetings of the stockholders and the Board of Directors and of committees
of the Board in a book or books to be kept for that purpose; (b) shall see that
notices are given and records and reports properly kept and filed by the
Corporation as required by law; (c) shall be the custodian of the seal of the
Corporation and see that it is affixed to all documents to be executed on
behalf of the Corporation under its seal; and, (d) in general, shall perform
all duties incident to the office of Secretary, and such other duties as may
from time to time be assigned to the Secretary by the Board of Directors, the
Chairman of the Board, or the President.
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SECTION 5.08. THE TREASURER. The Treasurer, or in Treasurer's
absence, an Assistant Treasurer, (a) shall have or provide for the custody of,
and when proper pay out, disburse, or otherwise dispose of, the funds or other
property of the Corporation; (b) shall collect and receive or provide for the
collection and receipt of moneys earned by or in any manner due to or received
by the Corporation; (c) shall deposit all funds in his custody as Treasurer in
such banks or other places of deposit as the Board of Directors may from time
to time designate; (d) shall keep accurate financial records and accounts and,
whenever so required by the Board of Directors, render statements showing his
transactions as Treasurer and the financial condition of the Corporation; and
(e) in general, shall discharge such other duties as may from time to time by
assigned to the Treasurer by the Board of Directors, the Chairman of the Board,
or the President.
SECTION 5.09. SALARIES. The salaries and other compensation of the
officers and agents of the Corporation elected or appointed by the Board of
Directors shall be fixed from time to time by the Board of Directors. The
salaries and other compensation of subordinate officers appointed pursuant to
delegated authority under Section 5.03 hereof shall be fixed from time to time
by the officers or committee appointing them.
ARTICLE VI
CERTIFICATES OF STOCK, TRANSFER, ETC.
SECTION 6.01. ISSUANCE. Each stockholder shall be entitled to a
certificate or certificates for shares of stock of the Corporation owned by
such stockholder upon request therefor. The stock certificates of the
Corporation shall be consecutively numbered and shall be registered in the
stock ledger and transfer books of the Corporation as they are issued. They
shall be signed by the Chairman of the Board or by the President or a Vice
President, and by the Secretary or an Assistant Secretary, if any, or by the
Treasurer or an Assistant Treasurer, if any, and shall bear the corporate seal,
which may be a facsimile, engraved, or printed. Any and all of the signatures
upon such certificate may be a facsimile, engraved, or printed. In case any
officer, transfer agent, or registrar who has signed, or whose facsimile
signature has been placed upon, any share certificate shall have ceased to be
such officer, transfer agent, or registrar before the certificate is issued, it
may be issued with the same effect as if such person were such officer,
transfer agent, or registrar at the date of its issue.
SECTION 6.02. RESTRICTION ON TRANSFER. No stockholder shall sell,
transfer, or otherwise dispose of such stockholder's shares of stock without
first offering said shares to the Corporation if and to the extent required by
the terms of the Stockholders Agreement or the Rights Agreement. This Section
6.02 shall terminate upon a Qualified Public Offering of the Corporation's
stock.
SECTION 6.03 TRANSFER, LEGENDS, ETC. Upon surrender to the
Corporation or the transfer agent of the Corporation of a certificate for
shares duly endorsed or accompanied by proper evidence of succession,
assignation, or authority to transfer the Corporation shall issue a new
certificate to the person entitled thereto, cancel the old certificate, and
record the transaction upon its books. The Board of Directors may by
resolution, (a) impose restrictions on transfer or registration of transfer of
shares of stock of the Corporation, and (b) require as
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a condition to the issuance or transfer of such shares that the person or
persons to whom such shares are to be issued or transferred agree in writing to
such restrictions. In the event that any such restrictions on transfer or
registration of transfer are so imposed, the Corporation shall require that
such restrictions be conspicuously noted on all certificates representing such
shares. In addition, all shares of the Corporation's stock are subject to
several restrictions and limitations as set forth in the Stockholders Agreement
and the Rights Agreement, which are to be noted on all certificates
representing such shares.
SECTION 6.04. LOST, STOLEN, DEFACED, WORN OUT, OR DESTROYED. The
Board of Directors may direct a new certificate or certificates to be issued in
place of any certificate or certificates theretofore issued by the Corporation
alleged to have been lost, stolen, defaced, worn-out, or destroyed, upon the
making of an affidavit of that fact by the person claiming the certificate of
stock to be lost, stolen, defaced, worn out, or destroyed. When authorizing
such issuance of a new certificate or certificates, the Corporation may, as a
condition precedent thereto, (a) require the owner of any defaced or worn out
certificate to deliver such certificate to the Corporation and order the
cancellation of the same, and (b) require the owner of any lost, stolen or
destroyed certificate or certificates, or his legal representative, to
advertise the same in such manner as the Corporation shall require and to give
the Corporation a bond in such sum as it may direct as indemnity against any
claim that may be made against the Corporation with respect to the certificate
alleged to have been lost, stolen, or destroyed. Thereupon, the Corporation may
cause to be issued to such person a new certificate in replacement for the
certificate alleged to have been lost, stolen, defaced, worn out, or destroyed.
Upon the stub of every new certificate so issued shall be noted the fact of
such issue and the number, date, and name of the registered owner of the lost,
stolen, defaced, worn out, or destroyed certificate in lieu of which the new
certificate is issued. Every certificate issued hereunder shall be issued
without payment to the Corporation for such certificate; provided that, there
shall be paid to the Corporation a sum equal to any exceptional expenses
incurred by the Corporation in providing for or obtaining any such indemnity
and security as is referred to herein.
SECTION 6.05. RECORD HOLDER OF SHARES. Except as otherwise provided
by applicable law, the Certificate of Incorporation, or these Bylaws, the
Corporation (a) shall be entitled to recognize the exclusive right of a person
registered on its books as the owner of shares to receive dividends and to vote
as such owner, (b) shall be entitled to hold liable for any required calls and
assessments a person so registered, and (c) shall not be bound to recognize (i)
any entity or person as a transferee of stock unless such entity or person both
complies with all transfer and other restriction imposed hereby or by the
Certificate of Incorporation and Stockholders Agreement and first becomes a
party to Stockholders Agreement, or (ii) any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof.
The Corporation may treat a fiduciary as having capability and
authority to exercise all rights of ownership in respect of shares of record in
the name of a decedent holder, a person, firm, or corporation in conservation,
receivership, or bankruptcy, a minor, an incompetent person, or a person under
disability, as the case may be, for whom such fiduciary is acting, and the
Corporation, its transfer agent, and its registrar, if any, upon presentation
of evidence of appointment of such fiduciary shall be under no duty to inquire
as to the powers of such
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fiduciary and shall not be liable for any loss caused by any act done or
omitted to be done by the Corporation or its transfer agent or registrar, if
any, in reliance thereon.
SECTION 6.06. DETERMINATION OF STOCKHOLDERS OF RECORD. In order
that the Corporation may determine the stockholders entitled to notice of or to
vote at any meeting of stockholders or any adjournment thereof, or to express
consent to corporate action in writing without a meeting, or entitled to
receive payments of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any change,
conversion, or exchange of stock, or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than (10) calendar days before the date of
such meeting, nor more than sixty (60) calendar days prior to any other action.
If no record date is fixed:
(a) The record date for determining stockholders entitled
to notice of or to vote at a meeting of stockholders
shall be at the close of business on the day next
preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day
next preceding the day on which the meeting is held.
(b) The record date for determining stockholders entitled
to consent to corporate action in writing without a
meeting, when no prior action by the Board of
Directors is necessary, shall be the first date on
which a signed written consent setting forth the
action taken or proposed to be taken is delivered to
the Corporation by delivery to its registered office
in Delaware, its principal place of business, or an
officer or agent of the Corporation having custody of
the book in which proceedings of meetings of
stockholders are recorded.
(c) The record date for determining stockholders for any
other purpose shall be at the close of business on
the day on which the Board of Directors adopts the
resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting provided
that the Board of Directors may fix a new record date for the adjourned
meeting.
SECTION 6.07. APPOINTMENT OF TRANSFER AGENTS, REGISTRARS, ETC. The
Board of Directors may from time to time by resolution appoint (a) one (1) or
more transfer agents and registrars for the shares of stock of the Corporation,
(b) a plan agent to administer any employee benefit, dividend reinvestment, or
similar plan of the Corporation, and (c) a dividend disbursing agent to
disburse any and all dividends authorized by the Board and payable with respect
to the shares of stock of the Corporation. The Board of Directors shall also
have authority to make such other rules and regulations not inconsistent with
applicable law, the Certificate of Incorporation, or these Bylaws, as it deems
necessary or advisable with respect to the issuance, transfer, and registration
of certificates for shares and the shares of stock represented thereby.
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ARTICLE VII
GENERAL PROVISIONS
SECTION 7.01. DIVIDENDS. Dividends, if any, upon the capital stock
of the Corporation may be declared only by the affirmative vote of at least
three-fourths (3/4) of the members of the Board of Directors then in office, at
any regular or special meeting of the Board of Directors. Dividends may be paid
in cash, in property, or in shares of the capital stock of the Corporation, or
in any combination thereof, but only out of funds available for the payment of
dividends as provided by applicable law. Any dividends declared upon the stock
of the Corporation shall be payable on such date or dates as the Board of
Directors shall determine by resolution. If the date fixed for the payment of
any dividend shall in any year fall upon a legal holiday, then the dividend
payable on such date shall be paid on the next day not a legal holiday.
Before payment of any dividend, there may be set aside out of any
funds of the Corporation available for dividends such sum or sums as the Board
of Directors from time to time, in its discretion, shall determine by
resolution is proper as a reserve or reserves to meet contingencies, for
equalizing dividends, or for repairing or maintaining any property of the
Corporation, or for such other purpose as the Board of Directors shall so
determine is in the best interests of the Corporation and its stockholders. The
Board may modify or abolish any such reserves in the manner in which it was
created.
SECTION 7.02. CONTRACTS, ETC. Except as otherwise provided by
applicable law, the Certificate of Incorporation, or these Bylaws, the Board of
Directors may authorize any officer or officers, any employee or employees, or
any agent or agents, to enter into any contract or to execute, acknowledge, or
deliver any agreement, deed, mortgage, bond, or other instrument in the name of
and on behalf of the Corporation and to affix the Corporation's seal thereon.
Such authority may be general or confined to specific instances.
SECTION 7.03. CHECKS. All checks, notes, obligations, bills of
exchange, acceptances, or other orders in writing shall be signed by such
person or persons as the Board of Directors may from time to time designate by
resolution.
SECTION 7.04. CORPORATE SEAL. The corporate seal shall have
inscribed thereon the name of the Corporation, the year of its organization,
and the words "Corporate Seal, Delaware." The seal may be used by causing it or
a facsimile thereof to be impressed or affixed or in any other manner
reproduced.
SECTION 7.05. DEPOSITS. All funds of the Corporation shall be
deposited from time to time to credit of the Corporation in such banks, trust
companies, or other depositories as the Board of Directors may approve or
designate, and all such funds shall be withdrawn only upon checks or other
orders signed by such one or more officers, employees, or agents as the Board
of Directors shall from time to time designate.
SECTION 7.06. EXAMINATION OF CORPORATE RECORDS. Upon written demand
under oath stating the purpose thereof, every stockholder of record shall have
a right to examine, in person or by attorney or other agent, during ordinary
business hours and for any proper purpose,
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the Corporation's stock ledger, a list of its stockholders, and its other books
and records and to make copies or extracts therefrom. A proper purpose shall
mean a purpose reasonably related to such person's interest as a stockholder.
In every instance where an attorney or other agent shall be the person who
seeks the right of inspection, the demand under oath shall be accompanied by a
power of attorney or other writing which authorizes the attorney or other agent
to so act on behalf of the stockholder. The demand under oath shall be directed
to the Corporation as its registered office in Delaware or at its principal
place of business.
Any director shall have the right to examine the Corporation's stock
ledger, a list of its stockholders, and its other books and records during
ordinary business hours for a purpose reasonably related to his or her position
as a director.
SECTION 7.07. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The
Corporation shall indemnify to the fullest extent authorized or permitted by
law any current or former director or officer of the Corporation (or his or her
testator or estate) made or threatened to be made a party to any threatened,
pending, or completed action, suit, or proceeding, whether criminal, civil
administrative, or investigative, by reason of the fact that he or she is or
was a director or officer of the Corporation or is or was serving, at the
request of the Corporation, as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust, employee benefit plan,
or other enterprise. Subject to applicable law, the Corporation may indemnify
an employee or agent of the Corporation to the extent that and with respect to
such proceedings as, the Board of Directors may determine by resolution, in its
discretion.
SECTION 7.08. AMENDMENT OF BYLAWS. (a) These Bylaws may be amended,
modified, or repealed, or new Bylaws may be adopted by the Board of Directors
of the Corporation, subject to (i) the consent of the holders of Series A
Preferred as provided in the Rights Agreement and (ii) amendment, modification
or repeal, by the Corporation's stockholders. Any such amendment, modification
or repeal by the Corporation's stockholders shall require, in addition to all
applicable requirements of law and the Certificate of Incorporation, the
affirmative vote of the record holders of two-thirds (2/3) or more of the
outstanding shares of Common Stock, at any annual meeting of stockholders or at
any special meeting thereof, if notice of such amendment, modification, repeal
or adoption of new Bylaws is contained in the notice of such special meeting.
Notwithstanding any of the foregoing to the contrary, Section 2.01 (c) hereof
may not be amended, modified or repealed by either the Board of Directors or
the stockholders without the unanimous vote of all holders of record of stock.
(b) Notwithstanding the above paragraph, this paragraph (b) of
Section 7.08 and paragraph (c) of Section 3.09 may only be amended, modified,
or repealed by the Board of Directors of the Corporation with the affirmative
vote of three-fourths (3/4) or more of the Board of Directors at any meeting of
the Board at which there is a quorum.
(c) Following a Qualified Public Offering of the Corporation's
stock, these Bylaws may be amended, modified, or repealed, or new Bylaws may be
adopted by the Board of Directors of the Corporation, subject to amendment,
modification or repeal by the Corporation's stockholders and applicable law.
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EXHIBIT 3.3
SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF PEGASUS SYSTEMS, INC.
This Second Amended and Restated Certificate of Incorporation amends and
restates the Amended and Restated Certificate of Incorporation filed in the
office of the Secretary of State of the State of Delaware on June 25, 1996,
which amended and restated the Certificate of Incorporation of Pegasus Systems,
Inc., a corporation originally incorporated in Delaware as "Pegasus Systems,
Inc." on July 10, 1995. This Second Amended and Restated Certificate of
Incorporation has been duly adopted pursuant to Section 245 of the Delaware
General Corporation Law,
ARTICLE I
The name of this corporation is Pegasus Systems, Inc. (the "Corporation").
ARTICLE II
The address of the registered office of the Corporation in the State of
Delaware is 1013 Centre Road, New Castle County, Wilmington, Delaware
19805-1297, The name of the registered agent of the Corporation at that address
is The Prentice-Hall Corporation Systems, Inc.
ARTICLE III
The nature of the business or purposes to be conducted or promoted by the
Corporation is to engage in any lawful business, act or activity for which
corporations may be organized under the General Corporation Law of the State of
Delaware. The private property of the stockholders shall not be subject to the
payment of corporate debts to any extent whatsoever.
ARTICLE IV
This Corporation is authorized to issue two classes of stock, designated
"Common Stock" and "Preferred Stock". The total number of shares which this
Corporation is authorized to issue is 102,000,000 shares. The number of shares
of Common Stock which this Corporation is authorized to issue is 100,000,000
shares, par value $0.01 per share. The number of shares of Preferred Stock
which this Corporation is authorized to issue is 2,000,000 shares, par value
$0.01 per share, which shall initially be undesignated as to series.
Any Preferred Stock not previously designated as to series may be issued
from time to time in one or more series pursuant to a resolution or resolutions
providing for such issue duly adopted by the Board of Directors (authority to
do so being hereby expressly
2
vested in the Board), and such resolution or resolutions shall also set forth
the voting powers, full or limited or none, of each such series of Preferred
Stock and shall fix the designations, preferences and relative, participating,
optional or other special rights and qualifications, limitations or
restrictions of each such series of Preferred Stock. The Board of Directors is
authorized to alter the designation, rights, preferences, privileges and
restrictions granted to or imposed upon any wholly unissued series of Preferred
Stock and, within the limits and restrictions stated in any resolution or
resolutions of the Board of Directors originally fixing the number of shares
constituting any series of Preferred Stock, to increase or decrease (but not
below the number of shares of any such series then outstanding) the number of
shares of any such series subsequent to the issue of shares of that series.
Each share of Preferred Stock issued by the Corporation, if reacquired by
the Corporation (whether by redemption, repurchase, conversion to Common Stock
or other means), shall upon such reacquisition resume the status of authorized
and unissued shares of Preferred Stock, undesignated as to series and available
for designation and issuance by the Corporation in accordance with the
immediately preceding paragraph.
The relative rights, preferences, privileges and restrictions granted to
or imposed upon the Common Stock or the holders thereof are as follows:
(a) Dividend Rights. Subject to the prior rights of holders of all
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of the Corporation
legally available therefor, such dividends as may be declared from time to time
by the Board of Directors.
(b) Liquidation Rights. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation, after
payment or provision for payment of the debts and other liabilities of the
Corporation and of any amounts to which the holders of all classes of stock at
the time outstanding having prior rights as to liquidation are entitled, the
holders of all outstanding shares of Common Stock shall be entitled to share
ratably in the remaining assets of the Corporation.
(c) Redemption. The Common Stock is not redeemable.
(d) Voting Rights. The holder of each share of Common Stock shall
have the right to one vote, and shall be entitled to notice of any
shareholders' meeting in accordance with the Bylaws of this Corporation, and
shall be entitled to vote upon such matters and in such manner as may be
provided by law.
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(e) Residual Rights. All rights accruing to the outstanding shares of
this Corporation not expressly provided for to the contrary herein shall be
vested in the Common Stock.
ARTICLE V
The Corporation is to have perpetual existence.
ARTICLE VI
Elections of directors need not be by written ballot unless a stockholder
demands election by written ballot at the meeting and before voting begins or
unless the Bylaws of the Corporation shall so provide.
ARTICLE VII
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors of the Corporation is expressly authorized to make,
alter, amend or repeal the Bylaws of the Corporation.
ARTICLE VIII
(a) To the fullest extent permitted by the General Corporation Law of
the State of Delaware as the same exists or as may hereafter be amended, a
director of the Corporation shall not be personally liable to the Corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director.
(b) The Corporation may indemnify to the fullest extent permitted by
law any person made or threatened to be made a party to an action or
proceeding, whether criminal, civil, administrative or investigative, by reason
of the fact that he, his estate or legal representative is or was a director,
officer, employee or agent of the Corporation or any predecessor of the
Corporation or serves or served at any other enterprise as a director, officer,
employee or agent at the request of the Corporation or any other predecessor to
the Corporation.
(c) No amendment nor repeal of this Article VIII, nor the adoption of
any provision of this Corporation's Certificate of Incorporation inconsistent
with this Article VIII, shall eliminate or reduce the effect of this Article
VIII, in respect of any matter occurring, or any action or proceeding accruing
or arising or that, but for this Article VIII, would accrue or arise, prior to
such amendment, repeal or adoption of an inconsistent provision.
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ARTICLE IX
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
ARTICLE X
Advance notice of new business and stockholder nominations for the
election of directors shall be given in the manner and to the extent provided
in the Bylaws of the Corporation.
ARTICLE XI
The business and affairs of the Corporation shall be managed by or under
the direction of the Board of Directors. The Board of Directors may exercise
all such authority and powers of the Corporation and do all such lawful acts
and things as are not by statute or this Certificate of Incorporation directed
or required to be exercised or done by the stockholders.
1. Number of Directors
The number of directors of the Corporation shall be fixed from time to
time only by action of not less than a majority of the members of the Board of
Directors then in office. The number of directors comprising the Board of
Directors of the Corporation shall not be less than two (2) or more than
twenty-five (25).
2. Classes
Subject to the rights, if any, of any series of Preferred Stock then
outstanding, the directors shall be divided into three classes, designated
Class I, Class II and Class III. The number of directors in each class shall be
the whole number contained in the quotient arrived at by dividing the
authorized number of directors by three, and if a fraction is also contained in
such quotient then if such fraction is one-third (1/3) the extra director shall
be a member of Class III and if the fraction is two-thirds (2/3) then one of
the extra directors shall be a member of Class III and the other shall be a
member of Class II. Upon filing of this Second Amended and Restated Certificate
of Incorporation with the Secretary of State of the State of Delaware, Donald
R. Dixon, John Biggs and W.C. Hammett, Jr. shall be members of Class I, Malcolm
Highet, Bruce W. Wolff and Mark C. Wells shall be members of Class II, and
Rockwell A. Schnabel, John F. Davis, III and Paul Travers shall be
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members of Class III. The term of office of directors in each class shall
expire as follows: Class I shall expire at the 1998 annual meeting of
stockholders, Class II shall expire at the 1999 annual meeting of stockholders,
Class III shall expire at the 2000 annual meeting of stockholders. At each such
meeting of stockholders, directors shall be elected to succeed those directors
whose terms expire for a term of office to expire at the third succeeding
annual meeting of stockholders after their election. All directors shall hold
office until the annual meeting of stockholders for the year in which their
term expires and until their successors are duly elected and qualified, or
until their earlier death, resignation, disqualification or removal.
3. Vacancies
Subject to the rights, if any, of the holders of any series of Preferred
Stock then outstanding, newly created directorships resulting from any increase
in the authorized number of directors or any vacancies in the Board of
Directors resulting from death, resignation, disqualification or removal may be
filled only by a majority vote of the directors then in office, though less
than a quorum, and directors so chosen shall hold office for a term expiring at
the annual meeting of stockholders at which the term of office of the class to
which they have been elected expires and until such director's successor shall
have been duly elected and qualified.
4. Removal
Any director or the entire Board of Directors may be removed only for
cause and only by the vote of the holders of two-thirds (2/3) of the securities
of the Corporation then entitled to vote at an election of directors voting
together as a single class.
ARTICLE XII
Any action required or permitted to be taken at any annual or special
meeting of stockholders may only be taken upon the vote of the stockholders at
an annual or special meeting duly called and may not be taken by written
consent of the stockholders. Special meetings of the stockholders, unless
otherwise prescribed by statute, may be called at any time only by the Chairman
of the Board or the Chief Executive Officer of the Corporation or the Board of
Directors.
ARTICLE XIII
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation. In addition to any affirmative
vote required by applicable law or any other provision of this Certificate of
Incorporation or specified in any agreement, the affirmative
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vote of the holders of not less than two-thirds (2/3) of the voting power of
all securities of the Corporation entitled to vote generally in the election of
directors shall be required to amend, add, alter, change, repeal or adopt any
provisions inconsistent with Sections 1, 2 or 3 of Article XI, Article XII or
this Article XIII of this Certificate of Incorporation and the affirmative vote
of not less than eighty percent (80%) of the voting power of all securities of
the Corporation entitled to vote generally in the election of directors shall
be required to amend, add, alter, change, repeal or adopt any provisions
inconsistent with Section 4 of Article XI or this Article XIII with respect to
Section 4 of Article XI.
IN WITNESS WHEREOF, the Corporation has caused this Second Amended and
Restated of Certificate to be duly executed this ____ day of ___________, 1997.
By:
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John F. Davis, III
President and Chief Executive Officer
ATTEST:
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Ric L. Floyd, Secretary
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EXHIBIT 3.4
SECOND AMENDED AND RESTATED BYLAWS
OF
PEGASUS SYSTEMS, INC.
(A DELAWARE CORPORATION)
ARTICLE I.
OFFICES AND FISCAL YEAR
SECTION 1.1 REGISTERED OFFICE. The registered office of the Corporation
shall be as stated in the Certificate of Incorporation until a change in such
office is established by resolution of the Board of Directors and a statement
of such change is filed in the manner provided by applicable law.
SECTION 1.2 OTHER OFFICES. The Corporation may also have offices and keep
its books, documents, and records at such other places within or without the
State of Delaware as the Board of Directors may from time to time determine or
the business of the Corporation may require.
SECTION 1.3 FISCAL YEAR. The fiscal year of the Corporation shall end on
the 31st day of December in each year or on such other date as the Board of
Directors may designate by resolution.
ARTICLE II.
THE STOCKHOLDERS
SECTION 2.1 TYPES OF STOCK.
(a) The Corporation's Certificate of Incorporation, as amended (the
"Certificate of Incorporation") currently authorizes two classes of capital
stock - Common Stock and Preferred Stock. The aggregate number of shares of
Common Stock and Series A Preferred which the Corporation has authority to
issue is set forth in the Certificate of Incorporation.
(b) Except as provided herein or in the Certificate of Incorporation,
or except as may be provided by the laws of the State of Delaware, the holders
of Common Stock shall have exclusively all rights of stockholders.
SECTION 2.2 PLACE OF MEETING; ANNUAL MEETING. All meetings of the
stockholders of the Corporation shall be held at the principal offices of the
Corporation, or
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at such other place within or without the State of Delaware as shall be
designated by the Board of Directors in the notice of such meeting. The Board
of Directors may fix by resolution the date and time of the annual meeting of
the stockholders, and at said meeting the stockholders then entitled to vote
shall elect directors to serve until the next annual meeting of stockholders
and until their successors are duly nominated, qualified and elected, and shall
transact such other business as may properly be brought before the meeting.
SECTION 1.023 SPECIAL MEETINGS. Except as otherwise provided by applicable
law, the Certificate of Incorporation, or these Bylaws, a special meeting of
the stockholders of the Corporation entitled to vote may be called at any time
only by the Chairman of the Board or the President of the Corporation or the
Board of Directors.
SECTION 1.024 NOTICE OF MEETINGS. Unless otherwise provided by applicable
law, the Certificate of Incorporation, or these Bylaws, written notice of the
place, date, and hour of every meeting of the stockholders, whether annual or
special, shall be given to each stockholder of record entitled to vote at the
meeting at the address of such stockholder as it appears on the records of the
Corporation, not less than ten (10) nor more than sixty (60) calendar days
before the date of the meeting. Every notice of a special meeting shall state
the purpose or purposes thereof.
SECTION 1.025 QUORUM. MANNER OF ACTING AND ADJOURNMENT. (a) Except as
otherwise provided by the Certificate of Incorporation or these Bylaws, the
record holders of at least a majority of the shares of capital stock of the
Corporation issued and outstanding and entitled to vote thereat, must be
present in person or represented by proxy to constitute a quorum at any annual
or special meeting of the stockholders. Whether or not a quorum is present or
represented at any meeting of the stockholders, the record holders of a
majority of the shares of capital stock present or so represented shall have
the power to adjourn the meeting from time to time. When a meeting is adjourned
to another time or place, no notice need be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the
adjournment is taken. At any adjourned meeting at which a quorum shall be
present or represented, any business may be transacted which might have been
transacted at the original meeting. If an adjournment is for more than thirty
(30) calendar days, or if after an adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the adjourned meeting. Except as
otherwise provided by applicable law, the Certificate of Incorporation or these
Bylaws, the affirmative vote of the record holders of a majority of the shares
of capital stock of the Corporation present in person or represented by proxy
and entitled to vote on the subject matter at a meeting duly called and held
with the necessary quorum, shall be the act of the stockholders at any annual
or special meeting of stockholders. Except as otherwise required by applicable
law or provided by the Certificate of Incorporation or these Bylaws, the
stockholders present in person or by proxy at a meeting duly called and held
can continue to do business with respect to any matters properly brought before
the meeting,
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until adjournment, notwithstanding withdrawal of enough stockholders to leave
less than a quorum.
(b) Shares of its own capital stock belonging to the Corporation, or
to another corporation if a majority of the shares entitled to vote in the
election of directors of such other corporation is held directly or indirectly
by the Corporation, shall not be entitled to vote and shall not be counted for
quorum purposes.
SECTION 1.026 ORGANIZATION. At every meeting of the stockholders, the
Chairman of the Board, or in the case of a vacancy in the office or absence of
the Chairman of the Board, one of the following persons present in the order
stated: the Vice Chairmen in their order of rank, the President, the
Vice-Presidents in their order of rank, a chairman designated by the Board of
Directors, or a chairman chosen by the stockholders entitled to cast two-thirds
(2/3) of the votes that all stockholders present in person or by proxy are
entitled to cast, shall act as chairman of the meeting, and the Secretary, or,
in such person's absence, an Assistant Secretary, if any, or any person
appointed by the chairman of the meeting, shall act as secretary of the
meeting.
SECTION 1.027 PROXIES. Each stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for such
stockholder by proxy, but no such proxy shall be voted or acted upon after
three (3) years from its date, unless the proxy provides for a longer period.
Every proxy shall be executed in writing by the stockholder, or by the
stockholder's duly authorized attorney-in-fact, and shall be delivered to the
secretary of the meeting at or prior to the time designated in the order of
business for so delivering such proxies. A duly executed proxy shall be
irrevocable if it states that it is irrevocable and if, and only as long as, it
is coupled with an interest sufficient in law to support an irrevocable power.
A proxy may be made irrevocable regardless of whether the interest with which
it is coupled is an interest in the stock itself or an interest in the
Corporation generally.
SECTION 1.028 CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. Any action
required or permitted to be taken at any annual or special meeting of
stockholders may only be taken upon the vote of the stockholders at an annual
or special meeting duly called and may not be taken by written consent of the
stockholders.
SECTION 1.029 VOTING LISTS. The officer who has charge of the stock ledger
of the Corporation shall prepare and make, at least ten (10) calendar days
before every meeting of stockholders, a complete list of the stockholders
entitled to vote at the meeting. The list shall be arranged in alphabetical
order showing the address of each stockholder and the number of shares
registered in the name of such stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least (10) calendar days prior to
the meeting, either at a place within the city where the
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meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present. The stock ledger of the Corporation shall be the only evidence as to
who are the stockholders entitled to examine the stock ledger, the list
required by this section, or the books of the Corporation or are entitled to
vote in person or by proxy at any annual or special meeting of the
stockholders.
SECTION 1.0210 VOTING PROCEDURES; JUDGES OF ELECTION. Except as otherwise
provided by applicable law, the Certificate of Incorporation, or these Bylaws,
or as directed by the chairman of the meeting, the election of directors and
the vote upon any other matter need not be by written ballot. In advance of any
meeting of stockholders, the Board of Directors may appoint one or more judges
of election, who need not be stockholders, to act at such meeting or any
adjournment thereof. If judges of election are not so appointed, the chairman
of any such meeting may, and, upon the demand of any stockholder entitled to
vote or such stockholder's proxy, at the meeting and before voting begins,
shall appoint judges of election. In the case of judges appointed upon demand
of a stockholder, the number of judges shall be either one (1) or three (3), as
determined by the stockholders present or represented by proxy, entitled to
cast a majority of votes that all stockholders present or so represented are
entitled to cast thereon. No person who is a candidate for office shall act as
a judge. In case any person appointed as judge fails to appear or refuses to
act, the vacancy may be filled by appointment made by the Board of Directors in
advance of the convening of the meeting, or at the meeting by the chairman of
the meeting.
Except as provided in the Certificate of Incorporation, if judges of
election are appointed as aforesaid, they shall (a) determine the number of
shares outstanding and the voting power of each, the shares represented at the
meeting, the existence of a quorum, and the authenticity, validity, and effect
of proxies; (b) receive votes or ballots; (c) hear and determine all challenges
and questions in any way arising in connection with the right to vote; (d)
count and tabulate all votes; (e) determine the results of the election or
other vote; and (f) do such acts as may be proper to conduct the election or
vote with fairness to all stockholders. If there be three (3) or more judges of
election, the decision, act, or certificate of a majority shall be effective in
all respects as the decision, act, or certificate of all.
On request of the chairman of the meeting or of any stockholder entitled
to vote or such stockholder's proxy, the judges shall make a report in writing
of any challenge, question, or other matter determined by them, and shall
execute a certificate of any fact found by them.
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ARTICLE III.
BOARD OF DIRECTORS
SECTION 1.031 POWERS. The Board of Directors shall have full power to
manage the business and affairs of the Corporation, and all powers of the
Corporation, except those specifically reserved or granted to the stockholders
by applicable law, the Certificate of Incorporation, these Bylaws, or that
certain Rights Agreement dated as of June 25, 1996 to which the Corporation is
a party (as it may be amended, the "Rights Agreement"), are hereby granted to
and vested in the Board of Directors. Without limiting the foregoing, the Board
of Directors may, if it so desires, appoint one or more advisory councils to
the Board of Directors, consisting of such numbers and with such duties as the
Board may deem appropriate.
SECTION 1.032 NUMBER, NOMINATIONS, ELECTION, TERM OF OFFICE, REMOVAL,
TERMINATION AND VACANCIES.
1. Number of Directors. The number of directors of the Corporation
shall be fixed from time to time only by action of not less than a
majority of the members of the Board of Directors then in office. The
number of directors comprising the Board of Directors of the Corporation
shall not be less than two (2) or more than twenty-five (25).
2. Classes. Subject to the rights, if any, of any series of Preferred
Stock then outstanding, the directors shall be divided into three classes,
designated Class I, Class II and Class III. The number of directors in
each class shall be the whole number contained in the quotient arrived at
by dividing the authorized number of directors by three, and if a fraction
is also contained in such quotient then if such fraction is one-third
(1/3) the extra director shall be a member of Class III and if the
fraction is two-thirds (2/3) then one of the extra directors shall be a
member of Class III and the other shall be a member of Class II. Upon
filing of the Corporation's Second Amended and Restated Certificate of
Incorporation with the Secretary of State of the State of Delaware, Donald
R. Dixon, John Biggs and W.C. Hammett, Jr. shall be members of Class I,
Malcolm Highet, Bruce W. Wolff and Mark C. Wells shall be members of Class
II, and Rockwell A. Schnabel, John F. Davis, III and Paul Travers shall be
members of Class III. The term of office of directors in each class shall
expire as follows: Class I shall expire at the 1998 annual meeting of
stockholders, Class II shall expire at the 1999 annual meeting of
stockholders, Class III shall expire at the 2000 annual meeting of
stockholders. At each such meeting of stockholders, directors shall be
elected to succeed those directors whose terms expire for a term of office
to expire at the third succeeding annual meeting of stockholders after
their election. All directors shall hold office until the annual meeting
of stockholders for the year in which their term expires and until their
successors are duly elected and qualified, or until their earlier death,
resignation, disqualification or removal.
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3. Vacancies. Subject to the rights, if any, of the holders of any
series of Preferred Stock then outstanding, newly created directorships
resulting from any increase in the authorized number of directors or any
vacancies in the Board of Directors resulting from death, resignation,
disqualification or removal may be filled only by a majority vote of the
directors then in office, though less than a quorum, and directors so
chosen shall hold office for a term expiring at the annual meeting of
stockholders at which the term of office of the class to which they have
been elected expires and until such director's successor shall have been
duly elected and qualified.
4. Removal. Any director or the entire Board of Directors may be
removed only for cause and only by the vote of the holders of two-thirds
(2/3) of the securities of the Corporation then entitled to vote at an
election of directors voting together as a single class.
SECTION 1.033 QUALIFICATIONS. All directors of the Corporation shall be
natural persons, but need not be residents of Delaware or stockholders of the
Corporation.
SECTION 1.034 RESIGNATIONS. Any director of the Corporation may resign at
any time by giving written notice to the Chairman of the Board, the President,
or the Secretary of the Corporation. Such resignation shall take effect at the
date of the receipt of such notice or at any later time specified therein and,
unless otherwise specified therein, the acceptance of such resignation shall
not be necessary to make it effective. Upon the effectiveness of such
resignation, the vacancy created thereby shall be filled in the manner provided
in Section 3.2 hereof.
SECTION 1.035 ORGANIZATION. At every meeting of the Board of Directors,
the Chairman of the Board, or in the case of a vacancy in the office or absence
of the Chairman of the Board, one of the following officers present in the
order stated: the President, the Vice Presidents in their order of rank, or a
chairman chosen by the affirmative vote of the directors holding two-thirds
(2/3) of the votes of the Board of Directors present, shall act as chairman of
the meeting, and the Secretary, or, in the absence of the Secretary, an
Assistant Secretary, if any, or any other person appointed by the chairman of
the meeting, shall act as secretary of the meeting.
SECTION 1.036 PLACE OF MEETING. All meetings of the Board of Directors of
the Corporation shall be held at the principal offices of the Corporation, or
at such other place within or without the State of Delaware as shall be
designated in a notice of such meeting or otherwise.
SECTION 1.037 ANNUAL AND REGULAR MEETINGS. The Board of Directors shall
meet for the purpose of organization, the election of officers and the
transaction of other business, as soon as practicable after each annual meeting
of stockholders, on the same day and at the same place where such annual
meeting shall be held. Notice of such meeting need not be given. If such annual
meeting is not so held, then the annual meeting
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of the Board of Directors may be held at such other time or place (within
or without the State of Delaware) as shall be specified in a notice thereof
given as required herein. Regular meetings of the Board of Directors may be
held without notice at such time and place as shall be designated from time to
time by the Board of Directors. At such regular meetings, the directors shall
transact such business as may properly be brought before the meeting. Notice of
regular meetings of the Board of Directors need not be given except as
otherwise required by applicable law or these Bylaws.
SECTION 1.038 SPECIAL MEETINGS. Special meetings of the Board of Directors
may be held whenever called by the Chairman of the Board, the President or by
the affirmative vote of twenty percent (20%) or more of the directors then in
office. Except as otherwise provided by applicable law, the Certificate of
Incorporation, or these Bylaws, notice of each such meeting shall be given to
each director by telephone or in writing at least three (3) calendar days (in
the case of notice by telephone, telegram, cable, or facsimile transmission) or
seven (7) calendar days (in the case of notice by mail) before the time at
which the meeting is to be held. Each such notice shall state the time and
place of the meeting to be so held, and shall be deemed to be given at the time
when so made by telephone, sent by telegram, cable, or facsimile transmission,
or deposited in the U.S. mail. Unless otherwise indicated in the notice
thereof, any and all business may be transacted at any special meeting.
SECTION 1.039 QUORUM, MANNER OF ACTING, AND ADJOURNMENT. (a) Each director
shall have one (1) vote on any matter voted upon by the Board of Directors. The
voting and other rights of the Corporation's directors and stockholders are
further defined and limited by the Certificate of Incorporation and the Rights
Agreement.
(b) Except as otherwise provided by applicable law, the Certificate
of Incorporation, the Rights Agreement or these Bylaws, as amended from time to
time, a majority of the total number of directors then in office shall
constitute a quorum for the transaction of business at all meetings of the
Board of Directors, and the act of a majority of the directors present at any
meeting at which there is a quorum shall be the act of the Board. If a quorum
shall not be present at any meeting of the Board of Directors, the directors
present thereat may adjourn the meeting to another date and time by giving
notice to each director not less than five (5) calendar days before the time at
which said adjourned meeting is to be held, in the manner set forth in Section
3.8 hereof. At any adjourned meeting at which a quorum is present, any business
may be transacted that might have been transacted at the meeting as originally
called.
SECTION 1.0310 CONSENT IN LIEU OF MEETING. Except as otherwise provided by
applicable law, the Certificate of Incorporation, or these Bylaws, and
notwithstanding Section 3.8 hereof, any action required or permitted to be
taken at any meeting of the Board of Directors, or of any committee thereof,
may be taken without a meeting if all members of the Board or the committee, as
the case may be, consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the Board or the committee, as the
case may be.
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SECTION 1.0311 CONFERENCE TELEPHONE MEETINGS. Except as otherwise
provided by applicable law, the Certificate of Incorporation, or these Bylaws,
one or more directors may participate in a meeting of the Board of Directors,
or of any committee thereof, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other. Participation in a meeting pursuant to this
section shall constitute presence in person at such meeting.
SECTION 1.0312 EXECUTIVE AND OTHER COMMITTEES. The Board of Directors may,
by resolution adopted by the affirmative vote of a majority of the whole Board
of Directors, designate and name an Executive Committee and one or more other
committees, each committee to consist of one (1) or more directors, provided
that any Executive Committee shall have at least three (3) directors. The Board
may designate one (1) or more directors as alternate members of any committee
to replace any absent or disqualified member at any meeting of the committee.
In the absence or disqualification of a member (and the alternate or
alternates, if any, designated for such member) of any committee, the member or
members thereof present at any meeting and not disqualified from voting,
whether or not such member or members constitute a quorum, may unanimously
appoint another director to act at the meeting in the place of any such absent
or disqualified member.
Any such committee (to the extent provided in the resolution establishing
such committee) shall conduct itself, including with respect to provisions for
votes of its members, as set forth in resolutions adopted by the Board of
Directors, and shall have and may exercise all the powers and authority of the
Board of Directors in the management of the business and affairs of the
Corporation, expressly including the power and authority to declare a dividend,
to adopt a certificate of ownership and merger pursuant to Section 253 of the
Delaware General Corporation Law (the "GCL"), and to authorize the seal of the
Corporation to be affixed to all papers which may require it.
Each committee designated pursuant to this section shall keep regular
minutes of its meetings and report the same to the Board of Directors when
required.
SECTION 1.0313 COMPENSATION OF DIRECTORS. The Board of Directors shall
have the authority to fix the compensation of directors. The directors may be
paid their expenses, if any, of attendance at each meeting of the Board of
Directors and may be paid a fixed sum for attendance at each meeting of the
Board of Directors or a stated salary as director. No such payment shall
preclude any director from serving the Corporation in any other capacity and
receiving compensation therefor; provided that, the Board, in its discretion,
may reduce the compensation of any director who is concurrently receiving
compensation for services rendered to the Corporation as an officer thereof.
Members of special or standing committees may be paid like compensation for
attending committee meetings.
SECTION 1.0314 INTERESTED DIRECTORS. No contract or transaction between
the Corporation and one (1) or more of its directors or officers, or between
the Corporation and
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any other corporation, partnership, association, or other organization in which
one or more of its directors or officers are directors or officers, or have a
financial interest, shall be void or voidable solely for this reason, or solely
because the director or officer is present at or participates in the meeting of
the Board or of a committee thereof which authorizes the contract or
transaction, or solely because his, her or their votes are counted for such
purpose, if:
(a) The material facts as to his or her relationship or interest and
as to the contract or transaction are disclosed or are known to
the Board of Directors or the committee, and the Board or
committee in good faith authorizes the contract or transaction
by the affirmative vote of a majority of the disinterested
directors, even though the disinterested directors comprise less
than a quorum;
(b) The material facts as to his or her relationship or interest and
as to the contract or transaction are disclosed or are known to
the stockholders entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by vote of
the stockholders; or
(c) the contract or transaction is fair to the Corporation as of the
time it is authorized, approved or ratified by the Board of
Directors, a committee thereof, or the stockholders.
Common or interested directors may be counted in determining the presence of a
quorum at a meeting of the Board of Directors or of a committee which
authorizes the contract or transaction.
ARTICLE IV.
NOTICE-WAIVERS
SECTION 1.041 NOTICE. WHAT CONSTITUTES. Except as otherwise provided by
applicable law, the Certificate of Incorporation or the Bylaws, any provision
of applicable law, the Certificate of Incorporation or these Bylaws which
requires notice to be given to any director or stockholder of the Corporation
shall not be deemed or constituted to require personal notice (unless otherwise
expressly provided therein), but rather such notice may be given via telephone,
facsimile or first class mail addressed to such director or stockholder at his
or her address as it appears on the records of the Corporation, with postage
thereon prepaid, and such notice shall be deemed to be given at the time when
the same is deposited in the U.S. mail.
SECTION 1.042 WAIVERS OF NOTICE. Whenever any notice is required to be
given under applicable law, the Certificate of Incorporation or these Bylaws, a
written waiver thereof, signed by the person or persons entitled to such
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Except as otherwise
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provided by applicable law, the Certificate of Incorporation or these Bylaws,
neither the business to be transacted at nor the purposes of, any regular or
special meeting of the stockholders, directors, or a committee of directors
need be specified in any written waiver of notice of such meeting.
Attendance of a person, either in person or by proxy, at any meeting shall
constitute a waiver of notice of such meeting, except when a person attends a
meeting for the express purpose of objecting at the beginning of the meeting to
the transaction of any business because the meeting has not been lawfully
called or convened.
ARTICLE V.
OFFICERS
SECTION 1.051 NUMBER, QUALIFICATIONS AND DESIGNATION. The officers of the
Corporation shall be chosen by the Board of Directors and shall be a President
and a Secretary, and may include one or more Vice Presidents, a Treasurer, and
such other officers as may be elected in accordance with the provisions of
Section 5.3 of this Article V. One person may hold more than one (1) office.
Except as provided below with respect to the Chairman of the Board, and Vice
Chairmen of the Board, officers may, but need not be, directors or stockholders
of the Corporation. The Board of Directors shall also elect, from among the
members of the Board, a Chairman of the Board, and one or more Vice Chairmen of
the Board, each of which shall be deemed to be an officer of the Corporation.
SECTION 1.052 ELECTION, TERM OF OFFICE, RESIGNATION, AND REMOVAL. The
officers of the Corporation, except those elected by delegated authority
pursuant to Section 5.3 of this Article V, shall be elected annually by the
Board of Directors, and each such officer shall hold his or her office until
his or her successor shall have been duly elected and qualified, or until his
or her earlier death, resignation or removal. Any officer may resign at any
time upon written notice to the Corporation. Subject to the terms of any
applicable employment or service agreement, all officers, agents, and employees
shall be subject to removal, with or without cause, at any time by the Board of
Directors [, the Chairman of the Board or the President]. The election or
appointment of an officer shall not of itself create contract rights. Any
vacancy caused by the death, resignation, or removal of any officer, or
otherwise, may be filled by the Board of Directors or pursuant to delegated
authority as provided in Section 5.3 hereof.
SECTION 1.053 OTHER OFFICERS, COMMITTEES, AND AGENTS. The Board of
Directors may from time to time elect such other officers, including Assistant
Secretaries and Assistant Treasurers, and appoint such committees, employees,
or other agents as it deems necessary. Such officers, committee members,
employees, or other agents shall hold their offices for such terms and shall
exercise such powers and perform such duties as are provided in these Bylaws or
as the Board of Directors may from time to time determine by resolution. By
resolution, the Board of Directors may delegate to any officer or committee the
power to elect subordinate officers and to retain or appoint employees
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or other agents, or committees thereof, and to prescribe the authority and
duties of such subordinate officers, committees, employees, or other agents.
Subject to the terms of any applicable employment or service agreement, all
such subordinate officers, agents, and employees shall also be subject to
removal, with or without cause, at any time by the officers or committee
appointing them.
SECTION 1.054 THE CHAIRMAN OF THE BOARD. The Chairman of the Board shall
preside at meetings of the Board of Directors and at meetings of the
stockholders. The Chairman of the Board shall counsel with and advise the
President and perform such other duties as may be from time to time assigned to
the Chairman of the Board of Directors. Except as otherwise provided by
resolution of the Board, the Chairman of the Board shall be ex-officio a member
of all committees of the Board.
SECTION 1.055 THE VICE CHAIRMEN OF THE BOARD. The Vice Chairmen of the
Board shall perform the duties of the Chairman of the Board in the Chairman's
absence (in their order of rank) and such other duties as may from time to time
be assigned to them by the Board of Directors, the Chairman of the Board, or
the President.
SECTION 1.056 THE PRESIDENT. The President shall perform all of the duties
usually incident to such office, and such other duties as may from time to time
be assigned to the President by the Board of Directors. In the absence of the
Chairman of the Board and any Vice Chairmen of the Board, the President shall
preside at all meetings of the stockholders and of the Board of Directors.
SECTION 1.057 THE SECRETARY. The Secretary, or in the Secretary's absence
an Assistant Secretary, (a) shall attend all meetings of the stockholders and
of the Board of Directors and shall record the proceedings of the meetings of
the stockholders and the Board of Directors and of committees of the Board in a
book or books to be kept for that purpose; (b) shall see that notices are given
and records and reports properly kept and filed by the Corporation as required
by law; (c) shall be the custodian of the seal of the Corporation and see that
it is affixed to all documents to be executed on behalf of the Corporation
under its seal; and (d) in general, shall perform all duties incident to the
office of Secretary, and such other duties as may from time to time be assigned
to the Secretary by the Board of Directors, the Chairman of the Board, or the
President.
SECTION 1.058 THE TREASURER. The Treasurer, or in Treasurer's absence, an
Assistant Treasurer, (a) shall have or provide for the custody of, and when
proper pay out, disburse, or otherwise dispose of, the funds or other property
of the Corporation; (b) shall collect and receive or provide for the collection
and receipt of moneys earned by or in any manner due to or received by the
Corporation; (c) shall deposit all funds in his custody as Treasurer in such
banks or other places of deposit as the Board of Directors may from time to
time designate; (d) shall keep accurate financial records and accounts and,
whenever so required by the Board of Directors, render statements showing his
transactions as Treasurer and the financial condition of the Corporation; and
(e) in general, shall discharge
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such other duties as may from time to time by assigned to the Treasurer by the
Board of Directors, the Chairman of the Board, or the President.
SECTION 1.059 SALARIES. The salaries and other compensation of the
officers and agents of the Corporation elected or appointed by the Board of
Directors shall be fixed from time to time by the Board of Directors. The
salaries and other compensation of subordinate officers appointed pursuant to
delegated authority under Section 5.03 hereof shall be fixed from time to time
by the officers or committee appointing them.
ARTICLE VI.
CERTIFICATES OF STOCK, TRANSFER, ETC.
SECTION 1.061 ISSUANCE. Each stockholder shall be entitled to a
certificate or certificates for shares of stock of the Corporation owned by
such stockholder upon request therefor. The stock certificates of the
Corporation shall be consecutively numbered and shall be registered in the
stock ledger and transfer books of the Corporation as they are issued. They
shall be signed by the Chairman of the Board or by the President or a Vice
President, and by the Secretary or an Assistant Secretary, if any, or by the
Treasurer or an Assistant Treasurer, if any, and shall bear the corporate seal,
which may be a facsimile, engraved, or printed. Any and all of the signatures
upon such certificate may be a facsimile, engraved, or printed. In case any
officer, transfer agent, or registrar who has signed, or whose facsimile
signature has been placed upon, any share certificate shall have ceased to be
such officer, transfer agent, or registrar before the certificate is issued, it
may be issued with the same effect as if such person were such officer,
transfer agent, or registrar at the date of its issue.
SECTION 1.062 TRANSFER, LEGENDS, ETC. Upon surrender to the Corporation or
the transfer agent of the Corporation of a certificate for shares duly endorsed
or accompanied by proper evidence of succession, assignation, or authority to
transfer the Corporation shall issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction upon its books.
The Board of Directors may by resolution, (a) impose restrictions on transfer
or registration of transfer of shares of stock of the Corporation, and (b)
require as a condition to the issuance or transfer of such shares that the
person or persons to whom such shares are to be issued or transferred agree in
writing to such restrictions. In the event that any such restrictions on
transfer or registration of transfer are so imposed, the Corporation shall
require that such restrictions be conspicuously noted on all certificates
representing such shares. [In addition, all shares of the Corporation's stock
are subject to several restrictions and limitations as set forth in the Rights
Agreement, which are to be noted on all certificates representing such shares.]
SECTION 1.063 LOST, STOLEN, DEFACED, WORN OUT, OR DESTROYED. The Board of
Directors may direct a new certificate or certificates to be issued in place of
any certificate or certificates theretofore issued by the Corporation alleged
to have been lost, stolen, defaced, worn-out, or destroyed, upon the making of
an affidavit of that fact by the
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person claiming the certificate of stock to be lost, stolen, defaced, worn out,
or destroyed. When authorizing such issuance of a new certificate or
certificates, the Corporation may, as a condition precedent thereto, (a)
require the owner of any defaced or worn out certificate to deliver such
certificate to the Corporation and order the cancellation of the same, and (b)
require the owner of any lost, stolen or destroyed certificate or certificates,
or his legal representative, to advertise the same in such manner as the
Corporation shall require and to give the Corporation a bond in such sum as it
may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost, stolen,
or destroyed. Thereupon, the Corporation may cause to be issued to such person
a new certificate in replacement for the certificate alleged to have been lost,
stolen, defaced, worn out, or destroyed. Upon the stub of every new certificate
so issued shall be noted the fact of such issue and the number, date, and name
of the registered owner of the lost, stolen, defaced, worn out, or destroyed
certificate in lieu of which the new certificate is issued. Every certificate
issued hereunder shall be issued without payment to the Corporation for such
certificate; provided that, there shall be paid to the Corporation a sum equal
to any exceptional expenses incurred by the Corporation in providing for or
obtaining any such indemnity and security as is referred to herein.
SECTION 1.064 RECORD HOLDER OF SHARES. Except as otherwise provided by
applicable law, the Certificate of Incorporation, or these Bylaws, the
Corporation (a) shall be entitled to recognize the exclusive right of a person
registered on its books as the owner of shares to receive dividends and to vote
as such owner, (b) shall be entitled to hold liable for any required calls and
assessments a person so registered, and (c) shall not be bound to recognize (i)
any entity or person as a transferee of stock unless such entity or person both
complies with all transfer and other restrictions, if any, imposed hereby or by
the Certificate of Incorporation, or (ii) any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof.
Unless otherwise required under applicable law, the Corporation may treat
a fiduciary as having capability and authority to exercise all rights of
ownership in respect of shares of record in the name of a decedent holder, a
person, firm, or corporation in conservation, receivership, or bankruptcy, a
minor, an incompetent person, or a person under disability, as the case may be,
for whom such fiduciary is acting, and the Corporation, its transfer agent, and
its registrar, if any, upon presentation of evidence of appointment of such
fiduciary shall be under no duty to inquire as to the powers of such fiduciary
and shall not be liable for any loss caused by any act done or omitted to be
done by the Corporation or its transfer agent or registrar, if any, in reliance
thereon.
SECTION 1.065 DETERMINATION OF STOCKHOLDERS OF RECORD. In order that the
Corporation may determine the stockholders entitled to notice of or to vote at
any meeting of stockholders or any adjournment thereof, or to express consent
to corporate action in writing without a meeting, or entitled to receive
payments of any dividend or other distribution or allotment of any rights, or
entitled to exercise any rights in respect of any change, conversion, or
exchange of stock, or for the purpose of any other lawful action, the
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Board of Directors may fix, in advance, a record date, which shall not be more
than sixty (60) nor less than (10) calendar days before the date of such
meeting, nor more than sixty (60) calendar days prior to any other action.
If no record date is fixed:
(a) The record date for determining stockholders entitled to notice
of or to vote at a meeting of stockholders shall be at the close
of business on the day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the
day next preceding the day on which the meeting is held.
(b) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which
the Board of Directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting provided
that the Board of Directors may fix a new record date for the adjourned
meeting.
SECTION 1.066 APPOINTMENT OF TRANSFER AGENTS, REGISTRARS, ETC. The Board
of Directors may from time to time by resolution appoint (a) one (1) or more
transfer agents and registrars for the shares of stock of the Corporation, (b)
a plan agent to administer any employee benefit, dividend reinvestment, or
similar plan of the Corporation, and (c) a dividend disbursing agent to
disburse any and all dividends authorized by the Board and payable with respect
to the shares of stock of the Corporation. The Board of Directors shall also
have authority to make such other rules and regulations not inconsistent with
applicable law, the Certificate of Incorporation, or these Bylaws, as it deems
necessary or advisable with respect to the issuance, transfer, and registration
of certificates for shares and the shares of stock represented thereby.
ARTICLE VII.
GENERAL PROVISIONS
SECTION 1.071 DIVIDENDS. Subject to applicable law, the Certificate of
Incorporation and the Rights Agreement, dividends upon the shares of capital
stock of the Corporation may be declared by the Board of Directors at any
regular or special meeting. Dividends may be paid in cash, in property, or in
shares of the capital stock of the Corporation, or in any combination thereof,
but only out of funds available for the payment of dividends as provided by
applicable law. Any dividends declared upon the stock of the Corporation shall
be payable on such date or dates as the Board of Directors shall determine by
resolution. If the date fixed for the payment of any dividend shall in any year
fall upon a legal holiday, then the dividend payable on such date shall be paid
on the next day not a legal holiday.
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Before payment of any dividend, there may be set aside out of any funds of
the Corporation available for dividends such sum or sums as the Board of
Directors from time to time, in its discretion, shall determine by resolution
is proper as a reserve or reserves to meet contingencies, for equalizing
dividends, or for repairing or maintaining any property of the Corporation, or
for such other purpose as the Board of Directors shall so determine is in the
best interests of the Corporation and its stockholders. The Board may modify or
abolish any such reserves in the manner in which it was created.
SECTION 1.072 CONTRACTS, ETC. Except as otherwise provided by applicable
law, the Certificate of Incorporation, or these Bylaws, the Board of Directors
may authorize any officer or officers, any employee or employees, or any agent
or agents, to enter into any contract or to execute, acknowledge, or deliver
any agreement, deed, mortgage, bond, or other instrument in the name of and on
behalf of the Corporation and to affix the Corporation's seal thereon. Such
authority may be general or confined to specific instances.
SECTION 1.073 CHECKS. All checks, notes, obligations, bills of exchange,
acceptances, or other orders in writing shall be signed by such person or
persons as the Board of Directors may from time to time designate by
resolution.
SECTION 1.074 CORPORATE SEAL. The corporate seal shall have inscribed
thereon the name of the Corporation, the year of its organization, and the
words "Corporate Seal, Delaware." The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or in any other manner reproduced.
SECTION 1.075 DEPOSITS. All funds of the Corporation shall be deposited
from time to time to credit of the Corporation in such banks, trust companies,
or other depositories as the Board of Directors may approve or designate, and
all such funds shall be withdrawn only upon checks or other orders signed by
such one or more officers, employees, or agents as the Board of Directors shall
from time to time designate.
1. The City and Developer hereby agree that the funds paid by
Developer for FM 720 as set forth in the Facilities Agreement
(the "FM 720 Funds") will be used by the City for the
construction of Lake Forest Drive from FM 720 to State Highway
121.
2. The City agrees to diligently move forward with the construction
of two lanes of Lake Forest Drive from FM 720 to State Highway
121 by acquiring all necessary right of ways and funding in
addition to the FM 720 Funds paid by Developer pursuant to the
Facilities Agreement with construction to begin no later than
December 31, 1997.
3. Developer will be reimbursed in full for all FM 720 Funds used
for construction of Lake Forest Drive as payments are received
by the City from land owners adjoining Lake Forest Drive from FM
720 to State Highway 121
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or as otherwise collected by the City pursuant to applicable
Roadway Impact Fee Ordinances. Any reimbursements received prior
to payment in full by Developer of the FM 720 Funds will be a
credit against amounts owed by Developer for this purpose
pursuant to the Facilities Agreement.
4. In the event the City imposes a Roadway Impact Fee and FM 720
adjacent to Developer's property made the subject of the
Facilities Agreement is included in the Improvements Plan,
Developer will pay such portion of the Roadway Impact Fee as is
represented by the construction costs for FM 720 adjacent to
Developer's property made the subject of the Facilities
Agreement and Developer shall pay the fee in the same manner as
all other property owners in the roadway service area containing
Developer's property made the subject of this Facilities
Agreement.
5. In the event FM 720 adjacent to Developer's property made the
subject of this Facilities Agreement has not been constructed
within three (3) years of the date of this First Amendment or
Lake Forest Drive from FM 720 to State Highway 121 has not been
constructed to completion prior to December 31, 1998, all FM 720
Funds paid by Developer will be refunded to Developer with
interest and Developer shall have no further obligation for
payment of the FM 720 Funds.
[SECTION 1.076 EXAMINATION OF CORPORATE RECORDS. Upon written demand under
oath stating the purpose thereof, every stockholder of record shall have a
right to examine, in person or by attorney or other agent, during ordinary
business hours and for any proper purpose, the Corporation's stock ledger, a
list of its stockholders, and its other books and records and to make copies or
extracts therefrom. A proper purpose shall mean a purpose reasonably related to
such person's interest as a stockholder. In every instance where an attorney or
other agent shall be the person who seeks the right of inspection, the demand
under oath shall be accompanied by a power of attorney or other writing which
authorizes the attorney or other agent to so act on behalf of the stockholder.
The demand under oath shall be directed to the Corporation as its registered
office in Delaware or at its principal place of business.]
Any director shall have the right to examine the Corporation's stock
ledger, a list of its stockholders, and its other books and records during
ordinary business hours for a purpose reasonably related to his or her position
as a director.
SECTION 1.077 INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Corporation
shall indemnify to the fullest extent authorized or permitted by law any
current or former director or officer of the Corporation (or his or her
testator or estate) made or threatened to be made a party to any threatened,
pending, or completed action, suit, or proceeding, whether criminal, civil
administrative, or investigative, by reason of the fact that he or she is or
was a director or officer of the Corporation or is or was serving, at the
request of the Corporation, as a director, officer, employee, or agent of
another corporation, partnership,
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joint venture, trust, employee benefit plan, or other enterprise. Subject to
applicable law, the Corporation may indemnify an employee or agent of the
Corporation to the extent that and with respect to such proceedings as, the
Board of Directors may determine by resolution, in its discretion.
SECTION 1.078 AMENDMENT OF BYLAWS. The Board of Directors is expressly
authorized to adopt, amend or repeal the Bylaws of the corporation. Any Bylaws
made by the directors under the powers conferred hereby may be amended or
repealed by the directors or by the stockholders. Notwithstanding the foregoing
and anything contained in the Bylaws to the contrary, the Bylaws shall not be
amended or repealed by the stockholders, and no provision inconsistent
therewith shall be adopted by the stockholders, without the affirmative vote of
the holders of at least two-thirds (2/3) of the voting power of all shares of
the corporation entitled to vote generally in the election of directors voting
together as a single class.
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EXHIBIT 4.3
RIGHTS AGREEMENT
This Rights Agreement (the "AGREEMENT"), is entered into as of the 25th
day of June, 1996, by and among Pegasus Systems, Inc., a Delaware corporation
(the "COMPANY") and the purchasers of the Company's Series A Preferred Stock
listed on Schedule I attached hereto (the "PURCHASERS") and, for purposes of
certain provisions hereof, the stockholders listed on Schedule II hereto,
including without imitation Lodging Network, Inc., a Delaware corporation
("LNI") (each an "EXISTING STOCKHOLDER" and collectively the "Existing
Stockholders") and the stockholders listed on Schedule III hereto (each a
"Management Holder" and collectively the "MANAGEMENT HOLDERS").
RECITALS
A. The Purchasers and the Company are parties to that certain
Series A Preferred Stock Purchase Agreement dated as of the date hereof (the
"PURCHASE AGREEMENT"),
B. The Existing Stockholders (other than LNI) and the Management
Holders currently hold capital stock of the Company, and the parties desire to
provide certain rights to such holders as provided herein.
C. The Company and LNI have agreed that the Company shall
repurchase from LNI a portion of the shares of capital stock held by LNI in The
Hotel Clearing Corporation, a subsidiary of the Company ("HCC'') and shall issue
shares of Common Stock of the Company to LNI upon conversion by LNI of the
balance of the HCC shares held by LNI, and to grant certain rights to LNI as
set forth herein.
D. The execution of this Agreement is a condition to the closing
of the transactions contemplated by the Purchase Agreement.
E. The Purchasers, the Existing Stockholders, the Management
Holders and the Company desire that the transactions contemplated by the
Purchase Agreement be consummated.
NOW, THEREFORE, in reliance on the foregoing recitals, and in and for
the mutual covenants and consideration set forth herein, the parties hereto
agree as follows:
1. CERTAIN DEFINITIONS. As used in this Agreement, the following
terms shall have the following respective meanings:
1.1 The terms "AFFILIATE" and "AFFILIATED" shall refer to
any person who is an "affiliate" as defined in Rule 12b-2 of the General Rules
and Regulations under the Securities Exchange Act of 1934, as amended. For
purposes of this definition, "person" shall mean any individual, firm,
corporation, partnership, trust, incorporated or unincorporated association,
joint venture, joint stock company, governmental authority or other entity of
any kind, and shall include any successor (by merger or otherwise of such
entity.
2
1.2 "COMMISSION" shall mean the Securities and Exchange
Commission or any other federal agency at the time administering the Securities
Act.
1.3 "COMMON STOCK" shall mean the Company's Common Stock,
$0.01 par value per share.
1.4 "CONVERSION STOCK" shall mean the Common Stock issued
or issuable pursuant to conversion of the Series A Preferred.
1.5 "EXISTING STOCKHOLDERS" shall mean the Existing
Stockholders as listed on Schedule II hereof and any person holding Other
Shareholder Stock to whom the rights under this Agreement have been transferred
in accordance with Section 14 hereof.
1.6 "HOLDER" shall mean any Purchaser, Existing
Stockholder or Management Holder holding Registrable Securities and any person
holding Registrable Securities to whom the rights under this Agreement have
been transferred in accordance with Section 14 hereof.
1.7 "INITIATING HOLDERS" shall mean any Holder or Holders
(other than Management Holders and Existing Stockholders) holding, in the
aggregate, at least forty percent (40%) of the then outstanding Registrable
Securities (not including Management Stock or Other Shareholder Stock).
1.8 The term "MAJOR HOLDER" shall mean each Holder (but
not any Management Holder or Existing Stockholder) who is a holder of at least
50,000 shares of Registrable Securities (as adjusted for any stock split, stock
dividend or similar capital reorganization), and permitted assignees under
Section 17(e) hereof.
1.9 "MANAGEMENT HOLDERS" shall mean the Management
Holders as listed on Schedule III hereof and any person holding Management
Stock to whom the rights under this Agreement have been transferred in
accordance with Section 14 hereof.
1.10 "REGISTRABLE SECURITIES" shall mean (a) the
Conversion Stock and any Common Stock of the Company issued or issuable in
respect of the Conversion Stock, or other securities issued or issuable
pursuant to the conversion of the Series A Preferred upon any stock split,
dividend, combination, recapitalization or similar event, or any Common Stock
otherwise issued or issuable with respect to the Series A Preferred; (b) all
shares of Common Stock of the Company currently held by the Existing
Stockholders as well as the 67,300 shares of Common Stock to be issued to LNI
in connection with the repurchase of HCC stock, as set forth on Schedule II
hereto (the "Other Shareholder Stock"), and any Common Stock of the Company
issued or issuable in respect of such Other Shareholder Stock upon any stock
split, dividend, combination, recapitalization or similar event (which
additional shares shall also be referred to as Other Shareholder Stock); and
(c) with respect to any registration subsequent to the Company's initial
Qualified Public Offering (as defined below), up to 25% of the shares of the
Common Stock currently held by the Management Holders, as specified on Schedule
III hereto, and held as of the time of such registration by Management Holders
who shall continue to be employees or consultants to the Company (the
"Management Stock"), and any Common Stock of the Company issued
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or issuable in respect of such Management Stock upon any stock split, dividend,
combination, recapitalization or similar event (which additional shares shall
also be referred to as Management Stock); provided, however, that shares of
Common Stock or other securities shall only be treated as Registrable
Securities if and so long as they have not been (i) sold to or through a broker
or dealer or underwriter in a public distribution or a public securities
transaction, or (ii) subject to Section 16 below, sold or are available for
sale in the opinion of counsel to the Company in a transaction exempt from the
registration and prospectus delivery requirements of the Securities Act so that
all transfer restrictions and restrictive legends with respect thereto are
removed upon the consummation of such sale.
1.11 The terms "REGISTER," "REGISTEREd" and "REGISTRATION"
refer to a registration effected by preparing and filing a registration
statement in compliance with the Securities Act, and the declaration or
ordering of the effectiveness of such registration statement by the Commission.
1.12 "REGISTRATION EXPENSES" shall mean all expenses,
except as otherwise stated below, incurred by the Company in complying with
Sections 5, 6 and 7 hereof, including, without limitation, all registration,
qualification and filing fees, printing expenses, escrow fees, fees and
disbursements of counsel for the Company, fees and disbursements for one
counsel for the Holders selected by the Holders and approved by the Company
(which consent will not be unreasonably withheld), blue sky fees and expenses,
and the expense of any special audits incident to or required by any such
registration, but excluding (a) the compensation of regular employees of the
Company, which shall be paid in any event by the Company, and (b) Selling
Expenses.
1.13 "RESTRICTED SECURITIES" shall mean the securities of
the Company required to bear the legend set forth in Section 3 hereof.
1.14 "SECURITIES ACT" shall mean the Securities Act of
1933, as amended, or any similar federal statute and the rules and regulations
of the Commission thereunder, all as the same shall be in effect at the time.
1.15 "SELLING EXPENSES" shall mean all underwriting
discounts, selling commissions and stock transfer taxes applicable to the
securities registered by the Holders and, except as set forth above, all
reasonable fees and disbursements of counsel for any Holder other than the fees
and disbursements of counsel included in Registration Expenses.
1.16 "SERIES A PREFERRED" shall mean the Company's Series
A Preferred Stock, $0.01 par value per share, issued pursuant to the Purchase
Agreement.
1.17 "UNDERWRITER" shall mean the managing underwriter or
underwriters in a public offering pursuant to Section 5, Section 6 or Section 7
hereof.
2. RESTRICTIONS ON TRANSFERABILITY. The Series A Preferred and
the Conversion Stock shall not be sold, assigned, transferred or pledged except
upon the conditions specified in this Agreement, which conditions are intended
to ensure compliance with the provisions of the Securities Act and
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applicable state and foreign securities laws. Each Purchaser shall cause any
proposed purchaser, assignee, transferee, or pledgee of Series A Preferred or
Conversion Stock held by such Purchaser to agree to take and hold such
securities subject to the provisions and upon the conditions specified in this
Agreement.
3. RESTRICTIVE LEGEND. Each certificate representing (a) the
Series A Preferred Stock, (b) the Conversion Stock and (c) any other securities
issued in respect of the Series A Preferred or the Conversion Stock upon any
stock split, stock dividend, recapitalization, merger, consolidation or similar
event shall (unless otherwise permitted by the provisions of Section 4 below)
be stamped or otherwise imprinted with the following legends (in addition to
any legend required under applicable state or foreign securities laws):
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH
SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION OR UNLESS THE COMPANY RECEIVES
AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT
STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF
SAID ACT. COPIES OF THE AGREEMENTS COVERING THE
PURCHASE OF THESE SHARES, IMPOSING CERTAIN RIGHTS OF
FIRST REFUSAL AND RESTRICTING THEIR TRANSFER MAY BE
OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE
HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY
OF THE COMPANY AT THE PRINCIPAL EXECUTIVE OFFICES OF
THE COMPANY."
Each Purchaser consents to the Company making a notation on
its records and giving instructions to any transfer agent of the Series A
Preferred or the Common Stock in order to implement the restrictions on
transfer established pursuant to this Agreement or applicable law.
4. NOTICE OF PROPOSED TRANSFERS. The holder of each certificate
representing Restricted Securities by acceptance thereof agrees to comply in
all respects with the provisions of this Section 4. Prior to any proposed sale,
assignment, transfer or pledge of any Restricted Securities (other than (a) a
transfer not involving a change in beneficial ownership or (b) in transactions
involving the distribution without consideration of Restricted Securities by
any of the Purchasers to any of its partners, or retired partners, or to the
estate of any of its partners or retired partners, so long as each such
transferee agrees in writing to be bound by the terms of this Agreement),
unless there is in effect a registration statement under the Securities Act
covering the proposed transfer, the holder thereof shall give written notice to
the Company of such holder's intention to effect such transfer, sale,
assignment or pledge. Each such notice shall describe the manner and
circumstances of the proposed transfer, sale, assignment or pledge in
sufficient detail, and shall be accompanied, at such holder's expense by either
(a) an unqualified written opinion of legal counsel addressed to the Company,
to the effect that the proposed transfer of the Restricted Securities may be
effected without registration under the Securities Act, or (b) a "no action"
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letter from the Commission to the effect that the transfer of such securities
without registration will not result in a recommendation by the staff of the
Commission that action be taken with respect thereto, whereupon the holder of
such Restricted Securities shall be entitled to transfer such Restricted
Securities in accordance with the terms of the notice delivered by the holder
to the Company. Each certificate evidencing the Restricted Securities
transferred as above provided shall bear, except if such transfer is made
pursuant to Rule 144 (or similar successor provision), the appropriate
restrictive legend set forth in Section 3 above, except that such certificate
shall not bear such restrictive legend if in the opinion of counsel for such
holder and the Company such legend is not required in order to establish
compliance with any provision of the Securities Act or this Agreement.
5. REQUESTED REGISTRATION.
5.1 Notice of Registration; Registration. In case the
Company shall receive from Initiating Holders a written request that the
Company effect any registration, qualification or compliance (other than a
registration on Form S-3 or any successor form) with respect to at least 20% of
the Registrable Securities then held by the Initiating Holders (or any lesser
percentage resulting in an aggregate offering price to the public of at least
$10,000,000 at a price of at least $13.00 per share (as adjusted for stock
splits, dividends, subdivision, combinations, reclassifications and like
events)), the Company will:
(i) promptly give written notice of the proposed
registration to all other Holders; and
(ii) as soon as practicable, use all reasonable
efforts to effect such registration, qualification or compliance (including,
without limitation, the execution of an undertaking to file post-effective
amendments, appropriate qualification under applicable blue sky or other state
securities laws and appropriate compliance with applicable regulations issued
under the Securities Act) as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Registrable
Securities as are specified in such request, together with all or such portion
of the Registrable Securities of any Holder or Holders joining in such request
as are specified in a written request given within twenty (20) days after
receipt of such written notice from the Company, provided, however, that the
Company shall not be obligated to take any action to effect any such
registration, qualification or compliance pursuant to this Section 5:
(1) In any particular jurisdiction in
which the Company would be required to qualify to do business or execute a
general consent to service of process in effecting such registration,
qualification or compliance unless the Company is already subject to service in
such jurisdiction and except as may be required by the Securities Act;
(2) Prior to the earlier of (a) three
(3) years following the date of this Agreement, or (b) six months after the
effective date of the registration statement pertaining to the first
underwritten firm commitment public offering of securities of the Company for
its own account (other than a registration relating solely to a Commission Rule
145 transaction or a registration relating solely to employee benefit plans);
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(3) After the Company has effected
two (2) registrations pursuant to this Section 5 and such registrations have
been declared or ordered effective and all or a portion of the securities
offered pursuant to such registrations have been sold; or
(4) If at the time of the request
to register Registrable Securities the Company gives notice within thirty (30)
days of such request that it is engaged or has bona fide plans to engage within
thirty (30) days of the time of the request in a firmly underwritten registered
public offering in which the Holders may include Registrable Securities
pursuant to Section 5, 6 or 7 hereof.
Subject to the foregoing clauses (l) through (4) and to Section 5.3,
the Company shall file a registration statement covering the Registrable
Securities so requested to be registered as soon as practicable after receipt
of the request of the Initiating Holders.
5.2 Underwriting
(a) If the Initiating Holders intend to
distribute the Registrable Securities covered by their request by means of an
underwriting, they shall so advise the Company as a part of their request made
pursuant to Section 5 and the Company shall include such information in the
written notice referred to in Section 5.1. The right of any Holder to
registration pursuant to Section 5 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent requested (unless
otherwise mutually agreed by a majority in interest of the Initiating Holders
and such Holder) as provided herein.
(b) The Company shall (together with all Holders
proposing to distribute their securities through such underwriting) enter into
an underwriting agreement in customary form with the Underwriter selected for
such underwriting by a majority in interest of the Initiating Holders. If any
Holder disapproves of the terms of the underwriting, such person may elect to
withdraw therefrom by written notice to the Company, the Underwriter and the
Initiating Holders. The Registrable Securities and/or other securities so
withdrawn from such underwriting shall also be withdrawn from such
registration; provided, however, that, if by the withdrawal of such Registrable
Securities a greater number of Registrable Securities held by other Holders may
be included in such registration (up to the maximum of any limitation imposed
by the underwriters), then the Company shall offer to all Holders who have
included Registrable Securities in the registration the right to include
additional Registrable Securities in proportion (as nearly as practicable) to
the total amount of Registrable Securities held by each such Holder.
(c) Notwithstanding any other provision of this
Section 5, if the Underwriter determines that marketing factors require a
limitation on the number of shares to be underwritten, the Underwriter may
limit the number of Registrable Securities to be included in the registration
and underwriting; provided, however, that the number of shares of Registrable
Securities offered by the Holders that may be included in the registration and
underwriting shall be allocated among the Holders in proportion, as nearly as
practicable, to the respective aggregate amounts of Registrable Securities held
by such Holders at the time of filing the registration statement. If the
Underwriter has not so limited the
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number of Registrable Securities to be underwritten, the Company may include
securities for its own account or the account of others in such registration if
the Underwriter so agrees and if the number of Registrable Securities which
would otherwise have been included in such registration and underwriting will
not thereby be limited or the price applicable to such included Registrable
Securities will not thereby be reduced.
5.3 Delay of Registration. If the Company shall furnish
to the Initiating Holders a certificate signed by the President of the Company
stating that, in the good faith judgment of the Board of Directors of the
Company, it would be not in the best interests of the Company and its
stockholders for such registration statement (including any supplement or
amendment thereto) to be filed on or before the date filing would be required
and it is therefore appropriate to defer such filing, then the Company may
direct that such request for registration be delayed for a period not in excess
of sixty (60) days, such right to delay a request to be exercised by the
Company no more than twice in any twelve month period.
6. COMPANY REGISTRATION.
6.1 Notice of Registration. If at any time or from time
to time the Company shall determine to register any of its equity securities,
either for its own account or the account of a security holder or holders,
other than (a) a registration relating solely to employee benefit plans, or (b)
a registration relating solely to a Rule 145 transaction, the Company shall:
(i) promptly give to each Holder written notice thereof, and
(ii) include in such registration (and any related
qualification under blue sky laws or other compliance), and in any
underwriting involved therein, all the Registrable Securities specified in a
written request or requests, made within twenty (20) days after receipt of such
written notice from the Company, by any Holder.
6.2 Underwriting. If the registration of which the
Company gives notice is for a registered public offering involving an
underwriting, the Company shall so advise the Holders as a part of the written
notice given pursuant to Section 6.l(i). In such event the right of any
Holder to registration pursuant to this Section 6 shall be conditioned upon
such Holder's participation in such underwriting and the inclusion of
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting
shall (together with the Company) enter into an underwriting agreement in
customary form with the Underwriter, selected for such Underwriting by the
Company. Notwithstanding any other provision of this Section 6, if the
Underwriter determines that marketing factors require a limitation of the
number of shares to be underwritten, the underwriter may limit, on a pro rata
basis, the Registrable Securities to be included in such registration;
provided, however, that in no public offering shall other holders of
"piggyback" registration rights participate in such offering unless the Holders
have participated to the full extent requested. The Company shall so advise
all Holders distributing their securities through such underwriting and the
number of shares of Registrable Securities that may be included in the
registration and underwriting shall be allocated among all Holders in
proportion, as nearly as practicable, to the respective amounts of Registrable
Securities held by such Holders at the time of filing the registration
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statement. To facilitate the allocation of shares in accordance with the above
provisions, the Company may round the number of shares allocated to any Holder
to the nearest one hundred (100) shares. If any Holder disapproves of the terms
of any such underwriting, he may elect to withdraw therefrom by written notice
to the Company and the managing underwriter.
6.3 Right to Terminate Registration. The Company shall
have the right to terminate or withdraw any registration initiated by it under
this Section 6 prior to the effectiveness of such registration whether or not
any Holder has elected to include securities in such registration.
7. REGISTRATION ON FORM S-3.
(a) If Initiating Holders request that the Company file a
registration statement on Form S-3 (or any successor form to Form 5-3) for a
public offering of shares of the Registrable Securities the reasonably
anticipated aggregate price to the public of which, net of underwriting
discounts and commissions, would exceed $500,000, and the Company is a
registrant entitled to use Form S-3 to register the Registrable Securities for
such an offering, the Company shall (i) promptly give written notice of the
proposed registration to all other Holders, and (ii) as soon as practicable,
use all reasonable efforts to effect such registration, qualification or
compliance (including, without limitation, the execution of an undertaking to
file post-effective amendments, appropriate qualification under applicable blue
sky or other state securities laws and appropriate compliance with applicable
regulations issued under the Securities Act) as may be so requested and as
would permit or facilitate the sale and distribution of all or such portion of
such Registrable Securities as are specified in such request, together with all
or such portion of the Registrable Securities of any Holder or Holders joining
in such request as are specified in a written request given within twenty (20)
days after receipt of such written notice from the Company, use all reasonable
efforts to cause such Registrable Securities to be registered for the offering
on such form and to cause such Registrable Securities to be qualified in such
jurisdictions as the Initiating Holders may reasonably request; provided,
however, that the Company shall not be obligated to effect more than four (4)
registrations under this Section 7. The substantive provisions of Section 6.2,
excluding all provisions relating to the rights of the Underwriter to exclude
certain percentages of Registrable Securities for a subject offering, shall be
applicable to each registration initiated under this Section 7.
(b) Notwithstanding the foregoing, the Company shall not
be obligated to take any action pursuant to this Section 7: (i) more than once
in any twelve (12) month period; (ii) in any particular jurisdiction in which
the Company would be required to execute a general consent to service of
process in effecting such registration, qualification or compliance unless the
Company is already subject to service in such jurisdiction and except as may be
required by the Securities Act; (iii) if the Company, within ten (10) days of
the receipt of the request of Initiating Holders pursuant to this Section 7,
gives notice of its bona fide intention to effect the filing of a registration
statement with the Commission within sixty (60) days of receipt of such request
(other than with respect to a registration statement relating to a Rule 145
transaction, an offering solely to employees or any other registration which is
not appropriate for the registration of Registrable Securities) in which such
Holders can exercise their rights pursuant to Section 6 hereof; or (iv) during
the period starting with the date sixty (60) days prior to the Company's
estimated date of filing of, and ending on the date three (3) months
immediately following, the effective date of any registration statement
pertaining to securities of the Company (other
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than a registration of securities in a Rule 145 transaction or with respect to
an employee benefit plan), provided that the Company is actively employing in
good faith all reasonable efforts to cause such registration statement to
become effective.
(c) Registrations effected pursuant to this Section 7
shall not be counted as demands for registration or registrations effected
pursuant to Section 5 or Section 6, respectively.
8. LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after
the date of this Agreement, the Company shall not, without the consent of (i)
Holders of in excess of 50% of the Registrable Securities then outstanding, and
(ii) Holders of in excess of 50% of the Registrable Securities held by Holders
other than Existing Holders and Management Holders, enter into any agreement
granting any holder or prospective holder of any securities of the Company
registration rights, including standoff rights, superior to the registration
rights granted Holders hereunder.
9. EXPENSES OF REGISTRATION. All Registration Expenses incurred
in connection with all registrations pursuant to Section 5, Section 6 and
Section 7 shall be borne by the Company. Unless otherwise stated, all Selling
Expenses relating to securities registered on behalf of the Holders shall be
borne by the Holders of such securities pro rata on the basis of the number of
shares so registered. In connection with any registration pursuant to Sections
5 and 6, if the participating Holders elect to be represented by counsel for
the Company, the Company shall pay reasonable fees and disbursements of one
counsel incurred in so representing such participating Holders.
10. REGISTRATION PROCEDURES. In the case of each registration,
qualification or compliance effected by the Company pursuant to this Agreement,
the Company shall keep each Holder or its counsel advised in writing as to the
initiation of each registration, qualification and compliance and as to the
completion thereof At its expense the Company shall:
(a) Prepare and file with the Commission a registration
statement, and all requisite supplements and amendments thereto, with respect
to such securities and use its best efforts to cause such registration
statement, as amended, to become and remain effective for at least one hundred
twenty (120) days;
(b) Furnish to the Holders or their counsel participating
in such registration and to the underwriters of the securities being registered
such reasonable number of copies of the registration statement, and all
supplements and amendments thereto, preliminary prospectus, final prospectus
and such other documents as such underwriters may reasonably request in order
to facilitate the public offering of such securities and such other information
necessary to allow the Holders participating in such registration to remain
reasonably informed about the public offering;
(c) With respect to registrations effected pursuant to
Section 6 and Section 7 above, use its best efforts to register and qualify the
securities covered by such registration statement under such other securities
or blue sky laws of such jurisdictions as shall be reasonably requested by the
Holders; provided, however, that the Company shall not be required in
connection therewith or as a condition
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thereto to qualify to do business or to file a general consent to service for
process in any such states or jurisdictions;
(d) With respect to registrations effected pursuant to
Section 7 above, in the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the Underwriter of such offering;
(e) Notify each Holder of Registrable Securities or its
counsel covered by such registration statement, at any time when a prospectus
relating thereto is required to be delivered under the Securities Act, of the
happening of any event as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein
or necessary to make the statements therein not misleading in the light of the
circumstances then existing; and
(f) At the request of any Holder requesting registration
of Registrable Securities pursuant to Section 5, Section 6 or Section 7 above,
furnish to the Holders participating in such registration and to the
underwriters, if any, of such offering, on the date that such Registrable
Securities are delivered to the underwriters for sale in connection with a
registration statement pursuant to SectionS, Section 6 or Section 7 above, if
such securities are being sold through underwriters, or, if such securities are
not being sold through underwriters, on the date that the registration
statement with respect to such securities becomes effective, (i) an opinion,
dated such date, of counsel representing the Company for the purposes of
registration addressed to the underwriters, if any, and to the Holders
requesting registration of Registrable Securities and (ii) a letter, dated such
date, from the independent certified public accountants of the Company, in form
and substance as is customarily given by independent public accountants to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and to the Holders requesting registration of Registrable Securities.
11. INDEMNIFICATION.
(a) The Company will indemnify each Holder, each of its
officers and directors and partners, and each person controlling such Holder
within the meaning of Section 15 of the Securities Act, with respect to which
registration, qualification or compliance has been effected pursuant to this
Agreement, and each underwriter, if any, and each person who controls any
underwriter within the meaning of Section 15 of the Securities Act, or the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), against all
expenses, claims, losses, damages or liabilities (joint or several) (or actions
in respect thereof), to which they become subject under the Securities Act or
the Exchange Act, including any of the foregoing incurred in settlement of any
litigation, commenced or threatened, arising out of or based on any untrue
statement (or alleged untrue statement) of a material fact contained in any
registration statement, prospectus, offering circular or other document, or any
amendment or supplement thereto, incident to any such registration,
qualification or compliance, or based on any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances in which they
were made, not misleading, or any violation by the Company of the Securities
Act or the Exchange Act or any rule or regulation promulgated thereunder
applicable to the Company in connection with any such registration,
qualification or
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compliance, and the Company will pay to each such Holder, each of its officers
and directors, and each person controlling such Holder, each such underwriter
and each person who controls any such underwriter, any legal and any other
expenses reasonably incurred as such expenses are incurred in connection with
investigating, preparing or defending any such claim, loss, damage; liability
or action, provided that the Company will not be liable in any such case to the
extent that any such claim, loss, damage, liability or expense arises out of or
is based on any untrue statement or omission or alleged untrue statement or
omission, made in reliance upon and in conformity with written information
furnished to the Company by an instrument duly executed by such Holder
controlling person or underwriter and stated to be specifically for use
therein; provided, however, that the indemnity agreement contained in this
Section 11(a) shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability or action if such settlement is effected without the
consent of the Company, which consent shall not be unreasonably withheld.
(b) Each Holder will, if Registrable Securities held by
such Holder are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Company, each of
its directors and officers, each underwriter, if any, of the Company's
securities covered by such a registration statement, each person who controls
the Company or such underwriter within the meaning of Section 15 of the
Securities Act or the Exchange Act, and each other such Holder, each of its
officers and directors and each person controlling such Holder within the
meaning of Section 15 of the Securities Act or the Exchange Act, against all
claims, losses, damages and liabilities (or actions in respect thereof) to
which any of the foregoing persons may become subject under the Securities Act
or the Exchange Act, arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and will
reimburse the Company, such Holders, such directors, officers, persons,
underwriters or control persons for any legal or any other expenses reasonably
incurred as such expenses are incurred in connection with investigating or
defending any such claim, loss, damage, liability or action, in each case to
the extent, but only to the extent, that such untrue statement (or alleged
untrue statement) or omission (or alleged omission) is made in such
registration statement, prospectus, offering circular or other document in
reliance upon and in conformity with written information furnished to the
Company by an instrument duly executed by such Holder and stated to be
specifically for use therein; provided, however, that the indemnity agreement
contained in this Section 11(b) shall not apply to amounts paid in settlement
of any such loss, claim, damage, liability or action if such settlement is
effected without the consent of the Holder, which consent shall not be
unreasonably withheld. Notwithstanding the foregoing, the liability of each
Holder under this Section 11(b) shall be limited to an amount equal to the
aggregate proceeds received by such Holder from the sale of Registrable
Securities hereunder, unless such liability arises out of or is based on
willful conduct by such Holder.
(c) Each party entitled to indemnification under this
Section 11 (the "INDEMNIFIED PARTY") shall give notice to the party required to
provide indemnification (the "INDEMNIFYING PARTY") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may
be sought, and shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of
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such claim or litigation, shall be approved by the Indemnified Party (whose
approval shall not unreasonably be withheld), and the Indemnified Party may
participate in such defense at such party's expense, and provided further that
the failure of any Indemnified Party to give notice as provided herein shall
not relieve the Indemnifying Party of its obligations under this Agreement
unless the failure to give such notice is materially prejudicial to an
Indemnifying Party's ability to defend such action and provided further, that
the Indemnifying Party shall not assume the defense for matters as to which
there is a conflict of interest or separate and different defenses. No
Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation.
12. INFORMATION BY HOLDER. The Holder or Holders of Registrable
Securities included in any registration shall furnish to the Company or its
counsel such information regarding such Holder or Holders, the Registrable
Securities held by them and the distribution proposed by such Holder or Holders
as the Company or its counsel may reasonably request in writing and as shall
be required in connection with any registration, qualification or compliance
referred to in this Agreement.
13. RULE 144 REPORTING. With a view to making available the
benefits of certain rules and regulations of the Commission which may at any
time permit the sale of the Restricted Securities to the public without
registration, after such time as a public market legally exists for the Common
Stock of the Company, the Company agrees to use its best efforts to:
(a) Make and keep public information available, as those
terms are understood and defined in Rule 144 under the Securities Act, at all
times after the effective date that the Company becomes subject to the
reporting requirements of the Securities Act or the Exchange Act;
(b) Use its best efforts to file with the Commission in a
timely manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act (at any time after it has become subject to
such reporting requirements);
(c) Take such action, including the voluntary
registration of its Common Stock under Section 12 of the Exchange Act, as is
necessary to enable the Holders to utilize Form S-3 for the sale of their
Registrable Securities, such registration under Section 12 to be taken as soon
as practicable after the six-month period following the date on which the first
registration statement filed by the Company for the offering of its equity
securities to the general public is declared effective; and
(d) So long as a Purchaser owns any Restricted Securities
to furnish to the Purchaser forthwith upon request a written statement by the
Company as to its compliance with the reporting requirements of said Rule 144
(at any time after ninety (90) days after the effective date of the first
registration statement filed by the Company for an offering of its equity
securities to the general public), and of the Securities Act and the Exchange
Act (at any time after it has become subject to such reporting requirements), a
copy of the most recent annual or quarterly report of the Company, and such
other reports and documents of the Company and other information in the
possession of or reasonably
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obtainable by the Company as a Purchaser may reasonably request in availing
itself of any rule or regulation of the Commission allowing a Purchaser to sell
any such securities without registration.
14. TRANSFER OF REGISTRATION RIGHTS. The rights to cause the
Company to register securities granted Holders under Sections 5, 6 and 7 may be
assigned or transferred to any third party who acquires at least 50,000 shares
of Registrable Securities (as may be appropriately adjusted upon any stock
split, stock dividend, recapitalization, merger, consolidation or similar
event), provided that (a) such transfer may otherwise be effected in accordance
with applicable securities laws, and (b) such assignee or transferee agrees to
be bound by the terms of this Agreement and assumes all of the obligations of
the transferring Holder hereunder. Notwithstanding the foregoing, however, the
rights to cause the Company to register securities may be assigned to partners
and constituent members, former partners and former constituent members and
Affiliates of that Holder without regard to the foregoing share threshold or
other requirements, provided that written notice thereof is promptly given to
the Company.
15. STANDOFF AGREEMENT. Each Holder and each of the Existing
Stockholders agree, in connection with the first registration of the Company's
securities which covers Common Stock (or other securities) to be sold on its
behalf to the general public in an underwritten initial public offering, upon
request of the Company or the Underwriter of such initial public offering, not
to sell, make any short sale of; loan, grant any option for the purchase of, or
otherwise dispose of any of the Company's equity securities (other than those
included in the registration) without the prior written consent of the Company
or such Underwriter, as the case may be, for a period of time not to exceed one
hundred eighty (180) days from the effective date of such registration;
provided, however, that all officers, directors and holders of registration
rights (including registration rights granted other than pursuant to this
Agreement) enter into similar agreements and the Company uses all reasonable
efforts to cause all of the holders of one percent (1%) or more of the
outstanding voting securities of the Company to enter into similar agreements.
16. TERMINATION OF REGISTRATION RIGHTS. The rights granted
pursuant to Sections 1 through 15 of this Agreement shall terminate as to any
Holder at such time as Holder holds less than 1% of the Company's outstanding
capital stock and may sell all of such Holder's shares under Rule 144 (or any
successor provisions) promulgated under the Securities Act, or a successor
rule, within a three-month period.
17. RIGHT OF FIRST REFUSAL FOR ISSUANCE OF NEW SECURITIES. The
Company hereby grants to each Major Holder and permitted assignee under Section
17(e) the right of first refusal to purchase a Pro Rata Share (as defined
below) of any New Securities (as defined in subsection 17(a)) which the Company
may, from time to time, propose to sell and issue. A "PRO RATA SHARE," for
purposes of this right of first refusal, shall be a fraction, the numerator of
which is the sum of the number of shares of Common Stock then held by such
Major Holder or issuable to such Major Holder upon conversion of the Series A
Preferred held by such Major Holder, and the denominator of which is the sum of
the total number of shares of Common Stock then outstanding and the number of
shares of Common Stock issuable upon conversion or exercise of all outstanding
capital stock options or warrants convertible into or exercisable for Common
Stock.
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(a) Except as set forth below, "NEW SECURITIES" shall
mean any shares of capital stock of the Company, including Common Stock and
Preferred Stock whether now authorized or not. Notwithstanding the foregoing,
"NEW SECURITIES" does not include (i) securities issued pursuant to the
acquisition of another corporation by the Company by merger, purchase of all or
substantially all of the assets or other transaction whereby the Company or its
stockholders own not less than fifty-one percent (51%) of the voting power of
the surviving or successor corporation, (ii) shares of the Company's Common
Stock or Options exercisable for the purchase of Common Stock issued from and
after the date hereof to employees, officers and directors of, and consultants
to, the Company, pursuant to any incentive program or written agreement
approved by the Board of Directors of the Company (net of any repurchases of
such shares or any other shares of Common Stock originally issued to officers,
directors, employees or consultants to the Corporation, and net of cancellation
or expiration of options), (iii) securities issued in connection with lease or
debt financing transactions, (iv) Common Stock issuable upon conversion of the
Series A Preferred, and (v) securities issued solely pursuant to a stock split
or stock dividend.
(b) In the event that the Company proposes to undertake
an issuance of New Securities, it shall give each Major Holder written notice
of its intention, describing the type of New Securities, and the price and
terms upon which the Company proposes to issue the same. Each such Major Holder
shall have twenty (20) days from the date of receipt of any such notice to
agree to purchase all but not a portion of its respective Pro Rata Share of
such New Securities for the price and upon terms specified in the notice by
giving written notice to the Company.
(c) In the event that such Major Holder fails to exercise
the right of first refusal within said twenty (20) day period, the Company
shall have sixty (60) days thereafter to sell or enter into an agreement
(pursuant to which the sale of New Securities covered thereby shall be closed,
if at all, within thirty (30) days from the date of said agreement) to sell the
New Securities not elected to be purchased by such Major Holder at the price
and upon terms no more favorable to the purchasers of such securities than
specified in the Company's notice. In the event that the Company has not sold
the New Securities or entered into an agreement to sell the New Securities
within said sixty (60) day period (or sold and issued New Securities in
accordance with the foregoing within thirty (30) days from the date of said
agreement), the Company shall not thereafter issue or sell any New Securities
without first offering such securities in the manner provided above.
(d) The right of first refusal granted under this
Agreement shall terminate immediately prior to the closing of an initial public
offering of the Common Stock of the Company to the general public which is
effected pursuant to a registration statement filed with, and declared
effective by, the Commission under the Securities Act.
(e) The right of first refusal granted Major Holders
under this Section may be in whole or in part assigned or transferred to any
third party who acquires at least 50,000 shares of Registrable Securities (as
may be appropriately adjusted upon a stock split, stock dividend,
recapitalization, merger, consolidation or similar event), provided that, (a)
such transfer may otherwise be effected in accordance with applicable
securities laws, and (b) such assignee or transferee agrees to be bound by this
Agreement and assumes the obligations of the transferring Major Holder
hereunder.
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Notwithstanding the foregoing, however, the right of first refusal may be
assigned by a Major Holder that is a partnership to any of its partners, that
is a venture capital group or fund to an Affiliated entity or person, or that
is a corporation to any of its shareholders without regard to the foregoing
share threshold or other requirement, provided that (a) written notice thereof
is promptly given to the Company, (b) such transfer may otherwise be effected
in accordance with applicable securities laws, and (c) such assignee or
transferee agrees to be bound by this Agreement and assumes the obligations of
the transferring Major Holder hereunder.
18. AFFIRMATIVE COVENANTS. The Company and each Purchaser hereby covenants
and agrees as follows:
18.1 Financial Information.
(a) The Company shall mail the following reports
to each Major Holder:
(i) As soon as practicable after the end
of each fiscal year, and in any event within 90 days thereafter, a copy of the
annual audit report (prepared in accordance with generally accepted accounting
principles) for such year for the Company and any consolidated subsidiary,
including therein Consolidated balance sheets of the Company and any such
subsidiary as of the end of such fiscal year, Consolidated statements of income
and stockholders equity and statements of cash flow of the Company and any such
subsidiary for such fiscal year, setting forth in each case in comparative form
the corresponding figures for the preceding fiscal year, all duly certified by
an independent public accounting firm selected by the Company's Board of
Directors;
(ii) As soon as practicable after the end
of the first, second, third and fourth quarterly accounting periods in each
fiscal year of the Company, and in any event within 45 days thereafter, a
Consolidated budget model balance sheet of the Company as of the end of each
such quarterly period, and Consolidated budget model statements of income and
stockholders equity and Consolidated budget model statements of cash flows of
the Company and any subsidiary for such period and for the current fiscal year
to date, prepared in accordance with generally accepted accounting principles
(other than for accompanying notes), subject to changes resulting from year-end
audit adjustments, and signed by the principal financial or accounting officer
of the Company;
(iii) As soon as practicable after the end of
each month, and in any event within 30 days thereafter, Consolidated budget
model balance sheets of the Company and any subsidiary as of the end of such
month, and Consolidated budget model statements of income and stockholders'
equity for each month and for the current fiscal year to date, and comparing
such results to the then current business plan, prepared in accordance with
generally accepted accounting principles (other than for accompanying notes),
subject to changes resulting from year-end audit adjustments and signed by the
principal financial or accounting officer of the Company;
(iv) As soon as available (but in any
event at least within 30 days before the commencement of its fiscal year), an
annual budget and business plan prepared on a monthly basis for each fiscal
year, together with any modifications thereto adopted through such fiscal year;
-15-
16
(v) With respect to the financial
statements called for in subsections (ii) and (iii) of this Section 18.1 (a),
an instrument executed by the Chief Financial Officer or President of the
Company and certifying that such financial statements were prepared in
accordance with generally accepted accounting principles consistently applied
with prior practice for earlier periods (with the exception of footnotes that
may be required by generally accepted accounting principles) and fairly present
the financial condition of the Company and its results of operation for the
period specified, subject to period-end adjustment; and
(vi) Such other information relating to
the financial condition, business, prospects or corporate affairs of the
Company as the Major Holder may from time to time reasonably request.
(b) The Company shall also afford each Major
Holder, at the principal offices of the Company, reasonable access to material
documents of the Company and rights to examine without undue disruption the
facilities and offices of the Company, upon at least five (5) days notice in
advance of such visit to the Company from such Major Holder and upon receipt of
a request from such Major Holder specifying which documents, offices and
facilities such Major Holder wishes to inspect five (5) days in advance of such
visit; but, in any event, not more than once every fiscal quarter.
(c) The Company shall afford each Major Holder,
reasonable Board of Directors' visitation rights. Such visitation rights shall
include the right to designate one representative of the Major Holders
(selected by the affirmative vote of a majority of the Major Holders) to (i)
receive reasonable notice in advance of all Board of Directors' meetings, (ii)
the right to receive, concurrently with receipt by members of the Board of
Directors, all materials, reports and other written communications received by
members of the Board of Directors and (iii) the right to attend all Board of
Directors meetings.
(d) The covenants set forth in this Section 18.1
shall terminate and be of no further force or effect at such time as the
Company is required to file reports pursuant to Section 13 or 15(d) of the
Exchange Act.
(e) Notwithstanding any other provisions of this
Section 18.1 or Section 13(d), the Company may require as a condition precedent
to any Major Holder's rights under this Section 18.1 or Section 13(d), that
each person proposing to attend any meeting of the Board of Directors and each
person to have access to any of the information provided by the Company to its
Board of Directors shall agree to hold in confidence and trust and to act in a
fiduciary manner with respect to all information so received during such
meetings or otherwise; and, provided further, that the Company reserves the
right not to provide such information to a Major Holder or its representative
(or not to provide to a Major Holder such portions of the information which is
sensitive vis & vis such Major Holder) and to exclude such Major Holder or its
representative from any meeting or portion thereof to the extent necessary in
order to prevent the breach of attorney client privilege or if such Major
Holder or its representative is a competitor of the Company (including any of
its direct or indirect subsidiaries).
-16-
17
18.2 Confidential Information. Each Major Holder agrees
that any information obtained by such Major Holder pursuant to Section 18.1 or
Section 13(d) which is, or would reasonably be perceived to be, proprietary to
the Company or otherwise confidential will not be disclosed without the prior
written consent of the Company. Notwithstanding the foregoing, each Major
Holder may disclose such information, on a need to know basis, to its
employees, accountants or attorneys, or to the employees, accountants or
attorneys of its general partner or investment manager (so long as each such
person to whom confidential information is disclosed agrees to keep such
information confidential), in compliance with a court order or when otherwise
necessary to enforce any of the Major Holder's rights hereunder. Such
information may also be disclosed to a Major Holder's constituent partners,
members or shareholders (so long as each such person to whom confidential
information is disclosed agrees to keep such information confidential). Each
Major Holder further acknowledges and understands that any information will not
be utilized by such Major Holder in connection with purchases and/or sales of
the Company's securities except in compliance with applicable state and federal
antifraud statutes.
18.3 Assignment of Rights to Financial Information. The
rights and obligations pursuant to Sections 18.1 and 18.2 may be assigned or
otherwise conveyed by any Major Holder, or by any subsequent transferee of any
such rights to a transferee, upon prior written notice to the Company, upon the
transfer by such Major Holder of at least 50,000 shares of Registrable
Securities to any transferee other than a competitor or customer of the Company
(including any of its direct or indirect subsidiaries); provided, however, that
the Company shall not be obligated under Section 18.1 to provide to any
transferee other than a person or entity affiliated with the transferor any
information which the Company deems in good faith to be a trade secret or
similar confidential information.
19. VOTING AGREEMENT.
(a) For so long as the Purchasers or their Affiliates
hold not less than an aggregate of 180,000 shares of Series A Preferred or
Common Stock issued on conversion thereof (as appropriately adjusted for all
stock splits, dividends, combinations, reclassifications and the like), each of
the Existing Stockholders, Management Holders and Purchasers (and their
Affiliates) agrees to vote all of the shares of Common Stock Series A Preferred
or other securities of the Company entitled to vote in the election of
directors, to elect two (2) persons designated by the Purchasers to serve as
members of the Company's Board of Directors; provided, however, that if the
size of the Board of Directors shall be increased or decreased, each of the
Existing Stockholders, Management Holders and Purchasers (and their Affiliates)
agrees to vote all of the shares of Common Stock Series A Preferred or other
securities of the Company entitled to vote in an election of directors, to
elect a number of persons designated by the Purchasers to serve as members of
the Company's Board of Directors such that the number of persons designated by
the Purchasers shall constitute at least 20% of the Board of Directors. The
Purchasers have designated Donald Dixon and Rockwell Schnabel to serve as
directors effective as of the date hereof The Company shall reimburse the
reasonable expenses of Board meeting attendance by the representatives of the
Purchasers.
(b) In the event that any person designated to the Board
of Directors in accordance with Section 19(a) above resigns or otherwise ceases
to be a director, a replacement director shall be
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designated by the Purchasers and the terms of this Section 19 shall apply to
any such replacement director for so long as it would otherwise apply to the
initial director.
(c) Each of the Purchasers, Management Holders and
Existing Stockholders agrees to be present, in person or by proxy, at all
meetings of shareholders of the Company so that all shares of voting securities
held by such Purchaser, Management Holder or Existing Stockholder may be voted
for the election of the directors as set forth in this Section 19.
(d) So long as the provisions of this Section 19 are in
effect, each certificate evidencing shares of voting securities held by the
Purchasers, Management Holders and the Existing Stockholders shall bear a
legend in substantially the following form:
"THESE SECURITIES ARE SUBJECT TO CERTAIN RESTRICTIONS ON VOTING AS SET
FORTH IN A RIGHTS AGREEMENT BETWEEN THE COMPANY AND THE ORIGINAL
HOLDER OF SUCH SHARES. A COPY OF SUCH AGREEMENT IS ON FILE AT THE
COMPANY'S PRINCIPAL PLACE OF BUSINESS AND ITS REGISTERED OFFICE."
(e) The provisions of this Section 19 shall terminate
upon the closing of the Company's initial public offering of Common Stock
pursuant to a registration statement declared effective by the Commission.
20. COMPANY RIGHT OF FIRST REFUSAL ON CERTAIN SALES OF SERIES A
PREFERRED STOCK AND CONVERSION STOCK
20.1 General. In the event that a Holder proposes to make
any sale or transfer of Series A Preferred and Conversion Stock (or proposed
sale or transfer) otherwise permitted pursuant to this Agreement, to any
proposed transferee which is not solely a financial investor and which proposes
to acquire the shares for strategic business purposes and not solely as an
investment, then prior to effecting such sale or transfer the Holder shall give
the Company the opportunity to purchase such shares in the following manner:
(i) Such Holder shall give notice (the "TRANSFER
NOTICE") to the Company in writing of such intention, specifying the securities
proposed to be sold or transferred, the proposed price per share therefor (the
"TRANSFER PRICE"), the name of the proposed transferee or transferees and the
other material terms upon which such disposition is proposed to be made,
including such other terms and information as the Company may reasonably
request in order to confirm the bona fide nature of the proposed transaction.
(ii) The Company shall have the right, exercisable
by written notice given by the Company to such Holder within ten (10) days
after receipt of such Transfer Notice to purchase all (but not less than all)
of the securities specified in such Transfer Notice. The Company may during
such ten (10) day period advise such Holder of the Company's desire to exercise
its right of first refusal set forth herein subject to the ability of the
Company to secure financing. In such event, the Company shall
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19
have an additional thirty (30) days following the initial ten (10) day period
in which to secure financing. At the end of the thirty (30) period, the Company
shall advise such Holder as to whether the Company has successfully secured the
financing. If not, the Company's exercise of its right of first refusal shall
be deemed void and such Holder shall be entitled to consummate the proposed
transaction with the third party or parties.
(iii) If the Company exercises its right of first
refusal hereunder, the closing of the purchase of the securities with respect
to which such right has been exercised shall take place within thirty (30) days
after the Company gives notice of such exercise, which period of time shall be
extended if necessary to comply with applicable securities laws and
regulations. Upon exercise of its right of first refusal, the Company and such
Holder shall be legally obligated to consummate the purchase contemplated
thereby and shall use their best efforts to secure any approvals required in
connection therewith.
(iv) If the Company does not exercise its right of
first refusal hereunder within the ten (10) day period specified for such
exercise (or, in the event that the right has been exercised subject to
securing financing, within the additional thirty (30) day period specified
above), such Holder shall be free, during the period of ninety (90) days
following the expiration of such time for exercise to enter into an agreement
to sell the securities specified in such Transfer Notice, to the specified
proposed transferee or another investor which is solely a financial investor
acquiring for investment purposes, on terms no less favorable to such Holder
than the terms specified in such Transfer Notice, provided that the closing of
the purchase and sale of such securities shall take place within sixty (60)
days after such Holder enters into such agreement.
20.2 No Assignment of Rights of First Refusal The Company
may not assign its rights of first refusal under this Section 20.
20.2 Termination The Company's right of first refusal set
forth herein shall terminate upon the first to occur of (i) the closing of an
initial public offering of the Common Stock of the Company to the general
public which is effected pursuant to a registration statement filed with, and
declared effective by, the Commission under the Securities Act, and (ii) such
date as the Company shall be subject to the reporting requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended.
21. MISCELLANEOUS.
21.1 Aggregation of Shares. For purposes of any provision
of this Agreement requiring a person or entity to hold a minimum number of
shares of Series A Preferred or Registrable Securities in order to gain the
benefit of such provision, all shares beneficially owned by Affiliated entities
or persons (including partners and constituent members and former partners and
former constituent members) shall be aggregated together for the purposes of
determining such Holder's status or rights under such provision. For purposes
of this Section 21.1 the Company may rely on such person whom a group of
related persons shall designate from time to time (which person shall initially
be the Chief
-19-
20
Financial Officer of Trident Capital, L.P., for Information Associates, L.P.
and Information Associates, C.V. and related persons) for information relating
to the affiliations of entities or persons.
21.2 Governing Law. This Agreement in all respects shall
be governed by and construed and enforced in accordance with the corporate laws
of the State of Delaware and (with respect to matters other than matters of
corporate law) the laws of the State of Texas as such laws apply to contracts
entered into and wholly to be performed within such state. In any litigation
relating to this Agreement or the transactions contemplated hereby, the
prevailing party shall be entitled to recover its costs and reasonable
attorneys' fees.
21.3 Survival. The representations, warranties, covenants
and agreements made herein shall survive any investigation made by any
Purchaser and the closing of the transactions contemplated hereby.
21.4 Successors and Assigns. Except as otherwise provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto. Nothing in this Agreement, express or implied, is intended to
confer upon any party other than the parties hereto or their respective
successors and assigns any rights, remedies, obligations, or liabilities under
or by reason of this Agreement, except as expressly provided in this Agreement.
21.5 Entire Agreement; Amendment. This Agreement and the
other documents delivered pursuant hereto constitute the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof; and no party shall be liable or bound to any other party in
any manner by any warranties, representations or covenants except as
specifically set forth herein or therein. Except as expressly provided herein,
neither this Agreement nor any term hereof may be amended, waived, discharged
or terminated other than by a written instrument signed by the party against
whom enforcement of any such amendment, waiver, discharge or termination is
sought; provided, however, that any provision of this Agreement may be amended,
waived or modified with the written consent of (i) the Company, (ii) Holders of
at least 50% of the outstanding shares of Registrable Securities, and (iii)
Holders other than Existing Stockholders and Management Holders who hold at
least a majority of the outstanding shares of Registrable Securities held by
all holders other than Existing Stockholders and Management Holders.
21.6 Effect of Amendment or Waiver, Each Purchaser
acknowledges that by the operation of Section 21.5 hereof the Holders of more
than 50% of the outstanding shares of Registrable Securities shall have the
right and power to diminish or eliminate all rights of such Holders under this
Agreement.
21.7 Notices. All notices and other communications
required or permitted hereunder shall be in writing, shall be effective when
given, and shall in any event be deemed to be given upon receipt or, if
earlier, (a) five (5) days after deposit with the U.S. Postal Service or other
applicable postal service, if delivered by first class mail, postage prepaid,
(b) upon delivery, if delivered by hand, (c) one business day after the
business day of deposit with Federal Express or similar overnight courier,
freight
-20-
21
prepaid or (d) one business day after the business day of facsimile
transmission, if delivered by facsimile transmission with copy by first class
mail, postage prepaid, and shall be addressed (i) if to a Purchaser, at such
Purchaser's address as set forth in the Purchase Agreement, (ii) if to an
Existing Stockholder, at such Existing Stockholder's address according to the
Company's stock records, and (iii) if to the Company, at the address of its
principal corporate offices (attention: Secretary), or at such other address as
a party may designate by ten days' advance written notice to the other party
pursuant to the provisions above.
21.8 Delays or Omissions. Except as expressly provided
herein, no delay or omission to exercise any right, power or remedy accruing to
any Holder of any Registrable Securities, upon any breach or default of the
Company under this Agreement, shall impair any such right, power or remedy of
such Holder nor shall it be construed to be a waiver of any such breach or
default, or an acquiescence therein, or of or in any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or thereafter
occurring. Any waiver, permit, consent or approval of any kind or character on
the part of any Holder of any breach or default under this Agreement, or any
waiver on the part of any Holder of any provisions or conditions of this
agreement, must be in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Agreement or by law or otherwise afforded to any Holder, shall be cumulative
and not alternative.
21.9 Counterparts. This Agreement may be executed in any
number of counterparts, each of which may be executed by less than all of the
Purchasers, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
21.10 Severability. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision; provided that no such severability shall be
effective if it materially changes the economic benefit of this Agreement to
any party.
21.11 Titles and Subtitles. The titles and subtitles used
in this Agreement are used for convenience only and are not considered in
construing or interpreting this Agreement.
-21-
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[Signature Page to Rights Agreement]
The foregoing agreement is hereby executed as of the date
first above written.
"COMPANY"
PEGASUS Systems, INC.
a Delaware corporation
By: /s/ JOHN F. DOE III
--------------------------------
Title: PRESIDENT
-----------------------------
"PURCHASERS"
INFORMATION ASSOCIATES, L.P.
By: Trident Capital Management,L.L.C.
Its: General Partner
By: /s/ [ILLEGIBLE]
--------------------------------
INFORMATION ASSOCIATES, C.V
By: Trident Capital Management, L.L.C.
Its: Investment General Partner
By: /s/ [ILLEGIBLE]
--------------------------------
"EXISTING STOCKHOLDERS"
PEGASUS SYSTEMS, INC.
By:
--------------------------------
Its:
-------------------------------
CHOICE HOTELS
By: /s/ JAMES R. YOAKUM
--------------------------------
Its: SA. Vice President
-------------------------------
-22-
23
[Signature Page to Rights Agreement]
ANASAZI, INC.
By: /s/ [ILLEGIBLE]
--------------------------------
Its: CEO
-------------------------------
BEST WESTERN INTERNATIONAL
By: /s/ [ILLEGIBLE]
--------------------------------
Its: Board Representative for BWI
-------------------------------
REED TRAVEL GROUP,
A Division of Reed Elsevier Inc.
By: /s/ [ILLEGIBLE]
--------------------------------
Its: EVP Finance & Operations
-------------------------------
HYATT HOTELS CORPORATION
By: /s/ [ILLEGIBLE] 6-25-96
--------------------------------
Its: Executive-Vice President
-------------------------------
INTER-CONTINENTAL HOTELS CORPORATION
By: /s/ [ILLEGIBLE]
--------------------------------
Its: Senior Vice President-Property
Management
-------------------------------
[ILLEGIBLE]
FORTE HOTELS
By: /s/ [ILLEGIBLE]
--------------------------------
Its: EXECUTIVE DIRECTOR HOTELS
-------------------------------
June 25th 1996
-23-
24
[Signature Page to Rights Agreement]
ITT SHERATON CORPORATION
By: /s/ [ILLEGIBLE]
--------------------------------
Its: S.V.P. - CIO
-------------------------------
LA QUINTA INNS, INC.
By: /s/ [ILLEGIBLE]
--------------------------------
Its: Sr. Vice President - Acct &
Admin
-------------------------------
MARRIOTT INTERNATIONAL, INC.
By: /s/ BRUCE WOLFF
--------------------------------
Its: Vice President, Distribution
Sales
-------------------------------
PROMUS HOTELS, INC.
By: /s/ [ILLEGIBLE] 6/25/96
--------------------------------
Its:
-------------------------------
UTELL INTERNATIONAL LTD.
By: /s/ [ILLEGIBLE]
--------------------------------
Its: Authorized Representative
-------------------------------
CHOICE HOTELS INTERNATIONAL
By:
--------------------------------
Its:
-------------------------------
HFS, INC.
By: /s/ [ILLEGIBLE]
--------------------------------
Its: VP MIS
-------------------------------
TRUSTHOUSE FORTE CALIFORNIA, INC.
By:
--------------------------------
Its:
-------------------------------
HILTON HOTELS CORPORATION
By: /s/ [ILLEGIBLE]
--------------------------------
Its: V.P. Marketing Distribution
-------------------------------
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25
[SIGNATURE PAGE TO RIGHTS AGREEMENT]
LODGING NETWORK, INC. WESTIN HOTELS & RESORTS
By: /s/ SCOTT A. SHEFIELD By: /s/ TIMOTHY M. COLEMAN
------------------------------- -------------------------------
Its: Vice-President Timothy M. Coleman
-------------------------------
Its: Vice President-Distribution
--------------------------------
/s/ JOHN F. DAVIS, III
-------------------------------
John F. Davis, III
"MANAGEMENT HOLDERS"
/s/ JOHN F. DAVIS, III
-------------------------------
John F. Davis, III
/s/ BILL NICHOLSON
-------------------------------
Bill Nicholson
/s/ NICK JENT
-------------------------------
Nick Jent
/s/ LARRY WEARDEN
-------------------------------
Larry Wearden
/s/ PHIL HART
-------------------------------
Phil Hart
/s/ BRYAN DONOWHO
-------------------------------
Bryan Donowho
/s/ STEVE REYNOLDS
-------------------------------
Steve Reynolds
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26
[SIGNATURE PAGE TO RIGHTS AGREEMENT]
/s/ RIC FLOYD
-------------------------------
Ric Floyd
/s/ DENNIS CARPENTER
-------------------------------
Dennis Carpenter
/s/ NANCY CONKLIN
-------------------------------
Nancy Conklin
/s/ CAROLYN LANE
-------------------------------
Carolyn Lane
-26-
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SCHEDULE I
Purchasers:
Information Associates, L.P.
Information Associates, C.V.
28
SCHEDULE II
Existing Stockholders:
Anasazi Service Corporation
Best Western International
Choice Hotels International
Trusthouse Forte California, Inc.
Hilton Hotels Corporation
Hospitality Franchise Systems, Inc.
Reed Travel Group
Hyatt Hotels Corporation
Inter-Continental Hotels Corporation
ITT Sheraton Corporation
La Quinta Corporation Inns, Inc.
Marriott International, Inc.
Promus Hotels, Inc.
Utell International, Ltd.
Westin Hotels and Resorts
John F. Davis, III
29
SCHEDULE III
Management Holders:
John F. Davis, III
Joseph W. Nicholson
Nick Jent
Larry Wearden
Phil Hart
Bryan Donowho
Steve Reynolds
Ric L. Floyd
Dennis Carpenter
Nancy Conklin
Carolyn Lane
1
EXHIBIT G
No.1 PEGASUS SYSTEMS, INC.
For the purchase of
259,292 Shares
COMMON STOCK PURCHASE WARRANT
THIS CERTIFIES that HOLIDAY HOSPITALITY CORPORATION
(hereinafter called the "Holder") is entitled to purchase from PEGASUS SYSTEMS,
INC., a Delaware corporation (hereinafter called the "Company"), upon the
surrender of this Warrant to the Company at the principal office in Dallas,
Texas, at any time on and after May 13, 1997 (the "Detachment Date"), and
before the close of business on May 12, 1999 (the"Termination Date"), the
number of fully paid and nonassessable shares of Common Stock, par value $.01
per share ("Common Stock"), set forth above, evidenced by a certificate
therefor, upon payment of the lesser of $9.60 per share or 85% of the initial
public offering price per share of the Company's Common Stock (the "Warrant
Price") for the number of shares set forth herein above; provided, however,
that under certain conditions set forth hereinafter, the number of shares of
Common Stock purchasable upon the exercise of this Warrant may be increased or
reduced and the Warrant Price may be adjusted. The Warrant Price shall be
payable in cash, or by certified or official bank check, in United States
dollars, to the order of the Company. No adjustment shall be made for any cash
dividends on any shares of stock issuable upon exercise of this Warrant. The
right of purchase represented by this Warrant is exercisable by Holder, its
parent, subsidiary, affiliate or any other successor to all or substantially all
of its business by sale of stock, sale of assets, merger or otherwise only, in
its entirety only and only in respect of all of such shares. In the event this
Warrant has not been exercised as required herein before the close of business
on the Termination Date, it shall automatically terminate and be of no force
and effect.
Subject to the provisions hereof, Holder shall have the right
to purchase from the Company (and the Company shall issue and sell to Holder)
the number of fully paid and nonassessable shares of Common Stock specified in
this Warrant, upon surrender of this Warrant to the Company at its office in
Dallas, Texas and upon payment to the Company of the Warrant Price for the
number of shares of Common Stock for which this Warrant is issued and any
applicable taxes. Upon surrender of this Warrant, and payment of the Warrant
Price as aforesaid, the Company shall issue and cause to be delivered with all
reasonable dispatch to Holder a certificate for the number of full shares of
Common Stock so purchased upon the exercise of this Warrant. Such certificate
shall be deemed to have been issued and Holder shall be deemed to have become a
holder of record of such shares as of the date of the surrender of this Warrant
and payment of the Warrant Price as aforesaid. The rights of purchase
represented by this Warrant shall be exercisable, at the election of Holder,
once only for all and not less than all of the shares specified herein and, in
the event this Warrant is exercised in respect of less than all of the shares
specified therein such exercise shall be invalid and of no force or effect.
There have been reserved, and the Company shall at all times keep
reserved, out of the authorized and issued shares of Common Stock, a number of
shares sufficient to provide for the exercise of the rights of purchase
represented by this Warrant, and the transfer Agent for the Common Stock and
every subsequent Transfer Agent for any shares of the Company's capital stock
issuable upon the exercise of any of the rights of purchase aforesaid are
hereby irrevocably
-1-
2
authorized and directed at all times to reserve such number of authorized and
unissued shares as shall be requisite for such purpose.
The Warrant Price and number of shares subject to this Warrant shall
be subject to adjustment from time to time as follows:
a. In case the Company shall at any time subdivide its
outstanding shares of Common Stock into a greater number of shares, the Warrant
Price in effect immediately prior to such subdivision shall be proportionately
reduced and, in case the outstanding shares of the Common Stock of the Company
shall be combined into a smaller number of shares, the Warrant Price in effect
immediately prior to such combination shall be proportionately increased.
b. Upon each adjustment of the Warrant Price pursuant to
the provisions hereof, the number of shares issuable upon the exercise of this
Warrant shall be adjusted by multiplying the Warrant Price in effect prior to
the adjustment by the number of shares of Common Stock covered by the Warrant
and dividing the product so obtained by the adjusted Warrant Price.
c. Except upon consolidation or reclassification of the shares of
Common Stock of the Company as provided for in subsections (a) or (f) hereof,
the Warrant Price in effect at any time may not be adjusted upward or increased
in any manner whatsoever.
d. Irrespective of any adjustment or change in the Warrant Price
or the number of shares of Common Stock actually purchasable under this
Warrant, this Warrant shall continue to express the Warrant Price per share and
the number of shares purchasable hereunder as the Warrant Price per share and
the number of shares purchasable were expressed in this Warrant when initially
issued with the adjustment or change reflected as set forth in subsection (g)
hereof.
e. If any capital reorganization or reclassification of the
capital stock of the Company or consolidation or merger of the Company with
another corporation or the sale of all or substantially all of its assets to
another corporation shall be effected, then, as a condition of such
reorganization, reclassification, consolidation, merger or sale, lawful and
adequate provision shall be made whereby Holder shall have the right to
purchase and receive upon the basis and upon the terms and conditions specified
herein and in lieu of the shares of the Common Stock of the Company immediately
theretofore purchasable and receivable upon the exercise of the rights
represented by each such Warrant, such shares of stock, securities or assets as
may be issued or payable with respect to or in exchange for a number of shares
of such Common Stock purchasable upon the exercise of the rights represented by
this Warrant had such reorganization, reclassification, consolidation, merger
or sale not taken place, and in any such case appropriate provisions shall be
made with respect the rights and interests of Holder to the end that the
provisions hereof (including without limitation provisions for adjustment of
the Warrant Price and of the number of shares purchasable upon the exercise of
this Warrant) shall thereafter be applicable, as nearly as may be in relation
to the shares of stock thereafter deliverable upon the exercise of this
Warrant.
-2-
3
f. No adjustment of the Warrant Price shall be made in connection
with the issuance or sale of Common Stock issuable pursuant to any stock option
plan or incentive compensation arrangements now or hereafter granted to
employees of the Company or any of its subsidiaries in connection with their
employment or the issuance or sale of shares of Preferred Stock.
g. Whenever the Warrant Price is adjusted as herein provided,
the Company shall provide a written statement to Holder showing in detail the
facts requiring such adjustment and the Warrant Price and the number of shares
of Common Stock purchasable upon exercise of this Warrant after such
adjustment.
h. The Company may retain a firm of independent certified
public accountants of recognized standing (which may be the firm that regularly
examines the financial statements of the Company) selected by the Board of
Directors of the Company or the Executive Committee of said Board to make any
computation required hereunder and a certificate signed by such firm shall be
conclusive evidence of the correctness of any such computation. If Holder does
not agree as to the correctness of such computation. Holder at their own
expense may retain a firm of independent certified public accountants of
recognized standings to develop a second computation. Such accounting firms
shall attempt to resolve any differences of opinion with respect to such
computations, but in the absence of such resolution, the matter shall be
submitted to binding arbitration in Dallas, Texas in accordance with the then
applicable rules of the American Arbitration Association.
Notwithstanding any other provision hereof, to the extent permitted
by applicable law, the Company shall provide written notice to Holder at least
ten (10) days prior to the record date or other effective date for any of the
following actions: dividends, mergers, liquidations, consolidations,
reclassifications of stock, sale of substantially all of the assets or any
other action for which stockholder approval is required by Delaware law.
The Company shall issue a new warrant to be issued in place of this
Warrant in the event this Warrant has been lost, stolen, defaced, worn-out,
or destroyed, upon the making of an affidavit of that fact by Holder. When
issuing a new warrant, the Company may, as a condition precedent thereto, (a)
require the Holder of a defaced or worn out warrant to deliver such warrant to
the Company and order the cancellation of the same, and (b) require the Holder
of any lost, stolen or destroyed warrant or its legal representative, to
advertise the same in such manner as the Company shall require and to give the
Company a bond in such sum as it may direct as indemnity against any claim that
may be made against the Company with respect to the warrant alleged to have
been lost, stolen or destroyed. Thereupon, the Company may cause to be issued to
Holder a new warrant in replacement for the warrant alleged to have been lost,
stolen, defaced, worn out or destroyed. Upon the new warrant so issued shall be
noted the fact of such issue and the number, date, and name of the registered
Holder of the lost, stolen, defaced, worn out, or destroyed warrant in lieu of
which the new warrant is issued. Every warrant issued hereunder shall be issued
without payment to the Company for such warrant, provided that, there shall be
paid to the Company a sum equal to any exceptional expenses incurred by the
Company in providing for or obtaining any such indemnity and security as is
referred to herein.
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Notwithstanding any other provision hereof, in the event this
Warrant is exercised in connection with an initial public offering of the
Company's stock or the sale of the Company, such exercise may be conditioned
upon and subject to the consummation of such initial public offering or sale.
The Company shall not be required to issue fractions of shares
of Common Stock on the exercise or conversion of this Warrant. If any fraction
of a share of Common Stock would, except for the provisions of this paragraph,
be issuable on the exercise or conversion of this Warrant, the Company shall
purchase such fraction for an amount in cash equal to the current fair market
value of such fraction.
The right to exercise this Warrant and purchase the stock as
provided herein is expressly contingent upon and conditioned upon Holder being
in material compliance with all of the material terms of that certain
Distribution Services Agreement for Holiday Inn Worldwide between the Company
and Holder and further provided that Holder has not terminated any of the
Services (as defined therein), unless as a result of a breach of the Agreement
by the Company, as of the exercise of this Warrant.
Except as otherwise provided herein, nothing contained in this
Warrant shall be construed as conferring upon Holder the right to vote or to
consent or to receive notice as a stockholder in respect of the meetings of
stockholders for the election of directors of the Company or any other matters,
or any rights whatsoever as a stockholder of the Company.
Any notice pursuant to this Warrant to be given or made by Holder or
the Company shall be sufficiently given or made if sent by first-class mail,
postage prepaid, or by next day delivery service for personal delivery,
addressed (until another address is provided in writing by the Company or
Holder) as follows with a copy to the Company's or Holder's legal departments:
President Senior Vice President, Worldwide Reservations
Pegasus Systems, Inc. Holiday Hospitality Corporation
3811 Turtle Creek Boulevard Three Ravinia Drive
Suite 1100 Suite 2900
Dallas, Texas 75219 Atlanta, Georgia 30346
All the covenants and provisions of this Warrant by or for the benefit
of the Company or Holder shall bind and inure to the benefit of their respect
successors and assigns hereunder.
This Warrant shall be deemed to be a contract made under the laws of
the State of Texas and for all purposes shall be construed in accordance with
the laws of said State.
Nothing herein shall be construed to give to any person or
corporation other than the Company and Holder any legal or equitable right,
remedy or claim hereunder, but the terms of this Warrant shall be for the sole
and exclusive benefit of Holder and the Company.
Except as otherwise provided herein, this Warrant is not transferable.
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In connection with the exercise of this Warrant, Holder agrees to
execute the Investment Representative Statement (or a substantially similar
document) attached hereto as Exhibit A.
IN WITNESS WHEREOF, this Warrant is hereby executed by the President
and Secretary of Pegasus Systems, Inc. as the act of the Company.
Date: May 27, 1997
PEGASUS SYSTEMS, INC.
By: /s/ JOHN F. DAVIS, III
----------------------------------
John F. Davis, III, President
ATTEST:
By: /s/ RIC L. FLOYD
----------------------------------
Ric L. Floyd, Secretary
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INVESTMENT REPRESENTATION STATEMENT
In connection with the exercise of Warrant Number 1 of Pegasus
Systems, Inc. and the purchase of the Securities described therein, the
undersigned Holder represents to the Company the following:
(a) Holder is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company
to reach an informed and knowledgeable decision to acquire the Securities.
Holder is acquiring these Securities for investment for Holder's own account
only and not with a view to, or for resale in connection with, any
"distribution" thereof within the meaning of the Securities Act of 1933, as
amended (the "Securities Act").
(b) Holder acknowledges and understands that the
Securities constitute "restricted securities" under the Securities Act and have
not been registered under the Securities Act in reliance upon a specific
exemption therefrom, which exemption depends upon, among other things, the bona
fide nature of Holder's investment intent as expressed herein. Holder further
understands that the Securities must be held indefinitely unless they are
subsequently registered under the Securities Act or an exemption from such
registration is available. Holder further acknowledges and understands that the
Company is under no obligation to register the Securities. Holder understands
that the certificate evidencing the Securities will be imprinted with a legend
which prohibits the transfer of the Securities unless they are registered or
such registration is not required in the opinion of counsel satisfactory to the
Company and any other legend required under then applicable state or federal
securities laws.
(c) Holder is familiar with the provisions of Rule 701
and Rule 144, each promulgated under the Securities Act, which, in substance,
permit limited public resale of "restricted securities" acquired, directly or
indirectly from the issuer thereof, in a non-public offering subject to the
satisfaction of certain conditions. Rule 701 provides that if the issuer
qualifies under Rule 701 at the time of the issuance of the Warrant to the
Holder, the exercise will be exempt from registration under the Securities Act.
In the event the Company becomes subject to the reporting requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") ninety (90) days thereafter (or such longer period as any
market stand-off agreement may require) the Securities exempt under Rule 701
may be resold, subject to the satisfaction of certain of the conditions
specified by Rule 144, including: (1) the resale being made through a broker in
an unsolicited "brokers transaction" or in transactions directly with a market
maker (as said term is defined under the Exchange Act); and, in the case of an
affiliate, (2) the availability of certain public information about the
Company, (3) the amount of Securities being sold during any three month period
not exceeding the limitations specified in Rule 144(e), and (4) the timely
filing of a Form 144, if applicable.
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EXHIBIT "A"
TO
COMMON STOCK PURCHASE WARRANT
In the event that the Company does not qualify under Rule 701
at the time of issuance of the Warrant, then the Securities may be resold in
certain limited circumstances subject to the provisions of Rule 144, which
requires the resale to occur not less than one year after the later of the date
the Securities were sold by the Company or the date the Securities were sold by
an affiliate of the Company, within the meaning of Rule 144; and, in the case
of acquisition of the Securities by an affiliate, or by a non-affiliate who
subsequently holds the Securities less than two years, the satisfaction of the
conditions set forth in sections (1), (2), (3) and (4) of the paragraph
immediately above.
(d) Holder further understands that in the event all of
the applicable requirements of Rule 701 or 144 are not satisfied, registration
under the Securities Act, compliance with Regulation A under the Securities Act
or some other registration exemption will be required; and that, notwithstanding
the fact that Rules 144 and 701 are not exclusive, the Staff of the Securities
and Exchange Commission has expressed its opinion that persons proposing to
sell private placement securities other than in a registered offering and
otherwise than pursuant to Rules 144 or 701 will have a substantial burden of
proof in establishing that an exemption from registration is available for such
offers or sales, and that such persons and their respective brokers who
participate in such transactions do so at their own risk. Holder understands
that no assurances can be given that any such other registration exemption will
be available in such event.
HOLIDAY HOSPITALITY CORPORATION, HOLDER
By:
-------------------------------------
Its:
-------------------------------
Date:
-------------------------
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EXHIBIT 10.1
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT ("Agreement") is being entered into
as of June 25, 1996 (the "Closing Date") by and between Pegasus Systems, Inc.,
a Delaware corporation (the "Company"), and John F. Davis, III ("Executive").
RECITALS
A. Executive has served as Chief Executive Officer of the Company
since July 1995.
B. Pursuant to a Series A Preferred Stock Purchase Agreement,
dated as of the Closing Date, by and among the Company, and the entities listed
on Exhibit A thereto (the "Purchasers"), the Purchasers are purchasing certain
shares of Series A Preferred Stock, par value $0.01 per share, of the Company
(the "Purchase").
C. The Purchasers have required, as a condition to consummating
the Purchase, that Executive execute and deliver this Agreement.
AGREEMENT
In order to induce the Purchasers to consummate the Purchase, and in
further consideration of the mutual covenants and agreements contained herein,
the parties agree as follows:
1. EMPLOYMENT
1.1 TERM; DUTIES.
(a) TERM. Subject to Section 1.6 below, Executive agrees to
serve as an employee of the Company during the period commencing on the Closing
Date and ending on the date four (4) years from the Closing Date, subject to
automatic one year annual renewals if neither party has provided the other with
a written notice expressing an intent to terminate the Executive's employment
with the Company 60 days prior to the beginning of such renewal period (the
"Employment Term").
(b) DUTIES. During the Employment Term,Executive shall
serve as the Chief Executive Officer of the Company and in such capacity shall
have such responsibilities and perform such duties as the Company's Board of
Directors may specify from time to time consistent with such position. Executive
agrees to serve the Company faithfully and to the best of his ability, and to
devote substantially all of his working time, attention and efforts during the
Employment Term to the business and affairs of the Company. Executive shall not
serve as a director, employee, consultant or advisor to any other corporation
(other than the Company's affiliates) or other business enterprise without the
prior written consent of the Company; provided, however, that Executive may
serve in any capacity with any civic, educational or charitable organization or
any trade association without the approval of the Board, so long
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as such activities do not interfere with his duties and obligations under this
Agreement. Executive represents and warrants to the Company that he is under no
contractual commitments inconsistent with his obligations set forth in this
Agreement.
1.2 COMPENSATION. In consideration for all services to be performed
under this Agreement, Executive shall receive the following compensation:
(a) SALARY. Executive shall be paid a base salary at a rate
of not less than $22,916.67 per month, subject to increase annually at the
discretion of the Compensation Committee of the Board of Directors and payable
at such times as other executives of the Company receive their regular salary
payments (the "Base Salary").
(b) SIGNING BONUS. The Company shall pay to Executive on or
before June 30, 1996 a signing bonus in the amount of $200,000.
(c) BONUS PROGRAM. The Executive will be eligible to
receive annual bonus payments in addition to the Base Salary. Such annual bonus
shall be determined by the Compensation Committee in its discretion based on
achievement of performance objectives established by the Compensation Committee
of the Board of Directors from time to time.
(d) OPTION. The Company shall grant to Executive an option
(the "Option") (or, at Executive's election, a stock purchase right to purchase
shares of Common Stock of the Company (the "Common Stock") for a total of
225,000 shares of Common Stock) at an exercise price of $2.68 per share.
Subject to Section 1.6(b)(ii) below, such Option will vest 1/4 on the first
anniversary of the Closing Date and 1/48 after each subsequent month of
employment, so that such Option would be fully vested four (4) years after the
Closing Date based on continued employment.
(e) AUTOMOBILE ALLOWANCE. The Company agrees to pay
Executive an automobile allowance of up to $911 per month.
(f) LIFE INSURANCE. To the extent commercially practicable,
the Company shall maintain life insurance with respect to Executive, in the
amount of $2,000,000 with the Company as beneficiary and $1,000,000 with
Executive's estate as beneficiary.
The Company shall be entitled to withhold from the compensation
payments otherwise required to be made to Executive such amounts as may be
required under applicable tax laws and other applicable legal requirements.
1.3 OTHER BENEFITS. The Company shall provide to Executive, during
the Employment Term such other benefits (including vacation) as the Company
makes generally available to its other employees and makes generally available
to its executives during the Employment Term, subject to Executive's
satisfaction of the respective requirements for such benefits.
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The Hotel Industry Switch Company, The Hotel Clearing Corporation, the Hotel
Clearing Corporation (U.K.) and TravelWeb, Inc., any salary, bonus or other
compensation or benefit of any nature (whether relating to any period prior to
the Closing Date or relating to any period after the Closing Date) except as
expressly provided in Sections 1.2 and 1.3 above. Executive represents and
warrants to the Company that he is not aware of any claims or rights against
the Company arising directly or indirectly from his past employment with the
Company, and Executive hereby releases and discharges the Company and its
affiliates from all claims, rights, causes of action, demands and obligations
arising directly or indirectly from his past employment with the Company.
1.5 EXPENSES. Executive shall be entitled to reimbursement from the
Company for reasonable out-of-pocket business expenses reasonably incurred by
Executive during the Employment Term in the performance of Executive's duties
under this Agreement, in accordance with the Company policies in effect from
time to time; provided however, that the Company shall not be required to
reimburse Executive for any such expenses unless: (a) Executive presents
vouchers and receipts indicating in reasonable detail the amount and business
purpose of each of such expenses; and (b) Executive otherwise complies with
the Company's reimbursement policies established from time to time and in
effect during the Employment Term.
1.6 TERMINATION.
(a) Executive and the Company acknowledge and agree that
either the Company or Executive shall have the right to terminate Executive's
employment, at any time during the Employment Term, with or without Cause (as
defined in Section 1.7), by delivering written notice of termination to the
other thirty (30) days prior to the date of termination. Upon any such
termination of this Agreement, Executive's employment with the Company shall
terminate and, except as provided in Section 1.6(b) or 1.6(c) below, as
applicable, the Company shall have no further monetary obligation or other
obligation of any nature to Executive under this Agreement or with respect to
his employment or the termination of his employment (except as expressly
required by applicable law).
(b) If (i) the Company terminates this Agreement without
Cause (as defined in Section 1.7 below) during the Employment Term, (ii)
Executive satisfies all of his obligations relating to the termination of his
employment under this Agreement as specified in Sections 2, 3 and 4.1 hereof),
and (iii) Executive executes and delivers to the Company a general release of
liability (satisfactory in form and substance to the Company) in favor of the
Company, then so long as Executive does not breach Section 2, 3 or 4.1 hereof:
(A) The Company shall pay to Executive the Base
Salary referred to in Section 1.2(a) above for a period of twelve (12)
months following the date of termination, payable over such
twelve-month period at such times as executives of the Company receive
their regular salary payments;
(B) Vesting of the Option shall accelerate so that
(i) if termination of employment occurs prior to the date being three
(3) years and one (1) month after the Closing Date, Executive's Option
shall vest for an additional 56,250 shares of Common Stock (in addition
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to shares vested as of the date of termination) or (ii) if termination
of employment occurs on or after the date being three (3) years and one
(1) month after the Closing Date, Executive's Option shall fully vest;
and
(C) The Company shall pay to Executive all accrued
salary, any benefits under any plans of the Company in which Executive
is a participant to the full extent of Executive's rights under such
plans and any appropriate out-of-pocket business expense
reimbursements.
(c) If this Agreement is terminated other than pursuant to
Section 1.6(b), including voluntary termination or termination by the Company
with Cause, or by reason of death or disability, then so long as Executive does
not breach Section 2, 3 or 4.1 hereof, Executive shall be entitled to payment of
all accrued salary, vesting of the Option through the date of termination only,
any further benefits under any plans of the Company in which Executive is a
participant to the full extent of Executive's rights under such plans through
the date of termination only, and any appropriate out-of-pocket business expense
reimbursements.
(d) The termination of this Agreement pursuant to this
Section 1.6 or otherwise shall not limit or otherwise affect any of Executive's
obligations under Sections 2, 3 and 4.1 hereof, which obligations shall survive
any such termination.
(e) Executive shall be entitled to no benefits,
compensation or other payments or rights upon termination of employment except
as expressly set forth under Section 1.6(b), 1.6(c) or 1.6(d), as applicable;
provided, only, that to the extent the Consolidated Omnibus Budget
Reconciliation Act of 1985 ("COBRA") shall be applicable to the Company,
Executive may be eligible following termination of employment to continue to
receive group health plan benefits pursuant to COBRA by making the appropriate
election and payments.
1.7 DEFINITION OF "CAUSE." Executive's employment with the Company
shall be deemed to have been terminated for "Cause" if such employment is
terminated due to:
(a) habitual failure to report to work, which is not cured
within sixty (60) days after written notice from the Board of Directors;
(b) habitual substance abuse, which is not cured within
sixty (60) days after written notice from the Board of Directors;
(c) material breach of Executive's fiduciary duty to the
Company or its affiliates, including without limitation, misappropriation of
corporate assets, self dealing and violation of any noncompetition agreement or
any confidential information and assignment agreement;
(d) any intentional misconduct, fraud or bad faith on the
part of Executive in the performance of his duties as an employee of the
Company;
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(e) the conviction of Executive of, or the entry by
Executive of a plea of guilty or no contest to, any felony, any activity
constituting unlawful harassment, or any other malfeasance that could
materially impair the reputation of the Company or Executive; and
(f) the breach by Executive of any material provision in
this Agreement, which is not cured within sixty (60) days after written notice
from the Board of Directors.
1.8 DISABILITY. If, during the term of this Agreement, Executive,
in the reasonable judgment of the Board of Directors, has failed to perform his
duties under this Agreement on account of illness or physical or mental
incapacity, and such illness or incapacity continues for a period of six (6)
months, the Company shall have the right to terminate Executive's employment
hereunder by written notification to Executive.
1.9 DEATH. In the event of Executive's death during the term of
this Agreement, the date of termination shall be deemed to have occurred as of
the last day of the month during which his death occurs.
2. CONFIDENTIAL INFORMATION.
The Confidential Information and Invention Assignment Agreement entered
into by the Executive as of the date hereof and attached hereto as Exhibit A is
hereby incorporated by reference.
3. NON-COMPETITION AND NON-SOLICITATION
3.1 NON-COMPETITION. During the period commencing on the Closing
Date and continuing until the date twelve (12) months after the termination of
the Executive's employment with the Company (the "Noncompete Period"),
Executive shall not, directly or indirectly, provide any service (as an
employee, consultant or otherwise), support, product, or technology to any
person or entity, residing or located in the states or provinces of North
America and the countries of Europe, if such service, support, product or
technology involves or relates to, in any material respect, the business of the
Company as conducted during the term of Executive's employment (each a
"Restricted Business"). The Company and the Executive agree that these
limitations as to time, geographical area, and scope of activity to be
restrained are reasonable and the limitations are necessary to protect the
goodwill or other business interests of the Company.
3.2 NON-SOLICITATION. Executive further agrees that during the
Noncompete Period, he will not:
(a) directly or indirectly, personally or through others,
encourage, induce, attempt to induce, solicit or attempt to solicit (on
Executive's own behalf or on behalf of any other person or entity) the
employment of (i) any employee of the Company or any of the Company's affiliates
or (ii) any person who was within the previous twelve (12) months an employee
of the Company or any of the Company's affiliates;
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(b) directly or indirectly, personally or through others,
approach, contact, solicit, advise or do (or attempt to do) business with, or
otherwise interfere with the relationship of the Company or any of the
Company's affiliates with, any person or entity who is, was or is reasonably
anticipated to become a customer or client of the Company or any of the
Company's affiliates with respect to any Restricted Business.
3.3 SEPARATE COVENANTS. The covenants contained in Section 3.2(a)
and (b) above shall be each construed as a series of separate covenants, one
for each county, city, state and country of any geographic area where any
business is presently carried on by the Company. Except for geographic
coverage, each such separate covenant shall be identical in terms to the
covenant contained in Section 3.2(a). If, in any judicial proceeding, a court
refuses to enforce any of such separate covenants (or any part thereof), then
such unenforceable covenant (or such part) shall be eliminated from this
Agreement to the extent necessary to permit the remaining separate covenants
(or portions thereof) to be enforced. In the event that the provisions of this
Section 3 are deemed to exceed the time, geographic or scope limitations
permitted by applicable law, then such provisions shall be reformed to the
maximum time, geographic or scope limitations, as the case may be, permitted by
applicable laws.
4. MISCELLANEOUS PROVISIONS.
4.1 SURRENDER OF REWARDS AND PROPERTY. At such time as Executive no
longer serves as an Executive of the Company, Executive shall deliver promptly
to the Company (a) all records, manuals, books, blank forms, documents,
letters, memoranda, notes, notebooks, reports, data, tables, calculations or
copies thereof in his possession or under his control which are the property of
the Company or which relate in any way to the business, products, practices or
techniques of the Company, and (b) all other property and Confidential
Information of the Company in his possession or under his control, including
all documents which contain any Confidential Information of the Company.
4.2 INDEPENDENCE OF OBLIGATIONS. The covenants of Executive set
forth in this Agreement shall be construed as independent of any other
agreement between Executive, on the one hand, and the Company, on the other.
The existence of any claim or cause of action by Executive against the Company
shall not constitute a defense to the enforcement of such covenants against
Executive.
4.3 SPECIFIC PERFORMANCE. Executive agrees that in the event of
any breach or threatened breach by Executive of any covenant, obligation or
other provision contained in this Agreement, the Company shall be entitled (in
addition to any other remedy that may be available to it) to (a) a decree or
order of specific performance or mandamus to enforce the observance and
performance of such covenant, obligation or other provision, and (b) injunction
restraining such breach or threatened breach.
4.4 NON-EXCLUSIVITY. The rights and remedies of the Company
hereunder are not exclusive of or limited by any other rights or remedies which
the Company may have, whether at law, in equity, by contract or otherwise, all
of which shall be cumulative (and not alternative). Without limiting the
generality of the foregoing, the rights and remedies of the Company hereunder,
and the obligations and liabilities of Executive hereunder, are in addition to
their respective rights, remedies, obligations and liabilities under the law of
unfair competition, misappropriation of trade secrets and the like.
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4.5 INDEMNIFICATION. Without in any way limiting any of the rights
or remedies otherwise available to the Company, Executive shall hold harmless
and indemnify the Company from and against, and shall compensate and reimburse
the Company from, any loss, damage, injury, decline in value, lost opportunity,
liability, exposure, claim, demand, settlement, judgment, award, fine, penalty,
tax, fee (including reasonable attorneys' fees) charge, cost (including costs
of investigation) or expense of any nature (collectively, the "Damages") which
are directly or indirectly suffered or incurred at any time by the Company, or
to which the Company otherwise becomes subject (regardless of whether or not
such Damages relate to a third-party claim) and that arise from or are directly
or indirectly connected with, any breach of any covenant or obligation of
Executive contained herein.
4.6 NOTICES. All notices and other communications required or
permitted hereunder shall be in writing, shall be effective when given, and
shall in any event be deemed to be given upon receipt or, if earlier, (a) five
(5) days after deposit with the U.S. Postal Service or other applicable postal
service, if delivered by first class mail, postage prepaid, (b) upon delivery,
if delivered by hand, (c) one business day after the business day of deposit
with Federal Express or similar overnight courier, freight prepaid or (d) one
business day after the business day of facsimile transmission, if delivered by
facsimile transmission with copy by first class mail, postage prepaid, and
shall be addressed (i) if to Executive at his address as set forth herein, and
(ii) if to the Company, at the address of its principal corporate offices
(attention: Secretary), or at such other address as a party may designate by
ten (10) days' advance written notice to the other party pursuant to the
provisions above.
4.7 SEVERABILITY. If any provision of this Agreement or any part of
any such provision is held under any circumstances to be invalid or
unenforceable in any jurisdiction, then (a) such provision or part thereof
shall, with respect to such circumstances and in such jurisdiction, be deemed
amended to conform to applicable laws so as to be valid and enforceable to the
fullest possible extent, (b) the invalidity or unenforceability of such
provision or part thereof under any other circumstances and in such
jurisdiction shall not affect the validity or enforceability of such provision
or part thereof under any other circumstances or in any other jurisdiction and
(c) such invalidity of enforceability of such provision or part thereof shall
not affect the validity or enforceability of the remainder of such provision or
the validity or enforceability of any other provision of this Agreement. Each
provision of this Agreement is separable from every other provision of this
Agreement, and each part of each provision of this Agreement is separable from
every other part of such provision.
4.8 GOVERNING LAW. This Agreement shall be construed in accordance
with, and governed in all by, the laws of the State of Texas (without giving
effect to principles of conflicts of laws).
4.9 WAIVER. No failure on the part of either party to exercise any
power, right, privilege or remedy under this Agreement, and no delay on the
part of either party in exercising any power, right, privilege or remedy under
this Agreement, shall operate as a waiver of such power, right, privilege or
remedy; and no single or partial exercise of any such power, right, privilege
or remedy shall preclude any other or further exercise thereof or of any other
power, right, privilege or remedy. Neither party shall be deemed to have waived
any claim arising out of this Agreement, or any power, right, privilege or
remedy under this Agreement, unless the waiver of such claim, power, right,
privilege or remedy is
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expressly set forth in a written instrument duly executed and delivered on
behalf of such party; and any such waiver shall not be applicable or have any
effect except in the specific instance in which it is given.
4.10 CAPTIONS. The captions contained in this Agreement are for
convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the construction or
interpretation of this Agreement.
4.11 COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall constitute an original and all of which, when
taken together, shall constitute one agreement.
4.12 FURTHER ASSURANCES. Each party hereto shall execute and/or
cause to be delivered to the other party hereto such instruments and other
documents and shall take such other actions as such other party may reasonably
request to effectuate the intent and purposes of this Agreement.
4.13 ENTIRE AGREEMENT. This Agreement sets forth the entire
understanding of the parties relating to the subject matter hereof and thereof
and supersedes all prior agreements and understandings between the parties
(including any prior agreements or understandings between Executive and any
subsidiary of the Company) relating to the subject matter hereof and thereof,
including without limitation the right to employment, employment compensation,
severance and other compensation upon termination of employment and rights to
acquire securities of the Company or any subsidiary which Executive may have to
acquire securities of the Company, provided only that this Agreement shall not
affect the Company's rights under the Amended and Restated Stockholders
Agreement of the Company dated June 25, 1996, which shall continue in full
force and effect.
4.14 AMENDMENTS. This Agreement may not be amended, modified,
altered or supplemented other than by means of a written instrument duly
executed and delivered on behalf of the Company and Executive.
4.15 ASSIGNMENT. This Agreement and all rights and obligations of
Executive hereunder are personal to Executive and may not be transferred or
assigned by Executive at any time. The Company may, assign its rights under
this Agreement to any entity that assumes the Company's obligations hereunder
in connection with any sale or transfer of all or a substantial portion of the
Company's assets to such entity.
4.16 BINDING NATURE. Subject to Section 4.15, this Agreement will be
binding upon and inure to the benefit of the Company and its successors and
assigns and Executive and his representatives, executors, administrators,
estate, heirs, successors and assigns.
4.17 ARBITRATION. Any disputes under this Agreement between the
parties hereto shall be settled by arbitration in Dallas, Texas under the
auspices of, and in accordance with the rules of, the American Arbitration
Association, by an arbitrator who is mutually agreeable to the parties hereto,
or, if the Company and Executive cannot agree on the selection of the
arbitrator, then before three arbitrators, one of which shall be appointed by
Executive, one of which shall be appointed by the Company, and the third of
which shall be chosen by the American Arbitration Association (such arbitrator
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or arbitrators hereinafter referred to as the "Arbitrator"). The decision in
such arbitration shall be final and conclusive on the parties and judgment upon
such decision may be entered in any court having jurisdiction thereof. The
parties hereby agree that the Arbitrator shall be empowered to enter an
equitable decree mandating specific enforcement of the terms of this Agreement.
The Company and Executive shall share equally all expenses of the Arbitrator
incurred in any arbitration hereunder; provided, however, that the Company or
Executive, as the case may be, shall bear all expenses of the Arbitrator and
all of the legal fees and out-of-pocket expenses of the other party if the
Arbitrator determines that the claim or position of such party was without
reasonable foundation. Executive hereby consents to personal jurisdiction of
the state and federal courts located in the State of Texas for any action or
proceeding arising from or relating to this Agreement or relating to any
arbitration in which the parties are participants.
4.18 SURVIVAL. The provisions of Sections 2, 3 and 4 hereof shall
survive termination of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered as of the date first above written.
PEGASUS SYSTEMS, INC.
By: JOHN W. BIGGS
-----------------------------
Name: John W. Biggs
---------------------------
Title: Chairman
--------------------------
EXECUTIVE
JOHN F. DAVIS, III
---------------------------------
John F. Davis, III
Address: 6043 Park Ln.
------------------------
Dallas, Tx 75225
---------------------------------
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EXHIBIT 10.2
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT ("Agreement") is being entered into
as of June 25, 1996 (the "Closing Date") by and between Pegasus Systems, Inc.,
a Delaware corporation (the "Company"), and Joseph W. Nicholson ("Executive").
RECITALS
A. Executive has served as Chief Information Officer of the
Company since July 1995.
B. Pursuant to a Series A Preferred Stock Purchase Agreement,
dated as of the Closing Date, by and among the Company, and the entities listed
on Exhibit A thereto (the "Purchasers"), the Purchasers are purchasing certain
shares of Series A Preferred Stock, par value $0.01 per share, of the Company
(the "Purchase").
C. The Purchasers have required, as a condition to consummating
the Purchase, that Executive execute and deliver this Agreement.
AGREEMENT
In order to induce the Purchasers to consummate the Purchase, and in
further consideration of the mutual covenants and agreements contained herein,
the parties agree as follows:
1. EMPLOYMENT
1.1 TERM; DUTIES.
(a) TERM. Subject to Section 1.6 below, Executive agrees to serve
as an employee of the Company during the period commencing on the Closing Date
and ending on the date four (4) years from the Closing Date, subject to
automatic one year annual renewals if neither party has provided the other with
a written notice expressing an intent to terminate the Executive's employment
with the Company 60 days prior to the beginning of such renewal period (the
"Employment Term").
(b) DUTIES. During the Employment Term, Executive shall serve as
the Chief Information Officer of the Company and in such capacity shall have
such responsibilities and perform such duties as the Chief Executive Officer or
the Company's Board of Directors may specify from time to time consistent with
such position. Executive agrees to serve the Company faithfully and to the best
of his ability, and to devote substantially all of his working time, attention
and efforts during the Employment Term to the business and affairs of the
Company. Executive shall not serve as a
2
director, employee, consultant or advisor to any other corporation (other than
the Company's affiliates) or other business enterprise without the prior written
consent of the Company; provided, however, that Executive may serve in any
capacity with any civic, educational or charitable organization or any trade
association without the approval of the Board, so long as such activities do
not interfere with his duties and obligations under this Agreement. Executive
represents and warrants to the Company that he is under no contractual
commitments inconsistent with his obligations set forth in this Agreement.
1.2 COMPENSATION. In consideration for all services to be
performed under this Agreement, Executive shall receive the following
compensation:
(a) SALARY. Executive shall be paid a base salary at a rate
of not less than $14,583 per month, subject to increase annually at the
discretion of the Compensation Committee of the Board of Directors and payable
at such times as other executives of the Company receive their regular salary
payments (the "Base Salary").
(b) BONUS PROGRAM. The Executive will be eligible to
receive annual bonus payments in addition to the Base Salary. Such annual bonus
shall be determined by the Compensation Committee in its discretion based on
achievement of performance objectives established by the Compensation Committee
of the Board of Directors from time to time.
(c) OPTION. The Company shall grant to Executive an option
(the "Option") (or, at Executive's election, a stock purchase right to purchase
shares of Common Stock of the Company (the "Common Stock") for a total of
$112,500 shares of Common Stock) at an exercise price of $2.68 per share.
Subject to Section 1.6(b)(ii) below, such Option will vest 1/4 on the first
anniversary of the Closing Date and 1/48 after each subsequent month of
employment, so that such Option would be fully vested four (4) years after the
Closing Date based on continued employment.
(d) AUTOMOBILE ALLOWANCE. The Company agrees to pay
Executive an automobile allowance of up to $500 per month.
(e) LIFE INSURANCE. To the extent commercially
practicable, the Company shall maintain life insurance with respect to
Executive, in the amount of $1,333,000 with the Company as beneficiary and
$667,000 with Executive's estate as beneficiary.
The Company shall be entitled to withhold from the compensation
payments otherwise required to be made to Executive such amounts as may be
required under applicable tax laws and other applicable legal requirements.
1.3 OTHER BENEFITS. The Company shall provide to Executive, during
the Employment Term, such other benefits (including vacation) as the Company
makes generally available to its other employees and makes generally available
to its executives during the Employment Term, subject to Executive's
satisfaction of the respective eligibility requirements for such benefits.
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1.4 NO OTHER COMPENSATION. Executive acknowledges and agrees that
he shall not be entitled to receive from the Company or any other affiliate of
the Company, including but not limited to, The Hotel Industry Switch Company,
The Hotel Clearing Corporation, the Hotel Clearing Corporation (U.K.) and
TravelWeb, Inc. any salary, bonus or other compensation or benefit of any
nature (whether relating to any period prior to the Closing Date or relating to
any period after the Closing Date) except as expressly provided in Sections 1.2
and 1.3 above. Executive represents and warrants to the Company that he is not
aware of any claims or rights against the Company arising directly or
indirectly from his past employment with the Company, and Executive hereby
releases and discharges the Company and its affiliates from all claims, rights,
causes of action, demands and obligations arising directly or indirectly from
his past employment with the Company.
1.5 EXPENSES. Executive shall be entitled to reimbursement from the
Company for reasonable out-of-pocket business expenses reasonably incurred by
Executive during the Employment Term in the performance of Executive's duties
under this Agreement, in accordance with the Company policies in effect from
time to time; provided, however, that the Company shall not be required to
reimburse Executive for any such expenses unless: (a) Executive presents
vouchers and receipts indicating in reasonable detail the amount and business
purpose of each of such expenses; and (b) Executive otherwise complies with the
Company's reimbursement policies established from time to time and in effect
during the Employment Term.
1.6 TERMINATION.
(a) Executive and the Company acknowledge and agree that either the
Company or Executive shall have the right to terminate Executive's employment
at any time during the Employment Term with or without Cause (as defined in
Section 1.7), by delivering written notice of termination to the other thirty
(30) days prior to the date of termination. Upon any such termination of this
Agreement, Executive's employment with the Company shall terminate and, except
as provided in Section 1.6(b) or 1.6(c) below, as applicable, the Company shall
have no further monetary obligation or other obligation of any nature to
Executive under this Agreement or with respect to his employment or the
termination of his employment (except as expressly required by applicable law).
(b) If (i) the Company terminates this Agreement without Cause (as
defined in Section 1.7 below) during the Employment Term, (ii) Executive
satisfies all of his obligations relating to the termination of his employment
under this Agreement as specified in Sections 2, 3 and 4.1 hereof), and (iii)
Executive executes and delivers to the Company a general release of liability
(satisfactory in form and substance to the Company) in favor of the Company,
then so long as Executive does not breach Section 2, 3 or 4.1 hereof.
(A) The Company shall pay to Executive the Base Salary
referred to in Section 1.2(a) above for a period of twelve (12) months
following the date of termination, payable over such twelve-month period
at such times as executives of the Company receive their regular salary
payments;
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(B) Vesting of the Option shall accelerate so that (i) if
termination of employment occurs prior to the date being three (3) years
and one (1) month after the Closing Date, Executive's Option shall vest
for an additional 28,125 shares of Common Stock (in addition to shares
vested as of the date of termination) or (ii) if termination of
employment occurs on or after the date being three (3) years and one (1)
month after the Closing Date, Executive's Option shall fully vest; and
(C) The Company shall pay to Executive all accrued salary, any
benefits under any plans of the Company in which Executive is a
participant to the full extent of Executive's rights under such plans
and any appropriate out-of-pocket business expense reimbursements.
(c) If this Agreement is terminated other than pursuant to Section
1.6(b), including voluntary termination, termination by the Company with Cause,
or by reason of death or disability, then so long as Executive does not breach
Section 2, 3 or 4.1 hereof, Executive shall be entitled to payment of all
accrued salary, vesting of the Option through the date of determination only,
any further benefits under any plans of the Company in which Executive is a
participant to the full extent of Executive's rights under such plans through
the date of termination only and any appropriate out-of-pocket business expense
reimbursements.
(d) The termination of this Agreement pursuant to this Section 1.6
or otherwise shall not limit or otherwise affect any of Executive's obligations
under Sections 2, 3, and 4.1 hereof, which obligations shall survive any such
termination.
(e) Executive shall be entitled to no benefits, compensation or
other payments or rights upon termination of employment except as expressly set
forth under Section 1.6(b), 1.6(c) or 1.6(d), as applicable; provided, only,
that to the extent the Consolidated Omnibus Budget Reconciliation Act of 1985
(""COBRA'') shall be applicable to the Company, Executive may be eligible
following termination of employment to continue to receive group health plan
benefits pursuant to COBRA by making the appropriate election and payments.
1.7 DEFINITION OF "CAUSE." Executive's employment with the Company
shall be deemed to have been terminated for "Cause" if such employment is
terminated due to:
(a) habitual failure to report to work, which is not cured within
sixty (60) days after written notice from the Board of Directors;
(b) habitual substance abuse, which is not cured within sixty (60)
days after written notice from the Board of Directors;
(c) material breach of Executive's fiduciary duty to the Company or
its affiliates, including without limitation, misappropriation of corporate
assets, self dealing and violation of any noncompetition agreement or any
confidential information and assignment agreement;
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(d) any intentional misconduct, fraud or bad faith on the part of
Executive in the performance of his duties as an employee of the Company;
(e) the conviction of Executive of, or the entry by Executive of a
plea of guilty or no contest to, any felony, any activity constituting unlawful
harassment, or any other malfeasance that could materially impair the
reputation of the Company or Executive; and
(f) the breach by Executive of any material provision in this
Agreement, which is not cured within sixty (60) days after written notice from
the Board of Directors.
1.8 DISABILITY. If, during the term of this Agreement, Executive,
in the reasonable judgment of the Board of Directors, has failed to perform his
duties under this Agreement on account of illness or physical or mental
incapacity, and such illness or incapacity continues for a period of six (6)
months, the Company shall have the right to terminate Executive's employment
hereunder by written notification to Executive.
1.9 DEATH. In the event of Executive's death during the term of
this Agreement, the date of termination shall be deemed to have occurred as of
the last day of the month during which his death occurs.
2. CONFIDENTIAL INFORMATION
The Confidential Information and Invention Assignment Agreement entered
into by the Executive as of the date hereof and attached hereto as Exhibit A is
hereby incorporated by reference.
3. NON-COMPETITION AND NON-SOLICITATION
3.1 NON-COMPETITION. During the period commencing on the Closing
Date and continuing until the date twelve (12) months after the termination of
the Executive's employment with the Company (the "Noncompete Period"), Executive
shall not, directly or indirectly, provide any service (as an employee,
consultant or otherwise), support, product, or technology to any person or
entity residing or located in the states or provinces of North America and the
countries of Europe, if such service, support, product or technology involves or
relates to, in any material respect, the business of the Company as conducted
during the term of Executive's employment (each, a "Restricted Business"). The
Company and Executive agree that these limitations as to time, geographical
area, and scope of activity to be restrained are reasonable and the limitations
are necessary to protect the goodwill or other business interests of the
Company.
3.2 NON-SOLICITATION. Executive further agrees that during the
Noncompete Period, he will not:
(a) directly or indirectly, personally or through others,
encourage, induced, attempt to induce, solicit or attempt to solicit (on
Executive's own behalf or on behalf of any other person or entity) the
employment of (i) any employee of the Company or any of the Company's
affiliates or
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(ii) any person who was within the previous twelve (12) months an employee of
the Company or any of the Company's affiliates;
(b) directly or indirectly, personally or through others, approach,
contact, solicit, advise or do (or attempt to do) business with, or otherwise
interfere with the relationship of the Company or any of the Company's
affiliates with, any person or entity who is, was or is reasonably anticipated
to become a customer or client of the Company or any of Company's affiliates
with respect to any Restricted Business.
3.3 SEPARATE COVENANTS. The covenants contained in Section 3.2(a)
and (b) above shall be each construed as a series of separate covenants, one
for each country, city, state and country of any geographic area where any
business is presently carried on by the Company. Except for geographic
coverage, each such separate covenant shall be identical in terms to the
covenant contained in Section 3.2(a). If, in any judicial proceeding, a court
refuses to enforce any of such separate covenants (or any part thereof), then
such unenforceable covenant (or such part) shall be eliminated from this
Agreement to the extent necessary to permit the remaining separate covenants
(or portions thereof) to be enforced. In the event that the provisions of this
Section 3 are deemed to exceed the time, geographic or scope limitations
permitted by applicable law, then such provisions shall be reformed to the
maximum time, geographic or scope limitations, as the case may be, permitted by
applicable laws.
4. MISCELLANEOUS PROVISIONS.
4.1 SURRENDER OF REWARDS AND PROPERTY. At such time as Executive
no longer serves as an Executive of the Company, Executive shall deliver
promptly to the Company(a) all records, manuals, books, blank forms, documents,
letters, memoranda, notes, notebooks, reports, data, tables, calculations or
copies thereof in his possession or under his control which are the property of
the Company, and (b) all other property and Confidential Information of the
Company in his possession or under his control, including all documents which
contain any Confidential Information of the Company.
4.2 INDEPENDENCE OF OBLIGATIONS. The covenants of Executive set
forth in this Agreement shall be construed as independent of any other
agreement or arrangement between Executive, on the one hand, and the Company,
on the other. The existence of any claim or cause of action by Executive
against the Company shall not constitute a defense to the enforcement of such
covenants against Executive.
4.3 SPECIFIC PERFORMANCE. Executive agrees that in the event of
any breach or threatened breach by Executive of any covenant, obligation or
other provision contained in this Agreement, the Company shall be entitled (in
addition to any other remedy that may be available to it) to (a) a decree or
order of specific performance or mandamus to enforce the observance and
performance of such covenant, obligation or other provision, and (b)
injunction restraining such breach or threatened breach.
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4.4 NON-EXCLUSIVITY. The rights and remedies of the Company
hereunder are not exclusive of or limited by any other rights or remedies which
the Company may have, whether at law, in equity, by contract or otherwise, all
of which shall be cumulative (and not alternative). Without limiting the
generality of the foregoing, the rights and remedies of the Company hereunder,
and the obligations and liabilities of Executive hereunder, are in addition to
their respective rights, remedies, obligations and liabilities under the law of
unfair competition, misappropriation of trade secrets and the like.
4.5 INDEMNIFICATION. Without in any way limiting any of the rights
or remedies otherwise available to the Company, Executive shall hold harmless
and indemnify the Company from and against, and shall compensate and reimburse
the Company from any loss, damage, injury, decline in value, lost opportunity,
liability, exposure, claim, demand, settlement, judgment, award, fine, penalty,
tax, fee (including reasonable attorneys' fees) charge, cost (including costs
of investigation) or expense of any nature (collectively, the "Damages") which
are directly or indirectly suffered or incurred at any time by the Company, or
to which the Company otherwise becomes subject (regardless of whether or not
such Damages relate to a third-party claim) and that arise from or are directly
or indirectly connected with, any breach of any covenant or obligation of
Executive contained herein.
4.6 NOTICES. All notices and other communications required or
permitted hereunder shall be in writing, shall be effective when given, and
shall in any event be deemed to be given upon receipt of, if earlier, (a) five
(5) days after deposit with the U.S. Postal Service or other applicable postal
service, if delivered by first class mail, postage prepaid, (b) upon delivery,
if delivered by hand, (c) one business day after the business day of deposit
with Federal Express or similar overnight courier, freight prepaid or (d) one
business day after the business day of facsimile transmission, if delivered by
facsimile transmission with copy by first class mail, postage prepaid, and
shall be addressed (i) if to Executive at his address as set forth herein, and
(ii) if to the Company, at the address of its principal corporate offices
(attention: Secretary), or at such other address as a party may designate by
ten (10) days' advance written notice to the other party pursuant to the
provisions above.
4.7 SEVERABILITY. If any provision of this Agreement or any part
of any such provision is held under any circumstances to be invalid or
unenforceable in any jurisdiction, then (a) such provision or part thereof
shall, with respect to such circumstances and in such jurisdiction, be deemed
amended to conform to applicable laws so as to be valid and enforceable to the
fullest possible extent, (b) the invalidity or unenforceability of such
provision or part thereof under such circumstances and in such jurisdiction
shall be affect the validity or enforceability of such provision or part
thereof under any other circumstances or in any other jurisdiction and (c) such
invalidity of enforceability of such provision or part thereof shall not affect
the validity or enforceability of the remainder of such provision or the
validity or enforceability of any other provision of this Agreement. Each
provision of this Agreement is separable from every other provision of this
Agreement, and each part of each provision of this Agreement is separable from
every other part of such provision.
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4.8 GOVERNING LAW. This Agreement shall be construed in accordance
with, and governed in all by, the laws of the State of Texas (without giving
effect to principles of conflicts of laws).
4.9 WAIVER. No failure on the part of either party to exercise any
power, right, privilege or remedy under this Agreement, and no delay on the
part of either party in exercising any power, right, privilege or remedy under
this Agreement, shall operate as a waiver of such power, right, privilege or
remedy; and no single or partial exercise of any such power, right, privilege
or remedy shall preclude any other or further exercise thereof or of any other
power, right, privilege or remedy. Neither party shall be deemed to have waived
any claim arising out of this Agreement, or any power, right, privilege or
remedy under this Agreement, unless the waiver of such claim, power, right,
privilege or remedy is expressly set forth in a written instrument duly
executed and delivered on behalf of such party; and any such waiver shall not
be applicable or have any effect except in the specific instance in which it
is given.
4.10 CAPTIONS. The captions contained in this Agreement are for
convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the construction or
interpretation of this Agreement.
4.11 COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall constitute an original and all of which, when
taken together, shall constitute one agreement.
4.12 FURTHER ASSURANCES. Each party hereto shall execute and/or
cause to be delivered to the other party hereto such instruments and other
documents and shall take such other actions as such other party may reasonably
request to effectuate the intent and purposes of this Agreement.
4.13 ENTIRE AGREEMENT. This Agreement sets forth the entire
understanding of the parties relating to the subject matter hereof and thereof
and supersedes all prior agreements and understandings between the parties
(including any prior agreements or understandings between Executive and any
subsidiary of the Company) relating to the subject matter hereof and thereof,
including without limitation the right to employment, employment compensation,
severance and other compensation upon termination of employment and rights to
acquire securities of the Company or any subsidiary which Executive may have to
acquire securities of the Company, provided only that this Agreement shall not
affect the Company's rights under the Amended and Restated Stockholders
Agreement of the Company dated June 25, 1996, which shall constitute in full
force and effect.
4.14 AMENDMENTS. This Agreement may not be amended, modified,
altered or supplemented other than by means of a written instrument duly
executed and delivered on behalf of the Company and Executive.
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4.15 ASSIGNMENT. This Agreement and all rights and obligations of
Executive hereunder are personal to Executive and may not be transferred or
assigned by Executive at any time. The Company may, assign its rights under
this Agreement to any entity that assumes the Company's obligations hereunder
in connection with any sale or transfer of all or a substantial portion of the
Company's assets to such entity.
4.16 BINDING NATURE. Subject to Section 4.15, this Agreement will
be binding upon and inure to the benefit of the Company and its successors and
assigns and Executive and his representatives, executors, administrators,
estate, heirs, successors and assigns.
4.17 ARBITRATION. Any disputes under this Agreement between the
parties hereto shall be settled by arbitration in Dallas, Texas under the
auspices of, and in accordance with the rules of, the American Arbitration
Association, by an arbitrator who is mutually agreeable to the parties hereto,
or, if the Company and Executive cannot agree on the selection of the
arbitrator, then before three arbitrators, one of which shall be appointed by
Executive, one of which shall be appointed by the Company, and the third of
which shall be chosen by the American Arbitration Association (such arbitrator
or arbitrators hereinafter referred to as the "Arbitrator"). The decision in
such arbitration ???????????? court having jurisdiction thereof. The parties
hereby agree that the Arbitrator ???????????? enter an equitable decree
mandating specific enforcement of the terms of this Agreement. The Company and
Executive shall share equally all expenses of the Arbitrator incurred in any
arbitration hereunder; provided, however, that the Company or Executive, as the
case may be, shall bear all expenses of the Arbitrator and all of the legal
fees and out-of-pocket expenses of the other party if the Arbitrator determines
that the claim or position of such party was without reasonable foundation.
Executive hereby consents to personal jurisdiction of the state and federal
courts located in the State of Texas for any action or proceeding arising from
or relating to this Agreement or relating to any arbitration in which the
parties are participants.
4.18 SURVIVAL. The provisions of Sections 2, 3 and 4 hereof shall
survive termination of this Agreement.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered as of the date first above written.
PEGASUS SYSTEMS, INC.
By: /s/ JOHN F. DAVIS, III
-----------------------------
Name: John F. Davis, III
----------------------------
Title: President
---------------------------
/s/ JOSEPH W. NICHOLSON
---------------------------------
Name: Joseph W. Nicholson
Address:
-------------------------
---------------------------------
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EXHIBIT 10.3
[PEGASUS SYSTEMS INC. LETTERHEAD]
August 29, 1996
Mr. Jerome L. Galant
4444 Gloster Road
Dallas, TX 75220
Dear Jerry,
I am pleased to extend to you an offer of employment as Chief Financial Officer
of Pegasus Systems, Inc. The terms of your employment are as follows:
Effective: No later than October 1, 1996
Salary: $12,083.33 per month
Bonus potential up to 30%
Stock: 40,000 shares of the employee stock option plan at a
strike price of $2.68 per share
Vacation: Two weeks accrued on start date
Comprehensive insurance and benefit program
If you are in agreement with the above, please sign below and return this letter
to me.
We look forward to having you on board!
Best regards,
/s/ JOHN F. DAVIS, III
John F. Davis, III
CEO
---------------------- -------------------------
Jerome L. Galant Date
Please note that Pegasus Systems, Inc. is an employment at-will organization
and the above does not constitute an employment contract.
1
[PEGASUS LETTERHEAD]
April 18, 1997
Michael R. Donahue
2110 Walters
Northbrook, Ill. 60062
Dear Mike,
I am pleased to extend to you an offer of employment as Chief Marketing Officer
of Pegasus Systems, Inc. The terms of your employment are as follows:
Base Salary: $13,750 per month
Bonus: Up to 40% of annual base salary on the following basis:
- 15% if company meets forecast
- 10% based on mutually agreed goals
- three quarters of one percent for each 1% company exceeds
forecast up to 15% of your base salary
Equity: 40,000 shares at $7.00 per share, vesting over four years.
The shares vest at 25% after the first twelve months, and
2,500 shares per quarter thereafter.
- Participation in future employee stock option plans as
approved by the Compensation Committee
Severance: Through the first 12 months of employment, the equivalent of
6 months salary; the second 12 months the equivalent of
9 months salary, and a full year after three years of
service.
Benefits: - Full medical and dental coverage paid by Pegasus; 50%
family coverage paid by Pegasus.
- 3 weeks vacation
- participation in the Pegasus 401(k) plan, Pegasus matching
up to 5% of base salary up to the maximum allowed by law.
- Country club membership, up to $250.00 per month.
Participation in a corporate sponsored membership, if
Pegasus chooses to purchase a corporate membership.
- Automobile allowance of $600. per month.
2
Michael Donahue
April 18, 1997
Page Two
Relocation: - 90 days temporary housing
- One months salary as "settling in" allowance
- $30,000 to cover closing and other costs
- transportation and actual costs of the move
- two house hunting trips for spouse
Effective date: No later than May 15, 1997
If you are in agreement with the above, please sign below and return the letter
to me.
I look forward to having you on board!
Sincerely,
/s/ JOHN F. DAVIS, III
John F. Davis, III
Chief Executive Officer
---------------------------------
Michael Donahue
cc: Paul Travers
Jerry Galant
Chuck Ollinger
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EXHIBIT 10.5
PEGASUS SYSTEMS, INC.
AMENDED 1996 STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this Stock Option Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and any Parent or Subsidiary and to promote the success of the
Company's business. Options granted under the Plan may be Incentive Stock
Options or Nonstatutory Stock Options, as determined by the Administrator at
the time of grant of an option and subject to the applicable provisions of
Section 422 of the Code and the regulations promulgated thereunder.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or the Compensation Committee
appointed by the Board.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means the Compensation Committee appointed by the Board of
Directors.
(e) "Common Stock" means the Common Stock of the Company.
(f) "Company" means Pegasus Systems, Inc.
(g) "Consultant" means any person who is engaged by the Company or any
Parent or Subsidiary to render consulting or advisory services and is
compensated for such services, and any director of the Company whether
compensated for such services or not. If and in the event the Company registers
any class of any equity security pursuant to the Exchange Act, the term
Consultant shall thereafter not include directors who are not compensated for
their services or are paid only a director's fee by the Company.
(h) "Continuous Status as an Employee or Consultant" means that the
employment or consulting relationship with the Company, any Parent or
Subsidiary is not interrupted or terminated. Continuous Status as an Employee
or Consultant shall not be considered interrupted in the case of (i) any leave
of absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor. A
leave of absence approved by the Company shall include sick leave, military
leave, or any other personal leave. For purposes of Incentive Stock Options, no
such leave may exceed 90 days, unless
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reemployment upon expiration of such leave is guaranteed by statute or
contract, including Company policies. If reemployment upon expiration of a
leave of absence approved by the Company is not so guaranteed, on the 181st day
of such leave any Incentive Stock Option held by the Optionee shall cease to be
treated as an Incentive Stock Option and shall be treated for tax purposes as a
Nonstatutory Stock Option.
(i) "Disability" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(j) "Employee" means any person, including officers and directors,
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(l) "Fair Market Value" means, as of any date, the value of Common Stock
determined as follows:
(i) If the Common Stock is listed on any established stock exchange
or a national market system, including without limitation the Nasdaq National
Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair
Market Value shall be the closing sales price for such stock (or the closing
bid, if no sales were reported) as quoted on such exchange or system for the
last market trading day prior to the time of determination, as reported in The
Wall Street Journal or such other source as the Administrator deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common
Stock on the last market trading day prior to the day of determination; or
(iii) In the absence of an established market for the Common Stock,
the Fair Market Value shall be determined in good faith by the Administrator.
(m) "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code.
(n) "Nonstatutory Stock Option" means an Option not intended to qualify as
an Incentive Stock Option.
(o) "Option" means a stock option granted pursuant to the Plan.
(p) "Optioned Stock" means the Common Stock subject to an Option.
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(q) "Optionee" means an Employee or Consultant who receives an Option.
(r) "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(s) "Permitted Transferee" means a member of a holder's immediate family,
trusts for the benefit of such immediate family members, and partnerships in
which the holder and such immediate family members are the only partners,
provided that no consideration is provided for the transfer.
(t) "Plan" means this Amended 1996 Stock Option Plan.
(u) "Section 16(b)" means Section 16(b) of the Securities Exchange Act of
1934, as amended.
(v) "Share" means a share of the Common Stock, as adjusted in accordance
with Section 11 below.
(w) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 975,000 Shares. The Shares may be authorized, but unissued,
or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been
exercised in full, or is surrendered pursuant to an option exchange program
authorized by the Administrator, the unpurchased Shares which were subject
thereto shall become available for future grant or sale under the Plan (unless
the Plan has terminated); provided, however, that Shares that have actually
been issued under the Plan shall not be returned to the Plan and shall not
become available for future distribution under the Plan, except that if
unvested Shares are repurchased by the Company at their original purchase
price, such Shares shall become available for future grant under the Plan.
4. Administration of the Plan.
(a) Initial Plan Procedure. Prior to the date, if any, upon which the
Company becomes subject to the Exchange Act, the Plan shall be administered by
the Board or the Compensation Committee appointed by the Board.
(b) Plan Procedure after the Date, if any, upon Which the Company becomes
Subject to the Exchange Act. With respect to Option grants made to Employees or
Consultants, the Plan shall be administered by (A) the Board or (B) the
Compensation Committee designated by the Board, which committee shall be
constituted to satisfy the legal requirements, if any, relating to the
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administration of incentive stock option plans of state corporate and
securities laws, of the Code, and of any stock exchange or national market
system upon which the Common Stock is then listed or traded (the "Applicable
Laws"). Once appointed, such Committee shall serve in its designated capacity
until otherwise directed by the Board. The Board may increase the size of the
Committee and appoint additional members, remove members (with or without
cause) and substitute new members, fill vacancies (however caused), and remove
all members of the Committee and thereafter directly administer the Plan, all
to the extent permitted by Applicable Laws.
(c) Powers of the Administrator. Subject to the provisions of the Plan and
approval of any relevant authorities, including the approval, if required, of
any stock exchange or national market system upon which the Common Stock is
then listed, the Administrator shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(l) of the Plan;
(ii) to select the Consultants and Employees to whom Options may from
time to time be granted hereunder;
(iii) to determine whether and to what extent Options are granted
hereunder;
(iv) to determine the number of shares of Common Stock to be covered
by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any award granted hereunder. Such terms and conditions
may include, but are not limited to, the exercise price, the time or times when
Options may be exercised, any vesting acceleration or waiver of forfeiture
restrictions, and any restriction or limitation regarding any Option or the
Shares relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vii) to determine whether and under what circumstances an Option
may be settled in cash under Section 9(e) instead of Common Stock;
(viii) to reduce the exercise price of any Option to the then current
Fair Market Value if the Fair Market Value of the Common Stock covered by such
Option has declined since the date the Option was granted;
(ix) to provide for the early exercise of Options for the purchase of
unvested Shares, subject to such terms and conditions as the Administrator may
determine; and
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(x) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan.
(d) Effect of Administrator's Decision. All decisions, determinations and
interpretations of the Administrator shall be final and binding on all
Optionees and any other holders of any Options.
5. Eligibility.
(a) Nonstatutory Stock Options may be granted to Employees and
Consultants. Incentive Stock Options may be granted only to Employees. An
Employee or Consultant who has been granted an Option may, if otherwise
eligible, be granted additional Options.
(b) Each Option shall be designated in the written option agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options.
For purposes of this Section 5(b), Incentive Stock Options shall be taken
into account in the order in which they were granted, and the Fair Market Value
of the Shares shall be determined as of the time the Option with respect to
such Shares is granted.
(c) The Plan shall not confer upon any Optionee any right with respect to
the continuation of the Optionee's employment or consulting relationship with
the Company, nor shall it interfere in any way with the Optionee's right or the
Company's right to terminate the Optionee's employment or consulting
relationship at any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to occur
of its adoption by the Board of Directors or its approval by the stockholders
of the Company, as described in Section 18 of the Plan. It shall continue in
effect for a term of ten (10) years unless sooner terminated under Section 14
of the Plan.
7. Term of Option. The term of each Option shall be the term stated in the
Option Agreement; provided, however, that the term shall be no more than ten
(10) years from the date of grant thereof. However, in the case of an Incentive
Stock Option granted to an Optionee who, at the time the Option is granted,
owns stock representing more than ten percent (10%) of the voting power of all
classes of stock of the Company or any Parent or Subsidiary, the term of the
Option shall be five (5) years from the date of grant thereof or such shorter
term as may be provided in the Option Agreement.
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8. Option Exercise Price and Consideration.
(a) The per share exercise price for the Shares to be issued pursuant to
exercise of an Option shall be such price as is determined by the Board, but
shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the grant of such
Incentive Stock Option, owns stock representing more than ten percent (10%) of
the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee described in
the preceding paragraph, the per Share exercise price shall be no less than
100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per share
exercise price shall be determined by the Administrator but shall, in no event,
be less than fifty percent (50%) of the Fair Market Value per Share on the date
of grant.
(b) The consideration to be paid for the Shares to be issued upon exercise
of an Option, including the method of payment, shall be determined by the
Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option have been owned by the Optionee for more
than six months on the date of surrender and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (5) delivery of a properly executed
exercise notice together with such other documentation as the Administrator and
the broker, if applicable, shall require to effect an exercise of the Option
and delivery to the Company of the sale or loan proceeds required to pay the
exercise price, or (6) any combination of the foregoing methods of payment. In
making its determination as to the type of consideration to accept, the
Administrator shall consider if acceptance of such consideration may be
reasonably expected to benefit the Company.
9. Exercise of Option.
(a) Procedure for Exercise; Rights as a Stockholder. Any Option granted
hereunder shall be exercisable at such times and under such conditions as
determined by the Administrator, including performance criteria with respect to
the Company and/or the Optionee, and as shall be permissible under the terms of
the Plan.
An Option may not be exercised for a fraction of a Share.
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An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or
any other rights as a stockholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Company shall issue (or
cause to be issued) such stock certificate promptly upon exercise of the
Option. No adjustment will be made for a dividend or other right for which the
record date is prior to the date the stock certificate is issued, except as
provided in Section 12 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Employment or Consulting Relationship. Upon
termination of an Optionee's Continuous Status as an Employee or Consultant,
other than upon the Optionee's death or Disability, the Optionee may exercise
his or her Option, but only within such period of time as is specified in the
Notice of Grant, and only to the extent that the Optionee was entitled to
exercise it at the date of termination (but in no event later than the
expiration of the term of such Option as set forth in the Notice of Grant). In
the absence of a specified time in the Notice of Grant, the Option shall remain
exercisable for three (3) months following the Optionee's termination. In the
case of an Incentive Stock Option, such period of time for exercise shall not
exceed three (3) months from the date of termination. If, on the date of
termination, the Optionee is not entitled to exercise the Optionee's entire
Option, the Shares covered by the unexercisable portion of the Option shall
revert to the Plan. If, after termination, the Optionee does not exercise his
or her Option within the time specified by the Administrator, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
Notwithstanding the above, in the event of an Optionee's change in status
from Consultant to Employee or Employee to Consultant, an Optionee's Continuous
Status as an Employee or Consultant shall not automatically terminate solely as
a result of such change in status. However, in such event, an Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option
three months and one day following such change of status.
(c) Disability of Optionee. In the event of termination of an Optionee's
Continuous Status as an Employee or Consultant as a result of his or her
Disability, the Optionee may, but only within twelve (12) months from the date
of such termination (and in no event later than the expiration date of the term
of his or her Option as set forth in the Option Agreement), exercise the Option
to the extent the Optionee was otherwise entitled to exercise it on the date of
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such termination. To the extent that the Optionee is not entitled to exercise
the Option on the date of termination, or if the Optionee does not exercise the
Option to the extent so entitled within the time specified herein, the Option
shall terminate, and the Shares covered by the Option shall revert to the Plan.
(d) Death of Optionee. In the event of the death of an Optionee, the
Option may be exercised at any time within twelve (12) months following the
date of death (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant), by the Optionee's estate or by a
person who has acquired the right to exercise the Option by bequest or
inheritance, but only to the extent that the Optionee was entitled to exercise
the Option at the date of death. If, at the time of death, the Optionee was not
entitled to exercise his or her entire Option, the Shares covered by the
unexercisable portion of the Option shall immediately revert to the Plan. If,
after death, the Optionee's estate or a person who acquires the right to
exercise the Option by bequest or inheritance does not exercise the Option
within the time specified herein, the Option shall terminate, and the Shares
covered by such Option shall revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to buy out
for a payment in cash or Shares, an Option previously granted, based on such
terms and conditions as the Administrator shall establish and communicate to
the Optionee at the time that such offer is made.
(f) Rule 16b-3. Options granted to persons subject to Section 16(b) of the
Exchange Act must comply with Rule 16b-3 and shall contain such additional
conditions or restrictions as may be required thereunder to qualify for the
maximum exemption from Section 16 of the Exchange Act with respect to Plan
transactions.
10. Stock Withholding to Satisfy Withholding Tax Obligations. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this Section 10. When an Optionee incurs tax liability in
connection with an Option which tax liability is subject to tax withholding
under applicable tax laws, and the Optionee is obligated to pay the Company an
amount required to be withheld under applicable tax laws, the Optionee may
satisfy the withholding tax obligation by electing to have the Company withhold
from the Shares to be issued upon exercise of the Option that number of Shares
having a Fair Market Value equal to the amount required to be withheld. The
Fair Market Value of the Shares to be withheld shall be determined on the date
that the amount of tax to be withheld is to be determined (the "Tax Date").
All elections by an Optionee to have Shares withheld for this purpose
shall be made in writing in a form acceptable to the Administrator and shall be
subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax Date;
(b) once made, the election shall be irrevocable as to the particular
Shares of the Option as to which the election is made;
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(c) all elections shall be subject to the consent or disapproval of the
Administrator.
In the event the election to have Shares withheld is made by an Optionee
and the Tax Date is deferred under Section 83 of the Code because no election
is filed under Section 83(b) of the Code, the Optionee shall receive the full
number of Shares with respect to which the Option is exercised but such
Optionee shall be unconditionally obligated to tender back to the Company the
proper number of Shares on the Tax Date.
11. Transferability of Options and Rights. Incentive Stock Options granted
under the Plan shall not be transferable otherwise than by will or the laws of
descent and distribution, or pursuant to a qualified domestic relations order
as defined by the Code or Title I of the Employee Retirement Income Security
Act of 1974, as amended, or the rules thereunder. Incentive Stock Options shall
be exercisable during the lifetime of the Employee only by the Employee or by
the Employee's guardian or legal representative (unless such exercise would
disqualify it as an Incentive Stock Option). Unless the Committee otherwise
provides in an agreement regarding the award of non-qualified stock options or
rights (not granted in connection with an Incentive Stock Option),
non-qualified stock options or rights (not granted in connection with Incentive
Stock Options) may be transferred by the holder to Permitted Transferees,
provided that there cannot be any consideration for the transfer.
12. Adjustments Upon Changes in Capitalization or Merger.
(a) Changes in Capitalization. Subject to any required action by the
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, and the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, as well as the price per share of Common Stock covered
by each such outstanding Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made by
the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed dissolution
or liquidation of the Company, the Administrator shall notify each Optionee as
soon as practicable prior to the effective date of such proposed transaction.
The Administrator in its discretion may provide
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for an Optionee to have the right to exercise his or her Option until ten (10)
days prior to such transaction as to all of the Optioned Stock covered thereby,
including Shares as to which the Option would not otherwise be exercisable. In
addition, the Administrator may provide that any Company repurchase option
applicable to any Shares purchased upon exercise of an Option shall lapse as to
all such Shares, provided the proposed dissolution or liquidation takes place
at the time and in the manner contemplated. To the extent it has not been
previously exercised, an Option will terminate immediately prior to the
consummation of such proposed action.
(c) Acquisition Events
(1) Consequences of Acquisition Events. Upon the occurrence of an
Acquisition Event (as defined below), or the execution by the Company of any
agreement with respect to an Acquisition Event, the Board shall take any one or
more of the following actions with respect to then outstanding Options: (i)
provide that outstanding Options shall be assumed or equivalent Options shall
be substituted by the acquiring or succeeding entity (or an affiliate thereof),
provided that any such Options substituted for Incentive Stock Options shall
satisfy, in the determination of the Board, the requirements of Section 424(a)
of the Code; (ii) upon written notice to the Optionees, provide that all then
unexercised Options will become exercisable in full as of a specified date (the
"Acceleration Date") prior to the Acquisition Event and will terminate
immediately prior to the consummation of such Acquisition Event, except to the
extent exercised by the Optionees between the Acceleration Date and the
consummation of the Acquisition Event or (iii) in the event of an Acquisition
Event under the terms of which holders of Common Stock will receive upon
consummation thereof a cash payment for each share of Common Stock surrendered
pursuant to such Acquisition Event (the "Acquisition Price") provide that all
outstanding Options shall terminate upon consummation of such Acquisition Event
and each Optionee shall receive, in exchange therefor, a cash payment equal to
the amount (if any) by which (A) the Acquisition Price multiplied by the number
of shares of Common Stock subject to such outstanding Options (whether or not
then exercisable), exceeds (B) the aggregate exercise price of such Options.
An "Acquisition Event" shall mean: (a) any merger or consolidation which
results in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving or acquiring entity) less
than 60% of the combined voting power of the voting securities of the Company
or such surviving or acquiring entity outstanding immediately after such merger
or consolidation; (b) any sale of all or substantially all of the assets of the
Company; (c) the complete liquidation of the Company; or (d) the acquisition of
"beneficial ownership" (as defined in Rule 13d- 3 under the Exchange Act) of
securities of the Company representing 50% or more of the combined voting power
of the Company's then outstanding securities (other than through a merger or
consolidation or an acquisition of securities directly from the Company) by any
"person", as such term is used in Sections 13 (d) and 14 (d) of the Exchange
Act other than the Company, any trustee or other fiduciary holding securities
under an employee benefit plan of the Company, or any entity owned directly or
indirectly by the stockholders of the Company in substantially the same
proportion as their ownership of stock of the Company.
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(2) Assumption of Options Upon Certain Events. The Board may grant
options under the Plan in substitution for stock and stock-based awards held by
employees of another entity who become Employees as a result of a merger or
consolidation of the employing entity with the Company or the acquisition by
the Company of property or stock of the employing entity. The substitute
options shall be granted on such terms and conditions as the Board considers
appropriate in the circumstances.
13. Time of Granting Options. The date of grant of an Option shall, for
all purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Administrator.
Notice of the determination shall be given to each Employee or Consultant to
whom an Option is so granted within a reasonable time after the date of such
grant.
14. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend, alter,
suspend or discontinue the Plan, but no amendment, alteration, suspension or
discontinuation shall be made which would impair the rights of any Optionee
under any grant theretofore made, without his or her consent. In addition, to
the extent necessary and desirable to comply with Rule 16b-3 under the Exchange
Act or with Section 422 of the Code (or any other applicable law or regulation,
including the requirements of any stock exchange or national market system upon
which the Common Stock is then listed), the Company shall obtain stockholder
approval of any Plan amendment in such a manner and to such a degree as
required.
(b) Effect of Amendment or Termination. Any such amendment or termination
of the Plan shall not affect Options already granted, and such Options shall
remain in full force and effect as if this Plan had not been amended or
terminated, unless mutually agreed otherwise between the Optionee and the
Board, which agreement must be in writing and signed by the Optionee and the
Company.
15. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and
the issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act
of 1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange or national market
system upon which the Common Stock is then listed or traded, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without
any present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned relevant provisions of law.
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16. Reservation of Shares. The Company, during the term of this Plan,
shall at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall
relieve the Company of any liability in respect of the failure to issue or sell
such Shares as to which such requisite authority shall not have been obtained.
17. Agreements. Options shall be evidenced by written agreements in such
form as the Administrator shall approve from time to time.
18. Stockholder Approval. Continuance of the Plan shall be subject to
approval by the stockholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such stockholder approval shall be obtained
in the degree and manner required under applicable state and federal law and
the rules of any stock exchange or national market system upon which the Common
Stock is then listed or traded.
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EXHIBIT 10.6
PEGASUS SYSTEMS, INC.
1997 STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this Stock Option Plan
are to attract and retain the best available personnel for positions of
substantial responsibility, to provide additional incentive to Employees and
Consultants of the Company and any Parent or Subsidiary and to promote the
success of the Company's business. Options granted under the Plan may be
Incentive Stock Options or Nonstatutory Stock Options, as determined by the
Administrator at the time of grant of an option and subject to the applicable
provisions of Section 422 of the Code and the regulations promulgated
thereunder.
2. Definitions. As used herein, the following definitions shall
apply:
(a) "Administrator" means the Board or the Compensation
Committee appointed by the Board.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as
amended.
(d) "Committee" means the Compensation Committee
appointed by the Board of Directors.
(e) "Common Stock" means the Common Stock of the Company.
(f) "Company" means Pegasus Systems, Inc.
(g) "Consultant" means any person who is engaged by the
Company or any Parent or Subsidiary to render consulting or advisory services
and is compensated for such services, and any director of the Company whether
compensated for such services or not. If and in the event the Company
registers any class of any equity security pursuant to the Exchange Act, the
term Consultant shall thereafter not include directors who are not compensated
for their services or are paid only a director's fee by the Company.
(h) "Continuous Status as an Employee or Consultant"
means that the employment or consulting relationship with the Company, any
Parent or Subsidiary is not interrupted or terminated. Continuous Status as an
Employee or Consultant shall not be considered interrupted in the case of (i)
any leave of absence approved by the Company or (ii) transfers between
locations of the Company or between the Company, its Parent, any Subsidiary, or
any successor. A leave of absence approved by the Company shall include sick
leave, military leave, or any other personal leave. For purposes of Incentive
Stock Options, no such leave may exceed 90 days, unless
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reemployment upon expiration of such leave is guaranteed by statute or
contract, including Company policies. If reemployment upon expiration of a
leave of absence approved by the Company is not so guaranteed, on the 181st day
of such leave any Incentive Stock Option held by the Optionee shall cease to be
treated as an Incentive Stock Option and shall be treated for tax purposes as a
Nonstatutory Stock Option.
(i) "Disability" means total and permanent disability as
defined in Section 22(e)(3) of the Code.
(j) "Employee" means any person, including officers and
directors, employed by the Company or any Parent or Subsidiary of the Company.
The payment of a director's fee by the Company shall not be sufficient to
constitute "employment" by the Company.
(k) "Exchange Act" means the Securities Exchange Act of
1934, as amended.
(l) "Fair Market Value" means, as of any date, the value
of Common Stock determined as follows:
(i) If the Common Stock is listed on any
established stock exchange or a national market system, including without
limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The
Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for
such stock (or the closing bid, if no sales were reported) as quoted on such
exchange or system for the last market trading day prior to the time of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable;
(ii) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, its Fair
Market Value shall be the mean between the high bid and low asked prices for
the Common Stock on the last market trading day prior to the day of
determination; or
(iii) In the absence of an established market for
the Common Stock, the Fair Market Value shall be determined in good faith by
the Administrator.
(m) "Incentive Stock Option" means an Option intended to
qualify as an incentive stock option within the meaning of Section 422 of the
Code.
(n) "Nonstatutory Stock Option" means an Option not
intended to qualify as an Incentive Stock Option.
(o) "Option" means a stock option granted pursuant to the
Plan.
(p) "Optioned Stock" means the Common Stock subject to an
Option.
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(q) "Optionee" means an Employee or Consultant who
receives an Option.
(r) "Parent" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(s) "Permitted Transferee" means a member of a holder's
immediate family, trusts for the benefit of such immediate family members, and
partnerships in which the holder and such immediate family members are the only
partners, provided that no consideration is provided for the transfer.
(t) "Plan" means this 1997 Stock Option Plan.
(u) "Section 16(b)" means Section 16(b) of the Securities
Exchange Act of 1934, as amended.
(v) "Share" means a share of the Common Stock, as
adjusted in accordance with Section 11 below.
(w) "Subsidiary" means a "subsidiary corporation,"
whether now or hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of
Section 12 of the Plan, the maximum aggregate number of Shares which may be
optioned and sold under the Plan is 375,000 Shares. The Shares may be
authorized, but unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having
been exercised in full, or is surrendered pursuant to an option exchange
program authorized by the Administrator, the unpurchased Shares which were
subject thereto shall become available for future grant or sale under the Plan
(unless the Plan has terminated); provided, however, that Shares that have
actually been issued under the Plan shall not be returned to the Plan and shall
not become available for future distribution under the Plan, except that if
unvested Shares are repurchased by the Company at their original purchase
price, such Shares shall become available for future grant under the Plan.
4. Administration of the Plan.
(a) Initial Plan Procedure. Prior to the date, if any,
upon which the Company becomes subject to the Exchange Act, the Plan shall be
administered by the Board or the Compensation Committee appointed by the Board.
(b) Plan Procedure after the Date, if any, upon Which the
Company becomes Subject to the Exchange Act. With respect to Option grants
made to Employees or Consultants, the Plan shall be administered by (A) the
Board or (B) the Compensation Committee designated by the Board, which
committee shall be constituted to satisfy the legal requirements, if any,
relating to the
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administration of incentive stock option plans of state corporate and
securities laws, of the Code, and of any stock exchange or national market
system upon which the Common Stock is then listed or traded (the "Applicable
Laws"). Once appointed, such Committee shall serve in its designated capacity
until otherwise directed by the Board. The Board may increase the size of the
Committee and appoint additional