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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 21, 2000
REGISTRATION NO. 333-92683
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 4 TO
FORM S-4
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, and Telephone Number, including Area Code, of
Registrant's Principal Executive Offices)
JOHN F. DAVIS, III
CHIEF EXECUTIVE OFFICER AND PRESIDENT
PEGASUS SYSTEMS, INC.
3811 TURTLE CREEK BOULEVARD, SUITE 1100
DALLAS, TEXAS 75219
(214) 528-5656
(Name, Address, including Zip Code, and Telephone Number, including Area Code,
of Agent for Service)
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With copies to:
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GUY KERR FRANK M. PLACENTI
JOHN B. MCKNIGHT LOUIS A. BRILLEMAN
WHIT ROBERTS Bryan Cave LLP
Locke Liddell & Sapp LLP Two North Central Avenue, Suite 2200
2200 Ross Avenue, Suite 2200 Phoenix, Arizona 85004
Dallas, Texas 75201 (602) 364-7000
(214) 740-8000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: At the
effective time of the merger of a wholly owned subsidiary of the Registrant with
and into REZ, Inc., which shall occur as soon as practicable after the effective
date of this Registration Statement and the satisfaction or waiver of all
conditions to the closing of such merger.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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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 SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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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 information statement/prospectus shall
not constitute an offer to sell or the solicitation of an offer to buy
nor shall there be any sale of these securities in any State in which
such offer, solicitation or sale would be unlawful prior to registration
or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED MARCH 21, 2000
INFORMATION STATEMENT/PROSPECTUS
[REZINC LOGO]
7500 Dreamy Draw Drive, Suite 120
Phoenix, Arizona 85020
March , 2000
Dear REZ Stockholder:
The boards of directors of Pegasus Systems, Inc. and REZ, Inc., formerly
known as REZsolutions, Inc., have unanimously approved the merger of Pegasus and
REZ. Under the terms of the merger, the outstanding shares of REZ common stock
will be converted into the right to receive on a pro rata basis an aggregate of
3.99 million shares of Pegasus common stock and other consideration of $135
million, consisting of $115 million in cash and a $20 million promissory note.
The $20 million promissory note is being issued solely to Reed Elsevier plc, the
owner of 65.9% of the outstanding common stock of REZ, in lieu of $20 million of
the cash to which it otherwise would be entitled. If the merger is completed,
the REZ stockholders will own approximately 16.4% of the outstanding Pegasus
common stock and will have no further equity interest in REZ.
Pegasus common stock is traded on the Nasdaq National Market under the
symbol "PEGS." On March 17, 2000, the last reported sale price for the common
stock on the Nasdaq National Market was $18.00 per share.
The holders of more than 85% of the outstanding shares of REZ common stock
agreed to execute a written consent approving the merger and merger agreement,
and prior to the date of mailing this information statement/prospectus these
holders will have executed the written consent. Under Delaware law and the terms
of REZ's certificate of incorporation and bylaws, as well as a stockholders
agreement between REZ and most of its stockholders, this approval is sufficient
to approve the merger and the merger agreement. For this reason, REZ is not
calling a meeting of its stockholders to vote on the merger and the merger
agreement, nor is REZ asking you for a proxy.
The board of directors of REZ is furnishing this document to you to provide
you with important information about the merger. This document is also a
prospectus of Pegasus relating to the shares of Pegasus common stock to be
issued in the merger, and is being mailed to the stockholders of REZ beginning
on or about March , 2000.
If you are not in favor of the merger, Delaware law provides that the
holders of shares of REZ common stock who have not approved the merger and the
merger agreement and who otherwise strictly comply with the applicable
requirements of Section 262 of the Delaware General Corporation Law are entitled
to an appraisal of the fair value of their shares and may demand payment of the
fair value of their shares. Holders of shares who wish to assert appraisal
rights should comply with the procedures detailed in Section 262, a copy of
which is attached as Appendix I to the information statement/prospectus.
This information statement/prospectus constitutes notice to the stockholders
of REZ of stockholder action taken pursuant to a written consent and notice of
appraisal rights pursuant to Section 262 of the Delaware General Corporation
Law.
Sincerely,
I. Malcolm Highet
President and Chief Executive
Officer
THE PROPOSED MERGER IS A COMPLEX TRANSACTION. PEGASUS AND REZ STRONGLY URGE
YOU TO READ AND CONSIDER THIS INFORMATION STATEMENT/PROSPECTUS IN ITS ENTIRETY,
INCLUDING THE MATTERS REFERRED TO UNDER "RISK FACTORS" BEGINNING ON PAGE 12.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE PEGASUS COMMON STOCK TO BE ISSUED
UNDER THIS INFORMATION STATEMENT/PROSPECTUS OR DETERMINED THE ADEQUACY OR
ACCURACY OF THIS INFORMATION STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
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Questions and Answers About the Merger...................... 1
Summary..................................................... 3
The Companies............................................. 3
The Merger................................................ 4
What REZ Securityholders will Receive in the Merger....... 4
What you will Receive in the Merger for each Share of REZ
Common Stock........................................... 7
Conditions to the Merger.................................. 8
Termination of the Merger Agreement....................... 8
REZ Voting Agreements..................................... 9
Stockholder Agreements.................................... 9
Noncompetition Agreement.................................. 9
Limitation on Negotiations................................ 9
Termination Fees and Expenses............................. 9
Board and Stockholder Approvals........................... 10
Opinions of Financial Advisors............................ 10
Interests of Certain Persons in the Merger................ 10
Federal Income Tax Consequences........................... 10
Anticipated Accounting Treatment.......................... 10
Management Following the Merger........................... 11
Ownership Following the Merger............................ 11
Rights of REZ Stockholders Following the Merger........... 11
Risk Factors................................................ 12
Risks Related to the Merger............................... 12
Risks Related to the Business and Operations of Pegasus
and REZ as a Combined Company.......................... 17
Investment Risks.......................................... 24
Additional Information About Pegasus and this Information
Statement/Prospectus...................................... 26
Selected Consolidated Historical Financial Statement Data... 28
Selected Unaudited Pro Forma Combined Financial Statement
Data...................................................... 31
Comparative Per Share Data.................................. 33
Forward-Looking Statements May Prove Inaccurate............. 34
Market Price and Dividend Information....................... 35
Approval of the Merger and Related Transactions............. 36
Background of the Merger.................................. 36
Pegasus Board Considerations.............................. 38
REZ Board Considerations.................................. 40
Approval by Boards and Stockholders....................... 42
Opinion of Pegasus' Financial Advisor..................... 43
Opinion of REZ's Financial Advisor........................ 48
Interests of Certain Persons in the Merger................ 54
Prior Relationship of Pegasus and REZ..................... 54
Terms of the Merger Agreement and Related Transactions...... 56
General................................................... 56
Effective Time of the Merger.............................. 56
Merger Consideration...................................... 56
Disposition of REZ Securities Other than Common Stock..... 60
Exchange of REZ Stock Certificates........................ 61
The Merger Agreement...................................... 62
REZ Voting Agreements..................................... 65
Stockholder Agreements.................................... 66
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Noncompetition Agreement.................................. 67
Regulatory Approvals...................................... 67
Nasdaq Listing of Pegasus Common Stock.................... 68
Anticipated Accounting Treatment.......................... 68
Material Federal Income Tax Matters for United States REZ
Securityholders........................................ 68
Appraisal Rights.......................................... 72
Pegasus Business............................................ 73
Pegasus Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 88
Management Following the Merger............................. 98
Pegasus Executive Compensation and Other Matters............ 101
Pegasus Security Ownership of Management and Principal
Stockholders.............................................. 105
Pegasus Certain Transactions................................ 107
REZ Business................................................ 109
REZ Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 115
REZ Certain Transactions.................................... 124
REZ Security Ownership of Management and Principal
Stockholders.............................................. 124
Unaudited Pro Forma Financial Information and Related
Notes..................................................... 126
Description of Pegasus Capital Stock........................ 134
Material Differences Between Rights of REZ Stockholders and
Pegasus Stockholders...................................... 137
Experts..................................................... 138
Legal Matters............................................... 138
Trademarks.................................................. 138
Index to Financial Statements............................... F-1
Pegasus Financial Statements.............................. F-2
REZ Financial Statements.................................. F-25
Appendix A -- Agreement and Plan of Merger
Appendix B -- Voting Agreement (with Reed Elsevier)
Appendix C -- Form of Voting Agreement (with parties other than
Reed Elsevier)
Appendix D -- Form of Stockholder Agreement (with Reed Elsevier)
Appendix E -- Form of Stockholder Agreement (with parties other
than Reed Elsevier)
Appendix F -- Form of Noncompetition Agreement
Appendix G -- Fairness Opinion of Hambrecht & Quist LLC
Appendix H -- Fairness Opinion of Thomas Weisel Partners, LLC
Appendix I -- Section 262 of the Delaware General
Corporation Law: Appraisal Rights
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QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHY ARE PEGASUS AND REZ PROPOSING TO
MERGE?
A: The merger allows Pegasus and REZ as a
combined company to significantly expand each company's presence as a
solution provider to the hotel industry, to increase each company's
product and service offerings to new and existing customers and to
capitalize on each company's technologies and resources. Pegasus has
historically served chain hotels in the United States, while REZ has
concentrated its efforts on serving independent hotels around the world.
By merging, each company will be able to capitalize on the other's
strengths and customer relationships. In addition, Pegasus will be able to
take advantage of REZ's large infrastructure that includes sales,
marketing and customer support offices and personnel around the world. To
review the background and reasons for the merger in greater detail, see
page 36.
Q: WHAT ARE THE MOST SIGNIFICANT DISADVANTAGES
OF THE MERGER TO PEGASUS STOCKHOLDERS?
A: REZ has typically experienced slower revenue
growth and lower operating margins than Pegasus has historically
experienced, and REZ has incurred net losses in recent periods. As a
result, the combined company's results of operations will in the near term
likely not compare favorably with that of Pegasus in recent periods.
Further, as a result of the purchase accounting treatment of the merger,
non-cash charges associated with the amortization of goodwill and other
intangibles will adversely affect the combined company's results of
operations in future periods. Finally, the estimated costs incurred in
connection with the merger and Pegasus' anticipated expensing of REZ's
costs associated with in process research and development will negatively
impact results of operations in the near term. These disadvantages may
adversely affect the market price for Pegasus' common stock in the future.
Q: WHEN IS IT EXPECTED THAT THE MERGER WILL BE
COMPLETED?
A: Pegasus and REZ are working toward
completing the merger as quickly as possible, and hope to complete the merger
during the first quarter of 2000. They will complete the merger when all
the conditions to completion of the merger are satisfied or waived. The
merger will become effective when a certificate of merger is filed with
the Secretary of State of Delaware.
Q: HAS SOMEONE DETERMINED THAT THE MERGER IS
IN THE BEST INTEREST OF THE REZ STOCKHOLDERS?
A: Yes. The board of directors of REZ has
determined that the merger is in the best interest of the REZ
stockholders. The board of directors of REZ has unanimously approved the
merger and the merger agreement. In addition, the board of directors of
REZ received an opinion from its financial advisor, Thomas Weisel Partners
LLC, that the merger was fair, from a financial point of view, to the
stockholders of REZ.
Q: WILL PEGASUS STOCKHOLDERS VOTE ON THE
MERGER?
A: No, their vote is not required.
Q: WHAT DO I NEED TO DO NOW?
A: Nothing. REZ stockholders owning more
than 85% of the issued and outstanding common stock of REZ have agreed to
execute a written consent approving the merger and the merger agreement.
As the holders of the required percentage of outstanding shares of REZ
common stock have agreed to give their approval, REZ does not need to call
a meeting of its stockholders to approve the merger or the merger
agreement, and REZ is not soliciting proxies or consents.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the merger is completed, Pegasus
will send you a letter of transmittal and written instructions for
exchanging your stock certificates. You should not surrender your REZ
stock certificates until after the merger and until you receive the letter
of transmittal.
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Q: WILL I RECEIVE ANY FRACTIONAL SHARES OF
PEGASUS COMMON STOCK IN THE MERGER?
A: No, Pegasus will not issue fractional shares.
You will receive cash based on the market price of Pegasus common stock
for any fractional share of Pegasus common stock you would otherwise
receive.
Q: DO I HAVE APPRAISAL RIGHTS IF I DON'T LIKE THE
MERGER?
A: Yes. Under Delaware law, you are entitled to
appraisal rights if you follow the requirements specified by Delaware law
and do not approve the merger and merger agreement.
Q: WHO CAN ANSWER MY QUESTIONS?
A: If you would like additional copies of this
information statement/prospectus, or if you have questions about the
merger, you should contact:
REZ, Inc.
7500 Dreamy Draw Drive, Suite 120
Phoenix, Arizona 85020
Telephone: (602) 870-3330
Attention: Kristin S. Schloemer
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SUMMARY
This summary highlights selected information contained in this information
statement/prospectus. Pegasus and REZ encourage you to carefully read this
entire document and the documents referred to in this information
statement/prospectus for a complete understanding of the merger. For additional
information, see "Additional Information About Pegasus and this Information
Statement/Prospectus" on page (26). Page references are included in parentheses
to direct you to a more complete description of the items presented in this
summary.
THE COMPANIES (PAGES 73 AND 109)
Pegasus Systems, Inc.
3811 Turtle Creek Boulevard, Suite 1100
Dallas, Texas 75219
(214) 528-5656
Pegasus is a leading provider of transaction processing and electronic
commerce services to the hotel industry worldwide. Pegasus is organized into
three businesses: Pegasus Electronic Distribution, Pegasus Commission Processing
and Pegasus Business Intelligence.
- Pegasus Electronic Distribution improves the efficiency and effectiveness
of the hotel reservation process by enabling travel agents and individual
travelers to electronically access hotel room inventory information and
conduct reservation transactions. Pegasus Electronic Distribution
includes its GDS distribution service and its Internet-based distribution
services, which include TravelWeb.com, the private-label reservation
service and other Internet-based distribution services.
- Pegasus Commission Processing improves the efficiency and effectiveness
of the commission payment process for participating hotels and travel
agencies by consolidating the payments in the travel agency's currency of
choice and providing comprehensive transaction reports.
- Pegasus Business Intelligence provides database marketing and consulting
services and is being expanded to provide data mining and reporting
services for benchmark analysis and strategic planning for the hotel
industry.
REZ, Inc.
7500 Dreamy Draw Drive, Suite 120
Phoenix, Arizona 85020
(602) 870-3330
REZ is a leader in providing distribution services and solutions for the
hotel industry. It offers a fully integrated portfolio of services and
applications to independent hotels, management companies and hotel chains in
approximately 180 countries. REZ maintains a global network of approximately 40
offices with approximately 1,800 employees. REZ provides services to
approximately 25,000 hotels and 80 brands.
REZ's services and solutions improve the efficiency and effectiveness of
the hotel reservations process by providing REZ customers with access to and the
use of REZView, REZ's central reservation system, one of the most advanced,
high-performance, functionally rich reservation systems in the hotel industry.
REZView is designed to operate in numerous processing environments to handle a
wide range of customers from small independent hotels to large hotel chains. REZ
offers its customers the following five major types of services and solutions:
- REZ offers representation services primarily to independent hotels that
seek to sell their rooms in marketplaces outside their locale. These
hotels associate themselves with a hotel representation service which
uses its systems and office infrastructure to assist the hotels in
marketing and making reservations for their rooms.
- REZ provides international brand management services under its brand
names, which include Summit Hotels & Resorts, Golden Tulip Hotels & Tulip
Inns, Sterling Hotels & Resorts and Prima Hotels. As part of the branding
relationship, the hotel receives reservation support, marketing
assistance, purchasing, operations training and financial services.
- REZ's private label services include the operation of private label
central reservation systems and call centers on behalf of large
individual properties, brand management companies and hotel chains.
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- REZ provides application server processing services to customers who
choose to operate their own reservations call centers but want a
transaction processing solution for their central reservation system.
- REZ licenses its RezView, Guestview and other applications software to
hotels worldwide.
ABOUT REED ELSEVIER INC. AND UTELL INTERNATIONAL GROUP LTD.
Reed Elsevier Inc. and Utell International Group Ltd. are wholly owned
subsidiaries of Reed Elsevier plc and collectively own 65.9% of the outstanding
common stock of REZ. Reed Elsevier plc is indirectly jointly owned by Reed
International P.L.C. and Elsevier N.V., each of which are publicly held
companies. Reed Elsevier plc, through its subsidiaries and affiliates, is one of
the world's leading publishers and providers of scientific, professional and
business information. Reed Travel Group, a division of Reed Elsevier Inc., and
Utell International, a division of Reed Electronic Publishing, Inc., were early
stockholders of Pegasus. In addition, as consideration for a loan made by Reed
Electronic Publishing to Pegasus which has since been repaid, in November 1988
Pegasus granted to Reed Electronic Publishing a license to use Pegasus'
Ultraswitch technology in connection with operations unrelated to the hotel
industry. As part of this licensing arrangement, Reed Electronic Publishing
agreed not to compete with the services provided by Pegasus using the
Ultraswitch technology.
THE MERGER
Upon the completion of the merger, REZ will merge with a subsidiary of
Pegasus and REZ will become a wholly-owned subsidiary of Pegasus. The merger is
subject to various conditions and rights of termination described in this
document and in the merger agreement. The merger agreement is attached as
Appendix A to this information statement/prospectus. It is a legal document that
governs your rights in connection with the merger.
WHAT REZ SECURITYHOLDERS WILL RECEIVE IN THE MERGER (PAGE 56)
Holders of REZ common stock
In the merger, stockholders of REZ common stock will be entitled to
receive, on a pro rata basis, an aggregate of 3.99 million shares of Pegasus
common stock and other consideration of $135 million, consisting of $115 million
in cash and a $20 million promissory note. The $20 million promissory note is
being issued solely to Reed Elsevier in lieu of $20 million of the cash
consideration it would otherwise be entitled to receive. The payment of this
consideration to REZ stockholders is subject to the closing and post-closing
adjustments and escrow arrangements discussed below. Based on the closing stock
price of Pegasus common stock of $18.00 as reported on the Nasdaq National
Market on March 17, 2000, the 3.99 million shares to be issued in the merger
have an aggregate market value of $71.8 million. For a description of the value
of what you will receive in the merger, see "-- What You will Receive as a REZ
Stockholder in the Merger for each share of REZ Common Stock."
Closing Adjustment (page 57). At the closing of the merger, the cash
consideration of $115 million provided for in the merger agreement will be
ratably reduced based on a balance sheet prepared as of the end of a calendar
month within 45 days prior to the closing of the merger. This balance sheet is
referred to as the "estimated balance sheet" in the merger agreement. The cash
consideration will be reduced in an amount equal to the sum of the following:
- The amount of REZ debt as reflected on the estimated balance sheet
- The amount of monies loaned by Pegasus to REZ under the option note to
fund the cash-out of REZ options
- Any merger expenses incurred by REZ exceeding $2.75 million
- The amount of any decrease in the net tangible assets of REZ as reflected
on the estimated balance sheet from the amount of the net tangible assets
reflected on the REZ balance sheet as of July 31, 1999
- The amount of any decrease in the working capital as reflected on the
estimated balance sheet from the amount of the fore-
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casted working capital for the applicable period set forth in the merger
agreement
Post-Closing Adjustment (page 57). At the closing, shares of Pegasus common
stock having a market value of $2 million will be issued and placed in an escrow
account pending the determination of post-closing adjustments. Following the
closing of the merger, a closing balance sheet will be prepared as of the date
of the closing of the merger. Any post-closing adjustment will be based on the
following:
- Any change in the amount of the REZ debt as reflected on the closing date
balance sheet from the REZ debt reflected on the estimated balance sheet
- Any change in the amount of the net tangible assets as reflected on the
closing date balance sheet from the amount of the net tangible assets
reflected on the estimated balance sheet
- Any change in the sum of (a) the difference between the working capital
as reflected on the estimated balance sheet and forecasted working
capital for the applicable period and (b) the difference between the
working capital as reflected on the closing date balance sheet and the
forecasted working capital for the applicable period
Pegasus will be entitled to reduce from the escrow as a post-closing
adjustment an amount to compensate for any worsened financial condition of REZ
based on the three preceding bullet points. Conversely, Pegasus is required to
pay into the escrow account a cash amount to compensate the REZ stockholders for
any improved financial condition of REZ based on the preceding bullet points.
The post-closing adjustment will be made promptly after a 60 to 90 day period
following the closing of the merger, although a dispute between the parties
about the post-closing adjustment could cause delays. As soon as practicable
after the post-closing adjustment is determined, the balance of the shares of
Pegasus common stock and any cash deposited into the escrow account will be
distributed, on a pro-rata basis, to the REZ stockholders.
Indemnification Escrow Arrangements (page 59). On the closing of the merger
cash of $5.5 million and shares of Pegasus common stock having a value of $5.5
million that REZ stockholders are entitled to receive in the merger will also be
placed in an escrow account until the later of one year from the effective time
of the merger or the date of the publication of the first audited consolidated
financial statements of Pegasus after the effective time of the merger. These
shares and the cash will be used on a pro rata basis to satisfy any claims made
by Pegasus prior to the expiration of the escrow period for any damages incurred
by Pegasus as a result of any misrepresentation or breach of any representation,
warranty, covenant or agreement made by REZ or Reed Elsevier in the merger
agreement, subject to Pegasus incurring losses of at least $1.5 million prior to
recovering any damages from the escrow account. Any of the escrowed shares or
cash remaining after the satisfaction of any claims will be released from escrow
and distributed to you by the escrow agent based on the relative number of
shares of REZ common stock that you own at the closing of this merger.
Illustration of Impact on Merger Consideration of Adjustment and
Indemnification Provisions. Based on the closing stock price of Pegasus common
stock as reported on the Nasdaq National Market on March 17, 2000, and before
giving effect to the adjustment and escrow provisions included in the merger
agreement, the aggregate merger consideration payable to REZ stockholders in the
merger would be $206.8 million. If the merger had closed on January 31, 2000,
then it is estimated that the aggregate merger consideration ultimately received
by REZ stockholders would have been reduced by an aggregate of $22.7 million
based on the terms of the merger agreement and following assumptions:
- The closing adjustment provided for in the merger agreement would reduce
the aggregate amount of cash consideration payable in the merger due to
REZ's financial condition as of December 31, 1999, and assuming that all
REZ options will be cashed-out, that Pegasus will loan to REZ all monies
necessary to fund the cash-out and that REZ's merger expenses will not
exceed $2.75 million.
- All of the escrowed shares of Pegasus common stock and cash will
ultimately be distributed to REZ stockholders.
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- The value of Pegasus common stock is constant, based on the closing
Pegasus stock price of $18.00 as reported on the Nasdaq National Market
on March 17, 2000.
Holders of REZ options
As of February 29, 2000 there were options to purchase 3,430,062 shares of
REZ common stock outstanding, each of which was granted pursuant to a REZ option
plan. Additional options may be granted by REZ in the normal course of business
prior to the closing of the merger, subject to some limitations. The options to
purchase REZ common stock granted under REZ's stock option plans will accelerate
and become fully vested and exercisable immediately prior to the merger.
The options to purchase REZ common stock granted under REZ's 1997 Stock
Option Plan and 1998 Outside Director Stock Option Plan are referred to as
"accelerated REZ options." The options to purchase REZ common stock granted
under REZ's Stock Option Scheme are referred to as "UK options." Pursuant to the
merger agreement, all holders of outstanding accelerated REZ options have the
choice of either
- exercising the options prior to the closing date of the merger in
accordance with the terms of the option plan under which the options were
issued, or
- receiving a cash payment of $1.73 per share covered by an option upon the
closing of the merger.
The shares of REZ common stock received upon the exercise of accelerated
REZ options will be treated like all other outstanding shares of REZ common
stock in the merger, as described above. Any accelerated REZ options that are
not exercised or cashed out will terminate prior to the closing date of the
merger. The REZ stockholders will share on a pro rata basis the shares of
Pegasus common stock and cash that a REZ optionholder would ultimately have
received if he had elected to exercise or cash out his options, but did not
receive because he failed to take any action.
All holders of outstanding UK options have the choice of either
- exercising any or all of the UK options and purchase the related shares
of REZ common stock, or
- receiving a cash payment of $1.73 per share covered by an option upon the
closing of the merger.
If a holder of UK options makes his or her election prior to the closing of
the merger, then the holder will receive shares of REZ common stock or cash, as
he or she elects, and on the closing of the merger will be treated in the same
way as electing holders of accelerated REZ options. If, however, a holder of UK
options makes no election prior to the merger, then this holder will be entitled
during the six-month period following the closing of the merger to elect to
exercise the UK options, pay the related exercise price, and receive the merger
consideration as if the holder had elected to exercise his or her UK options and
receive shares of REZ common stock prior to the closing of the merger. After the
six-month period following the merger closing date, any merger consideration
relating to UK options that are not exercised will be distributed to the former
REZ stockholders based on each REZ stockholder's pro rata ownership of the REZ
common stock at the time of the merger.
REZ has sent notices to all holders of accelerated REZ options and UK
options, and virtually all holders have elected to cash out their options. The
decision of each of these optionholders to exercise or cash out his options
depended upon his personal choice, as affected by such things as:
- the ability of the REZ optionholder to fund the exercise price of $5.22
per option
- the certainty of receiving cash of $1.73 per option and the prompt
payment of the cash
- the possibilities of net downward adjustments in the merger consideration
and claims against the Pegasus stock and cash held in escrow
- the uncertainty of fluctuations in the value of Pegasus common stock,
both in the near term and while it is being held in escrow
6
<PAGE> 11
WHAT YOU WILL RECEIVE AS A REZ STOCKHOLDER IN THE MERGER FOR EACH SHARE OF REZ
COMMON STOCK
For each share of REZ common stock that you hold at the closing of the
merger, you will receive an amount of cash and shares of Pegasus common stock,
as determined in accordance with the terms of the merger agreement. The value
that you will receive in the merger for each share of your REZ common stock will
be affected primarily by
- the price of Pegasus common stock
- the amount of the shares of Pegasus stock and cash distributed from the
escrow to cover the post-closing adjustment and any Pegasus
indemnification claims
- the closing adjustment to the merger consideration
The three tables below are designed to show a range of values that you are
reasonably likely to receive in the merger. Each table shows the aggregate value
of cash and Pegasus stock that you would receive for a share of REZ common stock
based on the last reported sales price per share of Pegasus common stock on the
Nasdaq National Market on November 16, 1999, the last trading day prior to the
announcement of the merger, and based on the last reported sales price per share
of Pegasus common stock on the Nasdaq National Market on March 17, 2000, the
most recent practicable date. These tables also show the values that you would
receive if the price per share of Pegasus common stock were, alternatively, to
increase 25% or to decrease 25% from the last reported sales price per share on
the date specified.
It is assumed in all tables that there will be 34,539,929 outstanding
shares of common stock on the closing date of the merger, which further assumes
that all REZ optionholders will elect to receive a cash payment for all of their
outstanding REZ options. This assumption is made because the impact upon the
values that you will receive in the merger will not be materially affected by
the number of REZ options that are exercised.
The tables below reflect a downward closing adjustment to the merger
consideration ranging from $15.0 million to $17.6 million. This range represents
the currently estimated amount of the closing adjustment based upon application
of the terms of the merger agreement to the most recent available information
regarding REZ's financial condition and assuming a closing date of March 31,
2000.
The first table below is designed to illustrate the higher reasonably
likely values that you would receive in the merger for each share of your REZ
common stock based upon reasonably favorable assumptions regarding the
disposition of the escrowed Pegasus stock and cash and the adjustment to the
merger consideration at closing. Specifically, the first table assumes that
- All escrowed shares of Pegasus common stock and cash will ultimately be
distributed to REZ stockholders and
- The net downward closing adjustment to the merger consideration set forth
in the merger agreement will be equal to $15.0 million.
HIGHER REASONABLY LIKELY VALUES
<TABLE>
<CAPTION>
VALUE PER VALUE PER VALUE PER
REZ SHARE REZ SHARE REZ SHARE
PEGASUS BASED ON ASSUMING ASSUMING
COMMON INDICATED PEGASUS PEGASUS
STOCK PER PEGASUS SHARE PRICE SHARE PRICE
SHARE PRICE SHARE PRICE INCREASES 25% DECREASES 25%
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
November 16, 1999.... $31.75 $6.97 $7.89 $6.05
March 17, 2000....... $18.00 $5.38 $5.90 $4.86
</TABLE>
The second table is designed to illustrate the lower reasonably likely
values that you would receive in the merger for each share of your REZ common
stock based upon reasonably unfavorable assumptions regarding the disposition of
the escrowed Pegasus stock and cash and the adjustment to the merger
consideration at closing. Specifically, the second table assumes that
- None of the escrowed shares of Pegasus common stock and cash will
ultimately be distributed to REZ stockholders and
- The net downward closing adjustment to the merger consideration set forth
in the merger agreement will be equal to $17.6 million.
7
<PAGE> 12
LOWER REASONABLY LIKELY VALUES
<TABLE>
<CAPTION>
VALUE PER VALUE PER VALUE PER
REZ SHARE REZ SHARE REZ SHARE
PEGASUS BASED ON ASSUMING ASSUMING
COMMON INDICATED PEGASUS PEGASUS
STOCK PER PEGASUS SHARE PRICE SHARE PRICE
SHARE PRICE SHARE PRICE INCREASES 25% DECREASES 25%
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
November 16, 1999.... $31.75 $6.52 $7.43 $5.60
March 17, 2000....... $18.00 $4.93 $5.45 $4.41
</TABLE>
The third table is designed to illustrate the midpoint of reasonably likely
values that you may receive in the merger for each share of your REZ common
stock based upon the midpoint of reasonable assumptions regarding the
disposition of the escrowed Pegasus stock and cash and the adjustment to the
merger consideration at closing. Specifically, the third table assumes that
- One-half of the escrowed shares of Pegasus common stock and cash will
ultimately be distributed to REZ stockholders and
- The net downward closing adjustment to the merger consideration set forth
in the merger agreement will be equal to $16.3 million.
MIDPOINT OF REASONABLY LIKELY VALUES
<TABLE>
<CAPTION>
VALUE PER VALUE PER VALUE PER
REZ SHARE REZ SHARE REZ SHARE
PEGASUS BASED ON ASSUMING ASSUMING
COMMON INDICATED PEGASUS PEGASUS
STOCK PER PEGASUS SHARE PRICE SHARE PRICE
SHARE PRICE SHARE PRICE INCREASES 25% DECREASES 25%
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
November 16, 1999.... $31.75 $6.74 $7.66 $5.83
March 17, 2000....... $18.00 $5.16 $5.67 $4.64
</TABLE>
The various assumptions set forth above and the indicated range of per
share prices for Pegasus common stock may not prove accurate, and you may
receive less than any of the "Values per REZ Share" shown in these tables.
Stock prices can fluctuate dramatically. You are urged to check recent
stock prices of Pegasus common stock.
ILLUSTRATION OF WHAT A REZ STOCKHOLDER MIGHT RECEIVE IN THE MERGER FOR 10,000
SHARES OF REZ COMMON STOCK AND WHEN HE MIGHT RECEIVE IT
The table immediately below is provided to illustrate the reasonably likely
aggregate value of Pegasus stock and cash that a holder of 10,000 shares of REZ
common stock might receive in the merger and the approximate dates upon which
the various portions of merger consideration might be received. The indicated
"Value of Merger Consideration to be Received" in the table below is based upon
a value per REZ share of $5.16, which is derived from the table immediately
above entitled "Midpoint of Reasonably Likely Values." This value per REZ share
is based upon the closing stock price of Pegasus common stock of $18.00 on March
17, 2000 and reflects the other assumptions indicated for that table.
<TABLE>
<CAPTION>
VALUE OF
MERGER CONSIDERATION
APPROXIMATE TO BE RECEIVED FOR
DATE OF RECEIPT OF 10,000 SHARES OF
MERGER CONSIDERATION REZ STOCK
- ---------------------------------- -----------------------
VALUE OF
PEGASUS STOCK CASH
------------- -------
<S> <C> <C>
March 31, 2000 (closing of
merger)......................... $18,622 $31,046
Shortly following June 30, 2000
(distribution of any escrowed
Pegasus stock remaining after
the post-closing adjustment).... 290 --
Shortly following March 31, 2001
(distribution of any Pegasus
stock and cash remaining in
escrow after satisfaction of any
Pegasus indemnification
claims)......................... 796 796
------- -------
Total..................... $19,708 $31,842
======= =======
</TABLE>
The foregoing illustration is based upon a number of assumptions that may
not prove accurate, and REZ stockholders may receive less value in the merger
than this illustration would suggest.
CONDITIONS TO THE MERGER (PAGE 63)
Pegasus and REZ will complete the merger only if a number of standard
contractual and other legal conditions are either satisfied or waived.
TERMINATION OF THE MERGER AGREEMENT (PAGE 64)
The merger agreement may be terminated by either Pegasus or REZ if, among
other things:
- The merger is not completed by April 1, 2000; provided that in the event
of governmental delays, this date may be extended to May 15, 2000
- If REZ accepts or recommends to its stockholders a superior proposal and
pays
8
<PAGE> 13
to Pegasus a breakup fee in the amount of $7.5 million
REZ does not have "walk-away rights" and consequently cannot terminate the
merger agreement solely because Pegasus' stock price declines.
REZ VOTING AGREEMENTS (PAGE 65 AND APPENDICES B AND C)
To induce Pegasus to enter into the merger agreement, Reed Elsevier and
some other stockholders of REZ entered into voting agreements with Pegasus. The
voting agreements require these REZ stockholders to vote all shares of REZ
common stock beneficially owned by them in favor of the merger and the adoption
of the merger agreement and against approval of any proposal opposing or
competing against the merger. The voting agreements also provide that the
stockholders grant an irrevocable proxy in favor of Pegasus to vote each of
these REZ stockholders' shares in favor of the merger and merger agreement.
These REZ stockholders were not paid additional consideration in connection with
the voting agreements.
The REZ stockholders who entered into the voting agreements own an
aggregate of 29,470,163 shares of REZ common stock, representing approximately
85.3% of REZ's common stock as of February 29, 2000. These REZ stockholders have
agreed to execute a written consent in lieu of a stockholders meeting pursuant
to which they will approve the merger and the merger agreement. The REZ
stockholders that entered into the voting agreements are:
- Utell International Group, Ltd.
- Morgan Stanley Venture Partners II, L.P.
- Reed Elsevier
- Trident Capital Inc.
- W. Thomas Castleberry
- Rockwell Schnabel
- C. Joseph Atteridge
- Vernon L. Snider
STOCKHOLDER AGREEMENTS (PAGE 66 AND APPENDICES D AND E)
At the closing of the merger, Reed Elsevier and each REZ stockholder owning
more than 1% of the outstanding REZ common stock will enter into stockholder
agreements with Pegasus, which provide for restrictions on the transferability
and resale of the Pegasus common stock to be issued in the merger or otherwise
owned by these REZ stockholders.
NONCOMPETITION AGREEMENT (PAGE 67 AND APPENDIX F)
At the closing of the merger, Reed Elsevier will enter into a five-year
noncompetition agreement with Pegasus, which will become effective upon the
closing date of the merger.
LIMITATION ON NEGOTIATIONS (PAGE 63)
Until the merger is completed or the merger agreement terminated, REZ has
agreed not to directly or indirectly solicit other acquisition proposals. Until
the merger is completed or the merger agreement terminated, REZ has also agreed
to promptly notify Pegasus of any third party inquiries or requests for
non-public information that may result in any acquisition proposals.
TERMINATION FEES AND EXPENSES (PAGE 64)
Generally, Pegasus and REZ will each pay their own fees and expenses in
connection with the merger, whether or not the merger is completed. If specified
merger fees and expenses of REZ exceed $2.75 million, any REZ merger expenses in
excess of this amount will be deducted from the cash amount otherwise payable to
the REZ stockholders in the merger. While the total amount that might be payable
in a termination situation cannot be known at this time, the aggregate costs and
expenses that Pegasus and REZ expect to incur in connection with the merger are
approximately $11.0 million.
REZ has agreed to pay Pegasus a breakup fee of $7.5 million upon the
occurrence of any of the following events:
- REZ accepts or recommends to the REZ stockholders a superior proposal
- The REZ board of directors withdraws, modifies or refrains from
recommending the merger
- A third party acquires beneficial ownership, or the right to acquire
beneficial ownership, of at least 20% of REZ's outstanding voting stock
9
<PAGE> 14
- REZ accepts or recommends a superior proposal before March 1, 2001 with a
party with whom REZ conducted discussions regarding an acquisition
proposal prior to termination of the merger agreement
BOARD AND STOCKHOLDER APPROVALS (PAGE 42)
Pegasus
The board of directors of Pegasus has unanimously approved the merger and
the merger agreement. The Pegasus stockholders are not required to approve the
merger or the merger agreement.
REZ
The board of directors of REZ has unanimously approved the merger and the
merger agreement. The holders of approximately 85.3% of the outstanding shares
of REZ common stock have agreed to approve the merger and merger agreement.
Under Delaware law and the terms of REZ's certificate of incorporation and
bylaws, as well as a stockholders agreement between REZ and most of its
stockholders, this approval will be sufficient to approve the merger and the
merger agreement. For this reason, REZ is not calling a meeting of its
stockholders to vote on the merger and the merger agreement, nor is REZ asking
you for a proxy or a consent.
On February 29, 2000, directors and executive officers of REZ and their
affiliates owned approximately 78.1% of the issued and outstanding shares of REZ
common stock.
OPINIONS OF FINANCIAL ADVISORS (PAGE 43 AND 48 APPENDICES G AND H)
In deciding to approve the merger, the board of directors of Pegasus
considered the opinion of its financial advisor and the board of directors of
REZ considered the opinion of its financial advisor. Pegasus received an opinion
from its financial advisor, Hambrecht & Quist LLC, that the consideration to be
paid by Pegasus in the merger was fair to Pegasus from a financial point of
view. REZ received an opinion from its financial advisor, Thomas Weisel Partners
LLC, that the consideration to be received by the REZ stockholders in the merger
was fair to the stockholders of REZ from a financial point of view.
INTERESTS OF CERTAIN PERSONS IN THE MERGER (PAGE 54)
Several stockholders and executive officers of REZ have personal interests
in the merger that are different from, or in addition to, the interests of most
REZ stockholders. As a result, these stockholders and executive officers may
have a conflict of interest that influenced their support of the merger.
FEDERAL INCOME TAX CONSEQUENCES (PAGE 68)
The merger will be a taxable transaction for federal income tax purposes to
the REZ stockholders who are citizens or residents of the United States. In
general, United States REZ stockholders will be taxed on the gain, if any, from
the exchange of their REZ common stock for cash and Pegasus common stock
pursuant to the merger. This tax treatment may not apply to every United States
REZ stockholder. United States REZ stockholders will also be subject to state
and local taxation on the transaction if currently subject to income tax in a
state or local jurisdiction. The tax consequences for foreign stockholders are
not addressed. For further discussion on the tax consequences of the merger, see
"Terms of the Merger Agreement and Related Transactions -- Material Federal
Income Tax Matters for United States REZ Securityholders -- United States REZ
Stockholders."
Existing options to purchase REZ common stock will be taxed differently
depending upon the particular REZ stock plan under which the options were issued
and whether the options are exercised or cashed out. Tax considerations for
individuals who are not citizens or residents of the United States are not
addressed in this document.
TAX MATTERS ARE VERY COMPLICATED. THE TAX CONSEQUENCES OF THE MERGER TO
EACH REZ STOCKHOLDER WILL DEPEND ON THE FACTS OF EACH STOCKHOLDER'S SITUATION.
REZ STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS, AS TO THE SPECIFIC
TAX CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL
AND FOREIGN TAX LAWS.
ANTICIPATED ACCOUNTING TREATMENT (PAGE 68)
Pegasus and REZ expect that the transaction will be accounted for as a
purchase for financial reporting and accounting purposes.
10
<PAGE> 15
MANAGEMENT FOLLOWING THE MERGER (PAGE 98)
The directors and executive officers of Pegasus will not change as a result
of the merger, but it is expected that Joseph W. Nicholson will become the
Executive Vice President of Pegasus. Reed Elsevier has the right to nominate a
person to serve on the Pegasus board of directors. After the merger, the
directors and executive officers of Pegasus Worldwide will become the directors
and executive officers of the surviving corporation.
OWNERSHIP FOLLOWING THE MERGER (PAGE 55)
Subject to adjustments in the merger consideration and the escrow
arrangements provided for in the merger agreement, the REZ stockholders will
receive 3.99 million shares of Pegasus common stock and these shares will
represent approximately 16.4% of the outstanding shares of Pegasus common stock
following the merger based on the number of outstanding shares of Pegasus common
stock as of February 29, 2000. Upon completion of the merger, REZ will become a
wholly owned subsidiary of Pegasus.
RIGHTS OF REZ STOCKHOLDERS FOLLOWING THE MERGER (PAGE 137)
The rights of REZ's stockholders are currently governed by Delaware law,
REZ's certificate of incorporation and bylaws, and a stockholders agreement
between REZ and most of the REZ stockholders. The rights of Pegasus'
stockholders are governed by Delaware law and Pegasus' certificate of
incorporation and bylaws. As of the effective time of the merger, REZ
stockholders will become Pegasus stockholders. There are important differences
between the rights of stockholders of REZ and the rights of stockholders of
Pegasus. In particular, Pegasus has adopted a stockholder rights plan that
discourages some types of change of control transactions.
11
<PAGE> 16
RISK FACTORS
The following factors should be considered together with the other
information included in this information statement/prospectus. Any of the
following risks could materially adversely affect the business, operating
results and financial condition of Pegasus, REZ or the combined company. You
should consider these factors in conjunction with the other information
contained in this information statement/prospectus, including its Appendices.
RISKS RELATED TO THE MERGER
DIFFICULTIES AND SUBSTANTIAL COSTS INTEGRATING THE TECHNOLOGY, OPERATIONS AND
PERSONNEL OF PEGASUS AND REZ MAY REDUCE THE OPERATIONAL EFFICIENCIES AND
FINANCIAL BENEFITS OF THE MERGER.
As a result of the difference in services provided and customers and the
geographic distance separating their bases of operation, the business and
operations of Pegasus and REZ may not be quickly and efficiently integrated. If
Pegasus and REZ do not integrate their operations and technologies quickly and
smoothly, the combined company may incur substantial expenses and not attain the
operational efficiencies and financial benefits of the merger which may
adversely affect the earnings and earnings per share of the combined company.
The process of integrating the products, technologies, infrastructure, research
and development activities, administration, sales and marketing and other
operations of the two companies will involve significant costs and effort on
behalf of the combined company. The difficulties, costs and delays involved in
integrating the companies, which may be substantial, include:
- Distracting management and other key personnel from the business of the
combined company
- Perceived and potential adverse changes in business focus or product
offerings
- Potential incompatibility of business cultures
- Pegasus' inexperience in integrating its operations with those of another
company
- Costs and delays in implementing common systems and procedures,
particularly in integrating different information systems
- Possible negative effects on customer service resulting from the
differing focus on product and service offerings
- Inability to retain and integrate key management, technical, sales and
customer support personnel
INTEGRATION OF THE COMBINED COMPANY MAY PROVE MORE DIFFICULT DUE TO THE RECENT
FORMATION OF REZ AND FUTURE POTENTIAL BUSINESS ACQUISITIONS WHICH MAY DIVERT THE
RESOURCES OF THE COMBINED COMPANY.
The challenges of integrating the organizations and operations of Pegasus
and REZ may be compounded by the ongoing efforts associated with the integration
of Anasazi, Inc. and the Utell operations that resulted in the formation of REZ
in December 1997. In addition, any potential future acquisitions by the combined
company may also make integration efforts difficult. REZ is still in the process
of integrating the operations of these predecessor companies which, following
the merger, may compound the difficulties integrating the operations of Pegasus
and REZ encountered by the combined company. The integration of the combined
company's operations following the merger will require the dedication of
management resources, which may distract management's attention from the
day-to-day business of the combined company.
PEGASUS' LACK OF EXPERIENCE IN MANAGING A BUSINESS WITH A BROAD MARKET SCOPE AND
A LARGE NUMBER OF EMPLOYEES AND OFFICES SPREAD ACROSS NUMEROUS COUNTRIES AROUND
THE WORLD COULD ADVERSELY AFFECT THE BUSINESS OF THE COMBINED COMPANY.
Due to Pegasus' limited experience in operating and managing a company with
significant and widespread foreign operations and a large number of employees
and offices, the combined company may fail to derive the expected economic
benefits and operating efficiencies of the merger. Since Pegasus has
12
<PAGE> 17
little experience in managing or operating many of the services and solutions
offered by REZ, and REZ has little experience with Pegasus' areas of operations,
the combined company could face problems managing and staffing a large business
operation. Following the merger, there will be a significant increase in
Pegasus' management resources required to oversee a large number of employees
and business offices located in numerous foreign countries, while Pegasus'
senior management team will largely remain unchanged, which may further
complicate the combined company's ability to effectively manage its resources.
The combined company may also experience difficulties in handling the laws,
regulations and cultural differences associated with employing a large personnel
pool and operating offices in foreign countries.
NEITHER PEGASUS NOR REZ CAN TELL YOU WHAT VALUE YOU WILL RECEIVE FOR EACH SHARE
OF YOUR REZ COMMON STOCK BECAUSE THE VALUE YOU WILL RECEIVE WILL BE BASED UPON A
NUMBER OF DIFFERENT FACTORS.
The value that you will receive in the merger for each share of your REZ
common stock will be affected primarily by the value of Pegasus' common stock,
the number of shares of REZ common stock outstanding on the closing date of the
merger, and the impact that some adjustments and escrow arrangements provided
for in the merger agreement have upon the number of shares of Pegasus common
stock and the amount of cash that you are entitled to receive. Subject to the
escrow arrangements described immediately below, the number of shares of Pegasus
common stock that will be issued in the merger is fixed at 3.99 million shares,
and will not change due to any increase or decrease in the market price of
Pegasus common stock prior to the merger. Hence, REZ stockholders risk a loss in
the value that they will receive for their shares of REZ common stock in the
event of a decrease in the market value of Pegasus common stock. The market
price of Pegasus common stock upon completion of the merger may vary
substantially from its price on the date the merger agreement was signed and the
date of this information statement/prospectus due to numerous factors, and
neither Pegasus nor REZ can assure you as to the market price of Pegasus common
stock at any time before or after the merger. Further, in the event that REZ
issues additional shares of common stock prior to the merger as a result of the
exercise of outstanding options to purchase REZ common stock or otherwise, then
each REZ stockholder will receive fewer shares of Pegasus common stock. In
addition, the cash consideration payable to REZ stockholders in the merger is
subject to an adjustment at the time of the closing of the merger based on REZ's
balance sheet prepared as of the end of a calendar month within 45 days prior to
the closing of the merger. If this balance sheet reflects a worsened financial
condition, then each REZ stockholder will receive less cash consideration for
his shares. Finally, as described immediately below, a portion of the
consideration to be received by REZ stockholders in the merger will be placed in
an escrow account and will be subject to certain claims that may result in REZ
stockholders receiving less than all of the consideration placed in the escrow
account. Please see the illustrative tables set forth under the caption
"Summary -- What you will Receive in the Merger for each Share of REZ Common
Stock" for examples of a range of values that REZ stockholders will likely
receive for each of their shares of REZ common stock.
A PORTION OF THE CONSIDERATION TO BE RECEIVED BY THE REZ STOCKHOLDERS IN THE
MERGER WILL BE HELD IN AN ESCROW ACCOUNT, AND REZ STOCKHOLDERS MAY NOT RECEIVE
ALL OR A PART OF THE ESCROWED CONSIDERATION.
If there is a post-closing adjustment in favor of Pegasus or if Pegasus
successfully asserts one or more claims for breach that, in the aggregate,
exceed $1.5 million while the escrowed cash and shares remain in an escrow
account, the REZ stockholders will not receive all or part of the escrowed cash
and shares. At the time of the closing of the merger, cash in the amount of $5.5
million and Pegasus shares having a market value of $5.5 million will be
delivered to Chase Bank of Texas, N.A. on behalf of the holders of REZ common
stock to provide compensation to Pegasus for any breach by REZ or Reed Elsevier
of any of their respective representations, warranties or covenants set forth in
the merger agreement. The escrowed cash and shares covering any breaches are to
remain in the escrow account for at least one year after the effective time of
the merger. In addition, at the time of the closing of the merger, Pegasus
shares having a market value of $2.0 million will be delivered to Chase Bank of
Texas, N.A. on behalf of the REZ stockholders to satisfy possible post-closing
adjustments in favor of Pegasus.
13
<PAGE> 18
DUE TO THE UNCERTAINTIES RAISED BY THE MERGER TRANSACTION, SOME CUSTOMERS OF
PEGASUS AND REZ COULD DELAY PURCHASING DECISIONS, OR CEASE DOING BUSINESS WITH
PEGASUS AND REZ ALTOGETHER, WHICH COULD ADVERSELY AFFECT THE BUSINESS OF THE
COMBINED COMPANY.
Uncertainty in the marketplace or customer concern regarding the impact of
the merger could result in customers or potential customers of Pegasus or REZ
deferring purchasing decisions until the closing of the merger or after, or
ceasing to do business with Pegasus and REZ altogether, which could harm the
business of the combined company. Since the merger transaction between the
companies may be unsettling to some customers, some of Pegasus' and REZ's
respective customers may delay their purchase decisions until they have the
opportunity to learn more about the business plans of the combined company. As a
result, the near-term quarterly results of Pegasus could fail to meet the
expectations of investors and analysts.
THE MERGER WILL GREATLY INCREASE THE NUMBER OF FREELY TRADABLE PEGASUS SHARES,
WHICH COULD DRIVE DOWN THE PRICE OF PEGASUS STOCK.
Upon the issuance of the 3.99 million shares of Pegasus common stock in the
merger, the REZ stockholders will hold approximately 16.4% of the then
outstanding number of shares of common stock of Pegasus, based on the number of
shares of Pegasus common stock outstanding on February 29, 2000. Sales in the
public market of a substantial number of these shares shortly following
completion of the merger could adversely affect the market price of the Pegasus
common stock. Further, any negative effect on the market price for Pegasus
common stock may not be limited by magnitude or period of time. The terms of
stockholder agreements executed by REZ stockholders that will receive
approximately 97% of the shares issued in the merger contractually prohibit the
resale of any shares of Pegasus common stock for 30 days following the closing
of the merger, and subsequently restrict the resale of more than half of the
shares for nine months following the closing of the merger. Subject to these
contractual restrictions, all of the shares issued in the merger will be freely
tradable in the public market.
THE RIGHTS OF THE REZ STOCKHOLDERS WILL DIFFER FROM THEIR RIGHTS AS PEGASUS
STOCKHOLDERS WHICH COULD PROVIDE LESS PROTECTION TO THE REZ STOCKHOLDERS
FOLLOWING THE MERGER.
Upon the consummation of the merger, the REZ stockholders will become
Pegasus stockholders. Several material differences exist between the rights of
stockholders of Pegasus under Pegasus' charter documents and the rights of
stockholders of REZ under REZ's charter documents and a stockholders agreement
between REZ and most of its stockholders which could provide less protection to
the REZ stockholders and give more discretion to the executive officers and
directors of Pegasus. These differences include, among others, the fact that
Pegasus has adopted a stockholder rights plan that may discourage some types of
transactions involving an actual or threatened change of control of Pegasus. REZ
has no stockholder rights plan.
REZ HAS REPORTED NET LOSSES IN MOST RECENT HISTORICAL PERIODS AND IF THESE
LOSSES CONTINUE THEY WOULD ADVERSELY AFFECT PEGASUS' FINANCIAL PERFORMANCE AND
CONDITION.
REZ has incurred net losses for both of the years ended December 31, 1998
and December 31, 1999. If the combined company is not successful in reversing
the performance of REZ's business operations, then these business operations
would have a negative impact on the overall business of the combined company.
Further, as a result of the purchase accounting treatment of the merger,
non-cash charges associated with the amortization of goodwill and other
intangibles will adversely affect the combined company's performance in future
periods. These negative factors may adversely affect the market price for
Pegasus common stock in the future.
14
<PAGE> 19
DUE TO REZ'S HISTORICALLY SLOWER REVENUE GROWTH AND LOWER OPERATING MARGINS, THE
FUTURE PERFORMANCE OF THE COMBINED COMPANY'S BUSINESS COULD BE NEGATIVELY
IMPACTED.
REZ has typically experienced slower revenue growth and lower operating
margins than Pegasus has historically experienced. As a result, the combined
company's business will likely experience slower revenue growth and lower
operating margins than that of Pegasus. If the combined company's revenue growth
and operating margins do not improve over REZ's previous operating performance,
the combined company's cash flow and operating revenue could be adversely
affected.
THE SUBSTANTIAL EXPENSES ASSOCIATED WITH THE MERGER COULD ADVERSELY AFFECT THE
FINANCIAL RESULTS OF THE COMBINED COMPANY.
Pegasus and REZ estimate that the aggregate costs and expenses that will be
incurred in connection with the merger will be approximately $11.0 million.
These costs will primarily relate to the costs associated with combining the
operations of the two companies and the fees of financial advisors, attorneys
and accountants. Although Pegasus and REZ believe that the costs will not exceed
this estimate, the estimate may be incorrect or unanticipated contingencies may
occur that substantially increase the costs of combining their operations. In
subsequent quarters, the combined company may incur additional charges to
reflect costs associated with the merger. If the merger is not completed,
Pegasus and REZ will have incurred significant costs for which they will have
received no benefits.
NON-CASH CHARGES ASSOCIATED WITH THE MERGER WILL REDUCE PEGASUS' EARNINGS IN THE
FUTURE, WHICH COULD ADVERSELY AFFECT PEGASUS' STOCK PRICE.
Based on the total consideration determined for the merger as set forth in
Note 2 to the Pro Forma Combined Condensed Financial Statements, Pegasus expects
to amortize approximately $269.6 million of acquired intangible assets and
goodwill over periods ranging from three to ten years, which will negatively
impact results of operations for the duration of the applicable periods. The
amortization expense relating to the intangible assets and goodwill purchased in
the merger will not be tax deductible. In addition, Pegasus anticipates
expensing the costs associated with in process research and development, which
will negatively impact results of operations in the quarter in which the merger
is completed. As a result, Pegasus' earnings per share will be adversely
affected, which may negatively affect the market price of Pegasus common stock.
SOME EXECUTIVE OFFICERS AND STOCKHOLDERS OF REZ HAVE CONFLICTS OF INTEREST
ARISING FROM PERSONAL BENEFITS TO BE RECEIVED IN THE MERGER AND, HENCE, THERE IS
A RISK THAT THE MERGER CONSIDERATION THAT REZ STOCKHOLDERS WILL RECEIVE IN THE
MERGER IS LESS THAN IT WOULD HAVE BEEN HAD NO PERSONAL BENEFITS BEEN EXTENDED TO
THESE EXECUTIVE OFFICERS AND STOCKHOLDERS.
The personal benefits to be received in the merger by some executive
officers and stockholders of REZ raises conflicts of interest because the
receipt of these benefits may have favorably influenced their support of the
merger. In the absence of these personal benefits, these executive officers and
stockholders may have concluded that the consideration to be received by REZ
stockholders under the terms of the merger agreement was not adequate. Some of
the personal benefits that may have influenced these executive officers and
stockholders include the fact that Reed Elsevier will be relieved of its
guaranty under one of REZ's revolving lines of credit, REZ will repurchase all
of the outstanding shares of REZ Series A Preferred Stock held by Reed Elsevier,
Hambrecht & Quist, as an existing REZ stockholder, will receive merger
consideration and some executives of REZ may be entitled to receive severance
payments as a result of the merger. Further, Reed Elsevier is entitled to
designate an individual to serve as a director on the Pegasus board of directors
following the merger. See "Approval of the Merger and Related
Transactions-Interests of Certain Persons in the Merger."
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SOME OF THE RESPECTIVE COMBINED COMPANY'S CUSTOMERS MAY CEASE TO DO BUSINESS OR
REDUCE THE AMOUNT OF BUSINESS THAT THEY DO WITH THE COMBINED COMPANY, WHICH
COULD CAUSE A DECLINE IN THE COMBINED COMPANY'S REVENUES.
Since some of Pegasus' current customers are direct competitors of REZ, and
one of REZ's current customers is a direct competitor of Pegasus, the
announcement and consummation of the merger may cause some of these customers to
end or curtail their relationships with the combined company and seek
alternative vendors. Pegasus estimates that its customers that are direct REZ
competitors accounted for approximately $600,000 of revenues in fiscal 1999, and
REZ estimates that its customer that is a direct Pegasus competitor accounted
for approximately $900,000 of revenues in fiscal 1999. While Pegasus and REZ are
working to minimize any negative impact the merger may have in this regard, one
or more customers of Pegasus or REZ may use the merger to end or curtail their
relationships with the combined company, which could have a material adverse
effect on the business, operating results and financial condition of the
combined company.
THE STOCKHOLDERS' AGENT MAY NOT ACT IN THE MANNER YOU DESIRE.
The merger agreement provides that several representatives of REZ will act
as the stockholders' agent in some matters involving the cash and shares of
Pegasus common stock to be held in escrow. The merger agreement appoints Henry
Z. Horbaczewski, Frank M. Placenti and Vernon L. Snider collectively as the
stockholders' agent. The stockholders' agent may, among other things, dispute
items in the closing balance sheet prepared by Pegasus, dispute claims by
Pegasus on the escrow for indemnification, arbitrate these claims and compromise
and settle these claims. The stockholders' agent may not act in the manner you
desire and decisions made by the stockholders' agent could have the effect of
reducing the consideration you ultimately receive in the merger.
FAILURE TO COMPLETE THE MERGER COULD ADVERSELY AFFECT THE BUSINESS AND FINANCIAL
CONDITION OF PEGASUS AND REZ.
If the merger is not completed for any reason, Pegasus and REZ may be
subject to a number of material risks, including the following:
- Potential customers may defer purchases of Pegasus or REZ services and
products
- Potential partners may refrain from entering into agreements with Pegasus
or REZ
- Employee turnover may increase
The occurrence of any of these factors could result in serious harm to the
business, operating results and financial condition of Pegasus, REZ or both.
SINCE THE MERGER DOES NOT QUALIFY AS A TAX-FREE TRANSACTION, THE MERGER
CONSIDERATION YOU WILL RECEIVE IN THE MERGER IS SUBJECT TO UNITED STATES FEDERAL
INCOME TAXES AND POSSIBLY STATE, LOCAL AND FOREIGN TAXES THAT MAY REQUIRE YOU TO
OBTAIN ADDITIONAL FINANCIAL RESOURCES TO PAY THESE TAXES.
Although some mergers are structured as a tax-free transaction to
stockholders, the merger between Pegasus and REZ will be a taxable transaction
for federal income tax purposes to the REZ stockholders who are citizens or
residents of the United States. Further, a substantial portion of the merger
consideration that you will receive will be in the form of shares of Pegasus
common stock, and you may not be able to sell these shares at prices attractive
to you should you need the proceeds to pay taxes. In general, United States REZ
stockholders will be taxed on the gain, if any, from the exchange of their REZ
common stock for Pegasus common stock, cash or a combination of both pursuant to
the merger. This tax treatment may not apply to every REZ stockholder. REZ
stockholders may also be subject to state, local and foreign taxation on the
transaction. You should note that tax matters are very complicated and the tax
consequences of the merger to you will depend on the facts of your own
situation. You should consult your own tax advisor as to the specific tax
consequences of the merger, including the applicable federal, state, local and
foreign tax laws.
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THE COMBINED COMPANY MAY REQUIRE ADDITIONAL FINANCING TO MEET ITS FUTURE CAPITAL
AND OPERATIONAL REQUIREMENTS AND MAY FACE UNCERTAINTY IN OBTAINING FAVORABLE
FINANCING ALTERNATIVES.
If the liquidity and cash flow from operations of the combined company are
insufficient to meet its operating and capital requirements, the combined
company may have to seek additional financing, including public or private debt
or equity offerings which may be dilutive to current Pegasus stockholders. If
adequate funds are not available on acceptable terms, the combined company may
be unable to develop or enhance its services, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements.
The combined company's future capital requirements will depend on numerous
factors, including the combined company's profitability, operational cash
requirements, competitive pressures, development of new services and
applications, acquisition of complementary businesses or technologies and
response to unanticipated requirements. There can be no assurance that any
financing alternatives sought by the combined company will be available, or, if
available, will be on terms or in amounts attractive to the combined company.
RISKS RELATED TO THE BUSINESS AND OPERATIONS OF PEGASUS AND REZ AS A COMBINED
COMPANY
The risks set forth below are a number of the risks relating to the
business and operations of Pegasus and REZ that could harm the business of the
combined company after the merger.
PEGASUS IS GROWING RAPIDLY AND MAY NOT HAVE THE RESOURCES TO EFFECTIVELY MANAGE
ADDITIONAL GROWTH.
The recent growth and potential future growth of Pegasus has placed
significant demands on its management as well as on its administrative,
operational and financial resources. As a result, the combined company may not
have sufficient resources to sustain and effectively manage any additional
growth. The expansion of the combined company's business to take advantage of
new market opportunities will require significant management attention and
financial resources. To manage additional growth the combined company may be
required to:
- Expand its sales, marketing and customer support organizations
- Attract and retain additional qualified personnel
- Expand its physical facilities
- Invest in the development or enhancement of its current services and
develop new services that meet changing industry needs
- Develop systems, procedures or controls to support the expansion of its
operations
An inability on the part of the combined company to sustain or manage any
additional growth could have a material adverse effect on the business,
operating results and financial condition of the combined company.
NEITHER PEGASUS NOR REZ CAN ACCURATELY PREDICT THE BUSINESS ENVIRONMENT THAT THE
COMBINED COMPANY WILL FACE, AND THE COMBINED COMPANY MAY EXPERIENCE UNEXPECTED
REVENUE SHORTFALLS AND QUARTERLY VARIATIONS IN OPERATING RESULTS.
Since the combined company's operating costs will be based on anticipated
revenues and its costs will be relatively fixed, even a limited decline in
revenue, a failure to achieve expected revenue in any fiscal quarter or an
unanticipated variation in the recognition of revenues may cause significant
variations in operating results from quarter to quarter and may negatively
affect the combined company's cash flow. In the future, the combined company may
not accurately predict the introduction of its new or enhanced services or those
of its competitors, or the degree of customer acceptance of new services. The
combined company may also be unable to adjust spending rapidly enough to
compensate for any unexpected revenue shortfall. As a result, in one or more
future quarters Pegasus' operating results may fall below the expectations of
securities analysts and investors which could have a material adverse effect on
the stock
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price of Pegasus. Neither Pegasus nor REZ believes that period-to-period
comparisons of either of their past operating results should be relied upon as
an indication of future performance of the combined company.
LOSS OF THE COMBINED COMPANY'S ARRANGEMENTS WITH KEY CUSTOMERS OR THIRD-PARTY
SERVICE PROVIDERS COULD ADVERSELY AFFECT ITS BUSINESS.
In the future, the business of the combined company will be dependent upon
its customer arrangements with hotel chains, independent hotels, hotel
representation firms, hotel management companies, travel agencies, travel agency
consortia, global distribution systems and Internet-based information and
reservation providers. If the combined company is unable to renew, extend or
enter into contracts or arrangements with its current or future customers or
with alternate service providers on favorable terms or initiate new terms, it
could harm the business operations of the combined company. For instance,
Pegasus currently relies, and the combined company will in the future rely, on
third parties to provide remittance and worldwide currency exchange services,
and for facility maintenance and disaster recovery services for the computer and
voice/data communications systems used in all of its services. Further, neither
Pegasus nor REZ has entered into written agreements with most of the travel
agencies relating to Pegasus Commission Processing or REZ's financial services.
CLAIMS MADE BY REZ CUSTOMERS AGAINST REZ COULD LEAD TO THE LOSS OF THOSE
CUSTOMERS OR TO LITIGATION.
Several important REZ customers, including several national hotel chains,
have within the last two years asserted that REZ is in breach of their
respective customer contracts. REZ does not believe that it is in breach of
these contracts. In each of these cases, REZ believes that
- the customer asserted the claim in the hope that it could re-open
contract negotiations, or
- the customer has misinterpreted the contract, or
- REZ has resolved any potential breach in accordance with the remedies
provisions contained in the contract.
If REZ does not satisfactorily address these or similar future customer
situations, any customer dispute could lead to loss of the customer and
litigation which, if decided against REZ, could be material and adverse to REZ's
business, operating results and financial condition.
THE COMBINED COMPANY WILL DEPEND ON ITS ABILITY TO EFFECTIVELY DEVELOP NEW
TECHNOLOGIES AND SERVICES TO MEET THE CHANGING INDUSTRY STANDARDS, PRACTICES AND
CUSTOMER NEEDS ASSOCIATED WITH THE RAPIDLY CHANGING AND INTENSELY COMPETITIVE
HOTEL INDUSTRY.
The combined company will depend, in part, on its ability to develop
leading technologies, enhance its existing services and develop and introduce
new technologies and services to meet the needs of the combined company's
customers. The combined company also must continue to meet the demands of
technological advances and emerging industry standards and practices on a timely
and cost-effective basis. Although the combined company will strive to be a
technological leader, future technology advances may not complement or be
compatible with its services. In addition, the combined company may be unable to
economically and timely incorporate technology changes and technology advances
into its business. The combined company may be unsuccessful in effectively using
new technologies, adapting its services to emerging industry standards or
developing, introducing and marketing service enhancements or new services. The
combined company may also experience difficulties that could delay or prevent
the successful development, introduction or marketing of these services. If the
combined company is unable to develop and introduce new services or enhance
existing services on a timely and cost-effective basis or if new services do not
achieve market acceptance, it could have a material adverse effect on the
business, operating results and financial condition of the combined company.
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THE COMBINED COMPANY'S OPERATIONS DEPEND ON THE EXPERIENCE OF KEY PERSONNEL AND
ITS ABILITY TO RETAIN, ATTRACT, AND INTEGRATE THE KEY PERSONNEL OF PEGASUS AND
REZ.
The combined company's business operations depends on the continued
services of its executive officers and other key personnel, including John F.
Davis, III and Joseph W. Nicholson. Following the merger, the combined company
may be unable to retain the key personnel of Pegasus or REZ or attract other
qualified personnel. The future operations of the combined company depends upon
the ability of the combined company to retain, attract and integrate key
management personnel. Even though Pegasus currently has "key-man" insurance
covering Messrs. Davis and Nicholson, this insurance may not adequately
compensate the combined company for the loss of their services.
Competition for highly-skilled personnel is intense in the industry in
which Pegasus and REZ operate. You cannot be assured that the combined company
will be able to successfully identify, attract, hire and retain other
highly-skilled personnel in a timely and effective manner. During the pre-merger
and integration phases, competitors may intensify their efforts to recruit key
employees. The loss of services of any of the key members of the combined
company's management team, the failure to attract and retain other key personnel
or recruit new personnel could disrupt operations and have a negative effect on
employee productivity and morale of the combined company.
RECENT RESIGNATIONS BY SEVERAL REZ OFFICERS AND SEVERANCE PAYMENTS TO VARIOUS
REZ OFFICERS MAY HARM THE COMBINED COMPANY.
REZ's chief financial officer and chief sales and marketing officer have
recently resigned, and it is anticipated that REZ's president and chief
executive officer will remain in the employ of the combined company for only 60
days following the merger. The vacancies created by these departures may
adversely affect the business of REZ and the integration of the combined
company. In addition, some officers of REZ may be entitled to receive severance
payments under the terms of their respective employment and other agreements.
There can be no assurance that these officers will remain with the combined
company.
AS NEARLY ALL OF PEGASUS' AND REZ'S REVENUES ARE DERIVED FROM THE HOTEL
INDUSTRY, A DOWNTURN IN THE HOTEL INDUSTRY WOULD LIKELY ADVERSELY AFFECT THE
COMBINED COMPANY'S BUSINESS.
Nearly all of Pegasus' and REZ's revenues are directly or indirectly
dependent on the hotel industry. The hotel industry could experience rapid and
unexpected downturns. In the event of a downturn in the hotel industry, both
Pegasus and REZ would likely experience significantly reduced demand for their
services and solutions. Any significant downturn in the hotel industry or any
reduction in the demand for hotel rooms and travel generally, would negatively
impact the combined company's revenues and financial condition. For instance,
the hotel industry is highly sensitive to any change in the economic conditions
affecting business or leisure travel as well as other unforeseen events. Many
factors affect the hotel industry, most of which are beyond the control of
Pegasus or REZ. The hotel industry and demand for hotel rooms or travel may be
affected by, among other things:
- Political instability
- Regional hostilities
- Recession
- Gasoline price escalation
- Inflation
- Any event resulting in significant decreases in demand for hotel rooms or
travel
- Any decrease in hotel room reservation volumes, which may result from
increased competition among hotels
- A decrease in the average hotel room rate
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The combined company may experience substantial period-to-period
fluctuations in its results of operations as a consequence of these industry
patterns and the general economic conditions affecting the demand for hotel
rooms and travel.
REDUCTIONS IN HOTEL COMMISSION PAYMENTS WOULD REDUCE THE COMBINED COMPANY'S
REVENUES AND NET INCOME DERIVED FROM THESE PAYMENTS.
Pegasus Commission Processing and REZ's Paycom services derive revenues
based on the dollar value of travel agency commissions paid by hotels. For the
year ended December 31, 1999, Pegasus and REZ derived 11.4% of their revenues on
a pro forma combined basis from commission processing services. If there is any
change in the commission payment process or any increase in the direct
distribution of rooms by hotels, the combined company's revenues and net income
derived from its commission processing services could substantially decrease.
Hotels typically are under no contractual obligation to pay room reservation
commissions to travel agencies. Hotels could elect to reduce the current
customary commission rate of 10%, limit the maximum commission generally paid
for a hotel room reservation or eliminate commissions entirely. For example,
Marriott Hotels, a significant Pegasus customer, has required travel agencies to
complete a training course and to sign an agreement in order to continue to
receive a 10% commission after November 15, 1999. Failure to do so may result in
the travel agency receiving reduced commissions. Hotels increasingly are
utilizing other direct distribution channels, like the Internet, or offering
negotiated rates to major corporate customers that are non-commissionable to
travel agencies. Although Pegasus has not to date experienced any material
reduction in revenues due to this initiative, there can be no assurance that
this initiative or any other initiative to reduce hotel reservation commissions
would not adversely affect Pegasus' revenues or net income. Any change in the
process affecting the way Pegasus or REZ derives revenues could have a material
adverse effect on the business, operating results and financial condition of the
combined company.
RAPID CONSOLIDATION IN THE HOTEL INDUSTRY COULD LOWER THE VALUE OF SERVICES
PROVIDED BY THE COMBINED COMPANY.
The combined company will offer volume-based discounting of its fees. The
recent consolidation of the hotel industry has resulted in a higher percentage
of discounted fees, and this trend could continue. In addition, the global
distribution system industry has consolidated into four major global
distribution systems. If further consolidation occurs, the value of the combined
company's services and the benefits to hotel operators of utilizing the GDS
distribution service would be reduced. Any potential decrease in the combined
company's customer base or any potential increase in the percentage of
discounted fees may have a material adverse effect on the business, operating
results and financial condition of the combined company.
THE COMBINED COMPANY'S LIMITED EXPERIENCE IN MANAGING AND INTEGRATING
ORGANIZATIONS MAY RESULT IN FUTURE ACQUISITIONS OR JOINT VENTURES BEING
DIFFICULT AND DISRUPTIVE.
Pegasus regularly evaluates acquisition and joint venture opportunities and
in the future the combined company expects to make acquisitions of other
companies or technologies or enter into joint ventures. These acquisitions or
joint ventures may divert the time and resources of the combined company's
management. Further, Pegasus has limited experience in integrating newly
acquired organizations into its operations. Acquisitions involve many risks,
including:
- Difficulty in integrating or otherwise assimilating technologies,
products, personnel and operations
- Diversion of management's attention from other business concerns
- Issuance of dilutive equity securities and incurrence of debt or
contingent liabilities
- Large write-offs and amortized expenses related to goodwill and other
intangible assets
- Loss of key employees of acquired organizations
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- Risks of entering markets in which the combined company has no or limited
prior experience
- Payments of cash, incurrence of debt or assumption of other liabilities
to acquire other businesses
The result of one or more of these factors could have a material adverse
effect on the business, operating results and financial condition of the
combined company.
THE COMBINED COMPANY'S COMPUTER SYSTEMS AND DATABASES MAY SUFFER SYSTEM
FAILURES, BUSINESS INTERRUPTIONS OR SECURITY RISKS.
The combined company's operations will depend 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 its control. A significant amount of Pegasus' and REZ's computer
equipment is located at a single site in Phoenix, Arizona. Any unanticipated
problems may cause a significant system outage or data loss. Despite the
implementation of security measures, the combined 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 combined company's databases, failure
of communication links, security breach or other loss that causes interruptions
in its operations could have a material adverse effect on the business,
operating results and financial condition of the combined company.
THE COMBINED COMPANY WILL BE DEPENDENT TO A SUBSTANTIAL DEGREE ON INTERNET
COMMERCE FOR ITS FUTURE GROWTH.
The future growth of the combined company's Internet-based distribution
services depends on the viability of the Internet as a channel for distributing
services and products. The combined company's services depend on the expansion
of the Internet infrastructure to enable the Internet to support the future
demand created by expected growth. Participants in the Internet industry may
fail to develop necessary infrastructure or complementary services and products,
like high speed modems and high speed communication lines. In addition, there
are critical issues concerning the commercial use of the Internet that remain
unresolved, including issues relating to security, reliability, cost, ease of
use, accessibility and quality of service. If the issues concerning the
commercial use of the Internet are not resolved favorably, it could have a
material adverse effect on the business, operating results and financial
condition of the combined company.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD FORCE THE COMBINED COMPANY
TO CHANGE ITS OPERATIONS.
Although several aspects of the travel industry are heavily regulated by
the United States and other governments, the combined company does not believe
the services that it expects to offer are currently subject to any material
industry-specific government regulation. Any future regulations implemented by
federal, state or foreign governmental authorities affecting one or more of the
combined company's current or future services could have a material adverse
effect on the operations of the combined company.
The combined company's primary customers consist of hotel chains, hotel
representation firms, independent hotels, hotel management companies and travel
agencies. Although some of Pegasus' stockholders are customers, Pegasus and REZ
expect that the combined company will operate as an entity independent from its
stockholders. Any federal, state or foreign governmental authorities, the
competitors or the consumers of the combined company raising any
anti-competitive concerns regarding the combined company's relationship with its
stockholders that are customers could institute an action against the combined
company. Any action by federal, state or foreign governmental authorities or
allegations by third parties could have a material adverse effect on the
business, operating results and financial condition of the combined company.
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THE OPERATIONS OF THE COMBINED COMPANY COULD BE SUBJECT TO NEW LAWS AND
REGULATIONS RELATING TO THE INTERNET.
The combined company will be subject to the same federal, state, local and
foreign laws as other companies conducting business on the Internet. Today there
are relatively few laws specifically directed towards online services. However,
due to the increasing popularity and use of the Internet and online services, it
is possible that laws and regulations will be adopted with respect to the
Internet or online services. The vast majority of these laws were adopted prior
to the advent of the Internet and related technologies and, as a result, do not
contemplate or address the unique issues of the Internet and related
technologies. Those laws that do reference the Internet have not yet been
thoroughly interpreted by the courts and their applicability and reach are
therefore uncertain. These laws and regulations could cover issues like online
contracts, user privacy, freedom of expression, pricing, fraud, content and
quality of products and services, taxation, advertising, intellectual property
rights and information security. Applicability to the Internet of existing laws
governing issues relating to property ownership, copyrights and other
intellectual property issues, taxation, libel, obscenity and personal privacy is
uncertain.
NEW LEGISLATION AND GOVERNMENTAL REGULATION OF PRIVACY ISSUES RELATING TO THE
INTERNET COULD AFFECT THE COMBINED COMPANY'S OPERATIONS.
Changes to existing laws or the passage of new laws intended to address
privacy issues relating to the Internet could directly affect the way the
combined company will do business and could create uncertainty in the
marketplace. Several states within the United States have proposed legislation
that would limit the uses of personal user information gathered online or
require online services to establish privacy policies and some foreign
jurisdictions have adopted similar legislation. The United States Federal Trade
Commission also has recently settled a proceeding with one online service
regarding the manner in which personal information is collected from users and
provided to third parties. This could reduce demand for the combined company's
services, increase the cost of doing business as a result of litigation costs or
increased service delivery costs, or otherwise harm its business.
THE COMBINED COMPANY MAY BE SUBJECT TO PENALTIES FOR FAILING TO PROPERLY QUALIFY
AS A FOREIGN CORPORATION IN VARIOUS JURISDICTIONS DUE TO ITS OPERATIONS AS AN
INTERNET COMPANY.
Since the combined company's services will be accessible worldwide, foreign
jurisdictions may require that the combined company comply with their laws. The
combined company's failure to comply with foreign laws could subject it to
penalties ranging from fines to bans on the combined company's ability to offer
its services. In the United States, companies are required to qualify as foreign
corporations in states where they are conducting business. As an Internet
company, it is unclear in which states the combined company is actually
conducting business. The combined company's failure to qualify as a foreign
corporation in a jurisdiction where it is required to do so could subject it to
taxes and penalties for the failure to qualify and could result in its inability
to enforce contracts in those jurisdictions. Any new legislation or regulation,
or the application of laws or regulations from jurisdictions whose laws do not
currently apply to the combined company's business, could adversely affect its
business, operating results and financial condition.
THE COMBINED COMPANY'S INTERNATIONAL OPERATIONS WILL MAKE IT SUSCEPTIBLE TO
GLOBAL ECONOMIC FACTORS, FOREIGN TAX LAW ISSUES, FOREIGN BUSINESS PRACTICES AND
CURRENCY FLUCTUATIONS.
Pegasus has little experience outside of the United States, while REZ has
substantial foreign operations. The combined company's international operations
will be subject to particular risks, including:
- Pegasus' inexperience in managing foreign operations
- Difficulties and costs of managing and staffing foreign operations
- Costs associated with the termination of any foreign employees
- Impact of possible adverse political and economic conditions
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- Fluctuations in the value of the U.S. dollar relative to other currencies
and among foreign currencies
- Potentially adverse tax consequences
- Impact of the policies of the United States and foreign governments on
foreign trade
- Reduced protection for intellectual property rights in some countries
- Unexpected changes in regulatory requirements
- Cost of adapting the Pegasus services to foreign markets
If the combined company does not realize the expected results from
international operations, it could have a material adverse effect on the
business, operating results and financial position of the combined company.
THE COMBINED COMPANY MAY BE UNABLE TO ADEQUATELY PROTECT ITS PROPRIETARY RIGHTS
OR PREVENT THEIR UNAUTHORIZED USE, WHICH COULD DIVERT ITS FINANCIAL RESOURCES
AND HARM ITS BUSINESS.
The combined company's success will depend upon its proprietary technology.
Both Pegasus and REZ currently rely upon a combination of copyright, trademarks,
trade secrets, confidentiality procedures and contractual provisions to protect
this proprietary technology. Despite current efforts to protect these
proprietary rights, these protective measures may not be adequate to prevent
misappropriation or independent third-party development of the combined
company's technology. Many foreign jurisdictions offer less protection of
intellectual property rights than the United States. Effective copyright,
trademark and trade secret protection may not be available in other
jurisdictions. In addition, the combined company may need to litigate claims
against third parties to enforce its intellectual property rights, protect its
trade secrets, determine the validity and scope of the proprietary rights of
others or defend against claims of infringement or invalidity. This litigation
could result in substantial cost and diversion of management resources. A
successful claim against the combined company could effectively block its
ability to use or license its technology in the United States or abroad. If the
combined company cannot adequately protect its proprietary rights, it could have
a material adverse effect on the business, operating results and financial
condition of the combined company.
PEGASUS RELIES ON SEVERAL TECHNOLOGY LICENSES FROM THIRD PARTIES, THE LOSS OF
WHICH MAY HARM THE COMBINED COMPANY'S ABILITY TO DEVELOP AND SELL ITS SERVICES.
Pegasus currently has, and in the future the combined company may procure,
licenses from third parties relating to its services or technology. In
particular, Pegasus has licenses for the Netscape application server software
and the Informix database software that are critical to its business and would
be difficult to replace. The combined company's inability to obtain or maintain
these licenses could impair its ability to develop and sell its services. If the
combined company or its suppliers are unable to obtain licenses, the combined
company could be forced to market services without some technological features.
Pegasus also licenses some software and technology for its operations. The
combined company's inability to obtain licenses or its inability to obtain such
licenses on competitive terms could have a material adverse effect on the
ability of the combined company effectively offer its services.
IF THE COMBINED COMPANY IS UNABLE TO QUICKLY DEVELOP NEW TECHNOLOGIES AND NEW
SERVICES TO MEET THE NEEDS OF THE PARTICIPANTS IN THE INTENSELY COMPETITIVE
HOTEL INDUSTRY, THE COMBINED COMPANY MAY LOSE MARKET SHARE AND BE FORCED TO
REDUCE THE PRICE OF ITS SERVICES.
The combined company will compete in a market that is rapidly evolving,
intensely competitive and involve continually changing technology and industry
standards. The combined company may not be successful in competing against its
current and future competitors. The competitors of the combined company may be
able to respond more quickly to new or emerging technologies, services or
changes in customer requirements. The combined company may experience increased
competition from current and
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potential competitors, many of which have significantly greater financial,
technical, marketing and other resources than the combined company does. Other
participants in the hotel room distribution process, commission processing,
business information, hotel representation service, hotel branding service,
technology service, and hotel property management system sectors, as well as new
competitors, could create services and applications that are more attractive
than the services and applications of the combined company. Competitive
pressures could reduce market share of the combined company or require it to
reduce the prices of its services. An inability to compete effectively with
these services could have a material adverse effect on the business, operating
results and financial condition of the combined company.
POTENTIAL YEAR 2000 ISSUES MAY EXPOSE THE COMBINED COMPANY TO LIABILITY OR LOSS.
Neither Pegasus nor Rez experienced any material adverse impact from the
transition to the year 2000. Even though no material adverse impact from the
year 2000 transition has been noted through internal investigations and
inquiries with its major customers and suppliers, neither Pegasus nor Rez can
provide any assurance that its suppliers and customers have not been affected in
a manner that is not yet apparent. Each of Pegasus and Rez will continue to
monitor its year 2000 compliance and the year 2000 compliance of its suppliers
and customers. The combined company's inability to effectively process
electronic hotel reservations, manage hotel room inventory or consolidate hotel
commissions as a result of year 2000 problems could have a material adverse
affect on its ability to generate revenues from its services.
INVESTMENT RISKS
THE STOCK PRICE OF PEGASUS HAS BEEN AND MAY CONTINUE TO BE EXTREMELY VOLATILE
DUE TO MANY FACTORS, WHICH MAY MAKE IT MORE DIFFICULT FOR YOU TO RESELL SHARES
WHEN YOU WANT TO AT PRICES YOU FIND ATTRACTIVE.
Several factors have caused the stock price of Pegasus common stock to be
and in the future may be extremely volatile which could result in the future
market price of Pegasus common stock to be lower than its market price at the
closing of the merger. The Pegasus stock price could be subject to wide
fluctuations in response to a variety of factors, including the following:
- Actual or anticipated variations in quarterly operating results
- The ability of the combined company to successfully develop, introduce
and market new or enhanced products and services to the hotel industry on
a timely basis
- Unexpected changes in demand for the combined company's services and
solutions due to the fixed nature of a large portion of the combined
company's expenses
- Unpredictable volume and timing of customer revenues due to seasonality
in the travel industry, the terms of customer contracts and other factors
- Pegasus' purchasing and payment patterns
- The pricing policies of the combined company's competitors
- Announcements of technological innovations or new services by the
combined company or its competitors
- Conditions or trends in the Internet and online commerce industries
- Changes in the market valuations of other similarly situated companies
- Developments in Internet regulations
- Announcements by the combined company or its competitors of significant
acquisitions, strategic partnerships, joint ventures or capital
commitments
- Market fluctuations and performance of the hotel industry
- Unscheduled system downtime
24
<PAGE> 29
In addition, the trading prices of Internet stocks in general have
experienced extreme price and volume fluctuations. Any negative change in the
public's perception of the prospects of Internet or e-commerce companies or
other broad market and industry factors could depress the market price of
Pegasus common stock, regardless of the combined company's operating
performance. Market fluctuations, as well as general political and economic
conditions, such as recession or interest rate or currency rate fluctuations,
also may decrease the market price of Pegasus' common stock.
LITIGATION MAY DIVERT THE COMBINED COMPANY'S RESOURCES AND REDUCE THE MARKET
PRICE OF PEGASUS COMMON STOCK.
In some instances, following declines in the market price of a company's
securities, securities class-action litigation often has been instituted against
that company. Litigation of this type, if instituted against the combined
company, could result in a decline in the Pegasus stock price, and could result
in substantial costs and a diversion of management's attention and resources,
which could reduce the combined company's operating revenue.
PROVISIONS IN PEGASUS' CHARTER AND BYLAWS MAY DETER POTENTIAL ACQUISITION BIDS,
INCLUDING BIDS WHICH MAY BE BENEFICIAL TO ITS STOCKHOLDERS.
Provisions of Pegasus' certificate of incorporation and bylaws could make
it more difficult for a third party to acquire it, even if doing so would be
beneficial to Pegasus' stockholders. Pegasus' certificate of incorporation and
bylaws 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. Pegasus' certificate of
incorporation also authorizes only the board of directors to fill director
vacancies, including newly created directorships, and states that directors may
be removed only for cause and only by the affirmative vote of holders of at
least two-thirds of the outstanding shares of Pegasus' voting stock voting
together as a single class. These provisions could discourage potential
acquisition proposals and could delay or prevent a change in control
transaction. They could also discourage others from making tender offers for
Pegasus' shares. As a result, these provisions may prevent the market price of
Pegasus' common stock from reflecting the effects of actual or rumored takeover
attempts. These provisions may also prevent significant changes in Pegasus'
board of directors and its management.
PEGASUS' STOCKHOLDER RIGHTS PLAN MAY DISCOURAGE A THIRD PARTY FROM ACQUIRING
CONTROL OF THE COMBINED COMPANY.
On September 28, 1998, the Pegasus board of directors adopted a stockholder
rights plan and declared a dividend distribution of one right for each
outstanding share of Pegasus' common stock to stockholders of record at the
close of business on October 13, 1998. The number of rights associated with
shares of common stock has been proportionately adjusted for the stock split
effected in January 2000. This stockholder rights plan may discourage or
increase the difficulty for a third party to acquire control of the combined
company. In addition, each share of common stock issued in connection with the
merger will be coupled with a right under the stockholder rights plan. Each
right entitles the registered holder to purchase from Pegasus one-one thousandth
of a share of its Series A Preferred Stock for each share of Pegasus common
stock held, at a price of $90. The rights are exercisable only if a person or
group of affiliated persons acquires, or has announced the intent to acquire,
20% or more of the Pegasus common stock.
DELAWARE LAW MAY DETER POTENTIAL ACQUISITION BIDS FOR PEGASUS, INCLUDING BIDS
THAT MAY BE BENEFICIAL TO ITS STOCKHOLDERS.
Pegasus is subject to the provisions of Delaware law which restrict some
mergers with interested stockholders even if a combination would be beneficial
to stockholders. These provisions may inhibit a non-negotiated merger or other
merger. The anti-takeover provisions of the Delaware General Corporation Law
prevent Pegasus from engaging in a "merger" with any "interested stockholder"
for three years
25
<PAGE> 30
following the date that the stockholder became an interested stockholder. For
purposes of Delaware law, a "merger" includes a merger or consolidation
involving Pegasus and the interested stockholder and the sale of more than 10%
of the combined company's assets. In general, Delaware law defines an
"interested stockholder" as any entity or person beneficially owning more than
15% of the outstanding voting stock of a corporation and any entity or person
affiliated with or controlling or controlled by the entity or person. Under
Delaware law, a Delaware corporation may opt out of the anti-takeover
provisions. Pegasus does not intend to opt out of these anti-takeover
provisions.
ADDITIONAL INFORMATION ABOUT PEGASUS AND
THIS INFORMATION STATEMENT/PROSPECTUS
Pegasus files annual, quarterly and special reports, proxy statements and
other information with the Securities Exchange Commission, or the SEC. You may
inspect and copy these materials at the public reference facilities maintained
by the SEC at:
<TABLE>
<S> <C> <C>
Judiciary Plaza Citicorp Center Seven World Trade Center
Room 1024 500 West Madison Street 13th Floor
450 Fifth Street, N.W. Suite 1400 New York, New York 10048
Washington, D.C. 20549 Chicago, Illinois 60661
</TABLE>
You may also obtain copies of these materials from the SEC at prescribed
rates by writing to the Public Reference Section of the SEC, 450 Fifth Street,
N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for more
information on the operation of the public reference rooms. You can also find
Pegasus SEC filings at the SEC's website at www.sec.gov. Reports, proxy
statements and other information about Pegasus may be inspected at the National
Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C.
20006.
Pegasus has filed with the SEC a registration statement on Form S-4 under
the Securities Act of 1933, with respect to Pegasus' common stock to be issued
to REZ stockholders in the merger. This information statement/prospectus is part
of that registration statement and, as permitted by the SEC's rules, does not
contain all of the information set forth in the registration statement. For
further information about Pegasus and its common stock, Pegasus refers you to
those copies of contracts or other documents that have been filed as exhibits to
the registration statement, and statements relating to those documents are
qualified in all respects by this reference. You can review and copy the
registration statement and its exhibits and schedules from the SEC at the
address listed above or from its Internet site.
Pegasus' world wide web home page is located at www.pegsinc.com. REZ's
world wide web home page is located at www.rez.com. Information contained in
either Pegasus' or REZ's website does not constitute, and shall not be deemed to
constitute, part of this information statement/prospectus.
Except where the context requires otherwise, references in this information
statement/prospectus to "Pegasus Systems, Inc." and "Pegasus" refer to Pegasus
Systems, Inc., a Delaware corporation and its consolidated subsidiaries.
References in this information statement/prospectus to "Pegasus Worldwide, Inc."
or "Pegasus Worldwide" refer to Pegasus Worldwide, Inc., a Delaware corporation
and a wholly owned subsidiary of Pegasus. References in this information
statement/prospectus to "Pegasus common stock," or "common stock of Pegasus"
refer to the common stock, $.01 par value per share, of Pegasus with each share
carrying a preferred stock purchase right.
References in this information statement/prospectus to "REZ, Inc.," or
"REZ" refer to REZ, Inc., a Delaware corporation, formerly known as
REZsolutions, Inc., and its consolidated subsidiaries.
Reed Elsevier Inc. and Utell International Group Ltd. are wholly owned
subsidiaries of Reed Elsevier plc, which is one of the world's leading
publishers and providers of scientific, professional and business information.
References in this information statement/prospectus to "Reed Elsevier" refer to
Reed Elsevier plc, a corporation organized under the laws of England and Wales,
and its consolidated subsidiaries, including Reed Elsevier Inc., a Massachusetts
corporation, and Utell International
26
<PAGE> 31
Group Ltd., a corporation organized under the laws of England and Wales, as well
as the affiliates of these entities. Reed Elsevier plc is indirectly jointly
owned by Reed International P.L.C. and Elsevier N.V., each of which is a
publicly held company. For a description of the prior relationship between
Pegasus and REZ, as well as the prior relationship between Pegasus and Reed
Elsevier, see "Approval of the Merger and Related Transactions -- Prior
Relationships of Pegasus and REZ."
References in this information statement/prospectus to "you" or "your"
refer to an individual holder of the outstanding shares of REZ common stock.
The Pegasus board of directors declared a 3-for-2 split of its shares of
common stock effected in the form of a stock dividend on January 7, 2000 to all
Pegasus' stockholders of record on December 20, 1999. Unless otherwise
indicated, the information contained in this information statement/prospectus,
including the historical market prices and number of shares of Pegasus common
stock, has been adjusted to reflect this stock split.
You should rely only on the information contained in this information
statement/prospectus. Neither Pegasus nor REZ has authorized anyone to provide
you with information that is different from what is contained in this
information statement/prospectus.
This information statement/prospectus is dated March , 2000. You should
not assume that the information contained in this information
statement/prospectus is accurate as of any date other than that date, and the
issuance of Pegasus common stock in the merger will not create any implication
to the contrary. Pegasus provided the information concerning Pegasus. REZ
provided the information concerning REZ.
27
<PAGE> 32
SELECTED CONSOLIDATED HISTORICAL FINANCIAL STATEMENT DATA
The following selected consolidated historical financial statement data of
Pegasus and REZ has been derived from their respective historical financial
statements, which are included in this information statement/prospectus. The
following data should be read in conjunction with the historical consolidated
financial statements of Pegasus and REZ, respectively, and the related notes,
the unaudited pro forma condensed consolidated financial statements, and the
related notes, as well as Pegasus' and REZ's respective "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this information statement/prospectus.
PEGASUS SELECTED HISTORICAL FINANCIAL DATA
(In thousands, except for per share data)
The statement of operations data below reflects Pegasus' operations,
including the depreciation and amortization of the following:
- Acquisition of Driving Revenue in August 1998
- Acquisition of the remaining 16.7% of the outstanding capital stock of
The Hotel Clearing Corporation in June 1996
- Acquisition of 83.3% of the outstanding capital stock of The Hotel
Clearing Corporation in July 1995
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues................................. $38,036 $29,064 $20,903 $15,869 $ 9,296
Operating expenses:
Cost of services........................... 12,180 9,717 7,445 6,199 3,883
Research and development................... 2,367 2,673 2,504 1,961 840
Write-off of purchased in-process research
and development......................... -- 1,480 -- 245 1,223
General and administrative expenses........ 5,463 4,442 3,715 3,799 2,770
Marketing and promotion expenses........... 5,936 4,824 3,998 2,824 912
Depreciation and amortization.............. 2,438 2,690 3,017 3,426 2,477
------- ------- ------- ------- -------
Total operating expenses........... 28,384 25,826 20,679 18,454 12,105
------- ------- ------- ------- -------
Operating income (loss)...................... 9,652 3,238 224 (2,585) (2,809)
Other income (expense):
Interest income............................ $ 4,828 $ 2,503 $ 993 $ 114 $ --
Write-off of minority interest
investment.............................. (1,100) -- -- -- --
Interest expense........................... (26) (147) (600) (893) (815)
------- ------- ------- ------- -------
Income (loss) before income taxes and
minority interest....................... 13,354 5,594 617 (3,364) (3,624)
Income taxes................................. 4,688 198 28 15 --
------- ------- ------- ------- -------
Income (loss) before minority interest....... 8,666 5,396 589 (3,379) (3,624)
Minority interest............................ -- -- -- (106) 53
------- ------- ------- ------- -------
Net income (loss)............................ $ 8,666 $ 5,396 $ 589 $(3,485) $(3,571)
======= ======= ======= ======= =======
</TABLE>
28
<PAGE> 33
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net income (loss) per share:
Basic...................................... $ 0.47 $ 0.34 $ 0.05 $ (0.44) $ (0.87)
======= ======= ======= ======= =======
Diluted.................................... $ 0.44 $ 0.32 $ 0.05 $ (0.44) $ (0.87)
======= ======= ======= ======= =======
Weighted average shares outstanding:
Basic...................................... 18,576 15,691 10,801 7,870 4,128
Diluted.................................... 19,689 16,795 13,014 7,870 4,128
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------
1999 1998 1997 1996 1995
-------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................ $143,605 $44,398 $ 38,397 $ 2,068 $ (1,560)
Total assets................... 163,540 60,320 49,923 13,892 10,316
Accounts payable and accrued
liabilities............................ 6,162 4,715 4,048 2,689 1,941
Current portion of capital lease
obligations............................ 53 535 1,048 1,834 1,049
Long-term obligations, net of current
portion................................ -- 58 661 6,353 6,994
Minority interest........................ -- -- -- -- 1,340
Accumulated earnings/(deficit)........... 82 (8,584) (13,981) (14,570) (11,085)
Total stockholders' equity
(deficit).................... 156,771 54,264 43,478 1,954 (2,380)
</TABLE>
29
<PAGE> 34
REZ SELECTED HISTORICAL FINANCIAL DATA
(In thousands, except for per share data)
REZ's statement of operations data for 1996 reflect the carved out results
of operations of the Utell reservation and data processing business of Reed
Elsevier. REZ's statement of operations data for 1997 reflect the carved out
results of operations of Utell for the first eleven months of 1997, as well as
the combined results of operations for Utell and Anasazi, Inc. for December
1997, reflecting the merger in that month of Utell operations and Anasazi that
resulted in the formation of REZ. Statements of operations for subsequent
periods reflect REZ's operations.
The 1997 statement of operations data include a non-recurring charge of
$20.0 million for in-process research and development allocated to the purchase
price for Anasazi in the Utell/Anasazi merger. The statement of operations data
for the years ended December 31, 1999 and 1998 include amortization of
intangibles related to purchase accounting of $7.3 million for each year.
Prior to December 1997, the Utell operations were operated within different
business units of Reed Elsevier. In preparation for the business combination
with Anasazi, Inc., the Utell operations for 1996 and subsequent periods were
carved out from the other Reed Elsevier operations, and through a series of
transactions were ultimately contributed to the separate legal entity that
acquired Anasazi in a transaction that was recorded using the purchase method of
accounting. See Note 1 to the REZ consolidated financial statements for a more
complete description of this carve out and business combination. In light of the
passage of time since the Utell/Anasazi merger, the complications associated
with carving out Utell operations prior to 1996 and the reduced significance of
those earlier operations to an understanding of REZ's current operating results
and financial condition, the full selected historical financial data for REZ has
not been provided. However, available information pertaining to revenues, direct
expenses and operating income data has been provided for 1995 for comparative
purposes.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1999 1998(a) 1997 1996 1995
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................................ $147,745 $141,870 $ 90,454 $80,610 $70,344
-------- -------- -------- ------- -------
Operating expenses:
Direct Costs (cost of services)........... 74,535 74,634 41,148 36,161 31,602
Research and development.................. 4,100 2,985 292 -- --
Write-off of purchased in-process research
and development........................ -- -- 19,999 -- --
General and administrative................ 28,507 26,282 16,558 12,452 11,932
Sales and marketing....................... 28,736 30,164 22,670 17,584 13,043
Depreciation and amortization............. 16,980 16,064 5,248 3,002 3,694
-------- -------- -------- ------- -------
Total operating expenses.......... 152,858 150,129 105,915 69,199 28,669
-------- -------- -------- ------- -------
Operating income (loss)..................... (5,113) (8,259) (15,461) 11,411 $10,074
=======
Other income (expense):
Interest income (expense) -- net.......... (1,111) (613) 79 264
Gain on sale of investments............... -- 3,443 -- --
-------- -------- -------- -------
Income (loss) before income taxes........... (6,224) (5,429) (15,382) 11,675
Income tax benefit (provision).............. 1,633 1,086 (2,170) (3,970)
-------- -------- -------- -------
Net income (loss)........................... $ (4,591) $ (4,343) $(17,552) $ 7,705
======== ======== ======== =======
</TABLE>
- ---------------
(a) As restated, See Note 11 in the Notes to the consolidated financial
statements.
30
<PAGE> 35
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------
1999 1998(a) 1997 1996
-------- -------- -------- -------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)........................... $ (8,110) $ (9,312) $ (4,573) $(4,275)
Total assets........................................ 111,764 104,611 113,272 41,383
Accounts payable and accrued liabilities............ 38,000 30,323 28,193 28,188
Short-term borrowings, including current portion of
long-term......................................... 6,747 6,814 2,299 --
Deferred revenue.................................... 7,952 7,471 5,872 --
Reed Elsevier equity................................ -- -- -- 13,195
Accumulated deficit................................. (32,471) (27,880) (23,537) --
Total stockholders' equity.......................... 48,244 52,928 58,960 --
</TABLE>
- ---------------
(a) As restated, see Note 11 in the Notes to the consolidated financial
statements.
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENT DATA
(In thousands, except per share data)
The following pro forma combined statement of operations data assumes the
merger took place as of the beginning of the period presented and combines
Pegasus' consolidated statement of operations for the year ended December 31,
1999 and REZ's consolidated statement of operations for the same period.
The pro forma balance sheet data assumes the merger took place as of
December 31, 1999 and combines Pegasus' December 31, 1999 consolidated balance
sheet data and REZ's December 31, 1999 consolidated balance sheet data.
The pro forma combined financial statements give effect to the proposed
merger of Pegasus and REZ using the purchase method of accounting. Under this
method of accounting, the aggregate purchase price is allocated to assets
acquired and liabilities assumed based on their estimated fair values. The pro
forma adjustments are preliminary and are based on management's estimates of the
value of the tangible and intangible assets and liabilities acquired. The final
allocation of the purchase price to the respective assets and liabilities
acquired are determined a reasonable time after consummation of these
transactions and are based on a complete evaluation of the assets and
liabilities assigned. Accordingly, the information presented herein may differ
from the final purchase price allocation; however, the allocations are not
expected to differ materially from the preliminary amounts.
31
<PAGE> 36
The pro forma information is unaudited and does not purport to be
indicative of the combined company's financial condition or the results that
actually would have been obtained had the merger been consummated as of the
assumed dates and for the period presented, nor are they indicative of the
combined company's results of operations or financial condition for any future
period or date. See "Unaudited Pro Forma Combined Condensed Financial
Statements" for a further description of the pro forma adjustments.
<TABLE>
<CAPTION>
PRO FORMA COMBINED
FOR THE YEAR ENDED
DECEMBER 31, 1999
------------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................................................ $184,024
Operating expenses:
Cost of services.......................................... 84,958
Research and development.................................. 6,467
Write-off of purchased in-process research and
development............................................ --
General and administrative expenses....................... 33,970
Marketing and promotion expenses.......................... 34,672
Depreciation and amortization............................. 66,629
--------
Total operating expenses.......................... 226,696
--------
Operating loss.............................................. (42,672)
Other income (expense):
Interest expense, net..................................... (4,210)
Net loss on sale of investments........................... (1,100)
--------
Loss before income taxes.................................... (47,982)
Income taxes................................................ (10,877)
--------
Net loss.................................................... $(37,105)
========
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA COMBINED
AS OF
DECEMBER 31, 1999
------------------
<S> <C>
BALANCE SHEET DATA:
Working Capital............................................. $ 24,516
Total assets................................................ 403,277
Accounts payable and accrued liabilities.................... 43,730
Short-term borrowings, including current portion of notes
payable and capital lease obligation...................... 6,800
Deferred income............................................. 8,015
Accumulated deficit......................................... (7,919)
Total stockholders' equity.................................. $275,553
</TABLE>
32
<PAGE> 37
COMPARATIVE PER SHARE DATA
The following table sets forth the historical per share data of Pegasus and
REZ and pro forma combined per share data after giving effect to the merger on a
purchase basis of accounting.
You should read the information set forth below along with Pegasus' and
REZ's consolidated financial statements and the pro forma combined financial
information of Pegasus and REZ included elsewhere in this information
statement/prospectus. The pro forma combined financial data are not necessarily
indicative of the operating results that would have been achieved had the merger
been consummated as of the beginning of the period presented and you should not
construe it as representative of future operations.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
-----------------
<S> <C>
Historical -- Pegasus:
Basic net income per share................................ $ 0.47
Diluted net income per share.............................. $ 0.44
Historical -- REZ:
Basic net (loss) per share................................ $(0.13)
Diluted net (loss) per share.............................. $(0.13)
Pro forma combined net (loss)
Per Pegasus share......................................... $(1.64)
Equivalent per REZ share.................................. $(0.19)
</TABLE>
The above REZ equivalent pro forma combined net loss per share amounts are
calculated by multiplying the Pegasus combined pro forma net loss per share
amounts by the assumed exchange ratio in the merger of .1156. This exchange
ratio assumes that all REZ optionholders will elect to receive cash, rather than
exercise their options and receive REZ common stock. Based on this assumption,
there will be 34,513,780 shares of REZ common stock outstanding at closing,
which given the issuance of 3.99 million shares of Pegasus common stock yields
an assumed exchange ratio of .1156.
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1999
-----------------
<S> <C>
Book value per share:
Historical Pegasus........................................ $ 7.71
Historical REZ............................................ $ 1.40
Pro forma combined per Pegasus share...................... $11.33
Pro forma combined per REZ share.......................... $ 1.31
</TABLE>
The historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock outstanding at the end of each
period. The pro forma combined book value per Pegasus share is computed by
dividing pro forma stockholders' equity by the pro forma number of shares of
common stock of Pegasus outstanding at December 31, 1999, assuming the merger
had occurred at the end of this period. The pro forma combined book value per
REZ share is computed by multiplying the Pegasus pro forma combined book value
per share by the assumed exchange ratio in the merger of .1156.
For purposes of pro forma combined data, Pegasus' financial data for the
fiscal year ended December 31, 1999 have been combined with REZ's financial data
for the corresponding period, including the effects of pro forma adjustments
described elsewhere in this information statement/prospectus.
Pegasus and REZ estimate that the aggregate costs and expenses that will be
incurred in connection with the merger will be $11.0 million, which will be
included as part of the purchase price to be allocated to the REZ assets
acquired. The pro forma combined book value per share data gives effect to the
estimated direct transaction costs as if these costs had been incurred as of the
respective balance sheet date. The direct transaction costs are not included in
the pro forma combined net income per share data. See "Unaudited Pro Forma
Financial Information and Related Notes."
33
<PAGE> 38
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
Some statements made in this document are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements include
statements as to:
- The anticipated closing date of the merger
- Any adjustments to the merger consideration and any distribution to REZ
stockholders of shares of Pegasus common stock and cash from escrow
- The anticipated tax treatment of the merger
- The benefits expected to result from the merger
- The performance and financial condition of the combined company following
the merger
- Projections or other forward-looking statements made in support of the
respective opinions of Hambrecht & Quist and Thomas Weisel Partners in
this information statement/prospectus
Any statements contained in this information statement/prospectus,
including without limitation statements to the effect that Pegasus or REZ or
their respective management "believes," "expects," "anticipates," "plans,"
"may," "will," "projects," "continues" or "estimates," or statements concerning
"potential," or "opportunity" or other variations thereof or comparable
terminology or the negative thereof, that are not statements of historical fact
should be considered forward-looking statements. Actual results could differ
materially and adversely from those anticipated in the forward-looking
statements as a result of several factors, including those set forth in "Risk
Factors" beginning on page 10, which you should review carefully.
34
<PAGE> 39
MARKET PRICE AND DIVIDEND INFORMATION
The following table sets forth for the quarters indicated the high and low
sale prices per share of Pegasus common stock as reported on the Nasdaq National
Market. The market prices detailed below have been adjusted to reflect Pegasus'
3-for-2 stock split effected on January 7, 2000. The Pegasus common stock trades
on the Nasdaq National Market under the symbol "PEGS."
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
2000
First quarter (through March 17, 2000).................... $40.66 $17.75
1999
Fourth quarter............................................ 54.42 24.17
Third quarter............................................. 29.75 19.33
Second quarter............................................ 32.92 20.75
First quarter............................................. 30.67 16.67
1998
Fourth quarter............................................ 24.17 5.92
Third quarter............................................. 17.92 7.17
Second quarter............................................ 20.67 14.67
First quarter............................................. 18.08 9.08
</TABLE>
Information regarding the market prices of REZ's capital stock is not
included since there is no established trading market for shares of REZ capital
stock.
RECENT CLOSING PRICES
On November 16, 1999, the last full trading day prior to the public
announcement of the execution and delivery of the merger agreement, the last
reported sale price on the Nasdaq National Market was $31.75 per share of
Pegasus common stock. On March 17, 2000, the latest practicable date before the
mailing of this information statement/prospectus, the last reported sale price
on the Nasdaq National Market was $18.00 per share of Pegasus common stock.
Since the market price of Pegasus common stock is subject to fluctuation,
the market value of the shares of Pegasus common stock that REZ stockholders
will receive in the merger may increase or decrease prior to and following the
merger.
NEITHER PEGASUS NOR REZ CAN PREDICT THE FUTURE PRICES FOR PEGASUS COMMON
STOCK. YOU ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR PEGASUS COMMON
STOCK.
DIVIDEND INFORMATION
Neither Pegasus nor REZ has declared or paid cash dividends on shares of
their capital stock. After the merger, Pegasus intends to retain earnings for
development of its business and not to distribute earnings to stockholders as
dividends. The declaration and payment by Pegasus of any future dividends and
the amount of any dividend will depend upon Pegasus' results of operations,
financial condition, cash requirements, future prospects and other factors
deemed relevant by the Pegasus board of directors.
NUMBER OF STOCKHOLDERS
As of February 29, 2000, there were 58 stockholders of record who held
shares of Pegasus common stock, and as of February 29, 2000, there were 128
stockholders of record who held shares of REZ capital stock.
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APPROVAL OF THE MERGER AND RELATED TRANSACTIONS
BACKGROUND OF THE MERGER
For several years, Pegasus and REZ and their respective predecessors have
transacted business together as customers of each other in various areas. For
example, REZ helped Pegasus develop its original technology for its electronic
distribution services and today provides facilities management services to
Pegasus. In addition, several current or former affiliates of REZ previously
were affiliated with Pegasus or its predecessors. Through these various contacts
and otherwise, Pegasus and REZ have from time to time discussed the possibility
and the relative merits of various business relationships, including a strategic
business combination between the two organizations. In March 1998, the board of
directors of REZ established an IPO Committee to analyze the feasibility of an
initial public offering of REZ common stock or, alternatively, the desirability
of a merger with, or acquisition of REZ by, an unaffiliated third party. From
mid-1998 through early 1999, Pegasus and REZ executed several non-disclosure or
confidentiality agreements to permit the parties to share limited amounts of
information necessary to determine whether additional discussions concerning a
possible business combination should be pursued. Throughout 1998 and 1999,
representatives of REZ also engaged in discussions with several other potential
acquirors.
In January 1999, Pegasus retained Hambrecht & Quist as its financial
advisor to assist in exploratory discussions with REZ and ultimately to help
Pegasus negotiate and evaluate the merits of a transaction with REZ. Also in
January 1999, REZ retained Thomas Weisel Partners as its financial advisor to
assist in exploring the possibility of a sale of the company. In early February
1999, representatives of Pegasus and REZ management met for two days in Phoenix,
Arizona during which time REZ presented its Strategic Plan and 1999 Business
Plan to Pegasus. In April 1999, the REZ Board of Directors considered, and
ultimately rejected, three confidential proposals to acquire the company,
including a proposal from Pegasus. In each series of discussions between Pegasus
and REZ prior to the late summer of 1999, the parties ultimately decided not to
pursue further discussions because of an inability to reach an agreement on the
basic terms and structure of a possible transaction.
During the late summer of 1999, at the request of Pegasus management,
representatives of Hambrecht & Quist prepared and delivered a preliminary,
non-binding term sheet outlining a proposed merger between Pegasus and REZ in an
effort to renew the dialogue between the parties and determine what major issues
needed to be discussed and agreed on before pursuing a definitive agreement. The
parties and their financial and legal advisors discussed and revised the
non-binding term sheet on several occasions through early October 1999, but the
parties were unable to reach agreement on various material terms outlined in the
term sheet including, among other things, the amount of Pegasus stock and cash
and other consideration to be paid to REZ shareholders, whether the transaction
would be structured to be fully taxable to stockholders or partially tax
deferred, the extent of an exclusive period of negotiation, the merger closing
conditions and whether options granted by REZ would be assumed by Pegasus. In
addition, prior to late September 1999, a limited amount of information about
REZ was made available to Pegasus and neither Pegasus nor REZ was permitted to
conduct any confidential due diligence with respect to the other party's
business.
On September 9, 1999, Pegasus' management reported to the Pegasus board of
directors on the status of the discussions with REZ. The Pegasus board of
directors discussed the rationale for and possible terms of a transaction with
REZ. The Pegasus board of directors determined that further discussions were
desirable and authorized management to continue discussions. Similarly, at a
meeting of the REZ board of directors on September 16, 1999, the REZ board
reviewed with REZ management and its legal and financial advisers the status of
negotiations with various potential acquirors and determined that it would be
desirable to continue discussions with Pegasus. The board authorized REZ
management to proceed with the discussions with Pegasus because the board
believed it was unlikely that another buyer would pay more for REZ, and Pegasus
was the most likely potential buyer to be able to conclude the purchase on the
terms offered. On September 24, 1999 during a telephonic meeting of the REZ
board of directors, both REZ management and its legal and financial advisors
reviewed the most recent version of the non-binding term sheet prepared by
representatives of Hambrecht & Quist on behalf of Pegasus. During this meeting,
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the REZ board of directors unanimously resolved to proceed with its due
diligence investigation of Pegasus's affairs and to instruct REZ's legal
advisors to enter into negotiations regarding the terms of a definitive
agreement with Pegasus.
On September 30, 1999, Pegasus and REZ entered into an amendment to the
most recent confidentiality agreement whereby, for an exclusive period of time,
subject to fiduciary obligations, the parties agreed to permit due diligence
with respect to each other and to attempt to negotiate a definitive agreement
for a merger between the parties. Commencing in late September and continuing
through October and November of 1999, representatives of Pegasus, REZ and, in
some cases, Reed Elsevier, together with outside legal counsel, outside
accounting firms and financial advisors, held numerous meetings and discussions
to explore the possible merger, conduct due diligence and negotiate the terms of
a definitive merger agreement and related documents.
On October 21, 1999, the Pegasus board of directors discussed with the
Pegasus management and its financial advisors the latest proposed terms and
structure of the possible merger. In addition, Pegasus management and financial
advisors to Pegasus reported on the results of the due diligence investigation
of REZ and the potential benefits and risks of the merger and responded to
questions from members of the Pegasus board of directors.
On October 22, 1999, the REZ board of directors held a telephonic board
meeting during which REZ's executive management, and its legal and financial
advisors each reviewed their respective due diligence of Pegasus. Management and
the advisors answered the directors' questions in extensive discussions.
On November 8, 1999, an informal meeting of the Pegasus board of directors
was held specifically to consider the REZ transaction. At the meeting Mr. John
Davis reported on the status of the negotiations with REZ. Pegasus management
also updated the board of directors on the results of the due diligence
investigation of REZ. In addition, Mr. Highet, Chief Executive Officer of REZ,
attended part of the meeting to address various issues raised by the Pegasus due
diligence investigation, including the status of disputes with several major
customers, the background and details of continuing relationships between REZ
and Reed Elsevier, whether or not REZ options would be assumed by Pegasus,
future plans for the combined company, among other things. The Pegasus board of
directors reviewed and discussed these and other issues and potential changes in
the proposed terms of the transaction. The presentations and discussions at the
meeting were wide ranging and detailed and included, among other things:
- A presentation by Mr. John Davis and other Pegasus management of the
rationale and an update on the key terms of the proposed merger and
related transactions
- A presentation by Hambrecht & Quist regarding the fairness of the then
proposed transaction with REZ from a financial point of view
- A description of the structure of the transaction, the material terms of
the merger agreement, including the representations, warranties and
covenants of the parties, the conditions to closing the merger,
termination rights, whether the REZ options would be assumed by Pegasus,
Pegasus' demand for voting agreements with REZ stockholders, the terms of
existing REZ stockholder agreements, benefits to Pegasus of a
noncompetition agreement with Reed Elsevier and various other matters
On November 11, 1999, the REZ board of directors met and thoroughly
reviewed the status of the negotiations with Pegasus. These discussions
included:
- A review by Thomas Weisel Partners of the effect of changes in the
proposed merger agreement from points contained in the original term
sheet relating primarily to the amount and form of merger consideration,
treatment of REZ stock options as being accelerated or exchanged for cash
rather than being assumed by Pegasus, and potential closing adjustments
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<PAGE> 42
- An explanation of the methodology which Thomas Weisel Partners would use
to evaluate the fairness of the Pegasus proposal, which is further
discussed under "-- Opinion of REZ's Financial Advisor."
- REZ's legal advisors' report on outstanding issues in the proposed merger
agreement and possible negotiation strategies
- Identification of key issues relating primarily to the amount and form of
merger consideration, potential closing adjustments, treatment of REZ
options, closing conditions, scope of several representations and
warranties and other matters
- Formulation of REZ's requirements for settling the key issues
- A discussion of REZ's alternatives if the merger did not occur
On November 12, 1999, representatives of Pegasus and REZ held a conference
call in which the parties' respective legal and financial advisors participated.
During this call, the major remaining issues with respect to the merger
agreement were resolved and the parties' lawyers were instructed to finalize the
definitive merger agreement. Among other things, the parties agreed that the
transaction would be structured as a taxable transaction, that the consideration
to be paid to stockholders would be as provided in the final merger agreement,
that the closing adjustments would be refined in the final merger agreement and
that the closing conditions would be as provided in the final merger agreement.
In addition, the parties agreed that Pegasus would not assume the REZ stock
options and that REZ would bear the cost of any REZ options that were exchanged
for cash.
On November 15, 1999, at a special meeting of the Pegasus board of
directors, Pegasus senior management and Pegasus's financial and legal advisors
reported to the Pegasus board of directors that the parties had negotiated the
remaining material terms of a definitive merger agreement and related documents,
reviewed any material changes to the terms of the transaction with the Pegasus
board of directors and responded to questions. After all questions were
answered, Hambrecht & Quist delivered its oral opinion, subsequently confirmed
in writing, that, as of that date, the consideration to be paid by Pegasus in
the merger was fair to Pegasus from a financial point of view. At this point,
the Pegasus board of directors approved the merger and authorized management to
enter into the merger agreement and related documents.
Also on November 15, 1999, the REZ Board of Directors held a special
meeting for the purpose of reviewing and approving the merger agreement. At this
meeting, Thomas Weisel Partners delivered its opinion that, as of that date, the
consideration to be paid to REZ stockholders in the merger was fair to REZ
stockholders from a financial point of view. Following a final discussion of the
material terms of the merger agreement and related documents and a brief
question and answer period of REZ management, the REZ board of directors
approved the merger and authorized senior management of REZ to enter into the
merger agreement and related documents.
On November 16, 1999, Pegasus and REZ entered into the merger agreement and
the execution of the merger agreement was announced in a press release on
November 17, 1999. Effective December 7, 1999, the parties amended the merger
agreement to accommodate the stock split announced by Pegasus on that date and
for other purposes.
PEGASUS BOARD CONSIDERATIONS
The decision of the Pegasus board of directors to approve the merger was
based upon its consultation with Pegasus' management, as well as its financial,
legal, accounting and other advisors, and was based upon various factors which
when considered as a whole and balancing the positive and negative aspects of
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<PAGE> 43
each factor, separately and together, supported the board's decision to approve
the merger. These factors included the following:
(1) The financial condition, results of operations, business,
technologies, services and products of REZ and Pegasus, on both an
historical and prospective basis, as well as current industry, economic and
market conditions. In particular, the Pegasus board of directors considered
the following factors, all of which supported the board's decision to
approve the merger:
- Pegasus' strategic objective of achieving greater scale and presence
in the hotel industry
- Expansion of product and service offerings to existing and new
customers
- Enlargement of international sales platform and customer base
- Enhancement of Pegasus' central position as a solution provider for
hotel reservations
- Increase in depth of technological experience among new combined
employee base.
(2) The reports and opinions of Pegasus' management, and its legal,
accounting and financial advisors, including reports relating to the due
diligence review which had been conducted regarding REZ's business,
operations, technology, and possible synergistic and expansion
opportunities for the two companies.
(3) With the assistance of Pegasus' financial advisors, the past
business relationship and associations between Pegasus and REZ, an analysis
of the pro forma impact of the merger on the projected results of Pegasus,
the multiples paid in other selected merger and acquisition transactions,
trading and valuation statistics for selected public companies, discounted
cash flow analysis and potential future industry developments.
(4) The oral opinion, subsequently confirmed in writing, of Hambrecht
& Quist delivered November 15, 1999, that, as of that date, the
consideration to be paid by Pegasus in the merger was fair to Pegasus from
a financial point of view.
(5) The terms of the issuance of Pegasus common stock in the merger.
The merger agreement provides for the issuance of a fixed number of shares
of Pegasus common stock regardless of what fluctuations may occur in the
market price of Pegasus common stock before the closing. The board viewed
this positively since in many stock mergers a price decline could require
that additional stock be issued or could trigger a termination right.
(6) A review with Pegasus' legal counsel of the terms of the merger
agreement, including the obligation of REZ not to solicit or encourage
other acquisition proposals, the circumstances under which either Pegasus
or REZ can terminate the merger agreement and the closing conditions to the
merger.
(7) The compatibility of the corporate cultures of Pegasus and REZ.
Since REZ itself was created by combining the two different corporate
cultures of its predecessor entities, the Pegasus board viewed the merger
with REZ as an opportunity to eliminate the remaining vestiges of REZ's
predecessor cultures by melding the REZ organization into a unified Pegasus
corporate culture.
(8) The absence of significant cost savings projected as a result of
the closing of duplicate facilities, employee terminations and redundant
asset write-offs. While the opportunity for cost savings is an important
consideration supporting some acquisitions, the Pegasus board did not
consider the lack of such opportunities in the merger to be a negative
factor. The absence of the need for significant employee terminations and
the lack of redundant asset write-offs were viewed positively.
(9) Except for the processing of hotel commission payments, the
relatively few services which are provided by both REZ and Pegasus even
though the various services offered by each company are designed to improve
the overall distribution of hotel rooms.
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The Pegasus board of directors also considered a variety of potentially
negative factors in its deliberations concerning the merger, including the
following factors:
- The potential dilutive effect of the issuance of Pegasus common stock in
the merger
- The potential impact on Pegasus' future performance of REZ's historically
unprofitable business and historically slower rate of revenue growth and
lower operating margins than Pegasus has experienced
- The negative impact on Pegasus' future earnings from the amortization of
intangibles as a result of the merger
- The substantial costs expected to be incurred, primarily in the current
or next few quarters, in connection with the merger, including the
transaction expenses arising from the merger and costs associated with
combining the operations of the two companies
- The risk that either Pegasus or REZ would lose the business of some of
its customers for various reasons
- The risk that, despite the intentions and the efforts of the parties, the
benefits sought to be achieved in the merger will not be achieved
- The risk that the market price of Pegasus common stock might be adversely
affected by the public announcement of the merger
- The risk that despite the intentions and efforts of the parties, the key
personnel of REZ may not be retained by Pegasus
- The other risks described above under "Risk Factors"
The foregoing discussion of the information and factors considered by the
Pegasus board of directors is not intended to be exhaustive, but is believed to
include all material factors considered by the Pegasus board of directors. In
view of the variety of factors considered in connection with its evaluation of
the merger, the Pegasus board of directors did not find it possible to and did
not quantify or otherwise assign relative weights to the specific factors
considered in reaching its determination. In addition, individual members of the
Pegasus board of directors may have given different weights to different
factors. In the course of its deliberations, the Pegasus board of directors did
not establish a range of values for REZ and did not reach conclusions for each
particular factor or set of factors considered throughout the process; however,
based on the factors outlined above, including the opinion of its financial
advisor described above, the Pegasus board of directors determined that, on
balance, the terms of the merger agreement as ultimately presented to it were
fair to, and that the merger was in the best interests of, Pegasus and its
stockholders.
REZ BOARD CONSIDERATIONS
The decision of the REZ board of directors to recommend the transaction for
approval by the stockholders of REZ was reached following consultation with REZ
management, as well as with its financial, legal and accounting advisors, and
was based on various factors, including the following:
(1) The financial condition, results of operations, business,
technologies, services and products of REZ and Pegasus, on both a
historical and prospective basis, as well as the current industry, economic
and market conditions. In particular, the REZ board of directors considered
the following factors:
- The ability of the combined company to expand its offering of products
and services to existing and new customers
- The ability of the combined company, as a public company, to access
the capital markets
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- The fact that, absent the merger, REZ may require additional capital
investment in the short term
- The uncertain ability of REZ to complete an initial public offering in
the near term
- The fact that REZ stockholders would receive registered Pegasus stock,
which would provide them with greater liquidity than they would have
as stockholders of REZ
(2) The reports and opinions of REZ management, and its legal,
accounting and financial advisors, including reports relating to the due
diligence review which was conducted regarding Pegasus' business,
operations, technology and possible synergistic and expansion opportunities
for the two companies.
(3) Past business relationships and associations between Pegasus and
REZ which allowed the company's management team a relatively higher level
of knowledge regarding each other's businesses than might normally exist in
a typical merger.
(4) With the assistance of REZ financial advisors, an analysis of the
premium to market price and multiples paid in other comparable merger and
acquisition transactions, and an analysis of relative values of REZ.
(5) The terms of the issuance of Pegasus common stock provided in the
merger, and specifically the length of time following the merger before
which the Pegasus common stock received in the merger could be resold.
(6) A review with REZ legal counsel of the terms of the merger
agreement, including the ability of REZ to entertain unsolicited superior
acquisition proposals, and the circumstances in which either party could
terminate the merger agreement and the closing conditions to the merger.
(7) The oral opinion, subsequently confirmed in writing, of Thomas
Weisel Partners that, as of that date, the consideration to be received by
the REZ stockholders in the merger is fair from a financial point of view
to REZ and its stockholders.
(8) The ability of the combined company to successfully integrate its
businesses.
The REZ board of directors also considered a variety of potentially
negative factors in its deliberations concerning the merger, including the
following factors:
- The risk that the market price of Pegasus common stock might be adversely
affected by the public announcement of the merger, resulting in REZ
stockholders receiving a lower than anticipated value for their shares
- The fact that Pegasus was unwilling to agree to "pricing collars" for
Pegasus common stock that would have guaranteed a certain minimum value
for Pegasus common stock as of the date the merger closed
- The risk that the Pegasus management team could not successfully manage
an organization of considerably larger size, complexity and geographic
scope than Pegasus
- The risk that Pegasus' common stock price might decrease prior to the
expiration of the period during which REZ stockholders might be required
to hold a portion of their shares pursuant to stockholder agreements
required by Pegasus
- The risk that Pegasus may not be able to continue the historical level of
growth in its existing lines of business
- The risk that the combined company may not be able to retain the
businesses of REZ and Pegasus customers since some of these customers may
consider themselves competitors of REZ or Pegasus, as the case may be
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<PAGE> 46
- The risk that, despite the intentions and efforts of the parties, the
benefits sought to be achieved in the merger would not be achieved
- The other risks described above under "Risk Factors"
At various stages of the negotiating process, the board of directors of REZ
requested that Pegasus grant it the right to walk away from the transaction in
the event of a significant decline in the market price of Pegasus common stock.
Pegasus was unwilling to grant REZ this walk-away right. REZ decided, after
consultation with its outside counsel and financial advisers, that it was in the
best interest of its stockholders to enter into a definitive agreement with
Pegasus even in the absence of this right. REZ's decision was the result of its
belief that the pricing of the transaction was based on the inherent values of
the two companies and the resultant percentage ownership to be held by the REZ
stockholders in the combined company upon completion of the merger. REZ
considered the market value of Pegasus common stock at a particular point in
time to be of less significance in this respect.
The foregoing discussion of the information and factors considered by the
REZ board of directors is not intended to be exhaustive but it is believed to
include all the material factors considered by the REZ board of directors. In
view of the variety of factors considered in connection with its valuation of
the merger, the REZ board of directors did not find it possible and did not
quantify or otherwise assign relative weights to the specific factors considered
in reaching its determination. In addition, individual members of the REZ board
of directors may have given different weights to different factors, particularly
with respect to the liquidity to be obtained as a result of receiving registered
shares of Pegasus common stock. In the course of its deliberations, the REZ
board of directors did not establish a range of values for REZ and did not reach
conclusions for each particular factor or set of factors considered throughout
the process; however, based on the factors outlined above, including the opinion
of its financial advisors described above, the REZ board of directors determined
that, on balance, the terms of the merger agreement as ultimately presented to
it were fair to, and that the merger was in the best interest of, REZ and its
stockholders.
APPROVAL BY BOARDS AND STOCKHOLDERS
Pegasus
The Pegasus board of directors has unanimously approved the merger
agreement and the merger and believes that the terms of the merger agreement are
fair to, and that the merger is in the best interests of Pegasus and its
stockholders. Pegasus, as the holder of all of the outstanding capital stock of
Pegasus Worldwide, has also approved the merger and the merger agreement. The
approval of the stockholders of Pegasus is not required for consummation of the
merger and the merger agreement. Accordingly, Pegasus is not soliciting proxies
or consents from the Pegasus stockholders in connection with the merger.
REZ
The REZ board of directors has unanimously approved the merger agreement
and the merger and believes that the terms of the merger agreement are fair to,
and that the merger is in the best interests of REZ and its stockholders.
The holders of more than 85% of the outstanding shares of REZ common stock
have agreed to approve the merger and merger agreement. Under Delaware law and
the terms of REZ's certificate of incorporation and bylaws, as well as the
stockholders agreement between REZ and most of its stockholders, this approval
will be sufficient to approve the merger and the merger agreement. For this
reason, REZ is not calling a meeting of its stockholders to vote on the merger
and the merger agreement nor is REZ soliciting proxies or consents.
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OPINION OF PEGASUS' FINANCIAL ADVISOR
Pegasus engaged Hambrecht & Quist to act as its exclusive financial advisor
in connection with the proposed transaction and to render an opinion as to the
fairness, from a financial point of view, to Pegasus of the consideration to be
paid by Pegasus in the merger. Hambrecht & Quist was selected by the Pegasus
board based on Hambrecht & Quist's qualifications, experience and reputation, as
well as Hambrecht & Quist's past investment banking relationship and familiarity
with Pegasus. Hambrecht & Quist rendered its oral opinion, as confirmed in
writing, on November 15, 1999 to the Pegasus board that, as of this date, the
consideration to be paid by Pegasus in the merger was fair to Pegasus from a
financial point of view.
Pegasus determined the consideration it was willing to pay to the REZ
stockholders in the transaction through negotiations with REZ. Pegasus did not
impose any limitations on Hambrecht & Quist with respect to the investigations
made or procedures followed in rendering its opinion.
THE FULL TEXT OF THE OPINION DELIVERED BY HAMBRECHT & QUIST TO THE PEGASUS
BOARD DATED NOVEMBER 15, 1999, WHICH SETS FORTH, AMONG OTHER THINGS, THE
ASSUMPTIONS MADE, GENERAL PROCEDURES FOLLOWED, MATTERS CONSIDERED, AND
LIMITATIONS ON THE SCOPE OF REVIEW UNDERTAKEN BY HAMBRECHT & QUIST IN RENDERING
ITS OPINION, IS ATTACHED AS APPENDIX G TO THIS INFORMATION STATEMENT/PROSPECTUS
AND IS INCORPORATED HEREIN BY REFERENCE. HAMBRECHT & QUIST'S OPINION IS DIRECTED
TO THE BOARD OF DIRECTORS OF PEGASUS, AND ADDRESSES ONLY THE FAIRNESS, FROM A
FINANCIAL POINT OF VIEW, OF THE CONSIDERATION TO BE PAID BY PEGASUS IN THE
MERGER. THE SUMMARY OF HAMBRECHT & QUIST'S OPINION SET FORTH BELOW IS ONLY A
SUMMARY OF VARIOUS PROVISIONS OF THE FULL TEXT OF ITS OPINION. PEGASUS
STOCKHOLDERS ARE URGED TO READ THE OPINION CAREFULLY IN ITS ENTIRETY.
In arriving at its opinion, Hambrecht & Quist, among other things:
- Reviewed the financial statements of REZ for recent years and interim
periods to date and other relevant financial and operating data of REZ
made available to Hambrecht & Quist from the internal records of REZ
- Reviewed various internal financial and operating information, including
some projections, relating to REZ prepared by the management of REZ
- Discussed the business, financial condition and prospects of REZ with
various members of senior management of Pegasus and REZ
- Reviewed the publicly available financial statements of Pegasus for
recent years and interim periods to date and other relevant financial and
operating data of Pegasus made available to Hambrecht & Quist from
published sources and from the internal records of Pegasus
- Reviewed various internal financial and operating information, including
some projections, relating to Pegasus prepared by the management of
Pegasus
- Discussed the business, financial condition and prospects of Pegasus with
various members of senior management
- Reviewed the recent reported prices and trading activity for the common
stock of Pegasus and compared this information and other financial
information for Pegasus and REZ with similar information for other
companies engaged in businesses Hambrecht & Quist considered generally
comparable to those of Pegasus and REZ
- Reviewed the financial terms, to the extent publicly available, of
comparable merger and acquisition transactions involving companies
engaged in businesses Hambrecht & Quist believed to be generally
comparable to those of Pegasus and REZ
- Reviewed a draft of the merger agreement
- Performed other analyses and examinations and considered other
information, financial studies, analyses and investigations and
financial, economic and market data as Hambrecht & Quist deemed relevant
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Hambrecht & Quist did not independently verify any of the information
concerning Pegasus or REZ in connection with its review of the proposed
transaction and, for purposes of its opinion, Hambrecht & Quist assumed and
relied upon the accuracy and completeness of all this information. In connection
with its opinion, Hambrecht & Quist did not prepare or obtain any independent
valuation or appraisal of any of the assets or liabilities of Pegasus or REZ or
concerning the solvency or fair value of Pegasus or REZ, nor did it conduct a
physical inspection of the properties and facilities of Pegasus or REZ. With
respect to the financial forecasts and projections or any financial or operating
information made available to it, Hambrecht & Quist assumed that they reflected
the best currently available estimates and judgments of the competitive,
operating and regulatory environment and the expected future financial
performance of Pegasus and REZ. Hambrecht & Quist assumes no responsibility for
and expresses no view as to any forecasts and projections or the assumptions on
which they are based. Hambrecht & Quist assumed that neither Pegasus nor REZ was
a party to any material pending transactions, including external financings,
recapitalizations or mergers, other than the proposed transaction and those
activities undertaken in the ordinary course of conducting their respective
businesses. Hambrecht & Quist further assumed that the merger agreement in the
form executed would not differ in any material respects from the draft of the
merger agreement reviewed by it and that the proposed transaction would be
consummated substantially on the terms specified in the merger agreement,
without any waiver of any material terms or conditions by any party to the
merger agreement.
Hambrecht & Quist's opinion is necessarily based upon market, economic,
financial and other conditions as they existed and could be evaluated as of the
date of the opinion and any subsequent change in these conditions would require
a reevaluation of this opinion.
The preparation of a fairness opinion is a complex process and involves
various judgments and determinations as to the most appropriate and relevant
assumptions and financial analyses and the application of these methods to the
particular circumstances involved. This opinion is therefore not necessarily
susceptible to partial analysis or summary description. Accordingly, Hambrecht &
Quist believes that its analyses and the summary set forth below must be
considered as a whole and that selecting portions of its analyses, without
considering all analyses, or of the following summary, without considering all
factors and analyses, could create an incomplete and misleading view of the
processes underlying the analyses performed by Hambrecht & Quist in connection
with its opinion. In arriving at its opinion, Hambrecht & Quist did not
attribute any particular weight to any analyses or factors considered by it, but
rather made qualitative judgments as to the significance and relevance of each
analysis and factor. Hambrecht & Quist did not form an opinion as to whether any
individual analysis or factor whether positive or negative, considered in
isolation, supported or failed to support the Hambrecht & Quist opinion. In
performing its analyses, Hambrecht & Quist made numerous assumptions with
respect to industry performance, general business and economic conditions and
acquisition transaction environment and other matters, many of which are beyond
the control of Pegasus and REZ. Because these analyses are inherently subject to
uncertainty, Hambrecht & Quist does not assume responsibility if actual values
or actual future results, are significantly more or less favorable than
suggested by this analyses. No company or transaction used in the analyses as a
comparison is identical to Pegasus or REZ or the proposed transactions. These
analyses were prepared solely as part of the Hambrecht & Quist analysis of the
fairness to Pegasus, from a financial point of view, of the consideration to be
paid by Pegasus in the proposed transaction. The Hambrecht & Quist opinion was
one of many factors taken into consideration by the Pegasus board in making its
determination to approve the merger agreement.
The following is a brief summary of the material financial analyses
performed by Hambrecht & Quist in connection with providing its opinion to the
Pegasus board on November 15, 1999. Some of the summaries of the financial
analyses include information presented in tabular format. In addition, a summary
chart is included on page 46 of this information statement/prospectus. To fully
understand the financial analyses, you should read the tables and charts
together with the text of each summary. Considering the data set forth in the
tables without considering the narrative description of the financial analyses,
including the methodologies and assumptions underlying the analyses, could
create a misleading or incomplete view of the financial analyses.
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<PAGE> 49
Pro Forma Merger Analysis. Hambrecht & Quist analyzed the pro forma impact
of the merger on the projected financial results of Pegasus. Projections for
Pegasus were based on published Wall Street research estimates. Projections for
REZ were based on REZ management estimates, as adjusted by Pegasus management.
Hambrecht & Quist observed that the transaction is expected to be dilutive to
Pegasus' earnings for the foreseeable future as a result of the amortization of
goodwill and other intangible assets. Hambrecht & Quist observed that for some
technology companies, including Pegasus, some Wall Street research analysts have
published earnings estimates that exclude purchase accounting adjustments.
Excluding these purchase accounting adjustments, the transaction is anticipated
to be accretive to Pegasus' earnings in calendar 2000 and 2001.
Analysis of Selected Public Companies. Using published Wall Street
estimates, Hambrecht & Quist compared, among other things, various trading and
valuation statistics for 18 publicly-traded companies engaged in businesses
Hambrecht & Quist believed to be generally comparable, to corresponding measures
for REZ. These companies were generally categorized as vertical market systems
providers, business outsourcing service providers, telemarketing service
providers and hotel franchising companies. Hambrecht & Quist noted that no
company used in this analyses as a comparison had precisely the same mix of
business and financial condition as REZ. The companies that Hambrecht & Quist
reviewed in connection with this analysis were:
- - Affiliated Computer Services
- - Computer Sciences Corp.
- - Electronic Data Systems
- - Fiserv
- - Micros Systems
- - Perot Systems
- - Sabre Holdings
- - Acxiom
- - Bisys Group
- - CCC Information Services
- - CSG Systems
- - National Data Corporation
- - Transaction Systems Architects
- - APAC Customer Services
- - SITEL
- - Teletech Holdings
- - West Teleservices
- - Choice Hotels
Hambrecht & Quist derived a range of estimated trading multiples of
projected calendar 1999 and 2000 revenues and projected calendar 1999 and 2000
earnings before interest, taxes, depreciation and amortization, or "EBITDA" for
these public companies. Applying these multiples to the relevant operating
statistics for REZ, Hambrecht & Quist calculated a range of implied enterprise
values for REZ. The results of this analysis are indicated in the table below:
<TABLE>
<CAPTION>
IMPLIED
MULTIPLES ENTERPRISE VALUE
------------ ----------------
LOW HIGH LOW HIGH
---- ---- ------ ------
<S> <C> <C> <C> <C>
Enterprise Value as a Multiple of:
Calendar Year 1999 Revenues....................... 1.5x 2.5x $221.0 $368.4
Calendar Year 2000 Revenues....................... 1.0x 2.0x 167.2 334.4
Calendar Year 1999 EBITDA......................... 10.0x 13.0x 160.0 208.0
Calendar Year 2000 EBITDA......................... 8.0x 11.0x 213.9 294.1
</TABLE>
Hambrecht & Quist compared the range of implied enterprise values in the
table above to the implied enterprise value in the proposed transaction of
$262.8 as of November 12, 1999. As illustrated in the following chart, Hambrecht
& Quist observed that the implied enterprise value in the proposed transaction
was within the range of the implied enterprise values resulting from this
analysis.
Hambrecht & Quist noted that none of the selected companies were identical
to REZ and that any analysis of the selected companies necessarily involved
complex considerations and judgments concerning differences in financial and
operating characteristics and other factors that would necessarily affect the
relative trading values.
Analysis of Selected Transactions. Hambrecht & Quist compared the proposed
transaction with selected merger and acquisition transactions. Hambrecht and
Quist derived the multiples, where
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<PAGE> 50
information was available, of trailing twelve months revenues and EBITDA for 15
transactions since 1997 involving companies which had similar business
descriptions, service offerings and/or vertical market focus to REZ. These
transactions included (target/acquirer):
International Telecommunication Data Systems/
Amdocs
Transaction Network Services/PSINet
JDR Holdings/NCO Group Inc.
ABR Information Services/Ceridian Corp.
International Data Response Corp./TeleSpectrum Worldwide
TeleService Resources (AMR Corp.)/Platinum
Equity Holdings
Medaphis Services Corp. (Medaphis)/NCO
Group Inc.
Access Health/HBO & Co.
USCS International/DST Systems
Lexington Services Associate/Travel Services
International
May & Speh Inc./Acxiom Corp.
TRIS (Computer Sciences)/International
Telecom Data Systems
Neodata Corp./Electronic Data Systems
Apollo Travel Services/Galileo International
BHC Financial Inc./Fiserv Inc.
Hambrecht & Quist derived a range of multiples of trailing twelve months
revenues and EBITDA, as well as book value for the selected transactions.
Applying these multiples to the relevant operating statistics for REZ, Hambrecht
& Quist calculated a range of implied enterprise values for REZ. The results of
this analysis are indicated in the table below:
<TABLE>
<CAPTION>
IMPLIED
MULTIPLES ENTERPRISE VALUE
------------ ----------------
LOW HIGH LOW HIGH
---- ---- ------ ------
<S> <C> <C> <C> <C>
Enterprise Value as a Multiple of:
Last Twelve Months Revenues....................... 1.5x 3.0x $221.0 $442.1
Last Twelve Months EBITDA......................... 11.0x 14.0x 176.0 224.0
Equity Value as a Multiple of:
Book Value........................................ 4.0x 6.0x $218.5 $322.7
</TABLE>
Hambrecht & Quist compared the range of implied enterprise values in the
table above to the implied enterprise value in the proposed transaction of
$262.8 as of November 12, 1999. As illustrated in the chart below, Hambrecht &
Quist observed that the implied enterprise value in the proposed transaction was
within the range of the implied enterprise values resulting from this analysis.
No company or transaction used in the above analyses is identical to REZ or
the proposed transaction. Accordingly, an analysis of the results of the
foregoing is not mathematical; rather it involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies and other factors that could affect the values of the companies or
company to which they are compared.
Discounted Cash Flow Analysis. Hambrecht & Quist analyzed the theoretical
valuation of REZ based on the present value of its potential future cash flows.
To estimate the total present value of REZ's business, before giving effect to
its capital structure, Hambrecht & Quist discounted to the present the projected
stream of after-tax cash flows for REZ through the year ending December 31, 2004
and a terminal value based on multiples of REZ's projected calendar 2004 EBITDA.
In this analysis, Hambrecht & Quist used discount rates ranging from 12.0% to
20.0% and multiples for a sale of the business ranging from 8.0 to 12.0 times
projected calendar 2004 EBITDA. Based on these parameters, Hambrecht & Quist
determined the implied enterprise value of REZ to be in the range of $240.9
million to $463.0 million. As illustrated in the chart below, Hambrecht & Quist
observed that the implied enterprise value in the proposed transaction was less
than the range of the implied enterprise values resulting from this analysis.
Financial projections used by Hambrecht & Quist in this analysis were based
on REZ's management estimates, as adjusted by Pegasus management, and were
extrapolated through calendar 2004 by Hambrecht & Quist. Hambrecht & Quist noted
that the discounted cash flow analysis is highly sensitive
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<PAGE> 51
to assumptions regarding revenue growth and terminal value. Hambrecht & Quist
makes no representations as to the accuracy of attainability of the projections
for the future performance of REZ used by it in this analysis.
The following chart summarizes the analysis of selected public companies,
the analysis of selected transactions, and the discounted cash flow analysis
described above:
[OFFER PRICE]
In connection with the review of the proposed transaction by the Pegasus
board, Hambrecht & Quist performed a variety of financial and comparative
analyses for purposes of its opinion. While the foregoing summary describes the
analyses and factors reviewed by Hambrecht & Quist in connection with its
opinion, it does not purport to be a complete description of all analyses
performed by Hambrecht & Quist in arriving at its opinion. The analyses were
prepared solely for the purpose of Hambrecht & Quist in providing the opinion to
the Pegasus Board in connection with its consideration of the proposed
transaction and do not purport to be appraisals or to reflect the prices at
which businesses or securities actually may be sold, which may be significantly
more or less favorable.
Pursuant to an engagement letter dated January 6, 1999, Pegasus has agreed
to pay Hambrecht & Quist a fee of $750,000 in connection with the delivery of
the fairness opinion rendered on November 15, 1999. Upon consummation of the
proposed transaction, Pegasus has agreed to pay Hambrecht & Quist a fee of
approximately $5.0 million, less the fairness opinion fee previously paid.
Pegasus also has agreed to reimburse Hambrecht & Quist for its reasonable
out-of-pocket expenses and to indemnify Hambrecht & Quist against certain
liabilities, including liabilities under the federal securities laws or relating
to or arising out of Hambrecht & Quist's engagement as financial advisor.
In the past, Hambrecht & Quist has provided investment banking and other
financial advisory services to Pegasus and has received fees for rendering these
services. Specifically, Hambrecht & Quist served as lead-manager for Pegasus'
initial public offering in August 1997, as lead-manager for Pegasus' follow-on
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<PAGE> 52
offerings in February 1998 and May 1999, and as financial advisor with respect
to Pegasus' adoption of a stockholder rights plan in September 1998, and
Hambrecht & Quist may provide additional investment banking or other financial
advisory services to Pegasus. In the ordinary course of business, Hambrecht &
Quist acts as a market maker and broker in the publicly traded securities of
Pegasus and receives customary compensation in connection with these
transactions, and also provides research coverage of Pegasus. In the ordinary
course of business, Hambrecht & Quist actively trades in the equity and
derivative securities of Pegasus for its own account and for the accounts of its
customers and, accordingly, may at any time hold a long or short position in the
securities. In addition, Hambrecht & Quist or its affiliates own approximately
59,723 shares of REZ stock, which represents approximately 0.17% of REZ's shares
outstanding as of December 1, 1999. Hambrecht & Quist may in the future provide
investment banking or other financial advisory services to Pegasus. During 1998
and 1999, Pegasus paid Hambrecht & Quist approximately $3.5 million in aggregate
fees, exclusive of any fees relating to this merger transaction.
Hambrecht & Quist, as part of its investment banking services, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, strategic transactions, corporate restructurings,
negotiated underwritings, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
Hambrecht & Quist was recently acquired by The Chase Manhattan Corporation
and was subsequently merged into Chase Securities Inc.
OPINION OF REZ'S FINANCIAL ADVISOR
In January, 1999, the board of REZ hired Thomas Weisel Partners LLC to act
as REZ's financial advisor in connection with the possible acquisition of REZ.
On November 15, 1999, Thomas Weisel Partners delivered to the board of REZ its
oral opinion that, as of that date, the consideration to be received by REZ's
stockholders was fair to REZ's stockholders from a financial point of view.
Thomas Weisel Partners later delivered its written opinion dated November 15,
1999, confirming its oral opinion.
REZ determined the consideration its stockholders would receive in the
transaction through negotiations with Pegasus. REZ did not impose any
limitations on Thomas Weisel Partners with respect to the investigations made or
procedures followed in rendering its opinion.
The full text of the written opinion of Thomas Weisel Partners that was
delivered to REZ's board is attached as Appendix H to this information
statement/prospectus. You should read this opinion carefully and in its
entirety. However, the following is a summary of the Thomas Weisel Partners
opinion.
Thomas Weisel Partners has directed its opinion to the board of REZ. The
opinion addresses only the financial fairness of the consideration to be
received by REZ's stockholders. It does not address the relative merits of the
transaction or any alternatives to the transaction. Further, it does not address
REZ's underlying decision to proceed with or effect the transaction. Thomas
Weisel Partners' opinion is not a valuation of REZ as it does not attempt to
pinpoint a single value that Thomas Weisel believes is the value of REZ. Instead
the opinion is based on a series of analyses that help the REZ board and Thomas
Weisel Partners understand how the consideration to be paid to REZ's
stockholders compares to a range of values for REZ that result from the
application of a variety of methods as described below.
In connection with its opinion, Thomas Weisel Partners:
- Reviewed publicly available financial and other data with respect to REZ
and Pegasus including the consolidated financial statements for recent
years and interim periods to September 30, 1999, and other relevant
financial and operating data relating to REZ and Pegasus made available
to Thomas Weisel Partners from published sources and from the internal
records of REZ and from Pegasus
- Reviewed the financial terms and conditions of the November 12, 1999
draft of the agreement
- Reviewed publicly available information concerning the trading of, and
the trading market for, the common stock of Pegasus
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<PAGE> 53
- Compared REZ and Pegasus from a financial point of view with other
companies in the industries which Thomas Weisel Partners deemed to be
relevant
- Considered the financial terms, to the extent publicly available, of
selected recent business combinations of companies in the following
groups: business outsourcing services, inbound telemarketing services,
travel related services, and outsourced software solutions which Thomas
Weisel Partners deemed to be comparable, in whole or in part, to the
transaction
- Reviewed and discussed with representatives of REZ's management,
information of a business and financial nature regarding REZ and Pegasus,
furnished to Thomas Weisel Partners by REZ and Pegasus
- Reviewed and discussed financial forecasts and related assumptions of REZ
and Pegasus provided to Thomas Weisel Partners by REZ's management,
Pegasus' management and third party analysts for the purposes of REZ's
discounted cash-flow analysis and a pro forma merger analysis
- Discussed the transaction and related matters with REZ's counsel
In preparing its opinion, Thomas Weisel Partners did not assume any
responsibility to independently verify the information referred to above.
Instead, with REZ's consent, Thomas Weisel Partners relied on the information
being accurate and complete. Thomas Weisel Partners also made the following
assumptions, in each case with REZ's consent:
- With respect to the financial forecasts of REZ and Pegasus provided to
Thomas Weisel Partners by REZ's management, Pegasus' management and third
party analysts, Thomas Weisel Partners assumed for purposes of its
opinion, upon the advice of REZ's management, Pegasus' management and
third party analysts reports, that (1) these forecasts, including the
assumptions regarding the projections, have been reasonably prepared on
bases reflecting the best available estimates and judgments at the time
of preparation as to the future financial performance of REZ, and that of
Pegasus and (2) these forecasts provide a reasonable basis upon which
Thomas Weisel Partners could form its opinion
- That there have been no material changes in the assets, financial
condition, results of operations, business or prospects of REZ or Pegasus
since the respective dates of the last financial statements made
available to Thomas Weisel Partners
- That the transaction will be consummated in a manner that complies in all
respects with the applicable provisions of the Securities Act, the
Securities Exchange Act and all other applicable federal and state
statutes, rules and regulations
- That the transaction will be consummated in accordance with the terms
described in the November 12, 1999 draft of the agreement, without
further amendment thereto, and without any waiver by REZ of any of the
conditions to any party's obligations thereunder
In addition, for purposes of Thomas Weisel Partners' opinion:
- Thomas Weisel Partners acknowledged that REZ does not publicly disclose
internal management forecasts of the type provided to Thomas Weisel
Partners by REZ's management in connection with the review by Thomas
Weisel Partners of the transaction. These forecasts were not prepared
with a view toward public disclosure. In addition, these forecasts were
based upon numerous variables and assumptions that are inherently
uncertain, including, without limitation, factors related to general
economic and competitive conditions. Accordingly, actual results could
vary significantly from those set forth in these forecasts. Thomas Weisel
Partners did not assume any liability for these forecasts
- Thomas Weisel Partners relied on advice of its counsel and independent
accountants as to all legal and financial reporting matters with respect
to REZ, the transaction and the agreement
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<PAGE> 54
- Thomas Weisel Partners did not assume responsibility for making an
independent evaluation, appraisal or physical inspection of the assets or
liabilities, contingent or otherwise, of REZ, nor was Thomas Weisel
Partners furnished with any of these appraisals
- REZ informed Thomas Weisel Partners, and Thomas Weisel Partners assumed,
that the transaction would be recorded as a purchase transaction under
generally accepted accounting principles
- The Thomas Weisel Partners' opinion was based on economic, monetary,
market and other conditions as in effect on, and the information made
available to Thomas Weisel Partners as of, the date of its opinion.
Accordingly, although subsequent developments may affect its opinion,
Thomas Weisel Partners has not assumed any obligation to update, revise
or reaffirm its opinion.
The following represents a brief summary of the material analyses performed
by Thomas Weisel Partners in connection with providing its opinion to the board
of REZ. Some of the summaries of financial analyses performed by Thomas Weisel
Partners include information presented in tabular format. In order to fully
understand the financial analyses performed by Thomas Weisel Partners, you
should read the tables together with the text of each summary. The tables alone
do not constitute a complete description of the financial analyses. Considering
the data set forth in the tables without considering the full narrative
description of the financial analyses, including the methodologies and
assumptions underlying the analyses, could create a misleading or incomplete
view of the financial analyses performed by Thomas Weisel Partners.
In addition to these financial analyses, Thomas Weisel Partners considered
the results of discussions, which occurred during the period between July 1999
and September 1999, between REZ or its advisors and three parties other than
Pegasus regarding possible alternate merger or sale transactions. With one of
these parties, a leveraged buyout group, the REZ board decided not to proceed
based on REZ's determination that the party was not likely to offer a proposal
that would be acceptable or be competitive with a Pegasus proposal. A second
party, following meetings with the management of REZ, decided not to proceed
with discussions regarding an acquisition of REZ. The third party also had
meetings with the management of REZ to better understand REZ, however following
those meetings this third party indicated that it was unlikely to be able to pay
more than $150 million for REZ.
Further, Thomas Weisel Partners considered REZ's inability to accurately
project its future performance to be a significant factor. REZ's historical
difficulty with its ability to accurately forecast results has been illustrated
by its nearly 40% downward revision in its internal budget for calendar year
1999 earnings before interest, taxes, depreciation and amortization or "EBITDA"
estimate. Going forward, there was a concern that a significant shortfall in
REZ's performance as compared to REZ's forecasted budget could result in REZ
needing additional capital to fund operations.
Comparable Company Analysis
Based on public and other available information, Thomas Weisel Partners
calculated the multiples of aggregate value for various companies, which
compares the aggregate value of those companies to various historical and
projected operating data. Thomas Weisel Partners defined "aggregate value" as
equity value plus debt less cash and cash equivalents. The companies that were
selected by Thomas Weisel Partners fell into the following groups: business
outsourcing services, inbound telemarketing services, travel related services,
and outsourced software solutions whose securities are publicly traded and which
Thomas Weisel Partners believes have operating, market and trading valuations
similar to those that might be expected of REZ. Since there are no directly
comparable publicly traded companies, Thomas Weisel Partners analyzed companies
with similar business models to components of REZ's business. Thomas Weisel
Partners believes that the 18 companies listed below have operations similar to
some of the operations of REZ but
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<PAGE> 55
noted that none of these companies have the same management, composition, size
or combination of businesses as REZ:
<TABLE>
<CAPTION>
BUSINESS OUTSOURCING INBOUND TELEMARKETING TRAVEL RELATED SERVICES OUTSOURCED SOFTWARE
SERVICES PROVIDERS: SERVICE PROVIDERS: PROVIDERS: SOLUTIONS PROVIDERS:
<S> <C> <C> <C>
Acxiom Corp. APAC Customer Services, Galileo International PeopleSoft, Inc.
Automated Data Precision Response Corp. Sabre Group Holdings Remedy Corp.
Ceridian Corp. Sitel Corp. Travel Services Siebel Systems
First Data Corp. Snyder Communications
Paychex
Policy Management
The Profit Recovery
Group
Sykes Enterprises
</TABLE>
The following table sets forth the range of estimated trading multiples
derived from the analysis described above, comparing the "aggregate value" of
these companies to the following historical and projected operating data for
these companies: (i) last twelve months revenues, projected calendar year 1999
and 2000 revenue, (ii) last twelve months, projected calendar year 1999 and 2000
earnings before interest, taxes, depreciation and amortization or "EBITDA", and
(iii) projected calendar year 2000 net income. The last column in the following
table is intended to illustrate the implied multiple of the proposed
consideration to be paid by Pegasus to the stockholders of REZ as a multiple of
REZ's last twelve months revenues, REZ's projected calendar year 1999 and 2000
revenue, REZ's last twelve months EBITDA, REZ's projected calendar year 1999 and
2000 EBITDA, and REZ's projected calendar year 2000 net income.
<TABLE>
<CAPTION>
IMPLIED
MULTIPLE OF
RANGE OF MULTIPLES MEAN MEDIAN PEGASUS OFFER
------------------ ----- ------ -------------
<S> <C> <C> <C> <C>
Aggregate Value to:
Last Twelve Months Revenues........... 0.7x - 6.8x 2.9x 2.6x 1.8x
Projected Calendar Year 1999
Revenue............................ 0.6x - 5.7x 2.5x 2.3x 1.8x
Projected Calendar Year 2000
Revenue............................ 0.5x - 4.7x 2.2x 2.1x 1.5x
Last Twelve Months EBITDA............. 4.8x - 28.6x 13.0x 10.3x 24.1x
Projected Calendar Year 1999 EBITDA... 3.0x - 43.4x 12.3x 9.0x 16.6x
Projected Calendar Year 2000 EBITDA... 2.0x - 26.9x 9.8x 8.0x 8.7x
Equity Value to:
Projected Calendar Year 2000 Net
Income............................. 11.9x - 80.4x 24.5x 19.9x 48.6x
</TABLE>
While the comparable company analysis compared REZ to 18 companies in the
following groups: business outsourcing services, inbound telemarketing services,
travel related services, and outsourced software solutions, Thomas Weisel
Partners did not include every company that could be deemed to be a participant
in this same industry, or in the specific sectors of this industry. Paychex
(PAYX), Pegasus (PEGS) and Siebel Systems (SEBL) were excluded from the overall
high, mean, median and low calculations in the Comparable Companies Analysis
above because these companies were considered to be statistical outliers and
would therefore disproportionately influence the calculations. Furthermore,
Thomas Weisel Partners did not believe they had trading valuations similar to
those that might be expected by REZ. However, given that Thomas Weisel Partners
considered the companies to be comparable in whole or in part to REZ they were
represented in the analysis.
Comparable Transactions Analysis
Based on public and other available information, Thomas Weisel Partners
calculated the multiples of aggregate purchase price, which compares the
aggregate purchase price paid for selected comparable acquisitions to various
historical operating results of the company being acquired. Thomas Weisel
Partners defined "aggregate purchase price" as the "equity purchase price" plus
debt less cash and cash equivalents of the company being acquired, where "equity
purchase price" was defined as the amount paid for the
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<PAGE> 56
equity interests of the acquired company. Thomas Weisel Partners selected 14
comparable acquisitions within the following industries: business outsourcing
services, inbound telemarketing services, travel related services, and
outsourced software solutions that have been announced since 1997.
<TABLE>
<CAPTION>
ANNOUNCEMENT DATE NAME OF ACQUIROR NAME OF TARGET
- ----------------- ---------------- --------------
<S> <C> <C>
May 13, 1999.............. NCO Group, Inc. Compass International Services
May 3, 1999............... Ceridian Corp. ABR Information Services, Inc.
December 16, 1998......... CustomerOne Holding Corp. LCS Industries, Inc.
October 16, 1998.......... NCO Group, Inc. Medaphis Services Corp.
September 28, 1998........ Access Health HBO & Co.
September 2, 1998......... USWeb CKS Group
September 2, 1998......... DST Systems USCS International
August 20, 1998........... Navigant Consultant, Inc. Peterson Consulting
June 2, 1998.............. Travel Services Lexington Services
International
May 27, 1998.............. Acxiom Corp. May & Speh, Inc.
May 20, 1997.............. Galileo International Apollo Travel Services
March 19, 1997............ Snyder Communications, Inc. American List Corp.
March 3, 1997............. Fiserv Inc. BHC Financial, Inc.
February 20, 1997......... Iron Mountain, Inc. Safesite Records Management
</TABLE>
The following table sets forth the multiples indicated by this analysis and
the multiples implied by the proposed transaction. The Access Health/HBO & Co.
transaction was excluded from the mean and median calculations in the Comparable
Transactions Analysis section because it was considered a statistical outlier
and would therefore disproportionately influence the calculations. The last
column in the following table is intended to illustrate the implied multiple of
the proposed consideration to be paid by Pegasus to the stockholders of REZ as a
multiple of REZ's last twelve months revenues, REZ's last twelve months EBITDA
and REZ's last twelve months net income.
<TABLE>
<CAPTION>
PROPOSED
RANGE OF MULTIPLES MEAN MEDIAN TRANSACTION
------------------ ----- ------ -----------
<S> <C> <C> <C> <C>
Aggregate Purchase Price to:
Last Twelve Months Revenues............. 0.6x - 8.4x 2.9x 2.6x 1.8x
Last Twelve Months EBITDA............... 5.0x - 26.2x 11.7x 10.7x 24.1x
Equity Purchase Price to:
Last Twelve Months Net Income........... 11.2x - 48.4x 24.6x 21.9x NA
</TABLE>
No company or transaction used in the comparable company or comparable
transactions analyses is identical to REZ, or the transaction. Accordingly, an
analysis of the results of the foregoing is not mathematical; rather, it
involves complex considerations and judgments concerning differences in
financial and operating characteristics of the companies and other factors that
could affect the public trading value of the companies to which REZ, and the
transaction are being compared.
Discounted Cash Flow Analysis
Thomas Weisel Partners used financial cash flow forecasts of REZ for
calendar years 2000 through 2004, as estimated by REZ's management, to perform a
discounted cash flow analysis. In conducting this analysis, Thomas Weisel
Partners assumed that REZ would perform in accordance with these forecasts.
Thomas Weisel Partners first estimated the terminal value of REZ by applying
multiples to net income, which multiples ranged from 17.0x to 25.0x. Thomas
Weisel Partners then discounted the cash flows projected through 2004 and the
terminal values to present values using rates ranging from 20.0% to 30.0%. This
analysis indicated a range of aggregate values, which were then reduced by REZ's
estimated net debt, to calculate a range of equity values. These equity values
were then divided by fully diluted shares outstanding to calculate implied
equity values per share ranging from $4.69 to $9.01. Thomas Weisel Partners
noted that the value of stock consideration to be received by REZ stockholders
was $7.12.
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Pro Forma Merger Analysis
Thomas Weisel Partners used a pro forma analysis to determine the effect of
this transaction on Pegasus' pro forma projected 2000 calendar year earnings per
share on a cash basis. Thomas Weisel Partners defined cash earnings per share as
net income plus tax effected goodwill amortization divided by the weighted
average diluted shares outstanding. Thomas Weisel Partners used financial
information provided by REZ, and current public financial estimates for Pegasus
to complete this analysis. Based on the pro forma merger analysis, Thomas Weisel
Partners determined that this transaction may be accretive to the stockholders
of Pegasus common stock on the basis of cash earnings per share for the year
2000. This analysis performed by Thomas Weisel Partners is not necessarily
indicative of the accretion or dilution or actual future results which may be
significantly more or less favorable than those suggested by this analysis.
The foregoing description is only a summary of the analyses and
examinations that Thomas Weisel Partners deems material to its opinion. It is
not a comprehensive description of all analyses and examinations actually
conducted by Thomas Weisel Partners. The preparation of a fairness opinion
necessarily is not susceptible to partial analysis or summary description.
Thomas Weisel Partners believes that its analyses and the summary set forth
above must be considered as a whole and that selecting portions of its analyses
and of the factors considered, without considering all analyses and factors,
would create an incomplete view of the process underlying the analyses set forth
in its presentation to REZ. In addition, Thomas Weisel Partners may have given
various analyses more or less weight than other analyses, and may have deemed
various assumptions more or less probable than other assumptions. The fact that
any specific analysis has been referred to in the summary above is not meant to
indicate that this analysis was given greater weight than any other analysis.
Accordingly, the ranges of valuations resulting from any particular analysis
described above should not be taken to be the view of Thomas Weisel Partners
with respect to the actual value of REZ.
In performing its analyses, Thomas Weisel Partners made numerous
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond the control of REZ and
Pegasus. The analyses performed by Thomas Weisel Partners are not necessarily
indicative of actual values or actual future results, which may be significantly
more or less favorable than those suggested by these analyses. These analyses
were prepared solely as part of the analysis performed by Thomas Weisel Partners
with respect to the financial fairness of the consideration to be received by
REZ's stockholders pursuant to the transaction, and were provided to REZ in
connection with the delivery of the Thomas Weisel Partners opinion. The analyses
do not purport to be appraisals or to reflect the prices at which a company
might actually be sold or the prices at which any securities may trade at any
time in the future.
As described above, Thomas Weisel Partners' opinion and presentation were
among the many factors that REZ's board took into consideration in making its
determination to approve, and to recommend that REZ stockholders approve, the
transaction.
REZ has paid Thomas Weisel Partners a $100,000 retainer fee. In addition,
REZ has agreed to pay Thomas Weisel Partners an additional fee of $1,500,000,
payable only upon consummation of this transaction. Further, REZ has agreed to
reimburse Thomas Weisel Partners for its reasonable out-of-pocket expenses and
to indemnify Thomas Weisel Partners, its affiliates, and their respective
partners, directors, officers, agents, consultants, employees and controlling
persons against specific liabilities, including liabilities under the federal
securities laws. REZ has not paid Thomas Weisel Partners any fees since 1998,
other than those relating to the merger.
In the ordinary course of its business, Thomas Weisel Partners actively
trades the equity securities of Pegasus for its own account and for the accounts
of customers and, accordingly, may at any time hold a long or short position in
these securities.
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INTERESTS OF CERTAIN PERSONS IN THE MERGER
Several stockholders and executive officers of REZ have personal interests
in the merger that are different from, or in addition to, the interests of most
REZ stockholders. As a result, these stockholders and executive officers may
have a conflict of interest that influenced their support of the merger.
For instance, the merger agreement provides that Pegasus has agreed that
Reed Elsevier shall have the right to nominate a person to serve as a director
on the Pegasus board of directors immediately following the merger.
In addition, Hambrecht & Quist LLC, financial advisor to Pegasus, is the
record holder of 59,723 shares of REZ common stock, representing approximately
.17% of the outstanding common stock of REZ. Hambrecht & Quist will receive, on
its own behalf and on behalf of some of its own affiliates, Pegasus common stock
and cash in the merger in accordance with the terms of the merger agreement. In
addition, Hambrecht & Quist was recently acquired by Chase Manhattan Corp., and
one of its affiliates, Chase Bank of Texas, N.A., will act as escrow agent in
connection with the merger.
On or shortly following the closing of the merger, Pegasus intends to
refinance a revolving bank line of credit of REZ, which is currently guaranteed
by Reed Elsevier. As of March 17, 2000, there was an outstanding balance of
approximately $7 million on this line of credit. Following completion of the
refinancing, Reed Elsevier will no longer be obligated with respect to the
indebtedness underlying the bank line of credit.
Pursuant to the terms of the employment agreements between REZ and each of
I. Malcolm Highet, Michael Ball, Rachid Bengougam, John H. Holdsworth and Vernon
L. Snider, the change of control of REZ resulting from the merger will entitle
these REZ executives to the payment of severance benefits if there are specified
changes in their employment status. These executives also have the right to
terminate their employment with the combined company and receive specified
severance benefits during the 30 days following the first anniversary of the
merger, and under other circumstances that are typical in employment agreements.
On or prior to the closing date, REZ will repurchase all of the issued and
outstanding shares of REZ Series A Preferred Stock, all of which are held by
Reed Elsevier. The aggregate purchase price for Series A Preferred Stock will be
$103,515, which is equal to the aggregate par value and the original issuance
price of these shares.
PRIOR RELATIONSHIP OF PEGASUS AND REZ
Pegasus has entered into an arrangement with REZ to manage and operate
equipment owned by Pegasus at a facility owned by REZ. In this arrangement, REZ
also provides equipment monitoring services, assurance of power supply and
communications link back up support. During 1997, 1998 and 1999, Pegasus paid
$524,866, $430,988, and $522,754, respectively, for these services. Pegasus
entered into this arrangement in 1996 with one of REZ's predecessors, Anasazi,
Inc.
Pegasus provides to REZ electronic distribution services, commission
processing services and Internet-based distribution services. Pegasus received
revenues from REZ relating to these services during 1997, 1998 and 1999, in the
amounts of $751,075, $795,792 and $1,179,243, respectively.
As consideration for a loan made to Pegasus which has since been repaid,
Pegasus has granted to Reed Elsevier a license to use the Ultraswitch technology
in connection with operations unrelated to the hotel industry. As a part of this
licensing arrangement, Reed Elsevier agreed to not compete with the services
provided by Pegasus using the Ultraswitch technology.
Rockwell A. Schnabel, a current director of REZ, served on the Pegasus
board of directors from September 1996 to July 1998. Mr. Schnabel owns 3,000
shares of Pegasus common stock obtained through the exercise of Pegasus options
granted at an exercise price of $10.20 per share to him while serving as a
Pegasus director.
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<PAGE> 59
I. Malcolm Highet, a current director and the President and Chief Executive
Officer of REZ, served as a director of Pegasus from September 1996 to June
1998. Mr. Highet holds 3,000 vested options to purchase shares of Pegasus common
stock at an exercise price of $10.20 per share.
Tom Castleberry, a current director of REZ and a former director of Pegasus
owns 6,000 shares of Pegasus common stock held in a trust managed by Fiduciary
Trust of California.
Paul Travers, the former Chief Financial Officer of REZ, served as a
director of Pegasus from September 1996 to June 1998.
REZ, its predecessors and several affiliates of REZ, including Reed
Elsevier and its affiliates have been stockholders of Pegasus at various times
over the years and in some cases continue to be stockholders of Pegasus. The
table set forth below provides information regarding these stockholders, their
affiliation, their sales of Pegasus common stock and the number of shares of
Pegasus common stock they owned as of December 31, 1999.
<TABLE>
<CAPTION>
CURRENT
NUMBER OF
CURRENT/FORMER NUMBER OF PEGASUS NET PROCEEDS PEGASUS SHARES
PEGASUS STOCKHOLDER NATURE OF AFFILIATION SHARES SOLD/DATE FROM SALE HELD
- ------------------- ----------------------- ------------------ ------------ --------------
<S> <C> <C> <C> <C>
Reed Travel Group...... A subsidiary of Reed 192,900/ $ 1,554,774 0
Elsevier August 1997
Utell.................. Predecessor to REZ 34,800/ $ 280,488 0
August 1997
REZ.................... -- 313,200/ $ 3,445,200 0
February 1998
Reed Elsevier.......... A substantial REZ 355,595/ $ 3,911,545 0
stockholder February 1998
Rockwell A. Schnabel
and Affiliates....... Currently a REZ 1,034,948/ $11,384,428 3,000
Director, was a Pegasus February 1998
Director, from
September 1996 -- July
1998
REZ.................... -- 191,979/ $ 2,593,636 0
Third Quarter 1998
</TABLE>
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TERMS OF THE MERGER AGREEMENT AND RELATED TRANSACTIONS
The merger agreement, as well as the forms of several related agreements,
are attached as appendices to this information statement/prospectus. Pegasus and
REZ encourage you to read the merger agreement and these related agreements in
their entirety. These are the legal documents governing the merger and related
transactions, and in the event of any discrepancy between the terms of these
legal documents and the following summary, these legal documents will control.
GENERAL
On November 16, 1999, Pegasus, REZ and other affiliated parties entered
into the merger agreement, which provides for the merger of a wholly-owned
subsidiary of Pegasus, Pegasus Worldwide, with and into REZ, with REZ being the
surviving corporation. The parties amended the merger agreement effective
December 7, 1999. Attached to this information statement/prospectus as Appendix
A is the merger agreement, as amended and restated. Upon completion of the
merger, REZ will become a wholly-owned subsidiary of Pegasus. After the merger,
the certificate of incorporation and bylaws of the surviving corporation will be
amended to be the same as the certificate of incorporation and bylaws of Pegasus
Worldwide, but the name of the surviving corporation will be "REZ, Inc." The
directors and executive officers of Pegasus Worldwide will be the initial
directors and executive officers of the surviving corporation.
If the merger is completed, holders of REZ common stock will no longer hold
any interest in REZ other than through their interest in shares of Pegasus
common stock. They will become stockholders of Pegasus and their rights will be
governed by Pegasus' Third Amended and Restated Certificate of Incorporation and
Bylaws and the laws of the State of Delaware. See "Comparison of Rights of
Stockholders of Pegasus and REZ" for information about the relative rights of
stockholders of Pegasus and REZ.
EFFECTIVE TIME OF THE MERGER
The merger will become effective upon the filing of the signed Certificate
of Merger with the Secretary of State of Delaware. The merger agreement provides
that the contracting parties will cause the Certificate of Merger to be filed as
soon as practicable after:
- All required regulatory approvals and actions have been obtained or taken
- All other conditions to the consummation of the merger have been
satisfied or waived
There can be no assurance that the conditions to the merger will be
satisfied. Moreover, the merger agreement may be terminated by either Pegasus or
REZ under various conditions as specified in the merger agreement. Therefore,
there can be no assurance as to whether or when the merger will become
effective.
MERGER CONSIDERATION
Upon the closing of the merger, holders of outstanding shares of REZ common
stock will be entitled to receive, on a pro-rata basis, an aggregate of 3.99
million shares of Pegasus common stock and other consideration of $135 million,
consisting of $115 million in cash and a $20 million promissory note. Reed
Elsevier, the holder of 65.9% of the outstanding shares REZ common stock, will
receive the $20 million promissory note in lieu of $20 million of cash
consideration to which it would otherwise be entitled to receive. The Pegasus
common stock and cash consideration that REZ stockholders receive in the merger
are subject to some adjustments and escrow arrangements discussed below. The
merger agreement does not provide any limit to the amount of any downward
adjustments to the merger consideration.
No fractional shares of Pegasus common stock will be issued in the merger.
Instead, if you would otherwise be entitled to receive a fraction of a share,
you will receive from Pegasus cash equal to the per share market value of the
fractional share of Pegasus common stock.
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After completion of the merger, the 3.99 million shares of Pegasus common
stock issued to REZ stockholders in the merger will represent approximately
16.4% of the total number of shares of Pegasus common stock based upon the
number of shares of Pegasus common stock outstanding at February 29, 2000.
Upon completion of the merger, Reed Elsevier, other affiliate stockholders
and non-affiliate stockholders of REZ will own approximately 10.8 %, 3.3% and
2.2%, respectively, of the total outstanding shares of Pegasus common stock,
based on the number of shares of Pegasus common stock outstanding at February
29, 2000.
The number of shares of Pegasus common stock to be issued in the merger
will not increase or decrease due to fluctuations in the market price of Pegasus
common stock. In the event that the market price of Pegasus common stock
decreases or increases prior to the closing date, the value of Pegasus common
stock to be received by REZ stockholders in the merger would correspondingly
decrease or increase. REZ does not have "walk-away" rights and cannot terminate
the merger agreement solely because the Pegasus stock price declines. You are
advised to obtain recent market quotations for Pegasus common stock. Pegasus
cannot predict the market price of its common stock at the effective time of the
merger or the market price of its common stock at any time after the merger is
completed.
Closing Adjustment to the Cash Consideration
The cash consideration that REZ stockholders will receive at the closing of
the merger will be reduced on a pro rata basis, based on a closing balance sheet
adjustment determined immediately prior to the closing of the merger. This
closing adjustment to the cash consideration will be based on a balance sheet
prepared as of the end of a calendar month within 45 days prior to the closing
of the merger. This balance sheet is referred to as the "estimated balance
sheet" in the merger agreement. The cash consideration will be adjusted downward
based on the total of the following:
- The amount of REZ debt as reflected on the estimated balance sheet
- The amount of monies loaned by Pegasus to REZ under the option note that
are necessary to fund the cash-out of REZ options
- Any merger expenses incurred by REZ exceeding $2.75 million
- The amount of any decrease in the net tangible assets of REZ as reflected
on the estimated balance sheet from the amount of the net tangible assets
reflected on the REZ balance sheet as of July 31, 1999
- The amount of any decrease in the working capital as reflected on the
estimated balance sheet from the amount of the forecasted working capital
for the applicable period set forth in the merger agreement
Any downward adjustment to the amount of cash payable to the REZ stockholders in
the merger based on the items above will be offset to the extent the amount of
the working capital as reflected on the estimated balance sheet is greater than
the forecasted working capital for the applicable period detailed in the merger
agreement.
Post-Closing Adjustment to Stock Consideration
To provide for the post-closing adjustment that will be made shortly
following the closing of the merger, shares of Pegasus common stock with a value
of $2.0 million that REZ stockholders would otherwise receive at the closing of
the merger will also be placed in an escrow account at the closing of the
merger. A downward post-closing adjustment would be effected through a claim
against the escrowed shares, as described further below. A post-closing
adjustment to the number of shares of Pegasus common stock will be based on the
balance sheet as of the closing date, which is referred to as the "closing date
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<PAGE> 62
balance sheet" in the merger agreement. To arrive at the post-closing
adjustment, the parties will make the following calculations:
- The parties will subtract the amount of the debt reflected on the
estimated balance sheet from the debt reflected on the closing balance
sheet to arrive at a number, which may be a positive number or a negative
number. This adjustment is referred to as the Indebtedness Adjustment in
the formula provided below.
- The parties will subtract the amount of net tangible assets reflected on
the closing balance sheet from the amount of net tangible assets
reflected on the estimated balance sheet to arrive at a number, which may
be a positive number or a negative number. This adjustment is referred to
as the Net Tangible Asset Adjustment in the formula provided below.
- The parties to the merger have agreed that for purposes of the
post-closing adjustment, any positive number from this calculation will
not exceed the amount used in the closing adjustments described above
under the heading "-- Closing Adjustment to the Cash Consideration" to
compensate for any decrease in the net tangible assets reflected on the
estimated balance sheet from the amount of the net tangible assets
reflected on the REZ balance sheet as of July 31, 1999.
- The parties to the merger have further agreed that for purposes of the
post-closing adjustment, the amount of net tangible assets as reflected
on the closing balance sheet is greater than $23,745,000, then the
result of this calculation for net tangible assets will not be a
negative number.
- The parties will calculate a change in REZ's working capital through
making several calculations. This adjustment is referred to as the
Working Capital Adjustment in the formula provided below.
- The parties will subtract working capital as reflected on the estimated
balance sheet from the forecasted working capital for the month that
includes the date of the estimated balance sheet, which may be a
positive number or a negative number
- The parties will subtract working capital as reflected on the closing
balance sheet from the forecasted working capital for the month that
includes the date of the closing balance sheet, which may be a positive
number or a negative number
- The parties will then derive the result of the first working capital
calculation described immediately above minus the second working capital
calculation described immediately above to arrive at a number, which may
be a positive number or a negative number
Using the calculations provided above, the parties will arrive at the post
closing adjustment using the following formula.
I = Indebtedness Adjustment described in the first bullet point above
(whether positive or negative number)
NTA = Net Tangible Asset Adjustment described in the second bullet point
above (whether a positive or negative number)
WC = Working Capital Adjustment described in the third bullet point above
(whether a positive or negative number)
I +
NTA +
WC =
The amount of the post-closing adjustment
If the sum of the calculations made in the formula provided above results
in a positive number, then Pegasus will be entitled to reduce from the escrow an
amount equal to that positive number.
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Conversely, if the sum of the calculations made in the formula provided
above results in a negative number, Pegasus is required to pay into the escrow
account a cash amount equal to the absolute value of that negative number.
The post-closing adjustment will be made promptly after a 60 to 90 day
period following the closing of the merger, although a dispute between the
parties about the post-closing adjustment could cause delays.
The shares of Pegasus common stock having a value of $2.0 million that are
subject to the post-closing adjustment described above will be placed at the
closing of the merger in an escrow account with Chase Bank of Texas, N.A., as
the escrow agent. The number of shares of Pegasus common stock to be placed in
escrow will be determined by dividing $2.0 million by the average per share
closing price of the Pegasus common stock for the five market trading days
preceding the date that is three days before the closing date of the merger.
After this post-closing adjustment is made, any cash contributed by Pegasus due
to the post-closing adjustment or any Pegasus common stock remaining in the
escrow account after the determination of the post-closing adjustment will be
delivered by the escrow agent to the securityholder agent for distribution to
the REZ stockholders in proportion to the cash and shares of Pegasus common
stock that the REZ stockholders would otherwise receive in the merger.
Indemnification Escrow Arrangements
In addition to the escrow arrangement described above, at the closing of
the merger, Pegasus will deposit in an escrow account with Chase Bank of Texas,
N.A., as the escrow agent, $5.5 million in cash plus shares of Pegasus common
stock having a value of $5.5 million. The number of shares of Pegasus common
stock to be placed in escrow will be determined by dividing $5.5 million by the
average per share closing price of the Pegasus common stock for the five market
trading days preceding the date that is three days before the closing date of
the merger. The cash and shares of Pegasus common stock placed in escrow will be
contributed on behalf of each REZ stockholder in proportion to the cash and the
aggregate number of shares of Pegasus common stock the stockholder would
otherwise receive by virtue of the merger. This escrowed cash and stock will be
held in the escrow account for losses incurred by Pegasus in the event of
breaches by REZ or Reed Elsevier of their respective representations,
warranties, covenants and agreements contained in the merger agreement. Subject
to the satisfaction of any claims asserted by Pegasus, the escrowed cash and
stock shall be distributed to the REZ stockholders on the later of
- one year from the closing date of the merger or
- the date of the publication of the first audited consolidated financial
statements of Pegasus after the effective time of the merger.
Pegasus may collect amounts from the escrow account only after the aggregate
amount of Pegasus damages relating to breaches by REZ or Reed Elsevier under the
terms of the merger agreement exceed $1.5 million.
The escrow agreement sets forth the duties of the escrow agent, which
include (1) the safeguarding of the escrow cash and escrow shares during the
escrow period, and (2) the delivery to REZ stockholders at the expiration of the
escrow period of all the escrowed cash and escrow shares in excess of any
amounts necessary to cover any successful claim made by Pegasus. Pegasus and the
REZ stockholders will equally pay all the escrow agent's fees, with the fees
payable by the REZ stockholders being paid from the escrow account. The exchange
agent will invest any cash included in the escrow in U.S. investment-grade
securities, as directed by Pegasus. Any interest and other income resulting from
these investments shall be paid to the party ultimately receiving the
investments.
Securityholder Agent
After the closing of the merger, Henry Z. Horbaczewski, Vernon L. Snider
and Frank M. Placenti will act on behalf of the REZ stockholders as their agent
and attorney-in-fact in connection with the escrow arrangements, arbitration
matters, notices, communications or otherwise arising under the terms of
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the merger agreement or documents related to the merger agreement. These
individuals, who are referred to in the merger agreement as the "securityholder
agent," were selected by the REZ board of directors. The board determined that
the securityholder agent should include a representative of each of Reed
Elsevier, which owns a majority of REZ's outstanding stock, and the other REZ
stockholders, and should include an uneven number of persons. Mr. Horbaczewski
is a member of the REZ board of directors and is an officer of Reed Elsevier.
Mr. Snider is a REZ shareholder and a REZ officer. Mr. Placenti is a partner of
REZ's outside law firm. The REZ stockholders may remove a securityholder agent
or appoint a new securityholder agent by the affirmative vote of the holders of
an 85% interest in the escrow.
The securityholder agent is required to act in good faith and to exercise
reasonable judgment. The securityholder agent is not required to post a bond for
the responsibilities to be performed under the merger agreement nor will the
securityholder agent receive compensation for these services. The REZ
stockholders will indemnify the securityholder agent for all actions relating to
its duties arising under the merger agreement and incurred without negligence or
bad faith.
Any actions by the securityholder agent relating to the escrow arrangements
will be the act of the REZ stockholders and the escrow agent and Pegasus may
rely on any act or decision of the securityholder agent as being final and
binding on the REZ stockholders, the escrow agent and Pegasus. In addition, the
escrow agent and Pegasus will have no liability to any party relating to any act
or decision by the escrow agent and Pegasus based on any acts or decisions of
the securityholder agent.
DISPOSITION OF REZ SECURITIES OTHER THAN COMMON STOCK
REZ options
Existing options to purchase REZ common stock will be treated differently
in the merger depending under which REZ stock plan the options were issued. The
two categories of options are referred to as "accelerated REZ options" and "UK
options." The options to purchase REZ common stock that were granted under REZ's
1997 Stock Option Plan and the 1998 Outside Director Stock Option Plan are
referred to as "accelerated REZ options." All options to purchase REZ common
stock that were granted under REZ's Stock Option Scheme are referred to as "UK
options."
The accelerated REZ options will accelerate and become fully vested and
exercisable immediately prior to the merger. Pursuant to the merger agreement,
all holders of outstanding accelerated REZ options have the choice of either (1)
exercising any or all of the accelerated REZ options and purchase the related
shares of REZ common stock pursuant to the merger agreement in accordance with
the terms of the option plan under which the options were issued or (2)
receiving a cash payment of $1.73 per option share from REZ on the closing date
of the merger. If a holder of the accelerated REZ options exercises his options
prior to the closing date of the merger instead of receiving the cash payment,
the REZ shares purchased upon the exercise will convert into the right to
receive shares of Pegasus common stock and cash in the merger on the same terms
as all other holders of outstanding shares of REZ common stock. Any accelerated
REZ options that are not timely exercised or cashed out will be canceled and
terminated prior to the closing date of the merger.
All outstanding UK options accelerated and became fully vested, but not
exercisable at the time of the execution of the merger agreement. The right to
exercise UK options is subject to closing the merger. All holders of UK options
have the choice of either (1) exercising any or all of the UK options and
purchase the related shares of REZ common stock, or (2) receiving a cash payment
of $1.73 per option share from REZ on the closing date of the merger. If a
holder of UK options makes a timely election, then the holder will receive
shares of REZ common stock or cash, as he or she elects, and on the closing date
of the merger will be treated in the same way as electing holders of accelerated
REZ options. If, however, a holder of UK options makes no election prior to the
merger, then this holder will be entitled during the six-month period following
the closing of the merger to elect to exercise the UK options so held, pay the
related exercise price, and receive the merger consideration as if the holder
had elected to receive shares of REZ common stock prior to the closing of the
merger. After the six-month period
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following the merger closing date, any merger consideration relating to UK
options that are not exercised will be distributed to the former REZ
stockholders based on each REZ stockholder's pro rata ownership of the REZ
common stock at the time of the merger.
REZ has sent notices to all holders of accelerated REZ options and UK
options, and virtually all holders have elected to cash out their options. Each
REZ optionholder that elected to receive a cash payment for his REZ stock
options will receive the aggregate payment for the options on the closing date
of the merger. Any amounts necessary to pay the cash payment to the REZ
stockholders will be funded through a loan made by Pegasus to REZ. This loan
will be evidenced by a promissory note made payable to Pegasus, and this
promissory note is referred to as the "option note" in the merger agreement. The
option note will be considered debt of REZ and deducted from the cash
consideration to be paid to the REZ stockholders as part of the closing
adjustments.
In the merger agreement, REZ agreed to exercise its reasonable best efforts
to make available to REZ employees who choose to exercise REZ options loans from
a third party to enable them to fund the related option exercise prices. Despite
the exercise of these efforts pursuant to its obligations under the merger
agreement, REZ has not been able to identify a third party willing to make these
loans.
Redemption of Preferred Stock
Prior the closing date, REZ will repurchase all of the issued and
outstanding shares of REZ Series A Preferred Stock, all of which are held by
Reed Elsevier. The aggregate purchase price for Series A Preferred Stock will be
$103,515, which is equal to the aggregate par value and the original issuance
price of these shares.
EXCHANGE OF REZ STOCK CERTIFICATES
As soon as practicable after the effective time, Pegasus will cause
American Stock Transfer & Trust Co., its exchange agent, to mail to each REZ
stockholder of record a letter of transmittal with instructions to be used by
the stockholder in exchanging certificates which, prior to the merger,
represented shares of REZ common stock. After the effective time, there will be
no further registration or transfers on the stock transfer books of the
surviving corporation of shares of REZ common stock which were outstanding
immediately prior to the effective time.
Upon the surrender of a REZ common stock certificate to the exchange agent
or to the other agent as may be appointed by Pegasus together with a duly
executed letter of transmittal and the other documents as may be reasonably
required by the exchange agent, the holder of the certificate will be entitled
to receive a certified or bank cashier's check, or a wire transfer for amounts
in excess of $500,000, and a certificate representing the number of whole shares
of Pegasus common stock to which the holder of REZ common stock is entitled plus
cash in lieu of fractional shares. Each payment of cash may be reduced by the
amount of any withholding taxes required under applicable law. The merger
agreement provides for a similar mechanism following the election by a UK option
holder after the closing of the merger to exercise his or her UK options.
In the event of a transfer of ownership of REZ common stock that is not
registered in the transfer records of REZ, a certificate representing the
appropriate number of shares of Pegasus common stock may be issued to a
transferee if the certificate representing the shares of REZ common stock is
presented to the exchange agent, accompanied by all documents required to
evidence and effect the transfer and to evidence that any applicable stock
transfer taxes have been paid, along with a duly executed letter of transmittal.
Until a certificate representing REZ common stock has been surrendered to
the exchange agent, each REZ certificate will be deemed at any time after the
effective time of the merger to represent only the right to receive the cash or
promissory note, as applicable, and a certificate representing the number of
shares of Pegasus common stock to which the REZ stockholder is entitled under
the merger agreement plus cash in lieu of fractional shares.
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THE MERGER AGREEMENT
Representations, Warranties and Covenants
Under the merger agreement, Pegasus and/or REZ made a number of standard
representations, including representations relating to:
- Organization and similar corporate matters of Pegasus, REZ and their
respective subsidiaries
- The capital structure of Pegasus and REZ
- Authorization, execution, delivery, performance and enforceability of the
merger agreement and related matters
- The absence of conflicts under certificates of incorporation or bylaws,
required consents or approvals and violations of any instruments or law
- Documents filed with the SEC and the accuracy of the information
contained therein, if applicable
- Absence of some specified material adverse changes, material litigation
or material undisclosed liabilities
- Tax, labor and employee benefit matters
- Title to properties and intellectual property matters
- Compliance with applicable law including environmental laws
- The accuracy of information supplied by each of Pegasus and REZ in
connection with the preparation of this information statement/prospectus
and the related registration statement
- The receipt of fairness opinions from their respective financial advisors
- The approval of the merger agreement by the Pegasus board of directors
and the REZ board of directors and the inapplicability of the provisions
of the Delaware Business Combination Law, which concerns business
combinations with interested stockholders, to the transactions
contemplated by the merger agreement. Each party has agreed promptly to
notify the other party of any event likely to result in the failure of a
representation or warranty to be true in any material respect, or the
material breach of a covenant under the merger agreement
REZ has covenanted as to itself and its subsidiaries that, until the
consummation of the merger or the termination of the merger agreement, it will,
among other things, maintain its business, conduct its operations in the
ordinary course, not take actions outside the ordinary course without Pegasus'
consent, provide Pegasus with reasonable access to its financial, operating and
other information, and use all reasonable efforts to consummate the merger.
Pegasus has agreed to assume the employment agreements to which REZ is a
party.
Pegasus has also made additional covenants regarding REZ's existing
indemnification agreements and agreed to maintain directors' and officers'
liability insurance covering REZ's directors and officers for the three-year
period from the closing date of the merger, but in no event will Pegasus will be
required to expend in excess of $75,000 to maintain directors' and officers'
liability insurance.
Pursuant to the merger agreement, Pegasus has agreed to provide benefits to
employees of REZ and REZ subsidiaries that are not materially less favorable in
the aggregate to the employees than those in effect on the closing date. For
purposes of determining eligibility to participate, vesting, and entitlement to
benefits, service with REZ and the REZ subsidiaries will be treated as service
with Pegasus and its subsidiaries. Notwithstanding the foregoing, six months
after the closing date of the merger, Pegasus may amend or revise any benefits
provided to the employees of REZ or the REZ subsidiaries.
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Conditions to the Completion of the Merger
The obligations of Pegasus and REZ to consummate the merger are subject to
the satisfaction or waiver of each of the following conditions:
- The accuracy of the representations and warranties made by the other
party, without regard to materiality qualifiers, except for any
inaccuracies that would not have a material adverse effect
- The performance in all material respects by the other party of its
covenants
- The effectiveness and the absence of any stop orders or proceedings
seeking a stop order with respect to Pegasus' registration statements and
other filings with the Securities and Exchange Commission
- The absence of any legal restraint or prohibition issued or pending by
any court or governmental authority, or any statute or regulation that
would prohibit or render illegal the consummation of the merger
- The receipt of all material consents, orders and approvals and the
expiration of any waiting periods imposed by, any governmental entity
necessary for the consummation of the merger
- The shares of Pegasus common stock to be issued in connection with the
merger shall be approved for quotation on the Nasdaq National Market
- The estimated closing balance sheet will be determined and agreed upon by
the parties
- The absence of any material adverse change of the other party
- The receipt by REZ of specified contracts and consents
- The receipt by REZ of funds from the option note. The option note will be
funded by Pegasus several days prior to the closing of the merger to
provide REZ with the cash required to pay REZ optionholders that choose a
cash payment for their REZ options an amount equal to $1.73 per share
covered by the option. The option note will be repaid in full upon the
closing of the merger.
- The directors' and officers' liability insurance premium obtained by
Pegasus in an amount up to $75,000
- The delivery of specified ancillary documents
Limitation on Negotiations
The merger agreement provides that REZ will not, directly or indirectly,
solicit or encourage or take other action to facilitate, any inquiries or the
making of any proposal that constitutes or may reasonably be expected to lead to
an acquisition proposal from any person or engage in any discussions or
negotiations with any person with respect to any acquisition proposal or accept
any acquisition proposal. For purposes of the merger agreement, "acquisition
proposal" means any inquiries or proposals regarding:
- Any merger, consolidation, sale of a substantial amount of assets or
similar transactions involving REZ or any subsidiaries of REZ, other than
sales of assets or inventory in the ordinary course of business
- Purchase of 20% or more of the outstanding shares of capital stock of
REZ, including by way of a tender offer or an exchange offer, or similar
transactions involving REZ
- The acquisition by any person of beneficial ownership or a right to
acquire beneficial ownership of, or the formation of any "group" defined
under Section 13(d) of the Securities Exchange Act of 1934 and the rules
and regulations thereunder, which beneficially owns, or has the right to
acquire beneficial ownership of 20% or more of the then outstanding
shares of capital stock of REZ
- Any public announcement of a proposal, plan or intention to do any of the
foregoing or any agreement to engage in any of the foregoing
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The REZ board of directors, in the exercise of and as required by its
fiduciary duties as determined after consultation with outside legal counsel,
may engage in discussions or negotiations with, and furnish information to, a
third party who makes a written, unsolicited acquisition proposal that
constitutes a superior proposal, as long as Pegasus has been notified in writing
of the principal financial terms and conditions of the acquisition proposal. A
"superior proposal" means a written, unsolicited, bona fide acquisition proposal
that is reasonably capable of being consummated and is reasonably likely to be
financially superior to the merger, as determined in each case in good faith by
REZ's board of directors after consultation with REZ's financial advisors.
The merger agreement also requires REZ to immediately notify Pegasus of any
unsolicited offer or proposal to enter into negotiations relating to an
acquisition proposal and to provide Pegasus with information as to the identity
of the party making the offer or proposal and the principal financial terms and
conditions of the offer or proposal.
Waiver and Amendment
At any time before the effective time of the merger, Pegasus and REZ may:
- Extend the time for the performance of any of the obligations or other
acts of the parties under the merger agreement
- Waive any inaccuracies in the representations and warranties of the other
contained in the merger agreement
- Waive compliance by the other with any of the agreements or conditions
contained in the merger agreement
Termination, Break-Up Fees
Termination. The merger agreement may be terminated at any time prior to
the effective time of the merger as follows:
- By mutual written consent of Pegasus and REZ
- By Pegasus or REZ if the merger has not become effective on or before
April 1, 2000, unless the merger has not been consummated due to any
delay by the Securities and Exchange Commission or an action having been
instituted by the Department of Justice or FTC challenging or seeking to
enjoin the consummation of the merger, in which case the date is extended
to May 15, 2000, unless caused by the action or failure to act of the
party seeking to terminate the merger agreement in breach of that party's
obligations under the merger agreement
- By Pegasus or REZ if any court or governmental authority with
jurisdiction has taken any action having the effect of permanently
restraining, enjoining or prohibiting the merger, which action is final
and nonappealable or has sought to enjoin the merger and the terminating
party reasonably believes that the time period required to resolve the
governmental action and the related uncertainty is reasonably likely to
have a material adverse effect on either Pegasus or REZ
- By Pegasus if REZ shall have accepted or recommended to the stockholders
of REZ a superior proposal and REZ shall have paid to Pegasus the breakup
fee
- By Pegasus or REZ upon a breach of any representation, warranty, covenant
or agreement of the other party, or if any representation or warranty of
the other party has become untrue, in either case with the result that
the conditions to the consummation of the merger would not be satisfied
as of the time of the breach or as of the time the representation or
warranty became untrue, provided that if the inaccuracy in the
representation or warranty or breach is curable by the party through the
exercise of its reasonable efforts and for so long as the party continues
to exercise reasonable efforts, the other party may not terminate the
merger agreement
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In the event the merger agreement is terminated, the merger will be deemed
abandoned and the termination will be without liability of any party thereto,
except for liability for breach of the merger agreement and except for any
provisions relating to breakup fees. In the event of a termination, the
provisions of the merger agreement regarding confidentiality, fees and expenses
and termination shall survive.
Breakup Fees. REZ is required to make immediate payment to Pegasus of a
breakup fee of $7.5 million upon the occurrence of any of the following events:
- REZ accepts or recommends to the REZ stockholders a superior proposal
- The REZ board of directors withdraws, modifies or refrains from
recommending the merger
- A third-party acquires beneficial ownership, or the right to acquire
beneficial ownership of, at least 20% of REZ's outstanding voting stock
- REZ accepts or recommends a superior proposal before March 1, 2001 with a
party with whom REZ conducted discussions regarding an acquisition
proposal prior to termination of the merger agreement
Payment of the breakup fee will not substitute for damages incurred in the
event of a breach of the merger agreement.
Tax Indemnification By Reed Elsevier and Some REZ Stockholders
Reed Elsevier and each REZ stockholder that entered into a voting agreement
with Pegasus have agreed to indemnify Pegasus and its affiliates for any damages
suffered by Pegasus relating to tax matters occurring prior to the closing date
of the merger for a period of time equal to the applicable statute of
limitations with respect to the taxes. Reed Elsevier and the applicable REZ
stockholders will only be required to provide the tax indemnity to the extent
there are no amounts remaining in the escrow account established under the
provisions of the merger agreement and Pegasus has incurred damages in excess of
$1.5 million relating to the breach of representations, warranties, covenants or
agreements in the merger agreement.
Fees and Expenses
Pegasus and REZ will each pay their own fees and expenses in connection
with the merger, whether or not the merger is completed. However, Pegasus and
REZ will share equally all fees and expenses, other than attorneys' fees and
accounting fees, in connection with filings of materials required under the
Hart-Scott-Rodino Antitrust Improvements Act and the printing and filing of this
information statement/ prospectus and the registration statement of which this
information statement/prospectus is a part. If some merger fees and expenses of
REZ exceed $2.75 million, any REZ merger expenses in excess of this amount will
be deducted from the cash amount otherwise payable to the REZ stockholders in
the merger.
REZ VOTING AGREEMENTS
At the same time as the execution of the merger agreement, Reed Elsevier
and some stockholders of REZ entered into voting agreements with Pegasus, the
forms of which are attached as Appendix B and Appendix C to this information
statement/prospectus. Based on the number of shares of REZ common stock
outstanding on February 29, 2000, stockholders that signed voting agreements
beneficially own, excluding shares subject to options to purchase REZ common
stock, 85.3% of the outstanding REZ common stock. All of the REZ stockholders
that signed the voting agreements were executive officers, directors,
affiliates, founders or 5% or greater stockholders of REZ. The voting agreements
provide, among other things, for the following:
- The agreement on the part of the REZ stockholders to vote all shares of
REZ common stock held by them at any stockholders meeting and in every
written consent solicited in favor of approval of
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the merger and the merger agreements and against approval of any proposal
made in opposition to or in competition with the consummation of the
merger and against any merger, consolidation, sale of assets,
reorganization or recapitalization with any party other than Pegasus and
its affiliates and against any liquidation or winding up of REZ
- That the REZ stockholders will not transfer any shares of Pegasus common
stock, including shares obtained after the date of the voting agreement
- The grant to Pegasus of an irrevocable proxy to vote the REZ
stockholders' shares of REZ common stock in favor of the merger agreement
and the merger
- Some representations by the REZ stockholders relating to ownership of REZ
common stock, accredited investor status and receipt of the Pegasus
filings with the Securities and Exchange Commission
- The amendment of an existing stockholders agreement by and among REZ,
Reed Elsevier and some other holders of REZ common stock providing for
the waiver of some rights and obligations relating to the sale of shares
of REZ common stock in the case of the merger
- The provision of any necessary consents or waivers required to complete
the merger
The REZ stockholders also consented to the provision in the merger
agreement providing for tax indemnification by the REZ stockholders to Pegasus
if no escrow funds are available to compensate Pegasus for the breach of the tax
representations in the merger agreement and if Pegasus has previously incurred
at least $1.5 million in damages relating to breaches of the representations and
warranties in the merger agreement.
The voting agreements of the REZ stockholders, other than that of Reed
Elsevier, terminate upon the earlier to occur of the effective date of the
merger or the date the merger agreement is terminated. The Reed Elsevier voting
agreement further provides that the voting agreement will not terminate in the
event that REZ enters into a definitive agreement relating to a superior
proposal within one year following the termination of the merger agreement with
several parties, until the earlier to occur of REZ paying Pegasus the breakup
fee or one year following the termination of the merger agreement.
STOCKHOLDER AGREEMENTS
Reed Elsevier, officers and directors of REZ holding shares of (or having
the right to acquire) REZ common stock, and REZ securityholders holding, (or
having the right to acquire,) 1% or more of the outstanding REZ common stock
will each enter into a stockholder agreement with Pegasus at or before the
closing date of the merger, the forms of which are attached as Appendix D and
Appendix E to this information statement/prospectus. The terms of each
stockholder agreement provide some restrictions on the disposition and
transferability of the Pegasus common stock received by the REZ stockholders in
the merger or otherwise owned by the REZ stockholders.
The stockholder agreements prohibit the transferability of any Pegasus
common stock held by the REZ stockholders for a period of 30 days following the
closing of the merger. Thereafter, the REZ stockholders may sell up to 50% of
the Pegasus common stock received in the merger and the REZ stockholders may
sell all shares of Pegasus common stock nine months after the closing of the
merger. If a REZ stockholder owns less than 45,000 shares of Pegasus common
stock, then the REZ stockholder may sell all shares of Pegasus common stock 30
days after the closing date.
The stockholder agreement to be entered into by Reed Elsevier also provides
that Reed Elsevier will provide prior written notice to Pegasus of any intent to
dispose of more than 15,000 shares of Pegasus common stock in any transaction or
series of related transactions. In this case, Pegasus may require Reed Elsevier
to postpone selling any shares of Pegasus common stock during the 180-day period
following the closing of the merger if the board of directors of Pegasus
determines the proposed sale could be seriously detrimental to Pegasus or its
stockholders. During the 180-day period following the closing of the merger
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and upon the request of Reed Elsevier, Pegasus will assist Reed Elsevier in some
marketing efforts associated with the sale of shares of Pegasus common stock
held by Reed Elsevier. Reed Elsevier also specifically agrees to obtain the
prior consent of Pegasus prior to transferring Pegasus common stock to several
competitors of Pegasus.
NONCOMPETITION AGREEMENT
As a material inducement to Pegasus entering into the merger agreement,
Reed Elsevier Inc., on behalf of itself and some affiliates, will enter into a
five year noncompetition agreement with Pegasus at the closing of the merger.
The form of the noncompetition agreement is attached as Appendix F to this
information statement/prospectus. The terms of the noncompetition agreement will
restrict Reed Elsevier from disclosing any confidential information of Pegasus
and REZ and limit the type of duties that may be performed by any Pegasus
employee who becomes an employee or independent contractor of Reed Elsevier
during the term of the noncompetition agreement. Reed Elsevier will also agree
to not engage in activities that are similar to the business of Pegasus or hold
any equity interest, debt or to lend money to any person or entity engaged in a
business similar to that of Pegasus that would result in Reed Elsevier
controlling that particular person or entity.
REGULATORY APPROVALS
Under the merger agreement, the obligations of both Pegasus and REZ to
consummate the merger are subject to the following conditions:
- The expiration or termination of any waiting period and any extension of
the waiting period applicable to the consummation of the merger under the
Hart-Scott-Rodino Act, or HSR Act, and no action having been instituted
by the Department of Justice or the Federal Trade Commission, or FTC,
challenging or seeking to enjoin the consummation of the merger, which
action shall not have been withdrawn or terminated.
- All material authorizations, consents, orders or approvals of, or
declarations or filings with, or expiration of waiting periods imposed
by, any governmental entity, shall have been filed, expired or have been
obtained, other than those that, individually or in the aggregate, the
failure to be filed, expired or obtained, would not, in the reasonable
opinion of Pegasus, have a material adverse effect on REZ or Pegasus.
Pegasus cannot predict whether any applicable regulatory authority will
approve or take other required action with respect to the merger, or as to the
timing of the regulatory approval or other action. Pegasus and REZ are not aware
of any governmental approvals or actions that are required in order to
consummate the merger except in connection with the Securities Act of 1933, the
filing of merger-related documents under Delaware Law or as described below.
Should other approvals or actions be required, it is contemplated that Pegasus
and REZ would seek the other required approvals or actions. Pegasus cannot
predict whether or when any required approvals or actions could be obtained.
Transactions like the merger are reviewed by the Department of Justice and
the FTC to determine whether they comply with applicable antitrust laws. On
December 23, 1999, Pegasus and the ultimate parent entities of REZ, Reed
International P.L.C. and Elsevier N.V., each furnished notification of the
merger to the Department of Justice and the FTC to satisfy provisions of the HSR
Act. Early termination of the applicable waiting period under the HSR Act was
granted on January 14, 2000.
At any time before or after the effective time, the Department of Justice,
the FTC, state attorneys general, the antitrust regulatory agencies of various
foreign countries or a private person or entity could challenge the merger under
antitrust laws and seek, among other things, to enjoin the merger or to cause
Pegasus to divest itself, in whole or in part, of REZ or of other businesses
conducted by Pegasus. Based on information available to them, Pegasus and REZ
believe that the merger will not violate federal, state or foreign antitrust
laws. However, a challenge to the merger on antitrust grounds could be raised.
If a
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challenge is made, Pegasus and REZ may be required to accept several conditions,
possibly including some divestitures or hold-separate agreements in order to
consummate the merger.
Any person or persons receiving Pegasus common stock pursuant to the merger
may be required to make a filing pursuant to the HSR Act. In general, if
- a person receiving Pegasus common stock pursuant to the merger would own,
upon consummation of the merger, Pegasus common stock that exceeds $15
million in value
- several jurisdictional requirements are met; and
- no exemption applies; then
the HSR Act would require that the person file a Premerger Notification and
Report Form together with a filing fee of $45,000 payable to the FTC, and
observe the applicable waiting periods under the HSR Act prior to acquiring the
Pegasus common stock pursuant to the merger.
If the waiting periods described above have not expired or been terminated
at the effective time with respect to any REZ stockholder, Pegasus may be
required to deliver Pegasus common stock to be received by the REZ stockholder
in the merger into an escrow facility pending the expiration or termination of
the waiting period. Holders of REZ common stock are urged to consult legal
counsel to determine whether the requirements of the HSR Act will apply to the
receipt by them of Pegasus common stock pursuant to the merger.
NASDAQ LISTING OF PEGASUS COMMON STOCK
It is a condition to the obligations of REZ and Pegasus to consummate the
merger that the shares of Pegasus common stock to be issued in the merger be
approved for listing on the Nasdaq National Market. Pegasus will file an
additional listing application with Nasdaq covering the shares, and it is
anticipated that the application will be approved, subject to notice of
issuance, at or before the effective time of the merger.
ANTICIPATED ACCOUNTING TREATMENT
The merger will be accounted for under the purchase method of accounting in
accordance with generally accepted accounting principles. Under this method of
accounting, the assets and liabilities of REZ will be recorded at their fair
market value and any excess of Pegasus' purchase price over the fair value will
be attributed to either goodwill or a variety of intangible assets including
software, Reed Elsevier's non-compete, customer base and assembled workforce.
Pegasus intends to record an expense of approximately $8 million in the
quarter in which the merger closes with respect to the write-off of in-process
research and development acquired. In addition, the estimated intangible and
goodwill assets of approximately $269.6 million to be recorded with respect to
the merger are expected to be amortized over a periods ranging from three to ten
years following the closing of the merger. See the section titled "Unaudited Pro
Forma Information and Related Notes" for a description of the purchase method of
accounting.
MATERIAL FEDERAL INCOME TAX MATTERS FOR UNITED STATES REZ SECURITYHOLDERS
United States REZ Stockholders
The following discussion summarizes the federal income tax considerations
anticipated to be material to a REZ stockholder who is a citizen or resident of
the United States, a "U.S. REZ Stockholder," in connection with the merger. The
discussion does not intend to be exhaustive of all possible tax considerations;
for example, the discussion does not contain a description of any state, local,
or foreign tax considerations. In addition, the summary discussion is intended
to address only those federal income tax considerations that are generally
applicable to a U.S. REZ Stockholder who holds REZ common stock as
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a capital asset, and it does not discuss all aspects of federal income taxation
that might be relevant to a specific U.S. REZ Stockholder in light of particular
investment or tax circumstances.
In particular, the discussion does not purport to deal with all aspects of
taxation that may be relevant to U.S. REZ Stockholders subject to special
treatment under the federal income tax laws, including, without limitation:
individual retirement and other tax-deferred accounts; banks; insurance
companies; tax-exempt organizations; dealers or brokers in securities or
currencies; persons subject to the alternative minimum tax; persons who hold
their common stock as part of a straddle, hedging, or conversion transaction;
persons whose functional currency is other than the U.S. dollar; persons who
received their common stock as compensation in connection with the performance
of services or upon exercise of options received as compensation in connection
with the performance of services; persons eligible for tax treaty benefits; and
foreign corporations, foreign partnerships, other foreign entities, and
individuals who are not citizens or residents of the United States.
There will be different tax consequences for Reed Elsevier, which will
receive a promissory note from Pegasus in exchange for REZ common stock and REZ
stockholders who are not citizens or residents of the United States. The tax
consequences to these REZ stockholders involve tax considerations that are
beyond the scope of this discussion. It is therefore advised that the REZ
stockholders consult their own tax advisors to determine the tax consequences of
the merger applicable to the REZ stockholders.
The following discussion is a general summary of the material United States
federal income tax consequences of the merger. The information in the discussion
is based on the Federal Income Tax Laws which means, collectively,
- the Internal Revenue Code of 1986, as amended, or the "Code,"
- current, temporary and proposed Treasury regulations promulgated under
the Code,
- the legislative history of the Code,
- current administrative interpretations and practices of the Internal
Revenue Service including its practices and policies as expressed in
private letter rulings, which are not binding on the Internal Revenue
Service except with respect to a taxpayer that receives such a ruling,
and
- court decisions, all as of the date of this document.
No assurance can be given that future legislation, Treasury Regulations,
administrative interpretations and court decisions will not significantly change
the current law or adversely affect existing interpretations of the Federal
Income Tax Laws. Any change could apply retroactively to transactions preceding
the date of the change, and neither Pegasus nor REZ will undertake to inform the
U.S. REZ Stockholders of any change. No assurance can be provided that the
statements set forth in the following summary discussion, which do not bind the
Internal Revenue Service or the courts, would not be challenged by the Internal
Revenue Service or would be sustained by a court if so challenged.
The discussion is not intended to be, and should not be construed by the
U.S. REZ Stockholders as, tax advice. The U.S. REZ Stockholders are urged to
consult with their own tax advisors to determine the federal, state, local, and
foreign tax consequences of the merger. The following discussion is intended to
apply only to REZ Stockholders who are citizens or residents of the United
States. Therefore, for purposes of the following discussion, when reference is
made to a U.S. REZ Stockholder, the reference is to a REZ Stockholder who is a
citizen or resident of the Untied States and not a foreign REZ Stockholder.
For federal income tax purposes, the merger will be a taxable transaction.
The merger will be treated as a taxable stock sale by the U.S. REZ Stockholders.
Assuming this treatment, the merger will be treated as a fully taxable
disposition by the U.S. REZ Stockholders of the REZ common stock on which gain
or loss will be recognized. The gain or loss will equal the difference between
the amount realized from the
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disposition and the U.S. REZ Stockholder's adjusted tax basis in the REZ common
stock disposed of. A U.S. REZ Stockholder's amount realized equals the sum of
- the amount of cash received by the stockholder in the merger and
- the fair market value of the Pegasus common stock received by the
stockholder in the merger. See discussion below regarding the tax
consequences of amounts deposited in escrow.
The Federal Income Tax Laws do not provide definitive guidance regarding
the determination of the fair market value of publicly traded securities, but in
computing the amount realized by a U.S. REZ Stockholder, Pegasus and REZ intend
to compute the fair market value of the Pegasus common stock as the average of
the high and low sales prices of Pegasus common stock on The Nasdaq National
Market for the date on which the merger occurs. There can be no assurance,
however, that the Internal Revenue Service will not seek to establish a
different fair market value for the Pegasus common stock comprising part of the
merger consideration, for example by using the closing sales price of Pegasus
common stock on the Nasdaq National Market on that date.
The Federal Income Tax Laws do not provide definitive guidelines regarding
the taxation of the portion of the amount realized required to be placed in an
escrow account to secure the buyer against breach of representations and
warranties and for post-closing adjustments. See "Terms of the Merger Agreement
and Related Transactions -- Escrow Arrangements." In two Internal Revenue
Service letter rulings issued in 1986, the Internal Revenue Service held that
the portion of the amount realized deposited in escrow to secure the buyer
against breach of warranty, representation, or covenant, could be treated by the
seller as an installment obligation and could be reported by the seller on the
installment method. Because the letter rulings are binding on the Internal
Revenue Service only with respect to those parties who requested the rulings,
U.S. REZ Stockholders should consult with their own tax advisors concerning the
use of the installment method. The parties intend to treat the income earned on
the escrowed funds as taxable to Pegasus.
Furthermore with regard to the use of the installment method, U.S. REZ
Stockholders should be aware that the Ticket to Work and Work Incentives
Improvement Act of 1999 enacted on December 17, 1999 contains a provision
repealing the availability of the installment method for accrual basis
taxpayers. The provision applies to sales or other dispositions occurring on or
after December 1999. Because the merger will close after December 17, 1999 the
installment method will not be available for accrual basis taxpayers for
reporting the amount realized placed in the escrow account.
If the installment method is not available to the U.S. REZ Stockholders for
the amount realized placed in the escrow account, the stockholders will be
required to treat "all payments to be received" as having been received in the
year of sale. Under current law, it is unclear how the amount of payments should
be determined when the receipt is subject to substantial restrictions and
contingencies. Several alternatives are possible. The Internal Revenue Service
may seek to tax U.S. REZ Stockholders on the full amount transferred to escrow.
This approach assumes that all contingencies will be resolved in favor of the
REZ stockholders. If the ultimate distribution were less than this amount, REZ's
U.S. Stockholders would recognize a capital loss in the year of final
distribution.
Alternatively, REZ's U.S. Stockholders may be taxed currently on the fair
market value of their rights to receive funds from escrow, after discounting to
reflect the contingent nature of their rights. Funds distributed in excess of
this current value would be taxable to REZ's U.S. Stockholders in the year
received. A portion of the excess funds may be taxable as interest, with the
balance taxed as capital gain. If the aggregate distributions from escrow were
less than the current value, the stockholders would be treated as incurring a
capital loss in the year of final distribution.
As a third approach, REZ's U.S. Stockholders may be allowed to delay
reporting the escrowed funds as taxable income until the funds are actually
received in the future. As payments are received from escrow, a portion may be
taxable as interest, with the balance taxed as capital gain. This approach is
termed the "open transaction" method.
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The open transaction method has been upheld by courts where taxpayers
receive deferred payment obligations, such as contingent escrow rights, if the
obligations have no ascertainable fair market value. Regulations promulgated by
the Treasury Department also recognize the validity of the open transaction
method, but limit its applicability to "rare and extraordinary" situations in
which the value of the contingent obligation cannot reasonably be ascertained.
U.S. REZ Stockholders may determine that the fair value of the escrowed assets
cannot reasonably be ascertained due to the substantial contingencies imposed
under the escrow agreement. This determination may be supported by the trading
value of REZ's common stock immediately prior to the closing of the merger. If
the trading value of the stock does not exceed the merger consideration received
at the closing of the merger, it may reflect a market determination that the
value of the escrowed assets cannot be ascertained.
Because of the lack of clear legal authority, each U.S. REZ Stockholder is
urged to consult his or her tax advisor concerning the recognition of gain with
respect to amounts placed in escrow.
United States REZ Optionholders
Existing options to purchase REZ common stock will be taxed differently
depending upon the particular REZ stock plan under which the options were issued
and whether the options are exercised or cashed out. The following summary is
not comprehensive, and therefore it is advised that holders of options consult
their own tax advisors regarding the tax consequences of the options.
Outstanding options under REZ's 1998 Outside Director Stock Option Plan are
nonstatutory stock options. In general, if the holder of one of these options
exercises the options and purchases the related shares of REZ common stock prior
to the closing date of the merger in accordance with the terms of the option
plan, the holder will recognize ordinary income when the option is exercised
equal to the excess of the fair market value of the shares when purchased over
the option price. The tax basis in the REZ shares will be their fair market
value when purchased. The REZ shares purchased upon the exercise will convert
into the right to receive shares of Pegasus common stock and cash in the merger
on the same terms as all other holders of outstanding shares of REZ common
stock. See tax consequences above for the tax effect upon receiving Pegasus
common stock and cash. If, on the other hand, the holder of one of these options
elects to receive a cash payment from REZ on the closing date of the merger, the
holder will recognize ordinary income in the amount of the total cash received
at the time the cash is received.
Awards under REZ's 1997 Stock Option Plan include both nonstatutory stock
options and incentive stock options. The holders of nonstatutory stock options
under this plan will have the same tax consequences as the holders of options
under the 1998 Outside Director Stock Option Plan discussed above. If shares
acquired upon exercise of an incentive stock option are disposed of within two
years from the date the incentive stock option was granted or one year from the
date the incentive stock option was exercised, or "early disposition," the
holder recognizes ordinary income at the time of the early disposition. In
general, if the holder of one of the incentive stock options exercises options
and purchases the related shares of REZ common stock prior to the closing date
of the merger in accordance with the terms of the option plan, an early
disposition will occur when the REZ shares convert into the right to receive
shares of Pegasus common stock and cash in the merger. The holder will recognize
ordinary income at the time of the early disposition equal to the excess, if
any, of the lesser of
- the amount realized on the early disposition or
- the fair market value of the shares on the date of exercise, over the
option price.
The excess, if any, of the amount realized on the early disposition of the
shares over the fair market value of the shares on the date of exercise will be
short-term capital gain, provided the holder holds the shares as a capital asset
at the time of early disposition. If a holder disposes of such shares for less
than his or her basis in the shares, the difference between the amount realized
and his or her basis will be a short-term capital loss, provided the holder
holds the shares as a capital asset at the time of disposition. For purposes of
determining alternative minimum tax, the holder's alternative minimum taxable
income will include the gain on the disposition of the incentive stock option
stock. See the tax consequences
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<PAGE> 76
outlined above for the tax effect upon receiving Pegasus common stock and cash.
If, on the other hand, the holder of an incentive stock option elects to receive
a cash payment from REZ on the closing date of the merger, the holder will
recognize ordinary income in the amount of the total cash received at the time
the cash is received.
REZ's Stock Option Scheme is provided for REZ employees located in the
United Kingdom. Because tax considerations for individuals who are not citizens
or residents of the United States are beyond the scope of this discussion, the
holders of these options should consult their own tax advisors concerning the
tax consequences relating to the options granted under the Stock Option Scheme.
APPRAISAL RIGHTS
Under the Delaware General Corporation Law, or DGCL, notwithstanding the
approval of the merger by the holders of the requisite number of shares of
common stock of REZ, you are entitled to refuse the merger consideration to
which you would otherwise be entitled under the merger agreement and exercise
appraisal rights and obtain payment of the "fair value" for your shares under
the terms of the DGCL. In order to effectively exercise your appraisal rights
you must satisfy each of the following primary requirements:
- You must hold shares in REZ as of the date you make your demand for
appraisal rights and continue to hold shares in REZ through the effective
date of the merger
- You must deliver to REZ a written notice of your demand of payment of the
fair value for your shares within 20 days of the mailing date of the
information statement/prospectus
- You must not have consented to the merger and the merger agreement
If you fail to comply with any of the above conditions or otherwise fail to
comply with the requirements of Section 262 of the DGCL, you will have no
appraisal rights with respect to your shares.
The determination of fair value takes into account all relevant factors,
but excludes any appreciation or depreciation in anticipation of the applicable
merger. The costs of the appraisal proceeding may be determined by the Delaware
Court of Chancery and allocated among the parties as the Delaware Court of
Chancery deems equitable under the circumstances. Upon your application for
appraisal, the Delaware Court of Chancery may order all or a portion of the
expenses incurred by you in connection with the appraisal proceeding, including,
without limitation, reasonable attorney's fees and the fees and expenses of
experts, to be charged pro rata against the value of all shares entitled to
appraisal. In the absence of a determination or assessment, you will bear your
own expenses.
All written notices should be addressed to: REZ, Inc., 7500 Dreamy Draw
Drive, Suite 120, Phoenix, Arizona, 85020, Attention: Kristin S. Schloemer. All
written notices must be executed by, or with the consent of, the holder of
record. The notice must identify you and indicate your intention to demand
payment of the fair value for your shares. In the notice, your name should be
stated as it appears on your stock certificate(s). If your shares are owned of
record in a fiduciary capacity, such as by a trustee, guardian or custodian,
your demand must be executed by or for the fiduciary. If you own the shares with
another person, such as in a joint tenancy or tenancy in common, your demand
must be executed by or for all joint owners. An authorized agent, including an
agent for two or more joint owners, may execute your demand for appraisal.
However, the agent must identify you and any other owners of the shares and
expressly disclose the fact that, in exercising the demand, he or she is acting
as agent for you and any other owners.
IF YOU ARE CONTEMPLATING THE EXERCISE OF THE RIGHTS SUMMARIZED ABOVE IN
CONNECTION WITH THE MERGER, YOU ARE URGED TO CONSULT WITH YOUR OWN LEGAL
COUNSEL. THE DESCRIPTION OF SECTION 262 CONTAINED IN THIS DOCUMENT IS ONLY A
SUMMARY OF THE FULL TEXT DESCRIBED IN APPENDIX I ATTACHED TO THIS INFORMATION
STATEMENT/PROSPECTUS AND THE DGCL. FAILURE TO FOLLOW PRECISELY ALL OF THE STEPS
REQUIRED BY SECTION 262 OF THE DGCL WILL RESULT IN THE LOSS OF YOUR APPRAISAL
RIGHTS. ANY DEMANDS, NOTICES, CERTIFICATES OR OTHER DOCUMENTS REQUIRED TO BE
DELIVERED IN CONNECTION WITH YOUR EXERCISE OF APPRAISAL RIGHTS SHOULD BE SENT TO
REZ, INC. AT THE ADDRESS INDICATED ABOVE.
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PEGASUS BUSINESS
OVERVIEW
Pegasus is a leading provider of transaction processing and electronic
commerce services to the hotel industry worldwide. Pegasus is organized into
three businesses: Pegasus Electronic Distribution, Pegasus Commission Processing
and Pegasus Business Intelligence.
- Pegasus Electronic Distribution improves the efficiency and effectiveness
of the hotel room reservation process by enabling travel agents and
individual travelers to electronically access hotel room inventory
information and conduct reservation transactions. Pegasus Electronic
Distribution consists of the GDS distribution service and the
Internet-based distribution services, which include TravelWeb.com, the
private-label reservation service and other Internet-based distribution
services.
- Pegasus Commission Processing improves the efficiency and effectiveness
of the commission payment process for participating hotels and travel
agencies by consolidating payments in the customer's currency of choice
and providing comprehensive transaction reports.
- Pegasus Business Intelligence provides database marketing and consulting
services and is being expanded to provide services that search and
organize data into meaningful information for competitive analysis and
strategic planning for the hotel industry.
INDUSTRY BACKGROUND
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 that multiple parties 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. Furthermore, this process consists of a number of relatively small
payments to travel agencies that often include payments in multiple currencies.
In addition, information regarding guest cancellations and "no-shows" needs to
be accurately communicated between hotels and travel agencies in order to
reconcile commission payments.
Reservations for hotel rooms are made either directly by individual
travelers or indirectly through intermediaries. Individual travelers typically
make direct reservations by the traditional methods of 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 websites. Intermediaries for hotel
room reservations, including travel agencies, convention and other large meeting
organizers and corporate travel departments, access hotel information either by
telephone or fax or through a global distribution system. Global distribution
systems, such as Sabre and Galileo, are primarily mainframe-based systems that
are connected through communications links to travel agencies and other travel
reservation intermediaries. Global distribution systems maintain databases of
room rates, features and availability information provided by hotels to which
they are connected. Because each global distribution system has a unique
electronic interface to hotel reservation systems, each global distribution
system can obtain room information and book rooms only at hotels that have
developed protocols and message formats compatible with that particular global
distribution system.
A number of current trends are affecting the hotel industry:
- The hotel industry has been shifting from manual to electronic means of
making hotel room reservations. As more hotels become electronically
bookable, Pegasus expects that electronic hotel room reservations will
grow substantially in the United States and internationally over the next
several years.
- A growing number of individual travelers are making hotel room
reservations electronically on the Internet.
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- 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 customers of Pegasus.
- 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.
- Participants in the travel industry increasingly desire detailed,
customized information regarding hotel room distribution that can be
delivered in a timely manner. Much of the information currently available
regarding hotel room distribution does not contain in-depth detail about
guest behavior. It also may not be customized to contain the information
that is valuable to a user. Furthermore, it may reflect events or
industry patterns that occurred months in the past and as a result may
not be as useful.
PEGASUS SOLUTION
Pegasus provides information and transaction processing services that
improve the efficiency and effectiveness of the hotel room reservation and
commission payment processes. Pegasus Electronic Distribution enhances the
electronic hotel room reservation process by providing a single electronic
communication interface that enables individual travelers and intermediaries to
access hotel room inventory information and conduct reservation transactions.
Pegasus Commission Processing 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. Pegasus Business Intelligence is
intended to provide detailed and timely hotel information that is valuable to a
wide variety of audiences in the global hotel industry from hotel chains to
travel industry marketing groups to corporate travel departments.
Pegasus' services benefit many of the participants in the hotel room
distribution process. Travel industry participants that benefit from these
services range from hotels to travel agencies and hotel representation firms,
which are companies that assist hotels in marketing and sales, to global
distribution systems, convention and other large meeting organizers, corporate
travel departments and websites with travel-related features. Pegasus' strategic
position as a gateway in the hotel room distribution chain, its transaction
processing capabilities and its reputation for reliability and neutrality enable
Pegasus to offer a range of services delivering industry-wide benefits that are
difficult for industry participants to achieve individually. Because Pegasus
processes transactions from a wide variety of sources, it is well positioned to
capitalize on the overall growth in electronic hotel reservations, whether made
through global distribution systems, the Internet or other means.
STRATEGY
Pegasus' goal is to be the leading provider of information services and
technology in the distribution of hotel rooms. Pegasus believes that its central
role in the hotel industry room reservation process positions it to achieve this
goal. The following are key elements of Pegasus' strategy:
Expand Hotel Room Distribution Channels. Pegasus is expanding its service
and product 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. Pegasus is addressing this online distribution opportunity through
increasing the capability and consumer awareness of the TravelWeb.com website
and expanding the use by third-party websites of the private-label reservation
service. Pegasus' services are intended to provide transaction fee revenue
opportunities through virtually all of the distribution channels by which
electronic hotel room reservations occur.
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Develop and Expand Pegasus Business Intelligence. Pegasus intends to
continue the development and expansion of Pegasus Business Intelligence. This
service is intended to provide hotel and other industry participants with hotel
transaction information for use in strategic analysis, market tracking, improved
target marketing and revenue optimization. Pegasus recently acquired and is
developing software and technology to enhance its ability to gather and process
hotel checkout data for Pegasus Business Intelligence.
Build Strategic Alliances and Pursue Acquisition Opportunities. Pegasus
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 its services. Pegasus believes that these relationships will
increase brand recognition of its services and help to expand its customer base.
Pegasus will also seek to acquire assets, technology and businesses that provide
complementary services or access to new markets and customers.
Expand Customer Base. Pegasus' established customer base includes hotels,
hotel representation firms, travel agencies, global distribution systems and
third-party websites. Pegasus intends to expand its customer base domestically
and internationally by adding customers and by cross-selling new and existing
services to its current and future customers. Because of the fixed nature of
many of Pegasus' costs, addition of new customers and the increase in
transaction volumes with new and existing customers enhances the profitability
of all of its services.
SERVICES
Pegasus is organized into three businesses: Pegasus Electronic
Distribution, Pegasus Commission Processing and Pegasus Business Intelligence.
Pegasus Electronic Distribution
Pegasus Electronic Distribution consists of the GDS distribution service
and the Internet-based distribution services, including TravelWeb.com, the
private-label reservation service and other Internet-based services. Pegasus
Electronic Distribution provides improved hotel room reservation methods as
compared to traditional hotel room reservation methods that utilize telephone or
facsimile. Pegasus Electronic Distribution services allow travel agencies and
consumers to access hotel room data and shop for hotel rooms electronically
without tying up the resources of telephone sales agents.
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The following table summarizes the services of Pegasus Electronic
Distribution that Pegasus has developed or is developing (including year of
introduction) and specifies those services that have not yet generated a
significant amount of revenues:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
PEGASUS ELECTRONIC DISTRIBUTION
- --------------------------------------------------------------------------------------------------------
SERVICES USERS BENEFITS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
GDS DISTRIBUTION SERVICE (1989) - Hotels and hotel representation - Improved efficiency because of
firms single interface compared to
- Service that provides a single establishing a different link
electronic interface for for each global distribution
communications between system
reservation systems of hotels - Improved customer service
and hotel chains and the compared to traditional hotel
variety of global distribution room reservation methods, such
systems utilized by travel as telephone or fax, due to
agencies frequent hotel room inventory
updates
- Improved accessibility to wide
audience of travel agencies via
global distribution systems
compared to traditional hotel
room reservation methods, such
as telephone or fax, because of
widespread use of these systems
by travel agencies
--------------------------------------------------------------------
- Global distribution systems and - Improved efficiency because of
participating travel agencies single interface compared to
establishing separate links
with multiple travel industry
participants
- Rapid confirmations
- Access to over 29,000 hotel
properties worldwide
- Real-time availability of
information
-------------------------------------------------------------------------------------------------------
TRAVELWEB.COM - Hotels and hotel representation - Access to emerging low cost
firms electronic distribution channel
- Electronic hotel property - Reduced distribution costs
catalog (1994) compared to traditional hotel
- Internet-based hotel room room reservation methods
reservation functionality because of, among other
(1995) matters, reduced labor costs
- Inexpensive publication and
distribution of highly detailed
and up-to-date hotel
information and promotions
compared to traditional print,
radio, television and other
advertising methods
- More attractive presentation of
hotel information compared to
traditional hotel room
advertising methods
--------------------------------------------------------------------
- Individual travelers - Around the clock electronic
- Travel agents access to hotel reservation
capability
- Ability to shop and gain
convenient access to
approximately 32,000 hotel
properties with rich
information content, including
rate, feature and availability
information and pictures of
properties
-------------------------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
PEGASUS ELECTRONIC DISTRIBUTION
- --------------------------------------------------------------------------------------------------------
SERVICES USERS BENEFITS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
PRIVATE-LABEL RESERVATION SERVICE - Hotels and hotel representation - Access to special promotional
FOR TRAVEL-RELATED WEBSITES firms offers
OPERATED BY THIRD PARTIES (1997) - Access to emerging low cost
electronic distribution channel
- Electronic hotel property - Reduced distribution costs
catalog and Internet-based compared to traditional hotel
hotel room reservation room reservation methods
capability tailored and fully - Inexpensive publication and
integrated into travel-related distribution of highly detailed
websites operated by third and up-to-date hotel
parties information and promotions
- More attractive presentation of
hotel information compared to
traditional hotel advertising
methods
- Wider distribution of hotel
information and access to
individual travelers through
presence on multiple websites
--------------------------------------------------------------------
- Travel-related websites - Low cost access to highly
operated by third parties, such detailed hotel information and
as Preview Travel(TM) and electronic hotel room
Expedia.com reservation capability
- Increased site value due to
wider scope of services provided
- Advertising and
transaction-based revenue
opportunities
-------------------------------------------------------------------------------------------------------
PRIVATE-LABEL RESERVATION SERVICE - Hotels - Access to emerging low cost
FOR HOTEL PROPRIETARY WEBSITES electronic distribution channel
(1997) - Reduced distribution costs
compared to traditional hotel
- Electronic hotel property room reservation methods
catalog and Internet-based - Inexpensive publication and
hotel room reservation distribution of up-to-date
capability for hotels and hotel hotel information and
chains promotions
- More attractive presentation of
hotel information compared to
traditional hotel advertising
methods
-------------------------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
PEGASUS ELECTRONIC DISTRIBUTION
- --------------------------------------------------------------------------------------------------------
SERVICES USERS BENEFITS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
PRIVATE-LABEL RESERVATIONS - Hotels and hotel representation - Broadened distribution channel
SERVICE FOR CORPORATE TRAVEL firms compared to traditional hotel
(1997) (SIGNIFICANT REVENUES NOT room reservation methods
YET GENERATED) - Improved ability to update
corporate rate and availability
- Electronic hotel property information and respond to
catalog and electronic hotel reservation requests compared
room reservation capability to traditional hotel room
connected to corporate travel reservation methods
software - Reduced distribution costs for
corporate room sales compared
to traditional hotel room
reservation methods
--------------------------------------------------------------------
- Corporate travel departments - Reduced time and effort in
making hotel reservations
compared to traditional hotel
room reservation methods
- Enforcement of corporate travel
policies and utilization of
preferred rates
- Improved travel information
reporting compared to
traditional hotel room
reservation methods
--------------------------------------------------------------------
- Third-party corporate travel - Account retention
management systems providers - Low cost access to hotel
- Corporate travel agencies information and online booking
functionality
- Reduced time and effort in
making hotel reservations
compared to traditional hotel
room reservation methods
- Enforcement of corporate travel
policies and utilization of
negotiated rates at preferred
hotels
- Improved travel information
reporting compared to
traditional hotel room
reservation methods
-------------------------------------------------------------------------------------------------------
MEETINGS AND CONVENTIONS SERVICE - Hotels and hotel representation - Improved accuracy of convention
(IN DEVELOPMENT) (SIGNIFICANT firms and large meeting reservations
REVENUES NOT YET GENERATED) - Reduced costs by eliminating
manual reservation process
- Single electronic interface compared to traditional hotel
between reservation systems of room reservation methods
hotels and hotel chains and - Improved tracking of room
group reservation systems inventory compared to
utilized by meeting planners traditional hotel room
and convention housing reservation methods
organizers
--------------------------------------------------------------------
- Convention and visitors - Improved reservation and
bureaus cancellation tracking and
- Meeting planners reporting capabilities
- Group housing reservation compared to traditional hotel
providers room reservation methods
- Single connection to multiple
hotel properties
- Reduced costs by eliminating
manual reservation process
-------------------------------------------------------------------------------------------------------
</TABLE>
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GDS distribution service
Pegasus' GDS distribution service provides an electronic interface for
communications concerning hotel reservation information between major global
distribution systems and reservation systems maintained by hotels and hotel
chains. These reservation systems, consisting of both hardware and software, are
commonly referred to as central reservation systems. This electronic interface
enables a hotel to connect to all major global distribution systems without
having to build and maintain a separate interface for each global distribution
system. Without Pegasus' GDS distribution service or a similar service, hotel
chains that desire their room inventory to be accessible to travel agencies
electronically on a global distribution system must develop protocols and
message formats compatible with each global distribution system, a process that
entails significant time and expense. Alternatively, hotels may rely more
heavily on less-automated means, such as traditional toll-free telephone
reservation centers with higher processing costs. The technology underlying the
GDS distribution service enables the processing of hotel room reservations and
also transmits daily millions of electronic status messages, which are used to
update room rates, features and availability on global distribution system
databases. Many participating hotels also have chosen to utilize Pegasus'
service that provides travel agencies with direct access through Pegasus to a
hotel's central reservation system, bypassing the global distribution system
databases to obtain the most complete and up-to-date hotel room information
available.
Hotels using the GDS distribution service improve the efficiency of their
central reservation systems and reduce costs by not having to develop and
maintain separate hardware and software that is compatible with each global
distribution system. Through the GDS distribution service, participating hotels
gain access to a wide audience of travel agencies worldwide that are connected
to global distribution systems. Participating hotels also can provide better
customer service due to the ability to frequently update hotel room information
on global distribution system databases in a fast and reliable manner. The GDS
distribution service benefits travel agencies that use global distribution
systems by providing real-time access to detailed hotel room information and
enabling them to make reservations and receive confirmations in seconds from
over 29,000 hotel properties worldwide.
Pegasus charges its hotel customers a fee based on the number of net
reservations processed through the GDS distribution service. In addition, hotels
pay several fees for status messages sent to global distribution systems through
the GDS distribution service. New participants in the GDS distribution service
may be charged one-time set-up fees for work associated with the implementation
of the interface with the GDS distribution service. Pegasus also charges some
global distribution systems a fee based on either the number of net reservations
or the number of hotel links in place as compensation for Pegasus' management
and consolidation of multiple connections between the global distribution system
and hotels and other travel industry participants. Pegasus electronic
distribution technology enables Pegasus to enhance its revenue base by providing
the information and reservation capabilities for its other hotel reservation
services, including the TravelWeb.com, private-label reservation, meetings and
conventions and corporate travel services.
Internet-based distribution services
Pegasus' Internet-based distribution services include TravelWeb.com, the
private-label reservation service, the meetings and conventions service and the
corporate travel service. These services enable travelers to make reservations
electronically at approximately 32,000 properties in approximately 180
countries, as of December 31, 1999.
TravelWeb.com. Located at www.travelweb.com, TravelWeb.com provides
individual travelers direct access to online hotel information and the ability
to make reservations electronically. Individual travelers traditionally obtain
information or reserve a room by contacting a hotel directly by telephone or fax
or indirectly through intermediaries, such as travel agencies, convention and
other large meeting organizers and corporate travel departments. As a result, an
individual traveler cannot easily obtain information from a wide range of hotel
properties in a timely manner. TravelWeb.com provides travelers with detailed
information regarding a wide array of hotel properties. Furthermore, through the
use of the same proprietary technology that underlies Pegasus' GDS distribution
service, TravelWeb.com allows travelers to
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reserve a hotel room and receive a confirmation in seconds. In addition to hotel
room reservations, TravelWeb.com offers airline booking capabilities.
TravelWeb.com benefits hotels, hotel representation firms and individual
travelers. TravelWeb.com reduces distribution costs for hotels and hotel
representation firms compared to traditional hotel room reservation methods.
TravelWeb.com also enables access to an emerging low cost electronic
distribution channel. In addition, TravelWeb.com 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 the information using the
"remote author" feature. This feature enables 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.com 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.com.
Pegasus derives its TravelWeb.com revenues by charging participating hotels
a fee for subscribing to the service and a combination of transaction fees or
commissions. Transaction fees are based on the number of net reservations made
at participating properties through TravelWeb.com, and commissions are based on
the value of the guest stay for reservations booked through TravelWeb.com.
Private-label reservation service. Pegasus' private-label reservation
service is targeted to customers that are operators of travel-related websites,
such as Preview Travel and Expedia.com. This service offers Pegasus' hotel
information database and electronic hotel room reservation functionality. To
conduct Internet-based electronic commerce successfully, website operators must
offer a content set that is sufficiently broad, accurate, up-to-date,
graphically appealing and useful to attract buyers to the website. 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 website must offer
individual travelers the capability to effect a transaction in order to generate
a transaction fee. The private-label reservation service offers operators of
websites an extensive and comprehensive set of hotel information and a simple
and fast method of making a hotel room reservation online. The private-label
reservation service utilizes advanced technology applications to customize the
hotel database so that it appears to the user to be an integral part of the
third-party website. In connection with this service, the operator of the
third-party website establishes a connection to the Pegasus electronic
distribution technology that enables users of the website to shop and query room
availability, electronically make a reservation and receive a confirmation in
seconds.
Pegasus' hotel customers benefit from the private-label reservation service
because it enables a broader dissemination through the emerging, low cost
Internet distribution channel of the same marketing information supplied to
TravelWeb.com. As a result, hotels need only incur the effort and expense of
creating and maintaining their information on a single website to reach multiple
Internet distribution points and achieve increased overall visibility.
Furthermore, the private-label reservation 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 websites also can have their own content delivered to their sites
from the Internet database and process reservation requests from their websites
through the booking engine. Users and operators of third-party websites benefit
from the private-label service through immediate access to the rich content of
TravelWeb.com. Furthermore, because users of the third-party websites can book
hotel rooms and receive confirmations in seconds through the Pegasus electronic
distribution technology, the service affords the operators of third-party
websites the opportunity to generate a transaction fee revenue stream.
For reservations that originate on websites using the private-label
reservation service, Pegasus charges transaction fees based on the number of net
reservations made at participating properties. Private-label reservation
customers also pay initial development and either subscription or maintenance
fees. Initial development fees are for establishing an electronic communication
link between the hotel's central
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reservation system and third-party websites. Maintenance fees are for the
management of the communication link and the online distribution database.
Subscription fees are based on the number of properties listed on Pegasus'
database.
Other Internet-based services. Pegasus' meetings and conventions service
automates the processing of hotel room reservations for conventions and large
meetings. The manual process traditionally used to reserve hotel rooms for these
events is information-intensive and inefficient and frequently leads to
inaccurate and delayed information and overbooking or underbooking. With the
meetings and conventions service, convention and other large meeting organizers
are able to electronically transfer reservation requests through Pegasus to book
a room in each hotel central reservation system. Pegasus' meetings and
conventions 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.
Pegasus' meetings and conventions service can benefit all parties involved
in the distribution of hotel rooms for conventions and other large meetings.
Since reservations are made through the electronic room reservation capability
of Pegasus rather than manually, reservations, modifications and cancellations
can be received earlier and updated more frequently and efficiently. The
meetings and conventions service provides convention and other large meeting
organizers a single connection to multiple hotel properties and enables fast,
accurate and reliable reservation and confirmation of hotel rooms at reduced
cost. The meetings and conventions service also assists hotels in controlling
their room inventory by reducing the risk of overbooking or underbooking and
allows hotels to reduce the booking costs related to convention reservations.
Pegasus 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 GDS distribution service customers, Pegasus is
positioned to take advantage of the existing connectivity with these chains to
facilitate the development and marketing of the meetings and conventions
service.
Pegasus' corporate travel service provides the corporate travel management
industry with electronic hotel room inventory information and room reservation
capability by connecting these features with corporate intranet travel
management software. With the corporate travel service, corporate travelers are
able to check availability and make hotel reservations within seconds at hotel
chains or properties with which the traveler's employer has negotiated rates.
The corporate travel service enables corporate travel departments 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 corporate travel 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 compared to traditional hotel room
reservation methods such as telephone or facsimile. Pegasus markets this service
to developers of corporate travel software programs and to travel agencies that
operate intranet travel management services. The corporate travel service 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 a company has negotiated rates.
Pegasus has not received a material amount of revenues for private-label
reservations service for corporate travel or the meetings and conventions
service to date, and there can be no assurance that these services will produce
material revenues in the future.
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PEGASUS COMMISSION PROCESSING
Pegasus Commission Processing 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 Pegasus Commission
Processing:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
PEGASUS COMMISSION PROCESSING
- --------------------------------------------------------------------------------------------------------
SERVICES USERS BENEFITS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
PEGASUS COMMISSION PROCESSING - Travel agencies - Improved efficiency in
(1992) reconciliation of commission
- Commission processing service: payments compared to receiving
service that consolidates and separate commission payments
disburses to travel agencies for each reservation made
hotel room reservation - Reduced bookkeeping and banking
commissions paid by hotels costs compared to receiving
separate commission payments
for each reservation made
- Improved information on
customer reservation habits
compared to receiving separate
commission payments for each
reservation made
- Assistance in reconciling
commissions through customer
relation centers
--------------------------------------------------------------------
- Hotels and hotel representation - Streamlined commission payment
firms process compared to paying a
separate commission for each
guest stay reserved by a travel
agency
- Reduced accounting, processing
and bookkeeping costs compared
to paying a separate commission
for each guest stay reserved by
a travel agency
- Improved information regarding
travel agency bookings compared
to paying a separate commission
for each guest stay reserved by
a travel agency
- Encouragement of travel agency
bookings at hotels
-------------------------------------------------------------------------------------------------------
- Commission payment service: - Hotels - Streamlined commission payment
service that provides full process compared to internally
outsourcing on behalf of hotels processing and paying a
for all travel agency hotel separate commission for each
commission payments guest stay reserved by a travel
agency
- Reduced accounting, processing
and bookkeeping costs compared
to internally processing and
paying a separate commission
for each guest stay reserved by
a travel agency
-------------------------------------------------------------------------------------------------------
</TABLE>
Pegasus Commission Processing is the largest provider of travel agency
commission processing services in the hotel industry having as its customers
four of the five largest travel agencies according to Travel Weekly and nine of
the ten largest hotel chains based on total number of rooms. Pegasus has
registered over 25,000 properties and over 85,000 travel agencies as Pegasus
Commission Processing participants as of December 31, 1999.
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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. The process has consisted 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. Often,
guest cancellations or "no-shows" would 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.
Pegasus Commission Processing streamlines the commission payment process by
consolidating into a single payment the aggregate commissions owed by
participating hotels to each participating travel agency during a payment
period. Additionally, Pegasus Commission Processing offers a service to pay on
behalf of hotels commissions owed by a hotel to travel agencies that are not
Pegasus Commission Processing participants.
Pegasus Commission Processing provides an incentive to travel agencies to
make reservations at participating hotels in countries other than their own
because Pegasus Commission Processing disburses checks denominated in each
travel agency's currency of choice. Pegasus, however, does not receive
significant revenues or incur significant expenses in foreign currencies.
Furthermore, Pegasus Commission Processing provides monthly and quarterly
marketing reports and statistics that allow the hotel to identify and market
more effectively to those travel agencies that provide the hotel with the
majority of its guests. The hotel also benefits from Pegasus Commission
Processing's customer relations center, which allows travel agency inquiries
regarding commissions to be resolved by Pegasus rather than by the hotel itself.
Additionally, Pegasus Commission Processing provides benefits to its travel
agency participants. The single check that Pegasus Commission Processing
delivers for a particular payment period reduces the staff time spent processing
multiple checks and deposit slips, eliminates bank fees for multiple deposits
and currency exchanges for checks issued in foreign currency. Pegasus Commission
Processing also is designed to improve the travel agency's ability to manage
cash flow. Pegasus Commission Processing delivers a monthly report that allows
the travel agency to confirm commissions paid, follow customers' reservation
habits and reduce expenses associated with collection and tracking cancellations
or "no-shows." Pegasus Commission Processing's customer relations center
provides prompt responses to agency inquiries and can substantially reduce the
time and cost of reconciling outstanding commissions. Pegasus' optional service
for electronic payment and reconciliation of commissions enables travel agencies
to further reduce commission reconciliation costs and provides travel agencies
with immediate access to funds. Pegasus Commission Processing maintains a
website that provides a comprehensive description of its services. The site also
provides a complete listing of all of the hotels that have committed to paying
hotel commissions through Pegasus Commission Processing. Moreover, travel
agencies can subscribe to 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.
Pegasus charges each participating travel agency a service fee based on a
percentage of the commissions paid by hotels and hotel chains that are processed
by Pegasus on behalf of the travel agency. Pegasus also generally charges a
participating hotel a fee based on the number of commissionable transactions
arising from that hotel that are processed by Pegasus.
PEGASUS BUSINESS INTELLIGENCE
Pegasus Business Intelligence provides database marketing and consulting
services. Pegasus Business Intelligence also is being expanded to provide
services that search for and organize data in databases into meaningful
information for competitive analysis and strategic planning for the hotel
industry. Pegasus Business Intelligence is intended to provide information for a
wide variety of audiences in the global hotel industry, from hotel chains to
travel industry marketing groups to corporate travel departments. This service
compiles aggregate data regarding hotel guests and their use of hotels and
organizes that data into meaningful information. Pegasus intends to provide
other information services, including comparing a
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hotel's daily room and occupancy rates with that of its competition. Pegasus
Business Intelligence also intends to provide industry trend reports and
aggregate guest behavior data in an automated, timely format for hotels and
hotel marketing companies. Furthermore, Pegasus Business Intelligence intends to
provide data in an electronic format to individual travelers or corporate travel
departments regarding a particular stay at a hotel, together with information
provided by payment card companies, to facilitate automated expense reporting or
to ensure travel policy adherence.
COMPETITION
Pegasus competes in a market for hotel-related transaction processing and
electronic commerce services that is rapidly evolving, intensely competitive and
characterized by continually changing technology and industry standards.
Pegasus Electronic Distribution
GDS distribution service
Pegasus' GDS distribution service competes with third-party service
providers such as WizCom International Ltd. and with hotels directly. Customers
may change their electronic reservation interface to WizCom or to another
similar service. Some hotels have established a direct connection to one or more
global distribution systems rather than through an intermediary, such as Pegasus
or WizCom. Other hotels may choose to take the same action. If hotels establish
this direct connection, they would bypass Pegasus' intermediary position and
eliminate the need to pay Pegasus' fees. Other hotel room distribution services
such as the growing Internet-based services also have a competitive impact.
Several factors affecting the competitive success of Pegasus' GDS distribution
service include:
- Reliability
- Pricing structure
- The number of hotel properties using the combined company's system
- The ability to provide a neutral, comprehensive interface between hotels
and other participants in the distribution of hotel rooms
- The ability to develop new technological solutions
Internet-based distribution services
Pegasus' TravelWeb.com site, private-label reservation service and other
Internet-based services face competition in the online hotel room reservation
business from Pegasus' current competitors as well as potential new entrants,
including other websites. Several of Pegasus' competitors have websites offering
a more comprehensive range of travel opportunities than Pegasus does. These
websites include Preview Travel, Travelocity and Expedia.com. The costs of entry
into the Internet hotel room reservation business are relatively low. There can
be no assurance that Pegasus' Internet-based distribution services will compete
successfully.
Pegasus Commission Processing
Pegasus Commission Processing faces competition principally from National
Processing Company, Citicorp and Perot Systems, Inc. National Processing Company
has traditionally provided car rental and cruise line commission processing
services, and Citicorp and Perot Systems, Inc. have provided commission
consolidation services to hotel chains. In addition, hotels that are current or
potential customers of Pegasus Commission Processing can decide to process
commission payments without, or in competition with, Pegasus Commission
Processing. Furthermore, while Pegasus Commission Processing has written
agreements with substantially all of its hotel customers, most of its travel
agency customers are not bound by any written agreement with Pegasus. If a
significant portion of these customers stop using
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Pegasus Commission Processing, it could have a material adverse effect on the
business, operating results and financial condition of the combined company.
Pegasus Business Intelligence
Pegasus Business Intelligence principally competes with Smith Travel
Research, Global Marketing Services and Group 1 Software, Inc., each of which
currently provides information services to hotels. Additionally, accounting
firms and other businesses currently or may in the future provide information
services similar to Pegasus' current or future service offerings. Pegasus'
competitors may have existing customer relationships that create an obstacle to
Pegasus acquiring new customers. The current or future information service
offerings of Pegasus' existing competitors or new competitors may reduce the
attractiveness of Pegasus' services.
CUSTOMERS
Pegasus markets and provides services to a wide range of customers,
including but not limited to hotels, large travel agencies, travel agency
consortia comprised of smaller travel agencies, global distribution systems and
independent hotels represented by hotel representation firms, such as Lexington
Services Corporation. Pegasus includes as its customers nine of the ten largest
hotel chains in the world based on total number of rooms. Pegasus has registered
approximately 85,000 travel agencies as participants in Pegasus Commission
Processing and four of the top five travel agencies in the United States,
according to Travel Weekly, a publication of Reed Elsevier. No one customer
accounted for as much as 7% of Pegasus' revenues during fiscal 1999.
SALES AND MARKETING
Pegasus sells its services to hotels through a direct sales force in the
Americas and in Europe and sells Pegasus Commission Processing directly to
travel agencies and through relationships with travel agency consortia and
franchisors. Additionally, as of February 29, 2000, Pegasus has a team of 50
technical support staff to supplement the efforts of the sales force and provide
comprehensive customer support services. Pegasus' travel agency sales force
sells Pegasus Commission Processing services directly to large travel agencies.
Additionally, Pegasus Commission Processing offers services to smaller travel
agencies organized in consortia and to travel agency franchisees through
preferred supplier programs. Pegasus uses the services of DoubleClick Inc., a
third-party marketing organization to sell advertising on the TravelWeb.com
website.
TECHNOLOGY, SYSTEMS MAINTENANCE AND DISASTER RECOVERY
The GDS distribution service utilizes a UNIX-based, client/server
architecture. Global distribution systems are connected to Pegasus' interface by
either point-to-point telecommunications lines or a multi-protocol frame relay
network, both of which Pegasus manages. Communication processors running
proprietary, UNIX-based software perform protocol conversions. The transaction
processing engine contains its own proprietary, UNIX-based software. This engine
performs message formatting and field translation functions between global
distribution systems and hotels' central reservation systems. The service also
contains an Informix relational database that stores transaction-specific
information for billing and marketing and translates specific hotel property
information. In 1998, the average processing time for interactive transactions,
such as reservations and inquiry messages, was 0.19 seconds and the average
uptime across the 76 distinct connections was 99.7%, including all scheduled and
emergency downtime. Sun Microsystems, Inc. provides computer hardware
maintenance and replacement and mitigation of the potential effects of system
downtime. In addition, Comdisco, Inc. provides disaster recovery services which
includes full system redundancy within 24 hours in the event of a site disaster.
The Internet-based distribution services use a scalable architecture. The
information provided resides on an Informix relational database. To add, delete
and update information on their properties, hotels can access the information in
the database either through electronic batch transfers or using a standard Web
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browser through the proprietary "remote author" feature. The secured server
software prevents unauthorized use of the "remote author" feature. Pegasus'
communication engines called Web engines, currently consisting of a Sun
UltraSparcII, Netscape Enterprise server software and a Javascript application,
manipulate the information contained in the Informix database. The architecture
allows the addition of more database servers as demand requires. These services
provide a connection to the Pegasus technology that allows a user who has found
a desired hotel room to secure a hotel reservation and a confirmation. To assure
a high level of Internet connectivity, as opposed to the connectivity to global
distribution systems described in the previous paragraph, GTE Internetworking
Incorporated, a "Tier 1" Internet service provider, maintains Pegasus'
connections to the Internet. GTE is responsible for maintaining the speed and
reliability of communications. GTE also provides message routing assistance and
dynamic load balancing of communications to minimize bottlenecks in Internet
communications. Furthermore, Pegasus' databases and Web engines are located at
sites operated by GTE.
Pegasus Commission Processing provides a connection for hotels through the
same communication network used by Pegasus Electronic Distribution.
Communication engines perform protocol conversions. The UNIX-based processing
engine for Pegasus Commission Processing uses proprietary software to process
commission information. Pegasus Commission Processing 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. Participating hotels use
Pegasus' proprietary commission processing software to either collect the data
derived from a hotel's property management system or compile data from each
hotel property.
Pegasus Business Intelligence currently utilizes the software and services
of a third party to convert information received from hotels into a standardized
digital database. Once the standardized digital database is established,
third-party software is used to make specific inquiries of the database to
obtain usable analytical information. Pegasus holds a perpetual license to the
third-party software used to query the data. Pegasus is currently developing
proprietary software which will enhance and expand the gathering, manipulation
and analytical utilization of the hotel information.
RESEARCH AND DEVELOPMENT
Pegasus' research and development activities primarily consist of software
development, development of enhanced communication protocols and custom user
interfaces and database design and enhancement. At February 29, 2000, Pegasus
employed 110 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.
EMPLOYEES
At February 29, 2000, Pegasus had 172 employees, 165 which were located in
the United States, with 110 persons in the information technology group, 39
persons performing sales and marketing, customer relations and business
development functions and the remainder performing corporate, finance and
administrative functions. Pegasus had 7 employees in England performing
international sales activities. Pegasus has no unionized employees. Pegasus
believes that its employee relations are satisfactory.
PROPERTIES
Pegasus' principal executive office is a leased facility with approximately
58,886 square feet of space in Dallas, Texas. Pegasus leases this space under a
lease agreement that expires December 2002. Pegasus also maintains an
administrative and sales office in a leased facility with approximately 2,255
square feet of space near London, England. The lease agreement for the office in
England expires in February 2006. Under an agreement with REZ, some of the
equipment owned by Pegasus is housed at a site owned by REZ in Phoenix, Arizona.
Pegasus believes that its existing facilities are well maintained and in good
operating condition and are adequate for its present and anticipated levels of
operations.
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LEGAL PROCEEDINGS
Pegasus is a party from time to time to routine legal proceedings arising
in the ordinary course of its business. Although the outcome of any proceedings
cannot be predicted accurately, Pegasus does not believe any liability that
might result from the proceedings could have a material adverse effect on the
financial condition and results of operations of Pegasus.
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PEGASUS MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
Pegasus' consolidated financial statements and the related notes appearing
elsewhere in this information statement/prospectus.
GENERAL FINANCIAL INFORMATION RELATING TO PEGASUS
Pegasus is a leading provider of transaction processing and electronic
commerce services to the hotel industry worldwide. Pegasus is organized into
three businesses: Pegasus Electronic Distribution, Pegasus Commission Processing
and Pegasus Business Intelligence.
Pegasus Electronic Distribution. Pegasus Electronic Distribution includes
the GDS distribution service and the Internet-based distribution services. These
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.
Pegasus' GDS distribution service provides an electronic interface between
a hotel's central reservation system and the global distribution systems that
travel agents use to book hotel and airline reservations. Revenues from this
service are derived by charging 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 GDS distribution service. Status
messages are electronic messages sent by hotels to global distribution systems
to update room rates, features and availability information in global
distribution system 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. Pegasus
recognizes revenues based on the fee per transaction that a customer is expected
to pay during the entire year. Pegasus' interim balance sheets reflect a
liability for the difference between the fee per transaction that Pegasus
actually bills a customer during the period and the average fee per transaction
that a customer is expected to pay for the entire year. The liability created
during the early periods of the year is eliminated by the end of each year as
the fee per transaction that Pegasus actually bills a customer falls below the
average fee per transaction for the entire year. Pegasus offers volume-based
discounting of the GDS distribution service fees. The recent consolidation in
the hotel industry has resulted in a lower average fee per transaction for the
GDS distribution service. Despite increases in the number of transactions,
revenues generated from the GDS distribution service has remained consistent
with prior periods. Pegasus expects this trend to continue.
Additionally, Pegasus generally charges new participants in the GDS
distribution service a one-time set-up fee for work performed to establish the
connection between a hotel's central reservation system and the Pegasus
electronic distribution technology. Revenue for these one-time set-up fees is
recognized on a percentage of completion basis as the services are performed
over the set-up period, which generally ranges from two to six months. During
the set-up period, Pegasus establishes an electronic communication link with the
hotel customer's central reservation system and performs testing to ensure the
proper delivery of data and transactions between the hotel and each distribution
channel. Pegasus also charges the global distribution systems a fee based on
either the number of net reservations to compensate for the management and
consolidation of multiple interfaces or the number of hotels connected to the
global distribution system through the Pegasus electronic distribution
technology.
Pegasus' Internet-based distribution services provide online hotel
reservation capabilities to travelers via the TravelWeb.com website,
www.travelweb.com, and the private-label reservation service. To participate in
the Internet-based distribution services, hotels pay Pegasus subscription fees
based on the number of the hotel company's properties in the online distribution
database. For reservations that originate on the TravelWeb.com website, Pegasus
charges either a transaction fee based on the number of net reservations made at
participating properties or a commission based on the value of the guest stay.
For reservations that originate on websites using the private-label reservation
service, Pegasus charges transaction fees based on the number of net
reservations made at participating properties. Private-label
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reservation customers also pay initial development and either subscription or
maintenance fees. Initial development fees are for establishing an electronic
communication link between the hotel's central reservation system and
third-party websites. Subscription fees are based on the number of properties
included in Pegasus database. Maintenance fees are for the management of the
communication link and the online distribution database.
Pegasus Commission Processing. Pegasus Commission Processing provides hotel
commission payment processing. Pegasus Commission Processing improves the
efficiency and effectiveness of the commission payment process for participating
hotels and travel agencies by consolidating payments and providing comprehensive
transaction reports. Pegasus Commission Processing derives revenues by charging
a participating travel agency a fee based on a percentage of the commissions
paid by hotels and hotel chains that are processed by Pegasus on behalf of that
agency. Pegasus also generally charges a participating hotel a fee based on the
number of commissionable transactions arising from that hotel that are processed
by Pegasus. Revenues from travel agency fees can vary substantially from period
to period based on the types of hotels at which reservations are made and
fluctuations in overall room rates. Pegasus Commission Processing recognizes
revenues in the month in which the hotel stay occurs. In the following month,
Pegasus collects commissions from the hotels by the 12th business day of the
month and pays commissions to travel agencies by the 15th business day of the
month. 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. During
1999, Pegasus processed approximately $321 million in commissions for
participating agencies. Pegasus typically retains as its commission processing
fee approximately 5% of the commissions processed on behalf of the participating
agency.
Pegasus Business Intelligence. Pegasus Business Intelligence provides
database marketing and consulting services and is being expanded to provide data
mining and reporting services for benchmark analysis and strategic planning for
the hotel industry. Pegasus Business Intelligence revenues consist of fees
charged to hotels for the development of hotel databases and for consulting
services.
Historically, Pegasus derives a majority of its revenues from its
electronic distribution and commission processing services. For the year ended
December 31, 1999, approximately 47% of consolidated revenues were derived from
Pegasus Electronic Distribution, approximately 48% of consolidated revenues were
derived from Pegasus Commission Processing and approximately 5% of consolidated
revenues were derived from Pegasus Business Intelligence. Pegasus has
experienced substantial growth since its inception. However, there can be no
assurance that Pegasus 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 financial condition and results of operations of
Pegasus.
Pegasus has developed or is in the process of developing several new
services to capitalize on its existing technology and customer base and to
provide additional electronic hotel reservation capabilities and information
services to existing Pegasus customers and to other participants in the hotel
room distribution process. Pegasus Electronic Distribution introduced services
that automate the processing of hotel bookings for large meetings and
conventions and for corporate travelers. Pegasus Business Intelligence intends
to introduce data mining and reporting services for benchmark analysis and
strategic planning for the hotel industry. Pegasus has not received a material
amount of revenue from these services, and there can be no assurance that any of
these services will produce a material amount of revenue in the future. Pegasus'
future success will depend, in part, on its ability to:
- Develop leading technologies
- Enhance existing services
- Develop and introduce new services that address the increasingly
sophisticated and varied needs of current and prospective customers
- Respond to technological advances and emerging industry standards and
practices on a timely and cost-effective basis
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Pegasus' cost of services consists principally of personnel costs relating
to information technology, facilities and equipment maintenance costs and fees
paid to the processing bank for processing 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. Marketing and
promotion expenses consist primarily of personnel costs, advertising,
amortization of customer incentive contracts, public relations and participation
in trade shows and other industry events. Depreciation and amortization expense
includes depreciation of computer equipment, office furniture, office equipment
and leasehold improvements as well as amortization of software and goodwill.
Interest expense includes interest on notes payable to some stockholders of
Pegasus and interest on payments made under capital equipment leases. Minority
interest represents the former minority interests in the subsidiaries that have
been wholly owned by Pegasus since June 1996.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of several items from Pegasus' statement of operations to net
revenues:
PERCENTAGE OF NET REVENUES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Net revenues................................................ 100.0% 100.0% 100.0%
Operating expenses:
Cost of services.......................................... 32.0 33.4 35.6
Research and development.................................. 6.2 9.2 12.0
Write-off of purchased in-process research and
development............................................ -- 5.1 --
General and administrative expenses....................... 14.4 15.3 17.8
Marketing and promotion expenses.......................... 15.6 16.6 19.1
Depreciation and amortization............................. 6.4 9.3 14.4
----- ----- -----
Total operating expenses.......................... 74.6 88.9 98.9
----- ----- -----
Operating income (loss)..................................... 25.4 11.1 1.1
Other income (expense):
Interest income........................................ 12.7 8.6 4.7
Write-off minority interest investment................. (2.9) -- --
Interest expense....................................... (0.1) (0.5) (2.9)
----- -----
Income (loss) before income taxes and minority interest... 35.1 19.2 2.9
Income taxes.............................................. 12.3 0.6 0.1
----- -----
Income (loss) before minority interest.................... 22.8 18.6 2.8
Minority interest......................................... -- -- --
----- ----- -----
Net income (loss)......................................... 22.8% 18.6% 2.8%
===== ===== =====
</TABLE>
Years Ended December 31, 1999 and 1998
Net revenues. Net revenues for 1999 increased to $38.0 million from $29.1
million in 1998, an increase of 30.9%. The increase in revenues was primarily
driven by higher transaction levels for Pegasus Electronic Distribution and
Pegasus Commission Processing as well as the acquisition of Driving Revenue in
August 1998, which provided the majority of Pegasus Business Intelligence
revenues for 1999.
Pegasus Electronic Distribution revenues increased $5.6 million, or 45.3%,
in 1999 compared to 1998. The increase resulted primarily from a 28.2% increase
in the number of hotel reservations made through the GDS and Internet-based
distribution services. Although GDS revenue per transaction decreased in 1999
compared to 1998, total transaction revenue per transaction increased 7.2% due
to a higher
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percentage of Internet-based transactions, which generate more revenue per
transaction. A $1.7 million increase in non-transaction related revenues also
contributed to the increase in total electronic distribution revenues.
Non-transaction related revenues include implementation fees, subscription fees
and advertising revenues.
Pegasus Commission Processing revenues increased 14.7% in 1999 compared to
1998 as a result of a 22.4% increase in the number of hotel commission
transactions processed. The increase in the number of transactions was due in
part to an increase in the number of hotel properties and travel agencies
participating in Pegasus Commission Processing. The value of commissions paid by
Pegasus increased 25.6% in 1999 compared to 1998 because of an increase in the
number of hotel commission transactions processed combined with an increase in
the average value of commissions processed. Net revenues arising from the
increase in commissions paid was somewhat offset by a reduction in the average
fee received from participating travel agencies for consolidating and remitting
hotel commission payments. Pegasus expects this trend to continue.
Pegasus Business Intelligence revenues increased $1.1 million to $2.0
million in 1999 from $0.9 million for 1998. The increase was due to the
acquisition of Driving Revenue L.L.C. in August 1998. Pegasus Business
Intelligence revenues consisted of fees charged to hotels for the development
and maintenance of hotel databases and for consulting services.
Pegasus Business Intelligence had net pretax losses of approximately $4.0
million and $2.8 million for 1999 and 1998, respectively. During 1999, Pegasus
continued to invest in technology and personnel to grow this segment. During
1999, Pegasus also invested heavily in the development of marketing and sales
personnel to increase customer awareness of Pegasus Business Intelligence
services and products. Pegasus expects this segment to continue to have losses
in the foreseeable future. However, Pegasus expects the losses to decline as
this segment develops new products, builds its customer base and increases
revenues.
Cost of services. Cost of services increased by $2.5 million, or 25.4%, to
$12.2 million in 1999 from $9.7 million in 1998. Cost of services increased due
to additional staffing primarily related to new business intelligence services.
The number of technology personnel increased 25.6% at December 31, 1999 compared
to December 31, 1998. In addition, Pegasus incurred approximately $137,000 in
1999 for enhancing its infrastructure. These enhancements included upgrades to
e-mail and wide area networks. This increase was partially offset by a $727,000
decrease in costs associated with Pegasus Commission Processing during the first
half of 1999 as some functions that were previously outsourced were brought in-
house at a lower cost during the third quarter of 1998.
Research and development. Research and development expenses decreased $0.3
million, or 11.5%, to $2.4 million in 1999 from $2.7 million in 1998. In 1999,
research and development expenses were primarily related to the development of
business intelligence services while 1998 expenses included a major commission
processing project, which was completed in the third quarter 1998. This
commission processing project was comprised of internally developed software and
procedures to sort and consolidate commissions by travel agency. Prior to the
completion of this project, this process was outsourced.
Write-off of purchased in-process research and development. During 1998,
Pegasus incurred a charge of $1.5 million to write-off purchased in-process
research and development related to the acquisition of Driving Revenue in August
1998.
Based on a third party valuation, approximately $1.5 million of the
purchase price 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. In determining the valuation Pegasus
identified eight projects as in-process research and development. Of these
eight, three were associated with a market planner product, three with a
database product and two were Internet-enabled query tools. Each project was
estimated to have a specific revenue stream that was assumed to generate a 20%
cash flow margin over a ten-year period. Each project was determined to be at a
certain stage of completion ranging from 10% to 70%, and these factors were
applied to the present value of each project's future cash flows using a 30%
discount rate. The resulting $1.5 million valuation was charged to operations in
1998.
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Subsequent to the Driving Revenue acquisition, Pegasus re-evaluated the
role of the market planner product. Since the market planner is a stand-alone
software sale that does not fit with Pegasus' business strategy, Pegasus has
elected to stop selling it and terminated work on the development of the three
market planner projects. Pegasus has elected to focus its efforts on projects
that better fit with its strategy of producing recurring revenues from
customers. Pegasus management believes that the decision not to develop the
acquired technology will have no impact on future results of operations or
financial position.
Pegasus has continued developing new database tools and has completed the
major elements of the new database project as of January 2000. The cost to
complete the project was approximately $1.0 million, which is roughly consistent
with Pegasus' earlier projections. The new database capability is being rolled
out to Pegasus' customer base.
Pegasus is continuing to work on Internet-enabled query tools and expects
that these will be available in future years as estimated in the original cash
flows used in determining the purchased in-process research and development
charge in 1998.
General and administrative expenses. General and administrative expenses
increased $1.0 million, or 23.0%, to $5.5 million in 1999 from $4.4 million in
1998. The increase was primarily due to higher personnel expenses and office
costs including rent, telephone, travel and supplies associated with increased
headcount. Personnel and office costs increased approximately $841,000 in 1999
compared to 1998. In addition, accounting and legal expenses increased
approximately $113,000 as a result of additional reporting and consulting
services necessary due to increasingly complex tax, legal and reporting issues
associated with Pegasus' growth over the past year.
Marketing and promotion expenses. Marketing and promotion expenses
increased $1.1 million, or 23.1%, to $5.9 million in 1999 from $4.8 million in
1998. Marketing and promotion expenses increased primarily due to a 26.1%
increase in the number marketing and sales personnel and the related recruiting
and relocation costs. The additional sales and marketing personnel were needed
to promote commission processing services, Internet-based distribution services
and new business intelligence services.
Depreciation and amortization. Depreciation and amortization expenses
decreased $0.3 million, or 9.4%, to $2.4 million in 1999 from $2.7 million in
1998. Amortization expense decreased $507,000 in 1999 as compared to 1998
because goodwill and capitalized software associated with the purchase
accounting transaction that formed Pegasus was fully amortized as of the
beginning of the fourth quarter of 1998. The related amortization expense was
$798,000 in 1998. The decrease in amortization expense was somewhat offset of by
an additional $291,000 for the amortization of goodwill and software related to
the acquisition of Driving Revenue in August 1998. Depreciation expense
increased $253,000 in 1999 as compared to 1998 due to additions of property and
equipment. The increase in depreciation expense was partially offset because the
former computing platform for Pegasus Electronic Distribution was fully
depreciated and replaced in 1999 with less expensive equipment resulting in
lower depreciation expense.
Interest income. Interest income increased $2.3 million, or 92.9%, to $4.8
million in 1999 from $2.5 million in 1998. Interest income increased as Pegasus
had additional cash available for short-term investment as a result of the
secondary public offering of common stock in May 1999. The increase was
partially offset by a decline in the prevailing interest rate level for
short-term investments during the first three quarters of 1999 combined with a
shift in the investment portfolio to include tax-exempt securities with lower
pre-tax yields.
Interest expense. Interest expense decreased $120,000, or 81.8%, to $27,000
in 1999 from $147,000 in 1998. Interest expense reflects payments made under
capital equipment leases, and the decrease is due to the expiration of some
leases.
Write-off of minority interest investment. In September 1998, Pegasus
purchased a minority interest in Intermezzo, Inc. The Intermezzo board of
directors elected to cease operations in July 1999 and entered into an orderly
plan of liquidation. Pegasus wrote-off $1.1 million in the second quarter of
1999 representing its entire investment in Intermezzo.
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Income taxes. Income taxes for 1999 reflect federal, state and foreign
income taxes payable. Income taxes for 1998, include only state and foreign
taxes as Pegasus was able to realize the benefit of its federal net operating
loss carryforwards in 1998. The effective tax rate of approximately 35.1% for
1999 increased from the effective tax rate of approximately 3.5% for 1998. The
lower effective tax rate in 1998 was due to Pegasus' ability to realize the
benefit of net operating loss carryforwards.
Years Ended December 31, 1998 and 1997
Net revenues. Pegasus' net revenues for 1998 increased to $29.1 million
from $20.9 million in 1997, an increase of 39.0%. The increase in revenues was
primarily driven by higher transaction levels for Pegasus Electronic
Distribution and Pegasus Commission Processing as well as revenues derived from
Pegasus Business Intelligence.
Pegasus Electronic Distribution revenues increased 24.8% in 1998 compared
to 1997 primarily due to an increase in the number of hotel reservations made
through TravelWeb.com and an increase in the number of hotel reservations made
through other websites that use the private-label reservation service. Also,
more hotel companies paid fees to be listed in the online distribution database.
Net reservations made through the GDS and Internet-based distribution services
increased by 22.6% in 1998 compared to 1997, but this increase was offset by a
5.9% reduction in the total transaction revenue per reservation. As a result of
the lower average fee per reservation, net revenues from the GDS distribution
service remained consistent with the prior year.
Pegasus Commission Processing revenues increased 43.6% in 1998 compared to
1997 as a result of a 34.4% increase in the number of hotel commission
transactions processed. The increase in the number of transactions was due in
part to an increase in the number of hotel properties and travel agencies
participating in Pegasus Commission Processing. The value of commissions paid to
travel agencies by Pegasus Commission Processing increased 48.5% in 1998
compared to 1997 because of an increase in the number of hotel commission
transactions processed combined with an increase in the average value of the
commissions processed. The average value of commissionable transactions
processed increased due to rising overall average daily rates for hotel rooms as
well as a higher proportion of transactions generated by full-service and luxury
hotel chains. Net revenues arising from the increase in commissions paid was
somewhat offset by a reduction in the average fee received from participating
travel agencies for consolidating and remitting hotel commission payments.
Pegasus Business Intelligence revenues were $903,000 for 1998 and consisted
of fees charged to hotels for the development and maintenance of hotel databases
and for consulting services. Pegasus Business Intelligence had net pretax losses
of approximately $2.8 million and $570,000 in 1998 and 1997. As a start-up
business, this segment had technology development costs and no revenues until
Pegasus acquired Driving Revenue in August 1998. In 1998, Pegasus incurred
additional technology development costs as well as a write-off of purchased
in-process research and development and goodwill amortization related to the
Driving Revenue acquisition. Pegasus expects this segment to have significant
losses in the foreseeable future as it continues to invest in technology and
personnel to grow this business.
Cost of services. Cost of services increased by $2.3 million, or 30.5%, to
$9.7 million in 1998 from $7.4 million in 1997. Cost of services increased due
to additional staffing, higher pay rates for technology personnel and the
increased number of Pegasus Commission Processing transactions, which added to
the processing fees paid to the processing bank.
Research and development; Write-off of purchased in-process research and
development. Research and development expenses increased $1.7 million, or 65.9%,
to $4.2 million in 1998 from $2.5 million in 1997. Excluding the effect of the
one-time charge taken in 1998 for in-process research and development expenses
relating to the acquisition of Driving Revenue, research and development
expenses increased $170,000, or 6.8%, to $2.7 million in 1998 from $2.5 million
in 1997. This increase was primarily due to expenditures relating to the
development of business intelligence services.
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Based on a third party valuation, approximately $1.5 million of the Driving
Revenue acquisition purchase price was allocated to in-process research and
development projects that at the time of the Driving Revenue acquisition had not
reached technological feasibility and had no probable alternative future use. In
determining the valuation Pegasus identified eight projects as in-process
research and development. Of these eight, three were associated with the Market
Planner product, three with the Database product and two were Internet enabled
query tools. Each project was estimated to have a specific revenue stream that
was assumed to generate a 20% cash flow margin over a ten year period. Each
project was determined to be at a certain stage of completion ranging from 10%
to 70%, and these factors were applied to the present value of each project's
future cash flows using a 30% discount rate. The resulting $1.5 million
valuation was charged to operations.
Subsequent to the Driving Revenue acquisition, Pegasus re-evaluated the
role of the Market Planner product. Since Market Planner is essentially a
"stand-alone software sale" that does not fit with Pegasus' business strategy,
Pegasus has elected to stop selling it and terminated work on the development of
the three Market Planner projects. Pegasus has elected to focus its efforts on
projects that better fit with its strategy of producing recurring revenues from
clients. Pegasus management believes that there was no impact on future results
of operations or financial position caused by the decision not to develop the
acquired technology.
Pegasus has continued with the development of new database tools and as of
January 2000 has completed the major elements of the new database project. The
cost to complete the project was approximately $1.0 million, which is roughly
consistent with Pegasus' earlier projections. The new database capability is
being rolled out to Pegasus' customer base.
Pegasus is continuing to work on Internet enabled query tools and expects
that these will be available in future years as estimated in the original cash
flows used in the determination of the in-process research and development
charge.
General and administrative expenses. General and administrative expenses
increased $727,000, or 19.6%, to $4.4 million in 1998 from $3.7 million in 1997.
The increase was primarily due to additional costs associated with operating as
a public company. These costs increased approximately $190,000 in 1998 as
compared to 1997 and include legal, accounting, insurance, printing and
reporting costs. In addition, office costs, which include rent, telephone,
travel and supplies, increased approximately $288,000 in 1998 as compared to
1997. Personnel expenses also increased approximately $165,000 in 1998 as
compared to 1997. Office and personnel expenses increased because of an increase
in headcount.
Marketing and promotion expenses. Marketing and promotion expenses
increased $826,000, or 20.7%, to $4.8 million in 1998 from $4.0 million in 1997.
Marketing and promotion expenses grew primarily due to the addition of sales and
marketing staff, which were needed to promote Pegasus Electronic Distribution
and Pegasus Commission Processing.
Depreciation and amortization. Depreciation and amortization expenses
decreased $327,000, or 10.8%, to $2.7 million in 1998 from $3.0 million in 1997.
Amortization expense decreased $611,000 in 1998 as compared to 1997 because
goodwill and capitalized software associated with the purchase accounting
transaction that formed Pegasus was fully amortized as of the beginning of the
fourth quarter of 1998. The decrease in amortization expense was somewhat offset
by an additional $125,000 for the amortization of goodwill and software related
to the acquisition of Driving Revenue in August 1998. Depreciation expense
increased $285,000 in 1998 as compared to 1997 due to additions of property and
equipment.
Interest income. Interest income increased $1.5 million to $2.5 million in
1998 from $994,000 in 1997. Interest income increased as a result of short-term
investment of operating cash balances and of a portion of the proceeds from the
secondary public offering of common stock in February 1998. In addition, 1998
included a full year of interest income earned on proceeds from the initial
public offering of common stock in August 1997.
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Interest expense. Interest expense decreased $453,000, or 75.5%, to
$147,000 in 1998 from $600,000 in 1997. The 1998 expense reflects payments made
under capital equipment leases. The expense in 1997 consisted of interest
accrued on promissory notes payable to some Pegasus stockholders as well as
interest accrued on payments made under capital equipment leases. Pegasus repaid
all of its promissory notes in August 1997 using a portion of the proceeds from
its initial public offering.
Income taxes. Income taxes for 1998 reflect state and foreign income taxes
payable as Pegasus was able to realize the benefit of its federal net operating
loss carryforwards. In accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," Pegasus released a significant
portion of the valuation allowance in the fourth quarter of 1998, as management
believed it was more likely than not that the net deferred tax asset would be
realized. The conclusion to release the valuation allowance was based on the
Company's historical trend of positive operating results as well as management's
earnings projections for 1999 and beyond. Income taxes for 1997 reflect foreign
income taxes payable with respect to the taxable earnings of the United Kingdom
subsidiary, which reports earnings on a cost-plus basis. In 1997, the net
deferred tax asset was fully reserved because of uncertainty regarding the
ability to realize the benefit of the asset in future years.
LIQUIDITY AND CAPITAL RESOURCES
Pegasus' principal sources of liquidity at December 31, 1999 included cash
and cash equivalents of $104.6 million, short-term investments of $35.3 million
and restricted cash of $2.9 million. Pegasus' principal sources of liquidity at
December 31, 1998 included cash and cash equivalents of $25.0 million,
short-term investments of $15.8 million and restricted cash of $2.1 million.
Restricted cash represents funds for travel agency commission checks that
were never submitted to the bank by travel agencies for payment within one year
of their original issuance. After one year, the bank places a stop on the
outstanding travel agency commission checks and returns the funds to Pegasus.
Pegasus records, in an accrued liability account, an amount equal to the
restricted cash recorded upon receipt of the funds from the bank. The reasons
for the checks not clearing include travel agencies going out of business,
change in address or the checks being lost. The returned funds are repaid to the
original travel agency if they can be located or if not then to their state of
residence as required by the unclaimed property laws of their state.
Working capital increased to $143.6 million in 1999 from $44.4 million in
1998, and net cash provided by operating activities increased to $13.9 million
in 1999 from $6.8 million in 1998 due to Pegasus' improved operating
performance.
Capital expenditures consisted of purchases of software, furniture and
computer equipment as well as internally developed software costs and amounted
to $3.4 million in 1999 compared to $1.7 million in 1998. Additional uses of
cash for investing activities in 1999 included the purchase of marketable
securities. Additional uses of cash for investing activities in 1998 included
the purchase of Driving Revenue, strategic minority equity investments and
marketable securities. Pegasus has financed its cash requirements for
investments primarily through cash generated from operations and the sale of
capital stock. Pegasus estimates that its capital expenditures during 2000 will
approximate $3.0 million primarily related to adding capacity to existing
systems.
Proceeds from the exercise of stock options were $2.2 million and $0.3
million in 1999 and 1998, respectively.
Pegasus completed a secondary offering of its common stock in February
1998, raising net proceeds of $4.2 million. A portion of the proceeds was used
to repay certain lease obligations, with the remaining proceeds placed in
short-term marketable securities.
In May 1999, Pegasus completed a follow-on offering of common stock raising
net proceeds of $84.4 million. Pegasus is currently using the net proceeds from
this offering for working capital and other general corporate purposes, with the
remaining amount placed in short-term marketable securities.
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Pegasus expects to fund the total cash to be paid to REZ stockholders in
the merger and the related cash merger expenses through the use of cash, cash
equivalents and short-term investments available to Pegasus at the time the cash
is paid. As a result, Pegasus's existing liquidity will be significantly
reduced. While it does not expect to be required to borrow or otherwise obtain
additional funds to meet these merger-related cash requirements, Pegasus does
intend to seek to establish one or more credit relationships to provide
additional liquidity for the combined company's operations after the closing of
the merger.
Pegasus' future liquidity and capital requirements will depend on numerous
factors, including:
- Pegasus' profitability
- Operational cash requirements
- Competitive pressures
- Development of new services and applications
- Acquisition of complimentary businesses or technologies
- Response to unanticipated cash requirements
Pegasus believes that its liquidity and cash flow from operations after the
closing of the merger, together with funds available from future debt financing,
will be sufficient to meet its foreseeable operating and capital requirements
through at least the end of 2000. Pegasus may consider other financing
alternatives to fund its requirements, including possible public or private debt
or equity offerings. However, there can be no assurance that any financing
alternatives sought by Pegasus will be available or will be on terms that are
attractive to Pegasus. Further, any debt financing may involve restrictive
covenants, and any equity financing may be dilutive to stockholders.
INFLATION
Pegasus 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 Pegasus' and the combined company's
results of operations to the extent the increases are not passed along to
customers.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 requires
that the costs related to the development or purchase of internal-use software
be capitalized and amortized over the estimated useful life of the software. SOP
98-1 is effective for financial statements for fiscal years beginning after
December 15, 1998. Accordingly, Pegasus adopted SOP 98-1 effective January 1,
1999 for costs incurred related to voice recognition software and enhancements
to the online distribution database.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133). FAS 133 requires that all derivative
instruments be recorded on the balance sheet at fair value. Changes in the fair
value of derivative instruments are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction. FAS 133, as amended by Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of Effective Date of FAS 133," is effective for the first
quarter financial statements in fiscal 2001. Pegasus is not currently involved
in derivative instruments or hedging activities, and therefore, will measure the
impact of this statement as it becomes necessary.
On December 3, 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, which summarizes certain of the
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Staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. The Staff is providing this guidance due,
in part, to the large number of revenue recognition issues that registrants
encounter. The application of SAB 101 to revenue recognition for one-time set-up
fees currently has an immaterial effect on Pegasus' statement of operations.
Pegasus will apply SAB 101 on a prospective basis for fiscal years beginning
after December 31, 1999.
CHANGE OF INDEPENDENT ACCOUNTANTS
In January 1997, Pegasus advised Belew Averitt LLP that it would no longer
retain the firm as independent accountants. The reports of Belew Averitt on
Pegasus, formerly The Hotel Industry Switch Company, and The Hotel Clearing
Corporation for prior periods 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 plan to complete an initial public offering in 1997 and was approved by
Pegasus' 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.
PricewaterhouseCoopers LLP was engaged by Pegasus as its independent accountants
on January 7, 1997.
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MANAGEMENT FOLLOWING THE MERGER
Set forth below are the persons that will be the executive officers and
directors of Pegasus after completion of the merger:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John F. Davis, III......................... 47 President, Chief Executive Officer, and
Director
Joseph W. Nicholson........................ 39 Executive Vice President
Jerome L. Galant........................... 50 Chief Financial Officer
Mark C. Wells.............................. 50 Executive Vice President
Ric L. Floyd............................... 48 Secretary and General Counsel
Steven L. Reynolds......................... 40 Chief Information Officer
Gideon Dean................................ 35 Vice President, International Operations
William S. Lush............................ 57 Vice President, Business Development
Michael A. Barnett......................... 47 Director
Paul J. Brown.............................. 32 Director
Robert B. Collier.......................... 60 Director
William C. Hammett, Jr. ................... 53 Chairman of the Board of Directors
Thomas O'Toole............................. 42 Director
Bruce Wolff................................ 56 Director
</TABLE>
John F. Davis III has served as the President and Chief Executive Officer
of Pegasus since February 1989 and as a director of Pegasus since July 1995.
Before joining Pegasus, Mr. Davis was the founder, President and a 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 Operating Officer of Pegasus
since September 1998. From September 1989 to September 1998, Mr. Nicholson
served as the Chief Information Officer of Pegasus. Following completion of the
merger, Mr. Nicholson is expected to serve as Executive Vice President of
Pegasus.
Jerome L. Galant has served as the Chief Financial Officer of Pegasus 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.
Mark C. Wells has served as Executive Vice President of Pegasus since
January 2000. Mr. Wells served as a director of Pegasus from September 1996 to
January 2000. From May 1998 to January 2000, Mr. Wells has served as Senior Vice
President, Marketing of Choice Hotels International, Inc. From February 1996 to
May 1998, Mr. Wells served as Senior Vice President, Franchise Operations for
Promus Hotel Corporation. From April 1995 to February 1996, Mr. Wells served as
Senior Vice President, Marketing for Promus. From 1993 to April 1995, Mr. Wells
served as Senior Vice President, Marketing for Embassy Suites.
Ric L. Floyd has served as Secretary and General Counsel of Pegasus since
July 1997. From April 1993 to July 1997, Mr. Floyd served as Assistant Secretary
and General Counsel of Pegasus. From March 1995 to December 1999, Mr. Floyd
served as President of Floyd & Sloan, P.C., a law firm based in Dallas, Texas.
Steven L. Reynolds has served as the Chief Information Officer of Pegasus
since September 1998. From April 1996 to September 1998, Mr. Reynolds served as
Vice President of Information Technology of Pegasus. From November 1992 to April
1996, Mr. Reynolds served as Director of Systems Development of Pegasus.
Gideon Dean has served in our London office as Vice President of
International Operations since January 1999. From January 1996 to January 1999,
Mr. Dean served as the Director of International Sales
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for Pegasus. Prior to joining Pegasus, Mr. Dean served as Regional Director for
Europe, the Middle East and Africa for Reed Electronic Travel Marketing from
February 1992 to December 1995.
William S. Lush has served as Vice President, Business Development of
Pegasus 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.
Michael A. Barnett has served as a director of Pegasus since February 1999.
Mr. Barnett has served as Chairman of the Board and Chief Executive Officer of
Benchmark Bank since 1988. Since 1983, Mr. Barnett has served as President and
Chairman of the Board of Barnett Interests, Inc., a diversified real estate
management company. Since 1986, Mr. Barnett has served as President and Director
of Quinlan Bancshares, Inc., a bank holding company. Since 1994, Mr. Barnett has
served as Chairman of the Board of Barnett Lane Investments, Inc., a real estate
investment and management company. Mr. Barnett also served as a board member of
The Hotel Clearing Corporation, a predecessor of Pegasus, from 1993 to 1996.
Paul J. Brown has served as a director of Pegasus since August 1999. Since
January 2000, Mr. Brown has served as President and Chief Operating Officer of
Global eVentures, an e-commerce business generation company. From January 1999
to December 1999, Mr. Brown has served as Senior Vice President, Strategic
Services for Bass Hotels & Resorts, parent of Holiday Inn, Crowne Plaza Hotels
and Resorts, Holiday Inn Express, Staybridge Suites and Inter-Continental Hotels
and Resorts. From April 1998 to January 1999, Mr. Brown served as Vice President
of Strategic Planning for Bass Hotels & Resorts. Prior to joining Bass Hotels &
Resorts, Mr. Brown held the position of Consultant for Boston Consulting Group
from August 1994 to April 1998.
Robert B. Collier has served as a director of Pegasus since July 1998.
Since September 1998, Mr. Collier has served as President of RBC Associates.
From January 1997 to September 1998, Mr. Collier held the position of Vice
Chairman of Saison Overseas Holdings, a majority shareholder of
Inter-Continental Hotels and Resorts. From January 1994 to January 1997, Mr.
Collier served as Joint Managing Director of Inter-Continental.
William C. Hammett, Jr. has served as a director of Pegasus since October
1995 and as Chairman of the Board of Directors since May 1998. From October 1995
to May 1998, Mr. Hammett also served as Vice Chairman of the Board of Directors
of Pegasus. Since July 1998, Mr. Hammett has served as President of Dogwood
Creek Food Systems, Inc., a private restaurant management company. From
September 1997 to July 1998, Mr. Hammett served as President of DB&K
Enterprises, Inc., a private investment company. From August 1996 through
September 1997, Mr. Hammett served as Senior Vice President and Chief Financial
Officer of La Quinta Inns, Inc. From June 1992 to August 1996, Mr. Hammett
served as Senior Vice President, Accounting and Administration of La Quinta.
Thomas O'Toole has served as a director of Pegasus since May 1998. Since
March 1999, Mr. O'Toole has served as Senior Vice President, Marketing for Hyatt
Hotels Corporation. From July 1995 to March 1999, Mr. O'Toole served as Vice
President, Marketing for Hyatt. From March 1993 through June 1995, Mr. O'Toole
served as Vice President, Marketing for Renaissance Hotels International.
Bruce W. Wolff has served as a director of Pegasus since October 1995. Mr.
Wolff has served as Senior Vice President, Distribution Sales and Marketing for
the lodging division of Marriott International, Inc. since 1998. From 1986 to
1998, Mr. Wolff served as Vice President, Distribution, Sales and Marketing for
the lodging division of Marriott.
It is anticipated that I. Malcolm Highet, the President and Chief Executive
Officer of REZ, will continue to be employed by Pegasus for a period of
approximately 60 days following the closing of the merger. During this period,
Mr. Highet will provide general advice to Pegasus' executive officers.
In addition, pursuant to the merger agreement, following completion of the
merger Reed Elsevier is entitled to designate a nominee to be elected as a
director of Pegasus. As of the date of this information statement/prospectus,
Reed Elsevier has not indicated who it intends to nominate as a director of
Pegasus.
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PEGASUS EXECUTIVE COMPENSATION AND OTHER MATTERS
EXECUTIVE COMPENSATION
The following table sets forth for the periods indicated the compensation
earned by Pegasus' Chief Executive Officer and the four other most highly
compensated Pegasus executive officers (collectively, the "Named Executive
Officers") whose salary and bonus for the fiscal year ended December 31, 1999
were in excess of $100,000 for services rendered in all capacities to Pegasus
for that year:
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION AWARDS
----------------------------------------- ----------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($)(2) OPTIONS(#) COMPENSATION($)(3)
- --------------------------- ---- --------- -------- ------------------ ---------- ------------------
<S> <C> <C> <C> <C> <C> <C>
John F. Davis, III(4)........ 1999 $300,469 $120,188 $8,000 112,500 $10,356
President and Chief Executive 1998 300,000 150,000 8,000 120,000 10,292
Officer 1997 275,385 175,000 7,917 -- 9,397
Joseph W. Nicholson(4)....... 1999 $210,140 $ 73,549 $7,263 75,000 $ 3,269
Chief Operating Officer 1998 195,833 68,548 8,000 60,000 3,191
1997 175,159 74,750 7,596 -- 2,847
Jerome L. Galant............. 1999 $170,028 $ 51,008 $6,900 26,250 $ 571
Chief Financial Officer 1998 163,625 57,269 8,000 24,000 546
1997 147,944 69,167 7,523 22,500 --
Steven L. Reynolds........... 1999 $147,586 $ 44,276 $7,375 15,000 $ 476
Chief Information Officer 1998 122,833 30,713 6,613 15,000 378
1997 101,500 24,380 5,188 18,000 354
William S. Lush.............. 1999 $136,923 $ 27,385 $6,845 -- $ 476
Vice President, Business 1998 132,267 33,075 6,613 -- 462
Development 1997 128,000 41,140 6,229 7,500 438
</TABLE>
- ---------------
(1) In accordance with the rules of 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 Pegasus, and may not include some
perquisites and other personal benefits received by the Named Executive
Officers that do not exceed the lesser of $50,000 or ten percent (10%) of
any such officer's salary and bonus disclosed in the table.
(2) Reflects matching contributions made by Pegasus pursuant to its 401(k)
Savings Plan.
(3) Includes premiums paid for life insurance policies for the benefit of the
Named Executive Officers.
(4) The salaries of Messrs. Davis and Nicholson were paid in accordance with the
terms of their respective employment agreements.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options made during the
fiscal year ended December 31, 1999 to the Named Executive Officers:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES % OF TOTAL GRANT DATE
UNDERLYING OPTIONS GRANTED EXERCISE PRICE EXPIRATION PRESENT VALUE
NAME OPTIONS GRANTED(1) IN 1999(2) PER SHARE(3) DATE(4) ($)(5)
- ---- ------------------ --------------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
John F. Davis, III........ 112,500 21.43% $24.50 10/4/09 $1,912,500
Joseph W. Nicholson....... 75,000 14.29 24.50 10/4/09 1,275,000
Jerome L. Galant.......... 26,250 5.00 24.50 10/4/09 446,250
Steven L. Reynolds........ 15,000 2.86 24.50 10/4/09 255,000
</TABLE>
- ---------------
(1) The options held by Messrs. Davis, Nicholson, Galant and Reynolds vest over
a four-year period with twenty-five percent (25%) of the shares vesting
after one year and 1/12th of the balance of the shares vesting each quarter
for the next 12 quarters. Such options are subject to acceleration upon the
occurrence of an "acquisition event."
(2) Based on an aggregate of 524,875 shares subject to options granted in 1999.
(3) The exercise prices for the options set forth in the table for Messrs.
Davis, Nicholson, Galant and Reynolds are based on and equal to the closing
price of the common stock as quoted on the Nasdaq National Market on the day
immediately preceding the grant date.
(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 SEC for estimating the present value of options. The Black-Scholes
Option Pricing Model is based on assumptions as to the 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 for
Messrs. Davis, Nicholson and Galant were based on the following assumptions:
volatility -- 95.39%; risk free rate of return -- 5.0%; 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 of shares received during 1999 upon exercise
of options and the aggregate dollar amount received from such exercise, as well
as the number and value of securities underlying unexercised options held on
December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF IN-THE-MONEY
SHARES UNDERLYING OPTIONS
ACQUIRED ON VALUE OPTIONS AT YEAR AT
EXERCISE(#) REALIZED($)(1) END(#) YEAR-END(2)($)
----------- -------------- --------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John F. Davis, III....... 102,000 $2,964,464 321,750 258,750 $12,356,086 $7,002,281
Joseph W. Nicholson...... 105,000 2,851,296 106,875 148,125 4,079,153 3,795,672
Jerome L. Galant......... 23,250 632,394 50,469 68,531 1,812,983 1,873,209
Steven L. Reynolds....... 21,750 541,034 11,426 37,425 361,663 969,157
William S. Lush.......... 25,800 676,206 30,794 16,407 1,170,611 599,069
</TABLE>
- ---------------
(1) Based on the difference between the option exercise price and the closing
sales price of Pegasus' common stock as reported on the Nasdaq National
Market on the exercise date.
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(2) Based on the difference between the option exercise price and the closing
sale price of $40.21 of Pegasus' common stock as reported on the Nasdaq
National Market on December 31, 1999, the last trading day prior to the
closing of Pegasus' 1999 fiscal year multiplied by the number of shares
underlying the options.
EMPLOYMENT AGREEMENTS
Pegasus has employment agreements with John F. Davis, III, Joseph W.
Nicholson and Jerome L. Galant. Each agreement has a term expiring in January
2004. The agreements provide that Messrs. Davis, Nicholson and Galant will
receive base annual salaries of $400,000, $265,000 and $205,000 respectively and
will be eligible to receive a discretionary annual bonus in accordance with a
bonus plan approved by the Compensation Committee.
Each employment agreement provides that Pegasus may terminate the
executive's employment for cause or upon the death or disability of the
executive. Pegasus may terminate the executive's employment for cause if the
executive
- has been convicted of or pleads guilty or no contest to a felony,
- intentionally and with an absence of good faith and reasonable
belief that his action or failure to act was in the best interest of
Pegasus, engages in conduct demonstrably and materially injurious to
Pegasus,
- commits gross malfeasance or intentionally fails to perform his
duties after notice and opportunity to cure or
- violates any valid noncompetition or nondisclosure agreement or
Pegasus' insider trading policy.
Each of the executives may terminate his employment agreement for good
reason. The executive's right to terminate employment for good reason means the
occurrence of any of the following events:
- the executive is no longer serving in the capacity set forth in the
agreement,
- a reduction in the executive's base salary or the failure to pay any
other compensation or benefit required by the agreement,
- a change of control of Pegasus, defined as
-- an acquisition of more than 50% of the voting securities of
Pegasus,
-- a change in the Board of Directors by more than half resulting
from the election of members not nominated or elected by the
Board or
-- the liquidation, dissolution or sale of substantially all of the
assets of Pegasus,
- breach of the agreement by Pegasus with notice and failure to cure,
- a termination for cause by Pegasus found by a court or arbitrator to
not comply with the agreement or
- failure of Pegasus to obtain satisfactory agreement from any
successor of Pegasus to assume the agreement.
Additionally, the executive or Pegasus may voluntarily terminate the
executive's employment at any time upon 30 days prior written notice.
If the executive's employment is terminated by Pegasus for cause or
voluntarily by the executive, Pegasus is obligated to pay the executive all
amounts earned and accrued through the date of termination.
If the executive's employment is terminated by Pegasus for disability, the
executive is entitled to all amounts earned and accrued through the termination
date, base salary and a pro rata bonus for one year and a monthly payment upon
reaching age 60.
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If the executive's employment is terminated by Pegasus because of the
executive's death, Pegasus must pay executive all amounts earned and accrued
through the date of termination, base salary and a pro rata bonus for one year
and a single payment equal to the executive's total accrued benefit under the
Supplemental Employee Retirement Plan.
In the event executive's employment is voluntarily terminated by Pegasus or
by the executive for good reason the following results occur:
- Pegasus must pay the executive all accrued compensation and a pro
rata bonus,
- Pegasus must pay the executive his base salary and bonus for a
period of 24 months following termination,
- Pegasus must pay the executive his customary and usual benefits for
12 months,
- all restrictions on any outstanding stock options granted to the
executive shall lapse and the options shall be 100% vested,
- Pegasus must continue for 2 years to contribute to the supplemental
employee retirement plan for the benefit of executive and
- Pegasus must reimburse the executive for outplacement services costs
not to exceed $15,000.
SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN
The Board of Directors of Pegasus has adopted the Supplemental Employee
Retirement Plan effective as of January 1, 2000. The purpose of the plan is to
provide supplemental retirement benefits to certain management employees of
Pegasus selected by the Compensation Committee. No person has the automatic
right to become a participant of the plan.
Benefits under the plan will be distributed to the participant or his or
her beneficiary, as applicable, upon the retirement, death, total and permanent
disability or termination of employment for other than cause of the participant.
Upon retirement, total and permanent disability or termination of employment for
other than cause, the participant will receive monthly benefits equal to an
amount calculated based on his or her average compensation. In the event of
death, the beneficiary of the participant will receive a lump sum payment equal
to an actuarial equivalent amount with an interest rate of 8% compounded
annually.
At the option of the participant, benefits may be paid as a single life
annuity during the participant's lifetime or as an actuarial equivalent amount
to the participant and, upon his or her death, a beneficiary of the participant.
All amounts paid under the plan will be paid in cash from the general assets of
Pegasus or other funding vehicle as the Board of Directors may determine. All
assets in such funding vehicle will be subject to the general creditors of
Pegasus.
COMPENSATION OF DIRECTORS
The Chairman of the Board receives $15,000 per year. Other non-employee
directors receive $10,000 per year. In addition, each director receives $2,500
and $250 for each board meeting and committee meeting attended, respectively.
Additionally, each committee chairman receives an additional $250 for each
committee meeting attended. Directors are also reimbursed for all reasonable
expenses incurred in connection with the performance of their duties as
directors of Pegasus. Non-employee directors also receive options for 1,500
shares of Pegasus common stock upon election or re-election to the board and on
the date of each annual meeting held during a director's multi-year term. These
options have an exercise price of 85% of the closing price at the end of the
business day immediately preceding the grant date and vest over twelve months.
If a director serves a minimum of six months but less than a full year, a
portion of the director's option will vest at the end of that year. If the
proposed amendments to the 1997 Amended Stock Option Plan are approved at the
annual meeting, these automatic annual option grants will be eliminated and any
option grants to non-employee directors would be within the discretion of the
plan administrator which is currently the Compensation Committee of the board.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1999, Messrs. Collier, Hammett and Wells served on Pegasus'
compensation committee. None of these individuals was at any time, during 1999,
or at any other time, an officer or employee of Pegasus. On January 14, 2000,
Mr. Wells resigned from the committee and was replaced by Mr. Barnett. There
were no interlocks with any other company within the meaning of the Securities
Act.
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PEGASUS SECURITY OWNERSHIP OF MANAGEMENT
AND PRINCIPAL STOCKHOLDERS
The following table sets forth as of February 29, 2000 information
regarding the beneficial ownership of Pegasus' outstanding common stock by:
- Each person known by Pegasus to own beneficially more than five percent
of the outstanding common stock
- Each director and the chief executive officer and the four other most
highly compensated executive officers whose salary and bonus for 1999
exceeded $100,000
- All directors and executive officers of Pegasus as a group
The following calculations of the percentage of outstanding shares are
based on 20,353,135 shares of Pegasus' common stock outstanding as of February
29, 2000. The outstanding share percentages indicated are based on the issuance
of the 3.99 million shares to the REZ stockholders in the merger and that none
of the stockholders identified below engage in any transactions involving
Pegasus' common stock through the date of the completion of the merger.
Beneficial ownership is determined in accordance with the rules of the
Securities Exchange Commission and generally includes voting or investment power
with respect to securities. Information for each five percent stockholder is
derived solely from filings with the Commission on or before December 31, 1999.
Shares of the common stock subject to options that are presently
exercisable or exercisable within 60 days of February 29, 2000 are deemed
outstanding and beneficially owned by the person holding such options for the
purpose of computing the percentage of ownership of the person but are not
treated as
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outstanding for the purpose of computing the percentage of any other person.
These options are separately set forth below in the column titled "Options."
<TABLE>
<CAPTION>
PERCENT
----------------------------
NAME SHARES OPTIONS TOTAL BEFORE MERGER AFTER MERGER
- ---- --------- ------- --------- ------------- ------------
<S> <C> <C> <C> <C> <C>
FIVE PERCENT STOCKHOLDERS:
FMR Corp.(1)........................ 2,624,865 -- 2,624,865 12.9% 10.8%
82 Devonshire Street,
Boston, Massachusetts 02109
The TCW Group, Inc.(2).............. 1,731,213 -- 1,731,213 8.5 7.1
865 South Figueroa Street,
Los Angeles, California 90017
Wellington Management Company,
LLP(3)............................ 1,546,950 -- 1,546,950 7.6 6.4
75 State Street, 19th Floor
Boston, Massachusetts 02109
Capital Research and Management
Company(4)........................ 1,080,000 -- 1,080,000 5.3 4.4
333 South Hope Street
Los Angeles, California 90071
DIRECTORS AND OFFICERS:
John F. Davis, III.................. 15,108 374,250 389,358 1.9 1.6
Joseph W. Nicholson................. 385 133,125 133,510 * *
Jerome L. Galant.................... 1,768 60,977 62,745 * *
Ric L. Floyd........................ 1,249 6,524 7,773 * *
Steven L. Reynolds.................. 1,585 14,899 16,484 * *
Gideon Dean......................... -- 6,077 6,077 * *
William S. Lush..................... 2,064 35,636 37,700 * *
Michael Barnett(5).................. 54,198 3,000 57,198 * *
Paul J. Brown....................... -- -- -- * *
Robert B. Collier................... 2,400 -- 2,400 * *
William C. Hammett, Jr. ............ 11,897 6,000 17,897 * *
Thomas F. O'Toole................... -- 3,000 3,000 * *
Mark C. Wells(6).................... 750 6,000 6,750 * *
Bruce Wolff......................... -- 6,000 6,000 * *
Directors and executive officers as
a group (15 persons).............. 91,404 655,488 746,892 3.6% 3.1%
</TABLE>
- ---------------
* Less than one percent
(1) Dispositive powers of the Pegasus shares held by FMR Corp. are held by
Edward C. Johnson III. Voting powers of the Pegasus shares held by FMR Corp.
are shared by Edward C. Johnson III, Abigail P. Johnson and other members of
the Johnson family and the Fidelity Capital Appreciation Fund Board of
Trustees.
(2) Dispositive and voting powers of the Pegasus shares held by The TCW Group,
Inc. are held by Robert Day.
(3) Information obtained from a filing with the Securities and Exchange
Commission with an effective date of December 31, 1999.
(4) Information obtained from a filing with the Securities and Exchange
Commission with an effective date of December 31, 1999.
(5) Includes 54,198 shares of common stock held by Lodging Partners-Barnett
Joint Venture, a partnership controlled by Mr. Barnett.
(6) In January 2000, Mr. Wells became Executive Vice President of Pegasus and
resigned as a director.
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PEGASUS CERTAIN TRANSACTIONS
Prior to becoming an Executive Vice President of Pegasus, Mr. Wells was a
director of Pegasus and served as Senior Vice President, Marketing with Choice
Hotels International. During 1997, 1998 and 1999, Pegasus received from Choice
or its affiliates as remuneration for electronic distribution and commission
processing services the amounts of $439,648, $507,059 and $671,994,
respectively. During 1998 and 1999, Pegasus paid Choice or its affiliates
$18,210 and $23,558, respectively for consolidating commission data and funds
from its properties.
Mr. Wolff is a director of Pegasus and serves as Senior Vice President,
Distribution Sales and Marketing for the lodging division of Marriott
International, Inc. In 1997, 1998 and 1999, Pegasus received from Marriott or
its affiliates as remuneration for electronic distribution and business
intelligence services the amounts of $367,594, $1,046,263 and $2,143,894,
respectively. During 1997, 1998 and 1999, Pegasus paid Marriott or its
affiliates $522,834, $1,165,128 and $1,486,730, respectively for consolidating
commission data and funds from its properties.
Mr. O'Toole is a director of Pegasus and serves as Senior Vice President,
Marketing with Hyatt Hotels Corporation. In 1997, 1998 and 1999, Pegasus
received from Hyatt or its affiliates as remuneration for electronic
distribution and commission processing services the amount of $708,113, $769,499
and $882,111, respectively.
Mr. Brown is a director of Pegasus and served as Senior Vice President,
Strategic Services with Bass Hotels & Resorts through December 1999. In May
1999, Pegasus issued and sold approximately 518,584 shares to Bass at a purchase
price of $4.80 per share resulting in an aggregate purchase price of
approximately $2,489,208 pursuant to the exercise of a warrant issued in May
1997 to Holiday Hospitality Corporation, the predecessor of Bass. On July 6,
1999, a Form S-3 Registration Statement was declared effective by the Securities
and Exchange Commission covering 37,500 shares issued to Bass in connection with
the exercise of the warrant. The remainder of the shares issued to Bass remain
unregistered.
In 1997, 1998 and 1999, Pegasus received from Bass or its affiliates
remuneration for electronic distribution, commission processing and business
intelligence services in the amounts of $369,061, $778,625 and $1,678,616,
respectively. During 1997, 1998 and 1999, Pegasus paid Bass or its affiliates
$1,018,360, $1,152,145 and $1,462,803, respectively for consolidating commission
data and funds from its properties.
Prior to 1997, some former stockholders provided Pegasus with working
capital loans as set forth below. Pegasus has repaid all the outstanding amounts
relating to these loans with a portion of the proceeds from its initial public
offering of common stock, other than the loan from REZ as reflected in the table
below with an interest rate of prime plus 3%, which was repaid in March 1997.
The maturity date for the loan from Reed Travel Group was June 30, 2001. The
maturity date for each of the remaining loans was July 21, 2000. Prime means the
prime rate of interest published in The Wall Street Journal. The following table
sets forth some information concerning loans and the amount of principal and
interest, including the largest amount of indebtedness outstanding since 1997,
paid to the former stockholders during the periods indicated.
<TABLE>
<CAPTION>
AMOUNT OF PRINCIPAL
LARGEST AMOUNT OF AND INTEREST PAID IN
LOANS OUTSTANDING YEAR ENDED DECEMBER 31,
DURING 1997 TO 1999 ------------------------
LENDERS (INCLUDING ACCRUED INTEREST) ACCRUED INTEREST RATE 1997 1998 1999
- ------- ---------------------------- --------------------- ---------- ---- ----
<S> <C> <C> <C> <C> <C>
Reed Travel Group.................. $4,297,882 Prime + 2% $4,524,941 -- --
Choice Hotels International,
Inc. ............................ 64,576 Prime + 1% 64,576 -- --
Hyatt Hotels Corporation........... 104,176 Prime + 1% 104,176 -- --
Marriott International, Inc. ...... 27,913 Prime + 1% 27,913 -- --
REZ................................ 67,622 Prime + 1% 67,622 -- --
</TABLE>
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In the past, Pegasus 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 Pegasus.
Mrs. Davis received commissions not in excess of 15% of the amount of the
purchases. The total payments made to Right Angle and Mrs. Davis for furniture,
decorative items and commissions in 1997, 1998 and 1999 were $4,946, $3,184 and
$33,946 respectively. Pegasus believes that the terms of its transactions with
Right Angle were at least as favorable to Pegasus as terms that could have been
negotiated with an unrelated third party.
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REZ BUSINESS
OVERVIEW
REZ is a leader in providing distribution services and solutions for the
hotel industry. It offers a fully integrated portfolio of services and
applications to independent hotels, management companies and hotel chains in
approximately 180 countries. REZ maintains a global network of approximately 40
offices with approximately 1,800 employees. REZ provides services to
approximately 25,000 hotels and 80 brands. REZ's services and solutions are
marketed to a common customer base and its business operations are managed as a
single segment.
REZ was formed in connection with the merger in December 1997 of the Utell
reservation and data processing business of Reed Elsevier with Anasazi, Inc. At
the time of the merger, Anasazi was a leading provider of software systems,
private label reservations services and representation services to the hotel
industry, and Utell was one of the world's leading hotel marketing,
representation and reservation companies.
REZ'S SOLUTION
Through its REZView(TM) and GuestView(R) application platforms, REZ offers
distribution services and solutions that improve the efficiency and
effectiveness of hotel reservation processing, inventory control, data and rate
maintenance and third party connectivity. The flexibility and multiple
interfaces of REZ's applications enable customers to maximize revenue
opportunities, analyze reservations data and manage their business more
effectively. REZ's position as a market leader in developing technologies and
services for the hotel industry allows it to capitalize on new opportunities in
reservation processing and differentiates REZ from competitors who cannot offer
the same range of services and applications.
SERVICES AND SOLUTIONS
REZ provides distribution services and solutions to a wide variety of
customers worldwide in the hotel industry. These services and solutions improve
the efficiency and effectiveness of the hotel reservations process by providing
REZ customers with access to and the use of REZView, REZ's central reservation
system. REZ believes that REZView is one of the most advanced, high-performance,
functionally rich reservation systems in the hotel industry. REZ is not aware of
a system offered by its competitors that parallels REZView in speed and
functionality, such as tying an unlimited number of rates to corporate accounts
or providing customers with enhanced revenue management. REZView is designed to
operate in numerous processing environments to handle a wide range of customers
from small independent hotels to large hotel chains. See "-- Applications."
REZ offers its customers five major types of services, each characterized
by distinct attributes.
- Representation Services. REZ offers representation services primarily to
independent hotels that seek to sell their rooms in marketplaces outside
their locale. These hotels associate themselves with a hotel
representation service which uses its systems and office infrastructure
to assist the hotels in marketing and in making reservations for their
rooms. REZ is the largest representation company in the world
representing approximately 7,700 hotels worldwide. REZView provides
travel agents, corporate bookers, Internet bookers and other users
booking access to hotel rooms. REZ effects on average in excess of three
million reservations per year for its representation customers. REZ also
offers a wide range of financial services to its representation customers
designed to simplify the collection and payment of traveler prepayments
and the collection of commissions by the travel agent. These services are
known as Paytell(TM) and PayCom(TM). Paytell enables travel agents to
accept prepayments in the traveler's local currency and remit them to the
hotel in the hotel's local currency. PayCom allows hotels to pay travel
agency commissions in local currency, in a cost effective way. REZ earns
revenue from its representation services in the form of reservation
processing fees, membership fees, marketing services fees and financial
services fees.
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- Brand Management Services. REZ provides international brand management
services under its brand names, which include Summit Hotels &
Resorts(TM), Golden Tulip Hotels(TM) and Tulip Inns(TM), Sterling Hotels
& Resorts(TM) and Prima Hotels(TM). REZ acquired the Prima Hotels brand
in May 1999 and is in the process of transitioning the hotels in this
brand into its other brands. Each of these brands has a close working
relationship with REZ and is dependent on REZ for its worldwide marketing
distribution. As part of the branding relationship, the hotel receives
reservation support, marketing assistance, purchasing and operations
training, as well as financial services similar to those provided to
representation customers. Hotels are subject to meeting specified
inspection criteria to remain affiliated with the brand and are generally
required to have a designated star rating, a hotel industry standard
measurement of quality.
Brand participation is as follows (as of December 31, 1999):
<TABLE>
<S> <C>
Golden Tulip Hotels and Tulip Inns(TM)...................... 408 properties
Sterling Hotels and Resorts(TM)............................. 159 properties
Summit Hotels and Resorts(TM)............................... 157 properties
Prima Hotels(TM)............................................ 33 properties
</TABLE>
REZ earns revenue from its brand management services in the form of
reservation processing fees, membership fees, marketing services fees and
financial services fees.
- Private Label Services. REZ's private label services include the
operation of private label central reservation systems and call centers
on behalf of large individual properties, brand management companies and
hotel chains. These services include handling of reservations from
substantially all sources, data management and other related services.
Typical customers are small to mid-size hotel groups who do not want to
develop their own reservations infrastructure but desire to maintain
their market positioning without supplementary branding or affiliation.
REZ's involvement remains transparent to the end consumer, with all
services offered in the client's name. Private label services enable
these hotel groups to compete with larger hotel chains without incurring
the hardware and maintenance costs necessary for the operation of a
reservation system and call center. Private label services cover a wide
spectrum of client needs ranging from the maintenance of a unique two
letter code in the global distribution services to dedicated voice
reservations and customer support, Internet hosting, managed sales calls
and data management. Customer accounts are managed through a dedicated
team working at the head office and regional level. REZ earns revenue
from private label services primarily in the form of reservation
processing fees and membership fees.
- Application Server Processing Services. REZ provides application server
processing services to customers who choose to operate their own
reservations call centers but want a transaction processing solution for
their central reservation systems. REZ provides these customers with
REZView, which is configured to the customer's requirements, installed in
REZ's data center, and managed and operated by REZ. The customer has no
capital expense for hardware or facilities as those costs are included in
REZ's pricing structure. Typical contracts for application server
processing services range from 5 to 7 years. REZ earns application server
processing revenues primarily in the form of reservation processing fees.
- Application Software Licensing. REZ licenses its REZView, GuestView and
other applications software to hotels worldwide. See "REZ
Business -- Applications." REZ earns revenues from its license customers
in the form of initial license fees, integration or modification service
fees and maintenance and support fees.
APPLICATIONS
REZView(TM)
REZView is a comprehensive central reservation system, which uses a
Windows-based graphical interface. It includes the application of centralized
yield technology to help hotels maximize revenue from
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<PAGE> 115
their properties by enabling hotels to adjust rates to increase occupancy.
REZView interfaces with global distribution services connected to travel agent
locations worldwide and annually processes over 5.5 million reservations via
global distribution services. REZView provides comprehensive guest recognition
and history information, global distribution services connectivity and Internet
services. Decision support applications, available through the Anasazi Decision
Support feature within REZView, enables customers to analyze reservations data
and manage their business more effectively. Sales aids features provide
additional support for reservation agents by incorporating electronic color
pictures, mapping and search criteria.
REZ licenses its REZView software to hotels and hotel chains worldwide and
also utilizes this software application to provide representation, brand,
private label and application service processing services.
Information analysis tools contained in REZView provide control of last
room availability, multiple levels of inventory control and flexible rate
handling. A suite of data collection, management and distribution modules allow
full access to reservation information and reporting. The central booking
facility features:
- Real-time availability and pricing for properties, rooms, and products
- Connections with third-party systems, including airlines, tour operators,
GDS and Internet-based booking systems
- Interfaces with local property management systems for exchange of guest
profiles, consumption information, property statistics and financial data
- Bookings and queries from other customer-affiliated properties, sales
outlets and industry sources
- Referral bookings from other lodging company central reservation system
and emerging sources, such as the Internet
- Interfaces to revenue management and sales and catering systems intended
to maximize revenue opportunities
- Connectivity to NetRez(TM), REZ's property-based Internet terminal, for
rate and availability maintenance
GuestView(R)
GuestView is REZ's property management system, which enables a hotel to
track and service hotel guests. It also provides a centralized control of hotel
room inventory. This system is designed to allow centralized control of
inventory, with last room availability. Centralized inventory enables a hotel to
effectively manage its guest history and recognition programs, provides
centralized access and control of distribution channels and aids in optimizing
revenue.
GuestView comprises a full range of front-office functionality, including
check-in, check-out and tracking guest preferences. Management of rates, package
plans, detailed group reservations and travel agent wholesaling management allow
hotels to block reservations and adjust rates by season and day. GuestView's
ability to perform real-time updating of room availability provides control of
inventory to better achieve maximum occupancy and revenue.
GuestView utilizes Windows programming languages and tools. The graphical
user interface supports both pointing devices and touch screen technology. The
object linking and embedding feature is designed to provide seamless integration
to a variety of third-party office programs.
GuestView includes a comprehensive set of reports to meet operational and
marketing requirements. GuestView is able to interface with popular office
productivity tools like Microsoft Word and Excel. Using Excel, a customer can
export information from the database to a spreadsheet or chart. Additional
interfaces to other third-party services are available.
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GuestView is currently installed in over 550 hotels.
NetRez(TM)
NetRez is REZ's Internet software solution targeted at the central
reservation system customer for rates and inventory management, property
information management, notification and reports management. NetRez provides
hotel personnel with the ability to connect to the central reservation system
through the Internet. Using NetRez, inventory is rapidly updated in the central
reservation system and the GDS's. Additionally, rack and special rate plans may
be altered with a workflow command generated for all distribution channels.
NetRez allows hotel properties to receive and print notifications of
reservations, inventory changes and administrative messages. NetRez provides
processing of arrival data and consumer business reports. NetRez allows users to
view and modify rack rate and special rate plans. NetRez also provides rapid
access to rates through the main menu. Special features of NetRez include the
ability to specify a rate for a date within the selected date range and the
ability to track past modifications in inventory. The inventory history function
of NetRez provides a diary of changes made to one of four inventory types for
dates specified by the user. The four inventory types include:
- Special Rate Package Inventory
- Special Rate Package Group Inventory
- Rack Inventory
- Rate Level Inventory
Use of NetRez by REZ not only reduces REZ's internal cost but it also
provides the platform for extending e-commerce operations to hotels by making
NetRez an Internet portal for REZ's customers.
Anasazi Decision Support(TM)
Anasazi Decision Support is designed to provide a single source for the
compilation of information to be included in reports for the benefit of hotels
and hotel chains. Anasazi Decision Support can provide this information by
consolidating central reservation system and integrated property management
system reservation information, as well as external sources such as IATA or
"International Air Transport Association" and GDS updates. Anasazi Decision
Support utilizes PowerPlay technology, which consists of a suite of tools that
extracts information from the central reservation system and property management
systems. This information allows the user to accomplish a variety of reporting
tasks. Data reports can be viewed in a large number of formats, including
colorful pie and bar graphs or classic raw data presentation. Anasazi Decision
Support provides the capability to perform Online analytical processing of
reservation data. Online analytical processing tools give customers the power to
accomplish an array of data processing tasks.
CUSTOMERS
REZ markets and provides hotel distribution systems and solutions and
financial services to customers ranging from small independent hotels to large
international hotel chains within five distinct customer groups. REZ's
representation customers are typically independent hotels that have a need for
REZ's global sales force and office infrastructure to market their room
inventory on a worldwide basis. REZ's brand customers are typically three to
five star independent hotels that rely on REZ to provide worldwide distribution,
marketing assistance, purchasing, operations training and other services and are
loosely affiliated in one of REZ's brands. Private label customers are typically
small to medium hotel chains, large independent hotels or management groups that
contract with REZ to provide reservations processing, including call center and
global distribution service processing, and other related services, all in the
name of the customer. The majority of these customers are located in the United
States and Europe, and to a lesser extent, Asia Pacific. Application server
processing customers are typically medium to large hotel chains that contract
with REZ to provide transaction-based reservation processing services. Customers
for
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REZView, NetRez and Anasazi Decision Support are typically large hotel chains
that want to control their own reservation processing, by licensing the software
and providing their own call center and data center environments. GuestView
customers are typically independent hotels and small management groups, and
chains or franchises in the limited service segment.
No single customer accounted for more than 6% of REZ's revenues during
either the fiscal year ended December 31, 1999 or December 31, 1998.
STRATEGY
REZ's goal is to be the hotel industry's first choice for hotel
distribution services and solutions, focusing on e-commerce and the Internet as
its primary delivery mechanism with its REZView product as the foundation for
achieving this goal. The key elements of REZ's strategy are as follows:
Increase Customer Base Worldwide. REZ intends to increase its customer
portfolio by continuing to fully utilize the global sales force and office
infrastructure it has put into place. REZ expects this to result in contracts
for services to new hotels in the representation and brands businesses, and to
allow it to target private label and application server processing customers.
Build on Current Technology. REZ strives to continue to enhance its REZView
platform to provide additional products and services to existing and new
customers, which REZ anticipates will result in increased reservations volumes
being delivered to these customers and in turn generate increased fees to REZ.
REZ plans to continue to aggressively increase its application server processing
services and private label services. These opportunities typically form the
basis for enhancements to REZ's core technology and accordingly are key in
providing the infrastructure support for the other areas of business. REZ
expects that the enhancement of the REZView platform will facilitate accelerated
growth for the brand customer business as the relationship with those customers
offers a significant channel for sales of other products and services. REZ
believes that pursuing this strategy will give REZ the ability to acquire a
greater percentage of the customer's room inventory to sell in both its brands
and representation services segments.
Add Internet Capabilities. For many years REZ has used Internet tools and
technology in its services and applications. In 1999, REZ extended that
technology to support its infrastructure through NetRez. Additionally, REZ is
building products that will facilitate the operation of its representation
business in a predominantly electronic fashion. As a result, hotels may sign up
via online contracts, input necessary information to make their property
bookable through substantially all worldwide distribution channels, and receive
reports on results as well as invoices, with minimal human interaction. This
movement to electronic transactions will allow REZ to expand its hotel portfolio
in its representation services and to strengthen its relationships with other
customer segments. REZ is also reconstructing its public Internet site,
HotelBook, to be used as the basis for several other products which will offer
specialized capabilities to small businesses and travel agents. Using this
approach, REZ can minimize its product development costs and radically improve
time to market for new products.
COMPETITORS
REZ competes with other entities for each of the services and solutions
that it provides. For the representation services, REZ faces competition from a
number of different sources including hotel groups, franchisers, consortia,
reservation companies and representation companies. Entities that compete for
representation services include Lexington Service Corp. and SRS. Primary brand
services competitors include Leading Hotels of the World, Preferred Hotels,
Small Luxury Hotels, and traditional hotel companies and hotel franchise
companies like Choice and Best Western. The private label services competitors
include primarily Trust International and Lexington Service Corp. and, to a
lesser extent, Micros, Inc. REZ's application server processing services has as
its primary competitors hotel chains that have decided to build their own
infrastructure for these services. In central reservation system licensing, such
as REZView, competitors include hotel companies attempting to sell their
internal systems, third-party central reservation system software and service
providers, and a few property management system
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companies. These competitors include Computer Sciences Corporation, Sabre
Decision Technologies, and Micros, Inc. Competitors for property management
systems sold on a property by property basis are numerous, but the largest and
most successful is Fidelio Systems' division of Micros, Inc. Paycom services
compete with those of Pegasus, National Processing Company and Citicorp. Paytell
services compete with alternative pre-payment methodologies, such as check or
wire transfer, or a credit card guarantee.
EMPLOYEES
As of January 31, 2000, REZ had approximately 1,800 employees worldwide.
None of the employees are represented by a labor organization. REZ considers its
employee relations to be good.
FACILITIES
REZ is headquartered in Phoenix, Arizona and conducts its business in a
72,000 square foot leased office space and a 41,000 square foot dedicated
outsourcing data center. In addition, REZ operates offices throughout the world
to support its efforts in selling and supporting its hotel distribution systems
and solutions and financial services.
LEGAL PROCEEDINGS
REZ is a party from time to time to routine legal proceedings arising in
the ordinary course of its business. Although the outcome of any proceedings
cannot be predicted accurately, REZ does not believe any liability that might
result from the proceedings could have a material adverse effect on the
financial condition and results of operations of REZ.
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REZ MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
REZ's consolidated financial statements and the related notes appearing
elsewhere in this information statement/prospectus.
OVERVIEW
REZ is a leader in providing distribution services and solutions for the
hotel industry. It offers a fully integrated portfolio of services and
applications to independent hotels, management companies and hotel chains in
approximately 180 countries. REZ maintains a global network of approximately 40
offices with approximately 1,800 employees. REZ provides services to
approximately 25,000 hotels and 80 brands. The Company's services and solutions
are marketed to a common customer base and its business operations are managed
as a single segment.
Historical Background
REZ's statement of operations data for 1996 reflect the carved out results
of operations of the Utell reservation and data processing business of Reed
Elsevier. REZ's statement of operations data for 1997 reflect the carved out
results of operations of Utell for the first eleven months of 1997, as well as
the combined results of operations for Utell and Anasazi, Inc. for December
1997, reflecting the merger in that month of Utell and Anasazi that resulted in
the formation of REZ. Statements of operations for subsequent periods reflect
REZ's operations.
Prior to December 1997, the Utell operations were operated within different
business units of Reed Elsevier. In preparation for the business combination
with Anasazi, Inc., the Utell operations for 1996 and subsequent periods were
carved out from the other Reed Elsevier operations, and through a series of
transactions were ultimately contributed to the separate legal entity that
acquired Anasazi in a transaction that was recorded using the purchase method of
accounting. See Note 1 to the REZ consolidated financial statements for a more
complete description of this carve out and business combination. In light of the
passage of time since the Utell/Anasazi merger, the complications associated
with carving out Utell operations prior to 1996 and the reduced significance of
those earlier operations to an understanding of REZ's current operating results
and financial condition, the full selected historical financial data for REZ has
not been provided. However, available information pertaining to revenues, direct
expenses and operating income data has been provided for 1995 for comparative
purposes.
Revenues
REZ offers its customers five major types of services and solutions, each
characterized by distinct attributes:
- Representation Services. REZ offers representation services primarily to
independent hotels that seek to sell their rooms in marketplaces outside
their locale. These hotels associate themselves with a hotel
representation service which uses its systems and office infrastructure
to assist the hotels in marketing their products and making reservations
for their rooms. REZ earns revenue from its representation services in
the form of reservation processing fees, membership fees, marketing
services fees and financial services fees.
- Brand Management Services. REZ provides international brand management
services under its brand names, which include Summit Hotels & Resorts,
Golden Tulip Hotels and Tulip Inns, Sterling Hotels & Resorts and Prima
Hotels. As part of the branding relationship, the hotel receives
reservation support, marketing assistance, purchasing and operations
training, as well as financial services. REZ earns revenue from its brand
management services in the form of reservation processing fees,
membership fees, marketing services fees and financial services fees.
- Private Label Services. REZ's private label services include the
operation of private label central reservation systems and call centers
on behalf of large individual properties, brand management
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companies and hotel chains. These services include handling of
reservations from substantially all sources, data management and other
related services. REZ earns revenue from private label services primarily
in the form of reservation processing fees and membership fees.
- Application Server Processing Services. REZ provides application server
processing services to customers who choose to operate their own
reservations call centers but want a transaction processing solution for
their central reservation system. REZ earns application server processing
revenues primarily in the form of reservation processing fees.
- Application Software Licensing. REZ licenses its REZView, GuestView and
other applications software to hotels worldwide. REZ earns revenues from
its license customers in the form of initial license fees, integration or
modification service fees and maintenance and support fees.
The revenues that REZ derives from its provision of the services described
above may be categorized as follows:
- Reservation Processing Fees. These fees are earned for processing
reservations and are calculated in various manners based upon the type of
service provided.
- Membership Fees. These fees include initial and ongoing membership fees
and directory fees derived from customer participation in some of REZ's
services, as well as data management fees and other monthly service fees.
- Marketing Services Fees. These fees are received for the development and
implementation of targeted marketing programs, which are generally priced
on a cost plus basis and are designed to produce incremental reservation
processing volumes.
- Financial Services Fees. These fees are generated from REZ's Paytell and
PayCom services. REZ earns revenues on Paytell through a spread on foreign
exchange conversion between the currency of the traveler and currency of
the hotel in which the reservation is made. REZ earns revenues on PayCom
from a transaction processing fee to the hotel and a spread on foreign
exchange conversion between the currency of the hotel and currency of the
travel agent.
- License Fees. These fees are earned from customers to whom licenses are
granted through initial license fees, integration or modification service
fees and maintenance and support fees.
Operating Expenses
Direct costs, or cost of services, consists primarily of the salaries and
benefits of employees involved in systems maintenance, modification and
programming; worldwide operations which includes call center and data management
operations; account management; voice and data communications; customer service;
and data processing costs and related services.
Research and development expense consists primarily of the salaries and
benefits of the employees involved in internal software and product development.
REZ's product development efforts focus primarily on new Internet-based products
and improved versions and add-on modules to existing products. REZ believes that
the timely development of new applications and enhancements is essential to
maintain its competitive position in the market. In developing new products, REZ
works closely with customers and industry leaders to determine product
offerings. REZ believes that these collaborative efforts will lead to improved
software functionality and superior products. REZ has not capitalized any
software development costs.
General and administrative expense consists primarily of the salaries and
benefits of management and administrative personnel and general office and
facilities administration expense which includes finance, human resources,
information technology and other general corporate expenses.
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Marketing and promotion expense consists primarily of the salaries,
commissions and benefits of those employees involved in sales and marketing, as
well as travel, convention, corporate communication and other sales and
marketing related activities.
Depreciation and amortization expense consists primarily of depreciation of
computer and data processing equipment, telecommunications equipment, office
furniture and equipment, as well as amortization of license agreements and other
intangibles and goodwill.
RESTATEMENT
At December 31, 1997, REZ held an investment in 336,786 shares of common
stock of Pegasus, which completed an initial public offering of its shares
during 1997. The shares were obtained in satisfaction for loans that Utell and
Anasazi separately had previous made to Pegasus. The estimated fair value of the
shares held by both Anasazi and Utell was determined based on reference to the
quoted market price of the stock less a 25 percent discount to recognize
marketability restrictions. In 1998, all of the shares were sold, resulting in a
gain of $3,945,000, as previously reported.
Subsequent to the issuance of the 1998 consolidated financial statements,
REZ's management determined that the quoted market price of the investment is a
more appropriate measure of the fair value of the commons shares, without any
adjustment for the transferability restriction. As a result, the 1998 and 1997
consolidated financial statements have been restated from the amounts previously
reported to reflect this undiscounted value. The effects of the restatement have
been presented in Note 11 to the consolidated financial statements.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain items from REZ's statement of operations to net
revenues. The Anasazi/Utell merger was concluded and treated as a purchase by
Utell in December 1997, therefore the results for 1997 include one month of
combined operations and eleven months of Utell only operations, making
year-to-year comparisons less meaningful.
PERCENTAGE OF NET REVENUES
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------
1999 1998(a) 1997
----- ------- -----
<S> <C> <C> <C>
Net revenues................................................ 100.0% 100.0% 100.0%
Operating expenses:.........................................
Direct Costs (cost of services)........................... 50.4 52.6 45.5
Research and development.................................. 2.8 2.1 0.3
Write-off of purchased in-process research and
development............................................ -- -- 22.1
General and administrative................................ 19.3 18.5 18.3
Sales and marketing....................................... 19.5 21.3 25.1
Depreciation and amortization............................. 11.5 11.3 5.8
Total operating expenses.......................... 103.5 105.8 117.1
Operating income (loss)..................................... (3.5) (5.8) (17.1)
Other income (expense):
Interest income (expense) net............................. (0.7) (0.4) (0.1)
Gain on sale of investments............................... -- 2.4 --
Income (loss) before income taxes........................... (4.2) (3.8) (17.0)
Income taxes benefit (provision)............................ 1.1 .7 (2.4)
Net income (loss)........................................... (3.1) (3.1) (19.4)
</TABLE>
- ---------------
(a) As restated, see Note 11 in the Notes to the consolidated financial
statements.
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Years Ended December 31, 1999 and 1998
Net Revenues. Net revenues for 1999 increased to $147.7 million from $141.9
million for 1998, an increase of 4.1%. This increase was primarily due to
increases in revenues derived from brand management services, private label
services and application server processing services. These increases were
partially offset by decreases in revenues derived from licensing fees and
financial services. Licensing fees and financial services decreased to $5.1
million and $9.6 million, respectively, for 1999 from $16.9 million and $10.0
million, respectively, for 1998, a decrease of 69.8% and 4.0%, respectively. The
decrease in licensing fees was the result of several large REZView and GuestView
technology projects that were completed during 1998 and were not replaced in
1999.
Cost of services. Cost of services for 1999 decreased to $74.5 million from
$74.6 million for 1998, a decrease of 0.1%. As a percentage of revenues, cost of
services decreased from 52.6% in 1998 to 50.4% in 1999. This percentage decrease
was due primarily to achieving efficiencies in economies of scale from the
implementation of several new private label and application server processing
customers in 1999.
Research and development. Research and development expenses for 1999
increased to $4.1 million from $3.0 million for 1998, an increase of 36.7%,
primarily due to increased development efforts on global data management,
Internet products, Anasazi Decision Support, and to enhancements of REZ's
existing REZView and GuestView applications. The increase consists primarily of
increases in salaries, benefits and other programming related expenses. To date,
REZ has not capitalized any software development costs, since it believes its
current process for developing new software applications is essentially
completed concurrent with the establishment of technological feasibility.
General and administrative expenses. General and administrative expenses
for 1999 increased to $28.5 million from $26.3 million for 1998, an increase of
8.4%, primarily driven by increased office automation costs of approximately $.7
million to complete the world-wide upgrade of office systems, increased human
resource and training costs of approximately $.8 million, and an increase in bad
debt expense of an additional $2.0 million. During 1999, the Anasazi/Utell
merger integration efforts resulted in changes in management, billing processes
and systems which adversely impacted the collection of accounts receivable
balances. As a result of these changes, REZ determined that it was appropriate
to increase its allowance for doubtful accounts based on a change in estimate
regarding the ultimate collectibility of recorded balances. These increases in
general and administration expenses were partially offset by cost reductions of
approximately $1.3 million realized through cost-cutting initiatives implemented
in 1999.
Sales and marketing expenses. Sales and marketing expenses for 1999
decreased to $28.7 million from $30.2 million for 1998, a decrease of 5.0%, due
primarily to targeted reductions in corporate and selected regional and brands
marketing projects and materials.
Depreciation and amortization. Depreciation and amortization expense for
1999 increased to $17.0 million from $16.1 million for 1998, an increase of
5.6%, due to the acquisition of additional servers, personal computers and
networking equipment to complete the office automation rollout, and capital
expenditures incurred in connection with a new accounting and human resources
system.
Net interest income/expense. Net interest income/expense for 1999 increased
to net interest expense of $1.1 million from net interest expense of $.6 million
for 1998, due primarily to increased interest payments from the notes and
borrowings against REZ's lines of credit.
Gain on sale of investments. During 1998, REZ sold all of the Pegasus
common stock it held as an investment, resulting in a one-time gain.
Income taxes. Income taxes for 1999 and 1998 reflect federal, state and
foreign income taxes. Income taxes for 1999 reflect an income tax benefit at an
effective tax rate of 26.2%, which is primarily due to the tax effect of book
losses. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. REZ management
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considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. Based
upon these factors, management believes it is more likely than not that REZ will
not fully realize the benefits of net operating loss carryforwards and
deductible differences. As a result, REZ has recorded a partial valuation
allowance for the deferred tax assets related to net operating loss
carryforwards and deductible differences.
In making this assessment, REZ's management recognized that during the last
three years it had recognized losses before taxes. However, the substantial
portion of the loss in 1997 was attributable to a "one time" event, the write
off of approximately $20 million of purchased research and development. In 1998,
REZ incurred unusual charges totaling approximately $3.7 million, including
severance and employment related costs of $2.5 million, which were related to
the first phase of integration and reorganization of the business following the
1997 merger. Final phase reorganization and termination charges of approximately
$1.3 million, merger-related expenses of approximately $.8 million and an
additional provision for bad debts of $2.0 million in 1999 are not expected to
repeat in the year 2000. Management reassesses the valuation allowance and makes
changes when appropriate. REZ's management assessment of future operations and
cash flows, together with the other factors mentioned above, led it to conclude
that the valuation allowance was sufficient to reduce the deferred tax asset to
the amount that will be realized.
Years Ended December 31, 1998 and 1997
Since the Anasazi/Utell merger was concluded and treated as a purchase by
Utell in December 1997, the 1997 financial results include only one month of
combined operations and eleven months of Utell-only operations, making
year-to-year comparisons less meaningful.
Net revenues. REZ's net revenues for 1998 increased to $141.9 million from
$90.5 million in 1997, an increase of 56.8%, primarily reflecting the impact of
a full year of Anasazi's operations in 1998. The revenues contributed by
Anasazi's operations primarily related to private label services, application
server processing services and application software licensing.
Cost of services. Cost of services for 1998 increased to $74.6 million from
$41.1 million in 1997, an increase of 81.4%, primarily reflecting the impact of
a full year of supporting Anasazi's operations in 1998.
Research and development. Research and development expense for 1998
increased to $3.0 million from approximately $300,000 in 1997. This represents a
full year in 1998 and only one month in 1997 of research and development
expense, as Utell did not have a research and development staff.
Purchased research and development. Purchased in-process research and
development charges in 1997 relate to the acquisition of Anasazi. The Anasazi
acquisition was accounted for under the purchase method, in which a portion of
the purchase price was acquired in-process technology. The amount assigned to
in-process research and development is expensed immediately, since the
technological feasibility of the research and development projects had not yet
been achieved and the research and development was believed to have no
alternative future use.
For purposes of allocating the Anasazi purchase price, an independent
valuation was performed and used as an aid to management in assessing the fair
value of the identifiable assets acquired and allocating the purchase price
among the acquired assets, including the portion of the purchase price
attributed to in-process research and development. The amount assigned to
in-process research and development was determined based upon analysis employing
the risk-adjusted cash flows that were expected to be generated by the products
that would result from the in-process projects. This cash flow was estimated by
first forecasting total revenues expected to result from sales of each
in-process product. Revenues were not anticipated from the in-process research
and development projects until one year into the forecast. From this amount,
appropriate operating expenses, cash flow adjustments and contributory asset
returns were deducted, and adjustments were made to remove the value contributed
by core technology. The gross profit margin for in-process research and
development projects was approximately the same as that used for existing
technologies. Capital expenditures and other capital cash requirements started
at 28% of
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revenue and declined over eight years. The assumptions did not assume any
anticipated cost reductions or synergies. Once these deductions were made, the
analysis arrived at a forecast of net returns on the in-process technology.
These net returns were then discounted to a present value at discount rates that
incorporate both the weighted average cost of capital of approximately 13%
(relative to REZ and to the hospitality services industry) as well as the
specific risk associated with the purchased in-process research and development.
The product specific risk factors considered included the complexity of the
development effort, the likelihood of achieving technological feasibility, and
the likelihood of market acceptance. The applied discount rate was 14%, which
was believed to adequately account for the additional risks associated with the
in-process technologies over product technologies existing at the acquisition
date.
The forecast data employed in the analysis was based upon REZ management's
estimate of future performance of the business. The assumptions used in these
forecasts were believed by REZ management to be reasonable, but which are
inherently uncertain and unpredictable. These assumptions may be incomplete or
inaccurate, and no assurance can be given that unanticipated events and
circumstances will not occur. Accordingly, actual results may vary from the
forecasted results. While REZ management believed that all of the development
projects would be successfully completed, failure of any of these projects to
achieve technological feasibility, and/or variance from forecasted results, may
result in a material adverse effect on REZ's financial condition and results of
operations. The forecasted results used in the analysis for in-process projects
have not varied significantly from the actual results achieved through September
30, 1999.
A brief description of purchased IPR&D projects is set forth below. The CRS
projects, including those for Anasazi Travel Resources were estimated to be 14%
complete at the acquisition date with an estimated cost to complete of $14.2
million. The property management system projects were estimated to be 24%
complete at the acquisition date with an estimated cost to complete of $4.0
million.
Central Reservation System Software -- The Anasazi existing Central
Reservation System ("CRS") as of the acquisition date was being sold as
RezView, release 3.0. However, a major upgrade to the existing release was
under development. Planned changes included: expansion to the guest history
and group/package handling capability, additions for automated credit card
processing, and interfaces to several large tour operator systems.
Additionally, the development plans included the integration of RezView
with the GuestView and REZ's property management system described below.
Also, two additional products were under development at the
acquisition date, which would act as associated software to the RezView
system: NetRez and ALESA Decision Support ("ADS"). The NetRez suite of
products under development was Anasazi's Internet solution to rates and
inventory management, property management, information management, and
information reporting to the Anasazi CRS customer. ADS was being developed
to provide a single source for the hospitality industry's enterprise-wide
reporting needs. The ADS system design was to consolidate information
generated from the CRS systems and property management systems and to
provide the customer with the capability to perform on-line analytical
processing of reservation data.
Property Management System Software -- Anasazi offers hotel properties
a software product, GuestView, which is a property management system
("PMS") solution based on the latest in client-server and relational
database technologies. The GuestView's modern graphical user interface
includes custom toolbars and drop-down menus that offer instantaneous
access to vital guest history information, including guest preferences. Its
client-server technology insures predicable performance under any inquiry
load, thus insuring rapid reservation processing, guest registration and
check-out. It also includes a comprehensive set of reports to meet the
operational and marketing requirements of the hotel property managers. At
the Anasazi acquisition date, research and development was underway to
significantly upgrade PMS, specifically the GuestView product. Key product
technology improvements included the areas of scalability for larger, more
complex properties, and for international (multi-lingual, multi-currency)
applications.
Anasazi Travel Resources -- Anasazi provided representation services,
including sales representation, reservation processing and promotional
services, to individual hotel properties and affiliate groups
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of private label hotels. In providing these services, Anasazi utilized its
CRS and PMS software. ATR customers are highly interested in the speed and
efficiency of the navigation and response of the system to user input. The
robustness of the system's ability to handle abnormal conditions is also
critical. Since the ATR customers are spread throughout the world, Anasazi
was in the process of developing new technology to enhance communication
through GDS and Internet distribution as well as improved systems
integration.
General and administrative expenses. General and administrative expenses
for 1998 increased to $26.3 million from $16.6 million in 1997, reflecting the
impact of the merger. Also, during 1998, REZ provided $2.5 million for severance
and employment related expenses associated with integration of the formerly
separate operations of Utell and Anasazi. Additionally, REZ incurred $1.2
million of merger related costs, principally consisting of professional,
consulting and advertising expenses related to the integration.
Sales and marketing expenses. Sales and marketing expenses for 1998
increased to $30.2 million from $22.7 million in 1997, reflecting the impact of
the merger. However, marketing and promotion expenses as a percentage of
revenues decreased to 21.3% in 1998 from 25.1% in 1997. This decrease was
primarily due to Anasazi having lower marketing and promotion expenses as a
percentage of revenues than Utell.
Depreciation and amortization. Depreciation and amortization expenses for
1998 increased to $16.1 million from $5.2 million in 1997, primarily due to the
impact of the merger in 1998. The 1998 expense includes $8.8 million in
depreciation and $7.3 million in amortization related to goodwill and other
intangible assets resulting from the merger.
Net interest income/expense. Net interest income/expense for 1998 decreased
to net interest expense of approximately $613,000 from net interest income of
approximately $79,000 for 1997, due primarily to increased interest payments
made under capital equipment leases, notes, and borrowings against REZ's lines
of credit.
Gain on sale of investments. During 1998, REZ sold all of the Pegasus
common stock it held as an investment resulting in a one-time gain.
Income taxes. Income taxes for the years ended December 31, 1998 and
December 31, 1997 reflect federal, state and foreign income taxes. Income taxes
for the nine months ended September 30, 1999 reflect an income tax benefit at an
effective tax rate of 20%, which is primarily due to the tax effect of
additional book losses. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible. REZ's
management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this
assessment. Based upon these factors, management believes it is more likely than
not that REZ will not fully realize the benefits of net operating loss
carryforwards and deductible differences. As a result, REZ has recorded a
partial valuation allowance for the deferred tax assets related to net operating
loss carryforwards and deductible differences.
In making this assessment, REZ management recognized that during two of the
last three years it had recognized losses before taxes. However, a substantial
portion of the loss in 1997 was attributable to a "one time" event, the write
off of approximately $20 million of purchased research and development. In 1998,
REZ incurred unusual charges totaling approximately $3.7 million, including
severance and employment related costs of $2.5 million, which were related to
the first phase of integration and reorganization of the business following the
1997 merger. These costs are not expected to repeat in future years. REZ
management reassesses the valuation allowance and makes changes when
appropriate. REZ management's assessment of future operations and cash flows,
together with the other factors mentioned above, led it to conclude that the
valuation allowance was sufficient to reduce the deferred tax asset to the
amount that will be realized.
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<PAGE> 126
LIQUIDITY AND CAPITAL RESOURCES
REZ's working capital deficit decreased to $8.1 million at December 31,
1999, compared to $9.3 million at December 31, 1998 due primarily to the timing
of receipts from customers, partly offset by the timing of vendor payments.
Net cash provided by operating activities was $5.2 million for 1999 compared to
cash used by operating activities of $.4 million for 1998, an increase in cash
provided by operating activities of $5.6 million. This increase was due to
reduced operating losses of $3.1 million and an increase in the change in net
working capital of $2.9 million. Net cash used in operating activities was $.4
million for 1998 compared to $7.4 million provided by operations for 1997, a
decrease of $7.8 million, due primarily to an increase in the change in net
accounts receivable of $6.3 million and changes in other operating activities of
$1.5 million.
Net cash used in investing activities was $13.0 million for 1999 compared
to $5.0 million for 1998, an increased use of cash of $8.0 million. Cash used in
investing activities for 1999 included expenditures for furniture and computer
equipment of $13.0 million. Cash used in investing activities for 1998 included
expenditures for furniture and computer equipment of $11.0 million, which was
partially offset by proceeds of $6.0 million from the sale of Pegasus stock
during the same period. Net cash used in investing activities was from the sale
of Pegasus stock during the same period. Net cash used in investing activities
was $5.0 million for 1998 compared to $9.2 million for 1997, a decrease of $4.2
million. This decrease was primarily due to proceeds received from the sale of
Pegasus stock of $6.0 million in 1998, which partially offset expenditures for
furniture and computer equipment of $11 million compared to similar expenditures
in 1998 of $9 million.
Cash provided from financing activities was $7.5 million for 1999 compared
to $2.8 million used for financing activities for 1998, an increase of cash
provided of $10.3 million primarily attributable to an increase in net
borrowings on notes payable and the lines of credit. Cash used in financing
activities was $2.8 million for 1998 compared to $4.9 million provided in 1997,
a decrease of $7.7 million, primarily attributable to repayments on shareholder
notes.
REZ is a party to a $10 million revolving credit facility. Interest on amounts
borrowed under the credit facility is calculated according to a rate chosen by
the borrower at the time of borrowing, which is either LIBOR plus 225 basis
points or the lender's prime rate. REZ must repay all amounts borrowed under the
credit facility by May 5, 2001. As of March 17, 2000, approximately $10 million
was outstanding under the credit facility. Excluding the assets of certain REZ
subsidiaries, REZ has pledged substantially all of its assets as collateral for
any amounts borrowed under the credit facility.
REZ is also a party to a $10 million unsecured revolving credit facility
with another lender, which is guaranteed by Reed Elsevier. Interest on amounts
borrowed under the unsecured credit facility is calculated according to a
monthly rate chosen by the borrower at the time of borrowing, which is either
the bank's base rate or LIBOR plus 50 basis points. As of March 17, 2000,
approximately $7 million was outstanding under the unsecured credit facility.
REZ believes that internally generated funds and available borrowings under its
lines of credit will be sufficient to satisfy its operating cash requirements
for at least the next twelve months.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion covers quantitative and qualitative disclosures
about REZ's market risk. REZ's primary market exposures are to interest rates
and foreign exchange rates.
REZ meets its working capital requirements with a combination of variable
rate short-term and variable rate and fixed rate long-term financing. The
aggregate hypothetical loss in earnings for one month of those financial
instruments held by REZ at December 31, 1998 which are subject to interest rate
risk resulting from a hypothetical increase in interest rates of 10 percent is
not material. The hypothetical loss was determined by calculating the aggregate
impact of a one-month increase of 10 percent in the interest
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<PAGE> 127
rate of each variable rate financial instrument held by REZ at December 31, 1998
which is subject to interest rate risk. Fixed rate financial instruments were
not evaluated, as the risk exposure is not material.
REZ also enters into currency forward contracts with commercial banks to
manage currency exposures for financial instruments denominated in currencies
other than REZ's functional currency. The market-risk sensitive instruments used
by REZ for hedging are directly related to a particular asset, liability or
transaction for which a firm commitment is in place. REZ's outstanding currency
forward contracts include contracts to buy and/or sell British Pounds, Japanese
Yen, French Francs, Italian Lira, German Deutchemarks, Spanish Pesedo,
Portuguese Escudos, Singapore Dollars and United States Dollars. All foreign
contracts were related to specific transactions for which a firm commitment
existed, and therefore the associated market risk of the market risk sensitive
instruments and the underlying firm commitments in the aggregate is not
material.
INFLATION
REZ 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 combined company's results of
operations to the extent the increases are not passed along to customers.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities", SFAS No. 133, as amended by SFAS No. 137,
"Accounting for Derivative and Hedging Activities -- Deferral of Effective Date
of FAS 133," is effective for the first quarter of the year 2001. This statement
establishes standards for the accounting and reporting for derivative
instruments and for hedging activities. The future effect on REZ's financial
position and the results of operations has not been determined.
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<PAGE> 128
REZ CERTAIN TRANSACTIONS
Reed Elsevier and REZ entered into an employee lease agreement on September
1, 1998 pursuant to which the management services of I. Malcolm Highet were
leased to REZ on an interim basis. Under this agreement REZ paid Reed Elsevier
$80,000 with respect to 1998 and $180,000 in 1999 for Mr. Highet's management
services, with an additional $60,000 being payable to Reed Elsevier for 1999. By
mutual agreement dated September 1, 1999 Reed Elsevier and REZ agreed to
terminate the employee lease agreement on December 31, 1999. Mr. Highet's
employment with REZ is controlled by an employment agreement between Mr. Highet
and REZ dated August 1, 1999.
Reed Elsevier and REZ are parties to the arrangements described below, some
of which will continue in effect with the combined company following the merger.
REZ believes these arrangements are on an arms-length basis and are on terms no
less favorable to REZ than could have been obtained from unrelated third
parties.
- REZ leases an employee in Toronto, Canada from Reed Elsevier
- Reed Elsevier has an employee lease and service agreement with REZ for
Mexican employees, but no employees are currently leased under this
agreement
- Reed Elsevier subleases a facility from REZ in Italy and in London,
England
- Reed Elsevier has a premises license from REZ in Mexico
- REZ leases space from Reed Elsevier in Dusseldorf, Germany
Please see "Approval of the Merger and Related Transactions -- Prior
Relationship of Pegasus and REZ" for information regarding transactions between
Pegasus and REZ, or their respective affiliates.
REZ SECURITY OWNERSHIP OF
MANAGEMENT AND PRINCIPAL STOCKHOLDERS
The following table sets forth, as of February 29, 2000, some information
regarding the beneficial ownership of REZ's outstanding common stock by:
- Each person known by REZ to own beneficially more than five percent (5%)
of the outstanding common stock
- Each director and the chief executive officer and the four other most
highly compensated executive officers whose salary and bonus for 1999
exceeded $100,000
- All directors and executive officers of REZ as a group
The following calculations of the percentage of outstanding shares are made
based upon 34,539,929 shares of REZ's common stock outstanding as of February
29, 2000. Beneficial ownership is determined in accordance with the rules of the
Securities Exchange Commission and generally includes voting or investment power
with respect to securities, subject to community property laws, where
applicable. All outstanding options to purchase shares of REZ common stock will
accelerate and become exercisable in connection with the merger. The shares of
REZ common stock underlying these options are therefore deemed issued and
outstanding and beneficially owned by the person holding the options for the
purpose of computing the percentage of ownership of the person, but are not
treated as outstanding for the
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<PAGE> 129
purpose of computing the percentage of any other person. These options are
separately set forth below in the column titled "Options."
<TABLE>
<CAPTION>
NAME SHARES OPTIONS TOTAL PERCENT
- ---- ---------- --------- ---------- -------
<S> <C> <C> <C> <C>
FIVE PERCENT STOCKHOLDERS:
Utell International Group Ltd.(1)................. 20,446,936 -- 20,446,936 59.2%
Morgan Stanley Venture Partners II, L.P.(2)....... 2,455,069 -- 2,455,069 7.1%
Reed Elsevier Inc.(1) ........................... 2,300,285 100,000 2,400,285 6.9%
Trident Capital, Inc.(3).......................... 2,144,924 -- 2,144,924 6.2%
DIRECTORS AND OFFICERS:
Nigel Stapleton................................... -- -- -- *
W. Thomas Castleberry(4).......................... 670,683 335,000 1,005,683 2.9%
I. Malcolm Highet................................. -- 378,735 378,735 1.1%
Peter V. Ueberroth................................ -- 100,000 100,000 *
John C. Holt...................................... -- 100,000 100,000 *
Rockwell Schnabel(5).............................. 881,110 100,000 981,110 2.8%
John H. Holdsworth................................ 281,046 95,000 376,046 1.1%
Vernon L. Snider.................................. 203,553 90,000 293,553 *
Michael Ball...................................... 14,928 90,000 104,928 *
Rachid Bengougam.................................. 9,805 70,000 79,805 *
Directors and executive officers as a group (10
persons)(6)..................................... 2,061,125 1,398,735 3,459,860 9.6%
</TABLE>
- ---------------
* Less than one percent (1%).
(1) Utell International Group Ltd. and Reed Elsevier Inc. are wholly owned
subsidiaries of Reed Elsevier plc. which is indirectly jointly owned by Reed
International P.L.C. and Elsevier N.V., each a publicly traded entity.
(2) Represents shares owned of record by Morgan Stanley Venture Capital Fund II,
L.P., Morgan Stanley Venture Investors L.P. and Morgan Stanley Venture
Capital Fund II, C.V. Morgan Stanley Venture Partners II, L.P. is the
general partner of each of these funds and therefore deemed the beneficial
owner of the shares owned by each fund.
(3) Represents shares owned of record by Trident Capital Partners REZsolutions
Fund, L.P., Trident Capital Partners Fund-I, C.V., and Trident Capital
Partners Fund-I, L.P., with respect to each of which Trident Capital, Inc.
is the general partner. Trident Capital, Inc. is indirectly owned by three
individuals, Donald Dixon, Robert McCormack and Rockwell Schnabel, a
director of REZ.
(4) Held of record by W. Thomas Castleberry and Jean Castleberry, Trustees of
the JTC Revocable Trust.
(5) Includes 213,000 shares owned by Trident Capital Inc. with respect to which
Mr. Schnabel may be deemed the beneficial owner by virtue of his ownership
interest in Trident. Mr. Schnabel disclaims beneficial ownership with
respect to all other REZ shares owned by Trident, whether or not he has or
shares voting power with respect to those shares.
(6) Includes options held by Richard Sauerbrun (Vice President and Chief
Information Officer) to purchase 40,000 shares of common stock.
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<PAGE> 130
UNAUDITED PRO FORMA FINANCIAL INFORMATION AND RELATED NOTES
The following pro forma combined statement of operations assumes the merger
took place as of the beginning of the period presented and combines Pegasus'
consolidated statement of operations for the year ended December 31, 1999 and
REZ's consolidated statement of operations for the year ended December 31, 1999.
The pro forma balance sheet assumes the merger took place as of December
31, 1999 and combines Pegasus' consolidated balance sheet and REZ's consolidated
balance sheet as of December 31, 1999.
The pro forma combined financial statements give effect to the proposed
merger of Pegasus and REZ using the purchase method of accounting. Under this
method of accounting, the aggregate purchase price is allocated to assets
acquired and liabilities assumed based on their estimated fair values. The pro
forma adjustments are preliminary and are based on management's estimates of the
value of the tangible and intangible assets and liabilities acquired. The final
allocation of the purchase price to the respective assets and liabilities
acquired are determined a reasonable time after consummation of such
transactions and are based on a complete evaluation of the assets and
liabilities assigned. Accordingly, the information presented herein may differ
from the final purchase price allocation; however, the allocations are not
expected to differ materially from the preliminary amounts.
The pro forma information is unaudited and does not purport to be
indicative of the combined company's financial condition or the results that
actually would have been obtained had the merger been consummated as of the
assumed dates and for the period presented, nor are they indicative of the
combined company's results of operations or financial condition for any future
period or date. The pro forma combined financial statements, including the notes
thereto should be read in conjunction with, the historical consolidated
financial statements of Pegasus and REZ, including the notes thereto, included
elsewhere in this information statement/prospectus. See "Additional Information
about Pegasus and this Information Statement/Prospectus" on page iii.
126
<PAGE> 131
PEGASUS AND REZ
PRO FORMA COMBINED CONDENSED BALANCE SHEET
DECEMBER 31, 1999
(UNAUDITED)
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
HISTORICAL
-------------------
PEGASUS REZ(a) PRO PRO
-------- -------- FORMA FORMA
ADJUSTMENTS COMBINED
----------- ---------
<S> <C> <C> <C> <C>
Cash and cash equivalents..................... $107,545 $ 2,766 $(75,697)(b) $ 34,614
Short-term investments........................ 35,283 -- (35,283)(b) --
Accounts receivable, net...................... 4,854 37,121 (432)(d) 41,543
Other current assets.......................... 2,585 6,851 9,436
-------- -------- -------- --------
Total current assets................ 150,267 46,738 (111,412) 85,593
Capitalized software, net..................... 1,287 -- 1,287
Property and equipment, net................... 3,568 29,747 33,315
Goodwill, net................................. 2,890 19,814 95,373(c) 155,945
37,868(j)
Other intangibles, net........................ -- 10,355 106,145(c) 116,500
Other assets.................................. 5,527 5,110 10,637
-------- -------- -------- --------
Total assets........................ $163,539 $111,764 $127,974 $403,277
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities...... $ 6,162 $ 38,000 $ (432)(d) $ 43,730
Current portion of notes payable and capital
lease obligation............................ 53 6,747 6,800
Other current liabilities..................... 446 10,101 10,547
-------- -------- -------- --------
Total current liabilities........... 6,661 54,848 (432) 61,077
Notes payable................................. -- 8,672 20,000(b) 28,672
Other noncurrent liabilities.................. 107 -- 37,868(j) 37,975
Stockholders' equity:
Preferred stock............................. -- 104 (104)(c) --
Common stock................................ 205 35 40(b) 245
(35)(c)
Additional paid-in capital.................. 156,978 81,032 126,742(b) 283,720
(81,032)(b)(c)
Unearned compensation....................... (442) -- (442)
Accumulated deficit......................... 81 (32,471) 24,471(c)(e) (7,919)
Accumulated comprehensive loss.............. (25) (456) 456(c) (25)
Less treasury stock......................... (26) -- (26)
-------- -------- -------- --------
Total stockholders' equity.......... 156,771 48,244 70,538 275,553
-------- -------- -------- --------
Total liabilities and stockholders'
equity............................ $163,539 $111,764 $127,974 $403,277
======== ======== ======== ========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
127
<PAGE> 132
PEGASUS AND REZ
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
-------------------------
PEGASUS REZ(a) PRO PRO
----------- ----------- FORMA FORMA
ADJUSTMENTS COMBINED
----------- -----------
<S> <C> <C> <C> <C>
Net revenues........................... $ 38,036 $ 147,745 (1,757)(d) $ 184,024
Cost of services....................... 12,180 74,535 (1,757)(d) 84,958
Research and development............... 2,367 4,100 6,467
General and administrative expenses.... 5,463 28,507 33,970
Marketing and promotion expenses....... 5,936 28,736 34,672
Depreciation and amortization.......... 2,438 16,980 53,606(f) 66,629
(6,395)(g)
----------- ----------- ---------- -----------
Operating income (loss)................ 9,652 (5,113) (47,211) (42,672)
Other income (expense):
Interest income (expense), net....... 4,802 (1,111) (7,901)(h) (4,210)
Net (loss) on minority interest
investments....................... (1,100) -- (1,100)
----------- ----------- ---------- -----------
Income (loss) before income taxes...... 13,354 (6,224) (55,112) (47,982)
Income tax provision (benefit)......... 4,688 (1,633) (13,932)(k) (10,877)
----------- ----------- ---------- -----------
Net income (loss)...................... $ 8,666 $ (4,591) (41,180) $ (37,105)
=========== =========== ========== ===========
Net income (loss) per share:
Basic................................ $ 0.47 $ (0.13) $ (1.64)
=========== =========== ===========
Diluted.............................. $ 0.44 $ (0.13) $ (1.64)
=========== =========== ===========
Weighted average shares outstanding:
Basic................................ 18,576,107 34,508,499 3,990,488(i) 22,566,595
=========== =========== ========== ===========
Diluted.............................. 19,689,387 34,508,499 3,990,488(i) 22,566,595
=========== =========== ========== ===========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
128
<PAGE> 133
PEGASUS AND REZ
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
On November 16, 1999, Pegasus and REZ entered into a definitive agreement
that provides for the merger of Pegasus and REZ. Under the terms of the
agreement, Pegasus will issue 3.99 million (as adjusted for a 3-for-2 stock
split) shares of common stock, pay $115 million in cash, and issue a $20 million
note payable to Utell International Ltd., a subsidiary of Reed Elsevier plc, the
majority stockholder in REZ, subject to certain closing balance sheet
adjustments. The 3.99 million shares of Pegasus common stock has been valued at
$31.775 which equals the five day average of the closing stock price for the two
days before, day of, and two days after November 16, 1999.
The pro forma combined condensed financial statements reflect a total
consideration paid by the Company of $257.8 million as follows (in thousands):
<TABLE>
<S> <C>
Cash................................................. $115,000
Note payable to Utell................................ 20,000
Issuance of 3.99 million shares of Pegasus $0.01 par
value common stock at $31.775 (as adjusted for
3-for-2 stock split)............................... 126,782
Less: REZ assumed indebtedness at December 31,
1999............................................... (15,020)
--------
Net consideration paid to REZ stockholders......... 246,762
Estimated acquisition costs.......................... 11,000
--------
Total consideration paid........................... $257,762
========
</TABLE>
The purchase price is dependent upon certain adjustments arising from a
calculation of net tangible assets, working capital, and other balance sheet
related analysis shortly following the close of the merger. The change in the
purchase price will be based on a dollar-for-dollar adjustment arising from any
decrease in net tangible assets relative to REZ's net tangible assets or changes
in working capital relative to a forecast of REZ's projected closing working
capital provided as of the November 16, 1999 merger agreement. Pegasus shares of
$7.5 million of equivalent value and $5.5 million in cash have been placed in an
escrow account to cover any of these post-closing adjustments. If and when any
of the $7.5 million of escrowed Pegasus shares or $5.5 million of escrowed cash
are returned to the Company, the purchase price and goodwill will be adjusted at
the time of receipt. The adjusted goodwill balance will be amortized over the
remaining term of goodwill. Management does not expect any purchase adjustment
to have a significantly different result on the total consideration paid.
The REZ option plans contain provisions that provide for the acceleration
of unvested options upon a change in control. As of December 31, 1999, there
were options to purchase 3,490,210 shares of REZ common stock outstanding under
the REZ option plans. Prior to the effective time of the merger, holders of the
REZ accelerated options have the choice to either (1) exercise such options and
purchase shares of REZ common stock or (2) receive a cash payment of $1.73 per
option share from REZ on the closing date of the merger.
In accordance with Accounting Principles Board Opinion No. 25 and Emerging
Issues Task Force Issue 94-6, REZ will recognize the total amount paid to buyout
the REZ options as compensation expense in the REZ statement of operations in
the period immediately prior to the closing date of the merger. The maximum
compensation to be recognized by REZ, if all option holders accepted the buyout,
would be $6,038,063. The buyout of any of the options by REZ prior to the
closing of the merger would not have any impact on the total excess purchase
price arising from this transaction, because the consideration paid by Pegasus
would be reduced by the same amount as the decrease in REZ equity. Furthermore,
the
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<PAGE> 134
PEGASUS AND REZ
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
accounting for the options has not been reflected in the pro forma financial
statements because it does not have a continuing impact on the combined
companies.
The pro forma combined condensed balance sheet assumes that the merger took
place December 31, 1999 and combines Pegasus' consolidated balance sheet and
REZ's consolidated balance sheet as of December 31, 1999.
The pro forma combined condensed statement of operations assumes the merger
took place as of the beginning of the period presented and combines Pegasus'
consolidated statement of operations for the year ended December 31, 1999 and
REZ's consolidated statement of operations for the year ended December 31, 1999.
On December 8, 1999, the Pegasus board of directors declared a 3-for-2
split of its shares of common stock to be effected in the form of a stock
dividend on January 7, 2000 to all Pegasus' stockholders of record on December
20, 1999. The information contained in these pro forma combined condensed
financial statements has been adjusted to reflect the stock split.
2. PRO FORMA ADJUSTMENTS
(a) Certain reclassifications have been made to conform REZ's financial
statements to those of Pegasus.
(b) Adjustment reflects the components of the consideration paid, which
includes the following (in thousands):
<TABLE>
<S> <C>
Cash..................................................... $ 79,717
Estimated acquisition costs.............................. 11,000
Less: REZ assumed indebtedness at December 31, 1999...... (15,020)
--------
Cash consideration before liquidation of short-term
investments............................................ 75,697
Liquidation of short-term investments.................... 35,283
Note payable to Utell.................................... 20,000
Issuance of 3.99 million shares of Pegasus $0.01 par
value common stock at $31.775 (as adjusted for 3-for-2
stock split)........................................... 126,782
--------
Total consideration............................ $257,762
========
</TABLE>
130
<PAGE> 135
PEGASUS AND REZ
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(c) Adjustment reflects the allocation of the purchase price to the assets
acquired and the liabilities assumed as follows (in thousands):
<TABLE>
<CAPTION>
ALLOCATION OF
PURCHASE PRICE CARRYING VALUE ADJUSTMENTS
-------------- -------------- -----------
<S> <C> <C> <C>
Cash and cash equivalents................... $ 2,766 $ -- $ --
Accounts receivable, net.................... 37,121 37,121 --
Property and equipment, net................. 29,747 29,747 --
Goodwill, net............................... 115,187 19,814 95,373
Intangibles, net............................ 116,500 10,355 106,145
Other assets................................ 11,961 11,000 --
Accounts payable and accrued liabilities.... 38,000 38,000 --
Other liabilities........................... 10,500 10,500 --
Note payable................................ 15,020 15,020 --
Preferred stock............................. -- 104 (104)
Common stock................................ -- 35 (35)
Additional paid-in capital.................. -- 81,032 (81,032)
Accumulated deficit......................... (8,000) (32,471) 24,471
Translation adjustment...................... -- (456) 456
--------
$257,762
========
</TABLE>
Goodwill related to the merger is amortized over ten years. Of the $116.5
million allocated to intangible assets, approximately $17.5 million
relates to workforce-in-place, $60.0 million relates to customer
relationships, $35.0 million relates to software and $4.0 million relates
to a non-compete agreement with Reed Elsevier. Such intangible assets are
amortized over three years except for the non-compete agreement, which is
amortized over the five-year term of the agreement.
(d) REZ provides facility management, consulting and software development
services to Pegasus. Pegasus provides electronic hotel reservation and
commission processing services to REZ. Adjustment reflects the elimination
of intercompany transactions as set forth below:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------
<S> <C>
Intercompany receivable/payable:
Pegasus receivable/REZ payable............................ $204
REZ receivable/Pegasus payable............................ 228
----
$432
====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
-----------------
<S> <C>
Intercompany revenue/cost of services:
Pegasus................................................... $1,179
REZ....................................................... 578
------
Total............................................. $1,757
======
</TABLE>
The intercompany expense for each company represents cost of services.
(e) Management estimates that $8.0 million of the purchase price represents
purchased in-process research and development that has not yet reached
technological feasibility and has no alternative future use. This amount
is expensed as a non-recurring, non-tax deductible charge upon
consummation of the merger. The adjustment reflects the write-off of
purchased in-process research
131
<PAGE> 136
PEGASUS AND REZ
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
and development. This amount has been reflected as a reduction to
stockholders' equity and has not been included in the pro forma combined
condensed statement of operations due to its non-recurring nature.
The value assigned to purchased in-process research and development was
determined by identifying research projects in areas for which
technological feasibility has not been established. Projects included were
a customer reporting system valued at approximately $3.4 million and
Corporate Direct, a service that would provide a comprehensive program of
discounted corporate hotel rates on the Internet, valued at approximately
$4.6 million. The value was determined by estimating the costs to develop
these projects into commercially viable products; estimating the resulting
net cash flows from such projects; and discounting the net cash flows back
to their present values.
The net cash flows from such projects are based on Pegasus and REZ
management's estimates of revenues, cost of sales, research and
development costs, marketing, and general and administrative costs derived
from such projects. The resulting net cash flows are discounted back to
their present value based on discount rates from 20-25%, which is higher
than Pegasus' cost of capital of approximately 16% due to the inherent
uncertainties in the estimates described above including the uncertainty
of the successful development of the projects, the useful lives of the
technology, the profitability levels of the projects and the uncertainty
of technological advances that are unknown at this time.
(f) Adjustment reflects additional amortization expense resulting from the
allocation of the purchase price to goodwill and other intangible assets
as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
Goodwill.................................................. $15,306
Non-compete agreement..................................... 800
Other intangibles......................................... 37,500
-------
Total adjustment.................................. $53,606
=======
</TABLE>
Goodwill related to the merger is amortized over ten years. Of the $116.5
million allocated to intangible assets, approximately $17.5 million
relates to workforce-in-place, $60.0 million relates to customer
relationships, $35.0 million relates to software and $4.0 million relates
to a non-compete agreement with Reed Elsevier. Such intangible assets are
amortized over three years except for the non-compete agreement, which is
amortized over the five-year term of the agreement.
(g) Adjustment reflects the elimination of amortization expense related to
REZ's intangible assets as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
Total REZ depreciation and amortization................... $16,980
Less: amortization of REZ intangibles..................... 6,395
-------
Adjusted depreciation and amortization.................... $10,585
=======
</TABLE>
132
<PAGE> 137
PEGASUS AND REZ
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(h) Adjustment reflects financing costs related to the merger as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
-----------------
<S> <C>
$20 million note payable at 8%............................ $1,632
Letter of credit borrowings(1)............................ 2,328
------
Pro forma interest expense................................ 3,960
Reduction in historical Pegasus interest income(1)........ 3,941
------
Total adjustment.................................. $7,901
======
</TABLE>
(1) For the year ended December 31, 1999, borrowings for the
five-months preceding the Company's secondary offering in May
1999 are assumed. Interest income has been reduced for any
assumed invested cash which was applied toward the purchase.
The Company assumed a total cash required for the transaction of $115.0
million as follows (in thousands):
<TABLE>
<S> <C>
Total cash per agreement.......................... $115,000
Less: REZ debt at December 31, 1999............... (15,020)
Plus: Pegasus desired cash balance................ 15,000
--------
Cash required..................................... $114,980
========
</TABLE>
The Company assumed a fixed desired cash balance and then assumed that it
borrowed an amount to attain the cash required and/or applied excess cash
and marketable securities toward the purchase.
Interest expense for the letter of credit borrowings is based on interest
rates ranging from 8.8% to 9.5%.
A 1/8% increase or decrease in the assumed interest rate would have an
impact of $127,000 for the year ended December 31, 1999.
(i) Pro forma weighted average common shares outstanding for all periods
presented are based on Pegasus' and REZ' combined historical weighted
average shares, after adjustment of REZ' historical number of shares by
the assumed exchange ratio of 0.1156 (as adjusted for 3-for-2 stock
split). Pro forma weighted average share calculation does not consider
potential common stock equivalents because the combined company has a net
loss, and consideration of potential common stock equivalents would be
anti-dilutive.
(j) Adjustment reflects the tax effect of the purchase price allocation as
follows (in thousands):
<TABLE>
<S> <C>
Total intangibles acquired........................ $116,500
Less: non-compete agreement valuation............. (4,000)
--------
Net nondeductible intangibles..................... 112,500
Assumed tax rate.................................. 36.87%
--------
Total deferred tax liability...................... 41,475
Less: REZ deferred tax liability related to
intangibles as of December 31, 1999.............. (3,607)
--------
Deferred tax liability to book.................... $ 37,868
========
</TABLE>
(k) Adjustment reflects the tax effect of the pro forma adjustments.
133
<PAGE> 138
DESCRIPTION OF PEGASUS CAPITAL STOCK
Pegasus' authorized capital stock consists of 50,000,000 shares of common
stock, $.01 par value per share (along with related preferred stock purchase
rights), and 2,000,000 shares of Preferred Stock, $.01 par value per share,
issuable in series. As of February 29, 2000, there were outstanding 20,353,135
shares of common stock and no outstanding shares of preferred 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. In the event of a liquidation, dissolution or winding up of Pegasus,
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 Pegasus.
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 non assessable.
PREFERRED STOCK
Pegasus' 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
Pegasus. Pegasus has no present plan to issue any shares of preferred stock.
DELAWARE ANTI-TAKEOVER LAW AND CHARTER AND CONTRACTUAL PROVISIONS
Delaware Anti-Takeover Statute
Pegasus 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
Pegasus' Certificate of Incorporation 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 Pegasus 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
Pegasus may be called only by the Chairman of the Board, the Chief Executive
Officer or
134
<PAGE> 139
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 Pegasus 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 some types of transactions that may involve
an actual or threatened change of control of Pegasus. These provisions are also
designed to reduce the vulnerability of Pegasus to an unsolicited proposal for a
takeover of Pegasus 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 Pegasus. These provisions, however, could discourage potential
acquisition proposals and could delay or prevent a change in control of Pegasus.
These provisions may also have the effect of preventing changes in the
management of Pegasus.
Rights Agreement
On September 28, 1998, the board of directors of Pegasus declared a
dividend distribution of one purchase right for each outstanding share of its
common stock to Pegasus stockholders on October 13, 1998. Each purchase right
entitles the registered holder to purchase from Pegasus one-one thousandth
(1/1,000) of a share of Series A Preferred Stock at a price of $90.00 per
one-one thousandth (1/1,000) of a share, subject to adjustment.
Initially, the purchase rights are attached to all common stock
certificates representing shares then outstanding, and no separate rights
certificates are distributed. The purchase rights will separate from the common
stock upon the earlier of:
- ten business days following a public announcement that a person or group
of affiliated or associated persons has acquired, or obtained the right
to acquire, beneficial ownership of twenty percent or more of the
outstanding shares of common stock
- ten business days (or a later date as the board of directors determines)
following the commencement of a tender or exchange offer that would
result in a person or group beneficially owning twenty percent or more of
such outstanding shares of common stock
If an acquiring person or group obtains 20% or more of Pegasus' outstanding
common stock, other than in some types of permitted transactions, and unless the
purchase rights were redeemed earlier, the holder of each unexercised purchase
right will have the right to receive shares of Pegasus common stock having a
value equal to two times the purchase price. Similarly, unless the purchase
rights were redeemed earlier, after the tenth day following some types of
acquisition transactions, proper provision must be made so that holders of
purchase rights (other than those beneficially owned by an acquiring person,
which are void after being acquired by the acquiring person) will thereafter
have the right to receive, upon exercise, shares of common stock of the
acquiring company having a value equal to two times the purchase price. Prior to
the time the purchase rights become exercisable, the Pegasus board of directors
may redeem the purchase rights for $0.01. However, the purchase rights are not
exercisable following the triggering events until the purchase rights are no
longer redeemable by Pegasus as described below.
Until ten business days following the time the purchase rights become
exercisable, Pegasus may redeem the purchase rights in whole, but not in part,
at a price of $0.01 per purchase right (payable in cash, shares of common stock
or other consideration deemed appropriate by the Pegasus board of directors).
Prior to the acquisition by any acquiring person or group of fifty percent or
more of the outstanding shares of common stock, the Pegasus board of directors
may, without payment of the purchase price by the holder, exchange the purchase
rights (other than purchase rights owned by such acquiring person or group,
which will become void), in whole or in part, for shares of common stock at an
exchange ratio of one-half the number of shares of common stock (or in some
circumstances preferred stock) for which a purchase right is exercisable
immediately prior to the time of Pegasus' decision to exchange the
135
<PAGE> 140
purchase rights (subject to adjustment). The purchase rights expire on October
13, 2008 or on their earlier exchange, redemption or expiration in connection
with some types of permitted transactions.
Each share of Pegasus common stock issued in the merger with REZ carries
with it a purchase right.
LIMITATIONS ON DIRECTOR LIABILITY
Pegasus' Certificate of Incorporation 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 Pegasus will not be liable
to Pegasus or its stockholders for monetary damages for breach of fiduciary duty
as a director.
TRADING MARKET, TRANSFER AGENT AND REGISTRAR
The common stock is traded on the Nasdaq National Market under the symbol
"PEGS". The Transfer Agent and Registrar for the common stock is American Stock
Transfer & Trust Co.
INDEMNIFICATION POSITION OF THE SECURITIES AND EXCHANGE COMMISSION
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
the indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by the director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether the
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of the issue.
136
<PAGE> 141
MATERIAL DIFFERENCES BETWEEN RIGHTS OF REZ STOCKHOLDERS AND
PEGASUS STOCKHOLDERS
The rights of REZ and Pegasus stockholders are governed by REZ's and
Pegasus's respective certificates of incorporation, their bylaws, each as
amended and restated to date, the laws of the State of Delaware and, in the case
of REZ a stockholders agreement between REZ and most of its stockholders. After
the close of the merger, the REZ stockholders will become Pegasus stockholders
and their rights and obligations as stockholders will be governed by the Pegasus
third amended and restated certificate of incorporation, the Pegasus second
amended and restated bylaws and the laws of the State of Delaware.
While the rights and privileges of stockholders of REZ are, in many
instances, comparable to those of stockholders of Pegasus, there are some
differences. The following is a summary of the material differences between the
rights of stockholders of REZ and the rights of stockholders of Pegasus as of
the date of this document. These differences arise from differences between the
REZ restated certificate of incorporation, the REZ amended and restated bylaws,
the REZ stockholders agreement and the Pegasus certificate of incorporation and
the Pegasus bylaws. Pegasus is not a party to any stockholders agreement similar
in content or breadth to the REZ stockholders agreement.
STOCKHOLDER ACTION BY WRITTEN CONSENT
The Pegasus bylaws prohibit stockholder action by written consent, whereas
the REZ bylaws permit such action if REZ stockholders having the minimum number
of votes required to take such action at a meeting execute such written consent.
SPECIAL MEETINGS
The REZ bylaws permit one or more REZ stockholders owning in the aggregate
10% of its outstanding voting shares to call a special stockholders meeting.
Pegasus stockholders do not have the right to call a special meeting.
BOARD OF DIRECTORS; ELECTION AND REMOVAL
The Pegasus certificate of incorporation provides for a classified board of
directors with 1/3 of the directors up for election at each annual stockholders
meeting. REZ does not have a classified board of directors.
Pursuant to the REZ bylaws, Reed Elsevier has the right to nominate 3 out
of the 9 REZ board members and Anasazi, Inc. has the right to nominate an
additional 3 directors. The Pegasus bylaws do not provide such nomination rights
to holders of any individual class or series of Pegasus stock.
REZ directors may be removed only for cause by a majority of REZ
stockholders entitled to vote thereon, whereas Pegasus directors may be removed
only for cause by holders of 2/3 of the Pegasus shares entitled to vote thereon.
AMENDMENTS TO THE BYLAWS AND CERTIFICATE OF INCORPORATION
Amendments to the Pegasus certificate of incorporation or the Pegasus
bylaws require the approval of the holders of 2/3 of Pegasus shares having
voting power, with the exception of amendments to the provisions of the Pegasus
certificate of incorporation dealing with removal of directors or the procedure
for amending the Certificate, each of which require the approval of 80% of the
Pegasus shares having voting power. Until the occurrence of events specified in
the REZ Bylaws (none of which have occurred to date), Reed Elsevier and the
other founding stockholders of REZ have supermajority approval rights (85%) over
any amendment to the REZ Bylaws dealing with the number and composition of the
board of directors or the procedures for amending the Bylaws.
137
<PAGE> 142
APPROVAL OF FUNDAMENTAL MANAGEMENT DECISIONS
Pursuant to the REZ Bylaws and the REZ stockholders agreement, until the
occurrence of events specified in the REZ Bylaws (none of which have occurred to
date), the approval of the holders of at least 85% of the REZ shares originally
issued to the stockholders of Anasazi, Inc., Reed Elsevier and Utell
International Group, Ltd. is required with respect to certain fundamental
management decisions. For example under the REZ bylaws and stockholder's
agreement "fundamental decisions" involve actions ranging from approving a
merger or consolidation to issuing additional shares of REZ. (A complete list of
actions defined as a "fundamental decisions" is provided in the REZ bylaws and
the REZ stockholder's agreement). Pegasus stockholders do not have similar
rights, except as may be otherwise provided by Delaware law.
REZ STOCKHOLDERS AGREEMENT
At any time prior to an initial public offering of REZ securities, if the
holders of 85% of the outstanding shares of REZ common stock determine to accept
a third party offer to acquire the stock or assets of the company, then these
stockholders can require the remaining stockholders to participate in such
transaction on the same basis as the majority stockholders. Alternatively, if
any REZ stockholder or group proposes to sell REZ shares to a third party as a
result of which such third party will own 15% or more of the outstanding shares
of REZ common stock, then the remaining REZ stockholders are entitled to
participate in such sale on a pro rata basis. Pegasus stockholders do not have
similar rights.
EXPERTS
The consolidated financial statements of Pegasus Systems, Inc. and
subsidiaries as of December 31, 1999 and 1998 and for the years ended December
31, 1999, 1998 and 1997 included in this information statement/prospectus and
the related financial statement schedule for the years ended December 31, 1999,
1998 and 1997 included or incorporated by reference elsewhere in the information
statement/prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in auditing and accounting.
The consolidated financial statements of REZ, Inc. and subsidiaries as of
December 31, 1999 and 1998 and for the years ended December 31, 1999, 1998 and
1997 included in this information statement/prospectus and the related financial
statement schedule included elsewhere in the information statement/prospectus
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports (which express an unqualified opinion and include an explanatory
paragraph relating to the restatement described in Note 11 to the consolidated
financial statements) appearing herein and elsewhere in the information
statement/prospectus, and are included in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of Pegasus common stock offered hereby will be
passed upon for Pegasus by Locke Liddell & Sapp LLP.
TRADEMARKS
Pegasus and REZ own trademarks rights with respect to various trademarks
and service marks contained in this information statement/prospectus. This
document also includes trademarks, service marks or tradenames of companies
other than Pegasus and REZ, which are the property of their respective owners.
138
<PAGE> 143
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PEGASUS FINANCIAL STATEMENTS
Pegasus Systems, Inc. Audited Consolidated Financial
Statements
Report of Independent Accountants......................... F-2
Consolidated Balance Sheets as of December 31, 1999 and
1998................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997....................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1999, 1998 and 1997... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997....................... F-6
Notes to Consolidated Financial Statements................ F-7
REZ FINANCIAL STATEMENTS
REZ, Inc. Consolidated Financial Statements
Report of Independent Auditors............................ F-25
Consolidated Balance Sheets as of December 31, 1999 and
1998................................................... F-26
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997....................... F-27
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997........... F-28
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997....................... F-29
Notes to Consolidated Financial Statements................ F-30
</TABLE>
F-1
<PAGE> 144
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Pegasus Systems, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and changes in stockholders'
equity and of cash flows present fairly, in all material respects, the financial
position of Pegasus Systems, Inc. and its subsidiaries at December 31, 1999 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Dallas, Texas
February 10, 2000
F-2
<PAGE> 145
PEGASUS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Cash and cash equivalents................................... $104,616,147 $25,002,185
Restricted cash............................................. 2,928,680 2,106,676
Short-term investments...................................... 35,282,524 15,768,400
Accounts receivable, net of allowance for doubtful accounts
of $81,701 and $98,633, respectively...................... 4,854,185 3,687,518
Other current assets........................................ 2,585,247 3,689,254
------------ -----------
Total current assets.............................. 150,266,783 50,254,033
Capitalized software, net................................... 1,287,422 869,619
Property and equipment, net................................. 3,568,212 2,635,068
Goodwill, net of accumulated amortization of $937,922 and
$522,018, respectively.................................... 2,890,077 4,238,071
Other noncurrent assets..................................... 5,527,274 2,323,620
------------ -----------
Total assets...................................... $163,539,768 $60,320,411
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities.................... $ 6,162,314 $ 4,715,018
Unearned income............................................. 62,640 258,667
Current portion of capital lease obligations................ 52,564 535,072
Customer deposits........................................... 383,966 347,422
------------ -----------
Total current liabilities......................... 6,661,484 5,856,179
Capital lease obligations, net of current portion........... -- 57,634
Other noncurrent liabilities................................ 106,788 142,380
Commitments and contingencies (Note 11)..................... -- --
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares
authorized; Zero shares issued and outstanding......... -- --
Common stock, $.01 par value; 50,000,000 shares
authorized, 20,515,050 and 15,980,056 shares issued,
respectively........................................... 205,151 159,801
Additional paid-in capital................................ 156,978,043 63,330,637
Unearned compensation..................................... (442,106) (615,636)
Accumulated comprehensive loss (Note 4)................... (24,905) --
Retained earnings (deficit)............................... 81,651 (8,584,246)
Less treasury stock (174,726 shares, at cost)............. (26,338) (26,338)
------------ -----------
Total stockholders' equity........................ 156,771,496 54,264,218
------------ -----------
Total liabilities and stockholders' equity........ $163,539,768 $60,320,411
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 146
PEGASUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net revenues (Note 1)................................. $38,036,269 $29,064,467 $20,903,416
Cost of services...................................... 12,180,188 9,716,854 7,445,271
Research and development.............................. 2,367,107 2,673,628 2,504,074
Write-off of purchased in-process research and
development (Note 2)................................ -- 1,480,085 --
General and administrative expenses................... 5,462,895 4,442,557 3,715,547
Marketing and promotion expenses...................... 5,936,256 4,823,787 3,998,054
Depreciation and amortization......................... 2,437,410 2,689,867 3,016,619
----------- ----------- -----------
Operating income...................................... 9,652,413 3,237,689 223,851
Other income (expense):
Interest income..................................... 4,828,143 2,503,265 993,592
Interest expense.................................... (26,756) (146,879) (600,067)
Write-off of minority interest investment (Note
1)............................................... (1,100,110) -- --
----------- ----------- -----------
Income before income taxes............................ 13,353,690 5,594,075 617,376
Income taxes.......................................... 4,687,793 197,624 27,916
----------- ----------- -----------
Net income............................................ $ 8,665,897 $ 5,396,451 $ 589,460
=========== =========== ===========
Other comprehensive loss -- change in unrealized loss,
net of tax of $12,830 (Note 4)...................... (24,905) -- --
----------- ----------- -----------
Comprehensive income.................................. $ 8,640,992 $ 5,396,451 $ 589,460
=========== =========== ===========
Basic net income per share:
Basic............................................... $ 0.47 $ 0.34 $ 0.05
=========== =========== ===========
Diluted............................................. $ 0.44 $ 0.32 $ 0.05
=========== =========== ===========
Weighted average shares outstanding:
Basic............................................... 18,576,107 15,691,421 10,800,573
=========== =========== ===========
Diluted............................................. 19,689,387 16,795,343 13,014,078
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 147
PEGASUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<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.... 2,307,694 $ 23,077 7,961,599 $ 79,616 $ 16,934,133 $(485,937)
---------- -------- ---------- -------- ------------ ---------
Conversion of preferred stock to
common stock.................. (2,307,694) (23,077) 2,307,694 23,077 -- --
Initial public offering......... -- -- 5,175,000 51,750 40,441,750 --
Warrants issued for contract.... -- -- -- -- 238,000 --
Issuance of compensatory stock
options....................... -- -- -- -- 450,847 (252,596)
Exercise of stock options....... -- -- 2,000 20 4,119 --
Net income...................... -- -- -- -- -- --
---------- -------- ---------- -------- ------------ ---------
Balance at December 31, 1997.... -- -- 15,446,293 154,463 58,068,849 (738,533)
---------- -------- ---------- -------- ------------ ---------
Secondary offering.............. -- -- 420,481 4,205 4,221,091 --
Windfall tax benefit of stock
options....................... -- -- -- -- 403,532 --
Issuance of compensatory stock
options....................... -- -- -- -- 240,928 28,176
Forfeitures of compensatory
stock options................. -- -- -- -- (94,721) 94,721
Exercise of stock options....... -- -- 95,813 958 330,273 --
Issuance for stock purchase
plan.......................... -- -- 17,469 175 160,685 --
Net income...................... -- -- -- -- -- --
---------- -------- ---------- -------- ------------ ---------
Balance at December 31, 1998.... -- -- 15,980,056 159,801 63,330,637 (615,636)
---------- -------- ---------- -------- ------------ ---------
Secondary offering.............. -- -- 3,450,000 34,500 84,408,000 --
Windfall tax benefit of stock
options....................... -- -- -- -- 4,195,736 --
Issuance of compensatory stock
options....................... -- -- -- -- 249,774 73,434
Forfeitures of compensatory
stock options................. -- -- -- -- (100,096) 100,096
Exercise of stock options....... -- -- 542,592 5,426 2,190,592 --
Issuance of stock warrant....... -- -- 518,584 5,186 2,484,020 --
Issuance for stock purchase
plan.......................... -- -- 23,850 238 219,380 --
Change in unrealized gain (loss)
on marketable securities...... -- -- -- -- -- --
Dividend payable................ -- -- (32) -- -- --
Net income...................... -- -- -- -- -- --
---------- -------- ---------- -------- ------------ ---------
Balance at December 31, 1999.... -- $ -- 20,515,050 $205,151 $156,978,043 $(442,106)
========== ======== ========== ======== ============ =========
<CAPTION>
TREASURY STOCK
-------------------- ACCUMULATED RETAINED
NUMBER OF COMPREHENSIVE EARNINGS
SHARES AMOUNT LOSS (DEFICIT) TOTAL
--------- -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996.... (174,726) $(26,338) $ -- $(14,570,157) $ 1,954,394
-------- -------- ------------- ------------ ------------
Conversion of preferred stock to
common stock.................. -- -- -- -- --
Initial public offering......... -- -- -- -- 40,493,500
Warrants issued for contract.... -- -- -- -- 238,000
Issuance of compensatory stock
options....................... -- -- -- -- 198,251
Exercise of stock options....... -- -- -- -- 4,139
Net income...................... -- -- -- 589,460 589,460
-------- -------- ------------- ------------ ------------
Balance at December 31, 1997.... (174,726) (26,338) -- (13,980,697) 43,477,744
-------- -------- ------------- ------------ ------------
Secondary offering.............. -- -- -- -- 4,225,296
Windfall tax benefit of stock
options....................... -- -- -- -- 403,532
Issuance of compensatory stock
options....................... -- -- -- -- 269,104
Forfeitures of compensatory
stock options................. -- -- -- -- --
Exercise of stock options....... -- -- -- -- 331,231
Issuance for stock purchase
plan.......................... -- -- -- -- 160,860
Net income...................... -- -- -- 5,396,451 5,396,451
-------- -------- ------------- ------------ ------------
Balance at December 31, 1998.... (174,726) (26,338) -- (8,584,246) 54,264,218
-------- -------- ------------- ------------ ------------
Secondary offering.............. -- -- -- -- 84,442,500
Windfall tax benefit of stock
options....................... -- -- -- -- 4,195,736
Issuance of compensatory stock
options....................... -- -- -- -- 323,208
Forfeitures of compensatory
stock options................. -- -- -- -- --
Exercise of stock options....... -- -- -- -- 2,196,018
Issuance of stock warrant....... -- -- -- -- 2,489,206
Issuance for stock purchase
plan.......................... -- -- -- -- 219,618
Change in unrealized gain (loss)
on marketable securities...... -- -- (24,905) -- (24,905)
Dividend payable................ -- -- -- -- --
Net income...................... -- -- -- 8,665,897 8,665,897
-------- -------- ------------- ------------ ------------
Balance at December 31, 1999.... (174,726) $(26,338) $ (24,905) $ 81,651 $156,771,496
======== ======== ============= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 148
PEGASUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income....................................... $ 8,665,897 $ 5,396,451 $ 589,460
Adjustments to reconcile net income to net cash
provided by operating activities:
Accrued interest reclassified to notes
payable..................................... -- -- 58,049
Windfall tax benefit from employee exercise of
non-qualified stock options................. 4,195,736 403,532 --
Write-off of in-process research and
development costs........................... -- 1,480,085 --
Loss (gain) on sale of equipment.............. 11,082 4,821 (53)
Depreciation and amortization................. 2,437,410 2,689,867 3,016,619
Write-off of minority interest investment..... 1,100,110 -- --
Deferred income taxes......................... (661,100) (2,084,625) --
Decrease goodwill due to release of valuation
allowance................................... -- 1,467,246 --
Recognition of stock option compensation...... 323,208 269,104 198,251
Other......................................... 90,722 27,615 3,359
Changes in assets and liabilities:
Restricted cash............................. (822,005) (820,644) (595,826)
Accounts receivable......................... (1,166,667) (1,566,348) (292,779)
Other current and noncurrent assets......... (1,493,627) (807,830) (1,203,609)
Accounts payable and accrued liabilities.... 1,483,841 794,456 1,425,801
Unearned income............................. (196,027) (413,840) (463,488)
Other noncurrent liabilities................ (35,592) 9,030 23,904
------------ ------------ ------------
Net cash provided by operating
activities............................. 13,932,988 6,848,920 2,759,688
------------ ------------ ------------
Cash flows from investing activities:
Purchase of software, property and equipment..... (3,388,233) (1,729,950) (1,594,401)
Proceeds from sale of software, property and
equipment..................................... 4,699 29,887 1,075
Purchase of marketable securities................ (54,536,121) (33,832,343) (11,486,932)
Proceeds from maturity of marketable
securities.................................... 34,893,540 27,416,378 4,808,599
Purchase of Driving Revenue L.L.C................ -- (5,998,366) --
Purchase of equity interest in investees......... (100,110) (1,500,000) --
------------ ------------ ------------
Net cash used in investing activities.... (23,126,225) (15,614,394) (8,271,659)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of stock.................. 89,347,342 4,717,387 40,497,639
Repayments on notes payable to affiliates........ -- -- (5,447,133)
Repayments of capital leases..................... (540,143) (1,116,521) (1,171,966)
Proceeds from capital leases..................... -- -- 3,913
------------ ------------ ------------
Net cash provided by financing
activities............................. 88,807,199 3,600,866 33,882,453
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents...................................... 79,613,962 (5,164,608) 28,370,482
Cash and cash equivalents, beginning year.......... 25,002,185 30,166,793 1,796,311
------------ ------------ ------------
Cash and cash equivalents, end of year............. $104,616,147 $ 25,002,185 $ 30,166,793
============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid.................................... $ 27,647 $ 144,833 $ 601,787
============ ============ ============
Income taxes paid................................ $ 1,116,557 $ 256,288 $ 17,916
============ ============ ============
Supplemental schedule of noncash investing and
financing activities:
Acquisition of equipment under capital leases.... $ -- $ -- $ 79,144
============ ============ ============
Common stock warrants issued in exchange for
customer contract asset....................... $ -- $ -- $ 238,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 149
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Pegasus is a leading provider of transaction processing and electronic
commerce services to the hotel industry worldwide. Pegasus is organized into
three businesses: Pegasus Electronic Distribution, Pegasus Commission Processing
and Pegasus Business Intelligence. The consolidated financial statements include
the accounts of Pegasus Systems, Inc. and its wholly owned subsidiaries
("Pegasus" or "the Company"). All significant intercompany balances have been
eliminated in consolidation.
MANAGEMENT ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management 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.
RESTRICTED CASH
Funds for travel agency commission checks which have not cleared the
Company's processing bank after certain time periods are returned to the
Company. Any amounts which are not remitted to travel agents will be escheated
to the appropriate states, as required. A liability equal to the restricted cash
is recorded upon receipt of the funds from the bank and is included in accrued
liabilities on the balance sheet.
INVESTMENTS IN DEBT SECURITIES
Marketable securities consist of corporate debt securities. By policy, the
Company invests primarily in high-grade marketable securities. All marketable
securities are defined as available-for-sale or held-to-maturity under the
provisions of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities."
Management determines the appropriate classification of its investments in
marketable securities at the time of purchase and re-evaluates such
determination at each balance sheet date. Debt securities that are bought with
the intent and ability to hold until maturity are classified as held-to-maturity
securities and are recorded at amortized cost. Debt securities that the Company
does not have the intent or ability to hold until maturity are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the changes in the unrealized gain or loss reported as a separate component
of stockholders' equity, net of tax.
CAPITALIZED SOFTWARE
Software development costs are accounted for in accordance with either
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed," or with Statement
of Position No. 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." Capitalized software development costs are
amortized on a product-by-product basis using the greater of the amount computed
by the ratio of current year net revenue to estimated future net revenue, or the
amount computed by the straight-line method over a period which approximates the
estimated economic life of the products. In the event unamortized software
F-7
<PAGE> 150
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
costs exceed the net realizable value of the software, the excess is recognized
in the period the excess is determined. Additionally, capitalized software
includes software purchased from third parties used in the operations of the
Company.
Prior to 1996, capitalized software 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 capitalized software costs to three years. The
effect of this change in 1999, 1998 and 1997 was to increase net income by
approximately $5,000, $144,000 and $142,000, respectively. This change had no
impact on basic and diluted income per share for 1999 and increased basic and
diluted income per share by $0.01 in 1998 and 1997. During 1999, 1998 and 1997,
the Company capitalized software costs of approximately $917,000, $646,000, and
$505,000, respectively. For 1999, capitalized software additions consisted of
internally developed software and software purchased from third parties. For
1998 and 1997, capitalized software additions consisted of software purchased
from third parties. During 1999, 1998 and 1997, amortization expense related to
capitalized software was approximately $499,000, $959,000 and $1,435,000,
respectively. Accumulated amortization of capitalized software was approximately
$9,633,000 and $9,134,000 at December 31, 1999 and 1998, 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, while betterments and major renewals are
capitalized. Any gain or loss resulting from the retirement or sale of an asset
is credited or charged to operations.
The Company evaluates long-lived assets to be held and used in the
business, or to be disposed of, for impairment whenever events or changes in
circumstances indicate that the net book value of the asset may not be
recoverable. An impairment is determined by comparing expected future cash flows
(undiscounted and before interest) to the net book value of the assets. If
impairment exists, the amount of impairment is measured as the difference
between the net book value of the assets and the estimated fair value of the
related assets. Based on its most recent analysis, the Company believes that no
impairment of property and equipment existed at December 31, 1999 or 1998.
GOODWILL
Goodwill represents the excess of the purchase price of acquisitions over
the fair value of the net assets acquired. Goodwill is amortized on a
straight-line basis over ten to fifteen years. Unamortized goodwill at December
31, 1999 and 1998, was $2,890,077 and $4,238,071, 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, 1999 or 1998. Amortization of
goodwill was approximately $416,000, $218,000 and $125,000 in 1999, 1998 and
1997, respectively.
OTHER INVESTMENTS
In June 1998, the Company purchased 250,000 shares of Series A Convertible
Preferred Stock of Customer Analytics, Inc. for $500,000 representing
approximately 7.1% interest. Customer Analytics, Inc. is a database marketing
applications and solutions provider specializing in customer relationship
marketing. In November 1999, Customer Analytics merged with ActionSystems
Holdings, Inc. The Company's interest after the merger became approximately
1.4%. The investment is accounted for based on the lower of cost or fair value.
F-8
<PAGE> 151
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In September 1998, the Company purchased 225,225 shares of Series B
Convertible Preferred Stock of Intermezzo Systems, Inc. for $1.0 million
representing approximately 10.6% interest. Intermezzo is a developer of
enterprise software solutions for the hospitality industry. The Intermezzo board
of directors elected to cease operations in July 1999 and entered into an
orderly plan of liquidation. As a result, Pegasus wrote-off $1.1 million in the
second quarter of 1999 representing the Company's entire investment in
Intermezzo.
REVENUES
Pegasus primarily derives its revenues from transaction fees and
commissions charged to participating hotels and travel agencies. The Company's
revenues are predominantly transaction-based.
Pegasus Electronic Distribution. Pegasus derives revenues from its GDS
distribution service by charging hotel customers a fee based on the number of
reservations made, less the number cancelled ("net reservations"). In addition,
hotels pay fees for status messages sent to global distribution systems through
the GDS distribution service. Status messages are electronic messages sent by
hotels to global distribution systems to update room rates, features and
availability information in global distribution system 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 fee per
transaction that a customer is expected to pay during the entire year. The
Company's interim balance sheets reflect a liability for the difference between
the fee per transaction that Pegasus actually bills a customer during the period
and the average fee per transaction that a customer is expected to pay for the
entire year. The liability created during the early periods of the year is
eliminated by the end of the year as the fee per transaction that Pegasus
actually bills a customer falls below the average fee per transaction for the
entire year. Additionally, Pegasus generally charges new participants in the GDS
distribution service a one-time set-up fee for work performed to establish the
connection between a hotel's central reservation system and the Pegasus
electronic distribution technology. Revenue for these one-time set-up fees is
recognized ratably over the set-up period, which generally ranges from two to
four months. The Company also charges certain global distribution systems a fee
based on either the number of net reservations or the number of hotel chains
connected to the global distribution system through the Pegasus electronic
distribution technology to compensate for the management and consolidation of
multiple interfaces.
Pegasus derives its TravelWeb.com revenues by charging participating hotels
a combination of transaction fees or commissions. For reservations that
originate on the TravelWeb.com website, Pegasus charges either a transaction fee
based on the number of net reservations made at participating properties or a
commission based on the value of the guest stay.
For reservations that originate on websites using the private-label
reservation service, Pegasus charges hotels transaction fees based on the number
of net reservations made at participating properties. Private-label reservation
customers also pay initial development fees and monthly subscription or
maintenance fees. Initial development fees are recognized ratably over the
set-up period.
Pegasus Commission Processing. Pegasus derives commission processing
revenues by charging each participating travel agency a fee based on a
percentage of commissions paid to that agency through the commission processing
service. The Company also generally charges participating hotels a fee based on
the number of commissionable transactions processed. Revenues from travel agency
fees can vary substantially from period to period based on the types of hotels
at which reservations are made and fluctuations in overall room rates. Pegasus
recognizes revenues from its commission processing service in the month in which
the hotel stay occurs. In the immediate following month, Pegasus collects
commissions from the hotels by the 12th business day of such month and pays
commissions to travel agencies by the
F-9
<PAGE> 152
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15th business day of such month. If a hotel fails to deliver funds to the
Company, Pegasus is not obligated to deliver commission payments on behalf of
the hotel to travel agencies. For the years ended December 31, 1999, 1998 and
1997, Pegasus Commission Processing revenues from hotels are presented net of
commission payments to travel agencies of approximately $352 million, $255
million, and $165 million, respectively. Pegasus Commission Processing revenues
for 1998 and 1997 also include amortization of a $2.0 million payment received
by the Company in June 1993 in exchange for a five-year non-cancelable data
processing contract. This payment was initially recorded as unearned income and
was recognized as revenue over the life of the contract, which terminated in
1998.
Pegasus Business Intelligence. Pegasus derives its business intelligence
revenues by charging hotels fees for the development and maintenance of hotel
databases and for consulting services. Pegasus Business Intelligence recognizes
as revenue the portion of the total contract price that the cost expended to
date bears to the anticipated final cost, based on current estimates to
complete. Contract costs include all direct labor and benefits and direct
materials. Additional billings are included in revenues when awarded or
received. Revisions in estimates of costs and earnings during the course of the
work are reflected in the accounting period in which the facts that require the
revision become known. At the time a loss becomes known, the entire amount of
the estimated ultimate loss is recognized in the financial statements.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rate is recognized in income in the period that includes the
enactment date. 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 1999, 1998 and 1997 was approximately
$982,000, $1,105,000 and $609,000, respectively.
FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments reflected in
the consolidated balance sheets at December 31, 1999 and 1998 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; therefore, 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. Pro forma disclosure of net income based on the provisions
of
F-10
<PAGE> 153
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAS 123 is presented in Note 9. For financial reporting purposes, 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.
STOCK SPLITS
In May 1997, the board of directors declared 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 Company's initial public offering ("IPO") (Note 8).
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.
On December 8, 1999, the board of directors declared a three-for-two split
of common stock to be effected in the form of a stock dividend on January 7,
2000 to all Pegasus stockholders of record on December 20, 1999. All references
in the consolidated financial statements to shares, share prices, per share
amounts and stock plans have been adjusted retroactively for the three-for-two
stock split.
FOREIGN CURRENCY
The U.S. dollar is the functional currency for the Company's foreign
operation. Gains and losses from foreign currency transactions, such as
settlement of foreign payables and foreign payroll, are included in net income.
NET INCOME PER SHARE
In 1997, the Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings per Share" ("FAS 128"). FAS 128 replaces primary and fully
dilutive earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effect of potential common shares. Basic net income per share is based on the
weighted average outstanding common shares. Diluted net income per share is
based on the weighted average outstanding shares reduced by the effect of
potential common shares (Note 15).
COMPREHENSIVE INCOME
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income". This statement requires separate
financial statement disclosure of comprehensive income, which encompasses
changes in net asset values derived from activity from both owner and non-owner
sources. In 1999, the Company had marketable securities classified as
available-for-sale; therefore, the change in the unrealized gain (loss) is
included as a component of stockholders' equity and other comprehensive income,
net of taxes. There were no items that qualified for treatment as components of
other comprehensive income for 1998 and 1997.
SEGMENT INFORMATION
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("FAS 131"). FAS 131 supercedes Statement of Financial Accounting Standards No.
14, "Financial Reporting for Segments of a Business Enterprise", replacing the
"industry" approach with the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the Company's
reportable segments. FAS 131 also requires disclosures about products and
services, geographic areas, and major customers. The adoption of FAS 131
F-11
<PAGE> 154
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
did not affect results of operations or financial position but did affect the
disclosure of segment information (Note 16).
CHANGE IN ACCOUNTING POLICY
On December 3, 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which summarizes certain of the Staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Staff is providing this guidance due, in part, to the large number of
revenue recognition issues that registrants encounter. The application of SAB
101 to revenue recognition for one-time set-up fees currently has an immaterial
effect on Pegasus' consolidated statement of operations. Pegasus will apply SAB
101 on a prospective basis for fiscal years beginning after December 31, 1999.
2. ACQUISITIONS
In August 1998, the Company acquired all of the equity interest in Driving
Revenue L.L.C. for approximately $6.0 million plus estimated expenses of less
than $100,000. Driving Revenue provides hotel database marketing and consulting
services.
The acquisition was recorded under the purchase method of accounting.
Accordingly, Driving Revenue's results of operations 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 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 (including approximately $2,000 cash)..... $ 176,000
Software................................................. 344,000
Property and equipment................................... 42,000
Goodwill................................................. 4,296,000
Current liabilities...................................... 338,000
</TABLE>
Approximately $1,480,000, based on a valuation performed by a third party, 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. Factors considered in determining the amount of the
purchase price allocated to in-process research and development included the
estimated stage of development for each project at the acquisition date, the
projected cash flows from the expected revenues to be generated from each
project and discounting the net cash flows. Such amount of in-process research
and development was charged to expense at the date of acquisition. The balance
of the purchase price, approximately $4,296,000, was recorded as goodwill and is
being amortized on a straight-line basis over a ten year period ending August
2008.
The following unaudited pro forma summary combines the consolidated results
of operations of Pegasus and Driving Revenue for the years ended December 31,
1998 and 1997 as if the acquisition had occurred at the beginning of 1998 and
1997 after giving effect to certain pro forma adjustments. The pro forma
adjustments include:
- amortization of excess purchase price allocated to software
- amortization of goodwill
- decreased interest income associated with acquisition funding during 1998
and for the period from the Company's initial public offering in 1997 to
the end of 1997
F-12
<PAGE> 155
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- interest expense associated with acquisition funding for the period from
the beginning of 1997 to the date of the Company's initial public
offering in 1997
- elimination of in-process research and development in 1998 due to its
nonrecurring nature
- related income tax effects
This pro forma financial information is provided for informational purposes only
and may not be indicative of the results of operations as they would have been
had the transaction been effected on the assumed dates nor is it indicative of
the results of operations which may occur in the future.
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
Net revenues............................................... $29,737,000 $22,270,000
Net income (loss).......................................... 6,541,000 (232,000)
Net income (loss) per share................................ 0.39 (0.02)
</TABLE>
3. ACCOUNTS RECEIVABLE
The Company collects travel agents' commissions from hotel chains and,
after retaining a portion of these commissions as a fee, remits the net
commissions to the travel agents. At December 31, 1999 and 1998, trade accounts
receivable were stated net of commissions of approximately $29,200,000 and
$21,505,000, respectively.
4. MARKETABLE SECURITIES
Marketable securities held by the Company at December 31, 1999 are
classified as available-for-sale and consisted of corporate debt securities. The
cost and fair value of marketable securities at December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
1999
-----------
<S> <C>
Cost........................................................ $35,320,259
Gross unrealized holding gains.............................. 926
Gross unrealized holding losses............................. (38,661)
-----------
Fair value.................................................. $35,282,524
===========
</TABLE>
Marketable securities held by the Company at December 31, 1998 were classified
as held-to-maturity. At December 31, 1998, the amortized cost of corporate debt
securities was $15,768,400. As of December 31, 1998, the aggregate fair market
value of the held-to-maturity securities was not materially different from their
carrying values, and the gross unrealized gains and losses by type of security
were not material.
Realized gains and losses are determined on a specific identification
basis. There were no realized gains or losses from investment transactions in
1999, 1998 or 1997.
F-13
<PAGE> 156
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>
1999 1998
----------- -----------
<S> <C> <C>
Computer equipment......................................... $ 6,086,212 $ 5,817,100
Furniture and equipment.................................... 1,032,240 890,334
Office equipment........................................... 1,795,334 1,320,239
Leasehold improvements..................................... 204,084 93,313
----------- -----------
9,117,870 8,120,986
Less: accumulated depreciation............................. (5,549,658) (5,485,918)
----------- -----------
Property and equipment, net................................ $ 3,568,212 $ 2,635,068
=========== ===========
</TABLE>
6. CAPITAL LEASES
Assets recorded under capital leases, primarily consisting of computer
equipment, are recorded at the lower of the present value of future minimum
lease payments or the fair value of the asset. Total assets recorded under
capital leases in 1999 and 1998 were approximately $470,000 and $3,436,000,
respectively, net of accumulated amortization of $470,000 and $3,054,000,
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>
<S> <C>
Aggregate minimum lease payments all of which are due in the
year 2000................................................. $ 54,237
Less: amount representing interest and taxes................ (1,673)
--------
52,564
Less current portion........................................ (52,564)
--------
$ --
========
</TABLE>
Interest rates on capital leases range from approximately 7% to 14%. Interest
expense on capital leases for the years ended December 31, 1999, 1998 and 1997
was approximately $17,000, $144,000 and $277,000, respectively.
7. NOTES PAYABLE
In August 1997, the Company repaid all outstanding principal and accrued
interest on notes payable from the proceeds of the Company's initial public
offering (Note 8). Total principal and interest paid during 1997 was
approximately $5,711,000. Interest expense related to these notes was
approximately $322,000 during the year ended December 31, 1997.
8. STOCKHOLDERS' EQUITY
In August 1997, the stockholders amended the Company's certificate of
incorporation to increase the number of authorized shares of common stock from
20 million to 100 million.
The Company completed an IPO in August 1997. The Company's Registration
Statement on Form S-1 (File No. 333-28595) with respect to the IPO was declared
effective on August 6, 1997, and the Company's stock began trading on the Nasdaq
National Market under the symbol PEGS on August 7, 1997. The Company sold
5,175,000 shares of common stock at a per share price of $8.67. Net proceeds to
the Company, after deduction of the underwriting discount and estimated IPO
expenses, were approximately $40.5 million. Selling stockholders also sold
988,500 shares at a per share price of $8.67.
F-14
<PAGE> 157
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net proceeds to the stockholders after deduction of the underwriting discount
were approximately $8.0 million. The Company did not receive any proceeds from
the sale of shares by the selling stockholders. Concurrent with the completion
of the Company's IPO, a four-for-three split of the Company's outstanding common
and Series A preferred stock was effected (Note 1), and all outstanding shares
of Series A preferred stock were converted into shares of common stock. 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.
Effective February 11, 1998, the Company completed a secondary public
offering of common stock. The Company sold 420,481 shares of common stock at
$11.67 per share. Net proceeds, after deducting the underwriting discount and
estimated offering expenses, were approximately $4.2 million. Selling
stockholders also sold 3,202,019 shares at $11.67 per share. The Company did not
receive any proceeds from the sales of shares by the selling stockholders.
In May 1998, stockholders amended the Company's certificate of
incorporation to reduce the number of authorized shares of common stock from 100
million to 50 million. The financial statements have been retroactively adjusted
to reflect the reduction in authorized shares.
In September 1998, the board of directors authorized the repurchase of up
to $6.0 million in aggregate of the Company's common stock from time to time. No
shares have been acquired as of December 31, 1999.
In September 1998, the board of directors declared a dividend distribution
of one preferred stock purchase right for each outstanding share of the
Company's common stock. Each right will entitle stockholders to buy one
one-thousandth of a share of the Company's Series A preferred stock for each
share of the Company's common stock held at a price of $90.00. The number of
rights associated with shares of common stock has been proportionally adjusted
for the stock split effected in January 2000. The rights will be exercisable
only if a person or group of affiliated or associated persons acquires, or has
announced the intent to acquire, 20% or more of the Company's common stock.
In May 1999, Pegasus completed a secondary public offering of common stock.
The effective date of the registration statement on Form S-3 was May 6, 1999.
Pegasus sold 3,450,000 shares of common stock at a price of $25.92 per share.
After deducting the underwriters' discounts and offering expenses, net proceeds
to Pegasus were approximately $84.4 million.
On December 8, 1999, the board of directors approved a three-for-two stock
split to be effected in the form of a stock dividend on January 7, 2000 to
stockholders of record on December 20, 1999. All references in the consolidated
financial statements to shares, share prices, per share amounts and stock plans
have been retroactively adjusted for the three-for-two stock split. In
connection with the stock split, $68,383 and $53,268 was reclassified to common
stock from additional paid-in capital in the December 31, 1999 and 1998 balance
sheets, respectively.
9. STOCK-BASED COMPENSATION
In accordance with the Company's 1996 stock option plan ("1996 Plan"),
amended and approved in March 1997, options to purchase 1,300,000 shares of the
Company's common stock may be granted to Company employees. Options granted
under the 1996 Plan before September 15, 1999 expire in December 2005. In
accordance with the Company's 1997 stock option plan ("1997 Plan"), approved in
March 1997 and amended in May 1999, options to purchase 1,050,000 shares of the
Company's common stock may be granted to Company employees and non-employee
directors and contractors. Options granted to Company employees under the 1997
Plan before September 15, 1999 expire in December 2006. Options granted to
Company employees on or after September 15, 1999 under both the 1996 and 1997
Plans (collectively, "Plans") expire ten years from the date of grant. Options
granted under the Plans may be in the form of
F-15
<PAGE> 158
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
incentive stock options or nonqualified stock options. The compensation
committee of the board of directors ("Committee") administers the Plans and
determines grant prices. Options granted to Company employees generally vest
one-fourth after one year from the date of grant and one-twelfth of the balance
each quarter thereafter. Options granted to non-employee directors and
contractors vest and expire as determined by the Committee. The Company's
authorized but unissued or reacquired common stock is used as stock options are
exercised.
In accordance with APB 25, the Company recorded unearned compensation of
approximately $250,000, $241,000 and $451,000 in 1999, 1998 and 1997,
respectively, related to options. Unearned compensation is being recognized
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 approximately $323,000, $269,000 and $198,000 was
charged to operations in 1999, 1998 and 1997, respectively.
As discussed in Note 1, the Company has adopted the disclosure-only
provision of FAS 123. Had compensation cost for the Company's stock option plans
been determined based on the fair value provisions of FAS 123, the Company's net
income and net income per share would have been decreased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- --------
<S> <C> <C> <C>
Net income -- as reported......................... $8,665,897 $5,396,451 $589,460
Net income -- pro forma........................... $7,571,506 $4,859,692 $334,589
Net income per share -- as reported:
Basic........................................... $ 0.47 $ 0.34 $ 0.05
Diluted......................................... $ 0.44 $ 0.32 $ 0.05
Net income per share -- pro forma:
Basic........................................... $ 0.41 $ 0.31 $ 0.03
Diluted......................................... $ 0.38 $ 0.29 $ 0.03
</TABLE>
The pro forma disclosures provided are not likely to be representative of the
effects on reported net income for future years due to future grants and the
vesting requirements of the Company's stock option plans.
The weighted average fair value for options with exercise prices equal to
the market price of stock at the grant date was $14.55 in 1999 and $4.54 in
1998. There were no options granted in 1997 with exercise prices equal to the
market price of stock at the grant date. The weighted average fair value for
options with exercise prices below the market price of stock at the grant date
was $13.72 in 1999, $8.99 in 1998 and $5.67 in 1997. 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:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Dividend yield....................................... -- -- --
Expected volatility:
Pre-IPO grants..................................... -- -- 0.0%
Post-IPO grants.................................... 72.0% 72.8% 65.0%
Risk-free rate of return............................. 5.7% 4.6% 6.1%
Expected life........................................ 4.0 years 4.0 years 4.9 years
</TABLE>
F-16
<PAGE> 159
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes activity under the Company's stock option plans
during the years ended December 31:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE EXERCISE
NUMBER OF COMPANY OPTIONS PRICE PER SHARE
--------------------------------- -------------------------
1999 1998 1997 1999 1998 1997
--------- --------- --------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year......... 2,000,942 1,623,417 1,157,610 $ 4.91 $3.83 $1.59
Granted..................... 524,875 595,749 497,499 24.93 8.29 8.99
Exercised................... 543,322 100,480 2,000 4.02 3.73 2.07
Canceled.................... 123,322 117,744 29,692 6.64 8.13 2.89
--------- --------- --------- ------ ----- -----
Options outstanding at end
of year................... 1,859,173 2,000,942 1,623,417 $10.71 $4.91 $3.83
========= ========= ========= ====== ===== =====
Options exercisable at end
of year................... 706,978 735,784 395,151 $ 3.63 $2.95 $1.55
</TABLE>
The following table summarizes information for stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ---------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
EXERCISE PRICES OPTIONS CONTRACTUAL LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
- --------------- --------- ---------------- -------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
$1.34................... 514,250 6.0 years $ 1.34 414,874 $ 1.34
$2.07................... 144,098 5.8 years 2.07 91,871 2.07
$6.33-$8.93............. 396,397 6.9 years 7.03 88,704 6.93
$10.20-$15.09........... 278,053 6.2 years 10.94 111,519 10.82
$16.92-$25.25........... 427,375 8.0 years 24.34 -- --
$25.42-$31.17........... 99,000 6.5 years 27.25 -- --
--------- --------- ------ ------- ------
1,859,173 6.7 years $10.71 706,968 $ 3.63
========= ========= ====== ======= ======
</TABLE>
The pro forma disclosures for 1999 include approximately $108,000 of
compensation expense related to the Company's Employee Stock Purchase Plan (Note
13). The fair value of shares issued under this plan was estimated using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1999
--------
<S> <C>
Dividend yield.............................................. --
Expected volatility......................................... 72.0%
Risk-free rate of return.................................... 4.5%
Expected life............................................... 1.0 year
</TABLE>
10. INCOME TAXES
Pretax income from continuing operations for the years ended December 31
was taxed under the following jurisdictions:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- --------
<S> <C> <C> <C>
Domestic......................................... $13,260,045 $5,495,808 $519,459
Foreign.......................................... 93,645 98,267 97,917
----------- ---------- --------
$13,353,690 $5,594,075 $617,376
=========== ========== ========
</TABLE>
F-17
<PAGE> 160
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred taxes consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward........................... $1,721,136 $2,162,922
Capital loss.............................................. 374,037 --
Stock option compensation expense......................... 128,273 181,545
Depreciation and amortization............................. 844,814 --
Rent expense.............................................. 36,309 52,540
Various expense accruals.................................. 81,231 50,660
Charitable contributions.................................. 30,658 22,495
Bad debt reserves......................................... 25,399 36,396
Income tax credits........................................ 191,585 24,160
Other..................................................... 12,830 --
---------- ----------
Total gross deferred tax assets................... 3,446,272 2,530,718
Valuation allowance....................................... -- (270,000)
Deferred tax liability:
Software amortization..................................... -- (109,190)
Depreciation and amortization............................. -- (66,903)
---------- ----------
Net deferred tax assets..................................... $3,446,272 $2,084,625
========== ==========
</TABLE>
In 1997, the net deferred tax asset was fully reserved because of uncertainty
regarding the Company's ability to recognize the benefit of the asset in future
years. In the fourth quarter of 1998, the Company released a significant portion
of the valuation allowance as management believed it was more likely than not
that the net deferred tax asset would be realized. The valuation allowance
remaining at December 31, 1998 related to state net operating loss
carryforwards. This valuation allowance was removed in 1999 because the related
state net operating loss carryforward expired. A portion of the deferred tax
asset was related to net operating loss carryforwards of The Hotel Clearing
Corporation ("HCC") that existed at the time HCC was acquired by the Company in
1995. Accordingly, approximately $1,467,000 of the valuation allowance released
in 1998 reduced the remaining goodwill related to the purchase of HCC.
At December 31, 1999 and 1998, the Company had federal net operating loss
carryforwards of approximately $5,062,000 and $5,567,000, respectively. The 1999
net operating loss carryforwards that existed at December 31, 1999 will begin to
expire in 2007. 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. As of
December 31, 1999, management believes it is more likely than not that the net
deferred tax asset will be realized; therefore, no valuation allowance is
necessary.
In 1999, the Company determined that amortization expense related to the
Driving Revenue acquisition would be deductible for tax purposes. As a result,
the Company established a deferred tax asset in the amount of approximately
$932,000 and reduced goodwill accordingly.
F-18
<PAGE> 161
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the income tax provision for the years ended December 31
were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- --------
<S> <C> <C> <C>
Current provision:
Federal.......................................... $4,791,986 $ 381,025 $ 51,525
State............................................ 519,907 462,413 --
Foreign.......................................... 37,000 38,100 27,916
---------- --------- --------
5,348,893 881,538 79,441
---------- --------- --------
Deferred benefit:
Federal.......................................... (579,243) (641,069) $(51,525)
State............................................ (81,857) (42,845) --
---------- --------- --------
(661,100) (683,914) (51,525)
---------- --------- --------
Provision for income taxes......................... $4,687,793 $ 197,624 $ 27,916
========== ========= ========
</TABLE>
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>
1999 1998 1997
---- ----- -----
<S> <C> <C> <C>
Expected income tax provision.............................. 34.0% 34.0% 34.0%
Valuation allowance........................................ -- (46.7)% (38.4)%
Permanent differences...................................... (2.0)% 10.9% 9.8%
State income taxes......................................... 2.2% 5.0% --
Rate change, state taxes................................... 0.5% -- --
Other, net................................................. 0.4% 0.3% (0.9)%
---- ----- -----
Provision for income taxes................................. 35.1% 3.5% 4.5%
==== ===== =====
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
The Company leases its corporate office space and certain office equipment
under non-cancelable operating leases. The Company incurred rent expense of
approximately $1,039,000, $731,000 and $720,000 in 1999, 1998 and 1997,
respectively.
Approximate future minimum lease payments at December 31, 1999, under
non-cancelable operating leases with original terms exceeding one year,
including the Pegasus UK operating lease translated at the rate in effect at
December 31, 1999, were as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
2000.................................................... $1,319,000
2001.................................................... 1,388,000
2002.................................................... 1,362,000
2003.................................................... 65,000
2004.................................................... 65,000
Thereafter.............................................. 75,000
----------
$4,274,000
==========
</TABLE>
In May 1997, the Company issued a warrant to a customer for the purchase of
518,584 shares of the Company's common stock as part of a five year contract
involving a wide range of the Company's services. The warrant was exercised in
May 1999 at an exercise price of $4.80 per share. The Company used the
F-19
<PAGE> 162
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Black-Scholes option pricing model to value the warrant. A contract asset of
$238,000 was recorded in May 1997, which is being amortized ratably over the
associated five-year contract period.
12. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) defined contribution retirement plan ("401(k)
Plan") covering full-time employees who have attained the age of twenty-one. The
401(k) Plan allows eligible employees to defer receipt of up to fifteen percent
of their compensation and contribute such amounts to various investment funds.
Eligible employees may elect to participate at the beginning of any quarter
after their hire date. Employee contributions vest immediately.
The Company makes discretionary matching contributions of up to five
percent of employees' annual contributions. The Company's matching contributions
vest 20% a year for five years. After five years employment, an employee is
fully vested in all matching contributions. During 1999, 1998 and 1997, the
Company contributed approximately $363,000, $292,000 and $217,000, respectively,
to the 401(k) Plan.
13. STOCK PURCHASE PLAN
In May 1998, the Company's stockholders approved the Pegasus Systems, Inc.
1997 Employee Stock Purchase Plan ("Stock Plan"). The Company has reserved
750,000 shares of its common stock for purchase by employees pursuant to the
terms of the Stock Plan. Eligible participating employees of the Company may
elect to have an amount up to, but not in excess of, 10% of their regular salary
or wages withheld for the purpose of purchasing the Company's common stock.
Under the Stock Plan, an eligible participating employee will be granted an
option at the beginning of each plan year (the "Offering Commencement Date") to
purchase at the end of the plan year (the "Offering Termination Date") shares of
common stock using the amounts that have accumulated from the employee's payroll
deductions made during the plan year at a price that is 85% of the closing price
of the common stock on the Nasdaq National Market or any other national
securities exchange on the Offering Commencement Date or the Offering
Termination Date, whichever is lower.
14. RELATED PARTIES
Pegasus has entered into an arrangement with REZ, Inc. to manage and
operate equipment owned by Pegasus at a facility owned by REZ. In this
arrangement, REZ also provides equipment monitoring services, assurance of power
supply and communications link back-up support. During 1999, 1998 and 1997,
Pegasus recognized expense in the amount of approximately $578,000, $461,000 and
$488,000, respectively, for those services. Pegasus provides electronic
distribution, commission processing and Internet-based distribution services to
REZ. Revenues relating to these services were approximately $1,179,000, $796,000
and $751,000 during 1999, 1998 and 1997, respectively (Note 18).
Persons related to an officer of the Company have provided printing, design
and procurement services to the Company. During 1999, 1998 and 1997, the Company
paid approximately $34,000, $3,000 and $6,000, respectively, related to these
services, the majority of which related to capitalized furniture purchases.
Prior to the IPO, the Company derived a substantial portion of its revenues
from certain stockholders and stockholder-owned companies. For the year ended
December 31, 1997, revenue generated by stockholders and stockholder-owned
companies was approximately $15.7 million or 75.3%. Disclosing revenues
generated by stockholders and stockholder-owned companies was not considered
necessary for the years ended December 31, 1999 and 1998 since the ownership
percentage of these stockholders was reduced by the Company's IPO in August
1997, secondary offerings in February 1998 and May 1999 and subsequent open
market sales of their shares. The ownership percentage of these stockholders was
an
F-20
<PAGE> 163
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
aggregate of less than 10% of the Company's common shares outstanding at
December 31, 1999 and 1998; therefore, these stockholders were not considered
affiliates as of and for the years ended December 31, 1999 and 1998.
15. NET INCOME PER SHARE
Basic net income per share for the years ended December 31, 1999, 1998 and
1997 has been computed in accordance with FAS 128 using the weighted average
number of common shares outstanding after giving retroactive effect to stock
splits (Notes 1 and 8).
Diluted net income per share for the years ended December 31, 1999, 1998
and 1997 gives effect to all dilutive potential common shares that were
outstanding during the periods. Outstanding options and warrants with strike
prices below the average fair market value of the Company's common stock for the
years ended December 31, 1999, 1998 and 1997 were included in the diluted
earnings per share (EPS) calculations for the respective periods.
The following table sets forth the options excluded from the diluted EPS
calculations for the respective periods:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ------------------------ -----------------------
OPTIONS OPTIONS OPTIONS
THREE MONTHS ENDED EXCLUDED STRIKE PRICE EXCLUDED STRIKE PRICE EXCLUDED STRIKE PRICE
- ------------------ -------- ------------- -------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
March 31................ 1,500 $27.25 -- -- -- --
June 30................. 9,000 $27.25-$31.17 -- -- -- --
September 30............ 106,500 $25.25-$31.17 81,000 $12.96-$15.16 -- --
December 31............. -- -- 85,500 $12.96-$16.92 -- --
</TABLE>
The options were excluded because they were anti-dilutive. The options excluded
in 1999 and 1998 expire from December 2005 to December 2006.
F-21
<PAGE> 164
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the basic and diluted net income per share
computation for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net income.................................... $ 8,665,897 $ 5,396,451 $ 589,460
=========== =========== ===========
Basic:
Weighted average number of shares
outstanding.............................. 18,576,107 15,691,421 10,800,573
----------- ----------- -----------
Net income per share........................ $ 0.47 $ 0.34 $ 0.05
=========== =========== ===========
Diluted:
Weighted average number of shares
outstanding.............................. 18,576,107 15,691,421 10,800,573
Additional weighted average shares from
assumed conversion of dilutive
convertible preferred stock to common
stock, net of shares to be repurchased
with exercise proceeds................... -- -- 1,382,032
Additional weighted average shares from
assumed exercise of dilutive stock
options and warrants, net of shares to be
repurchased with exercise proceeds....... 1,113,280 1,103,922 831,473
----------- ----------- -----------
Weighted average number of shares
outstanding used in the diluted net
income per share calculation............. 19,689,387 16,795,343 13,014,078
----------- ----------- -----------
Net income per share........................ $ 0.44 $ 0.32 $ 0.05
=========== =========== ===========
</TABLE>
16. SEGMENT INFORMATION
In 1998, the Company adopted FAS 131. The prior years' segment information
has been restated to present the Company's three reportable segments:
- Pegasus Electronic Distribution -- provides services that enable travel
agents and individual travelers to electronically access hotel room
inventory information and conduct reservation transactions;
- Pegasus Commission Processing -- provides commission payment processing
services to the hotel industry and travel agencies; and
- Pegasus Business Intelligence -- provides data mining and reporting
services for benchmark analysis and strategic planning for the hotel
industry.
The accounting policies of the segments are the same as those described in the
Note 1. Segment data includes a charge allocating all corporate costs to the
operating segments. The Company evaluates the performance of its segments based
on pretax income. The Company is organized primarily on the basis of services
provided.
F-22
<PAGE> 165
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents information about reported segments for the
years ending December 31:
<TABLE>
<CAPTION>
ELECTRONIC COMMISSION BUSINESS RECONCILING
DISTRIBUTION PROCESSING INTELLIGENCE ITEMS TOTAL
------------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
1999
Net revenues.................. $17,888,157 $18,187,232 $1,960,880 $ -- $38,036,269
Interest income............... -- 158,325 44,322 4,625,496 4,828,143
Interest expense.............. 23,175 3,528 53 -- 26,756
Depreciation and
amortization................ 1,256,591 383,116 797,703 -- 2,437,410
Income(loss) before taxes..... 5,957,372 7,880,898 (3,993,490) 3,508,910 13,353,690
1998
Net revenues.................. 12,310,046 15,851,557 902,864 -- 29,064,467
Interest income............... 14,358 151,243 12 2,337,652 2,503,265
Interest expense.............. 112,988 33,788 103 -- 146,879
Depreciation and
amortization................ 1,258,152 1,175,451 256,264 -- 2,689,867
Write-off purchased in-process
R&D......................... -- -- 1,480,085 -- 1,480,085
Income(loss) before taxes..... 506,036 5,527,910 (2,777,523) 2,337,652 5,594,075
1997
Net revenues.................. 9,864,738 11,038,678 -- -- 20,903,416
Interest income............... 7,820 105,437 -- 880,335 993,592
Interest expense.............. 516,631 83,265 171 -- 600,067
Depreciation and
amortization................ 1,074,780 1,929,588 12,251 -- 3,016,619
Income(loss) before taxes..... (1,815,218) 2,122,436 (570,177) 880,335 617,376
</TABLE>
Reconciling items for 1999, 1998 and 1997 include interest income earned on
short-term investments. Reconciling items for 1999 also include a write-off of
the Company's investment in Intermezzo Systems, Inc.
The Company's business is conducted principally in the United States. The
Company does not utilize or measure revenues by geographic location to evaluate
Pegasus Electronic Distribution or Pegasus Business Intelligence segments.
However, the Company does track the geographic source of travel agency and hotel
transactions that give rise to Pegasus Commission Processing revenues. For 1999,
1998 and 1997, approximately $3,300,000, $2,922,000 and $2,037,000 of Commission
Processing revenues were derived from customers based outside the United States.
F-23
<PAGE> 166
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes the unaudited consolidated quarterly results
of operations for 1999 and 1998 after giving retroactive effect to a
three-for-two stock split (Note 8) (in thousands except per share amounts):
<TABLE>
<CAPTION>
QUARTERS ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1999
Revenues................................. $ 8,372 $ 9,189 $10,075 $10,400
Income before provision for income
taxes.................................. $ 2,432 $ 2,029 $ 4,136 $ 4,756
Net income............................... $ 1,501 $ 1,253 $ 2,730 $ 3,182
Basic net income per share............... $ 0.09 $ 0.07 $ 0.14 $ 0.16
Diluted net income per share............. $ 0.09 $ 0.06 $ 0.13 $ 0.15
Basic weighted average shares
outstanding............................ 15,862 18,115 20,049 20,214
Diluted weighted average shares
outstanding............................ 17,304 19,363 20,916 21,120
1998
Revenues................................. $ 6,167 $ 6,781 $ 7,803 $ 8,313
Income before provision for income
taxes.................................. $ 947 $ 1,382 $ 798 $ 2,467
Net income............................... $ 940 $ 1,357 $ 772 $ 2,328
Basic net income per share............... $ 0.06 $ 0.09 $ 0.05 $ 0.15
Diluted net income per share............. $ 0.06 $ 0.08 $ 0.05 $ 0.14
Basic weighted average shares
outstanding............................ 15,487 15,736 15,762 15,776
Diluted weighted average shares
outstanding............................ 16,557 16,904 16,793 16,923
</TABLE>
In accordance with FAS 128, earnings per share are computed independently for
each of the quarters presented; therefore, the sum of the quarterly earnings per
share may not equal the annual earnings per share.
18. SUBSEQUENT EVENT
On November 16, 1999, the Company entered into a definitive agreement to
acquire Phoenix-based REZsolutions, Inc., a leader in providing distribution
services and solutions for the hotel industry. Under the terms of the agreement,
Pegasus will issue 3.99 million shares of common stock, pay $115.0 million in
cash and agree to a $20.0 million note payable to Utell International Ltd., a
subsidiary of Reed Elsevier plc, a substantial REZ stockholder. Based on a five
day average stock price of $31.775, the transaction is valued at approximately
$260 million subject to closing balance sheet adjustments. The acquisition is
expected to close during the first quarter of 2000 and will be accounted for
under the purchase method of accounting.
F-24
<PAGE> 167
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
REZ, Inc.
Phoenix, Arizona
We have audited the accompanying consolidated balance sheets of REZ, Inc.
(formerly REZsolutions, Inc.) and subsidiaries (the "Company") as of December
31, 1999 and 1998, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1999 and 1998, and the results of its operations and its cash flows for each of
three years in the period ended December 31, 1999 in conformity with generally
accepted accounting principles.
As discussed in Note 11, the financial statements for the years ended
December 31, 1998 and 1997 have been restated.
Deloitte & Touche LLP
Phoenix, Arizona
February 21, 2000
F-25
<PAGE> 168
REZ, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000'S OMITTED EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
-------- -------------
(AS RESTATED,
SEE NOTE 11)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,766 $ 3,061
Accounts receivable, net of allowance of $6,858 and $4,870
in 1999 and 1998....................................... 37,121 29,771
Deferred income taxes..................................... 2,633 2,527
Prepaid expenses and other................................ 4,218 3,265
-------- --------
Total current assets.............................. 46,738 38,624
-------- --------
PROPERTY AND EQUIPMENT -- Net............................... 29,747 25,548
GOODWILL -- Net............................................. 19,814 20,679
OTHER INTANGIBLES -- Net.................................... 10,355 16,750
LICENSE AGREEMENTS -- Net................................... 3,427 2,438
DEPOSITS AND OTHER ASSETS................................... 1,683 572
-------- --------
TOTAL............................................. $111,764 $104,611
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable and capital lease
obligation............................................. $ 6,747 $ 6,814
Accounts payable.......................................... 19,965 9,905
Accrued expenses.......................................... 9,121 12,343
Accrued payroll and benefit related expenses.............. 5,494 5,464
Income taxes payable...................................... 3,420 2,611
Deferred revenue.......................................... 7,952 7,471
Hotel customers deposits.................................. 2,149 3,328
-------- --------
Total current liabilities......................... 54,848 47,936
NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS -- Net of
current portion........................................... 8,672 1,533
DEFERRED INCOME TAX LIABILITY............................... 2,214
-------- --------
Total liabilities................................. 63,520 51,683
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 7)
SHAREHOLDERS' EQUITY:
Non-Voting Series A Preferred shares, $.005 par
value -- authorized, 30,703,000 shares; issued and
outstanding, 20,702,900 shares......................... 104 104
Common shares, $.001 par value -- authorized, 70,000,000
shares; issued and outstanding, 34,513,780 and
34,504,281 shares in 1999 and 1998..................... 35 35
Additional paid-in capital................................ 81,032 80,982
Accumulated deficit....................................... (32,471) (27,880)
Accumulated other comprehensive (loss) income............. (456) (313)
-------- --------
Total shareholders' equity........................ 48,244 52,928
-------- --------
TOTAL............................................. $111,764 $104,611
======== ========
</TABLE>
See notes to consolidated financial statements.
F-26
<PAGE> 169
REZ INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000'S OMITTED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
-------- ------------- --------
(AS RESTATED,
SEE NOTE 11)
<S> <C> <C> <C>
REVENUE..................................................... $147,745 $141,870 $ 90,454
-------- -------- --------
DIRECT COSTS................................................ 74,535 74,634 41,148
-------- -------- --------
Gross profit...................................... 73,210 67,236 49,306
-------- -------- --------
OPERATING EXPENSES
Research and development.................................. 4,100 2,985 292
Purchased research and development........................ 19,999
Sales and marketing....................................... 28,736 30,164 22,670
General and administrative................................ 28,507 26,282 16,558
Depreciation and amortization............................. 16,980 16,064 5,248
-------- -------- --------
Total operating expenses.......................... 78,323 75,495 64,767
-------- -------- --------
OPERATING LOSS.............................................. (5,113) (8,259) (15,461)
GAIN ON SALES OF INVESTMENTS................................ 3,443
INTEREST (EXPENSE) INCOME -- Net............................ (1,111) (613) 79
-------- -------- --------
NET LOSS BEFORE INCOME TAXES................................ (6,224) (5,429) (15,382)
INCOME TAX BENEFIT (PROVISION).............................. 1,633 1,086 (2,170)
-------- -------- --------
NET LOSS.................................................... $ (4,591) $ (4,343) $(17,552)
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-27
<PAGE> 170
REZ INC. AND SUBSIDIARIES
(FORMERLY REZSOLUTIONS, INC.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (000'S OMITTED)
<TABLE>
<CAPTION>
REED PREFERRED SHARES COMMON SHARES ADDITIONAL
ELSEVIER ----------------- --------------- PAID-IN
EQUITY SHARES AMOUNT SHARES AMOUNT CAPITAL
-------- ------- ------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997................... $ 13,195
Net earnings through November 30, 1997... 5,985
Contribution to equity through
forgiveness of debt by Reed............ 2,752
Exchange of Reed equity for preferred and
common stock on December 1, 1997....... (21,932) 20,703 $104 23,003 $23 $21,805
Shares issued in connection with the
acquisition of Anasazi................. 11,501 12 58,177
Net loss subsequent to November 30,
1997...................................
Unrealized holding gain (net of tax of
$770) (as restated -- see Note 11).....
Translation adjustments..................
Comprehensive loss.................
-------- ------ ---- ------ --- -------
BALANCE, DECEMBER 31, 1997................. -- 20,703 104 34,504 35 79,982
Net loss (as restated -- see Note 11)....
Contribution to equity through
forgiveness of debt by Reed............ 1,000
Translation adjustments..................
Unrealized holding loss (net of tax
benefit of $770) (as restated -- see
Note 11)...............................
Comprehensive loss.................
-------- ------ ---- ------ --- -------
BALANCE, DECEMBER 31, 1998 (as
restated -- see Note 11)................. 20,703 104 34,504 35 80,982
Net loss.................................
Translation adjustments..................
Exercise of stock options................ 10 50
-------- ------ ---- ------ --- -------
BALANCE, DECEMBER 31, 1999................. $ -- 20,703 $104 34,514 $35 $81,032
======== ====== ==== ====== === =======
<CAPTION>
ACCUMULATED COMPREHENSIVE
INCOME (LOSS)
-------------------------------- TOTAL
ACCUMULATED SHAREHOLDERS' COMPREHENSIVE
DEFICIT OTHER TOTAL EQUITY INCOME
----------- ------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997................... $ 13,195
Net earnings through November 30, 1997... 5,985
Contribution to equity through
forgiveness of debt by Reed............ 2,752
Exchange of Reed equity for preferred and
common stock on December 1, 1997.......
Shares issued in connection with the
acquisition of Anasazi................. 58,189
Net loss subsequent to November 30,
1997................................... $(23,537) $(23,537) (23,537) $(23,537)
Unrealized holding gain (net of tax of
$770) (as restated -- see Note 11)..... $ 2,303 2,303 2,303 2,303
Translation adjustments.................. 73 73 73 73
--------
Comprehensive loss................. $(21,161)
-------- ------- -------- -------- ========
BALANCE, DECEMBER 31, 1997................. 23,537 2,376 (21,161) 58,960
Net loss (as restated -- see Note 11).... (4,343) (4,343) (4,343) $ (4,343)
Contribution to equity through
forgiveness of debt by Reed............ 1,000
Translation adjustments.................. (386) (386) (386) (386)
Unrealized holding loss (net of tax
benefit of $770) (as restated -- see
Note 11)............................... (2,303) (2,303) (2,303) (2,303)
--------
Comprehensive loss................. $ (7,032)
-------- ------- -------- -------- ========
BALANCE, DECEMBER 31, 1998 (as
restated -- see Note 11)................. (27,880) (313) (28,193) 52,928
Net loss................................. (4,591) (4,591) (4,591) $ (4,591)
Translation adjustments.................. (143) (143) (143) (143)
Exercise of stock options................ 50
-------- ------- -------- -------- --------
BALANCE, DECEMBER 31, 1999................. $(32,471) $ (456) $(32,927) $ 48,244 $ (4,734)
======== ======= ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-28
<PAGE> 171
REZ, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000'S OMITTED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
-------- ------------- --------
(AS RESTATED,
SEE NOTE 11)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (4,591) $ (4,343) $(17,552)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Provision for doubtful accounts........................ 4,704 1,581 2,015
Depreciation and amortization.......................... 16,980 16,064 5,248
Gain on sales of investments........................... (3,443)
Provision for deferred income taxes.................... (2,622) (3,840) (406)
Purchased research and development..................... 19,999
Changes in operating assets and liabilities:
Accounts receivable -- net........................... (14,809) (8,784) (2,436)
Prepaid expenses and other........................... (1,605) (947) (607)
Accounts payable and other current liabilities....... 7,127 3,329 1,187
-------- -------- --------
Net cash provided by (used in) operating
activities....................................... 5,184 (383) 7,448
-------- -------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Proceeds from sales of investments........................ 6,039
Purchase of property and equipment, net................... (12,975) (10,999) (9,222)
-------- -------- --------
Net cash used in investing activities............. (12,975) (4,960) (9,222)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayments to) shareholder -- net.......... (4,732) 8,041
Proceeds from notes payable............................... 25,395 5,928 345
Principal payments on notes payable and lease
obligations............................................ (17,806) (3,586) (4,316)
Decrease in notes receivable from employees............... 709
Proceeds from the exercise of stock options............... 50
Foreign currency translation adjustment................... (143) (386) 73
-------- -------- --------
Net cash provided by (used in) financing
activities....................................... 7,496 (2,776) 4,852
-------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (295) (8,119) 3,078
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 3,061 11,180 8,102
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 2,766 $ 3,061 $ 11,180
======== ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES INFORMATION:
Cash paid for interest.................................... $ 1,071 $ 987 $ 581
======== ======== ========
Contribution to equity through forgiveness of debt by
Reed................................................... $ -- $ 1,000 $ 2,752
======== ======== ========
Merger related liabilities issued in acquisition.......... $ -- $ -- $ 1,189
======== ======== ========
Assets acquired through capital leases.................... $ -- $ 44 $ --
======== ======== ========
Acquisition of license agreements......................... $ 1,852 $ -- $ --
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-29
<PAGE> 172
REZ, INC. AND SUBSIDIARIES
(FORMERLY REZSOLUTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(000'S OMITTED FOR DATA IN TABLES EXCEPT SHARE AMOUNTS)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
REZ, Inc. (formerly, REZsolutions, Inc.) (the "Company") is a leading
international supplier of reservation, hotel marketing and information
technology systems and services. The Company has approximately over 40 offices
worldwide and provides services to approximately 25,000 hotels. Acting as an
intermediary between travelers, travel agents and hotels, the Company offers
comprehensive reservations and payment settlement services. The Company also
provides marketing support services to certain hotels that it represents,
including advertising, trade promotion and brand development. In addition, the
Company is a leading supplier of information technology to the international
hospitality industry, including reservations and property management systems.
The Company's systems and services are marketed to a common customer base and
its business operations are merged as a simple segment.
The Company was incorporated on October 9, 1997, for the purpose of merging
certain components of the operations of Utell ("Utell"), the reservation and
data processing business of Reed Elsevier PLC ("Reed"), Utell, Inc. ("Utell,
Inc.") a U.S. subsidiary of Reed, and Anasazi Inc. and subsidiaries ("Anasazi"),
a privately-held corporation based in Phoenix, Arizona.
Utell was founded by John Utell in 1930 and, through a series of
acquisitions, eventually became part of Ordinto Investments, an affiliate of The
News Corporation Limited, an Australian corporation ("Ordinto"). The Utell
operations were engaged in international hotel marketing and reservation
services. Reed had previously acquired 100 percent of the Utell operations from
Ordinto in 1987 as part of a $825 million acquisition (the Utell operations
accounted for only approximately 10 percent of the acquisition). The acquired
Utell operations were integrated with certain other business units of Reed and
lost their separate identity. In order to prepare for the merger with Anasazi,
the Utell operations were "carved out" from Reed in September 1997 and included
in another wholly-owned subsidiary of Reed, Reed Telepublishing Ltd. ("RTL").
RTL was a holding company that consolidated several other Reed entities that
were unrelated to the Utell business. In order to retain only the Utell business
in RTL, the unrelated businesses were transferred to Reed through dividend
distributions. This left RTL as a holding company with its only business
investment, the Utell operations. Two other wholly-owned Reed United Kingdom
subsidiaries, Utell International Ltd. and Utell International (UK) Ltd., and
another Reed United States wholly-owned subsidiary, Utell, Inc., were
contributed to RTL. These additional Reed subsidiaries, in turn, owned a number
of foreign entities that were separately incorporated in various countries in
which Reed operated, in order to conduct Utell business outside the United
Kingdom. As these subsidiaries were all entities under common control and
ownership, the transfers of the subsidiaries into RTL were accounted for at
historical cost in a manner similar to that in a pooling of interests. RTL was
then merged into a newly formed United States entity, REZsolutions, Inc. ("REZ")
which acquired the business operations of Anasazi (the "Merger"). Before the
Merger, Anasazi was a United States enterprise unaffiliated with Reed and was a
supplier of information technology to the international hospitality industry.
Because of the interrelationship of the Utell operations with Reed, the
transfer of the Utell operations into REZ prior to the Merger has been shown in
the accompanying consolidated statements of shareholders' equity as "Reed
Elsevier Equity" based on the historical cost basis of the assets and
liabilities transferred. At the time of the Merger, this Reed Equity was
exchanged for preferred and common shares of REZ based on the terms of the
Merger agreement and, as a result, REZ became approximately 67 percent owned by
a United States Subsidiary of Reed, Reed Elsevier Inc., and a United Kingdom
subsidiary of Reed, Utell International Group Ltd., and 33 percent by the former
shareholders of Anasazi.
F-30
<PAGE> 173
REZ, INC. AND SUBSIDIARIES
(FORMERLY REZSOLUTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REZ determined that the primary expenses incurred by Reed on behalf of
Utell prior to the carve out from Reed were accounting, tax and legal services.
Through discussion with Reed management, an estimate of the annual amount of
such expenses was determined to be approximately $240,000. This amount was
allocated to general and administrative expenses in the carved out Utell
operations. REZ management believes that this estimate is reasonable and
approximates the expenses that Utell would have incurred on a stand-alone basis
during this period. The allocation method utilized was relative headcount.
In December 1997, Reed contributed all of the issued and outstanding common
stock of RTL and Utell, Inc. to the Company in exchange for 67 percent of the
capital stock of the Company, and the shareholders of Anasazi contributed all of
the outstanding common and preferred stock of Anasazi to the Company for 33
percent of the capital stock of the Company. The transaction has been accounted
for as the acquisition of Anasazi by the Company effective December 1, 1997.
Accordingly, the results of operations and cash flows of Anasazi are included in
the accompanying consolidated financial statements only from December 1, 1997,
the date of acquisition.
Principles of Consolidation -- The consolidated financial statements
include the accounts of the Company and its subsidiaries, which are essentially
all wholly owned. All intercompany balances and transactions among the entities
comprising the Company have been eliminated.
Revenue Recognition -- Revenue generated by software license sales and
software modification services are recognized when a license agreement has been
signed, the software product has been shipped, and there are no uncertainties
surrounding product acceptance, the fee is fixed or determinable, and collection
is probable. Booking fees are generally dependent upon the guests' length of
stay and the room rate. Revenue for bookings made is recognized either at the
time the reservation is used by the consumer or the transaction date based on
the contractual agreement with each customer.
Revenue generated by software license sales and software modification
services are recognized upon the shipment of the product if collection is
probable and the Company's remaining obligations under the license agreement are
insignificant. The Company has entered into certain significant software license
contracts in the current and prior years. These contracts call for the delivery
of proprietary software to the customer and require the Company to modify the
core software in order to meet certain specified criteria of performance.
Contracts which call for the delivery of software which require significant
modification are accounted for using percentage of completion method of contract
accounting and, therefore, take into account the cost, estimated earnings and
revenue to date on uncompleted contracts. The amount of revenue recognized is
the portion of the total contract price that the cost expended to date bears to
the anticipated final total cost, based on current estimates to complete.
Contract costs include all direct labor and benefits and direct materials.
Additional billings are included in revenues when awarded or received. Revisions
in estimates of costs and earnings during the course of the work are reflected
in the accounting period in which the facts, which require the revision, become
known. At the time a loss on a contract becomes known, the entire amount of the
estimated ultimate loss is recognized in the financial statements. Accordingly,
at December 31, 1999 and 1998, the Company had recorded unbilled accounts
receivable of approximately $1,216,000 and $3,257,000, respectively, that had
not been invoiced to customers based on contractual terms. Such unbilled amounts
are included in accounts receivable in the accompanying consolidated financial
statements.
Revenue from data processing and consultative services is recognized in the
period the services are rendered. Fixed fees for software maintenance and
membership fees are recognized ratably over the life of the software maintenance
contract or the membership.
The Company generates fees from financial services in the form of a
transaction processing fee and a foreign exchange fee. The transaction
processing fee is earned based on an established fee per transaction
F-31
<PAGE> 174
REZ, INC. AND SUBSIDIARIES
(FORMERLY REZSOLUTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for customers using the services from the travel agent commission system. The
foreign exchange fee is earned by providing the service of exchanging currencies
for hotels and travel agencies.
Cash and cash equivalents include cash and all highly-liquid investments
with original maturities at date of purchase of not more than three months.
Concentrations of Credit Risk -- Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist
principally of accounts receivable and unbilled accounts receivable.
The Company's revenues are derived from hotels and hotel companies in
various geographic areas around the world, with its most significant customers
being well-known businesses in the hospitality industry.
The Company performs ongoing credit risk evaluations of its customers'
financial condition and generally does not require collateral. Credit losses
have been provided for in the consolidated financial statements and have been
within management's expectations.
Property and equipment are stated at cost less accumulated depreciation and
amortization. Equipment held under capital lease is stated at the lower of the
present value of minimum lease payments or fair value at the inception of the
lease. Depreciation and amortization is provided on straight-line method over
the lesser of the estimated useful lives of the assets or the term of the lease,
ranging from three to ten years.
License agreements are amortized on a straight-line basis generally over
three to five years and are shown net of amortization of $1,748,000 and $812,000
in 1999 and 1998, respectively.
Hotel Customer Deposits -- The Company accepts prepayments for hotel
reservations from hotel customers at the reservation booking date. The Company
remits the hotel's portion of the prepayment to the hotel on the reservation
date.
Income Taxes -- The Company accounts for income taxes using the asset and
liability method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences of temporary differences between the
carrying amounts and tax bases of assets and liabilities using enacted rates.
Prior to the merger, Utell did not file separate tax returns because its results
were included in the income tax returns filed by Reed and its subsidiaries in
various U.S. and non-U.S. jurisdictions. The tax provisions reflected in the
accompanying consolidated statements of operations for periods prior to the
Capitalization include a provision in lieu of income taxes which was computed as
if Utell was a separate company and filed its own income tax returns for the
entire fiscal year.
Derivative Financial Instruments -- Currency forward contracts are used to
manage currency exposures for financial instruments denominated in currencies
other than the entity's functional currency. Foreign exchange forward contracts
are accounted for as hedges to the extent they are designated as, and are
effective as, hedges of firm foreign currency commitments. Gains and losses on
contracts designated as hedges on firm foreign currency commitments are
recognized in income in the same period as gain and losses on the underlying
transactions are recognized. These gains and losses were not material during the
years ended December 31, 1999, 1998 and 1997.
Major currencies affecting the Company's business are the U.S. Dollar,
British Pound Sterling, French Franc, German Deutschemark, Italian Lira,
Singapore Dollar and Dutch Guilder.
Goodwill and Intangibles -- Goodwill represents principally the excess of
total cost over the fair value of Anasazi's net assets acquired (see Note 2) and
is being amortized over 25 years. Goodwill is shown net
F-32
<PAGE> 175
REZ, INC. AND SUBSIDIARIES
(FORMERLY REZSOLUTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of amortization of $1,883,000 and $978,000 at December 31, 1999 and 1998,
respectively. Other intangibles are being amortized over 3 to 20 years and
consist of the following as of December 31:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Tradenames -- 20 years...................................... $10,171 $10,171
Assembled workforce -- 3 years.............................. 5,708 5,708
Customer contracts and relationships -- 3 years............. 5,659 5,659
Existing technology -- 3 years.............................. 6,291 6,291
------- -------
Total.................................................. 27,829 27,829
Less accumulated amortization............................... (17,474) (11,079)
------- -------
Other intangibles -- net.................................... $10,355 $16,750
======= =======
</TABLE>
Currency Translation -- A portion of the Company's functional currency is a
foreign currency, British pounds. Translation adjustments result from the
process of translating that currency into the reporting currency and are
reported as a separate component of shareholders' equity.
Product Development -- The costs to develop new software products and
enhancements to existing products are expensed as incurred until technological
feasibility has been established. The Company considers technological
feasibility to have occurred when all planning, designing, coding and testing
activities that are necessary to determine that the product can be produced to
meet its design specifications have been completed. Once technological
feasibility is established, any additional costs would be capitalized. The
Company believes its current process for developing software is essentially
completed concurrent with the establishment of technological feasibility and,
accordingly, no costs have been capitalized.
Purchased Research And Development -- Purchased in-process research and
development ("IPR&D") charges in 1997 relate to the acquisition of Anasazi. The
Anasazi acquisition was accounted for under the purchase method, in which a
portion of the purchase price was acquired in-process technology. The amount
assigned to IPR&D is expensed immediately, since the technological feasibility
of the research and development projects had not yet been achieved and the
research and development was believed to have no alternative future use.
For purpose of allocating the Anasazi purchase price, an independent
valuation was performed and used as an aid to management in assessing the fair
value of the identifiable assets acquired and allocating the purchase price
among the acquired assets, including the portion of the purchase price
attributed to purchased IPR&D. The amount assigned to IPR&D was determined based
upon analysis employing the risk-adjusted cash flows that were expected to be
generated by the products that would result from the in-process projects. This
cash flow was estimated by first forecasting total revenues expected to result
from sales of each in-process product. Revenues were not anticipated from the
IPR&D projects until one year into the forecast. From this amount, appropriate
operating expenses, cash flow adjustments and contributory asset returns were
deducted, and adjustments were made to remove the value contributed by core
technology. The gross profit margin for IPR&D projects was approximately the
same as that used for existing technologies. Capital expenditures and other
capital cash requirements started at 28 percent of revenue and declined over
eight years. The assumptions did not assume any anticipated expense
reductions/synergies. Once these deductions were made, the analysis arrived at a
forecast of net returns on the in-process technology. These net returns were
then discounted to a present value at discount rates that incorporate both the
weighted average cost of capital of approximately 13 percent (relative to REZ
and to the hospitality services industry) as well as the specific risk
associated with the purchased in-process research and development. The product
specific risk factors considered included: complexity of the
F-33
<PAGE> 176
REZ, INC. AND SUBSIDIARIES
(FORMERLY REZSOLUTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
development effort, likelihood of achieving technological feasibility, and the
likelihood of market acceptance. The applied discount rate was 14 percent, which
was believed to adequately account for the additional risks associated with the
in-process technologies over product technologies existing at the acquisition
date.
The forecast data employed in the analysis was based upon management's
estimate of future performance of the business. The assumptions used in these
forecasts were believed by management to be reasonable, but which are inherently
uncertain and unpredictable. These assumptions may be incomplete or inaccurate,
and no assurance can be given that unanticipated events and circumstances will
not occur. Accordingly, actual results may vary from the forecasted results.
While management believed that all of the development projects would be
successfully completed, failure of any of these projects to achieve
technological feasibility, and/or variance from forecasted results, may result
in a material adverse effect on REZ's financial condition and results of
operations. The forecasted results used in the analysis for the in-process
projects have not varied significantly from the actual results achieved through
December 31, 1999.
A brief description of purchased IPR&D projects is set forth below,
including the status of products within each project at the acquisition date:
Central Reservation System Software -- The Anasazi existing Central
Reservation System ("CRS") as of the acquisition date was being sold as
RezView, release 3.0. However, a major upgrade to the existing release was
under development. Planned changes included: expansion to the guest history
and group/package handling capability, additions for automated credit card
processing, and interfaces to several large tour operator systems.
Additionally, the development plans included the integration of RezView
with the GuestView and the Company's property management system described
below.
Also, two additional products were under development at the
acquisition date, which would act as associated software to the RezView
system: NetRez and ALESA Decision Support ("ADS"). The NetRez suite of
products under development was Anasazi's Internet solution to rates and
inventory management, property management, information management, and
information reporting to the Anasazi CRS customer. ADS was being developed
to provide a single source for the hospitality industry's enterprise-wide
reporting needs. The ADS system design was to consolidate information
generated from the CRS systems and property management systems and to
provide the customer with the capability to perform on-line analytical
processing of reservation data.
Property Management System Software -- Anasazi offers hotel properties
a software product, GuestView, which is a property management system
("PMS") solution based on the latest in client-server and relational
database technologies. The GuestView's modern graphical user interface
includes custom toolbars and drop-down menus that offer instantaneous
access to vital guest history information, including guest preferences. Its
client-server technology insures predictable performance under any inquiry
load, thus insuring rapid reservation processing, guest registration and
check-out. It also includes a comprehensive set of reports to meet the
operational and marking requirements of the hotel property managers. At the
Anasazi acquisition date, research and development was underway to
significantly upgrade PMS, specifically the GuestView product. Key product
technology improvements included the areas of scalability for larger, more
complex properties, and for international (multi-lingual, multi-currency)
applications.
Anasazi Travel Resources -- Anasazi provided representation services,
including sales representation, reservation processing and promotional
services, to individual hotel properties and affiliate groups of private
label hotels. In providing these services, Anasazi utilized its CRS and PMS
software. ATR customers are highly interested in the speed and efficiency
of the navigation and response of the
F-34
<PAGE> 177
REZ, INC. AND SUBSIDIARIES
(FORMERLY REZSOLUTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
system to user input. The robustness of the systems ability to handle
abnormal conditions is also critical. Since the ATR customers are spread
throughout the world, Anasazi was in the process of developing new
technology to enhance communication through GDS and Internet distribution
as well as improved systems integration.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Impairment -- The Company continually evaluates whether events and
circumstances have occurred that indicate the remaining estimated useful life of
long-lived assets and identifiable intangible assets may warrant revision or
that the remaining balance of these assets may not be recoverable. When factors
indicate that these assets should be evaluated for possible impairment, the
Company's management uses several factors including, among others, the Company's
projection of future operating revenues relating to these assets and their
related impact on cash flows.
New Accounting Standards -- In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133,
as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of Effective Date," is effective for the first quarter of
the year 2001. This statement establishes standards for the accounting and
reporting for derivative instruments and for hedging activities. The future
effect on the Company's financial position and the results of operations has not
been determined.
Reclassification -- Certain changes in account classification have been
made in the prior years' financial statements to conform to the 1999
presentation.
2. ACQUISITION OF ANASAZI
On December 1, 1997, the Company, through its wholly-owned subsidiary,
exchanged 11,501,427 shares of its common stock for all the issued and
outstanding shares of capital stock of Anasazi, which was valued at $57,000,000
at that time. The acquisition was accounted for using the purchase method of
accounting and, accordingly, the purchase price has been allocated to the assets
purchased and the liabilities assumed based upon their fair values at the date
of acquisition. As a result of the allocation of the purchase price, the Company
recorded an expense of $19,999,000 for IPR&D it acquired relating to software
for which technological feasibility has not been established and for which no
alternative future use existed.
The accompanying consolidated statements of operations reflect the
operating results of Anasazi since the effective date of the acquisition.
Assuming the acquisition had been made as of the beginning of 1997, the pro
forma unaudited consolidated operating results of the Company and Anasazi for
the year ended December 31, 1997 result in total revenues of $124,871,000, an
operating loss of $9,534,000 and a net loss of $6,770,000.
The unaudited pro forma results for 1997 have been prepared for
illustrative purposes only and include certain adjustments such as the
elimination of Anasazi's sale of software to Utell and the increase in
amortization expense associated with the capitalization of goodwill and other
intangibles, but exclude the write-off of IPR&D. The unaudited pro forma results
are not necessarily indicative of the results of operations as they would have
been had the transaction been effected at the beginning of each year, nor are
they necessarily indicative of future consolidated results of operations.
F-35
<PAGE> 178
REZ, INC. AND SUBSIDIARIES
(FORMERLY REZSOLUTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The allocation of the purchase price, including $1,189,000 of transaction
costs, is shown in the table below:
<TABLE>
<S> <C>
Cash and cash equivalents................................... $ 1,335
Investments................................................. 1,927
Accounts receivable......................................... 9,208
Other current assets........................................ 860
Property and equipment...................................... 4,087
License and other assets.................................... 3,578
Goodwill and other intangibles.............................. 42,374
Purchased research and development.......................... 19,999
Deferred tax asset.......................................... 2,000
Debt and other liabilities.................................. (27,179)
--------
Total....................................................... $ 58,189
========
</TABLE>
During 1999 and 1998, the Company provided $1,171,000 and $2,500,000,
respectively, for severance and employment related expenses associated with
integration of the formerly separate operations of Utell and Anasazi.
Additionally, the Company incurred $1,201,000 in 1998 of Merger related costs,
principally consisting of professional, consulting and advertising expenses,
related to the integration.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Furniture and fixtures...................................... $ 12,067 $ 11,558
Computer and communication equipment........................ 56,527 43,686
Leasehold improvements and other............................ 3,306 3,310
-------- --------
Total....................................................... 71,900 58,554
Less accumulated depreciation and amortization.............. (42,153) (33,006)
-------- --------
Property and equipment -- net............................... $ 29,747 $ 25,548
======== ========
</TABLE>
The Company held property under capital lease agreements of $976,000, with
accumulated depreciation of $778,000 and $583,000 at December 31, 1999 and 1998,
respectively.
F-36
<PAGE> 179
REZ, INC. AND SUBSIDIARIES
(FORMERLY REZSOLUTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. NOTES PAYABLE AND CAPITAL LEASE OBLIGATION
Notes payable and capital lease obligations consisted of the following at
December 31:
<TABLE>
<CAPTION>
1999 1998
------- ------
<S> <C> <C>
Revolving line of credit up to $10,000,000 with a bank,
bearing interest at LIBOR plus 0.50% (7.25% at December
31, 1999) payable monthly. The line is guaranteed by Reed
and expires in March 2000................................. $ 5,000 $3,700
Secured revolving line of credit up to $10,000,000 with a
bank, bearing interest at LIBOR plus 2.25% (8.72% at
December 31, 1999) payable monthly. The line matures in
May 2001.................................................. 8,195
Note payable, interest at 8.5%, principal with interest due
in three equal installments in June 1998, March 1999 and
January 2000, collateralized by certain license
agreements................................................ 834 1,667
Note payable, imputed interest at 18.55%, principal and
interest due monthly through November 2001, collateralized
by certain equipment...................................... 991 1,600
Capital lease obligations, due in monthly payments ranging
from $1,000 to $21,000, including imputed interest ranging
from 10% to 23%, with maturity dates ranging from February
2000 to October 2001, collateralized by equipment......... 356 694
Other....................................................... 43 686
------- ------
Total notes payable and capital lease obligation............ 15,419 8,347
Less current portion........................................ 6,747 6,814
------- ------
Total noncurrent portion.................................... $ 8,672 $1,533
======= ======
</TABLE>
Maturities of notes payable and long-term debt for the years succeeding
December 31, 1999 are $6,747,000 in 2000 and $8,672,000 in 2001.
On May 5, 1999, the Company entered into a credit agreement ("Credit
Agreement") with a bank to provide a secured line of credit of up to
$10,000,000. The Credit Agreement is collateralized by substantially all of the
Company's assets in the United States. At December 31, 1999, $8,195,000 was
outstanding under the revolving line, which has been classified as a long-term
obligation because management intends to maintain that amount outstanding under
the Credit Agreement for uninterrupted periods of more than one year after the
balance sheet date. The Credit Agreement contains certain financial covenants.
At December 31, 1999, the Company was in violation with one of the financial
covenants, which requirement, the lender has waived for 1999.
F-37
<PAGE> 180
REZ, INC. AND SUBSIDIARIES
(FORMERLY REZSOLUTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
The benefit (provision) for income taxes for the year ended December 31 is
comprised of the following:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current:
Federal............................................... $ 510 $(1,912)
State................................................. 71 (274)
Foreign............................................... (1,570) (568) $(1,675)
------- ------- -------
Total................................................... (989) (2,754) (1,675)
------- ------- -------
Deferred:
Federal............................................... 1,648 2,998 256
State................................................. 652 390 65
Foreign............................................... 322 452 85
------- ------- -------
Total................................................... 2,622 3,840 406
------- ------- -------
Provision in lieu of income taxes....................... (901)
------- ------- -------
Income tax benefit (provision).......................... $ 1,633 $ 1,086 $(2,170)
======= ======= =======
</TABLE>
The following is a reconciliation of the reported effective income tax
rates to the statutory rates:
<TABLE>
<CAPTION>
1999 1998 1997
----- ---- -----
(AS RESTATED)
<S> <C> <C> <C>
Federal statutory income tax rate.......................... 34.0% 34.0% 34.0%
State taxes, net........................................... 7.3 1.6 (0.5)
Provision for undistributed foreign earnings............... (15.7)
Purchased research and development......................... (42.7)
Effect of foreign tax rates................................ (1.0) (2.6)
Goodwill................................................... (4.6) (6.0)
Other items................................................ 6.2 (9.6) (2.2)
----- ---- -----
Effective rate............................................. 26.2% 20.0% (14.0)%
===== ==== =====
</TABLE>
F-38
<PAGE> 181
REZ, INC. AND SUBSIDIARIES
(FORMERLY REZSOLUTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial statement
and income tax reporting purposes. Significant components of the Company's
deferred income tax assets and liabilities as of December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
CURRENT NONCURRENT CURRENT NONCURRENT
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Deferred tax assets:
Accrued compensation........................ $ 771 $ 699
Bad debt reserves........................... 1,023 756
Net operating loss carryforwards............ $ 3,337 $ 3,749
Credit carryforwards........................ 80 473 450
Other....................................... 759 270 1,072 122
------ ------- ------ -------
Total deferred tax assets..................... 2,633 4,080 2,527 4,321
Valuation allowance for deferred tax assets... (50) (50)
------ ------- ------ -------
Net deferred tax assets....................... 2,633 4,030 2,527 4,271
------ ------- ------ -------
Deferred tax liabilities:
Intangibles................................. (3,607) (6,126)
Fixed assets................................ (121) (359)
------ ------- ------ -------
Total deferred tax liabilities................ (3,728) (6,485)
------ ------- ------ -------
Net deferred tax assets (liabilities)......... $2,633 $ 302 $2,527 $(2,214)
====== ======= ====== =======
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon generation of future taxable income during the periods in which
those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon projections of
future taxable income, management believes it is more likely than not that the
Company will not fully realize the benefits of net operating loss carryforwards
and deductible differences. As a result, the Company has recorded a partial
valuation allowance for the deferred tax assets related to net operating loss
carryforwards and deductible differences.
The Company has not provided for foreign withholding taxes or U.S. deferred
income taxes on accumulated undistributed earnings of foreign subsidiaries. If
such earnings were to be repatriated, such earnings could be subject to foreign
withholding tax and U.S. residual tax. The determination of the amount of
unrecognized withholding and U.S. taxes on those estimated earnings is not
practicable. For the year ended December 31, 1999, the Company provided current
taxes for earnings of a foreign subsidiary which management believes may be
deemed remitted.
At December 31, 1999, the Company has net operating loss carryforwards of
approximately $7,180,000 for federal and $9,070,000 for state income tax
purposes that begin expiring in the year 2011 for federal income tax purposes
and 2001 for state income tax purposes. The proposed merger of the Company
described in Note 10 could limit the availability of the net operating loss
carryforward.
6. DERIVATIVE FINANCIAL INSTRUMENTS
The Company's U.K. operations utilize foreign exchange forward contracts to
manage foreign currency exposures to its functional currency, British Pounds.
The principal objective of these contracts is to minimize the risks and/or costs
associated with global financial and operating activities.
F-39
<PAGE> 182
REZ, INC. AND SUBSIDIARIES
(FORMERLY REZSOLUTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under these contracts, the Company has the obligation to purchase or sell
foreign currencies at fixed rates at various maturity dates. At December 31,
1999, the Company had forward contracts outstanding for the sale and purchase of
foreign currencies at fixed rates at December 31, 1999, as summarized in the
table below:
(United States dollar amounts in thousands)
<TABLE>
<CAPTION>
SELL PURCHASE
------ --------
<S> <C> <C>
European Euro............................................... $1,868 $4,608
British Pound Sterling...................................... 1,210 613
Japanese Yen................................................ 1,275
Swedish Krona............................................... 814
Australian Dollar........................................... 307
Singapore Dollar............................................ 119
Hong Kong Dollar............................................ 114
Other currencies............................................ 214
------ ------
Total....................................................... $3,078 $8,064
====== ======
</TABLE>
The Company does not use derivative financial instruments for trading or
other speculative purposes, nor is the Company a party to leveraged derivatives.
7. COMMITMENTS
The Company leases certain office space and equipment under noncancelable
operating leases that expire in various years through 2012. Certain of these
leases contain renewal and purchase option clauses under various terms. The
total of the lease payments to be made is being expensed ratably over the term
of the lease. Rent expense was approximately $8,741,000, $10,408,000 and
$6,225,000 in 1999, and 1998 and 1997, respectively.
Future minimum payments under noncancelable operating leases and the
present value of future minimum capital lease obligations with initial terms of
one year or more consisted of the following at December 31, 1999:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
2000........................................................ $339 $ 5,739
2001........................................................ 57 4,719
2002........................................................ 4,467
2003........................................................ 2,629
2004........................................................ 2,122
Thereafter.................................................. 6,762
---- -------
Total minimum lease payment................................. 396 $26,438
=======
Less imputed interest -- rates ranging from 10% to 23%...... (40)
----
Present value of future minimum capital lease obligations... 356
Less current portion of capital lease obligations........... 300
----
Long-term portion of capital lease obligations.............. $ 56
====
</TABLE>
F-40
<PAGE> 183
REZ, INC. AND SUBSIDIARIES
(FORMERLY REZSOLUTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company participates in a 401(k) Incentive Savings Plan (the "401(k)
Plan") covering substantially all full-time employees in the U.S. Under the
terms of the 401(k) Plan, U.S. employees may make voluntary contributions,
subject to Internal Revenue Service limitations. The Company matches 50 percent
of the employee contributions up to three percent of the employee's annual
compensation. Company contributions vest 100 percent after three years of
service, as defined.
Subsequent to the Merger, approximately one-third of the former Utell
employees in the United Kingdom continued participation in a defined benefit
pension plan (the "Reed Elsevier Pension Plan"). Under the Reed Elsevier Pension
Plan, benefits were based primarily on final average salary and years of
service. Funding policies provided that contribution payments be at least equal
to the minimum funding required by applicable regulations in the United Kingdom.
Except for payments to cover administrative costs, no contributions have been
required to be made by the Company on behalf of participating employees as the
plan was in an overfunded status.
Entry into the Reed Elsevier Pension Plan stopped in October 1997. Existing
participants in the Reed Elsevier Pension Plan totaled 125 as of December 31,
1999. New employees since October 1997 are allowed to participate in a money
purchase retirement plan ("Money Purchase Plan"). The Company matches 200
percent of the employee contributions in the Money Purchase Plan up to six
percent of the employee's annual compensation.
In June 1999, the Company established a new defined benefit plan
("REZsolutions Pension Plan") for employees who participated in the Reed
Elsevier Pension Plan. The invested balances of participants in the Reed
Elsevier Pension Plan are to be transferred into the REZsolutions Pension Plan
in early 2000. Employees contribute five percent and the Company contributes 12
percent of eligible compensation to the REZsolutions Pension Plan.
At the inception of the plan, the projected benefit obligation of the
REZsolutions Pension Plan was approximately $4,032,000. The plan assets at that
date consisted of a receivable from the Reed Elsevier Pension Plan for
essentially the same amount. The projected benefit obligation was determined
based on an assumed weighted-average discount rate of 9 percent, an assumed
annual increase in employee compensation of 7 percent, and an assumed
weighted-average expected long-term rate of return on plan assets of 9 percent.
As the REZsolutions Pension Plan was recently created, there is no unrecognized
prior service cost, amount of unrecognized net gain or loss, or amount of net
pension asset or liability recognized in the Company's consolidated balance
sheet as of December 31, 1999. The net periodic pension cost of the REZsolutions
Pension Plan from inception to December 31, 1999 was approximately $350,000
which consisted of service cost component of $350,000 and interest cost
component of $212,000, reduced by the return on assets for the period of
$212,000.
8. FAIR VALUES OF FINANCIAL INSTRUMENTS
The recorded amounts of cash, accounts receivable, accounts payable, notes
payable and capital lease obligations approximate their fair values because of
the short-term nature of these instruments. The estimated fair value of the
Company's foreign currency forward contracts approximate amounts hedged. Fair
values are estimated by the use of quoted market prices, estimates obtained from
brokers, and other appropriate valuation techniques based upon information
available as of December 31, 1999. The fair value estimates do not necessarily
reflect the values the Company could realize in the current market.
9. STOCK OPTION PLAN
The Company maintains two stock option plans ("Stock Option Plans"). During
1997, the Company established a nonqualified stock option plan, (the "1997
Option Plan") which provides for the granting of
F-41
<PAGE> 184
REZ, INC. AND SUBSIDIARIES
(FORMERLY REZSOLUTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
options for up to 3,833,809 shares of its common stock to selected officers and
employees. During 1998, the Company instituted the 1998 Outside Director Stock
Option Plan which provides for the granting of options for up to 500,000 shares
of its common stock to directors of the Company.
The following table summarizes option activity since inception for the
Stock Option Plans:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- --------
<S> <C> <C> <C>
Outstanding at beginning of year.................. 2,727,508 985,000
Granted........................................... 1,269,560 1,890,675 985,000
Exercised......................................... (9,499)
Cancelled......................................... (497,359) (148,167)
---------- ---------- --------
Outstanding at end of year........................ 3,490,210 2,727,508 985,000
========== ========== ========
Options exercisable at end of year................ 1,700,969 579,978 --
========== ========== ========
Weighted average exercise price of options granted
during the year................................. $ 5.22 $ 5.22 $ 5.22
========== ========== ========
</TABLE>
All options granted, exercised and cancelled under the Stock Option Plans
have an exercise price at $5.22. In management's opinion, the exercise price of
$5.22 per share established for all of the options granted represents a fair
approximation of their value at the dates of grant. The options for the 1997
Stock Option Plan are exercisable at varying percentages up to 33 percent per
year commencing on the first anniversary date of grant. The options for the 1998
Outside Director Stock Option Plan granted in 1998 and certain options granted
in January 1999 became exercisable after one year. Other options granted in
January 1999 were exercisable upon grant. The options from the Stock Option
Plans will expire no later than ten years from the date of grant.
The Company applies Accounting Principles Board Opinion ("APB") No. 25,
Accounting for Stock Issued to Employees, and related interpretations in
accounting for its stock option plan. Accordingly, no compensation expense has
been recognized for its stock-based compensation plan. Had compensation cost for
the Company's stock option plan been determined based upon the fair value at the
grant date for awards under this plan consistent with the methodology prescribed
in SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net loss
for the years ended December 31, 1999 and 1998 would have increased by
approximately $1,068,000 and $785,000, respectively. Since the options granted
in 1997 were near the end of the year, the pro forma compensation cost and
resulting effect on net income for that year were not significant. The fair
value of the options granted during 1999, 1998 and 1997 is estimated as
$1,032,000, $2,328,000 and $1,300,000, respectively, on the date of grant using
an option-pricing model with the following assumptions in 1999, 1998 and 1997:
dividend yield and volatility of 0 percent, an average risk-free interest rate
of 6 percent, an assumed forfeiture rate of 0 percent and an average expected
life of five years. The remaining weighted average contractual life of the
options is approximately 8.6 years.
10. MERGER WITH PEGASUS SYSTEMS, INC.
In November 1999, the Company entered into an agreement and plan of merger
with Pegasus Systems, Inc. ("Pegasus"), a leading provider of transaction
processing and electronic commerce services to the hotel industry worldwide. The
transaction is expected to be finalized during the first quarter of 2000. The
purchase price consists of 3.99 million shares of Pegasus common stock, $115.0
million in cash and a $20.0 million note payable to Reed, subject to closing
adjustments. The acquisition of the Company by Pegasus will be recorded under
the purchase method of accounting.
F-42
<PAGE> 185
REZ, INC. AND SUBSIDIARIES
(FORMERLY REZSOLUTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. RESTATEMENT
At December 31, 1997, the Company held an investment in 336,786 shares of
common stock of Pegasus, which completed an initial public offering of its
shares during 1997. The shares were obtained in satisfaction for loans that
Utell and Anasazi separately had previously made to Pegasus. The estimated fair
value of the shares held by both Anasazi and Utell was determined based on
reference to the quoted market price of the stock less a 25 percent discount to
recognize marketability restrictions. In 1998, all of the shares were sold,
resulting in a gain of $3,945,000, as previously reported.
Subsequent to the issuance of the 1998 consolidated financial statements,
the Company's management determined that the quoted market price of the
investment is a more appropriate measure of the fair value of the common shares,
without any adjustment for the transferability restriction. As a result, the
1998 and 1997 consolidated financial statements have been restated from the
amounts previously reported to reflect this undiscounted value. The following
table presents the significant effects at the restatement:
<TABLE>
<CAPTION>
1998
---------------------
AS
PREVIOUSLY AS
REPORTED RESTATED
---------- --------
<S> <C> <C>
At December 31:
Deferred income taxes..................................... $ 2,431 $ 2,527
Goodwill.................................................. 21,161 20,679
Accumulated deficit....................................... (27,494) (27,880)
Accumulated other comprehensive loss......................
For the year ended December 31:
Depreciation and amortization............................. 16,084 16,064
Gains on sales of investments............................. 3,945 3,443
Income tax benefit........................................ 990 1,086
Net loss.................................................. 3,957 4,343
</TABLE>
Additionally, a prior period adjustment of $122,000 has been reflected in
Accumulated Comprehensive Loss for unrealized holding gains at December 31,
1997.
F-43
<PAGE> 186
APPENDIX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
PEGASUS SYSTEMS, INC.
PEGASUS WORLDWIDE, INC.
REZ, INC.
AND THE MAJORITY STOCKHOLDER
OF REZ, INC.
DATED AS OF NOVEMBER 16, 1999
(AS AMENDED AND RESTATED)
<PAGE> 187
<TABLE>
<S> <C> <C>
ARTICLE I THE MERGER.................................................. A-1
Section 1.01 The Merger.................................................. A-1
Section 1.02 Effective Time.............................................. A-1
Section 1.03 Effect of the Merger........................................ A-1
Section 1.04 Taking of Necessary Action; Further Action.................. A-1
Section 1.05 The Surviving Corporation................................... A-2
Section 1.06 The Closing................................................. A-2
ARTICLE II EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
CORPORATIONS; EXCHANGE OF CERTIFICATES...................... A-2
Section 2.01 Effect On Capital Stock..................................... A-2
Section 2.02 Exchange of Certificates.................................... A-4
Section 2.03 Dissenting Shares........................................... A-7
ARTICLE III PURCHASE PRICE ADJUSTMENTS.................................. A-7
Section 3.01 Determination of Net Tangible Assets and Indebtedness....... A-7
Section 3.02 Estimated Closing Balance Sheet............................. A-7
Section 3.03 Adjustment to Gross Cash Amount............................. A-8
Section 3.04 Closing Balance Sheet....................................... A-8
Section 3.05 Post-Closing Adjustment..................................... A-9
Section 3.06 Working Capital Adjustments................................. A-9
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE
MAJORITY STOCKHOLDER........................................ A-10
Section 4.01 Organization and Good Standing.............................. A-10
Section 4.02 Subsidiaries................................................ A-10
Section 4.03 Capitalization.............................................. A-10
Section 4.04 Power, Authorization and Execution.......................... A-11
Section 4.05 No Conflict................................................. A-12
Section 4.06 Intentionally Left Blank.................................... A-12
Section 4.07 Litigation.................................................. A-12
Section 4.08 Financial Statements; Undisclosed Liabilities............... A-12
Section 4.09 Tax Matters................................................. A-13
Section 4.10 Title to Assets............................................. A-15
Section 4.11 No Change................................................... A-16
Section 4.12 Contracts and Commitments................................... A-17
Section 4.13 Intellectual Property....................................... A-18
Section 4.14 Compliance with Laws; Permits............................... A-21
Section 4.15 No Material Adverse Changes................................. A-22
Section 4.16 Accounts Receivable; Evidences of Indebtedness.............. A-22
Section 4.17 Certain Transactions and Agreements......................... A-22
Section 4.18 Employees................................................... A-22
Section 4.19 Employee Matters and Benefit Plans.......................... A-23
Section 4.20 Insurance................................................... A-25
Section 4.21 Customers and Suppliers..................................... A-25
Section 4.22 Bank Accounts and Powers of Attorney........................ A-25
Section 4.23 Books and Records........................................... A-26
Section 4.24 Environmental Matters....................................... A-26
Section 4.25 Year 2000 Compliance........................................ A-27
Section 4.26 Brokers' and Finders' Fees.................................. A-27
Section 4.27 Disclosure.................................................. A-27
Section 4.28 Registration Statement...................................... A-28
Section 4.29 Majority Stockholder Representations........................ A-28
</TABLE>
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<TABLE>
<S> <C> <C>
ARTICLE V REPRESENTATIONS AND WARRANTIES OF PEGASUS AND NEWCO......... A-29
Section 5.01 Incorporation and Good Standing............................. A-29
Section 5.02 Authority................................................... A-29
Section 5.03 Enforceability of Obligations............................... A-29
Section 5.04 No Breach................................................... A-29
Section 5.05 Intentionally Left Blank.................................... A-29
Section 5.06 Brokerage................................................... A-29
Section 5.07 SEC Reports................................................. A-29
Section 5.08 Litigation.................................................. A-30
Section 5.09 Capitalization of Pegasus and Newco......................... A-30
Section 5.10 Disclosure.................................................. A-30
Section 5.11 Registration Statement...................................... A-31
Section 5.12 Material Adverse Change..................................... A-31
ARTICLE VI CONDUCT AND TRANSACTIONS PRIOR TO THE EFFECTIVE TIME........ A-31
Section 6.01 Conduct of the Business..................................... A-31
Section 6.02 Access to Books and Records................................. A-32
ARTICLE VII ADDITIONAL AGREEMENTS AND COVENANTS......................... A-33
Section 7.01 Preparation of Form S-4; Other Filings...................... A-33
Section 7.02 Registration of Pegasus Common Stock on Form S-3............ A-33
Section 7.03 Non competition Agreement................................... A-34
Section 7.04 Intercompany Arrangements................................... A-34
Section 7.05 Letter of the Company's Independent Accountants............. A-34
Section 7.06 Letter of Pegasus' Independent Accountants.................. A-34
Section 7.07 Agreements To Take Reasonable Action........................ A-34
Section 7.08 Consents.................................................... A-35
Section 7.09 Nasdaq Additional Shares Listing............................ A-35
Section 7.10 The Company Options; Employee Benefits...................... A-35
Section 7.11 FIRPTA Compliance........................................... A-36
Section 7.12 Restrictions on Negotiations with Third Parties............. A-37
Section 7.13 Employment Agreements....................................... A-38
Section 7.14 Notice of Certain Matters................................... A-38
Section 7.15 Release and Repurchase of Certain Company Stock............. A-38
Section 7.16 Confidential Information.................................... A-38
Section 7.17 Appointment of Majority Stockholder Representative to the
Pegasus Board............................................... A-39
Section 7.18 Actions under WARN and Similar State and Foreign Laws....... A-40
Section 7.19 Indemnification and Insurance............................... A-40
Section 7.20 Company Financial Statements................................ A-40
ARTICLE VIII CONDITIONS TO CLOSING....................................... A-40
Section 8.01 Conditions to Each Party's Obligation To Effect the
Merger...................................................... A-40
Section 8.02 Conditions to Pegasus' and Newco's Obligations.............. A-41
Section 8.03 Conditions to the Company's Obligations..................... A-42
ARTICLE IX ESCROW ARRANGEMENTS......................................... A-44
Section 9.01 Escrow Arrangements......................................... A-44
Section 9.02 Indemnification by Pegasus.................................. A-49
Section 9.03 Tax Indemnity............................................... A-51
Section 9.04 Exclusivity of Remedies..................................... A-51
ARTICLE X TERMINATION................................................. A-51
Section 10.01 Termination................................................. A-51
Section 10.02 Effect of Termination....................................... A-52
</TABLE>
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<TABLE>
<S> <C> <C>
Section 10.03 Fees and Expenses........................................... A-52
Section 10.04 Prompt Notice............................................... A-53
ARTICLE XI GENERAL PROVISIONS.......................................... A-53
Section 11.01 Survival of Representations, Warranties and Covenants....... A-53
Section 11.02 Press Releases and Announcements............................ A-53
Section 11.03 Notices..................................................... A-53
Section 11.04 Arbitration................................................. A-55
Section 11.05 Waiver; Amendment........................................... A-56
Section 11.06 Assignment.................................................. A-56
Section 11.07 Severability................................................ A-56
Section 11.08 Time of Essence............................................. A-56
Section 11.09 Entire Agreement............................................ A-56
Section 11.10 Interpretation.............................................. A-56
Section 11.11 Counterparts................................................ A-56
Section 11.12 Governing Law............................................... A-56
Section 11.13 Knowledge................................................... A-57
</TABLE>
EXHIBITS
<TABLE>
<S> <C>
Exhibit A-1 Form of Voting Agreement for Majority Stockholder
Exhibit A-2 Form of Voting Agreement
Exhibit B Form of Certificate of Merger
Exhibit C Form of Subordinated Note
Exhibit D Form of Non-Competition Agreement
Exhibit E Form of Stockholders Agreement
Exhibit F Form of Majority Stockholder's Stockholders Agreement
</TABLE>
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<PAGE> 190
DEFINED TERMS
<TABLE>
<S> <C>
AAA.........................................
Acquisition Proposal........................
Adjusted Closing Balance Sheet..............
Affiliate...................................
affiliated group............................
Agreement...................................
Arbitrator..................................
Assets......................................
Authorized Person...........................
Award.......................................
Balance Sheet Date..........................
Balance Sheet Escrow........................
Base Balance Sheet..........................
Blue Sky Laws...............................
Cash Consideration..........................
Cash Escrow.................................
CERCLA......................................
Certificate of Merger.......................
Certificates................................
Claim.......................................
Closing.....................................
Closing Adjustment..........................
Closing Balance Sheet.......................
Closing Date................................
Closing Working Capital Adjustment..........
Code........................................
Company.....................................
Company Affiliates..........................
Company Ancillary Agreements................
Company Capital Stock List..................
Company Common Stock........................
Company Disclosure Schedule.................
Company Employee............................
Company Employee Agreement..................
Company Employee Plan.......................
Company Intellectual Property...............
Company Pension Plan........................
Company Stockholders........................
Company Subsidiary..........................
Company Voting Agreement....................
Conflict....................................
Consent.....................................
Constituent Corporations....................
controlled foreign corporation..............
DGCL........................................
Disclosing Party............................
disposal....................................
Dissenting Shares...........................
DOL.........................................
Effective Time..............................
employee benefit plan.......................
Employment Agreements.......................
ERISA.......................................
Escrow Agent................................
Escrow Amount...............................
Escrow Certificate..........................
Escrow Fund.................................
Escrow Period...............................
Estimated Closing Balance Sheet.............
Estimated Closing Balance Sheet
Adjustment................................
Estimated Working Capital...................
Estimated Working Capital Adjustment........
Excess Fees.................................
excess parachute payments...................
Exchange Act................................
Exchange Agent..............................
Exchange Fund...............................
Financial Statements........................
Forecasted Working Capital..................
foreign person..............................
GAAP........................................
Governmental Entity.........................
Gross Cash Amount...........................
Hazardous Materials.........................
Hearing.....................................
HSR Act.....................................
Indebtedness................................
Indebtedness Adjustment.....................
Indemnification Period......................
Indemnified Parties.........................
Indemnified Person..........................
Indemnified Persons.........................
Injunction..................................
Intellectual Property.......................
International Employee Plan.................
IRS.........................................
Knowledge...................................
Laws........................................
Liens.......................................
Loss........................................
Loss Escrow.................................
Losses......................................
Majority Stockholder........................
Majority Stockholder Board Member...........
Majority Stockholder Stockholder
Agreement.................................
Material Adverse Change.....................
Material Adverse Effect.....................
Material Consents...........................
Merger......................................
Merger Consideration........................
Multiemployer Plan..........................
Nasdaq......................................
</TABLE>
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<PAGE> 191
<TABLE>
<S> <C>
Net Tangible Assets.........................
Net Tangible Assets Adjustment..............
Neutral Auditors............................
New Shares..................................
Non-Competition Agreement...................
Note........................................
Notice of Claim.............................
Notice of Dispute...........................
Option Plans................................
Other Filings...............................
Ownership Threshold.........................
passive foreign investment company..........
Pegasus.....................................
Pegasus Ancillary Agreements................
Pegasus Common Stock........................
Pegasus Representatives.....................
Pegasus SEC Reports.........................
Permits.....................................
Person......................................
Predecessor.................................
Pro Rata Percentage.........................
prohibited transaction......................
Proprietary Information.....................
PTO.........................................
Receivables.................................
Receiving Party.............................
Reed........................................
Registered Intellectual Property............
release.....................................
Required Stockholder Approval...............
Resolution Period...........................
Returns.....................................
Rez, Inc....................................
S-3.........................................
S-3 Shares..................................
S-4.........................................
safe harbor lease...........................
SEC.........................................
Securities Act..............................
Securityholder Agent........................
SRO.........................................
Stock.......................................
Stock Consideration.........................
Stock Escrow................................
Stockholder Agreements......................
Superior Proposal...........................
Surviving Corporation.......................
System......................................
Tax.........................................
Tax Affiliate...............................
Taxes.......................................
tax-exempt use property.....................
threatened release..........................
Total Fees..................................
UK Option Plan..............................
United States real property holding
corporation...............................
US Option Plans.............................
Utell.......................................
WARN Act....................................
Working Capital.............................
Year 2000 Compliant.........................
</TABLE>
v
<PAGE> 192
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "AGREEMENT") is entered into as of
November 16, 1999, by and among Rez, Inc., a Delaware corporation (the
"COMPANY"), Reed Elsevier Inc., a Massachusetts corporation ("REED"), and Utell
International Group, Ltd., a corporation organized under the laws of England and
Wales ("UTELL" and, together with Reed, the "MAJORITY STOCKHOLDER"), Pegasus
Systems, Inc., a Delaware corporation ("PEGASUS") and Pegasus Worldwide, Inc. a
Delaware corporation, and a wholly owned Subsidiary of Pegasus ("NEWCO"). Newco
and the Company are hereinafter sometimes collectively referred to as the
"CONSTITUENT CORPORATIONS."
RECITALS
A. The respective Boards of Directors of Pegasus, Newco and the Company have
approved and declared as advisable the merger of Newco with and into the
Company in accordance with the terms of this Agreement and the applicable
provisions of the laws of the State of Delaware (the "MERGER").
B. Concurrently with the execution of this Agreement, and as a condition and
inducement to Pegasus' and the Company's willingness to enter into this
Agreement, the Majority Stockholder is entering into a Voting Agreement in
substantially the form attached hereto as Exhibit A-1 and certain other
stockholders of the Company are entering into Voting Agreements in
substantially the forms attached hereto as Exhibit A-2 (the "COMPANY VOTING
AGREEMENT").
C. The Majority Stockholder is a party hereto solely for purposes of those
provisions that are expressly applicable to the Majority Stockholder.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements set forth herein, the parties hereto hereby agree as
follows:
ARTICLE I
THE MERGER
Section 1.01 THE MERGER. At the Effective Time and subject to the terms
and conditions of this Agreement in accordance with the Delaware General
Corporation Law ("DGCL"), Newco shall merge with and into the Company. The
Company and Newco shall execute a Certificate of Merger in substantially the
form attached hereto as Exhibit B (the "CERTIFICATE OF MERGER"). As a result of
the Merger, the separate corporate existence of Newco shall cease and the
Company shall continue as the surviving corporation and as a wholly owned
subsidiary of Pegasus. The Company, as the surviving corporation after the
Merger, is hereinafter sometimes referred to as the "SURVIVING CORPORATION."
Section 1.02 EFFECTIVE TIME. Subject to the provisions of this Agreement
and the Certificate of Merger, the Certificate of Merger, together with any
required certificates, shall be duly filed in accordance with the DGCL
simultaneously with or as soon as practicable following the Closing (as defined
in Section 1.06 below). The Merger shall become effective at such time as
specified in the Certificate of Merger (the "EFFECTIVE TIME") or such other date
and time as Pegasus and the Company may mutually agree.
Section 1.03 EFFECT OF THE MERGER. At the Effective Time, the effect of
the Merger shall be as provided in this Agreement and the applicable provisions
of the DGCL. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time all the property, rights, privileges, powers and
franchises of the Company and Newco shall vest in the Surviving Corporation, and
all debts, liabilities and duties of the Company and Newco shall become the
debts, liabilities and duties of the Surviving Corporation.
Section 1.04 TAKING OF NECESSARY ACTION; FURTHER ACTION. If, at any time
after the Effective Time, any such further action is necessary or desirable to
carry out the purposes of this Agreement and to vest
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<PAGE> 193
the Surviving Corporation with full right, title and possession to all assets,
property, rights, privileges, powers and franchises of the Company and Newco,
the officers and directors of the Company and Newco are fully authorized in the
name of their respective corporations or otherwise to take, and will take, all
such lawful action as shall be reasonable and necessary.
Section 1.05 THE SURVIVING CORPORATION.
(a) The Certificate of Incorporation of the Surviving Corporation
shall be amended upon the Effective Time to be the same as the Certificate
of Incorporation of Newco in effect at the Effective Time until altered,
amended or repealed in accordance with applicable law and such Certificate
of Incorporation; provided that the Certificate of Incorporation of the
Surviving Corporation shall reflect that the name of the Surviving
Corporation shall be "REZ, INC."
(b) The Bylaws of Newco in effect at the Effective Time shall be the
Bylaws of the Surviving Corporation until altered, amended or repealed in
accordance with applicable law, or the Certificate of Incorporation and the
Bylaws of the Surviving Corporation.
(c) At the Effective Time, the directors and officers of Newco shall
be the directors and officers of the Surviving Corporation, each to hold
office in accordance with the Bylaws of the Surviving Corporation until
their successors are duly elected or appointed and qualified.
Section 1.06 THE CLOSING. Unless this Agreement shall have been terminated
pursuant to Section 10.01, the closing of the Merger (the "CLOSING") will take
place at 10:00 a.m., Dallas, Texas time, on a date (the "CLOSING DATE") to be
mutually agreed upon by the Company and Pegasus, which date shall be the last
day of the month in which all of the conditions set forth in Article VIII shall
have been satisfied (or waived in accordance with the Agreement), unless another
date is agreed to in writing by the Company and Pegasus. The Closing shall take
place at the offices of Locke Liddell & Sapp LLP, 2200 Ross Avenue, Suite 2200,
Dallas, Texas 75201, unless another place is agreed to in writing by the Company
and Pegasus. As used in this Agreement, "BUSINESS DAY" shall mean any day, other
than a Saturday, Sunday or legal holiday on which banks are permitted to close
in the City of Dallas and State of Texas.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
Section 2.01 EFFECT ON CAPITAL STOCK. At the Effective Time, subject and
pursuant to the terms of this Agreement, by virtue of the Merger and without any
further action on the part of the Constituent Corporations or the holders of any
shares of capital stock of the Constituent Corporations:
(a) CAPITAL STOCK OF NEWCO. Each issued and outstanding share of the
common stock, $.01 par value per share, of Newco shall be converted into
one validly issued, fully paid and nonassessable share of common stock,
$.01 par value per share, of the Surviving Corporation. Each stock
certificate of Newco evidencing ownership of any such shares shall continue
to evidence ownership of such shares of common stock of the Surviving
Corporation.
(b) CANCELLATION OF CERTAIN SHARES OF COMPANY COMMON STOCK. Each share
of Company Common Stock (as defined in Section 2.01(c)) that is owned by
the Company as treasury stock and each share of Company Common Stock that
is owned by Pegasus, Newco or any other subsidiary of Pegasus or Newco
shall be canceled and no capital stock of Pegasus or other consideration
shall be delivered in exchange therefor.
(c) EXCHANGE FOR THE COMPANY COMMON STOCK. Each share of common stock,
$.001 par value per share, of the Company (the "COMPANY COMMON STOCK")
issued and outstanding immediately prior to the Effective Time (other than
shares canceled pursuant to Section 2.01(b)), will be canceled and
extinguished and automatically converted into the right to receive, subject
to amounts
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<PAGE> 194
held in the Escrow Fund (as defined in Section 9.01), a Per Share Amount of
(i) the Cash Consideration (as defined below) plus (ii) the Stock
Consideration (as defined below), together with any amounts payable under
Section 2.01(e), in each case upon surrender of the certificate
representing such share of Company Common Stock in the manner provided in
Section 2.02 (or in the case of a lost, stolen, or destroyed certificate,
upon delivery of an affidavit (and bond, if required) in the manner
provided in Section 2.02(g)). The Cash Consideration and the Stock
Consideration are referred to collectively as the "MERGER CONSIDERATION."
(i) "PER SHARE AMOUNT" means the amount determined by multiplying
(A) the aggregate amount of the item to be allocated into a Per Share
Amount by (B) a fraction that has as its numerator the number one (1)
and as its denominator the total number of shares of Company Common
Stock outstanding (or deemed outstanding under Section 7.10) at the
Closing. "PRO RATA PERCENTAGE" as applied to any Person means the amount
(expressed as a percentage) equal to a fraction that has as its
numerator the number of shares of outstanding Company Common Stock held
by such Person at the Closing and as its denominator the total number of
shares of Company Common Stock outstanding (or deemed outstanding under
Section 7.10) at the Closing. At or prior to the Closing, the Company
shall deliver to Pegasus and the Exchange Agent (as defined in Section
2.02(a)) a true, correct and complete list (the "COMPANY CAPITAL STOCK
LIST") as of the Closing of shares of capital stock of the Company
outstanding (or deemed outstanding under Section 7.10), including
without limitation any such shares issued as a result of the actions
contemplated by Section 7.10 (the "CLOSING SHARES OUTSTANDING"), upon
which list the Company, the Exchange Agent and the Escrow Agent (as
defined in Section 9.01) may rely in calculating the Per Share Amount
and the Pro Rata Percentage for any Person.
(ii) The term "CASH CONSIDERATION" shall mean $135 million in cash
(including for this purpose the principal amount of the Note described
below) (the "GROSS CASH AMOUNT") less any amounts attributable to (A)
any Indebtedness (as defined below) reflected on the Estimated Closing
Balance Sheet plus or minus the Estimated Working Capital Adjustment (as
defined in Section 3.06), (B) the Estimated Closing Balance Sheet
Adjustment (as defined in Section 3.03), and (C) any Excess Fees (as
defined in Section 10.03). Utell agrees to accept, as part of its Cash
Consideration, an unsecured, subordinated Promissory Note in the
principal amount of $20 million with an interest rate of 8% per annum
and a maturity date of the second anniversary date of the Closing Date,
and otherwise in the form attached hereto as Exhibit C (the "NOTE"), in
lieu of $20 million of cash.
(iii) The term "INDEBTEDNESS" shall mean the short-term
indebtedness and long-term indebtedness of the Company, including any
current portions thereof and the Option Note (as defined in Section
7.10) and not including any capital lease obligations, in each case as
reflected on the Base Balance Sheet, the Estimated Closing Balance
Sheet, the Closing Balance Sheet or the Adjusted Closing Balance Sheet.
For purposes of calculating Indebtedness with respect to Section
2.01(c)(ii) and Article III of this Agreement, if it is not reflected
thereon, the Option Note shall be deemed to be outstanding and reflected
on the Estimated Closing Balance Sheet.
(iv) The term "STOCK CONSIDERATION" shall mean 2.66 million shares
of common stock, $.01 par value per share, of Pegasus ("PEGASUS COMMON
STOCK," which term includes, unless otherwise indicated, the preferred
stock purchase rights described in Section 5.09(a)); provided, however,
that upon any stock split, stock dividend or stock combination of the
Pegasus Common Stock after November 16, 1999 and prior to the Effective
Time, the Stock Consideration shall be adjusted to be that aggregate
number of shares of Pegasus Common Stock that would result from such
split, dividend or combination with respect to the Stock Consideration
had the Stock Consideration been issued and outstanding at the time of
such event; and provided further that any reference to a number of
shares of Pegasus Common Stock in the Stockholder Agreements (as defined
in Section 7.02(b)) and the Majority Stockholder Stockholder Agreement
(as defined in Section 7.02(c)) shall be adjusted in proportion to any
such split, dividend or combination.
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<PAGE> 195
(d) STOCK OPTION PLANS. At the Effective Time, all options to purchase
the Company Common Stock then outstanding under the Company's 1997 Stock
Option Plan, 1998 Outside Director Stock Option Plan the "US OPTION PLANS")
and the Company's Share Option Scheme (the "UK OPTION PLAN", and together
with the US Option Plans, the "OPTION PLANS") shall be treated as set forth
in Sections 2.02(c) and 7.10.
(e) NO ISSUANCE OF FRACTIONAL SHARES. No certificates or scrip for
fractional shares of Pegasus Common Stock shall be issued, but in lieu
thereof each holder of shares of the Company Common Stock who would
otherwise be entitled to receive certificates or scrip for a fraction of a
share of Pegasus Common Stock shall receive from Pegasus, at such time as
such holder shall receive a certificate representing shares of Pegasus
Common Stock, an amount of cash equal to the per share market value of
Pegasus Common Stock determined by multiplying (i) the closing price of one
share of Pegasus Common Stock as reported on the Nasdaq National Market
("NASDAQ") on the last full trading day prior to the Closing Date by (ii)
the fraction of a share of Pegasus Common Stock to which such holder would
otherwise be entitled.
Section 2.02 EXCHANGE OF CERTIFICATES.
(a) EXCHANGE AGENT. Prior to the Closing Date, Pegasus shall engage
American Securities Transfer & Trust, Inc. (or some other entity acceptable
to Pegasus and Rez) to act as exchange agent (the "EXCHANGE AGENT") in the
Merger. Immediately following the Effective Time, Pegasus shall deposit
with the Exchange Agent, for the benefit of the holders of shares of the
Company Common Stock readily available funds in an amount equal to the Cash
Consideration (including without limitation the Note) and certificates
representing the shares of the Stock Consideration and cash in an amount
sufficient for payment in lieu of fractional shares pursuant to Section
2.01(e) (such Cash Consideration, including without limitation the Note,
and Stock Consideration, together with any dividends or distributions with
respect thereto, and cash for payment in lieu of fractional shares are
referred to as the "EXCHANGE FUND").
(b) EXCHANGE PROCEDURES. As soon as practicable (but in any event
within three (3) days) after the Effective Time, the Exchange Agent shall
mail to each holder of record (other than the Company, any Company
Subsidiary (as defined in Section 4.02), Newco, Pegasus and any other
subsidiary of Pegasus) of a certificate or certificates which immediately
prior to the Effective Time represented issued and outstanding shares of
the Company Common Stock (collectively, the "CERTIFICATES") whose shares
are being converted into the Merger Consideration pursuant to Section
2.01(c) of this Agreement, (i) a letter of transmittal (which shall specify
that delivery of the Certificates shall be effected, and risk of loss and
title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such
other provisions as Pegasus and the Company may reasonably specify) and
(ii) instructions for use in effecting the surrender of the Certificates in
exchange for amounts of cash and certificates representing Pegasus Common
Stock. Upon surrender of a Certificate for cancellation to the Exchange
Agent, together with a duly executed letter of transmittal and such other
documents as may be reasonably required by the Exchange Agent, the holder
of such Certificate shall be entitled to receive in exchange therefor,
subject to amounts held in the Escrow Fund (as defined in Section 9.01),
(x) a certified or bank cashier's check (or, for amounts in excess of
$500,000, a wire transfer of funds) in an amount equal to such holder's Pro
Rata Percentage of the Cash Consideration (which for the Majority
Stockholder shall include the Note in lieu of an amount of cash equal to
the principal amount of the Note otherwise payable hereunder) and (y) a
certificate representing that number of whole shares of such holder's Pro
Rata Percentage of the Stock Consideration. The Certificate so surrendered
shall forthwith be canceled. Each payment delivered for Cash Consideration
may be reduced by the amount of any withholding taxes required under
applicable law. In the event of a transfer of ownership of shares of the
Company Common Stock which is not registered on the transfer records of the
Company, a certificate representing the proper number of shares of Pegasus
Common Stock may be issued to a transferee if the Certificate representing
such Company Common Stock is presented to the Exchange Agent accompanied by
all documents required to evidence and effect such transfer and
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<PAGE> 196
by evidence that any applicable stock transfer taxes have been paid. Until
surrendered as contemplated by this Section 2.02, each Certificate shall be
deemed, on and after the Effective Time, to represent only the right to
receive upon such surrender such holder's Pro Rata Percentage of the Merger
Consideration. Except as contemplated under the Note, no interest will be
paid or will accrue on any Merger Consideration. The parties shall instruct
the Exchange Agent to use commercially reasonable efforts to effect all
exchanges contemplated hereby (to the extent Certificates and other
materials contemplated by this Section 2.02(b) have been delivered in a
manner to make such exchanges practicable) within seven (7) Business Days
following the Closing Date. Notwithstanding the foregoing provisions of
this Section 2.02(b), for any Person that has exercised Options but has not
received certificates representing Company Common Stock, if such Person has
delivered a duly executed Notice of Exercise (as well as amounts payable to
effect the Option exercise and any other materials necessary to exercise
any such Options held by such Person) in accordance with the applicable
Plan and otherwise satisfied all conditions for the issuance of stock
pursuant to the terms of the Option grant, then (i) such Notice of Exercise
shall be deemed hereunder to represent a Certificate for the number of
shares of Company Common Stock issuable upon the exercise of such Options
(except that the requirements of this Section 2.02(b) to deliver
Certificates to the Exchange Agent shall not apply), (ii) the Company
Common Stock issuable upon the exercise of such Options shall be deemed
hereunder to be outstanding, (iii) the holder of such Options shall be
deemed hereunder to be a Company Stockholder with respect to the number of
shares of Company Common Stock issuable upon the exercise of such Options
and (iv) the Exchange Agent upon delivery to it of such Notice of Exercise,
duly acknowledged on behalf of Pegasus together with any other materials
reasonably requested by the Exchange Agent, shall be authorized to issue
the Merger Consideration (subject to amounts held in the Escrow Fund (as
defined in Section 9.01)) to such holder of Options as if such Person had
delivered a Certificate representing the number of shares of Company Common
Stock issuable upon the exercise of such Options.
(c) EXCHANGE PROCEDURES FOR OPTIONS UNDER UK OPTION PLAN.
(i) For purposes of this Agreement, the Options (as defined in
Section 7.10) outstanding under the UK Option Plan on the Closing Date
shall be deemed to be vested and exercised into shares of Company Common
Stock, and such number of shares of Company Common Stock shall be deemed
outstanding and shall be included on the Company Capital Stock List.
(ii) Notwithstanding the provisions of Section 7.10(a), at any time
within six (6) months following the Closing Date, any Person holding any
Option to purchase Company Common Stock under the UK Option Plan may, in
lieu of the rights set forth in Section 7.10(a), deliver a notice to
Pegasus or the Surviving Corporation of the exercise of such Person's
Options in accordance with the terms of the UK Option Plan, together
with any amounts payable to effect such exercise. Upon delivery of such
notice and any such amounts payable, together with any necessary
materials, Pegasus shall deliver to such Person an instrument (a "NOTICE
OF TRANSFER") signed on behalf of Pegasus setting forth the number of
shares of Company Common Stock for which such Option or Options has been
exercised and instructions for use in effecting the surrender of the
Notice of Transfer in exchange for such Person's Pro Rata Percentage of
the Merger Consideration. Upon surrender of the Notice of Transfer to
the Exchange Agent, together with such other documents as may be
reasonably required by the Exchange Agent, the holder of such Notice of
Transfer shall be entitled to receive in exchange therefor, subject to
amounts held in the Escrow Fund (as defined in Section 9.01), (A) a
certified or bank cashier's check (or, for amounts in excess of
$500,000, a wire transfer of funds) in an amount equal to such holder's
Pro Rata Percentage of the Cash Consideration and (B) a certificate
representing that number of whole shares of such holder's Pro Rata
Percentage of the Stock Consideration. The Notice of Transfer so
delivered and surrendered shall forthwith be delivered by the Exchange
Agent to Pegasus. Each payment delivered for Cash Consideration, if any,
may be reduced by the amount of withholding taxes required under
applicable law. In the event of a transfer of ownership of Options to
purchase the Company Common Stock under the UK Option Plan which is not
registered on the records of the Company, a Notice of Transfer may be
issued to a transferee if
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the option agreement representing such Options is presented to Pegasus
accompanied by all documents required to evidence and effect such
transfer and by evidence that any applicable transfer taxes have been
paid. Until surrendered as contemplated by this Section 2.02, each
Notice of Transfer shall be deemed, on and after the Effective Time, to
represent only the right to receive upon such surrender such holder's
Pro Rata Percentage of the Merger Consideration.
(iii) In the event any Option outstanding under the UK Option Plan
is not treated as described in Section 7.10(a) or exercised prior to the
Merger or during the 6-month period thereafter as described in this
Section 2.02(c), all Merger Consideration attributable to such
unexercised options shall be distributed by the Exchange Agent pro rata
to the Company Stockholders set forth on the Company Capital Stock List
other than the holders of such unexercised Options.
(d) DISTRIBUTIONS WITH RESPECT TO UNSURRENDERED CERTIFICATES. No
dividends or other distributions declared or made after the Effective Time
with respect to Pegasus Common Stock with a record date after the Effective
Time shall be paid to the holder of any unsurrendered Certificate with
respect to the shares of Pegasus Common Stock represented thereby (or any
options to purchase Company Common Stock under the UK Option Plan) and no
cash payment in lieu of fractional shares shall be paid to any such holder
pursuant to Section 2.01(e) until the holder of record of such Certificate
shall surrender such Certificate thereby (or the holder of such options to
purchase Company Common Stock under the UK Option Plan delivers and
surrenders the Notice of Transfer). Subject to the effect, if any, of
applicable laws, following surrender of any such Certificate or Notice of
Transfer, there shall be paid to the record holder of the certificates
representing whole shares of Pegasus Common Stock issued in exchange
therefor, without interest, (i) at the time of such surrender, the amount
of any cash payable in lieu of a fractional share of Pegasus Common Stock
to which such holder is entitled pursuant to Section 2.01(e) and the amount
of dividends or other distributions with a record date after the Effective
Time theretofore paid with respect to such whole shares of Pegasus Common
Stock and (ii) at the appropriate payment date, the amount of dividends or
other distributions with a record date after the Effective Time but prior
to surrender and a payment date subsequent to surrender payable with
respect to such whole shares of Pegasus Common Stock.
(e) NO FURTHER OWNERSHIP RIGHTS IN THE COMPANY COMMON STOCK. All
Merger Consideration paid upon the surrender for exchange of shares of the
Company Common Stock in accordance with the terms of this Article II shall
be deemed to have been paid in full satisfaction of all rights pertaining
to such shares of the Company Common Stock. There shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of the Company Common Stock which were
outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation for
any reason, they shall be canceled and exchanged as provided in this
Article II.
(f) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund
which remains undistributed to the stockholders of the Company for twelve
(12) months after the Effective Time shall be delivered to Pegasus, upon
demand, and any former stockholders of the Company who have not previously
complied with this Article II shall thereafter look only to Pegasus for
payment of their claim for Merger Consideration.
(g) NO LIABILITY. None of the Exchange Agent, Pegasus, Newco or the
Company shall be liable to any holder of shares of the Company Common Stock
or Pegasus Common Stock, as the case may be, for cash amounts or shares (or
dividends or distributions with respect thereto) from the Exchange Fund
delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law.
(h) LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any
Certificates evidencing shares of the Company Common Stock shall have been
lost, stolen or destroyed, the holder of such lost, stolen or destroyed
Certificate(s) shall upon request of Pegasus execute an affidavit of that
fact and any indemnity which Pegasus may reasonably require against any
claim that may be made against Pegasus
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or the Exchange Agent with respect to the Certificate(s) alleged to have
been lost, stolen or destroyed. The affidavit and indemnity which may be
required hereunder shall be delivered to the Exchange Agent, who shall be
responsible for making payment for such lost, stolen or destroyed
Certificate(s).
(i) INVESTMENT OF EXCHANGE FUND. The Exchange Agent shall invest any
cash included in the Exchange Fund in U.S. investment-grade securities, as
directed by Pegasus, on a daily basis. Any interest and other income
resulting from such investments shall be paid to Pegasus.
(j) RETURN OF MERGER CONSIDERATION. Any portion of the Merger
Consideration made available to the Exchange Agent to pay for Dissenting
Shares (as defined in Section 2.03) for which appraisal rights have been
perfected shall be returned to Pegasus, promptly upon demand.
Section 2.03 DISSENTING SHARES. Notwithstanding Section 2.01, shares of
Company Common Stock outstanding immediately prior to the Effective Time and
held by a holder who has not voted in favor of the Merger or consented thereto
in writing and who has demanded appraisal for such shares in accordance with the
DGCL (such shares, "DISSENTING SHARES") shall not be converted into a right to
receive the Merger Consideration, unless such holder fails to perfect or
withdraws or otherwise loses such holder's right to appraisal. If after the
Effective Time such holder fails to perfect or withdraws or loses the right to
appraisal, such shares shall be treated under this Agreement as if they had been
converted as of the Effective Time into a right to receive the Merger
Consideration. The Company shall give Pegasus prompt notice of any demands
received by the Company for appraisal of shares of Company Common Stock, and
Pegasus shall have the right to participate in all negotiations and proceedings
with respect to such demands. The Company shall not, except with the prior
written consent of Pegasus, make any payment with respect to, or settle or offer
to settle, any such demands.
ARTICLE III
PURCHASE PRICE ADJUSTMENTS
Section 3.01 DETERMINATION OF NET TANGIBLE ASSETS AND INDEBTEDNESS. The
term "NET TANGIBLE ASSETS" shall mean all assets, other than license agreements,
goodwill and other intangible assets, less all liabilities, other than amounts
included in Indebtedness, in each case as reflected on the Base Balance Sheet,
the Estimated Closing Balance Sheet, the Closing Balance Sheet or the Adjusted
Closing Balance Sheet, as each such term is defined in this Article III. The
term "WORKING CAPITAL" shall mean the Company's current assets less the
Company's current liabilities with current liabilities excluding the fees and
expenses of the Company associated with the Merger and any current portions of
Indebtedness, and including, for purposes hereof, all liabilities of the Company
relating to severance arrangements (including without limitation the Company's
obligations to make payments under the agreements between the Company and Joe
Atteridge and the agreements between the Company and Tom Castleberry) unless
such amounts are included in Indebtedness (as such terms are defined by GAAP).
Section 3.02 ESTIMATED CLOSING BALANCE SHEET. For purposes of determining
an estimate of Net Tangible Assets, Working Capital and the Indebtedness to be
reflected on the Closing Balance Sheet and the Gross Cash Amount payable by
Pegasus at the Closing, not less than five (5) business days prior to the
Closing Date, the Company shall, in consultation with Pegasus, prepare and
deliver to Pegasus a balance sheet as of the end of a calendar month and as of a
date not more than 45 days prior to the Closing Date (the "ESTIMATED CLOSING
BALANCE SHEET"), such balance sheet (a) to be in form and detail consistent with
the balance sheet of the Company as of July 31, 1999 (the "BASE BALANCE SHEET")
previously delivered to Pegasus and (b) to be prepared in accordance with
generally accepted accounting principles in the United States ("GAAP") as in
effect on the date of such preparation and (c) otherwise to be consistent with
the past practice of the Company as to accounting methods, policies, practices
and procedures, with consistent classifications, judgments and estimation
methodologies. If Pegasus shall object to any of the information set forth on
the Estimated Closing Balance Sheet or accompanying schedules as presented by
the Company, Pegasus and the Company shall negotiate in good faith and attempt
to agree
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on appropriate adjustments such that the Estimated Closing Balance Sheet and
accompanying schedules reflect as accurately as reasonably practicable the
Working Capital and Indebtedness to be reflected on the Closing Balance Sheet
and a reasonable estimate of Net Tangible Assets to be reflected on the Closing
Balance Sheet. In connection with the determination of the Estimated Closing
Balance Sheet, the Company shall provide to Pegasus such information and detail
as Pegasus shall reasonably request.
Section 3.03 ADJUSTMENT TO GROSS CASH AMOUNT. In the event Net Tangible
Assets as reflected on the Estimated Closing Balance Sheet is less than Net
Tangible Assets as reflected on the Base Balance Sheet, the Gross Cash Amount
shall be reduced in an amount equal to the difference between (a) Net Tangible
Assets as reflected on the Estimated Closing Balance Sheet and (b) Net Tangible
Assets as reflected on the Base Balance Sheet. In no event will the calculations
described in the previous sentence include any positive or negative amounts
otherwise included in the Estimated Working Capital Adjustment; for purposes of
this calculation only, Working Capital shall be deemed to be a constant at the
amount stated on the Base Balance Sheet. The reductions to the Gross Cash Amount
described in this Section 3.03 are referred to as the "ESTIMATED CLOSING BALANCE
SHEET ADJUSTMENT."
Section 3.04 CLOSING BALANCE SHEET.
(a) DELIVERY OF CLOSING BALANCE SHEET. As promptly as practicable
following the Closing, but in no event later than thirty (30) days after
the Closing Date (with one automatic thirty (30) day extension upon written
notice to the Securityholder Agent), Pegasus shall prepare and deliver to
the Securityholder Agent (as defined in Section 9.01(g) an unaudited
balance sheet which shall set forth Net Tangible Assets, Working Capital
and Indebtedness as of the Closing Date (the "CLOSING BALANCE SHEET"). The
Closing Balance Sheet shall (a) be in form and detail consistent with the
Base Balance Sheet and (b) be prepared in accordance GAAP as in effect on
the date of such preparation and (c) otherwise be consistent with the past
practice of the Company as to accounting methods, policies, practices and
procedures, with consistent classifications, judgments and estimation
methodologies.
(b) NOTICE OF DISPUTE. If the Securityholder Agent disputes any items
of the Closing Balance Sheet, then the Securityholder Agent shall deliver
to Pegasus, within thirty (30) days following the delivery to the
Securityholder Agent of the Closing Balance Sheet, a written notice
specifying in reasonable detail all disputed items and the basis thereof
and setting forth the adjustment to Net Tangible Assets that the
Securityholder Agent believes should be made (a "NOTICE OF DISPUTE"). If
Pegasus does not agree with a Notice of Dispute, Pegasus and the
Securityholder Agent shall negotiate in good faith to resolve their
differences within thirty (30) days following delivery to Pegasus of such
Notice of Dispute (the "RESOLUTION PERIOD"), and any resolution by them as
to any disputed amounts shall be in writing and shall be final, binding and
conclusive.
(c) RESOLUTION BY NEUTRAL AUDITORS. In the event that Pegasus and the
Securityholder Agent are unable to resolve all disputes with respect to the
Closing Balance Sheet prior to the expiration of the Resolution Period,
issues remaining in dispute shall be submitted, as soon as practicable, to
Ernst & Young LLP, or if they are unable to serve in such capacity or are
not independent with respect to Pegasus, the Company or the Majority
Stockholder, to another firm of independent public accountants of
internationally recognized standing mutually acceptable to Pegasus and the
Securityholder Agent that is not the regular accounting firm of Pegasus,
the Company or the Majority Stockholder (the "NEUTRAL AUDITORS."). Pegasus
and the Securityholder Agent agree to execute a reasonable engagement
letter if requested by the Neutral Auditors. The Neutral Auditors shall act
as an expert and not as an arbitrator to determine only those issues with
respect to the Closing Balance Sheet which are still in dispute. The
Neutral Auditors' determination shall be made within thirty (30) days after
their selection, shall be set forth in a written statement delivered to
Pegasus and the Securityholder Agent and shall be final, binding and
conclusive and enforceable in any court of competent jurisdiction. The fees
and expenses of the Neutral Auditors shall be allocated by the Neutral
Auditors between Pegasus, on the one hand, and the Securityholder Agent, on
behalf of the holders of Company Common Stock ("COMPANY STOCKHOLDERS"), on
the other hand, in proportion to
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the extent that either party did not prevail on its items in dispute;
provided that so long as a party complies in all material respects in good
faith with the procedures of this Section 3.04, such fees shall not include
the other party's outside counsel or accounting fees.
(d) ADJUSTED CLOSING BALANCE SHEET. For purposes of this Agreement,
the "ADJUSTED CLOSING BALANCE SHEET" shall be either (i) the Closing
Balance Sheet in the event that (x) no Notice of Dispute is delivered to
Pegasus during the 30-day period specified by Section 3.04(b) or (y) the
Securityholder Agent and Pegasus so agree; or (ii) the Closing Balance
Sheet adjusted in accordance with the Notice of Dispute in the event that
Pegasus does not respond to the Notice of Dispute within the Resolution
Period; or (iii) the Closing Balance Sheet as adjusted by either (x) the
agreement of the Securityholder Agent and Pegasus or (y) the determination
of the Neutral Auditors.
Section 3.05 POST-CLOSING ADJUSTMENT.
(a) The following terms shall have the meanings ascribed to them
below:
(i) "NET TANGIBLE ASSETS ADJUSTMENT" shall mean the result, whether
a positive or negative number, obtained by subtracting (A) Net Tangible
Assets as reflected on the Adjusted Closing Balance Sheet from (B) Net
Tangible Assets as reflected on the Estimated Closing Balance Sheet;
provided that in no event shall any Net Tangible Asset Adjustment exceed
to the detriment of Pegasus any Estimated Closing Balance Sheet
Adjustment and provided further that if Net Tangible Assets as reflected
on the Adjusted Closing Balance Sheet is greater than $23,745,000 no Net
Tangible Asset Adjustment shall work to the detriment of the Company.
(ii) The parties shall make the following calculations: (A)
subtract Estimated Working Capital (as defined in Section 3.06) from the
Forecasted Working Capital (as defined in Section 3.06) for the month
containing the as of date of the Estimated Closing Balance Sheet and (B)
subtract Working Capital as reflected on the Adjusted Closing Balance
Sheet from the Forecasted Working Capital for the month containing the
as of date of the Adjusted Closing Balance Sheet. The parties shall then
take the difference of the result of the calculation of clause (A)
whether a positive or negative number, minus the result of the
calculation of clause (B), whether a positive or negative number. The
difference of the result of the calculation of clause (A) minus the
result of the calculation of clause (B), whether positive or negative,
shall be referred to herein as the "CLOSING WORKING CAPITAL ADJUSTMENT."
(iii) "INDEBTEDNESS ADJUSTMENT" shall mean the result, whether a
positive or negative number, obtained by subtracting (A) Indebtedness as
reflected on the Estimated Closing Balance Sheet from (B) Indebtedness
as reflected on the Adjusted Closing Balance Sheet.
(b) "CLOSING ADJUSTMENT" shall mean the sum, whether positive or
negative of the Net Tangible Asset Adjustment plus the Closing Working
Capital Adjustment plus the Indebtedness Adjustment. If the Closing
Adjustment is a positive number, the Escrow Agent shall deliver to Pegasus
from the Balance Sheet Escrow an amount equal to the Closing Adjustment in
accordance with Article IX. If the Closing Adjustment is a negative number,
Pegasus shall promptly pay into the Balance Sheet Escrow an adjustment
payment in an amount equal to the absolute value of the Closing Adjustment
in cash delivered to the Escrow Agent on behalf of the Company
Stockholders.
(c) Schedule 3.05 sets forth examples of the adjustments to be made
pursuant to this Section 3.05.
Section 3.06 WORKING CAPITAL ADJUSTMENTS. Schedule 3.06 sets forth a month
by month forecast of its Working Capital (the "FORECASTED WORKING CAPITAL") as
of the last day of each month for each month through the dates referred to in
Section 10.01(b). If the Working Capital reflected on the Estimated Closing
Balance Sheet (the "ESTIMATED WORKING CAPITAL") is less than Forecasted Working
Capital for the month containing the as of date of the Estimated Closing Balance
Sheet, then Indebtedness as reflected on the Estimated Closing Balance Sheet
shall be deemed to be increased by the difference between Estimated Working
Capital and Forecasted Working Capital for such month. If the Estimated Working
Capital is greater than the Forecasted Working Capital for the month containing
the as of date of the Estimated Closing Balance Sheet, then Indebtedness as
reflected on the Estimated Closing Balance
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Sheet shall be deemed to be decreased by the difference between the Forecasted
Working Capital for the month containing the as of date of the Estimated Closing
Balance Sheet and Estimated Working Capital. The increase or decrease in
Indebtedness described in this Section 3.06(a) is referred to in this Agreement
as the "ESTIMATED WORKING CAPITAL ADJUSTMENT."
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE
MAJORITY STOCKHOLDER
The Company hereby represents and warrants to Pegasus and Newco, subject to
such exceptions as are specifically disclosed in the disclosure schedules
supplied by the Company to Pegasus and Newco (the "COMPANY DISCLOSURE SCHEDULE")
and dated as of the date hereof, as follows (it being understood that matters
disclosed in one section of the Company Disclosure Schedule shall be deemed to
qualify such other representations and warranties of the Company herein to the
extent, but only to the extent, such qualification is evident from such
disclosure):
Section 4.01 ORGANIZATION AND GOOD STANDING. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has the corporate power and authority to own, operate and
lease its properties and to carry on its business as now conducted. The Company
is duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction set forth on Schedule 4.01, which is each
jurisdiction in which the ownership of its properties, the employment of its
personnel or the conduct of its business requires it to be so qualified, except
where the failure to be so qualified or licensed would not have a Material
Adverse Effect on the Company "MATERIAL ADVERSE EFFECT" or "MATERIAL ADVERSE
CHANGE" or a similar phrase shall mean, with respect to any Person, any event,
change or effect that, individually or together with all other events, changes
or effects, is materially adverse with respect to (i) the business, operations,
assets, liabilities, financial condition or results of operations of such Person
and its subsidiaries, taken as a whole or (ii) the ability of such Person to
consummate the transactions contemplated hereby. Set forth on Schedule 4.01 is a
listing of all names used by the Company or, to the Company's knowledge, by any
predecessor companies of the Company or the Company Subsidiaries (a
"PREDECESSOR") during the past five (5) years, including the names of any
entities from whom the Company acquired material assets during such period, and
of all names under which the Company or the Company Subsidiaries does or has
done business during such period.
Section 4.02 SUBSIDIARIES. Schedule 4.02 sets forth all corporations,
partnerships, joint ventures, associations, limited liability companies, or
other entities owned or controlled, directly or indirectly, by the Company
(collectively, the "Company Subsidiaries" and each a "COMPANY SUBSIDIARY").
Except as set forth on Schedule 4.02 and except for any ownership of capital
stock or other equity securities that is required by foreign laws, all
outstanding shares of capital stock or other equity securities of each Company
Subsidiary are owned and held of record and beneficially owned by the Company or
a Company Subsidiary free and clear of all liens, pledges, charges, claims,
security interests or other encumbrances ("LIENS"). Each Company Subsidiary has
the corporate power to own its properties and to carry on its business as now
being conducted, is duly organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation, and is duly qualified or
licensed to do business and in good standing as a foreign corporation in each
jurisdiction in which the failure to be so qualified or licensed could have a
Material Adverse Effect on the Company.
Section 4.03 CAPITALIZATION.
(a) AUTHORIZED/OUTSTANDING CAPITAL STOCK. The authorized capital stock
of the Company consists of One Hundred Million Seven Hundred Three Thousand
(100,703,000) shares, consisting of (i) Seventy Million (70,000,000) shares
of Common Stock, par value $0.001 per share of which Thirty Four Million
Five Hundred Nine Thousand Six Hundred Fourteen (34,509,614) shares are
issued and outstanding, and (ii) Thirty Million Seven Hundred Three
Thousand (30,703,000) shares of Preferred Stock, of which Twenty Million
Seven Hundred and Three Thousand (20,703,000) shares are designated as
Non-Voting Series A Preferred Stock, par value $0.005 per
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share ("Series A Preferred Stock"), all of which are issued and
outstanding] (the foregoing, the "Stock"). All shares of the Company's
outstanding Stock are owned and held of record and, to the Company's
knowledge, beneficially owned by the individuals and entities set forth on
Schedule 4.03(a) to this Agreement in the amounts set forth opposite their
respective names and, to the Company's knowledge, free and clear of all
Liens. Except as set forth on Schedule 4.03(a), the Stock is validly
issued, fully paid and non-assessable, and such Stock is not subject to any
preemptive or other similar rights. All issued and outstanding shares of
the Stock are not subject to any right of rescission and have been offered,
issued, sold and delivered by the Company in compliance with all
registration or qualification requirements (or applicable exemptions
therefrom) of applicable federal and state securities laws.
(b) OPTIONS/RIGHTS. Schedule 4.03(b) sets forth the date of grant, the
term, expiration date and the number and exercise price of all options,
stock appreciation rights, warrants, conversion privileges or preemptive or
other rights or agreements outstanding to purchase or otherwise acquire any
of the Company's authorized but unissued Stock. Other than set forth on
Schedule 4.03(b), there are no options, warrants, conversion privileges or
other rights or agreements, written or oral, to which the Company is a
party or otherwise bound involving the issuance, delivery, sale,
repurchase, redemption or other acquisition of any shares of the Company's
Stock, and there is no liability for dividends accrued but unpaid. Other
than set forth on Schedule 4.03(b), there are no voting agreements, rights
of first refusal or other restrictions (other than normal restrictions on
transfer under applicable federal and state securities laws) applicable to
any of the Company's outstanding Stock. There are no shares of the Company
Stock obligating the Company to grant, extend, accelerate the vesting of,
change the price of, otherwise amend or enter into any such option,
warrant, call, right, commitment or agreement. As a result of the Merger,
Pegasus will be the record owner of all shares of the Company's outstanding
Stock and all rights to acquire or receive any capital stock of the
Company.
Section 4.04 POWER, AUTHORIZATION AND EXECUTION.
(a) The Company has all necessary corporate power and authority to
enter into this Agreement and all other agreements and instruments to be
executed by the Company as contemplated by this Agreement (the "COMPANY
ANCILLARY AGREEMENTS") and to carry out its obligations under this
Agreement and the Company Ancillary Agreements. The execution, delivery and
performance of this Agreement and the Company Ancillary Agreements have
been duly and validly authorized by all necessary corporate actions on the
part of the Company, other than formal approval of the Merger by the
holders of 85% of the outstanding shares of Company Common Stock (the
"REQUIRED STOCKHOLDER APPROVAL"), and no further action is required on the
part of the Company or its stockholders to authorize the Agreement and the
Company Ancillary Agreements to which it is a party and the transactions
contemplated hereby and thereby. The Required Stockholder Approval
constitutes the only approval that remains to be obtained in accordance
with applicable law, the Company's Certificate of Incorporation, Bylaws and
any agreements affecting the securities of the Company for execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby. The Company has received from Thomas
Weisel Partners LLC, a written opinion, as to the fairness of the Merger to
the Company Stockholders from a financial point of view.
(b) This Agreement has been, and at Closing, the Company Ancillary
Agreements to which the Company is a party will have been, duly executed
and delivered to the other parties hereto and thereto by the Company and,
assuming the due authorization, execution and delivery by the other parties
hereto and thereto, constitute (or, as to the Company Ancillary Agreements,
at Closing will constitute) the valid and binding obligations of the
Company, enforceable in accordance with their respective terms, except as
such enforceability may be limited by principles of public policy and
subject to the laws of general application relating to bankruptcy,
insolvency and the relief of debtors and to rules of law governing specific
performance, injunctive relief or other equitable remedies.
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Section 4.05 NO CONFLICT. Except as set forth on Schedule 4.05 and except
for the filing of the Certificate of Merger the requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules
and regulations promulgated thereunder (the "HSR ACT"), neither the execution
and delivery of this Agreement or the Company Ancillary Agreements nor the
consummation of the transactions provided for hereby or thereby will (a)
conflict with, result in any violation of or default under (with or without
notice or lapse of time, or both), or give rise to a right of termination,
cancellation, modification or acceleration of any obligation or loss of any
benefit under (any such event, a "CONFLICT"), (b) result in any Lien upon any
assets of the Company or any Company Subsidiary, or (c) require any consent,
waiver, approval, order of or notice, report, registration, authorization,
declaration or filing with (each a "CONSENT") of any court, administrative
agency or commission or other federal, state, county, local or foreign
governmental authority, instrumentality, agency or commission ("GOVERNMENTAL
ENTITY") or any other individual, corporation, partnership, limited liability
company, trust, unincorporated organization, or the executors, administrators or
other legal representatives of an individual in such capacity (each, a "PERSON,"
which term shall include Governmental Entities) under the provisions of the
charter or other organizational documents of the Company or any Company
Subsidiary or any material indenture, lease, contract or other material
agreement, instrument, permit, concession, franchise or license to which the
Company or any of the Company Subsidiaries or any of their respective assets are
bound, or any law, statute, rule or regulation or order, judgement or decree to
which the Company or any Company Subsidiary is subject.
Section 4.06 INTENTIONALLY LEFT BLANK.
Section 4.07 LITIGATION. Except as set forth on Schedule 4.07, there are
no outstanding orders, judgments, injunctions, awards or decrees of any
Governmental Entity against the Company or the Company Subsidiaries that could
reasonably be expected to have a Material Adverse Effect on the Company. Except
as set forth on Schedule 4.07, there is no action, suit, proceeding, claim,
application, complaint or investigation in any court or before any arbitrator or
before or by any regulatory body or governmental or non-governmental body
pending or, to the Company's knowledge, threatened by or against the Company,
the Company Subsidiaries or the transactions contemplated by this Agreement, and
to the Company's knowledge, there is no factual or legal basis which could give
rise to any such action, suit, proceeding, claim, application, complaint or
investigation under applicable law. Except as set forth on Schedule 4.07, no
Person has a claim against the Company or, to the Company's knowledge, the
Company Stockholders based upon: (a) ownership or rights to ownership of any
shares of the Stock, (b) any rights as a holder of outstanding securities of the
Company, including, without limitation, any option or other right to acquire any
of the Company securities, any preemptive rights or any rights to notice or to
vote, or (c) any rights under any agreement between the Company and any current
or former holder of outstanding securities of the Company.
Section 4.08 FINANCIAL STATEMENTS; UNDISCLOSED LIABILITIES. The Company
has previously furnished to Pegasus and Newco, and Schedule 4.08 includes, true,
correct and complete copies of the audited balance sheet of the Company as of
December 31, 1998 and December 31, 1997, and the related statements of
operations, stockholder's equity and cash flows for the two (2) fiscal years
ended December 31, 1998 and December 31, 1997 as audited by the Company's
certified public accountants, together with the Company's unaudited balance
sheet and the related statements of operations, stockholders' equity and cash
flows for the seven-month period ended July 31, 1999 ("BALANCE SHEET DATE"),
(collectively, the "FINANCIAL STATEMENTS"). The Financial Statements (i) are
consistent with the books and records and accounting methods of the Company and
are complete and accurate in all material respects, (ii) fairly present the
financial position and results of operations of the Company as of the dates and
for the periods indicated and (iii) have been prepared in accordance with GAAP
consistently applied throughout the periods involved, except for the absence of
footnotes and year-end adjustments in the case of the unaudited Financial
Statements, none of which is expected to be material in amount or significance
and information regarding such adjustments is included in Schedule 4.08. Except
as set forth in the Financial Statements or otherwise set forth on Schedule
4.08, the Company does not have any material liability, indebtedness,
obligation, expense, claim, deficiency, guaranty or endorsement of any type,
whether
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accrued, absolute, contingent, matured, unmatured or other (whether or not
required to be reflected in financial statements in accordance with GAAP) which
(i) have not been reflected in or reserved against in the Financial Statements,
or (ii) have not arisen in the ordinary course of business consistent with past
practices since the Balance Sheet Date. The Company and the Company Subsidiaries
do not have any outstanding loans to their respective officers, directors or
employees, except for liabilities in respect of reimbursable expenses incurred
in the ordinary course of business.
Section 4.09 TAX MATTERS. Except as set forth on Schedule 4.09:
(a) Each of the Company, the Company Subsidiaries, the Predecessors
and predecessors of Company Subsidiaries (each, a "TAX AFFILIATE" and,
collectively, the "Tax Affiliates"), has: (i) timely filed after giving
effect to any applicable filing extension (or has had timely filed on its
behalf) all material returns, declarations, reports, estimates, information
returns, and statements ("RETURNS") required to be filed or sent by it in
respect of any "TAXES" (as defined below) or required to be filed or sent
by it by any taxing authority having jurisdiction, and all such Returns are
accurate and complete in all material respects; (ii) timely paid (or has
had paid on its behalf) all Taxes shown to be due and payable on such
Returns; (iii) timely paid all material Taxes which will be due and
payable, whether now or hereafter, for any period ending on, prior to or
including the Closing Date, or such Taxes are reflected on the books of the
Company as an accrued Tax liability determined in a manner which is
consistent with past practices and the Financial Statements, without taking
account of the Merger; (iv) complied in all material respects with all
applicable laws, rules, and regulations relating to the withholding of
Taxes and the payment thereof (including, without limitation, withholding
of Taxes under Sections 1441 and 1442 of the Internal Revenue Code of 1986,
as amended (the "CODE"), or any similar foreign laws), and timely and
properly withheld from employee wages and paid over to the proper
governmental authorities all amounts required to be so withheld and paid
over under all applicable laws. For purposes of this Agreement, the term
"TAXES" means all taxes, charges, fees, levies, or other assessments,
including, without limitation, all net income, gross income, gross
receipts, sales, use, ad valorem, transfer, franchise, profits, license,
withholding, payroll, employment, social security, unemployment, excise,
estimated, severance, stamp, occupation, property, or other taxes, customs
duties, fees, assessments, or charges of any kind whatsoever, including,
without limitation, all interest and penalties thereon, and additions to
tax or additional amounts imposed by any taxing authority, domestic or
foreign, upon the Company or any Tax Affiliate and the term "TAX" means any
one of the foregoing Taxes.
(b) No deficiency for any Taxes has been proposed, asserted or
assessed against the Company or any Tax Affiliate that has not been
resolved and paid in full. No waiver, extension or comparable consent given
by the Company or any Tax Affiliate regarding the application of the
statute of limitations with respect to any Taxes or Returns is outstanding,
nor is any request for any such waiver or consent pending. There is no Tax
audit or other administrative proceeding or court proceeding pending with
regard to any Taxes or Returns of the Company or any Tax Affiliate, nor has
there been any notice to the Company or any Tax Affiliate by any taxing
authority regarding any such Tax, audit or other proceeding, or, to the
Company's knowledge, is any such Tax audit or other proceeding threatened
with regard to any Taxes or Returns of the Company or any Tax Affiliate.
The Company does not expect the assessment of any additional Taxes with
respect to the Company or any Tax Affiliate and is not aware of any
unresolved questions, claims or disputes concerning the liability for Taxes
of the Company or any Tax Affiliate which would exceed the estimated
reserves established on its books and records.
(c) The Company and the Company Subsidiaries set forth on Schedule
4.09 are members of an "AFFILIATED GROUP" within the meaning of Section
1504(a)(1) of the Code and for all taxable periods on or after December 10,
1997 the Company and such Subsidiaries have filed federal income tax
returns on a consolidated basis. The Company and the Company Subsidiaries
do not have any liability for Taxes for any other affiliated group.
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(d) Except as set forth on Schedule 4.09, neither the Company nor any
Tax Affiliate is a party to any agreement, contract or arrangement that
would result, separately or in the aggregate, in the payment of any "EXCESS
PARACHUTE PAYMENTS" within the meaning of Section 280G of the Code and the
consummation of the transactions contemplated by this Agreement will not be
a factor causing payments to be made by the Company or any Tax Affiliate
that are not deductible (in whole or in part) under Section 280G of the
Code.
(e) Neither the Company nor any Tax Affiliate has filed any consent
under Section 341(f) of the Code (or any corresponding provision of state
or local income tax law) or agreed to have Section 341(f)(2) of the Code
(or any corresponding provision of state or local income tax laws) apply to
any disposition of any asset owned by it.
(f) There are no Tax liens as of the date hereof upon any of the
assets or properties of the Company or any Tax Affiliate except for
statutory liens for Taxes not yet due or delinquent.
(g) The amounts of Taxes withheld by or on behalf of the Company and
the Tax Affiliates with respect to all amounts paid to employees of the
Company and the Tax Affiliates or creditors or other parties for all
periods ending on or before the Closing Date have been proper and accurate
in all material respects, and all deposits required with respect to amounts
paid to such employees, creditors or other parties have been made in
compliance in all material respects with the provisions of all applicable
Tax laws.
(h) Neither the Company nor any Tax Affiliate is a party to, or has
any obligations under, any tax sharing or similar agreement or arrangement.
(i) The Company and the Tax Affiliates have made available for
inspection by Pegasus: (i) complete and correct copies of all Tax Returns
of the Company and any Tax Affiliates organized under the laws of the
United States or any state or other jurisdiction thereof that have been
required to be filed for taxable periods ending with or within the last two
(2) years; (ii) complete and correct copies of all ruling requests, private
letter rulings, revenue agent reports, information document requests and
responses thereto, notices of proposed deficiencies, deficiency notices,
applications for changes in method of accounting, protests, petitions,
closing agreements, settlement agreements and any similar documents
submitted by, received by or agreed to by or on behalf of the Company and
the Tax Affiliates and relating to taxable periods ending with or within
the last two (2) years; and (iii) copies of all record retention agreements
currently in effect between the Company and the Tax Affiliates with any
taxing authority.
(j) Neither the Company nor any Tax Affiliate is a party to or has
entered into any advance pricing agreements or any similar agreements with
any taxing authority.
(k) Except as set forth on Schedule 4.02, neither the Company nor any
Tax Affiliate owns any interest in any "CONTROLLED FOREIGN CORPORATION"
(within the meaning of Section 957 of the Code), "PASSIVE FOREIGN
INVESTMENT COMPANY" (within the meaning of Section 1297 of the Code) or
other entity the income of which is required to be included in the income
of the Company or any Tax Affiliate whether or not distributed.
(l) The Company is not, and has not been during the period beginning
with its existence and ending on the Closing Date, a "UNITED STATES REAL
PROPERTY HOLDING CORPORATION" within the meaning of Section 897 of the
Code.
(m) None of the assets of the Company or any Tax Affiliate directly or
indirectly secures any debt the interest on which is tax-exempt under
Section 103(a) of the Code.
(n) None of the assets of the Company or any Tax Affiliate is
"TAX-EXEMPT USE PROPERTY" within the meaning of Section 168(h) of the Code.
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(o) Neither the Company nor any Tax Affiliate has agreed to make nor
is it required to make any adjustment under Section 481(a) of the Code by
reason of a change in accounting method or otherwise.
(p) Schedule 4.09 sets forth a list of all foreign countries in which
the Company or any Tax Affiliate has had a permanent establishment, as
defined in any applicable tax treaty or convention between the United
States and such foreign country.
(q) Neither the Company nor any Tax Affiliate is a party to any joint
venture, partnership, or other arrangement or contract that could be
treated as a partnership for federal income tax purposes.
(r) None of the assets of the Company or any Tax Affiliate is property
that the Company or any Tax Affiliate is required to treat as being owned
by any other person pursuant to the "SAFE HARBOR LEASE" provisions of
former Section 168(f)(8) of the Code.
(s) Neither the Company nor any Tax Affiliate has participated in an
international boycott within the meaning of Section 999 of the Code.
(t) Prior to the Closing, the Company shall provide Pegasus with a
complete list of each Company Stockholder that is a "FOREIGN PERSON" as
that term is defined in Section 1445(f)(3) of the Code.
Section 4.10 TITLE TO ASSETS.
(a) The Company and the Company Subsidiaries own no real property.
Schedule 4.10 sets forth a list of all real property currently leased by
the Company and the Company Subsidiaries. All such leases are in full force
and effect, are valid and effective in accordance with their respective
terms, and there is not, under any of such leases, any existing default or
event of default (or event which with notice or lapse of time, or both,
would constitute a default) with respect to the Company or any Company
Subsidiary or to the Company's knowledge, any other party to any such
lease. There is no pending or, to the Company's knowledge, threatened
condemnation, expropriation, eminent domain or similar proceeding affecting
all or any part of such real property, and the Company has not received any
written notice of any of the foregoing matters set forth in this Section
4.10(a). The Company is not in violation of any material zoning, building,
safety or environmental ordinance, regulation or requirement or other law
or regulation applicable to the operation of leased properties, and the
Company has not received any notice of such violation with which it has not
complied or has waived.
(b) The Company and the Company Subsidiaries have good and valid title
to, or, in the case of leased properties and assets, valid leasehold
interests in, all of their respective tangible properties and assets, real,
personal and mixed, used or held for use in their respective businesses,
free and clear of any Liens, except (i) as reflected in the Financial
Statements, (ii) for Liens for Taxes not yet due and payable, (iii) such
imperfections of title and encumbrances which would not have a Material
Adverse Effect on the Company; and (iv) for Liens imposed by the owner of
any leased real or personal property other than any Liens which result from
default under any applicable lease agreement by the Company or Company
Subsidiary.
(c) Upon Closing, the Company will own or lease, or have the
unrestricted right to use, all of the assets and properties of every kind,
character, and description, whether tangible, intangible, real, personal or
mixed, including but not limited to contract rights, Intellectual Property,
permits, licenses and registrations (collectively, the "ASSETS") owned,
leased or employed by, or necessary for the worldwide business of the
Company or any of the Company Subsidiaries prior to the Closing, except for
(i) Assets the absence of which will not have a Material Adverse Effect on
Pegasus, (ii) the sale, transfer or disposition of Assets in the ordinary
course of business consistent with prior practice, and (iii) matters set
forth on Schedule 4.10(c).
(d) Except as set forth on Schedule 4.10(d), all of the tangible
Assets necessary for the conduct of the business of the Company and the
Company Subsidiaries as currently conducted are in good
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condition and repair, ordinary wear and tear excepted, and are usable in
the ordinary course of business.
Section 4.11 NO CHANGE. Since the Balance Sheet Date, except as set forth
on Schedule 4.11, there has not been, occurred or arisen any:
(a) transaction by the Company or the Company Subsidiaries except in
the ordinary course of business as conducted on that date and consistent
with prior practices;
(b) amendments or changes to the charter or other organizational
documents of the Company or the Company Subsidiaries;
(c) capital expenditure by the Company or the Company Subsidiaries
exceeding $500,000 in the aggregate;
(d) destruction of, damage to or loss of any assets of the Company or
the Company Subsidiaries (whether or not covered by insurance) that would
result in a Material Adverse Effect on the Company;
(e) any pending or threatened claim of wrongful discharge or other
unlawful labor practice or action involving the Company or any of the
Company Subsidiaries;
(f) change in accounting methods or practices (including any change in
depreciation or amortization policies or rates) by the Company other than
as required by GAAP or applicable laws;
(g) revaluation by the Company or the Company Subsidiaries of any
assets that are material to the Company or the Company Subsidiaries taken
as a whole;
(h) declaration, setting aside or payment of a dividend or other
distribution with respect to capital stock of the Company or any direct or
indirect redemption, purchase or other acquisition by the Company of shares
of its capital stock;
(i) material increase in the salary or other compensation payable or
to become payable by the Company or the Company Subsidiaries to any of
their respective officers, directors, employees or advisors, or the
declaration, payment or commitment or obligation of any kind for the
payment by the Company or the Company Subsidiaries of a material bonus or
other material additional salary or compensation to any such person, in
each case other than in the ordinary course of business consistent with
past practices;
(j) any termination, extension, material amendment or material
modification of the terms of any contract described in Section 4.12(a);
(k) sale, lease, license or other disposition of any of the assets or
properties of the Company or any of the Company Subsidiaries that would
result in a Material Adverse Effect on the Company, or any creation of any
security interest in such assets or properties, in each case other than in
the ordinary course of business consistent with past practice;
(l) waiver or release of any right or claim, including any write-off
or other compromise of any account receivable other than in the ordinary
course of business, that would result in a Material Adverse Effect upon the
Company;
(m) commencement or notice or threat of commencement of any lawsuit,
proceeding or investigation relating to the Company, the Company
Subsidiaries or any of their respective businesses;
(n) issuance or sale, or contract to issue or sell, by the Company of
any shares of its capital stock or securities exchangeable, convertible or
exercisable therefor, or any securities, warrants, options or rights to
purchase any of the foregoing other than the issuance of Company Common
Stock pursuant to options outstanding as of the Balance Sheet Date;
(o) change in pricing or royalties set or charged by the Company or
the Company Subsidiaries to their respective customers or licensees or in
pricing or royalties set or charged by persons who have
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licensed Intellectual Property (as defined in Section 4.13 below) to the
Company or the Company Subsidiaries that would result in a Material Adverse
Effect upon the Company;
(p) incurrence of indebtedness for borrowed money or in respect of
capital leases, or any guarantee of such indebtedness (other than
intercompany indebtedness or borrowings under an existing revolving credit
facility) other than in the ordinary course of business; or
(q) negotiation or agreement by the Company or the Company
Subsidiaries or any officer or employees thereof to do any of the things
described in the preceding clauses (a) through (p).
Section 4.12 CONTRACTS AND COMMITMENTS.
(a) Schedule 4.12(a) sets forth the following agreements, whether oral
or written, to which the Company, the Company Subsidiaries or, to the
Company's knowledge, their respective Predecessors are a party, which are
currently in effect, and which relate to the Company, the Company
Subsidiaries or any of their respective businesses: (i) collective
bargaining agreements or contracts with any labor union; (ii) bonus,
pension, profit sharing, retirement or other form of deferred compensation
plans, other than as set forth on Schedule 4.19; (iii) hospitalization
insurance or other welfare benefit plans, whether formal or informal, other
than as set forth on Schedule 4.19; (iv) stock purchase, stock option,
stock appreciation rights, any employee handbooks, policy manuals or other
workplace documents, plans or agreements of similar import that are
currently in effect or have been in effect since the Company's inception;
(v) contracts for the employment of any Person that will be binding on the
Company after the Closing Date or relating to severance pay for any Person,
other than as set forth on Schedule 4.19; (vi) confidentiality agreements,
(vii) contracts, agreements or understandings relating to the voting of the
Stock or the election of directors of the Company that will be binding on
the Company after the Closing Date; (viii) agreements or indentures
relating to the borrowing of money or to mortgaging, pledging or otherwise
placing a Lien on any of the assets of the Company; (ix) agreements of
indemnification or guaranties of any obligation for borrowed money or
otherwise; (x) leases or agreements under which the Company or any Company
Subsidiary is lessee of, or holds or operates any personal property owned
by any other party, for which the annual rental exceeds $250,000; (xi)
leases or agreements under which it is lessor of, or permits any third
party to hold or operate, any property, real or personal, for which the
annual rental exceeds $250,000; (xii) contracts or groups of related
contracts with the same party for the purchase of products or services
under which the undelivered balance of such products or services is in
excess of $250,000 per annum; (xiii) contracts or group of related
contracts with the same party for the sale of products or services under
which the undelivered balance of such products or services has a sales
price in excess of $250,000; (xiv) contracts or groups of related contracts
with the same party (other than any contracts or groups of related
contracts for the purchase or sale of products or services) continuing over
a period of more than six months from the date or dates thereof, not
terminable by the Company or any Company Subsidiary on 30 days' or less
notice without penalty and involving more than $250,000; (xv) any
agreements containing covenants to limit the Company's freedom to compete
in any line of business in any geographic area; (xvi) any dealer,
distributor, sales representative, original equipment manufacturer, value
added remarketer or other agreements for the distribution of the Company's
products or services; (xvii) franchise agreements; (xviii) contracts or
commitments for capital expenditures in excess of $250,000; (xix) any
fidelity or surety bond or completion bond; (xx) any agreements, contracts
or commitments outside the ordinary course of business relating to the
disposition or acquisition of assets that are material to the Company or
the Company Subsidiaries taken as a whole or any interest in any material
business enterprise; (xxi) any purchase orders or contracts for the
purchase of materials or services involving in excess of $250,000; (xxii)
any distribution, joint marketing or development agreements involving in
excess of $250,000; (xxiii) any other agreements, contracts or commitments
involving more than $250,000; (xxiv) any agreement relating to any joint
venture or strategic alliance to which the Company or the Company
Subsidiaries or their respective properties are subject; (xxv) any
agreement, including without limitation any facilities leasing or sharing
or employee leasing or sharing agreements, with any Company Affiliate (as
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defined in Section 4.17), including the Majority Stockholder and any of its
subsidiaries, or (xxvi) any other agreement which is either material to the
Company's business or was not entered into in the ordinary course of
business.
(b) Except as set forth on Schedule 4.12(b), the Company and the
Company Subsidiaries and, to the Company's knowledge, their respective
Predecessors (as to any obligation the performance of which is binding on
the Company) have performed all obligations required to be performed by
them in connection with the contracts or commitments set forth on Schedule
4.12(a) other than any obligation the breach of which would not cause a
Material Adverse Effect on the Company. Except as set forth on Schedule
4.12(b), neither the Company nor any Company Subsidiary is in receipt of
any written claim of default or failure to perform under any contract or
commitment required to be disclosed on such schedule. Neither the Company
nor any Company Subsidiary has any present expectation or intention of not
fully performing any obligation pursuant to any contract or commitment
required to be disclosed on Schedule 4.12(a). The Company has no knowledge
of any breach or anticipated breach by any other party to any contract or
commitment required to be disclosed on Schedule 4.12(a).
(c) Except as set forth on Schedule 4.12(c), no notices are required
to be delivered to any Person under any contract or commitment required to
be disclosed under Schedule 4.12(a) in connection with the execution and
delivery of this Agreement and the completion of the transactions
contemplated by this Agreement.
(d) The Company has specifically identified and made available to
Pegasus a true and correct copy of each written contract or commitment, and
a description of each oral contract or commitment, set forth on Schedule
4.12(a), together with all material amendments, waivers or other changes
thereto.
(e) Except as set forth on Schedule 4.12(e), the Company and the
Company Subsidiaries have no business contracts with any Governmental
Entity, including any prime contractor of any Governmental Entity and any
higher level subcontractor of a prime contractor of any Governmental
Entity, and including any employees or agents thereof.
Section 4.13 INTELLECTUAL PROPERTY.
(a) For the purposes of this Agreement, the following terms have the
following definitions:
"INTELLECTUAL PROPERTY" shall mean any or all of the following and
all rights in, arising out of, or associated therewith: (i) all United
States and foreign patents and applications therefor and all reissues,
divisions, renewals, extensions, provisionals, continuations and
continuations-in-part thereof, (ii) all inventions (whether patentable
or not), invention disclosures, improvements, trade secrets (whether
currently existing or in development), proprietary information, know
how, technology, technical data and customer lists, and all
documentation relating to any of the foregoing; (iii) all copyrights,
copyrights registrations and applications therefor, and all other rights
corresponding thereto throughout the world; (iv) all mask works, mask
work registrations and applications therefor, and all other rights
corresponding thereto throughout the world; (v) all industrial designs
and any registrations and applications therefor throughout the world;
(vi) all trade names, trade dress, logos, common law trademarks and
service marks; trademark and service mark registrations and applications
therefor throughout the world; (vii) all databases and data collections
and all rights therein throughout the world; and (viii) all computer
software including all source code, object code, firmware, development
tools, files, records and data, all media on which any of the foregoing
is recorded, and all documentation related to any of the foregoing
throughout the world.
"COMPANY INTELLECTUAL PROPERTY" shall mean any Intellectual
Property that: (i) is owned by or exclusively licensed to the Company or
the Company Subsidiaries, or (ii) is necessary to the operation of the
Company or the Company Subsidiaries, including the design, manufacture,
sale
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and use of the products or performance of the services of the Company
and the Company Subsidiaries, as it currently is operated or is
reasonably anticipated to be operated in the future.
(b) Schedule 4.13(b) sets forth all of the Company's and the Company
Subsidiaries' United States and foreign (i) patents, patent applications
(including provisional applications); (ii) registered trademarks,
applications to register trademarks, intent-to-use applications, or other
registrations related to trademarks; (iii) registered copyrights and
applications for copyright registration; (iv) mask work registrations and
applications to register mask works; and (v) other Company Intellectual
Property that is the subject of an application, certificate or registration
issued by or recorded by any state, government or other public legal
authority, all of the foregoing, the "REGISTERED INTELLECTUAL PROPERTY."
(c) Schedule 4.13(c) sets forth any proceedings or actions before any
court, tribunal (including the United States Patent Office ("PTO") or
equivalent authority anywhere in the world) related to any of the
Registered Intellectual Property.
(d) The Company or the Company Subsidiaries have complied with all
applicable disclosure requirements and have not committed any fraudulent
act in the application for and maintenance of any patent, trademark or
copyright of the Company or the Company Subsidiaries.
(e) Each item of Registered Intellectual Property is valid and
subsisting, all necessary registration, maintenance and renewal fees in
connection with such Registered Intellectual Property have been made and
all necessary documents and certificates in connection with such Registered
Intellectual Property have been filed with the relevant patent, copyright,
trademark or other authorities in the United States or foreign
jurisdictions, as the case may be, for the purposes of maintaining,
renewing or extending the registration of such Registered Intellectual
Property. Schedule 4.13(e) sets forth all actions and payments that must be
made in the twelve month period following the Closing Date in connection
with the preservation or maintenance of the Registered Intellectual
Property.
(f) The Company and the Company Subsidiaries are not barred from
seeking patents on any patentable inventions of the Company or the Company
Subsidiaries that in the reasonable judgment of the Company would have been
necessary to the operation of the Company or the Company Subsidiaries by
"on-sale" or similar bars to, patentability or by failure to apply for a
patent on such inventions within the time required.
(g) The contracts, licenses and agreements set forth on Schedule
4.13(g) include all contracts, licenses and agreements to which the Company
and the Company Subsidiaries is a party with respect to any Company
Intellectual Property with a known value or cost to the Company in excess
of $150,000.
(h) The contracts, licenses and agreements set forth on Schedule
4.13(g) are in full force and effect. The consummation of the transactions
contemplated by this Agreement will neither violate nor result in the
breach, modification, cancellation, termination or suspension of the
contracts, licenses and agreements set forth on Schedule 4.13(g). Other
than those matters that would not have a Material Adverse Effect on the
Company, the Company and the Company Subsidiaries are in compliance with,
and have not breached any term of, the contracts, licenses and agreements
set forth on Schedule 4.13(g), and, to the knowledge of the Company, all
other parties to the contracts, licenses and agreements set forth on
Schedule 4.13(g) of are in compliance with, and have not breached any
material term of, such contracts, licenses and agreements. Following the
Closing Date, Pegasus and its subsidiaries will be permitted to exercise
all of their respective rights under the contracts, licenses and agreements
set forth on Schedule 4.13(g) without the payment of any additional amounts
or consideration other than ongoing fees, royalties or payments which the
Company or the Company Subsidiaries would otherwise be required to pay.
(i) Except as set forth on Schedule 4.13(i), (i) no Person has any
rights to use any of the Company Intellectual Property; and (ii) the
Company and the Company Subsidiaries have not
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granted to any Person, nor authorized any Person to retain, any rights in
the Company Intellectual Property.
(j) Except as set forth on Schedule 4.13(j), (A) the Company or a
Company Subsidiary owns and has good, valid and exclusive title to, and has
the unrestricted right to license and use, each item of the Intellectual
Property of the Company or any Company Subsidiary, including all Registered
Intellectual Property set forth on Schedule 4.13(b), free and clear of any
Lien; (ii) the Company or a Company Subsidiary owns, or has the right,
pursuant to a valid contract, to use or operate all other Intellectual
Property of the Company or any Company Subsidiary, and (iii) the Company or
one of the Company Subsidiaries is the exclusive owner of all trademarks
and trade names used in connection with the operation or conduct of the
business of the Company and the Company Subsidiaries, including the sale of
any products or the provision of any services by the Company and the
Company Subsidiaries.
(k) To the Company's knowledge, the operation of the business of the
Company and the Company Subsidiaries, taken as a whole, as such business
currently is conducted, or as reasonably contemplated to be conducted,
including the Company and the Company Subsidiaries' design, development,
manufacture, marketing and sale of the products or services of the Company
and the Company Subsidiaries (including with respect to products currently
under development) has not, does not and will not infringe or
misappropriate the Intellectual Property of any other Person.
(l) Except as set forth on Schedule 4.13(l), the Company has not
received any written notice from any Person that the design, development,
manufacture and sale of the Company or the Company Subsidiaries' products
(including with respect to products currently under development) and
provision of their respective services, infringes or misappropriates the
Intellectual Property of any Person.
(m) To the Company's knowledge, the Company and the Company
Subsidiaries own or have the right to use all Intellectual Property
necessary to the conduct their respective business as currently is
conducted or is reasonably contemplated to be conducted, including, without
limitation, the design, development, manufacture and sale of all products
currently manufactured or sold by the Company and the Company Subsidiaries
or under development by the Company or the Company Subsidiaries and the
performance of all services provided or contemplated to be provided by the
Company or the Company Subsidiaries.
(n) Except as set forth on Schedule 4.13(n), to the Company's
knowledge, no Person has or is infringing or misappropriating any of
Company Intellectual Property.
(o) Except as set forth on Schedule 4.13(o), no Company Intellectual
Property, or product or service of the Company or the Company Subsidiaries
is subject to any proceeding or outstanding decree, order, judgment, or
stipulation restricting in any manner the use or licensing thereof by the
Company or the Company Subsidiaries, or which may affect the validity, use,
licensing or enforceability of such Company Intellectual Property.
(p) The Company and the Company Subsidiaries have taken all steps that
a reasonably prudent person would deem necessary to protect the Company's
or the Company Subsidiaries' rights in their respective confidential
information and trade secrets or any trade secrets or confidential
information of third parties provided to the Company and the Company
Subsidiaries, and, without limiting the foregoing, the Company and the
Company Subsidiaries has a policy requiring each employee and contractor to
execute proprietary information and confidentiality agreements
substantially in the Company's standard forms and except as set forth on
Schedule 4.13(p), all current employees and contractors of the Company and
the Company's Subsidiaries have executed such an agreement.
(q) The Company and the Company Subsidiaries own exclusively and have
good title to all copyrighted works that are the Company's and the Company
Subsidiaries' products or which the Company or the Company Subsidiaries
otherwise purport to own, except for those copyrighted works licensed to
the Company and the Company Subsidiaries set forth on Schedule 4.13(q).
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(r) Except as set forth on Schedule 4.13(r) and except for work,
inventions or material created by advertising or other marketing firms on
behalf of the Company and the Company Subsidiaries to which any such firm
has retained all rights, to the extent that any work, invention, or
material has been developed or created by a third party for the Company or
the Company Subsidiaries, the Company or the Company Subsidiaries have a
written agreement with such third party with respect thereto and the
Company or the Company Subsidiaries thereby have obtained ownership of, and
are the exclusive owners of, all Intellectual Property in such work,
material or invention by operation of law or by valid assignment.
Section 4.14 COMPLIANCE WITH LAWS; PERMITS.
(a) Except as set forth on Schedule 4.14 or such matters that would
not have a Material Adverse Effect on the Company, the Company and the
Company Subsidiaries have complied with all laws, ordinances, regulations
and rules, and all orders, writs, injunctions, awards, judgements and
decrees (collectively, "LAWS"), applicable to the Company and the Company
Subsidiaries or to the assets, properties and business of the Company and
the Company Subsidiaries, including, without limitation (i) all applicable
federal and state securities Laws and regulations, (ii) all applicable
foreign, federal, state and local Laws, pertaining to (A) the sale,
licensing, leasing, ownership or management of the Company and the Company
Subsidiaries owned, leased or licensed real or personal property, products
or technical data, (B) employment or employment practices, terms and
conditions of employment or wages and hours, or (C) safety, health, fire
prevention, environmental protection, building standards, zoning or other
similar matters, (iii) the Export Administration Act and regulations
promulgated thereunder or other Laws, writs, injunctions, judgments or
decrees applicable to the export or re-export of controlled commodities or
technical data, or (iv) the Immigration Reform and Control Act.
(b) (i) Except as would not have a Material Adverse Effect on the
Company, the Company and the Company Subsidiaries have made all filings
with, and have in full force and effect, all licenses, permits and
certificates from, federal, state, local and foreign Governmental Entities
necessary to conduct their respective businesses (collectively the
"PERMITS"), and (ii) the Company, its Predecessors and the Company
Subsidiaries have conducted their respective businesses in compliance with
all terms and conditions of the Permits. The Company and the Company
Subsidiaries are not relying on any exemption from or deferral of any such
applicable Law or other requirement that, to the knowledge of the Company,
would not be available to Pegasus.
(c) The Company and the Company Subsidiaries have not made or agreed
to make gifts of money, other property or similar benefits (other than
incidental gifts of articles of nominal value) to any actual or potential
customer, supplier, governmental employee or any other Person in a position
to assist or hinder the Company or the Company Subsidiaries in connection
with any actual or proposed transaction.
(d) No product liability, warranty or similar actions, suits or
proceedings have been asserted against the Company or any Company
Subsidiary since the Balance Sheet Date other than as set forth in the
Financial Statements.
(e) Since the Balance Sheet Date, neither the Company nor any Company
Subsidiary has incurred any liability or obligation under the Worker
Adjustment and Retraining Notification Act (the "WARN ACT") or similar
state or foreign laws. The Company and the Company Subsidiaries have
complied in all respects with WARN or such state or foreign laws, and any
regulations promulgated thereunder, and do not expect to incur any such
liability as a result of actions taken or not taken prior to the Closing.
Except as set forth on Schedule 4.14(e), the Company or any Company
Subsidiary has not laid off more than ten percent (10%) of its employees at
any single site of employment in any ninety (90) day period during the
period from September 30, 1999 through the Closing Date. Except as set
forth on Schedule 4.14(e), the Company and each Company Subsidiary has
complied and is in compliance in all material respects with the provisions
of the Americans with Disabilities Act.
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Section 4.15 NO MATERIAL ADVERSE CHANGES. Since the Balance Sheet Date,
there has occurred no Material Adverse Change with respect to the Company.
Section 4.16 ACCOUNTS RECEIVABLE; EVIDENCES OF INDEBTEDNESS. Set forth on
Schedule 4.16 to this Agreement is a list of all accounts receivable, promissory
notes, contract rights, commercial paper, debt securities and other rights to
receive money ("RECEIVABLES") outstanding of the Company and the Company
Subsidiaries showing the name of the account debtor, maker or obligor, the
unpaid balance, the age of the Receivable and, if applicable, the maturity date,
the interest rate and the collateral securing the obligation. All Receivables
are legal, valid and binding obligations of the obligors. Except as set forth on
Schedule 4.16, the Company has not (i) written off, cancelled, committed or
become obligated to cancel or write off any Receivables; (ii) disposed of or
transferred any Receivables; or (iii) acquired or permitted to be created any
Receivables except in the ordinary course of its business consistent with past
practice. Notwithstanding the foregoing, the Company shall have no further
liability under Section 9.01 or otherwise with respect to any representation or
warranty made in this Section 4.16 as to any Receivables, except (i) for claims
relating to the accuracy of the first two sentences of this Section 4.16 or (ii)
for claims that the Company's treatment of a particular Receivable violates
Section 6.01 of this Agreement.
Section 4.17 CERTAIN TRANSACTIONS AND AGREEMENTS. Except as set forth on
Schedule 4.17, no Person who is an officer or director of the Company (including
Tom Castleberry) or a holder of more than five percent (5%) of the outstanding
shares of Company Common Stock (collectively, the "COMPANY AFFILIATES") or a
member of any Company Affiliate's immediate family is, (and to the Company's
knowledge, no such Person has any direct or indirect ownership interest in any
other Person that is) a client, supplier, customer, lessor, lessee of the
Company or a Company Subsidiary or a party to a contract required to be
disclosed in Schedule 4.12(a) (except with respect to any interest in less than
1% of the outstanding voting shares of any corporation the stock of which is
publicly traded). Except as set forth on Schedule 4.17, no Company Affiliate or
any member of any Company Affiliates' immediate family, is directly or
indirectly interested in any material contract or informal arrangement with the
Company, or a Company Subsidiary, except for compensation for services as an
officer, director, employee or consultant of the Company or a Company Subsidiary
and except for the normal rights of a stockholder. Except at set forth on
Schedule 4.17, none of the Company Affiliates or their immediate family members
has any interest in any property, real or personal, tangible or intangible,
including, without limitation, the Intellectual Property, used in the business
of the Company or a Company Subsidiary, except for the normal rights of a
stockholder.
Section 4.18 EMPLOYEES.
(a) Schedule 4.18(a) sets forth all employees of the Company and the
Company Subsidiaries, along with each employee's respective title and first
date of employment of each employee with the Company or the respective
Company Subsidiaries. The Company previously has made available annual
compensation information with respect to each such Person which is true and
accurate. The Company and the Company Subsidiaries (i) have withheld all
amounts required by law or by agreement to be withheld from the wages,
salaries and other payments to its employees; (ii) are not liable for any
arrears of wages or any material penalty for failure to comply with any of
the foregoing; and (iii) are not liable for any material payment to any
trust or other fund or to any Governmental Entity, with respect to
unemployment compensation benefits, social security or other benefits or
obligations for its employees (other than routine payments to be made in
the normal course of business and consistent with past practice).
(b) No material work stoppage or labor strike against the Company or
the Company Subsidiaries is pending, or to the knowledge of the Company,
threatened. Neither the Company nor the Company Subsidiaries are involved
in or have been threatened with any labor dispute, grievance, or litigation
relating to labor, safety or discrimination matters involving any employee,
including, without limitation, charges of unfair labor practices or
discrimination complaints, which, if adversely determined, would,
individually or in the aggregate, have a Material Adverse Effect on the
Company. Neither the Company nor the Company Subsidiaries have engaged in
any unfair labor practices which
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could, individually or in the aggregate, have a Material Adverse Effect on
the Company. The Company and the Company Subsidiaries are not presently
parties to, or bound by, any collective bargaining agreement or union
contract with respect to any employees and no collective bargaining
agreement is being negotiated by the Company or the Company Subsidiaries.
Section 4.19 EMPLOYEE MATTERS AND BENEFIT PLANS.
(a) DEFINITIONS. With the exception of the definitions of "Affiliate"
and "International Employee Plan" set forth in Section 4.19(a)(i) and (iii)
below (such definitions shall apply to this Section 4.19), for purposes of
this Agreement, the following terms shall have the meanings set forth
below:
(1) "AFFILIATE," as used in this Section 4.19, shall mean any other
Person or entity under common control with the Company within the
meaning of Section 414(b), (c), (m) or (o) of the Code and the
regulations thereunder;
(2) "ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended;
(3) "INTERNATIONAL EMPLOYEE PLAN" shall mean each Company Employee
Plan that has been adopted or maintained by the Company, whether
informally or formally, for the benefit of a Company Employee (as
defined below) outside the United States;
(4) "COMPANY EMPLOYEE PLAN" shall refer to any plan, program,
policy, practice, contract, agreement or other arrangement providing for
compensation, severance, termination pay, performance awards, stock or
stock-related awards, fringe benefits or other employee benefits or
remuneration of any kind, whether formal or informal, funded or
unfunded, described in any employee handbook, or notebook, or otherwise,
including without limitation, each "EMPLOYEE BENEFIT PLAN," within the
meaning of Section 3(3) of ERISA, which is or has been maintained,
contributed to, or required to be contributed to, by Company or any
Affiliate for the benefit of any "COMPANY EMPLOYEE", and pursuant to
which the Company or any Affiliate has or may have any material
liability contingent or otherwise;
(5) "COMPANY EMPLOYEE" shall mean any current, former or retired
employee, officer, or director of Company or any Affiliate;
(6) "COMPANY EMPLOYEE AGREEMENT" shall refer to each management,
employment, severance, consulting, relocation, repatriation,
expatriation, visa, work permit or similar agreement or contract between
the Company or any Affiliate and any Company Employee or consultant;
(7) "IRS" shall mean the Internal Revenue Service;
(8) "MULTIEMPLOYER PLAN" shall mean any "Pension Plan" (as defined
below) which is a "multiemployer plan," as defined in Section 3(37) of
ERISA; and
(9) "COMPANY PENSION PLAN" shall refer to each Company Employee
Plan which is an "employee pension plan," within the meaning of Section
3(2) of ERISA.
(b) SCHEDULE. Schedule 4.19 sets forth each currently existing Company
Employee Plan, International Employee Plan and Company Employee Agreement.
Except as set forth on Schedule 4.19(b), the Company does not have any
intention or commitment to establish any new Company Employee Plan or
Company Employee Agreement, to modify any Company Employee Plan or Company
Employee Agreement (except to the extent required by law or to conform any
such Company Employee Plan or Company Employment Agreement to the
requirements of any applicable law, in each case as previously disclosed to
Pegasus or Newco in writing, or as required by this Agreement), or to enter
into any Company Employee Plan or Company Employee Agreement.
(c) DOCUMENTS. Company has provided to Pegasus and/or Newco (i)
correct and complete copies of all plan documents embodying each Company
Employee Plan and each Company Employee
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Agreement including all amendments thereto; (ii) the most recent annual
actuarial valuations, if any, prepared for each Company Employee Plan;
(iii) the three most recent annual reports (Series 5500 and all schedules
thereto), if any, required under ERISA or the Code in connection with each
Company Employee Plan or related trust; (iv) if Company Employee Plan is
funded, the most recent annual accounting of Company Employee Plan assets;
(v) the most recent summary plan description together with the most recent
summary of material modifications, if any, required under ERISA with
respect to each Company Employee Plan; (vi) all IRS determination letters
and rulings relating to Company Employee Plans and copies of all
applications and correspondence within the preceding year to or from the
IRS or the Department of Labor ("DOL") with respect to any Company Employee
Plan; (vii) all written communications material as to the Company to any
Company Employee or Company Employees relating to any Company Employee Plan
and any proposed Company Employee Plans, in each case, relating to any
amendments, terminations, establishments, increases or decreases in
benefits, acceleration of payments or vesting schedules or other events
which would result in a Material Adverse Effect on Company; and (viii) all
registration statements and prospectuses prepared in connection with each
Company Employee Plan.
(d) COMPANY EMPLOYEE PLAN COMPLIANCE. (i) Company has performed in all
material respects all obligations required to be performed by it under each
Company Employee Plan and each Company Employee Plan has been established
and maintained in all material respects in accordance with its terms and in
compliance with all applicable laws, statutes, orders, rules and
regulations, including but not limited to ERISA or the Code; (ii) to
knowledge of the Company, no "PROHIBITED TRANSACTION," within the meaning
of Section 4975 of the Code or Section 406 of ERISA, has occurred with
respect to any Company Employee Plan; (iii) there are no actions, suits or
claims pending, or, to the knowledge of Company, threatened or anticipated
(other than routine claims for benefits) against any Company Employee Plan
or against the assets of any Company Employee Plan; (iv) except as set
forth on Schedule 4.19(d), each Company Employee Plan can be amended,
terminated or otherwise discontinued after the Effective Time in accordance
with its terms, without liability to Company, Newco, Pegasus or any
Affiliates (other than ordinary administration expenses typically incurred
in a termination event); (v) each Company Pension Plan that is intended to
qualify under Section 401(a) of the Code has received a favorable
determination letter that such plan satisfies the qualification
requirements of the Tax Reform Act of 1986; (vi) there are no inquiries or
proceedings pending or, to the knowledge of the Company, threatened by the
IRS or DOL with respect to any Company Employee Plan; (vii) neither Company
nor any Affiliate is subject to any penalty or tax with respect to any
Company Employee Plan under Section 402(i) of ERISA or Sections 4975
through 4980B of the Code; and (viii) all contributions due from the
Company with respect to any of the Company Employee Plans have been made or
accrued on the Company financial statements, and no further contributions
will be due or will have accrued thereunder as of the Closing Date.
(e) COMPANY PENSION PLANS. Company does not now, nor has it ever,
maintained, established, sponsored, participated in, or contributed to, any
Company Pension Plan which is subject to Part 3 of Subtitle B of Title I of
ERISA, Title IV of ERISA or Section 412 of the Code.
(f) MULTIEMPLOYER PLANS. At no time has Company contributed to or been
requested to contribute to any Multiemployer Plan.
(g) NO POST-EMPLOYMENT OBLIGATIONS. Except as set forth on Schedule
4.19(g), no Company Employee Plan provides, or has any liability to
provide, life insurance, medical or other medical benefits to any Company
Employee upon his or her retirement or termination of employment for any
reason, except as may be required by statute, and Company has never
represented, promised or contracted (whether in oral or written form) to
any Company Employee (either individually or to Company Employees as a
group) that such Company Employee(s) would be provided with life insurance,
medical or other employee welfare benefits upon their retirement or
termination of employment.
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(h) EFFECT OF TRANSACTION. Except as provided in Schedule 4.19(h), the
execution of this Agreement and the consummation of the transactions
contemplated hereby will not (either alone or upon the occurrence of any
additional or subsequent events) constitute an event under any Company
Employee Plan, Company Employee Agreement, trust or loan that will or may
result in any payment (whether of severance pay or otherwise),
acceleration, forgiveness of indebtedness, vesting, distribution, increase
in benefits or obligations to fund benefits with respect to any Company
Employee.
(i) VIOLATIONS. To the Company's knowledge, no employee of Company has
violated any employment contract, patent disclosure agreement or
non-competition agreement between such employee and any former employer of
such employee due to such employee being employed by Company and disclosing
to Company trade secrets or proprietary information of such employer.
(j) INTERNATIONAL EMPLOYEE PLAN. Each International Employee Plan has
been established, maintained and administered in material compliance with
its terms and conditions and with the requirements prescribed by any and
all statutory or regulatory laws that are applicable to such International
Employee Plan. Furthermore, except as set forth on Schedule 4.19(j), no
International Employee Plan has unfunded liabilities, that as of the
Effective Time, will not be offset by insurance or fully accrued. Except as
required by law and except as set forth on Schedule 4.19(j), no condition
exists that would prevent Company or Pegasus and/or Newco from terminating
or amending any International Employee Plan at any time for any reason.
Section 4.20 INSURANCE. Schedule 4.20 sets forth the insurance policies of
the Company and expiration date of each policy, including without limitation,
fire and casualty, workers compensation, general liability, "key-man" and other
such insurance policies. The Company has no knowledge that any such insurance
policy will not be renewed in the normal course or that the premiums therefor
will be materially increased. No insurance policies of the Company have been
denied or coverage of such policy reduced. There is no material claim by the
Company or the Company Subsidiaries or any third party pending under any of such
policies or bonds as to which coverage has been questioned, denied or disputed
by the underwriters of such policies or bonds. All of such insurance policies
are in full force and effect and are issued by insurers of recognized
responsibility.
Section 4.21 CUSTOMERS AND SUPPLIERS. Schedule 4.21 sets forth the 10
largest customers and the 10 largest suppliers (each as measured by revenues to
the Company and the Company Subsidiaries on a consolidated basis) of the Company
and the Company Subsidiaries, taken as a whole, for the fiscal year ended
December 31, 1998 and for the nine month period ended September 30, 1999 and
sets forth opposite the name of each such customer or supplier the approximate
percentage of net sales or purchases by the Company and the Company Subsidiaries
attributable to such customer or supplier for each such period. Except as set
forth on Schedule 4.21, there are no currently pending, or to the Company's
knowledge, threatened disputes between the Company and the Company Subsidiaries
with their respective customers or suppliers that could materially and adversely
effect the relationship between the Company and the Company Subsidiaries, on the
one hand, and any of such customers and suppliers on the other. Except as set
forth on Schedule 4.21, to the knowledge of the Company, no customer or supplier
of the Company has expressed an intention to cease doing business with the
Company or the Company Subsidiaries prior to or after the consummation of the
transactions contemplated hereby, which cessation would have a Material Adverse
Effect upon the Company. Except as set forth on Schedule 4.21, since December
31, 1998, neither the Company nor any Company Subsidiary has experienced any
difficulties in obtaining any inventory items necessary to the operation of its
business, and no such shortage of supply of inventory items is pending or
threatened that would have a Material Adverse Effect upon the Company. The
Company is not required to provide any bonding or other financial security
arrangements in any amount in connection with any transactions with any of its
customers or suppliers except in the ordinary course of business consistent with
commercial practice in the Company's industry.
Section 4.22 BANK ACCOUNTS AND POWERS OF ATTORNEY. Schedule 4.22 sets
forth each bank, savings institution and other financial institution with which
the Company and any Company Subsidiary have an
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account or safe deposit box and the names of all Persons authorized to draw
thereon or to have access thereto. Each Person holding a power of attorney or
similar grant of authority on behalf of the Company or any Company Subsidiary is
set forth on Schedule 4.22. Except as disclosed on such Schedule, the Company
has not given any revocable or irrevocable powers of attorney to any Person
relating to its business for any purpose whatsoever.
Section 4.23 BOOKS AND RECORDS. The books, records and accounts of the
Company and the Company Subsidiaries (a) are in all material respects true and
complete, (b) have been maintained in accordance with reasonable business
practices on a basis consistent with prior years, (c) are stated in reasonable
detail and accurately and fairly reflect the transactions and disposition of the
assets of the Company in all material respects, and (d) accurately and fairly
reflect in all material respects the basis for the Financial Statements.
Section 4.24 ENVIRONMENTAL MATTERS.
(a) Neither the Company nor any Company Subsidiary has been or is
currently engaged in any activity involving the possession, transport,
disposal or release of any Hazardous Materials. To the Company's knowledge,
during the period that the Company and the Company Subsidiaries have leased
the premises currently occupied by them and those premises occupied by them
since the date of their incorporation, there have been no disposal, release
or threatened release of Hazardous Materials (as defined below) from or any
presence thereof on any such premises that would have a Material Adverse
Effect on the Company. To the Company's Knowledge there is no presence,
disposal, release or threatened release of Hazardous Materials on or from
any of such premises, which may have occurred prior to the Company having
taken possession of any of such premises that would have a Material Adverse
Effect on the Company. For purposes of this Agreement, the terms
"DISPOSAL," "RELEASE," and "THREATENED RELEASE" have the definitions
assigned thereto by the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, 42 U.S.C. sec. 9601 et seq., as amended
("CERCLA"). For the purposes of this Section 4.24, "HAZARDOUS MATERIALS"
mean any hazardous or toxic substance, material or waste which is or
becomes prior to the Closing Date regulated under, or defined as a
"hazardous substance," "pollutant," "contaminant," "toxic chemical,"
"hazardous material," "toxic substance" or "hazardous chemical" under (i)
CERCLA; (ii) the Emergency Planning and Community Right-to-Know Act, 42
U.S.C. sec. 11001 et seq.; (iii) the Hazardous Material Transportation Act,
49 U.S.C. sec. 1801, et seq.; (iv) the Toxic Substances Control Act, 15
U.S.C. sec. 2601 et seq.; (v) the Occupational Safety and Health Act of
1970, 29 U.S.C. sec. 651 et seq.; (vi) regulations promulgated under any of
the above statutes; or (vii) any applicable state or local statute,
ordinance, rule or regulation that has a scope or purpose similar to those
identified above.
(b) To the Company's knowledge, none of the premises currently leased
by the Company or any Company Subsidiary or any premises previously
occupied by the Company is in material violation of any federal, state or
local law, ordinance, regulation or order relating to industrial hygiene or
to the environmental conditions in such premises.
(c) During the time that the Company or any Company Subsidiary has
leased the premises currently occupied by it or any premises previously
occupied by the Company, neither the Company nor, to the knowledge of the
Company, any third party, has used, generated, manufactured or stored in
such premises or transported to or from such premises any Hazardous
Materials that would have a Material Adverse Effect on the Company.
(d) During the time that the Company has leased the premises currently
occupied by it or any premises previously occupied by the Company, there
has been no litigation, proceeding or administrative action brought or
threatened in writing against the Company by, or any settlement reached by
the Company with, any party or parties alleging the presence, disposal,
release or threatened release of any Hazardous Materials on, from or under
any of such premises.
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(e) During the period that the Company or any Company Subsidiary has
leased the premises currently occupied by it or any premises previously
occupied by the Company, to the Company's knowledge no Hazardous Materials
have been transported from such premises by or on behalf of the Company or
any Company Subsidiary to any site or facility now listed or proposed for
listing on the National Priorities List, at 40 C.F.R. Part 300, or any list
with a similar scope or purpose published by any state authority.
Section 4.25 YEAR 2000 COMPLIANCE. Except as set forth on Schedule 4.25,
(a) each automated, computerized and/or software system or program designed,
developed or licensed to third parties by the Company or any Company Subsidiary
(each, a "Company System") and, to the Company's knowledge, each automated,
computerized and/or software system or program provided by a third party and
used by the Company or any Company Subsidiary in the operation of their
respective businesses (each, a "THIRD PARTY SYSTEM") is designed to be used
prior to, during and after the calendar year 2000 A.D., including leap years,
and each Company System and, to the Company's knowledge, each Third Party System
will operate during each such time period without error relating to date data
("YEAR 2000 COMPLIANT"). Without limiting the generality of the foregoing each
Company System, and, to the Company's knowledge, each Third Party System:
(a) Will not abnormally end or provide invalid or incorrect results as
a result of date data, specifically including data which represents or
references years prior to the Year 2000 or years including and subsequent
to the Year 2000;
(b) Has been designed to ensure that it is Year 2000 Compliant,
including, but not limited to, date data recognition, calculations which
accommodate dates before, during and after the Year 2000 and date values
and date data interface values that reflect the dates before, during and
after the Year 2000;
(c) Will manage and manipulate data involving dates and will not cause
an abnormally ending scenario or result within the application or generate
incorrect values or invalid results involving such dates;
(d) Provides that all date-related user interface functionalities
include the indication of dates, before, during and after the Year 2000;
and
(e) Stores and interprets all date processing according to one of the
following methods: (i) field expansion format; (ii) century indicator; or
(iii) converting to packed or binary fields.
Notwithstanding the preceding provisions of this Section, to the extent any
such Company System must perform with Third Party Systems collectively as a
unified information processing system, each Company System will properly
exchange date/time data among such Third Party Systems to accurately receive,
provide and process date/time data (including, but not limited to, calculating,
comparing and sequencing) from, into and between the years 1999 and 2000, and
leap year calculations and will not malfunction, cease to function or provide
invalid or incorrect results as a result of date/time data; provided that any
such Third Party System functions in accordance with the specifications of this
Section 4.25. The Company and the Company Subsidiaries have, prior to the
Closing Date, submitted or specifically identified and made available to Pegasus
or Newco each Company System and Third Party System.
Section 4.26 BROKERS' AND FINDERS' FEES. Except for the fees of Thomas
Weisel Partners LLC, neither the Company nor the Company Subsidiaries and, to
the Company's knowledge, no Company Stockholder has entered into any agreement
which would entitle any Person to any valid claim against the Company, the
Company Subsidiaries, the Company Stockholders, Pegasus or Newco for a broker's
commission, finder's fee or similar payment with respect to any matters
contemplated by this Agreement.
Section 4.27 DISCLOSURE. The representations and warranties contained in
this Agreement and the schedules thereto delivered to Pegasus and Newco by the
Company under this Agreement, taken together, do not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
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to make the statements contained herein and therein, in light of the
circumstances under which such statements were made, not misleading.
Section 4.28 REGISTRATION STATEMENT. None of the information supplied or
to be supplied by the Company for inclusion or incorporation by reference in the
registration statement on Form S-4 to be filed with the SEC by Pegasus in
connection with the issuance of the Pegasus Common Stock in or as a result of
the Merger (the "S-4") or the registration statement on Form S-3 to be filed
with the SEC by Pegasus in accordance with Section 7.02 (the "S-3") will, at the
time the S-4 and the S-3 each becomes effective under the Securities Act,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
Section 4.29 MAJORITY STOCKHOLDER REPRESENTATIONS. The Majority
Stockholder hereby represents and warrants to Pegasus and Newco that:
(a) The Majority Stockholder has no knowledge that the representations
and warranties contained in Section 4.07 [Litigation] and 4.14 [Compliance
with Laws; Permits] are not true and correct.
(b) To the extent the Majority Stockholder or one of its subsidiaries
was responsible under applicable law or under a contract with the Company
or any Company Subsidiary for the preparation of any such Return or the
payment of such Taxes, the representations and warranties contained in
Section 4.09 [Tax Matters] are true and correct as to such Return or Tax;
provided that any provision that is qualified to the Company's knowledge
shall for purposes of this provision also be qualified to the knowledge of
the Majority Stockholder.
(c) To the extent the Majority Stockholder or one of its subsidiaries
was responsible under applicable law or under a contract with the Company
or any Company Subsidiary for the preparation of the applicable Financial
Statements, the representations and warranties contained in Section 4.08
[Financial Statements] are true and correct as to such Financial
Statements; provided that any provision that is qualified to the Company's
knowledge shall for purposes of this provision also be qualified to the
knowledge of the Majority Stockholder.
(d) The representations and warranties contained in Section 4.19
[Employee Matters and Benefit Plans] solely with respect to International
Employee Plans are true and correct; provided that any provision that is
qualified to the Company's Knowledge shall for purposes of this provision
also be qualified to the knowledge of the Majority Stockholder.
(e) The representations and warranties of Reed Elsevier Inc. and Utell
International Group, Ltd. contained in the Share Exchange Agreement dated
October 9, 1997 by and among Reed, Utell, Rezsolutions, Inc. (formerly
known as Anasazi, Inc.) and the Company (formerly known as Rezsolutions,
Inc.) were true and correct as of the dates prescribed in such Share
Exchange Agreement. Notwithstanding any other term of such Share Exchange
Agreement, the representations and warranties made in such Share Exchange
Agreement will terminate six (6) months following the Closing Date.
(f) None of the information supplied or to be supplied by the Majority
Stockholder for inclusion or incorporation by reference in the S-4 or the
S-3 will, at the time the S-4 and the S-3 each becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which
they are made, not misleading.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PEGASUS AND NEWCO
Pegasus and Newco hereby jointly and severally represent and warrant to the
Company and the Company Stockholders that:
Section 5.01 INCORPORATION AND GOOD STANDING. Each of Pegasus and Newco is
a corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware. Each of Pegasus and Newco is qualified to do
business as a foreign corporation in every jurisdiction in which the nature of
its business or its ownership of property requires it to be so qualified, except
where the failure to be so qualified or licensed would not have a Material
Adverse Effect on Pegasus.
Section 5.02 AUTHORITY. Each of Pegasus and Newco has all necessary
corporate power, authority and capacity to enter into this Agreement, the
Certificate of Merger and all other agreements and instruments to be executed by
Pegasus or Newco or both as contemplated by this Agreement (the "PEGASUS
ANCILLARY AGREEMENTS") and to carry out their respective obligations under this
Agreement, the Certificate of Merger and the Pegasus Ancillary Agreements. The
execution and delivery of this Agreement and the Pegasus Ancillary Agreements
have been duly authorized by all necessary corporate action on the part of
Pegasus and Newco. Pegasus has received from Hambrecht & Quist LLC, a written
opinion, as to the fairness of the Merger to the Company Stockholders from a
financial point of view.
Section 5.03 ENFORCEABILITY OF OBLIGATIONS. This Agreement constitutes,
and each of the Pegasus Ancillary Agreements, when executed and delivered in
accordance with the terms thereof, will constitute, the legal, valid and binding
obligations of Pegasus or Newco or both, as the case may be, enforceable in
accordance with their respective terms, except as such enforceability may be
limited by principles of public policy and subject to the laws of general
application relating to bankruptcy, insolvency and the relief of debtors and to
rules of law governing specific performance, injunctive relief or other
equitable remedies.
Section 5.04 NO BREACH. Except as set forth on Schedule 5.04, neither the
execution and delivery of this Agreement, the Pegasus Ancillary Agreements nor
the consummation of the transactions provided for hereby or thereby will
conflict with, (a) the Certificate of Incorporation or Bylaws of Pegasus or
Newco (b) result in any Lien upon any assets of the Company or Newco, or (c)
require any Consent of or with any Governmental Entity, under the provisions of
the Certificate of Incorporation or Bylaws of Pegasus or Newco or any indenture,
lease, contract or other material agreement, instrument, permit, concession,
franchise or license to which Pegasus or its subsidiaries or any of their
respective assets are bound or affected, or any Laws, judgment or decree to
which Pegasus or its subsidiaries are subject except for those required in
connection with the HSR Act and the filing of the Certificate of Merger with the
Secretary of State of the State of Delaware.
Section 5.05 INTENTIONALLY LEFT BLANK.
Section 5.06 BROKERAGE. Except for the fees of Hambrecht & Quist LLC,
which are payable by Pegasus, neither Pegasus nor Newco has entered into any
agreement which would entitle any Person to any valid claim against the Company,
the Company Stockholders, Pegasus or Newco for a broker's commission, finder's
fee or similar payment with respect to any matters contemplated by this
Agreement.
Section 5.07 SEC REPORTS.
(a) Since the time it became subject to the filing requirements of the
Securities Exchange Commission ("SEC"), Pegasus has filed all forms,
reports and documents (collectively, the "PEGASUS SEC REPORTS") with the
SEC required to be filed by it pursuant to the federal securities laws and
the rules and regulations of the SEC thereunder, all of which have complied
as of their respective filing dates, or in the case of registration
statements, their respective effective dates, in all material respects with
all applicable requirements of the Securities Act and the Securities
Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and the rules and
regulations promulgated thereunder. None of the Pegasus SEC Reports
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the
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circumstances under which they were made, not misleading, except for such
statements, if any, as have been modified by subsequent filings prior to
the date hereof.
(b) The consolidated balance sheets and related consolidated
statements of income, stockholders' equity and cash flows (including the
related notes and schedules thereto) of Pegasus included in the Pegasus SEC
Reports complied as to form, at the time filed, in all material respects
with the published rules and regulations of the SEC with respect thereto at
the time filed. Such materials were prepared in accordance with GAAP
applied on a consistent basis during the periods involved and include in
the case of unaudited interim financial statements all necessary
adjustments, are in accordance with the books and records of Pegasus, which
books and records are complete and accurate in all material respects, and
present fairly the consolidated financial position of Pegasus as of their
respective dates. The consolidated income and cash flows for the periods
presented in the Pegasus SEC Reports are in conformity with GAAP applied on
a consistent basis, except as otherwise noted therein or as permitted under
the Exchange Act. Since December 31, 1998, neither Pegasus nor any of its
subsidiaries has incurred any liabilities or obligations, whether absolute,
accrued, fixed, contingent, liquidated, unliquidated or otherwise and
whether due or to become due, except (i) as and to the extent set forth on
the audited balance sheet of Pegasus as at December 31, 1998, (ii) as
incurred in connection with the transactions contemplated by this
Agreement, (iii) as incurred after December 31, 1998 in the ordinary course
of business and consistent with past practice, (iv) as described in the
Pegasus SEC Reports, including but not limited to acquisitions described
therein, or (v) as would not, in the aggregate, constitute a Material
Adverse Effect on Pegasus.
Section 5.08 LITIGATION. Except as set forth on Schedule 5.08, there are
no actions, suits, proceedings, orders or investigations pending or, to the
knowledge of Pegasus and Newco, threatened against Pegasus or Newco, at law or
in equity, or before or by any Governmental Entity. Neither Pegasus nor Newco is
a party to, subject to, or threatened to be subject to, any order, decree,
agreement, memorandum of understanding or similar arrangement with, or a
commitment letter or similar submission to, any Governmental Entity, except for
those that would not have a Material Adverse Effect on Pegasus.
Section 5.09 CAPITALIZATION OF PEGASUS AND NEWCO.
(a) As of the date of this Agreement, (i) the authorized capital stock
of Pegasus consists of Fifty Million (50,000,000) shares of Pegasus Common
Stock, of which 13,461,644 shares were issued and outstanding as of
November 1, 1999, (with each share carrying a preferred stock purchase
right as described in the Pegasus SEC Reports), and Two Million (2,000,000)
shares of preferred stock, $.01 par value per share, of which no shares are
issued and outstanding, and (ii) the authorized capital stock of Newco
consists of One Thousand (1,000) shares of common stock, $.01 par value per
share, of which One (1) share is issued and outstanding, which share is
held by Pegasus. All outstanding shares of Pegasus Common Stock are duly
authorized, validly issued, fully paid and non-assessable and free of
preemptive or similar rights.
(b) The shares of Pegasus Common Stock to be issued in the Merger have
been duly authorized and, when issued and delivered in accordance with the
terms of this Agreement, will have been validly issued and will be fully
paid and non-assessable, and the issuance thereof is not subject to any
preemptive or other similar right.
(c) Pegasus has authorized but unissued shares in an amount sufficient
to issue all shares required to be issued pursuant to the terms of this
Agreement.
Section 5.10 DISCLOSURE. The representations and warranties contained in
this Agreement and the schedules thereto delivered to the Company and the
Company Stockholders by Pegasus and Newco under this Agreement, taken together,
do not contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements contained herein and
therein, in light of the circumstances under which such statements were made,
not misleading.
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Section 5.11 REGISTRATION STATEMENT. None of the information supplied or
to be supplied by Pegasus for inclusion or incorporation by reference in the S-4
or the S-3 will, at the time the S-4 and the S-3 each becomes effective under
the Securities Act, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading; and the S-4 and the S-3 will comply as to form in all
material respects with the provisions of the Securities Act and the rules and
regulations promulgated by the SEC thereunder.
Section 5.12 MATERIAL ADVERSE CHANGE. Since the date of Pegasus' most
recent SEC Filing, no Material Adverse Change has occurred; provided that a
reduction in the price of Pegasus Common Stock due to general stock market
conditions or otherwise shall not in and of itself constitute a Material Adverse
Change.
ARTICLE VI
CONDUCT AND TRANSACTIONS PRIOR TO THE EFFECTIVE TIME
The Company hereby covenants and agrees with Pegasus and Newco as follows:
Section 6.01 CONDUCT OF THE BUSINESS. Except as expressly permitted or
contemplated by this Agreement, the Company shall observe each term set forth in
this Section 6.01 and agrees that, from the date hereof until the Closing,
unless otherwise consented by Pegasus or Newco in writing:
(a) The business of the Company shall be conducted only in, and the
Company shall not take any action except in, the ordinary course of the
Company's business, on an arm's-length basis, in the best interest of the
Company and the Company Stockholders and in accordance in all material
respects with all applicable laws, rules and regulations and consistent
with the past practice of the Company;
(b) The Company shall not, directly or indirectly, do or permit to
occur any of the following: (i) issue or sell any additional shares of, or
any options, warrants, conversion privileges or rights of any kind to
acquire any shares of, any of its Stock , except that the Company may grant
additional options to its new employees consistent with the past practice
of the Company; provided that, the Company shall obtain the prior written
approval of Pegasus for any individual option grant for more than 5,000
shares of the Company Common Stock; (ii) sell, pledge, dispose of or
encumber any of its assets (or enter into factoring or similar
arrangements), except in the ordinary course of business and except as
identified to Pegasus or Newco in writing; (iii) amend or propose to amend
its Certificate of Incorporation or Bylaws; (iv) split, combine or
reclassify any outstanding shares of the Stock, or declare, set aside or
pay any dividend or other distribution payable in cash, stock, property or
otherwise with respect to shares of the Stock; (v) redeem (other then as
contemplated by Section 7.15), purchase or acquire or offer to acquire any
shares of the Stock or other securities of the Company; (vi) acquire (by
merger, exchange, consolidation, acquisition of stock or assets or
otherwise) any corporation, partnership, joint venture or other business
organization or division or material assets thereof; (vii) incur any
indebtedness for borrowed money or issue any debt securities except the
borrowing of working capital in the ordinary course of business and
consistent with past practice except pursuant to a revolving line of credit
from Imperial Bank N.A. in an amount not to exceed $15,000,000; (viii)
voluntarily permit any accounts payable owed to trade creditors to remain
outstanding more than 60 days; (ix) accelerate, beyond the normal
collection cycle, collection of accounts receivable except in the ordinary
course of business consistent with past practice; or (x) enter into or
propose to enter into, or modify or propose to modify, any agreement,
arrangement or understanding with respect to any of the matters set forth
in this Section 6.01(b);
(c) The Company (i) shall not, directly or indirectly, enter into or
modify any employment, severance or similar agreements or arrangements that
will be binding on, or in any way adversely affect Pegasus or Newco; or
(ii) take any action with respect to the grant of any bonuses, salary
increases, severance or termination pay that will be binding on, or in any
way adversely affect Pegasus
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or Newco after the Closing Date or increase any of the benefits payable in
effect on the date hereof that will be binding on Pegasus or Newco after
the Closing.
(d) The Company shall not adopt or amend any bonus, profit sharing,
compensation, stock option, pension, retirement, deferred compensation,
employment or other employee benefit plan, trust, fund or group arrangement
for the benefit or welfare of any employees;
(e) The Company shall not cancel or terminate its current insurance
policies or cause any of the coverage thereunder to lapse, unless
simultaneously with such termination, cancellation or lapse, replacement
policies providing coverage equal to or greater than the coverage under the
canceled, terminated or lapsed policies for substantially similar premiums
are in full force and effect;
(f) The Company shall (i) use commercially reasonable efforts to
preserve intact the Company's business organization and goodwill, keep
available the services of the Company's officers and employees as a group
and maintain satisfactory relationships with suppliers, distributors,
customers and others having business relationships with the Company; (ii)
confer on a regular and frequent basis with representatives of Pegasus or
Newco to report operational matters and the general status of ongoing
operations; and (iii) not intentionally take any action which would render,
or which reasonably may be expected to render, any representation or
warranty made by it in this Agreement untrue at the Closing; and
(g) The Company shall not (i) change any of its methods of accounting
in effect at December 31, 1998, other than those required by GAAP; (ii)
make or rescind any express or deemed election relating to Taxes, (iii)
settle or compromise any claim, action, suit, litigation, proceeding,
arbitration, investigation, audit or controversy relating to Taxes; or (iv)
change any of its methods of reporting income or deductions for federal
income Tax purposes from those employed in the preparation of the federal
income Tax returns for the taxable year ending December 31, 1998.
(h) The Company shall file at its own expense, on or prior to the due
date thereof, all Returns required to be filed for all Tax periods ending
on or before the Closing Date; provided, however, that the Company shall
not file any such Return (other than federal, state or local sales, use,
property, withholding or employment tax returns or statements) for any Tax
period without providing Pegasus or Newco with final copies of each such
Return (including returns of all employee benefit plans) at least ten (10)
Business Days before filing such return and shall reasonably cooperate with
any request by Pegasus or Newco in connection therewith.
Section 6.02 ACCESS TO BOOKS AND RECORDS. Between the date hereof and the
Closing Date, the Company shall (a) afford Pegasus and Newco and their
authorized representatives (the "PEGASUS REPRESENTATIVES") full access at all
reasonable times and upon reasonable notice to the offices, properties, books,
records, officers, employees and other items of the Company, (b) shall cause its
independent accountants to afford to the independent auditors of Pegasus
reasonable access to the audit work papers and other records of the independent
auditors of the Company and the Company Subsidiaries and (c) otherwise provide
such assistance as is reasonably requested by Pegasus and Newco in order that
Pegasus and Newco may have a full opportunity to make such investigation and
evaluation as it shall reasonably desire to make of the business and affairs of
the Company. In addition, the Company and its officers and directors shall
cooperate fully (including providing introductions, where necessary) with
Pegasus and Newco to enable Pegasus and Newco to contact such third parties,
including customers, prospective customers, vendors, or suppliers of the Company
as Pegasus deems reasonably necessary to complete its due diligence; provided
that, Pegasus and Newco agree not to initiate such contacts without the prior
approval of the Company, which approval will not be unreasonably withheld;
provided further, that a representative of the Company may, at the Company's
option, participate in such contacts. Each of Pegasus and Newco will hold, and
will use all reasonable efforts to cause its officers, employees, accountants,
counsel, financial advisors and all other representatives and affiliates to
hold, any nonpublic information in confidence to the extent required by, and in
accordance with, and will comply with the confidentiality provisions of this
Agreement.
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ARTICLE VII
ADDITIONAL AGREEMENTS AND COVENANTS
Section 7.01 PREPARATION OF FORM S-4; OTHER FILINGS. As promptly as
practicable after the date of this Agreement, Pegasus and the Company shall
prepare and file with the SEC the S-4. Each of Pegasus and the Company shall use
all reasonable efforts to respond to any comments of the SEC, to have the S-4
declared effective under the Securities Act as promptly as practicable after
such filing and to cause the S-4 to be mailed to such Company's stockholders at
the earliest practicable time. The Company and the Majority Stockholder will
ensure that Financial Statements used in connection with the S-4 and the S-3 are
prepared in accordance with GAAP, consistently applied throughout their
respective periods. As promptly as practicable after the date of this Agreement,
Pegasus and the Company shall prepare and file any other filings required under
the Exchange Act, the Securities Act of 1933, as amended (the "SECURITIES ACT")
or any other federal or state securities laws ("BLUE SKY LAWS") relating to the
Merger and the transactions contemplated by this Agreement and the Certificate
of Merger, including, without limitation, under the HSR Act and state takeover
laws (the "OTHER FILINGS"). Each of Pegasus, the Company and the Majority
Stockholder will coordinate and cooperate with each such other party hereto in
exchanging such information, will not make any such filing without providing to
each such other party a final copy thereof for their review and consent at least
two full Business Days in advance of the proposed filing. Each such party to
this Agreement shall notify each such other party to this Agreement promptly of
the receipt of any comments from the SEC or its staff and of any request by the
SEC or its staff or any other government officials for amendments or supplements
to the S-4 or any Other Filing or for additional information and will supply
such other parties with copies of all correspondence between such party or any
of its representatives, on the one hand, and the SEC, or its staff or any other
government officials, on the other hand, with respect to the S-4, the Merger or
any Other Filing. The S-4 and the Other Filings shall comply in all material
respects with all applicable requirements of law. Whenever any event occurs
which is required to be set forth in an amendment or supplement to the S-4 or
any Other Filing, Pegasus or the Company, as the case may be, shall promptly
inform the other party of such occurrence and cooperate in filing with the SEC
or its staff or any other government officials, and/or mailing to stockholders
of Pegasus and the Company, such amendment or supplement. The parties hereto
agree to amend, modify, rescind or terminate any Company Voting Agreement and to
amend this Agreement if required by the SEC in order to register the issuance of
the Stock Consideration on Form S-4 or Form S-3 as contemplated by this
Agreement.
Section 7.02 REGISTRATION OF PEGASUS COMMON STOCK ON FORM S-3.
(a) As soon as practicable after the filing of the S-4, Pegasus shall
cause to be filed with the SEC the S-3 (which is considered by the Company,
the Majority Stockholder and Pegasus to be an Other Filing) effecting the
registration of the shares of Pegasus Common Stock to be received in
connection with the Merger by the Majority Stockholder and the other
Company Stockholders that execute a Company Voting Agreement (collectively,
the "S-3 SHARES"). Each of Pegasus and the Company shall use all reasonable
efforts to respond to any comments of the SEC with respect to the S-3 such
that the S-3 will be declared effective under the Securities Act
contemporaneously with the S-4. The Company and the Majority Stockholder
will ensure that Financial Statements used in connection with the S-3 are
prepared in accordance with GAAP, consistently applied throughout their
respective periods.
(b) The Company shall cause each of the Company's officers and
directors that holds Company Common Stock (or rights exercisable for
Company Common Stock) and each Company Stockholder that holds (or has the
right to purchase) one percent 1% or more of the outstanding shares of
Company Common Stock as of the date of this Agreement to enter into a
stockholder agreement with Pegasus in the form attached hereto as Exhibit E
(the "STOCKHOLDER AGREEMENTS"), which provide certain restrictions on the
disposition of the Pegasus Common Stock received as a result of the Merger.
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(c) The Majority Stockholder shall enter into a stockholder agreement
with Pegasus in the form attached hereto as Exhibit F (the "MAJORITY
STOCKHOLDER STOCKHOLDER AGREEMENT"), which provides certain restrictions on
the disposition of the Pegasus Common Stock received as a result of the
Merger.
Section 7.03 NON-COMPETITION AGREEMENT ALLOCATION OF VALUE;
(a) Reed shall, and shall cause each affiliate of Reed that is engaged
in the same or similar business as Reed and not organized under the laws of
the United Kingdom, to enter into a non-competition agreement with Pegasus,
in the form attached hereto as Exhibit D (the "NON-COMPETITION AGREEMENT").
The parties to this Agreement expressly stipulate that (i) the Non-
Competition Agreement is a material inducement to Pegasus and Newco
entering into this Agreement; (ii) $4 million of the Merger Consideration
to be received by Reed shall be allocated to the Non-Competition Agreement;
and (iii) the appropriate parties agree to reflect such allocation on its
books and records, if applicable, and on any applicable Return or similar
filing made with any taxing authority.
(b) The form of Non-Competition Agreement attached to the Agreement as
Exhibit D is hereby deemed to be amended to delete Utell as a party thereto
and to substitute therefor as a party each affiliate of Reed that is
engaged in the same or similar business as Reed and is not organized under
the laws of the United Kingdom.
Section 7.04 INTERCOMPANY ARRANGEMENTS. On or before the Closing Date, the
Majority Stockholder and Pegasus shall enter into an agreement or agreements
relating to certain intercompany arrangements between the Majority Stockholder
and the Company from and after the Effective Time, including without limitation
a UK pension funds transfer and indemnification agreement reasonably
satisfactory to Pegasus and the Majority Stockholder.
Section 7.05 LETTER OF THE COMPANY'S INDEPENDENT ACCOUNTANTS. The Company
shall use all reasonable efforts to cause to be delivered to Pegasus a letter of
Deloitte & Touche, the Company's independent accountants, dated a date within
two Business Days before the date on which the S-4 and, if applicable, the S-3
shall become effective and addressed to Pegasus, in form and substance
reasonably satisfactory to Pegasus and customary in scope and substance for
letters delivered by independent auditors in connection with registration
statements similar to the S-4 and, if applicable, the S-3.
Section 7.06 LETTER OF PEGASUS' INDEPENDENT ACCOUNTANTS. Pegasus shall use
all reasonable efforts to cause to be delivered to the Company a letter of
PricewaterhouseCoopers LLP, Pegasus' independent auditors, dated a date within
two Business Days before the date on which the S-4 and, if applicable, the S-3
shall become effective and addressed to the Company, in form and substance
reasonably satisfactory to the Company and customary in scope and substance for
letters delivered by independent auditors in connection with registration
statements similar to the S-4 and, if applicable, the S-3.
Section 7.07 AGREEMENTS TO TAKE REASONABLE ACTION.
(a) The Company and the Majority Stockholder shall take, and the
Company shall cause the Company Subsidiaries to take, all reasonable
actions necessary to comply promptly with all legal requirements which may
be imposed on the Company or the Company Subsidiaries with respect to the
Merger (including furnishing the information required under the HSR Act)
and shall take all reasonable actions necessary to cooperate promptly with
and furnish information to Pegasus in connection with any such requirements
imposed upon Pegasus or Newco or any subsidiary of Pegasus or Newco in
connection with the Merger. The Company and the Majority Stockholder shall
take, and shall cause the Company Subsidiaries to take, all reasonable
actions necessary (i) to obtain any clearance, consent, authorization,
order or approval of, or any exemption by, any Governmental Entity, or
other third party (including without limitation those items identified in
Schedule 4.05) required to be obtained or made by the Company or any of its
subsidiaries in connection with the Merger or the taking of any action
contemplated by this Agreement; (ii) to lift, rescind or mitigate the
effect of any injunction or restraining order or other order adversely
affecting the ability of the Company to
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consummate the transactions contemplated hereby; (iii) to fulfill all
conditions applicable to the Company or the Majority Stockholder pursuant
to this Agreement; and (iv) to prevent, with respect to a threatened or
pending temporary, preliminary or permanent injunction or other order,
decree or ruling or statute, rule, regulation or executive order, the
entry, enactment or promulgation thereof, as the case may be; provided,
however, that with respect to clauses (i) through (iv) above, the Company
and the Company Subsidiaries will take only such curative measures (such as
licensing and divestiture) as Pegasus and the Company mutually determine,
in good faith, to be reasonable.
(b) Pegasus and Newco shall take, and shall cause their subsidiaries
to take, all reasonable actions necessary to comply promptly with all legal
requirements which may be imposed on them or their subsidiaries with
respect to the Merger (including furnishing the information required under
the HSR Act) and shall take all reasonable actions necessary to cooperate
promptly with and furnish information to the Company in connection with any
such requirements imposed upon the Company or any Company Subsidiary in
connection with the Merger. Pegasus and Newco shall take, and shall cause
their subsidiaries to take, all reasonable actions necessary (i) to obtain
any clearance, consent, authorization, order or approval of, or any
exemption by, any Governmental Entity, or other third party, required to be
obtained or made by Pegasus or any of its subsidiaries in connection with
the Merger or the taking of any action contemplated by this Agreement; (ii)
to lift, rescind or mitigate the effect of any injunction or restraining
order or other order adversely affecting the ability of Pegasus or Newco to
consummate the transactions contemplated hereby; (iii) to fulfill all
conditions applicable to Pegasus or Newco pursuant to this Agreement; and
(iv) to prevent, with respect to a threatened or pending temporary,
preliminary or permanent injunction or other order, decree or ruling or
statute, rule, regulation or executive order, the entry, enactment or
promulgation thereof, as the case may be; provided, however, that with
respect to clauses (i) through (iv) above Pegasus and its subsidiaries will
take only such curative measures (such as licensing and divestiture) as
Pegasus determines, in good faith, to be reasonable.
(c) Subject to the terms and conditions of this Agreement, each of the
parties to this Agreement shall use all reasonable efforts to take, or
cause to be taken, all actions and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective as promptly as practicable the transactions
contemplated by this Agreement, subject to the appropriate approval of the
stockholders of the Company. Pegasus and the Company will use all
reasonable efforts to resolve any competitive issues relating to or arising
under the HSR Act or any other federal or state antitrust or fair trade law
raised by any Governmental Entity including making offers of curative
divestitures and/or licensing of technology which Pegasus determines to be
reasonable. If such offers are not accepted by such Governmental Entity,
Pegasus (with the Company's cooperation) shall pursue all litigation
resulting from such issues. The parties hereto will consult and cooperate
with one another, and consider in good faith the views of one another, in
connection with any analyses, appearances, presentations, memoranda,
briefs, arguments, opinions and proposals made or submitted by or on behalf
of any party hereto in connection with proceedings under or relating to the
HSR Act or any other federal or state antitrust or fair trade law.
Section 7.08 CONSENTS. Each of Pegasus, Newco, the Company and the
Majority Stockholder shall use all reasonable efforts to obtain the Consent of,
or effect the notification of or filing with, each Person necessary for such
party hereto to consummate the Merger and the transactions contemplated by this
Agreement and to enable the Surviving Corporation to conduct and operate the
business of the Company and the Company Subsidiaries substantially as presently
conducted and as contemplated to be conducted.
Section 7.09 NASDAQ ADDITIONAL SHARES LISTING. Pegasus will cause the
shares of Pegasus Common Stock issuable to the Company Stockholders in the
Merger to be listed for trading on the Nasdaq National Market.
Section 7.10 THE COMPANY OPTIONS; EMPLOYEE BENEFITS.
(a) Not later than twenty (20) days prior to the Closing Date, the
Company shall deliver written or electronic notice to all of its employees
or other Persons who hold (i) options granted
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under the US Option Plans, including without limitation those options that
accelerate and become fully vested and exercisable as a result of the
Merger (the "ACCELERATED OPTIONS"), or (ii) any options outstanding under
the UK Option Plan (the "OTHER OPTIONS" and together with the Accelerated
Options, the "OPTIONS"), which notice shall request each such Person to
make an election not less than fifteen (15) days after delivery of the
notice referred to above to (A) exercise any or all of the Options held by
such Person and purchase the related shares of Company Common Stock (which
shares shall convert into the right to receive the Merger Consideration
upon the Effective Time) or (B) surrender the Options to be bought out by
the Company in accordance with the terms of the Options Plans in return for
a cash payment equal to the Option Per Share Amount. The Option Per Share
Amount shall be deemed to be $1.73, calculated as set forth on Schedule
7.10. On the Closing Date, the Company shall pay to each Person who elects
to receive such cash payment the aggregate amount of such cash payment as
calculated in accordance with the preceding sentence. Except as otherwise
provided above, the Accelerated Options shall terminate 15 days after the
date of delivery of the notice specified in the first sentence of this
Section 7.10(a) in accordance with the terms of the US Option Plans. Any
Other Options which are not exercised or surrendered as provided in this
Section 7.10(a), shall be treated in accordance with the provisions of
Section 2.02(c) and the terms of the UK Option Plan. In any event, none of
the Options shall be assumed by Pegasus.
(b) The Company and Pegasus agree that any amounts necessary to make
the cash payments contemplated by clause (a) above shall be funded by a
promissory note payable by the Company to Pegasus, in form and substance
reasonably satisfactory to the Company and Pegasus (the "OPTION
NOTE"),which shall be signed and delivered by the Company and funded by
Pegasus on or prior to the Closing Date.
(c) Pegasus shall provide or cause the Surviving Corporation to
provide benefits to employees of the Company and the Company Subsidiaries
that are not materially less favorable in the aggregate to such employees
than those in effect on the date of this Agreement. For purposes of
determining eligibility to participate, vesting, and entitlement to
benefits, service with the Company and the Company Subsidiaries shall be
treated as service with Pegasus and its subsidiaries. Notwithstanding the
preceding provisions of this Section 7.10(b), subject to any requirements
of law or contract relating to the Company's UK Pension Scheme, nothing in
this Agreement shall prevent Pegasus from amending or revising after six
(6) months following the Closing Date the benefits provided to such
employees. Notwithstanding the foregoing, no provision of this Section
7.10(c) shall be construed to create a right in any employee or beneficiary
of such employee under any benefit plan or other similar arrangement that
such employee or beneficiary would not otherwise have under such benefit
plans or other similar arrangements.
(d) The Company shall use its reasonable best efforts to make
available to employees of the Company holding Options a credit arrangement
through a third-party to enable such employees to deliver the funds
required to exercise any or all of the Options held by such Person and
purchase the related shares of Company Common Stock in accordance with
clause (A) of Section 7.10(a). The credit arrangement shall be full
recourse to such employees, but the Majority Stockholder shall fully secure
(by means of a guarantee or other credit support) such credit arrangement.
The credit extended to the employees shall have an interest rate at least
equal to the rate required by the Code to avoid any imputed interest
amounts. The Company shall include in the notice to be sent by the Company
to its employees which is referred to in Section 7.10(a) a description of
such credit arrangement and the procedure for obtaining funds from such
credit arrangement.
Section 7.11 FIRPTA COMPLIANCE. On the Closing Date, the Company and the
appropriate Company Stockholders (as indicated by the information provided under
Section 4.09(t)), shall deliver to Pegasus a properly executed statement in a
form reasonably acceptable to Pegasus for purposes of satisfying Pegasus'
obligations under U.S. Treasury regulation section 1.1445-2(b)(2) (promulgated
pursuant to Code Sections 897 and 1445).
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Section 7.12 RESTRICTIONS ON NEGOTIATIONS WITH THIRD PARTIES.
(a) From and after the date of this Agreement until the earlier of the
Effective Time or the termination of this Agreement in accordance with its
terms, the Company and the Majority Stockholder shall not, directly or
indirectly, through any officer, director, employee, representative or
agent of the Company or the Majority Stockholder or any of their respective
subsidiaries, solicit or encourage (including by way of furnishing
nonpublic information) or take other action, either directly or indirectly,
to facilitate any inquiries or the making of any proposal that constitutes
or may reasonably be expected to lead to an Acquisition Proposal (as
defined below) from any person, or engage in any discussions or
negotiations relating thereto or in furtherance thereof or accept any
Acquisition Proposal. For purposes of this Agreement, "ACQUISITION
PROPOSAL" means any inquiries or proposals regarding any (i) merger,
consolidation, sale of substantial assets or similar transactions involving
the Company or any Company Subsidiaries (other than sales of assets or
inventory in the ordinary course of business), (ii) purchase of 20% or more
of the outstanding shares of capital stock of the Company (including
without limitation by way of a tender offer or an exchange offer) or
similar transactions involving the Company or any Company Subsidiaries,
(iii) acquisition by any Person or "group" (as defined under Section 13(d)
of the Exchange Act and the rules and regulations thereunder) of beneficial
ownership or a right to acquire beneficial ownership of 20% or more of the
then outstanding shares of capital stock of the Company; or (iv) public
announcement of a proposal, plan or intention to do any of the foregoing or
any agreement to engage in any of the foregoing.
(b) Notwithstanding Section 7.12(a), the restrictions set forth in
this Agreement shall not prevent the Board of Directors of the Company, in
the exercise of and as required by its fiduciary duties as determined in
good faith by the Board of Directors of the Company after consultation with
its outside legal counsel, engaging in discussions or negotiations with,
and furnishing information concerning the Company and its business,
properties and assets (but not directly or indirectly soliciting or
initiating such discussions or negotiations or directly or indirectly
encouraging inquiries or the making of any Acquisition Proposal), to a
third party who makes a written, unsolicited, bona fide Acquisition
Proposal that is reasonably capable of being consummated and is reasonably
likely to be on financial terms and conditions more favorable to the
Company and its stockholders than the Merger, as determined in each case in
good faith by the Company's Board of Directors after consultation with the
Company's financial advisors (a "SUPERIOR PROPOSAL"), provided that Pegasus
shall have been promptly notified in writing of such Acquisition Proposal,
including the principal financial terms and conditions thereof, and the
identity of the person or group making such Acquisition Proposal.
(c) Upon compliance with the foregoing, the Company shall be entitled
to (i) withdraw, modify or refrain from making its recommendation regarding
the Merger following receipt of a Superior Proposal, and approve and
recommend to the stockholders of the Company a Superior Proposal and (ii)
enter into an agreement with such third party concerning a Superior
Proposal; provided, however, that the Company shall immediately and prior
to either (i) or (ii) make payment in full to Pegasus of the Breakup Fee as
defined in Section 10.03. In any such event and after payment to Pegasus of
the Breakup Fee, the Company Voting Agreements (expressly excluding any
voting agreement signed by the Majority Stockholder) then in effect shall
terminate in accordance with their terms.
(d) If the Company or any of its subsidiaries receives any unsolicited
offer or proposal to enter negotiations relating to an Acquisition
Proposal, the Company shall immediately notify Pegasus thereof, including
information as to the identity of the offeror or the party making any such
offer or proposal and the principal financial terms and conditions of such
offer or proposal, as the case may be.
(e) Notwithstanding the foregoing provisions of this Section 7.12, the
Company shall not provide any non-public information to a third party as
described above unless the Company provides such non-public information
pursuant to a nondisclosure agreement with terms regarding the protection
of
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confidential information at least as restrictive as such terms in the
Confidentiality Agreement previously entered into between Pegasus and the
Company. Nothing in this Section 7.12 shall constitute a waiver of any of
the provisions of Section 7.16.
(f) The Company shall immediately cease and cause to be terminated any
existing discussions or negotiations with any parties (other than Pegasus)
conducted prior to the date of this Agreement with respect to any
Acquisition Proposal.
Section 7.13 EMPLOYMENT AGREEMENTS. At or prior to Closing, Pegasus shall
enter into Employment Agreements with John F. Davis, III and Joseph W. Nicholson
having a term of at least two (2) years for their full-time service as Pegasus'
chief executive officer and chief information officer, respectively (the
"EMPLOYMENT AGREEMENTS").
Section 7.14 NOTICE OF CERTAIN MATTERS. Each of the Company and the
Majority Stockholder shall promptly notify Pegasus and Newco, and each of
Pegasus and Newco shall promptly notify the Company and the Majority
Stockholder, in writing (i) of any material governmental or administrative
complaints, investigations or hearings (or communications indicating that the
same may be contemplated); (ii) if such Person discovers that any representation
or warranty made by it in this Agreement was when made, or has subsequently
become, untrue in any respect; (iii) of any notice or other communication from
any third party relating to, a material default or event which, with notice or
lapse of time or both, would become a material default, received by such Person
subsequent to the date of this Agreement and prior to the Closing Date under any
material agreement, indenture or instrument to which such Person is a party or
to which the assets of such Person and its subsidiaries are subject, (iv) any
notice or other communication from any third party alleging that the consent of
such third party is or may be required in connection with the transactions
contemplated by this Agreement; or (v) any event or circumstance that, so far as
reasonably can be foreseen at the time of its occurrence, would result in a
Material Adverse Effect to such Person.
Section 7.15 RELEASE AND REPURCHASE OF CERTAIN COMPANY STOCK. At or prior
to Closing, the Company and the Majority Stockholder shall release or cause to
be released the Company's Series A Preferred Stock and any Company Common Stock
subject to the escrow established under the Share Exchange Agreement dated
October 9, 1997 by and among the Company, the Majority Stockholder and the other
parties named therein, and the Company shall repurchase all outstanding shares
of the Series A Preferred Stock of the Company.
Section 7.16 CONFIDENTIAL INFORMATION.
(a) Each of Pegasus and the Company has disclosed and delivered and
will through the Closing disclose and deliver to the other party hereto
certain information about its respective properties, employees, finances,
businesses and operations prepared by such party or its advisors (such
party when disclosing such information being "DISCLOSING PARTY" and such
party when receiving such information being the "RECEIVING PARTY"). All
such information furnished by the Disclosing Party or its Authorized
Persons (as defined below), whether furnished before or after the date
hereof, whether oral or written, and regardless of the manner in which it
is furnished, is referred to in this Agreement as "PROPRIETARY
INFORMATION." Proprietary Information does not include, however,
information which (i) is or becomes generally available to the public other
than as a result of a disclosure by the Receiving Party or its Authorized
Persons, (ii) was available to the Receiving Party on a nonconfidential
basis prior to its disclosure by the Disclosing Party or its Authorized
Persons, provided that the source of such information is not known to the
Receiving Party to be obligated to maintain such information as
confidential, (iii) becomes available to the Receiving Party on a
nonconfidential basis from a Person other than the Disclosing Party or its
Authorized Persons that is not otherwise bound by a confidentiality
agreement with the Disclosing Party or any of its Authorized Persons, or is
otherwise not under an obligation to the Disclosing Party or any of its
Authorized Persons not to transmit the information to the Receiving Party
or any other third party or (iv) required to be disclosed in connection
with this Agreement or any other documents contemplated hereby. As used in
this Agreement, the term "AUTHORIZED PERSON" means, as to any Person, those
Persons that are
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actively and directly participating in the evaluation and negotiation of
the transaction contemplated by this Agreement.
(b) Subject to Section 7.16(c), unless otherwise agreed to in writing
by the Disclosing Party, the Receiving Party agrees (a) except as required
by law, to keep all Proprietary Information confidential and not to
disclose or reveal any Proprietary Information to any person other than its
Authorized Persons, and to cause those persons to observe the terms of this
Agreement, (b) not to use Proprietary Information for any purpose other
than in connection with its evaluation of the transaction contemplated
hereby or the completion of the transaction contemplated hereby in a manner
approved by the Disclosing Party and (c) except as required by law or
pursuant to a listing or similar agreement with the New York Stock
Exchange, the American Stock Exchange, the National Association of
Securities Dealers, Inc. or other similar securities regulatory
organization (collectively, an "SRO"), not to disclose to any Person (other
than its Authorized Persons) (i) the fact that the Proprietary Information
exists or has been made available, (ii) any information about the
transactions contemplated hereby, or the terms or conditions or any facts
relating thereto, including without limitation, the fact that discussions
are taking place with respect thereto or the status thereof, or (iii) the
fact that Proprietary Information has been made available to the Receiving
Party or its Authorized Persons. The Receiving Party will be responsible
for any breach of the terms of this Section 7.16 by the Receiving Party or
any of its Authorized Persons.
(c) In the event that the Receiving Party is requested pursuant to, or
required by, applicable law, regulation or SRO rule or by legal process to
disclose any Proprietary Information or any other information concerning
the Disclosing Party or the Proposed Transaction, the Receiving Party
agrees that it will provide the Disclosing Party with prompt notice of such
request or requirement in order to enable the Disclosing Party to seek an
appropriate protective order or other remedy, to consult with the Receiving
Party with respect to the Disclosing Party taking steps to resist or narrow
the scope of such request or legal process, or to waive compliance, in
whole or in part, with the terms of this Agreement. In the event that no
such protective order or other remedy is obtained, or that the Disclosing
Party waives compliance with the terms of this Agreement, the Receiving
Party will use its reasonable best efforts to disclose only that portion of
any Proprietary Information which the Receiving Party is advised by counsel
is legally required and will exercise all reasonable efforts to ensure that
all Proprietary Information so disclosed will be accorded confidential
treatment.
(d) Each of Pegasus and the Company is aware, and each of Pegasus and
the Company will advise its respective Authorized Persons that are informed
of the matters that are the subject of this Agreement, of the restrictions
imposed by the United States securities laws on the purchase or sale of
securities by any Person who has received material, nonpublic information
from the issuer of such securities and on the communication of such
information to any other person when it is reasonably foreseeable that such
other Person is likely to sell such securities in reliance upon such
information.
(e) Without prejudice to the rights or remedies otherwise available to
each of the parties hereto, each such party shall be entitled to equitable
relief by way of specific performance, injunction or otherwise, if the
other party hereto or any of its Authorized Persons breaches or threatens
to breach any of the provisions of this Section 7.16. Each party hereto
agrees to waive any requirement for the security or posting of any bond in
connection with such remedy.
Section 7.17 APPOINTMENT OF MAJORITY STOCKHOLDER REPRESENTATIVE TO THE
PEGASUS BOARD. After the Closing Date, so long as the Majority Stockholder
continues to own in excess of five percent (5%) of the issued and outstanding
Pegasus Common Stock (the "OWNERSHIP THRESHOLD"), Reed shall have a right to
designate a Person, subject to the reasonable approval of Pegasus (the "MAJORITY
STOCKHOLDER BOARD MEMBER") to be elected to the Board of Directors of Pegasus at
the next regularly scheduled Board meeting of Pegasus following such
designation; and thereafter Reed shall have the right to remove and substitute
the Majority Stockholder Board Member subject to the reasonable approval of
Pegasus. The rights granted under this Section 7.17 shall terminate if the
Majority Stockholder at any time beneficially owns less than the Ownership
Threshold. If at any time Majority Stockholder does not beneficially own
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the Ownership Threshold, the Pegasus Board shall have the right to remove the
Majority Stockholder Board Member with cause or without cause, and if Pegasus so
desires, to fill such vacancy with any other Person.
Section 7.18 ACTIONS UNDER WARN AND SIMILAR STATE AND FOREIGN LAWS. The
Company shall provide any notice and otherwise comply with WARN and any similar
state and foreign laws applicable to the Company and the Company Subsidiaries by
reason of this Agreement, the Merger or any of the other documents or
transactions contemplated by this Agreement.
Section 7.19 INDEMNIFICATION AND INSURANCE.
(a) From and after the Effective Time, Pegasus shall, and shall cause
the Surviving Corporation to, fulfill and honor in all respects the
obligations of the Company pursuant to any indemnification provisions under
the Company's Certificate of Incorporation or Bylaws as in effect on the
date hereof with respect to directors and officers of the Company
immediately prior to the Effective Time (the "INDEMNIFIED PARTIES"). The
Certificate of Incorporation and Bylaws of the Surviving Corporation will
contain provisions with respect to exculpation and indemnification that are
at least as favorable to the Indemnified Parties as those contained in the
Certificate of Incorporation and Bylaws of the Company as in effect on the
date hereof, which provisions will not be amended, repealed or otherwise
modified for a period of three (3) years from the Effective Time in any
manner that would adversely affect the rights thereunder of individuals
who, immediately prior to the Effective Time, were directors, officers,
employees or agents of the Company, unless such modification is required by
law.
(b) For a period of three (3) years after the Effective Time, Pegasus
will, or will cause the Surviving Corporation to, use commercially
reasonable efforts to maintain in effect, if available, directors' and
officers' liability insurance covering those persons who are currently
covered by the Company's directors' and officers' liability insurance
policy on terms substantially similar to those applicable to the current
directors and officers of the Company; provided, however, that in no event
will Pegasus or the Surviving Corporation be required to expend in excess
of $75,000 in total.
(c) The provisions of this Section 7.19 shall operate for the benefit
of, and shall be enforceable by, each of the Indemnified Parties, their
heirs and their representatives.
Section 7.20 COMPANY FINANCIAL STATEMENTS. Prior to the date of the
Estimated Closing Balance Sheet, the Company shall recognize a bad debt expense
in the amount of $2 million for doubtful accounts receivable in addition to its
normal monthly bad debt expense, which shall be no less than $200,000 for each
month from October 1999 through the month of the Closing Date.
ARTICLE VIII
CONDITIONS TO CLOSING
Section 8.01 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE
MERGER. The respective obligation of each party to effect the Merger is subject
to the satisfaction prior to the Closing Date of the following conditions:
(a) HSR ACT. Any waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated, and no
action shall have been instituted by the Department of Justice or Federal
Trade Commission challenging or seeking to enjoin the consummation of the
Merger, which action shall not have been withdrawn or terminated.
(b) STOCKHOLDER APPROVAL. This Agreement shall have been approved and
adopted by the Required Stockholder Approval.
(c) EFFECTIVENESS OF THE S-4 AND S-3. The S-4 and S-3 shall have been
declared effective by the SEC under the Securities Act and shall not be the
subject of any stop order or proceeding by the SEC seeking a stop order.
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(d) GOVERNMENTAL ENTITY APPROVALS. All authorizations, consents,
orders or approvals of, or declarations or filings with, or expiration of
waiting periods imposed by, any Governmental Entity necessary for the
consummation of the transactions contemplated by this Agreement shall have
been filed, expired or been obtained, other than those that, individually
or in the aggregate, the failure to be filed, expired or obtained would
not, in the reasonable opinion of Pegasus, have a Material Adverse Effect
on the Company or a Material Adverse Effect on Pegasus.
(e) NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining
order, preliminary or permanent injunction or other order issued by any
court of competent jurisdiction or other legal restraint or prohibition (an
"INJUNCTION") preventing the consummation of the Merger shall be in effect,
nor shall any proceeding brought by an administrative agency or commission
or other governmental authority or instrumentality, domestic or foreign,
seeking any of the foregoing be pending; and there shall not be any action
taken, or any statute, rule, regulation or order (whether temporary,
preliminary or permanent) enacted, entered or enforced which makes the
consummation of the Merger illegal or prevents or prohibits the Merger.
(f) LISTING OF SHARES. The shares of Pegasus Common Stock issuable to
the Company Stockholders in accordance with this Agreement shall have been
approved for listing on Nasdaq, subject to official notice of issuance.
(g) AGREEMENT REGARDING ESTIMATED CLOSING BALANCE SHEET. Pegasus and
the Company shall have agreed to the Estimated Closing Balance Sheet.
Section 8.02 CONDITIONS TO PEGASUS' AND NEWCO'S OBLIGATIONS. The
obligations of Pegasus and Newco to consummate the transactions contemplated by
this Agreement are subject to the fulfillment and satisfaction as of the Closing
Date, of each of the following conditions, any of which may be waived in
writing, in whole or in part, by Pegasus or Newco:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of the Company and the Majority Stockholder set forth in this Agreement
shall be true and correct in all material respects (except that any such
representation and warranty that is qualified by the terms material,
materially, Material Adverse Effect or like terms shall be true and correct
in all respects) (i) as of the date hereof and (ii) as of the Closing Date,
as though made on and as of the Closing Date; and Pegasus shall have
received a certificate signed by the chief executive officer and the chief
financial officer of the Company and a duly authorized officer of the
Majority Stockholder to such effect.
(b) PERFORMANCE OF OBLIGATIONS OF THE COMPANY. The Company and the
Majority Stockholder shall have performed in all material respects (except
that any obligation or covenant that is qualified by material, materiality,
Material Adverse Effect or like terms shall have been performed in all
respects) all obligations and covenants required to be performed by it
under this Agreement prior to or as of the Closing Date, and Pegasus shall
have received a certificate signed by the chief executive officer and the
chief financial officer of the Company to such effect.
(c) DELIVERY OF AGREEMENTS. Each party other than Pegasus and Newco
shall have executed and delivered the Company Ancillary Agreements,
including the Certificate of Merger, the Employment Agreements, the
Non-Competition Agreement, the Stockholder Agreements, the Majority
Stockholder Stockholder Agreement, the Option Note and the UK pension
indemnity agreement from the Majority Stockholder.
(d) CONSENTS. Pegasus and Newco shall have received duly executed
copies in form and substance reasonably satisfactory to Pegasus and Newco
of the consents set forth on Schedule 8.02(d) (the "MATERIAL CONSENTS")
(e) LEGAL OPINION. Pegasus and Newco shall have received a legal
opinion from Bryan Cave LLP, counsel to the Company, covering the matters
set forth in Schedule 8.02(e). Bryan Cave LLP shall be entitled where
appropriate to rely on the opinion of the Company's in-house or general
counsel.
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(f) COMPANY CAPITAL STOCK LIST. Pegasus shall have received the
Company Capital Stock List.
(g) OTHER DELIVERIES. Prior to the Closing Date, the Company shall
have delivered or made available, as applicable, to Pegasus and Newco all
of the following:
(i) A copy of (A) certificates from the applicable Governmental
Entities for the Company and the Company Subsidiaries, as may be
appropriate under the applicable laws, dated as of a date not more than
ten (10) days prior to the Closing Date, attesting to the organization,
existence and good standing of the Company and the Company Subsidiaries,
and (B) a copy, certified by the applicable Governmental Entities as of
a date not more than ten (10) days prior to the Closing Date, of the
Certificate of Incorporation and all amendments thereto and the
organizational documents for the Company and each Company Subsidiaries,
respectively;
(ii) resignations (effective as of the Closing Date) of the
Company's and the Company Subsidiaries' officers and directors;
(iii) a copy of (A) the resolutions adopted by the Board of
Directors of the Company authorizing execution, delivery and performance
of this Agreement and, subject to the approval of the Company's
stockholders, the execution, delivery and performance of the Certificate
of Merger and the consummation of all of the transactions contemplated
by this Agreement and the Certificate of Merger and (B) the bylaws (or
similar document) of the Company and each Company Subsidiary, along with
certificates executed on behalf of each of the Company and each Company
Subsidiary by their respective corporate secretaries (or similar
functionaries) certifying to the Pegasus and Newco that such copies are
true, correct and complete copies of such resolutions and bylaws,
respectively, and that such resolutions and bylaws were duly adopted and
have not been amended or rescinded; and
(iv) incumbency certificates executed on behalf of the secretary
(or similar functionary) for the Company and each Company Subsidiary
certifying the signature and office of each officer executing this
Agreement, the Certificate of Merger and the Company Ancillary
Agreements.
(h) MATERIAL ADVERSE CHANGE. No Material Adverse Change (other than
any matters that would qualify as a Material Adverse Change solely under
clause (ii) of the definition of such term) shall have occurred with
respect to the Company.
(i) EXCESS INSURANCE PREMIUM. An amount equal to any excess of $75,000
necessary to obtain the insurance policy evidenced by the insurance
certificate referred to in Section 8.03(g)
(j) OTHER MATTERS. Such other certificates, documents and instruments
as Pegasus and Newco reasonably request related to the transactions
contemplated hereby.
Section 8.03 CONDITIONS TO THE COMPANY'S OBLIGATIONS. The obligations of
the Company to consummate the transactions contemplated by this Agreement are
subject to the satisfaction of the following conditions at or before the Closing
Date, any of which may be waived in writing, in whole or in part:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of Pegasus and Newco set forth in this Agreement shall be true and correct
in all material respects (except that any such representation and warranty
that is qualified by the terms material, materially, Material Adverse
Effect or like terms shall be true and correct in all respects) (i) as of
the date hereof and (ii) as of the Closing Date, as though made on and as
of the Closing Date; and the Company shall have received a certificate
signed by the chief executive officer and the chief financial officer of
Pegasus and the president of Newco to such effect.
(b) PERFORMANCE OF OBLIGATIONS OF PEGASUS AND NEWCO. Each of Pegasus
and Newco shall have performed in all material respects (except that any
obligation or covenant that is qualified by material, materiality, Material
Adverse Effect or like terms shall have been performed in all respects) all
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obligations and covenants required to be performed by it under this
Agreement prior to or as of the Closing Date, and the Company shall have
received a certificate signed by the chief executive officer and the chief
financial officer of Pegasus and the president of Newco to such effect.
(c) DELIVERY OF AGREEMENTS. Pegasus and Newco, as applicable, shall
have executed and delivered the Pegasus Ancillary Agreements, including the
Certificate of Merger, the Employment Agreements, the Non-competition
Agreement, the Stockholder Agreements and the Majority Stockholder
Stockholder Agreement.
(d) LEGAL OPINION. The Company and the Company Stockholders shall have
received a legal opinion from Locke Liddell & Sapp LLP, counsel to Pegasus,
covering the matters set forth in Schedule 8.03(d). Locke Liddell & Sapp
LLP shall be entitled where appropriate to rely on the opinion of Pegasus'
in-house or general counsel.
(e) OTHER DELIVERIES. At or prior to the Closing Date, Pegasus and
Newco will have delivered to the Company:
(i) a copy of (A) the certificates from the Secretary of State of
the State of Delaware for Pegasus and Newco dated as of a date not more
than ten (10) days prior to the Closing Date, attesting to the
organization, existence and good standing of Pegasus and Newco, and (B)
a copy, certified by the Secretary of State of the State of Delaware as
of a date not more than ten (10) days prior to the Closing Date, of the
Certificate of Incorporation and all amendments thereto of Pegasus and
Newco;
(ii) a copy of each of (A) the resolutions adopted by the board of
directors of Pegasus and Newco authorizing the execution, delivery and
performance of this Agreement and the Certificate of Merger and the
consummation of all of the transactions contemplated by this Agreement
and the Certificate of Merger and (B) the bylaws of Pegasus and the
Newco, along with certificates executed on behalf of each of Pegasus and
Newco by their respective corporate secretaries certifying to the
Company that such copies are true, correct and complete copies of such
resolutions and bylaws, respectively, and that such resolutions and
bylaws were duly adopted and have not been amended or rescinded, and
(iii) incumbency certificates executed on behalf of each of Pegasus
and Newco by their corporate secretaries certifying the signature and
office of each officer executing this Agreement, the Certificate of
Merger and the Pegasus Ancillary Agreements.
(f) INSURANCE CERTIFICATE. Pegasus shall deliver to the Company the
insurance policy specified in Section 7.19 of this Agreement prepaid,
together with a certificate of insurance indicating that such policy shall
remain in effect for a minimum of three (3) years from the Closing Date,
but only upon receipt of any funds required by Section 8.02(i).
(g) DISCLOSURE CERTIFICATE. A certificate signed by the chief
executive officer and chief financial officer of Pegasus as of the Closing
Date certifying that since Pegasus' most recent filing with the SEC no
material event or circumstance has occurred with respect to Pegasus that
would require Pegasus to amend, restate or supplement its then current SEC
filings or to file a current report on Form 8-K as to any matter that
materially and adversely affects Pegasus.
(h) MATERIAL ADVERSE CHANGE. No Material Adverse Change (other than
any matters that would qualify as a Material Adverse Change solely under
clause (ii) of the definition of such term) shall have occurred with
respect to Pegasus; provided that a reduction in the price of Pegasus
Common Stock due to general stock market conditions or otherwise shall not
in and of itself constitute a Material Adverse Change.
(i) FUNDING OF OPTION NOTE. Immediately available funds in an amount
equal to the principal amount of the Option Note.
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(j) OTHER MATTERS. Such other certificates, documents and instruments
as the Company reasonably requests related to the transactions contemplated
hereby.
ARTICLE IX
ESCROW ARRANGEMENTS
Section 9.01 ESCROW ARRANGEMENTS. The Escrow Agent (as defined herein)
hereby expressly agrees that its obligations and liabilities under this
Agreement shall be limited exclusively to the terms and conditions set forth in
Section 9.01 [Escrow Arrangements], Section 11.03 [Notices] and Section 11.04
[Arbitration] of this Agreement.
(a) ESCROW FUND. At the Effective Time, the Company Stockholders will
be deemed to have received as part of the Merger Consideration and
deposited with the Escrow Agent (as defined below) without any act of any
Company Stockholder (i) $5.5 million in cash (the "CASH ESCROW") (plus any
and all interest that accrues on the Cash Escrow) plus shares of Pegasus
Common Stock (the "STOCK ESCROW") having a value of $5.5 million plus (ii)
shares of Pegasus Common Stock (the "BALANCE SHEET ESCROW") having a value
of $2.0 million as determined under the terms of Section 9.01(d)(ii) (plus
any and all additional shares as may be issued in respect of such shares
upon any stock split, stock dividend or recapitalization effected by
Pegasus after the Effective Time) (items (i) and (ii) are referred to
collectively as the "ESCROW AMOUNT"). As soon as practicable after the
Effective Time, the Escrow Amount, without any act of any Company
Stockholder, will be deposited with Chase Bank of Texas, N.A. (or such
other institution acceptable to the Company and Pegasus) as Escrow Agent
(the "ESCROW AGENT"), such deposit to constitute an escrow fund (the
"ESCROW FUND") to be governed by the terms set forth herein. Such deposits
into the Escrow Fund shall be deemed made by each Company Stockholder in an
amount equal to such Person's Pro Rata Percentage of the Cash Escrow, the
Stock Escrow and the Balance Sheet Escrow. Upon receipt of such amounts,
the Escrow Agent shall invest the Cash Escrow in short-term
investment-grade securities. The Balance Sheet Escrow shall be available to
compensate Pegasus solely for any amounts payable to Pegasus under Section
3.05. The Cash Escrow and the Stock Escrow portions of the Escrow Fund (the
"LOSS ESCROW") shall be available solely to compensate Pegasus solely for
any claims, losses, liabilities, damages, deficiencies, costs and expenses,
including reasonable attorneys' fees and expenses, and expenses of
investigation and defense, including amounts due to Pegasus pursuant to
Sections 9.03 [Tax Indemnity] (hereinafter individually a "LOSS" and
collectively "LOSSES") incurred by Pegasus directly or indirectly arising
out of, relating to or in connection with (i) any inaccuracy or breach of a
representation or warranty of the Company or the Majority Stockholder
contained in this Agreement (as modified by the Company Disclosure
Schedule) or the certificates or other documents delivered by such parties
in connection with this Agreement or (ii) any breach of any covenant or
agreement of the Company or the Majority Stockholder contained in this
Agreement or the certificates or other documents delivered by such parties
in connection with this Agreement. Pegasus may not receive any amounts from
the Loss Escrow unless and until one or more Escrow Certificates (as
defined in Section 9.01(d) below) identifying Losses, the aggregate amount
of which exceed $1,500,000, have been delivered to the Escrow Agent as
provided in Section 9.01(d); in such case, Pegasus may recover from the
Loss Escrow the amount of its Losses that exceed such $1,500,000 amount. In
lieu of the deposit of any fractional share into the Balance Sheet Escrow
or the Loss Escrow and the distribution of any fractional share therefrom,
the number of shares to be deposited on behalf of or distributed to any
Company Stockholder shall be rounded in each case to the nearest whole
share.
(b) ESCROW PERIOD; DISTRIBUTION UPON TERMINATION OF ESCROW
PERIOD. Subject to the following requirements, the Loss Escrow shall
terminate at 5:00 p.m., Dallas, Texas time, on the later of (i) first
anniversary date of the Effective Time or (ii) the date of the publication
of the first audited consolidated financial statements of Pegasus after the
Effective Time (the "ESCROW PERIOD"); provided that the Escrow Period shall
not terminate with respect to such amount (or some portion
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thereof), that together with the aggregate amount remaining in amount of
the Loss Escrow that is necessary in the reasonable judgment of Pegasus,
subject to the objection of the Securityholder Agent and the subsequent
arbitration of the matter in the manner provided in Section 11.04, to
satisfy any unsatisfied claims concerning facts and circumstances existing
prior to the termination of such Escrow Period specified in any Escrow
Certificate delivered to the Escrow Agent prior to termination of such
Escrow Period. As soon as all such claims for losses have been resolved,
the Escrow Agent shall deliver to the Company Stockholders the remaining
portion of the Cash Escrow not required to satisfy such claims plus any and
all interest that accrues on the Cash Escrow and shall deliver to the
Securityholder Agent for distribution to the Company Stockholders the
remaining portion of the Stock Escrow not required to satisfy such claims.
The Balance Sheet Escrow shall terminate upon (i) delivery to Pegasus of
shares of Pegasus Common Stock out of the Balance Sheet Escrow having a
value determined under Section 9.01(d)(ii) in an amount payable in
accordance with the terms of Section 3.05 or (ii) delivery to the Escrow
Agent of a cash payment in an amount payable in accordance with the terms
of Section 3.05 and prompt distribution after receipt thereof of such
amounts by the Escrow Agent to the Company Stockholders. As soon as all
claims relating to the Balance Sheet Escrow have been resolved, the Escrow
Agent shall deliver to the Securityholder Agent for distribution to the
Company Stockholders the remaining portion of the Balance Sheet Escrow not
required to satisfy such claims. Deliveries of Escrow Amounts or any
amounts arising out of cash payments required under Section 3.05 to the
Company Stockholders pursuant to this Section 9.01(b) shall be made in
proportion to their respective original contributions to the Escrow Fund as
described in Section 9.01(a).
(c) PROTECTION OF ESCROW FUND.
(i) The Escrow Agent shall hold and safeguard the Escrow Fund,
shall treat such fund as a trust fund in accordance with the terms of
this Agreement and not as the property of Pegasus and shall hold and
dispose of the Escrow Fund only in accordance with the terms hereof.
(ii) Any shares of Pegasus Common Stock or other equity securities
issued or distributed by Pegasus (including shares issued upon a stock
split) ("NEW SHARES") in respect of Pegasus Common Stock in the Escrow
Fund which have not been released from the Escrow Fund shall be added to
the Escrow Fund and become a part thereof. New Shares issued or cash
dividends of distributions paid in respect of shares of Pegasus Common
Stock which have been released from the Escrow Fund shall not be added
to the Escrow Fund but shall be distributed to the record holders
thereof. Cash dividends on Pegasus Common Stock which have not been
released from the Escrow Fund shall be added to the Escrow Fund.
(iii) Each of the Company Stockholders shall have voting rights
with respect to the shares of Pegasus Common Stock contributed to the
Escrow Fund by such Company Stockholder (and on any voting securities
added to the Escrow Fund in respect of such shares of Pegasus Common
Stock).
(d) CLAIMS UPON ESCROW FUND.
(i) Upon receipt by the Escrow Agent of a written notice or other
authorization signed by Pegasus and the Securityholder Agent, or signed
solely by the accounting firm that performs the services described in
Section 3.03, the Escrow Agent shall deliver to Pegasus out of the
Balance Sheet Escrow that number of shares of Pegasus Common Stock
having a value determined under Section 9.01(d)(ii) in an amount
specified in such authorization (plus any and all additional shares as
may be issued in respect of such shares upon any split, stock dividend
or recapitalization effected by Pegasus after the Effective Time). Upon
receipt by the Escrow Agent at any time on or before the last day of the
Escrow Period of one or more certificates signed by Pegasus (an "ESCROW
CERTIFICATE") (A) stating that Pegasus has paid or properly accrued or
reasonably anticipates that it will have to pay or accrue Losses and (B)
specifying in reasonable detail the individual items of Losses included
in the amount so stated, the date each such item
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was paid or properly accrued, or the basis for such anticipated
liability, and the basis for the claim on the Loss Escrow, the Escrow
Agent shall, subject to the provisions of Section 9.01(e) and subject to
the limitations of the last sentence of Section 9.01(a), deliver to
Pegasus out of the Loss Escrow, as promptly as practicable, an amount
from the Escrow Loss equal to such Losses (plus any and all additional
shares as may be issued in respect of such shares upon any split, stock
dividend or recapitalization effected by Pegasus after the Effective
Time and any and all interest that has accrued on such amount). Any
amount payable under this Section shall be paid out of the Loss Escrow
first in cash and, to the extent there are no cash amounts remaining in
the Escrow Loss, then in shares of Pegasus Common Stock (with a value
determined as to the Pegasus Common Stock in accordance with Section
9.01(d)(ii)).
(ii) The number of shares of Pegasus Common Stock to be deposited
in the Loss Escrow and the Balance Sheet Escrow and to be delivered to
Pegasus from time to time out of the Loss Escrow or the Balance Sheet
Escrow pursuant to Section 9.01 shall be determined by dividing the
aggregate value of the amount to be so deposited or delivered by the
average per share closing sale price of the Pegasus Common Stock for the
five (5) market trading days preceding the date that is three (3) days
before the Closing Date.
(e) OBJECTIONS TO CLAIMS. At the time of delivery of any Escrow
Certificate to the Escrow Agent, a duplicate copy of such certificate shall
be delivered to the Securityholder Agent. The Escrow Agent shall make
delivery of an amount that has a value equal to the amount of the Losses
stated in the Escrow Certificate (plus any and all interest that has
accrued on such amount), provided that no such payment or delivery may be
made if the Securityholder Agent shall object in a written statement to the
claim made in the Escrow Certificate and such statement shall have been
delivered to the Escrow Agent within thirty (30) days of the delivery of
the Escrow Certificate.
(f) RESOLUTION OF CONFLICTS; ARBITRATION.
(i) In case the Securityholder Agent shall so object in writing to
any claim made in any Escrow Certificate, the Securityholder Agent and
Pegasus shall attempt in good faith to agree upon the rights of the
respective parties with respect to such claim. If the Securityholder
Agent and Pegasus should so agree, a memorandum setting forth such
agreement shall be prepared and signed by both parties and shall be
furnished to the Escrow Agent. The Escrow Agent shall be entitled to
rely on any such memorandum and distribute amounts from the Loss Escrow
in accordance with the terms thereof.
(ii) If no such agreement can be reached after good faith
negotiation for thirty (30) days after delivery of the Securityholder
Agent's objection referred to in Section 9.01(f)(i), either Pegasus or
the Securityholder Agent may demand arbitration of the matter to be
conducted in accordance with Section 11.04, unless the amount of the
Loss is at issue in pending litigation with a third party, in which
event arbitration shall not be commenced until such amount is
ascertained or all parties including the third party agree to
arbitration.
(g) SECURITYHOLDER AGENT OF THE COMPANY STOCKHOLDERS: POWER OF
ATTORNEY.
(i) In the event that the Merger is completed, effective upon such
event, and without further act of any Company Stockholder, Henry
Horbaczewski, Frank M. Placenti and Vern Snider shall be appointed as
agent and attorney-in-fact (collectively, the "SECURITYHOLDER AGENT")
(with the act of any two such Persons as evidenced by a writing bearing
their original or facsimile signature or otherwise being the conclusive
act of the Securityholder Agent) for each Company Stockholder (except
such Company Stockholders, if any, as shall have perfected their
appraisal or dissenters' rights under the DGCL), for and on behalf of
the Company Stockholders, to give and receive notices and
communications, to authorize delivery of amounts of cash and shares of
Pegasus Common Stock from the Escrow Fund in satisfaction of claims by
Pegasus, to object to such deliveries, to agree to, negotiate, enter
into settlements and compromises of, and demand arbitration and comply
with orders of courts and awards of arbitrators with respect to
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such claims, and to take all actions necessary or appropriate in the
judgment of Securityholder Agent for the accomplishment of the
foregoing. Such agency may be changed by the Company Stockholders from
time to time upon not less than thirty (30) days prior written notice to
Pegasus; provided that the Securityholder Agent may not be removed
unless holders of a 85% interest in the Escrow Fund agree to such
removal and to the identity of the substituted agent. Any vacancy in the
position of Securityholder Agent may be filled by approval of the
holders of a an 85% interest of the Escrow Fund. No bond shall be
required of the Securityholder Agent, and the Securityholder Agent shall
not receive compensation for his or her services. Notices or
communications to or from the Securityholder Agent shall constitute
notice to or from each of the Company Stockholders.
(ii) The Securityholder Agent shall not be liable for any act done
or omitted hereunder as Securityholder Agent while acting in good faith
and in the exercise of reasonable judgment. The Stockholders on whose
behalf the Escrow Amount was contributed to the Escrow Fund shall
jointly and severally indemnify the Securityholder Agent and hold the
Securityholder Agent harmless against any loss, liability or expense
incurred without negligence or bad faith on the part of the
Securityholder Agent and arising out of or in connection with the
acceptance or administration of the Securityholder Agent's duties
hereunder, including the reasonable fees and expenses of any legal
counsel retained by the Securityholder Agent.
(h) ACTIONS OF THE SECURITYHOLDER AGENT. A decision, act, consent or
instruction of the Securityholder Agent shall constitute a decision of all
the Company Stockholders for whom a portion of the Escrow Amount otherwise
payable or issuable to them is deposited in the Escrow Fund and shall be
final, binding and conclusive upon each of such Company Stockholders, and
the Escrow Agent and Pegasus may rely upon any such decision, act, consent
or instruction of the Securityholder Agent as being the decision, act,
consent or instruction of each such Company Stockholder. The Escrow Agent
and Pegasus are hereby relieved from any liability to any person for any
acts done by them in accordance with such decision, act, consent or
instruction of the Securityholder Agent.
(i) THIRD PARTY CLAIMS. In the event Pegasus becomes aware of a
third-party claim which Pegasus believes may result in a demand against the
Loss Escrow, Pegasus shall notify the Securityholder Agent of such claim,
and the Securityholder Agent, as representative for the Company
Stockholders, shall be entitled, at the Company Stockholder's expense, to
participate in any defense of such claim. Pegasus shall not have the right
to settle any such claim without the prior consent of the Securityholder
Agent; provided that such approval shall not be unreasonably withheld. In
the event that the Securityholder Agent has consented to any such
settlement and acknowledged that the claim is a valid claim against the
Loss Escrow, the Securityholder Agent shall have no power or authority to
object under any provision of this Article IX to the amount of any claim by
Pegasus against the Loss Escrow with respect to such settlement.
(j) ESCROW AGENT'S DUTIES.
(i) The Escrow Agent shall be obligated only for the performance of
such duties as are specifically set forth herein and as are set forth in
any additional written instructions with respect to the Escrow that the
Escrow Agent may receive after the date of this Agreement which are
signed by an officer of Pegasus and the Securityholder Agent. The Escrow
Agent may rely and shall be protected in relying or refraining from
acting on any instrument reasonably believed to be genuine and to have
been signed or presented by the proper party or parties. The Escrow
Agent shall not be liable for any act done or omitted hereunder as
Escrow Agent while acting in good faith and in the exercise of
reasonable judgment, and any act done or omitted pursuant to the advice
of counsel shall be conclusive evidence of such good faith.
(ii) The Escrow Agent is hereby expressly authorized to disregard
any and all warnings given by any of the parties hereto or by any other
person, excepting only orders or process of courts of law, and is hereby
expressly authorized to comply with and obey orders, judgments or
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decrees of any court. In case the Escrow Agent obeys or complies with
any such order, judgment or decree of any court, the Escrow Agent shall
not be liable to any of the parties hereto or to any other person by
reason of such compliance, notwithstanding any such order, judgment or
decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.
(iii) The Escrow Agent shall not be liable in any respect on
account of the identity, authority or rights of the parties executing or
delivering or purporting to execute or deliver this Agreement or any
documents or papers deposited or called for hereunder.
(iv) The Escrow Agent shall not be liable for the expiration of any
rights under any statute of limitations with respect to this Agreement
or any documents deposited with the Escrow Agent.
(v) In performing any duties under the Agreement, the Escrow Agent
shall not be liable to any party for damages, losses, or expenses,
except for gross negligence or willful misconduct on the part of the
Escrow Agent. The Escrow Agent shall not incur any such liability for
(A) any act or failure to act made or omitted in good faith or (B) any
action taken or omitted in reliance upon any instrument, including any
written statement or affidavit provided for in this Agreement that the
Escrow Agent shall in good faith believe to be genuine. The Escrow Agent
shall not be liable or responsible for forgeries, fraud, impersonations,
or determining the scope of any representative authority. In addition,
the Escrow Agent may consult with the legal counsel in connection with
Escrow Agent's duties under this Agreement and shall be fully protected
in any act taken, suffered or permitted by the Escrow Agent in good
faith in accordance with the advice of counsel. The Escrow Agent is not
responsible for determining and verifying the authority of any person
acting or purporting to act on behalf of any party to this Agreement.
(vi) If any controversy arises between the parties to this
Agreement, or with any other party, concerning the subject matter of
this Agreement, its terms or conditions, the Escrow Agent will not be
required to determine the controversy or to take any action regarding
it. The Escrow Agent may hold all documents and cash amounts and shares
of Pegasus Common Stock and may wait for settlement of any such
controversy by final appropriate legal proceedings or other means as, in
the Escrow Agent's discretion, the Escrow Agent may be required, despite
what may be set forth elsewhere in this Agreement. In such event, the
Escrow Agent will not be liable for damage.
(vii) The Escrow Agent may, at its option, file an action of
interpleader requiring the parties to answer and litigate any claims and
rights among themselves. The Escrow Agent is authorized to deposit with
the clerk of the court all documents and all amounts of cash and shares
of Pegasus Common Stock held in escrow, except all costs, expenses,
charges and reasonable attorney fees incurred by the Escrow Agent due to
the interpleader action and which shall be paid equally by Pegasus and
the Securityholder Agent, on behalf of the Company Stockholders. Upon
initiating such action, the Escrow Agent shall be fully released and
discharged of and from all obligations and liability imposed by the
terms of this Agreement.
(viii) Pegasus and the Securityholder Agent, on behalf of the
Company Stockholders, shall indemnify and hold Escrow Agent harmless
against any and all losses, claims, damages, liabilities, and expenses,
including reasonable costs of investigation, counsel fees, and
disbursements that may be imposed on Escrow Agent or incurred by Escrow
Agent in connection with the performance of the Escrow Agent's duties
under this Agreement, including but not limited to any litigation
arising from this Agreement or involving its subject matter.
(ix) The Escrow Agent may resign at any time upon giving at least
thirty (30) days written notice to the parties; provided, however, that
no such resignation shall become effective until the appointment of a
successor escrow agent which shall be accomplished as follows: Pegasus
and the Securityholder Agent shall use all reasonable efforts to agree
on a successor escrow agent within thirty (30) days after receiving such
notice. If such parties fail to agree upon a successor escrow
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agent within such time, the Escrow Agent shall have the right to appoint
a successor escrow agent authorized to do business in the State of
Texas. The successor escrow agent shall execute and deliver an
instrument accepting such appointment and it shall, without further
acts, be vested with all the estates, properties, rights, powers, and
duties of the predecessor escrow agent as if originally named as escrow
agent. The Escrow Agent shall be discharged from any further duties and
liability under this Agreement.
(k) FEES. All fees of the Escrow Agent for performance of its duties
hereunder shall be paid equally by Pegasus and the Securityholder Agent, on
behalf of the Company Stockholders; provided that the portion of such fees
payable by the Company Stockholders shall be paid from the Escrow Fund. It
is understood that the fees and usual charges agreed upon for services of
the Escrow Agent shall be considered compensation for ordinary services as
contemplated by this Agreement. In the event that the conditions of this
Agreement are not promptly fulfilled, or if the Escrow Agent renders any
service not provided for in this Agreement, or if the parties request a
substantial modification of its terms, or if any controversy arises, or if
the Escrow Agent is made a party to, or intervenes in, any litigation
pertaining to this escrow or its subject matter, the Escrow Agent shall be
reasonably compensated for such extraordinary services and reimbursed for
all costs, attorney's fees, and expenses occasioned by such default, delay,
controversy or litigation. All such amounts shall be paid equally by
Pegasus and the Securityholder Agent, on behalf of the Company
Stockholders.
(l) TAX MATTERS. Pegasus shall provide and the Company shall cause the
Company Stockholders to provide Escrow Agent with their taxpayer
identification numbers documented by an appropriate Form W 8 or Form W 9 at
or prior to Closing. Failure to so provide such forms may prevent or delay
disbursements from the Escrow Fund and may also result in the assessment of
a penalty and Escrow Agent's being required to withhold tax on any interest
or other income earned on the Escrow Fund. Any payments of income shall be
subject to applicable withholding regulations then in force in the United
States or any other jurisdiction, as applicable.
(m) FUNDS TRANSFER. In the event funds transfer instructions are given
(other than in writing at the time of execution of the Agreement), whether
in writing, by telefax, or otherwise, the Escrow Agent is authorized to
seek confirmation of such instructions by telephone call-back to the person
or persons designated in the Notices provision of Section 11.03 of this
Agreement, and the Escrow Agent may rely upon the confirmations of anyone
purporting to be the person or persons so designated. The persons and
telephone numbers for call-backs may be changed only in writing actually
received and acknowledged by the Escrow Agent. The parties to this
Agreement acknowledge that such security procedure is commercially
reasonable.
(n) It is understood that the Escrow Agent and the beneficiary's bank
in any funds transfer may rely solely upon any account numbers or similar
identifying number provided by either of the other parties hereto to
identify (i) the beneficiary, (ii) the beneficiary's bank, or (iii) an
intermediary bank. The Escrow Agent may apply any portion of the Escrow
Fund for any payment order it executes using any such identifying number,
even where its use may result in a person other than the beneficiary being
paid, or the transfer of funds to a bank other than the beneficiary's bank
or an intermediary bank, designated.
(o) NOTICES. Any notice or other communication required or permitted
to be given pursuant to the terms and conditions set forth in Section 9.01
hereof shall be made in accordance with the terms and conditions of the
Notices provision set forth in Section 11.03 of this Agreement.
Section 9.02 INDEMNIFICATION BY PEGASUS.
(a) Subject to the limitations set forth in this Section 9.02, Pegasus
shall indemnify and hold harmless the Company and those Persons that are
or, pursuant to Section 7.10, are deemed to be stockholders of the Company
immediately prior to the Closing (hereinafter in this Section 9.02 referred
to individually as an "INDEMNIFIED PERSON" and collectively as "INDEMNIFIED
PERSONS") from
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and against any and all Losses incurred by any such Indemnified Person
directly or indirectly arising out of, relating to or in connection with
(i) any inaccuracy or breach of a representation or warranty of the Pegasus
or Newco contained in this Agreement or the certificates or other documents
delivered by such parties in connection with this Agreement or (ii) any
breach of any covenant or agreement of Pegasus or Newco contained in this
Agreement or the certificates or other documents delivered by such parties
in connection with this Agreement. The Indemnified Persons may not receive
any amounts under this Section 9.02 unless and until the Losses to the
Indemnified Persons exceed in the aggregate amount $1,500,000, and in such
case, the Indemnified Persons may recover the amount of Losses that exceed
such $1,500,000 amount.
(b) DEFENSE OF CLAIMS. Promptly after the receipt by any Indemnified
Party of notice or discovery of any claim, damage or legal action or
proceeding giving rise to indemnification rights under this Section 9.02,
such Indemnified Party will give Pegasus written notice of such claim,
damage, legal action or proceeding (for purposes of this Section 9.02, a
"CLAIM") in accordance with this Section 9.02. Within seven days of
delivery of such written notice, Pegasus may, with such Indemnified Party's
written consent, which shall not be unreasonably withheld, at the expense
of Pegasus, elect to take all necessary steps properly to contest any Claim
involving third parties or to prosecute or defend such Claim to conclusion
or settlement. If Pegasus makes the foregoing election, then Pegasus will
take all necessary steps to contest any such Claim or to prosecute or
defend such Claim to conclusion or settlement, and will notify such
Indemnified Party of the progress of any such Claim, will permit such
Indemnified Party, at its expense, to participate in such prosecution or
defense (provided, however, that if a conflict of interest exists which
would make it inappropriate, in the reasonable opinion of such Indemnified
Party, for the same counsel to represent both such Indemnified Party and
Pegasus in the resolution of such Claim, then such Indemnified Party may
retain separate counsel, and the fees and expenses of one such counsel for
all applicable Indemnified Parties shall be borne by Pegasus rather than by
any such Indemnified Party) and will provide such Indemnified Party with
reasonable access to all relevant information and documents relating to the
Claim and Pegasus' prosecution or defense thereof. If Pegasus does not make
such election, then such Indemnified Party shall be free to handle the
prosecution or defense of any such Claim, will take all necessary steps to
contest any such Claim involving third parties or to prosecute or defend
such Claim to conclusion or settlement, will notify Pegasus of the progress
of any such Claim, and will permit Pegasus, at the expense of Pegasus, to
participate in such prosecution or defense and will provide Pegasus with
reasonable access to all relevant information and documents relating to the
Claim and such Indemnified Party's prosecution or defense thereof. In
either case, the party not in control of a Claim will fully cooperate with,
and will cause its counsel, if any, to fully cooperate with, the other
party in the conduct of the prosecution or defense of such Claim. Neither
party will compromise or settle any such Claim without the written consent
of either such Indemnified Party (if Pegasus defends the Claim) or Pegasus
(if such Indemnified Party defends the Claim), such consent not to be
unreasonably withheld.
(c) NOTICE OF CLAIMS. Any written notice of a Claim required under
this Section 9.02 (for purposes of this Section 9.02, a "NOTICE OF CLAIM")
will be in writing and will contain the following information to the extent
reasonably available to such Indemnified Party:
(i) such Indemnified Party's good faith estimate of the reasonably
foreseeable maximum amount of the alleged Loss (which amount may be the
amount of damages claimed by a third party plaintiff in an action
brought against such Indemnified Party); and
(ii) A brief description in reasonable detail of the facts,
circumstances or events giving rise to the alleged Loss based on such
Indemnified Party's good faith belief thereof and the basis under this
Agreement for such Claim, including, without limitation, the identity
and address of any third-party claimant (to the extent reasonably
available to such Indemnified Party) and copies of any formal demand or
complaint.
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(d) All claims for indemnification under Section 9.02 must be asserted
prior to the expiration of the later of (i) first anniversary date of the
Effective Time or (ii) the date of the publication of the first audited
consolidated financial statements of Pegasus after the Effective Time (the
"INDEMNIFICATION PERIOD").
(e) The aggregate liability of Pegasus and Newco for indemnification
under this Section 9.02 shall not exceed in the aggregate $11,000,000.
Section 9.03 TAX INDEMNITY. If and only to the extent that Losses to
Pegasus under this Article IX exceed, in the aggregate, $1,500,000 and if an
insufficient amount of Escrow Funds are available therefor, the Company
Stockholders that execute this Agreement or a Company Voting Agreement shall
indemnify and hold harmless Pegasus, its affiliates and their respective
officers, directors, stockholders, employees, representatives and agents from
and against any Losses with respect to or in connection with any Taxes arising
out of or relating to matters prior to the Closing for a period of time equal to
the applicable statute of limitations with respect to such Taxes.
Section 9.04 EXCLUSIVITY OF REMEDIES. The remedies provided to the parties
in Article III and this Article IX shall be the exclusive remedies to which the
parties hereto and the stockholders of the Company are entitled after Closing
for any breach of or noncompliance with the provisions of this Agreement, any
ancillary agreement and any transactions contemplated hereby or thereby, except
for any Losses that occur as a result of intentional misrepresentations or
fraudulent acts of Pegasus, Newco, the Company or the Majority Stockholder.
ARTICLE X
TERMINATION
Section 10.01 TERMINATION. This Agreement may be terminated at any time
prior to the Effective Time of the Merger:
(a) by mutual written consent duly authorized by the Boards of
Directors of Pegasus and the Company; or
(b) by either Pegasus or the Company if the Merger shall not have been
consummated by April 1, 2000 (provided that if the Merger shall not have
been consummated due to the waiting period (or any extension thereof) under
the HSR Act not having expired or been terminated, or due to any delay by
the SEC or an action having been instituted by the Department of Justice or
Federal Trade Commission challenging or seeking to enjoin the consummation
of the Merger, then such date shall be extended to May 15, 2000, and
provided further that the right to terminate this Agreement under this
Section 10.01(b) shall not be available to any party whose action or
failure to act has been the cause of or resulted in the failure of the
Merger to occur on or before such date and such action or failure to act
constitutes a breach of this Agreement); or
(c) by either Pegasus or the Company if a court of competent
jurisdiction or governmental, regulatory or administrative agency or
commission shall (i) have issued an order, decree or ruling or taken any
other action, in any case having the effect of permanently restraining,
enjoining or otherwise prohibiting the Merger, which order, decree or
ruling is final and nonappealable, or (ii) seek to enjoin the Merger and
the terminating party reasonably believes that the time period required to
resolve such governmental action and the related uncertainty is reasonably
likely to have a Material Adverse Effect on Pegasus or a Material Adverse
Effect on the Company; or
(d) by either Pegasus or the Company, if the Company (i) shall have
accepted or recommended to the stockholders of the Company a Superior
Proposal and (ii) in the case of the termination of this Agreement by the
Company, the Company shall have paid to Pegasus all amounts owing by the
Company to Pegasus under Section 10.03(b); or
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(e) by Pegasus, if the Board of Directors of the Company shall have
withdrawn, modified or refrained from making its recommendation concerning
the Merger referred to in Section 7.12 or if a third party other than
Pegasus or any of its affiliates (including a person or a group as defined
under Section 13(d) of the Exchange Act and the rules and regulations
thereunder) acquires beneficial ownership of, or the right to acquire
beneficial ownership of, at least twenty percent (20%) of the Company's
outstanding voting equity securities; or
(f) by the Company, upon a breach of any representation, warranty,
covenant or agreement on the part of Pegasus set forth in this Agreement,
or if any representation or warranty of Pegasus shall have become untrue;
in either case such that the conditions set forth in Section 8.02(a) would
not be satisfied as of the time of such breach or as of the time such
representation or warranty shall have become untrue provided that in any
event Pegasus shall have 3 days following notice to cure such breach or
inaccuracy; or
(g) by Pegasus, upon a breach of any representation, warranty,
covenant or agreement on the part of the Company set forth in this
Agreement, or if any representation or warranty of the Company shall have
become untrue, in either case such that the conditions set forth in Section
8.03(a) would not be satisfied as of the time of such breach or as of the
time such representation or warranty shall have become untrue; provided
that in any event the Company shall have three (3) days to cure such breach
or inaccuracy.
Section 10.02 EFFECT OF TERMINATION. In the event of the termination
of this Agreement as provided in Section 10.01, this Agreement shall be of
no further force or effect, except (i) as set forth in this Section 10.02,
Section 7.16, Section 10.03 and Article XI, each of which shall survive the
termination of this Agreement, and (ii) nothing herein shall relieve any
party from liability for any breach of this Agreement.
Section 10.03 FEES AND EXPENSES.
(a) Except as set forth in this Section 10.03(a) or in Section
10.03(b), all fees and expenses incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by the party
incurring such expenses, whether or not the Merger is consummated;
provided, however, that Pegasus and the Company shall share equally all
fees and expenses, other than attorneys' and accountants' fees, incurred in
relation to the printing and filing of materials required under the HSR Act
and the S-4 (including financial statements and exhibits) and any
amendments or supplements thereto. Notwithstanding the preceding provisions
of this Section, if the Company's total fees and expenses associated with
the Merger, including the fees associated with the filing under the HSR Act
but excluding costs incurred in connection with Section 7.19(b) up to
$75,000 (collectively, the "TOTAL FEES") exceed $2.75 million, then any
Total Fees in excess of such amount (the "EXCESS FEES") shall be deducted
from the Gross Cash Amount payable under Section 2.01 and the Company will
have no further responsibility for the payment of the Excess Fees.
(b) Upon the occurrence of any of the following events, the Company
shall immediately make payment to Pegasus (by wire transfer in immediately
available funds or cashiers check) of a breakup fee in the amount of $7.5
million (the "Breakup Fee"): (i) the Company shall have accepted or
recommended to the stockholders of the Company a Superior Proposal; (ii)
the Board of Directors of the Company shall have withdrawn, modified or
refrained from making its recommendation concerning the Merger or shall
have disclosed its intention to change such recommendation, (iii) a third
party (including a person or a group as defined under Section 13(d) of the
Exchange Act and the rules and regulations thereunder) other than Pegasus
or its affiliates acquires after the date hereof beneficial ownership of,
or the right to acquire beneficial ownership of, at least 20% of the
Company's outstanding voting equity securities or (iv) the Company accepts
or recommends a Superior Proposal before March 1, 2001 with a party with
whom the Company conducted discussions regarding an Acquisition Proposal
prior to termination of the Merger Agreement.
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(c) Payment of the fees described in Section 10.03(b) above shall be
in lieu of any damages incurred as a result of events specified in such
Section or any other remedy that Pegasus may have therefor in law or
equity.
Section 10.04 PROMPT NOTICE. In the event of termination of this Agreement
by any party as provided in Article X, prompt written notice shall be given to
the other parties thereto.
ARTICLE XI
GENERAL PROVISIONS
Section 11.01 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND
COVENANTS. Unless otherwise provided herein, all representations and warranties
of the Company and the Majority Stockholder in this Agreement shall survive the
Merger and shall terminate upon expiration of the Escrow Period. The covenants
of the Company, the Securityholder Agent and the Company Stockholders contained
in Article IX shall survive the Merger and shall terminate upon the expiration
of the Escrow Period and upon the disposition of the Escrow Funds in accordance
with the provisions of Article IX. All representations and warranties of Pegasus
and Newco in this Agreement, shall survive the Merger and shall terminate upon
the expiration of the Indemnification Period. The covenants of Pegasus contained
in Article IX shall survive the Merger and shall terminate upon the expiration
of the Indemnification Period and payment of any amounts payable by Pegasus in
accordance with the provisions of Section 9.02. All other covenants contained in
this Agreement shall not survive the Merger, except for the covenants contained
in Article II and Article III and Sections 1.04 [Further Action], 7.10(b) [UK
Options], 7.18 [Confidential Information], 7.19 [Appointment of Majority
Stockholder Board Representative], 10.03 [Fees and Expenses], and Article XI
(other than Section 11.02 [Press Releases and Announcements], each of which
shall survive the Merger.
Section 11.02 PRESS RELEASES AND ANNOUNCEMENTS. Prior to the Closing Date,
no party hereto shall issue any press release or make any other public
announcement related to this Agreement or the transactions contemplated hereby
or make any announcement to the employees, customers or suppliers of the
Company, Pegasus or Newco without prior written approval of each other party
hereto, except as may be necessary, in the reasonable opinion of counsel to
Pegasus, to comply with the requirements of applicable law. If any such press
release or public announcement is so required, the party making such disclosure
shall consult with the other party prior to making such disclosure, and the
parties shall use all reasonable efforts, acting in good faith, to agree upon a
text for such disclosure which is satisfactory to both parties.
Section 11.03 NOTICES. All notices, demands and other communications to be
delivered under or by reason of the provisions of this Agreement will be in
writing and will be deemed to have been delivered upon receipt when delivered
personally or by overnight courier or three days after being mailed, if mailed
by first class mail, return receipt requested, or when receipt is acknowledged,
if sent by facsimile, telecopy or other electronic transmission device. Notices,
demands and communications to the parties hereto will, unless another address is
specified in writing, be sent to the address indicated below:
NOTICES TO PEGASUS OR NEWCO:
Pegasus Systems, Inc.
3811 Turtle Creek Drive, Suite 1100
Dallas, Texas 75219
Attention: Ric L. Floyd, Esq.
Facsimile: (214) 528-5675
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With a copy to:
Locke Liddell & Sapp LLP
2200 Ross Avenue, Suite 2200
Dallas, Texas 75201
Attention: Guy Kerr, Esq.
Facsimile: (214) 740-8800
NOTICES TO THE COMPANY:
Rez, Inc.
7500 N. Dreamy Draw Drive, Suite 120
Phoenix Arizona 85020
Attention: President
Facsimile: (602) 861-7630
With a copy to:
Bryan Cave, LLP
Two North Central Avenue, Suite 2200
Phoenix, Arizona 65004-4406
Attention: Frank M. Placenti, Esq.
Facsimile: (602) 364-7070
NOTICES TO THE MAJORITY STOCKHOLDER:
Reed Elsevier Inc.
275 Washington Street
Newton, Massachusetts 02458
Attn: General Counsel
Fax No.: (617) 558-4649
NOTICE TO ESCROW AGENT:
Chase Bank of Texas, National Association
2200 Ross Avenue, Suite 500
Dallas, Texas 75201
CMFS/Escrow Section
Facsimile: (214) 965-3577
NOTICES TO SECURITYHOLDER AGENT:
Vernon L. Snider
Rez, Inc.
7500 N. Dreamy Draw Drive, Suite 120
Phoenix Arizona 85020
Facsimile: (602) 861-7630
Frank M. Placenti, Esq.
Bryan Cave, LLP
Two North Central Avenue, Suite 2200
Phoenix, Arizona 65004-4406
Facsimile: (602) 364-7070
Henry Z. Horbaczewski
Reed Elsevier Inc.
275 Washington Street
Newton, Massachusetts 02458
Facsimile: (617) 558-4649
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Section 11.04 ARBITRATION. The parties agree that any controversy, claim
or dispute arising under Article IX of this Agreement shall, at the request of
either Pegasus or the Securityholder Agent be resolved by a private arbitration
proceeding conducted pursuant to the Rules of Commercial Arbitration of the
American Arbitration Association (the "AAA"). Such arbitration proceeding shall
be conducted by a single arbitrator selected by the mutual agreement of the
parties (the "ARBITRATOR"). If the parties are unable to agree on an Arbitrator
within ten (10) days following the request of a party to submit a matter to
arbitration the parties shall request AAA to provide a list of seven (7) names
from which the parties shall select the Arbitrator. If the parties are unable to
agree on a person on the list, the parties shall alternately strike names from
the list until one (1) name is left on the list. A coin toss shall determine
which party is entitled to strike the first name. The Arbitrator shall not be
any person who is an officer, director or employee or Affiliate of such party or
any person who has a direct or indirect personal or financial interest in the
outcome of the arbitration. The Arbitrator shall set a hearing date for an
arbitration proceeding (the "HEARING") in accordance with the Rules of
Commercial Arbitration of the AAA, unless otherwise agreed by the parties, or
unless otherwise ordered by the Arbitrator at the request of any party. The
Hearing shall be conducted and completed on consecutive days. The Hearing shall
be held in Dallas, Texas if the arbitration is requested by the Company or the
Securityholder Agent, and in Phoenix, Arizona if the arbitration is requested by
Pegasus. The Hearing shall be conducted in accordance with the following
procedures:
(a) Unless otherwise agreed, within thirty (30) days prior to the
Hearing, each party shall submit to the Arbitrator, with a copy to the
other parties, a list of all witnesses and exhibits which it intends to
present at the Hearing.
(b) No later than fifteen (15) days prior to the scheduled Hearing,
each party shall provide to the Arbitrator a short (not to exceed five (5)
single-spaced pages or such other page limits as the Arbitrator permits)
statement of its position with regard to the dispute.
(c) At the Hearing, each party shall, unless it waives the
opportunity, make an oral opening statement and an oral closing statement.
(d) The Arbitrator shall not be strictly bound by rules of procedure
or rules of evidence, but shall use the Federal Rules as a guideline in
conducting the Hearing.
(e) The Hearing shall be conducted in private. Attendance at the
Hearing shall be limited to the following: (i) the Arbitrator; (ii)
representatives of each party; (iii) each party's attorneys and attorneys'
assistants or advisors, if any, including expert witnesses, if any (iv) a
court reporter if requested by any party; and (v) any witnesses. The
Arbitrator may sequester witnesses upon the motion of a party.
(f) When testimony is complete and each party has introduced its
exhibits and made a closing statement or waived the opportunity to do so,
the Arbitrator shall declare the Hearing closed; provided, however, that
the parties may submit post-hearing briefs pursuant to an agreed upon
schedule or one formulated by the Arbitrator.
(g) Within thirty (30) days after the close of the Hearing or
submission of the post-hearing briefs, the Arbitrator shall issue a written
opinion and award (the "AWARD"), based on evidence, arguments and
post-hearing briefs, if any. The Award shall resolve the parties' dispute
and shall be final and binding on the parties. The Arbitrator shall have
the Award delivered to each party in accordance with Section 11.03.
(h) Except as otherwise provided in this Agreement, there shall be no
ex-parte communication regarding the subject matter of the Hearing between
a party or its attorneys and the Arbitrator from the time the Arbitrator is
appointed until after the parties receive the Award.
(i) The parties may agree to submit the dispute to the Arbitrator
without a Hearing, in which event the Arbitrator will render and deliver to
the parties a written opinion and Award within (30) days of being notified
that the parties waive the Hearing.
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(j) The non-prevailing party in the arbitration proceeding shall pay
the costs and expenses of the arbitration, including filing fees, fees of
the Arbitrator and costs, if any, of obtaining a location for the Hearing.
The Award may include provisions awarding costs, expenses and attorney's
fees to the prevailing party.
Section 11.05 WAIVER; AMENDMENT. A waiver of any default, breach or
non-compliance under this Agreement is not effective unless in writing and
signed by the party to be bound by the waiver. No waiver shall be inferred from
or implied by any failure to act or delay in acting by a party in respect of any
default, breach or non-observance or by anything done or omitted to be done by
the other party. The waiver by a party of any default, breach or non-compliance
under this Agreement shall not operate as a waiver of that party's rights under
this Agreement in respect of any continuing or subsequent default, breach or
non-observance (whether of the same or any other nature). No supplement,
modification or amendment of this Agreement shall be binding unless executed in
writing by all of the parties hereto. No course of dealing between or among any
Persons having any interest in this Agreement will be deemed effective to modify
or amend any part of this Agreement or any rights or obligations of any Person
under or by reason of this Agreement.
Section 11.06 ASSIGNMENT. This Agreement and all of the provisions hereof
will be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, except that neither this Agreement
nor any of the rights, interests or obligations hereunder may be assigned or
conveyed by operation of law or otherwise by any party hereto without the prior
written consent of the other parties hereto.
Section 11.07 SEVERABILITY. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision will be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of such provision or the remaining provisions of this Agreement.
Section 11.08 TIME OF ESSENCE. Time shall be of the essence of this
Agreement in all respects.
Section 11.09 ENTIRE AGREEMENT. This Agreement, the schedules hereto, the
Company Ancillary Agreements and the Pegasus Ancillary Agreements and the
exhibits thereto and other documents referred to herein contain the complete
agreement between the parties and supersedes all prior agreements,
understandings, negotiations and discussions, whether oral or written.
Section 11.10 INTERPRETATION. When a reference is made in this Agreement
to an Article, Section or Schedule, such reference shall be to an Article,
Section or Schedule of this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include", "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation". All accounting terms not defined in this Agreement shall have the
meanings determined by generally accepted accounting principles.
Section 11.11 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, any one of which need not contain the signatures of more than one
party, but all such counterparts taken together will constitute one and the same
instrument.
Section 11.12 GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE. ALL REMEDIES AT LAW, IN
EQUITY, BY STATUTE OR OTHERWISE SHALL BE CUMULATIVE AND MAY BE ENFORCED
CONCURRENTLY OR FROM TIME TO TIME AND, SUBJECT TO THE EXPRESS TERMS OF THIS
AGREEMENT, THE ELECTION OF ANY REMEDY OR REMEDIES SHALL NOT CONSTITUTE A WAIVER
OF THE RIGHT TO PURSUE ANY OTHER AVAILABLE REMEDIES.
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Section 11.13 KNOWLEDGE.
(a) As used herein, the term "KNOWLEDGE OF THE COMPANY" or similar
terms shall mean the actual knowledge after due inquiry (including, without
limitation, inquiry of other Persons within the organization having
knowledge of the subject matter and any professionals retained with respect
to any such matter) of the following Persons: Nigel Stapleton, I. Malcolm
Highet, W. Thomas Castleberry, Joseph Atteridge, Vernon L. Snider, Kris
Schloemer, Raymond Martin, David Heuck, Ryan Benton, Rashid Bengougam, John
Holdsworth, Richard Sauerbrun, Alan White, Heather Blaseby, Michael Ball,
Nassir Kassum, Geoff Andrew, Lyle Hobbs.
(b) As used herein, the term "KNOWLEDGE OF THE MAJORITY STOCKHOLDER"
or similar terms shall mean the actual knowledge after due inquiry
(including, without limitation, inquiry of other Persons within the
organization having knowledge of the subject matter and any professionals
retained with respect to any such matter) of the following Persons: Mark
Armour (Finance Director -- Reed Elsevier plc), Henry Horbaczewski (General
Counsel -- Reed Elsevier Inc.), Charles Fontaine (Vice
President -- Tax -- Reed Elsevier Inc.), Monica Albano (Vice
President -- Human Resources -- Reed Elsevier Inc.), Anne Joseph (Legal
Director -- Reed Elsevier (UK) Limited), David Fuller (Tax Director -- Reed
Elsevier (UK) Limited), and Chris D. Thomas (Director of Benefits -- Reed
Elsevier (UK) Limited).
(c) As used herein, the term "KNOWLEDGE OF PEGASUS" or similar terms
shall mean the actual knowledge actual knowledge after due inquiry
(including, without limitation, inquiry of other Persons within the
organization having knowledge of the subject matter and any professionals
retained with respect to any such matter) of the following Persons: John F.
Davis, III, Joseph W. Nicholson, Jerome L. Galant, Ric L. Floyd, Steve
Reynolds, Bryan Donowho, Jeff Bzdawka and Kevin Short.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement of the
day and year first above written.
PEGASUS:
PEGASUS SYSTEMS, INC., a Delaware
corporation
By: /s/ JOHN F. DAVIS, III
----------------------------------
John F. Davis, III
Chief Executive Officer
NEWCO:
PEGASUS WORLDWIDE, INC., a
Delaware corporation
By: /s/ RIC L. FLOYD
----------------------------------
Name: Ric L. Floyd
------------------------------------
Title: President
---------------------------------
COMPANY:
REZ, INC., a Delaware corporation
By: /s/ I. M. HIGHET
----------------------------------
Name: I.M. Highet
--------------------------------
Title: President & CEO
---------------------------------
MAJORITY STOCKHOLDER:
REED ELSEVIER INC. (solely for those
Sections described in Recital C)
By: /s/ HENRY Z. HORBACZEWSKI
----------------------------------
Name: Henry Z. Horbaczewski
--------------------------------
Title: Senior Vice President
---------------------------------
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UTELL INTERNATIONAL GROUP, LTD.
(solely for those Sections described
in Recital C)
By: /s/ HENRY Z. HORBACZEWSKI
----------------------------------
Name: Henry Z. Horbaczewski
--------------------------------
Title: Attorney-in-Fact
---------------------------------
ESCROW AGENT (as to only Sections
9.01 and
Article XI except for Section
11.02):
By: /s/ KATHLEEN WAGNER
----------------------------------
Name: Kathleen Wagner
--------------------------------
Title: Vice President
---------------------------------
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APPENDIX B
REZ VOTING AGREEMENT
(MAJORITY STOCKHOLDER)
REZ, INC.
VOTING AGREEMENT
This Voting Agreement ("AGREEMENT") is made and entered into as of November
16, 1999 between Pegasus Systems, Inc., a Delaware corporation ("PEGASUS"), and
Reed Elsevier Inc., a Massachusetts corporation, and Utell International Group,
Ltd., a corporation organized under the laws of England and Wales (collectively,
the "STOCKHOLDER").
RECITALS
A. Concurrently with the execution of this Agreement, Pegasus, Rez, Inc., a
Delaware corporation ("REZ"), the Stockholder and Pegasus Worldwide, Inc.,
a Delaware corporation and a wholly owned subsidiary of Pegasus ("MERGER
SUB"), have entered into an Agreement and Plan of Merger of even date
herewith (the "MERGER AGREEMENT") which provides for the merger (the
"MERGER") of Merger Sub with and into Rez. Pursuant to the Merger, shares
of Common Stock of Rez will be converted into the right to receive the
"MERGER CONSIDERATION" as defined in and provided for in the Merger
Agreement. Capitalized terms not defined herein shall have the meanings
ascribed to them in the Merger Agreement.
B. The Stockholder is the record holder and beneficial owner (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT")) of such number of shares of the outstanding Common Stock
of Rez as is indicated on the final page of this Agreement (the "SHARES").
C. As a material inducement to enter into the Merger Agreement, Pegasus
desires the Stockholder to agree, and the Stockholder is willing to agree,
not to transfer or otherwise dispose of any of the Shares, or any other
shares of capital stock of Rez acquired hereafter and prior to the
Expiration Date (as defined in Section 1(a) below), except as otherwise
permitted hereby, and to vote the Shares and any other such shares of
capital stock of Rez so as to facilitate consummation of the Merger.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, the parties agree as follows:
1. AGREEMENT TO RETAIN SHARES.
(a) TRANSFER AND ENCUMBRANCE. Stockholder agrees not to transfer
(except as may be specifically required by court order), sell, exchange,
pledge or otherwise dispose of or encumber any of the Shares or any New
Shares as defined in Section 1(b) below, or to make any offer or agreement
relating thereto, at any time prior to the Expiration Date. As used herein,
the term "EXPIRATION DATE" shall mean the earliest to occur of: (i) such
date as the Merger shall become effective in accordance with the terms and
provisions of the Merger Agreement; (ii) a material breach of the Merger
Agreement by Pegasus or Newco, which breach shall not have been cured
within the time periods specified therein (and which breach would permit
termination of the Merger Agreement by Rez); (iii) termination of the
Merger Agreement pursuant to Section 10.01(a), 10.01(b), 10.01(c),
10.01(d), 10.01(e), 10.01(f) or Section 10.01(g), provided however that
this Agreement shall not terminate if the Company enters into a definitive
written agreement to consummate a Superior Proposal within one year
following termination of the Merger Agreement with a party with whom the
Company conducted discussions regarding an Acquisition Proposal prior to
termination of the Merger Agreement pursuant to Section 10.01(g) thereof
unless and until the Company has paid the Break-Up Fee required by Section
7.12 of the Merger Agreement; or (iv) one (1) year following any
termination of the Merger Agreement.
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(b) ADDITIONAL PURCHASES. Stockholder agrees that any shares of
capital stock of Rez that Stockholder purchases or with respect to which
Stockholder otherwise acquires beneficial ownership (as such term is
defined in Rule 13d-3 under the Exchange Act) after the execution of this
Agreement and prior to the Expiration Date ("NEW SHARES") shall be subject
to the terms and conditions of this Agreement to the same extent as if they
constituted Shares.
2. AGREEMENT TO VOTE SHARES. Prior to the Expiration Date, at every meeting
of the stockholders of Rez called with respect to any of the following, and at
every adjournment thereof, and on every action or approval by written consent of
the stockholders of Rez with respect to any of the following, Stockholder shall
vote the Shares and any New Shares: (i) in favor of approval of the Merger
Agreement and the Merger and any matter that could reasonably be expected to
facilitate the Merger; and (ii) against approval of any proposal made in
opposition to or competition with consummation of the Merger and against any
merger, consolidation, sale of assets, reorganization or recapitalization, with
any party other than with Pegasus and its affiliates and against any liquidation
or winding up of Rez (each of the foregoing is hereinafter referred to as an
"OPPOSING PROPOSAL"). Stockholder agrees not to take any actions contrary to
Stockholder's obligations under this Agreement.
3. IRREVOCABLE PROXY. Concurrently with the execution of this Agreement,
Stockholder agrees to deliver to Pegasus a proxy in the form attached hereto as
Annex A (the "PROXY"), which shall be irrevocable, with respect to the total
number of shares of capital stock of Rez beneficially owned (as such term is
defined in Rule 13d-3 under the Exchange Act) by Stockholder set forth therein.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE
STOCKHOLDER. Stockholder hereby represents, warrants and covenants to Pegasus as
follows:
(a) OWNERSHIP OF SHARES. Stockholder (i) is the beneficial owner of
the Shares, which at the date hereof and at all times up until the
Expiration Date will be free and clear of any liens, claims, options,
charges or other encumbrances; (ii) does not beneficially own any shares of
capital stock of Rez other than the Shares (excluding shares as to which
Stockholder currently disclaims beneficial ownership in accordance with
applicable law) and the outstanding shares of Series A Preferred Stock of
Rez; and (iii) has full power and authority to make, enter into and carry
out the terms of this Agreement and the Proxy.
(b) ACCREDITED INVESTOR. The Stockholder hereby acknowledges and
represents that such stockholder is familiar with and understands the
definition of the term "accredited investor" set forth in Rule 501(a)
promulgated under the Securities Act of 1933, as amended (the "SECURITIES
ACT"). The Stockholder represents and warrants that such stockholder (i) is
an "accredited investor" and has such knowledge and experience in financial
and business matters that such Stockholder is capable of evaluating the
merits and risks of an investment in the common stock, $.01 par value per
share, of Pegasus (the "PEGASUS COMMON STOCK"), which will be included in
the Merger Consideration, (ii) fully understands the nature, scope and
duration of the limitations on transfer of Pegasus Common Stock received
hereunder, described in the Merger Agreement and (iii) can bear the
economic risk of an investment in the shares of Pegasus Common Stock and
can afford a complete loss of such investment.
(c) RECEIPT OF INFORMATION. The Stockholder (i) has received copies of
Pegasus' Form 10-K for the period ended December 31, 1998 (the "FORM
10-K"), the Company's Proxy Statement for the 1999 Annual Stockholders'
Meeting ("PROXY STATEMENT") and Pegasus' Reports (the "REPORTS") on Form
10-Q for the fiscal quarters ended March 31, 1999, June 30, 1999 and
September 30, 1999 (the Form 10-K, Proxy Statement and the Reports
collectively referred to herein as the "PEGASUS SEC DOCUMENTS") and (ii)
has had the opportunity to ask questions of and receive answers from
Pegasus concerning the terms and conditions of this Agreement and to obtain
from Pegasus any additional information that Pegasus possesses or can
acquire without unreasonable effort or expense necessary to verify the
accuracy of the information described in the Pegasus SEC Documents.
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(d) NO RELIANCE. The Stockholder has not relied, in connection with
this transaction, upon any statements, representations, warranties or
agreements other than those set forth in the documents referred to in this
Agreement.
(e) DISTRIBUTION. The Stockholder represents that there is no current
plan or intention by such Stockholder to sell, exchange or otherwise
dispose of any of the shares of Pegasus Common Stock received by such
Stockholder in the Merger as of the Closing Date, except as contemplated in
the Merger Agreement.
(f) NO PROXY SOLICITATIONS. Stockholder will not, and will not permit
any entity under Stockholder's control to: (i) solicit proxies or become a
"participant" in a "solicitation" (as such terms are defined in Regulation
14A under the Exchange Act) with respect to an Opposing Proposal or
otherwise encourage or assist any party in taking or planning any action
that would compete with, restrain or otherwise serve to interfere with or
inhibit the timely consummation of the Merger in accordance with the terms
of the Merger Agreement; (ii) initiate a stockholders' vote or action by
consent of Rez stockholders with respect to an Opposing Proposal; or (iii)
become a member of a "group" (as such term is used in Section 13(d) of the
Exchange Act) with respect to any voting securities of Rez with respect to
an Opposing Proposal provided however that nothing herein shall prevent or
restrict Henry Horbaczewski or any other director of Rez from participating
in the deliberation of the Board of Directors of Rez with respect to an
Opposing Proposal or taking any actions in connection therewith consistent
with his fiduciary duties as permitted by the Merger Agreement.
5. ADDITIONAL DOCUMENTS. Stockholder hereby covenants and agrees to execute
and deliver any additional documents necessary or desirable, in the reasonable
opinion of Pegasus and Stockholder, as the case may be, to carry out the intent
of this Agreement.
6. CONSENT, WAIVER AND AMENDMENT. Stockholder hereby gives any consents or
waivers that are reasonably required for the consummation of the Merger under
the terms of any agreements to which Stockholder is a party or pursuant to any
rights Stockholder may have. Without limiting the foregoing, the Stockholder
hereby votes to amend the Stockholders Agreement by and among Rez, Reed Elsevier
Inc., Utell International Group, Ltd. and certain other holders of equity
interests in Rez to provide that Section 6.2 [Drag Along Rights] and Section 6.3
[Certain Rights of Inclusion] and Section 6.4 [Right of First Refusal] shall not
apply to the Merger or the Merger Agreement.
7. TERM. This Agreement and the Proxy delivered in connection herewith
shall terminate and shall have no further force or effect on and as of the
Expiration Date.
8. GENERAL.
(a) SEVERABILITY. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
void or unenforceable, then the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.
(b) BINDING EFFECT AND ASSIGNMENT. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns, but,
except as otherwise specifically provided herein, neither this Agreement
nor any of the rights, interests or obligations of the parties hereto may
be assigned by either of the parties without prior written consent of the
other.
(c) AMENDMENTS AND MODIFICATION. This Agreement may not be modified,
amended, altered or supplemented except upon the execution and delivery of
a written agreement executed by the parties hereto.
(d) SPECIFIC PERFORMANCE; INJUNCTIVE RELIEF. The parties hereto
acknowledge that Pegasus will be irreparably harmed and that there will be
no adequate remedy at law for a violation of any of the
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covenants or agreement of Stockholder set forth herein. Therefore, it is
agreed that, in addition to any other remedies that may be available to
Pegasus upon any such violation, Pegasus shall have the right to enforce
such covenants and agreements by specific performance, injunctive relief or
by any other means available to Pegasus at law or in equity.
(e) NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and sufficient if delivered in
person, by cable, telegram or telex, or sent by mail (registered or
certified mail, postage prepaid, return receipt requested) or overnight
courier (prepaid) to the respective parties as follows:
If to Pegasus: Pegasus Systems, Inc.
3811 Turtle Creek Blvd.
Suite 1100
Dallas, Texas 75219
Facsimile: (214) 528-5675
With a copy to: Locke Liddell & Sapp LLP
2200 Ross Avenue, Suite 2200
Dallas, Texas 75201
Attention: Guy Kerr
Facsimile: (214) 740-8800
If to the
Stockholder: At the address provided on the signature page hereto
or to such other address as any party may have furnished to the other in
writing in accordance herewith, except that notices of change of address
shall only be effective upon receipt.
8.6 GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Delaware without giving
effect to the conflicts of laws principles thereof.
8.7 ENTIRE AGREEMENT. This Agreement contains the entire understanding of
the parties in respect of the subject matter hereof, and supersedes all prior
negotiations and understandings between the parties with respect to such subject
matter.
8.8 COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be an original, but all of which together shall constitute
one and the same agreement.
8.9 EFFECT OF HEADINGS. The section headings herein are for convenience
only and shall not affect the construction of interpretation of this Agreement.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties have caused this Voting Agreement to be
duly executed on the date and year first above written.
PEGASUS SYSTEMS, INC.
By: /s/ JEROME L. GALANT
----------------------------------
Name: Jerome L. Galant
Title: Chief Financial Officer
STOCKHOLDER
REED ELSEVIER INC.
By: /s/ HENRY Z. HORBACZEWSKI
----------------------------------
Name: Henry Z. Horbaczewski
Title: Senior Vice President
UTELL INTERNATIONAL GROUP, LTD
By: /s/ HENRY Z. HORBACZEWSKI
----------------------------------
Name: Henry Z. Horbaczewski
Title: Attorney-in-Fact
Stockholder's Address for Notice:
Reed Elsevier Inc.
275 Washington Street
Newton, Massachusetts 02458
Attn: General Counsel
Fax No.: (617) 558-4649
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ANNEX A
IRREVOCABLE PROXY
(MAJORITY STOCKHOLDER)
Each undersigned Stockholder (collectively, the "STOCKHOLDER") of Rez,
Inc., a Delaware corporation ("REZ"), hereby irrevocably appoints the directors
on the Board of Directors of Pegasus Systems, Inc., a Delaware corporation
("PEGASUS"), and each of them, as the sole and exclusive attorneys and proxies
of the undersigned, with full power of substitution and resubstitution, to the
full extent of the undersigned's rights with respect to the shares of capital
stock of Rez beneficially owned by the undersigned, which shares are listed on
the final page of this Irrevocable Proxy (the "SHARES"), and any and all other
shares or securities issued or issuable in respect thereof on or after the date
hereof, until the earlier to occur of (i) the effectiveness of the Merger (as
defined in the Agreement and Plan of Merger (the "MERGER AGREEMENT") dated
November 16, 1999 by and among Pegasus, Rez, the Stockholder and Pegasus
Worldwide, Inc., a Delaware corporation and a wholly owned subsidiary of Pegasus
and (ii) the termination of the Voting Agreement (as defined below) in
accordance with its terms. Upon the execution hereof, all prior proxies given by
the undersigned with respect to the Shares and any and all other shares or
securities issued or issuable in respect thereof on or after the date hereof are
hereby revoked and no subsequent proxies will be given.
This proxy is irrevocable, is granted pursuant to the Voting Agreement
dated as of November 16, 1999 between Pegasus and the undersigned Stockholder
(the "VOTING AGREEMENT"), and is granted in consideration of Pegasus entering
into the Merger Agreement. Pegasus and the undersigned Stockholder agree and
acknowledge that the grant of this irrevocable proxy is a material inducement
for Pegasus to enter into the Merger Agreement and is therefore coupled with an
interest and irrevocable. The attorneys and proxies named above will be
empowered at any time prior to either termination of the Merger Agreement or the
Effective Time, as the case may be, to exercise all voting and other rights
(including, without limitation, the power to execute and deliver written
consents with respect to the Shares) of the undersigned at every annual, special
or adjourned meeting of Rez stockholders, and in every written consent in lieu
of such a meeting, or otherwise, in favor of approval of the Merger and the
Merger Agreement and any matter that could reasonably be expected to facilitate
the Merger, and against any proposal made in opposition to or competition with
the consummation of the Merger and against any merger, consolidation, sale of
assets, reorganization or recapitalization of Rez with any party other than
Pegasus and its affiliates and against any liquidation or winding up of Rez.
The attorneys and proxies named above may only exercise this proxy to vote
the Shares subject hereto at any time prior to either termination of the Merger
Agreement or the Effective Time, as the case may be, at every annual, special or
adjourned meeting of the stockholders of Rez and in every written consent in
lieu of such meeting, in favor of approval of the Merger and the Merger
Agreement and any matter that could reasonably be expected to facilitate the
Merger, and against any merger, consolidation, sale of assets, reorganization or
recapitalization of Rez with any party other than Pegasus and its affiliates,
and against any liquidation or winding up of Rez, and may not exercise this
proxy on any other matter. The undersigned Stockholder may vote the Shares on
all other matters.
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Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned.
This proxy is irrevocable.
Dated: November 16, 1999
REED ELSEVIER INC.
By: /s/ HENRY Z. HORBACZEWSKI
----------------------------------
Name: Henry Z. Horbaczewski
Title: Senior Vice President
Shares beneficially owned:
2,300,285 shares of Common Stock
Stockholder's Address for Notice:
Reed Elsevier Inc.
275 Washington Street
Newton, Massachusetts 02458
Attn: General Counsel
Fax No.: (617) 558-4649
UTELL INTERNATIONAL GROUP, LTD
By: /s/ HENRY Z. HORBACZEWSKI
----------------------------------
Name: Henry Z. Horbaczewski
Title: Attorney-in-Fact
Shares beneficially owned:
20,446,936 shares of Common Stock
c/o Reed Elsevier Inc.
275 Washington Street
Newton, Massachusetts 02458
Attn: General Counsel
Fax No.: (617) 558-4649
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APPENDIX C
FORM OF REZ VOTING AGREEMENT
(PARTIES OTHER THAN MAJORITY STOCKHOLDER)
REZ, INC.
VOTING AGREEMENT
This Voting Agreement ("AGREEMENT") is made and entered into as of November
16, 1999 between Pegasus Systems, Inc., a Delaware corporation ("PEGASUS"), and
the undersigned stockholder ("STOCKHOLDER") of Rez, Inc. a Delaware corporation
("REZ").
RECITALS
A. Concurrently with the execution of this Agreement, Pegasus, Rez and Pegasus
Worldwide, Inc., a Delaware corporation and a wholly owned subsidiary of
Pegasus ("MERGER SUB"), have entered into an Agreement and Plan of Merger
of even date herewith (the "MERGER AGREEMENT") which provides for the
merger (the "MERGER") of Merger Sub with and into Rez. Pursuant to the
Merger, shares of Common Stock of Rez will be converted into the right to
receive the "Merger Consideration" as defined in and provided for in the
Merger Agreement.
B. The Stockholder is the record holder and beneficial owner (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT")) of such number of shares of the outstanding Common Stock
of Rez as is indicated on the final page of this Agreement (the "Shares").
C. As a material inducement to enter into the Merger Agreement, Pegasus
desires the Stockholder to agree, and the Stockholder is willing to agree,
not to transfer or otherwise dispose of any of the Shares, or any other
shares of capital stock of Rez acquired hereafter and prior to the
Expiration Date (as defined in Section 1.1 below), except as otherwise
permitted hereby, and to vote the Shares and any other such shares of
capital stock of Rez so as to facilitate consummation of the Merger.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, the parties agree as follows:
1. AGREEMENT TO RETAIN SHARES.
(a) TRANSFER AND ENCUMBRANCE. Stockholder agrees not to transfer
(except as may be specifically required by court order), sell, exchange,
pledge or otherwise dispose of or encumber any of the Shares or any New
Shares as defined in Section 1(b) below, or to make any offer or agreement
relating thereto, at any time prior to the Expiration Date. As used herein,
the term "Expiration Date" shall mean the earlier to occur of (i) such date
and time as the Merger shall become effective in accordance with the terms
and provisions of the Merger Agreement, (ii) a material breach of the
Merger Agreement by Pegasus or Newco, which breach shall not have been
cured within the time periods specified therein (and which breach would
permit termination of the Merger Agreement by Rez); and (iii) termination
of the Merger Agreement pursuant to Section 10.01 and, if applicable, any
Break-Up Fee (as defined in the Merger Agreement) payable in connection
therewith shall have been paid in full.
(b) ADDITIONAL PURCHASES. Stockholder agrees that any shares of
capital stock of Rez that Stockholder purchases or with respect to which
Stockholder otherwise acquires beneficial ownership (as such term is
defined in Rule 13d-3 under the Exchange Act) after the execution of this
Agreement and prior to the Expiration Date ("NEW SHARES") shall be subject
to the terms and conditions of this Agreement to the same extent as if they
constituted Shares.
2. AGREEMENT TO VOTE SHARES. Prior to the Expiration Date, at every meeting
of the stockholders of Rez called with respect to any of the following, and at
every adjournment thereof, and on every action or
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approval by written consent of the stockholders of Rez with respect to any of
the following, Stockholder shall vote the Shares and any New Shares: (i) in
favor of approval of the Merger Agreement and the Merger and any matter that
could reasonably be expected to facilitate the Merger; and (ii) against approval
of any proposal made in opposition to or competition with consummation of the
Merger and against any merger, consolidation, sale of assets, reorganization or
recapitalization, with any party other than with Pegasus and its affiliates and
against any liquidation or winding up of Rez (each of the foregoing is
hereinafter referred to as an "OPPOSING PROPOSAL"). Stockholder agrees not to
take any actions contrary to Stockholder's obligations under this Agreement.
3. IRREVOCABLE PROXY. Concurrently with the execution of this Agreement,
Stockholder agrees to deliver to Pegasus a proxy in the form attached hereto as
Annex A (the "PROXY"), which shall be irrevocable, with respect to the total
number of shares of capital stock of Rez beneficially owned (as such term is
defined in Rule 13d-3 under the Exchange Act) by Stockholder set forth therein.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE
STOCKHOLDER. Stockholder hereby represents, warrants and covenants to Pegasus as
follows:
(a) OWNERSHIP OF SHARES. Stockholder (i) is the beneficial owner of
the Shares, which at the date hereof and at all times up until the
Expiration Date will be free and clear of any liens, claims, options,
charges or other encumbrances; (ii) does not beneficially own any shares of
capital stock of Rez other than the Shares (excluding shares as to which
Stockholder currently disclaims beneficial ownership in accordance with
applicable law); and (iii) has full power and authority to make, enter into
and carry out the terms of this Agreement and the Proxy.
(b) ACCREDITED INVESTOR. The Stockholder hereby acknowledges and
represents that such stockholder is familiar with and understands the
definition of the term "accredited investor" set forth in Rule 501(a)
promulgated under the Securities Act of 1933, as amended (the "SECURITIES
ACT"). The Stockholder represents and warrants that such stockholder (i) is
an "accredited investor" and has such knowledge and experience in financial
and business matters that such Stockholder is capable of evaluating the
merits and risks of an investment in the common stock, $.01 par value per
share, of Pegasus (the "PEGASUS COMMON STOCK"), which will be included in
the Merger Consideration, (ii) fully understands the nature, scope and
duration of the limitations on transfer of Pegasus Common Stock received
hereunder, described in the Merger Agreement and (iii) can bear the
economic risk of an investment in the shares of Pegasus Common Stock and
can afford a complete loss of such investment.
(c) RECEIPT OF INFORMATION. The Stockholder (i) has had access to
copies of Pegasus' Form 10-K for the period ended December 31, 1998 (the
"FORM 10-K"), the Company's Proxy Statement for the 1999 Annual
Stockholders' Meeting ("PROXY STATEMENT") and Pegasus' Reports (the
"REPORTS") on Form 10-Q for the fiscal quarters ended March 31, 1999, June
30, 1999 and September 30, 1999 (the Form 10-K, Proxy Statement and the
Reports collectively referred to herein as the "PEGASUS SEC DOCUMENTS") and
(ii) has had the opportunity to ask questions of and receive answers from
Pegasus concerning the terms and conditions of this Agreement and to obtain
from Pegasus any additional information that Pegasus possesses or can
acquire without unreasonable effort or expense necessary to verify the
accuracy of the information described in the Pegasus SEC Documents.
(d) NO RELIANCE. The Stockholder has not relied, in connection with
this transaction, upon any statements, representations, warranties or
agreements other than those set forth in the documents referred to in this
Agreement.
(e) DISTRIBUTION. The Stockholder represents that there is no current
plan or intention by such Stockholder to sell, exchange or otherwise
dispose of any of the shares of Pegasus Common Stock received by such
Stockholder in the Merger as of the Closing Date, except as contemplated in
the Merger Agreement.
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(f) NO PROXY SOLICITATIONS. Stockholder will not, and will not permit
any entity under Stockholder's control to: (i) solicit proxies or become a
"participant" in a "solicitation" (as such terms are defined in Regulation
14A under the Exchange Act) with respect to an Opposing Proposal or
otherwise encourage or assist any party in taking or planning any action
that would compete with, restrain or otherwise serve to interfere with or
inhibit the timely consummation of the Merger in accordance with the terms
of the Merger Agreement; (ii) initiate a stockholders' vote or action by
consent of Rez stockholders with respect to an Opposing Proposal; or (iii)
become a member of a "group" (as such term is used in Section 13(d) of the
Exchange Act) with respect to any voting securities of Rez with respect to
an Opposing Proposal provided however that nothing herein shall prevent or
restrict Henry Horbaczewski or any other director at Rez from participating
in the deliberation of the Board of Directors of Rez with respect to any
Opposing Proposal or taking any actions in connection therewith consistent
with his fiduciary duties as permitted by the Merger Agreement.
5. ADDITIONAL DOCUMENTS. Stockholder hereby covenants and agrees to execute
and deliver any additional documents necessary or desirable, in the reasonable
opinion of Pegasus and Stockholder, as the case may be, to carry out the intent
of this Agreement.
6. CONSENT, WAIVER AND AMENDMENT. Stockholder hereby gives any consents or
waivers that are reasonably required for the consummation of the Merger under
the terms of any agreements to which Stockholder is a party or pursuant to any
rights Stockholder may have. Without limiting the foregoing, the Stockholder
hereby votes to amend the Stockholders Agreement by and among Rez, Reed Elsevier
Inc., Utell International Group, Ltd. and certain other holders of equity
interests in Rez to provide that Section 6.2 [Drag Along Rights] and Section 6.3
[Certain Rights of Inclusion] and Section 6.4 [Right of First Refusal] shall not
apply to the Merger or the Merger Agreement.
7. JOINDER IN TAX INDEMNITY. The Stockholder agrees to be bound by the
terms of Section 9.02 [Tax Indemnity] of the Merger Agreement which generally
provides for indemnification of Pegasus by certain stockholders of Rez for the
tax representations contained therein to the extent that no escrow funds are
available therefor and the $1.5 million deductible has been exceeded.
8. TERM; MODIFICATION. This Agreement and the Proxy delivered in connection
herewith shall terminate and shall have no further force or effect on and as of
the Expiration Date. The parties agree to modify, amend, rescind or terminate
this Agreement if and as required in order to permit registration of this
issuance of Pegasus Common Stock on Form S-4 as contemplated by Section 7.01 of
the Merger Agreement.
9. GENERAL.
9.1 SEVERABILITY. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, then the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
9.2 BINDING EFFECT AND ASSIGNMENT. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns, but, except as
otherwise specifically provided herein, neither this Agreement nor any of the
rights, interests or obligations of the parties hereto may be assigned by either
of the parties without prior written consent of the other.
9.3 AMENDMENTS AND MODIFICATION. This Agreement may not be modified,
amended, altered or supplemented except upon the execution and delivery of a
written agreement executed by the parties hereto.
9.4 SPECIFIC PERFORMANCE; INJUNCTIVE RELIEF. The parties hereto
acknowledge that Pegasus will be irreparably harmed and that there will be no
adequate remedy at law for a violation of any of the covenants or agreement of
Stockholder set forth herein. Therefore, it is agreed that, in addition to any
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other remedies that may be available to Pegasus upon any such violation, Pegasus
shall have the right to enforce such covenants and agreements by specific
performance, injunctive relief or by any other means available to Pegasus at law
or in equity.
9.5 NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and sufficient if delivered in
person, by cable, telegram or telex, or sent by mail (registered or certified
mail, postage prepaid, return receipt requested) or overnight courier (prepaid)
to the respective parties as follows:
If to Pegasus: Pegasus Systems, Inc.
3811 Turtle Creek Blvd.
Suite 1100
Dallas, Texas 75219
Facsimile: (214) 528-5675
With a copy to: Locke Liddell & Sapp LLP
2200 Ross Avenue, Suite 2200
Dallas, Texas 75201
Attention: Guy Kerr
Facsimile: (214) 740-8800
If to the
Stockholder: At the address provided on the signature page hereto
or to such other address as any party may have furnished to the other in
writing in accordance herewith, except that notices of change of address
shall only be effective upon receipt.
9.6 GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Delaware without giving
effect to the conflicts of laws principles thereof.
9.7 ENTIRE AGREEMENT. This Agreement contains the entire understanding of
the parties in respect of the subject matter hereof, and supersedes all prior
negotiations and understandings between the parties with respect to such subject
matter.
9.8 COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be an original, but all of which together shall constitute
one and the same agreement.
9.9 EFFECT OF HEADINGS. The section headings herein are for convenience
only and shall not affect the construction of interpretation of this Agreement.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties have caused this Voting Agreement to be
duly executed on the date and year first above written.
PEGASUS SYSTEMS, INC.
By:
------------------------------------
Name:
---------------------------------
Title:
---------------------------------
STOCKHOLDER
------------------------------------
Name:
------------------------------------
Stockholder's Address for Notice:
------------------------------------
------------------------------------
------------------------------------
Number of Shares Beneficially Owned:
shares of Common Stock
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ANNEX A
IRREVOCABLE PROXY
The undersigned Stockholder (the "STOCKHOLDER") of Rez, Inc., a Delaware
corporation ("REZ"), hereby irrevocably appoints the directors on the Board of
Directors of Pegasus Systems, Inc., a Delaware corporation ("PEGASUS"), and each
of them, as the sole and exclusive attorneys and proxies of the undersigned,
with full power of substitution and resubstitution, to the full extent of the
undersigned's rights with respect to the shares of capital stock of Rez
beneficially owned by the undersigned, which shares are listed on the final page
of this Irrevocable Proxy (the "SHARES"), and any and all other shares or
securities issued or issuable in respect thereof on or after the date hereof,
until the earlier to occur of (i) the effectiveness of the Merger (as defined in
the Agreement and Plan of Merger (the "MERGER AGREEMENT") dated November 16,
1999 by and among Pegasus, Rez, the majority stockholder named therein and
Pegasus Worldwide, Inc., a Delaware corporation and a wholly owned subsidiary of
Pegasus and (ii) the termination of the Voting Agreement (as defined below) in
accordance with its terms. Upon the execution hereof, all prior proxies given by
the undersigned with respect to the Shares and any and all other shares or
securities issued or issuable in respect thereof on or after the date hereof are
hereby revoked and no subsequent proxies will be given.
This proxy is irrevocable, is granted pursuant to the Voting Agreement
dated as of November 16, 1999 between Pegasus and the undersigned Stockholder
(the "VOTING AGREEMENT"), and is granted in consideration of Pegasus entering
into the Merger Agreement. Pegasus and the undersigned Stockholder agree and
acknowledge that the grant of this irrevocable proxy is a material inducement
for Pegasus to enter into the Merger Agreement and is therefore coupled with an
interest and irrevocable. The attorneys and proxies named above will be
empowered at any time prior to either termination of the Merger Agreement or the
Effective Time, as the case may be, to exercise all voting and other rights
(including, without limitation, the power to execute and deliver written
consents with respect to the Shares) of the undersigned at every annual, special
or adjourned meeting of Rez stockholders, and in every written consent in lieu
of such a meeting, or otherwise, in favor of approval of the Merger and the
Merger Agreement and any matter that could reasonably be expected to facilitate
the Merger, and against any proposal made in opposition to or competition with
the consummation of the Merger and against any merger, consolidation, sale of
assets, reorganization or recapitalization of Rez with any party other than
Pegasus and its affiliates and against any liquidation or winding up of Rez.
The attorneys and proxies named above may only exercise this proxy to vote
the Shares subject hereto at any time prior to either termination of the Merger
Agreement or the Effective Time, as the case may be, at every annual, special or
adjourned meeting of the stockholders of Rez and in every written consent in
lieu of such meeting, in favor of approval of the Merger and the Merger
Agreement and any matter that could reasonably be expected to facilitate the
Merger, and against any merger, consolidation, sale of assets, reorganization or
recapitalization of Rez with any party other than Pegasus and its affiliates,
and against any liquidation or winding up of Rez, and may not exercise this
proxy on any other matter. The undersigned Stockholder may vote the Shares on
all other matters.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned.
This proxy is irrevocable.
Dated: , 1999
Signature of Stockholder:
-------------------------------------------------
Print Name of Stockholder:
----------------------------------------------------
Shares beneficially owned:
shares of Common Stock
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APPENDIX D
FORM OF STOCKHOLDER AGREEMENT
(MAJORITY STOCKHOLDER)
THIS AGREEMENT (the "AGREEMENT") is made and entered into as of
, , by and between Pegasus Systems, Inc., a Delaware corporation (the
"COMPANY"), and Reed Elsevier Inc., a Massachusetts corporation, and Utell
International Group, Ltd., a corporation organized under the laws of England and
Wales (collectively, the "STOCKHOLDER").
RECITALS
A. In accordance with the Agreement and Plan of Merger entered into as of
November 16, 1999 (the "MERGER AGREEMENT") by and among the Company, Rez,
Inc. ("REZ"), the Stockholder and Pegasus Worldwide, Inc., a Delaware
corporation and wholly owned subsidiary of the Company ("NEWCO"), Newco
shall merge with and into Rez, with Rez being the surviving corporation
(the "MERGER").
B. The Merger Agreement provides, as a condition to the closing of the Merger
thereunder, that Stockholder shall execute and deliver this Agreement; and
C. The agreements of Stockholder hereunder are an important aspect of the
Merger, and the Company would not consummate the Merger absent the
execution and delivery by Stockholder of this Agreement.
AGREEMENT
For and in consideration of the premises and of the mutual covenants and
agreements contained herein and in the Agreement and the other documents
contemplated by the Agreement, and of other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, and upon the terms and
subject to the conditions hereinafter set forth, the parties do hereby agree as
follows:
1. RESTRICTION ON TRANSFERS. The Stockholder will not, without the prior
written consent of the Company, as determined in its sole discretion, directly
or indirectly sell, offer, contract to sell, transfer the economic risk of
ownership in, make any short sale, pledge or otherwise dispose of any shares of
common stock, $.01 par value per share, of Pegasus Systems, Inc. (the "Common
Stock") or any securities convertible into or exchangeable or exercisable for or
any other rights to purchase or acquire Common Stock, whether obtained as a
result of the Merger or otherwise, except that, subject to applicable laws, (a)
after thirty (30) days following the Closing Date (such term as used herein is
as defined in the Merger Agreement), Stockholder may sell up to one-half of the
Common Stock received by Stockholder as a result of the Merger and (b) after
nine (9) months following the Closing Date, Stockholder may sell all shares of
Common Stock held by such Stockholder; provided however that, subject to Section
3 hereof the Stockholder may transfer the rights but not the obligations under
this agreement to any wholly owned subsidiary of Stockholder so long as such
transferee agrees to be bound by the terms hereof.
2. COOPERATION; DELAY OF REGISTRATION.
(a) The Company and the Stockholder shall cooperate with each other in
effecting the disposition of the Common Stock held by the Stockholder and
received in the Merger. Without limiting the preceding sentence, the
Stockholder agrees to provide written notice of its intent to offer, sell
or otherwise dispose of more than 15,000 shares of Common Stock in any
single transaction or series of related transactions.
(b) Upon request of the Stockholder but no more often than once every
six (6) months, the Company shall cause the Company's Chief Executive
Officer and Chief Financial Officer to participate in efforts lasting not
more than three (3) days for each such request to market and facilitate the
offer and sale of the shares of Common Stock held by the Stockholder, or
part thereof;
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provided that the Stockholder's rights to request such assistance under
Section 2(b) shall expire 180 days following the Closing Date.
(c) If the Company shall furnish to the Stockholder a certificate
signed by the Chairman of the Board of Directors of the Company stating
that in the good faith judgment of the Board of Directors of the Company,
it would be seriously detrimental to the Company and its stockholders for
the Stockholder to offer, sell or otherwise dispose of its shares of Common
Stock at such time, the Company shall have the right upon written notice to
the Stockholder to delay any such offer, sale or other disposition of any
or all shares of Common Stock held by the Stockholder for a period of not
more than one hundred eighty (180) days after the Closing Date; provided
that such right to delay any such offer, sale or other disposition shall be
exercised by the Company not more than once and provided further that such
right shall not apply to any offer, sale or other disposition by the
Stockholder of less than 15,000 shares of Common Stock in any single
transaction or series of related transactions or if the Stockholder holds
less than one percent (1%) of all shares of Common Stock outstanding at the
time of such offer, sale or other disposition.
3. TRANSFER OF SHARES TO COMPETITORS OF THE COMPANY. Without the Company's
written consent, the Stockholder shall not directly or indirectly sell, offer,
contract to sell, transfer the economic risk of ownership in, pledge or
otherwise dispose of any shares of Common Stock to any person known after due
inquiry to be engaged in the Business (as such term is defined in the
Noncompetition Agreement dated on or about the date hereof among the parties
hereto) other than by means of a "broker's transaction" (as defined in Rule
144(g) under the Securities Act of 1933, as amended).
4. LEGEND.
(a) LEGEND ON CERTIFICATE. The Stockholder understands that all
certificates representing Common Stock delivered to the Stockholder
pursuant to the Merger shall bear a legend in substantially the form set
forth below, until the earlier to occur of (i) one of the events referred
to in Section 5 above or (ii) the date on which the undersigned requests
removal of such legend; provided that, such request occurs at least two
years from the Effective Time (as defined in the Merger Agreement) and that
the undersigned is not at the time of such request, and has not been during
the three months period preceding to such request, an affiliate of the
Company.
"The shares represented by this certificate may only be transferred in
accordance with the terms of a stockholders agreement between the
initial holder hereof and the Company, a copy of which agreement may be
inspected by the holder of this certificate at the principal offices of
the Company, or furnished by the Company to the holder of this
certificate upon written request, to bear the foregoing legend."
(b) STOP TRANSFER ORDER. The Company, in its discretion, may cause
appropriate stop transfer orders to be placed with its transfer agent with
respect to the certificates for the shares of Common Stock that are
required to bear the foregoing legend.
5. GENERAL.
(a) SEVERABILITY. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
void or unenforceable, then the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.
(b) BINDING EFFECT AND ASSIGNMENT. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns, but,
except as otherwise specifically provided herein, neither this Agreement
nor any of the rights, interests or obligations of the parties hereto may
be assigned by either of the parties without prior written consent of the
other.
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<PAGE> 266
(c) AMENDMENTS AND MODIFICATION. This Agreement may not be modified,
amended, altered or supplemented except upon the execution and delivery of
a written agreement executed by the parties hereto.
(d) SPECIFIC PERFORMANCE; INJUNCTIVE RELIEF. The parties hereto
acknowledge that the Company will be irreparably harmed and that there will
be no adequate remedy at law for a violation of any of the covenants or
agreement of Stockholder set forth herein. Therefore, it is agreed that, in
addition to any other remedies that may be available to the Company upon
any such violation, the Company shall have the right to enforce such
covenants and agreements by specific performance, injunctive relief or by
any other means available to the Company at law or in equity.
(e) NOTICES. Any notice, request, instruction, document or other
communication to be given hereunder by any party hereto to any other party
hereto shall be in writing and validly given if (i) delivered personally,
(ii) sent by telecopy with electronic confirmation of receipt, (iii)
delivered by overnight express, or (iv) sent by registered or certified
mail, postage prepaid, as follows:
If to the Company: Pegasus Systems, Inc.
3811 Turtle Creek Blvd.
Suite 1100
Dallas, Texas 75219
Facsimile: (214) 528-5675
With a copy to: Locke Liddell & Sapp LLP
2200 Ross Avenue, Suite 2200
Dallas, Texas 75201
Attention: Guy Kerr
Facsimile: (214) 740-8800
If to the Stockholder: At the address provided on the signature page
hereto
or at such other address for a party as shall be specified by like
notice. Any notice that is delivered personally, or sent by telecopy or
overnight express in the manner provided herein shall be deemed to have
been duly given to the party to whom it is directed upon receipt by such
party. Any notice that is addressed and mailed in the manner herein
provided shall be conclusively presumed to have been given to the party
to whom it is addressed at the close of business, local time of the
recipient, on the three days after the day it is so placed in the mail.
(f) GOVERNING LAW. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Delaware without
giving effect to the conflicts of laws principles thereof.
(g) ENTIRE AGREEMENT. This Agreement contains the entire understanding
of the parties in respect of the subject matter hereof, and supersedes all
prior negotiations and understandings between the parties with respect to
such subject matter.
(h) COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
(i) EFFECT OF HEADINGS. The section headings herein are for
convenience only and shall not affect the construction of interpretation of
this Agreement.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties have caused this Stockholder Agreement to
be duly executed on the date and year first above written.
PEGASUS SYSTEMS, INC., a Delaware
corporation
By:
----------------------------------
Name:
---------------------------------
Title:
---------------------------------
STOCKHOLDER:
REED ELSEVIER INC.
By:
----------------------------------
Name:
---------------------------------
Title:
---------------------------------
UTELL INTERNATIONAL GROUP, LTD.
By:
----------------------------------
Name:
---------------------------------
Title:
---------------------------------
Stockholder's Address for Notice:
------------------------------------
------------------------------------
------------------------------------
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<PAGE> 268
APPENDIX E
FORM OF STOCKHOLDER AGREEMENT
(OTHER THAN MAJORITY STOCKHOLDER)
THIS AGREEMENT (the "AGREEMENT") is made and entered into as of by
and between Pegasus Systems, Inc., a Delaware corporation (the "COMPANY"), and
("STOCKHOLDER"), a stockholder of REZ, Inc. ("REZ").
RECITALS
A. In accordance with the Agreement and Plan of Merger entered into as of
November 16, 1999 (the "MERGER AGREEMENT") by and among the Company, REZ,
Inc., Reed Elsevier, Inc. and Pegasus Worldwide, Inc., a Delaware
corporation and wholly owned subsidiary of the Company ("NEWCO"), Newco
will merge with and into REZ, with REZ being the surviving corporation (the
"MERGER").
B. The Merger Agreement provides, as a condition to the closing of the Merger
thereunder, that Stockholder shall execute and deliver this Agreement; and
C. The agreements of Stockholder hereunder are an important aspect of the
Merger, and the Company would not consummate the Merger absent the
execution and delivery by Stockholder of this Agreement.
AGREEMENT
For and in consideration of the premises and of the mutual covenants and
agreements contained herein and in the Agreement and other documents
contemplated by the Agreement, and of other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, and upon the terms and
subject to the conditions hereinafter set forth, the parties do hereby agree as
follows:
1. RESTRICTION ON TRANSFERS. The Stockholder will not, without the prior
written consent of the Company, as determined in its sole discretion, directly
or indirectly sell, offer, contract to sell, transfer the economic risk of
ownership in, make any short sale, pledge or otherwise dispose of any shares of
common stock, $.01 par value per share, of Ranger, Inc. (the "COMMON STOCK") or
any securities convertible into or exchangeable or exercisable for or any other
rights to purchase or acquire Common Stock, whether obtained as a result of the
Merger or otherwise, except that subject to applicable laws (a) after thirty
(30) days following the Closing Date (such term as used herein is as defined in
the Merger Agreement), Stockholder may sell up to one-half of the Common Stock
received by Stockholder as a result of the Merger and (b) after nine (9) months
following the Closing Date, Stockholder may sell all shares of Common Stock held
by such Stockholder. Notwithstanding the preceding provisions of this Section 1,
if the Stockholder holds less than forty-five thousand (45,000) shares of Common
Stock, then the Stockholder may sell any and all such shares of Common Stock
after thirty (30) days following the Closing Date.
2. PERMITTED TRANSFERS. Notwithstanding the foregoing, if the Stockholder
is an individual, he or she may transfer any shares of Common Stock or
securities convertible into or exchangeable or exercisable for the Common Stock
either during his or her lifetime or on death by will or intestacy to his or her
immediate family or to a trust the beneficiaries of which are exclusively the
Stockholder and/or a member or members of his or her immediate family or to any
other trust or entity for bona fide charitable or estate planning purposes;
provided, however, that prior to any such transfer each transferee shall execute
an agreement satisfactory to the Company, pursuant to which each transferee
shall agree to receive and hold such shares of Common Stock, or securities
convertible into or exchangeable or exercisable for the Common Stock, subject to
the provisions hereof, and there shall be no further transfer except in
accordance with the provisions hereof. For the purposes of this Section 2,
"immediate family" shall mean spouse, lineal descendant, father, mother, brother
or sister of the transferor.
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<PAGE> 269
3. LEGEND.
(a) LEGEND ON CERTIFICATE. The Stockholder understands that all
certificates representing Common Stock delivered to the Stockholder
pursuant to the Merger shall bear a legend in substantially the form set
forth below, until the earlier to occur of (i) one of the events referred
to in Section 5 above or (ii) the date on which the undersigned requests
removal of such legend; provided that, such request occurs at least two
years from the Effective Time (as defined in the Merger Agreement) and that
the undersigned is not at the time of such request, and has not been during
the three months period preceding to such request, an affiliate of the
Company.
"The shares represented by this certificate may only be transferred in
accordance with the terms of a stockholders agreement between the
initial holder hereof and the Company, a copy of which agreement may be
inspected by the holder of this certificate at the principal offices of
the Company, or furnished by the Company to the holder of this
certificate upon written request, to bear the foregoing legend."
(b) STOP TRANSFER ORDER. The Company, in its discretion, may cause
appropriate stop transfer orders to be placed with its transfer agent with
respect to the certificates for the shares of Common Stock that are
required to bear the foregoing legend.
4. GENERAL.
Section 11.14 SEVERABILITY. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, void or unenforceable, then the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.
Section 11.15 BINDING EFFECT AND ASSIGNMENT. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns, but, except as
otherwise specifically provided herein, neither this Agreement nor any of the
rights, interests or obligations of the parties hereto may be assigned by either
of the parties without prior written consent of the other.
Section 11.16 AMENDMENTS AND MODIFICATION. This Agreement may not be
modified, amended, altered or supplemented except upon the execution and
delivery of a written agreement executed by the parties hereto.
NOTICES. Any notice, request, instruction, document or other
communication to be given hereunder by any party hereto to any other party
hereto shall be in writing and validly given if (a) delivered personally,
(b) sent by telecopy with electronic confirmation of receipt, (c) delivered
by overnight express, or (d) sent by registered or certified mail, postage
prepaid, as follows:
<TABLE>
<S> <C>
If to the Company: Pegasus Systems, Inc.
3811 Turtle Creek Blvd.
Suite 1100
Dallas, Texas 75219
Facsimile: (214) 528-5675
With a copy to: Locke Liddell & Sapp LLP
2200 Ross Avenue, Suite 2200
Dallas, Texas 75201
Attention: Guy Kerr
Facsimile: (214) 740-8800
</TABLE>
or at such other address for a party as shall be specified by like notice.
Any notice that is delivered personally, or sent by telecopy or overnight
express in the manner provided herein shall be deemed to have been duly
given to the party to whom it is directed upon receipt by such party. Any
notice that
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<PAGE> 270
is addressed and mailed in the manner herein provided shall be conclusively
presumed to have been given to the party to whom it is addressed at the
close of business, local time of the recipient, on the three days after the
day it is so placed in the mail.
Section 11.17 GOVERNING LAW. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Delaware
without giving effect to the conflicts of laws principles thereof.
Section 11.18 ENTIRE AGREEMENT. This Agreement contains the entire
understanding of the parties in respect of the subject matter hereof, and
supersedes all prior negotiations and understandings between the parties with
respect to such subject matter.
Section 11.19 COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
Section 11.20 EFFECT OF HEADINGS. The section headings herein are for
convenience only and shall not affect the construction of interpretation of this
Agreement.
[SIGNATURE PAGE FOLLOWS]
E-3
<PAGE> 271
IN WITNESS WHEREOF, the parties have caused this Stockholder Agreement to
be duly executed on the date and year first above written.
PEGASUS SYSTEMS, INC.
By:
----------------------------------
Name:
---------------------------------
Title:
---------------------------------
STOCKHOLDER
------------------------------------
Name:
---------------------------------
Stockholder's Address for Notice:
------------------------------------
------------------------------------
------------------------------------
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<PAGE> 272
APPENDIX F
FORM OF NONCOMPETITION AGREEMENT
THIS AGREEMENT (the "AGREEMENT") is made and entered into as of ,
by and among Pegasus Systems, Inc., a Delaware corporation (the "COMPANY"),
and Reed Elsevier Inc., a Massachusetts corporation, and Utell International
Group, Ltd., a corporation organized under the laws of England and Wales
(collectively, the "SELLER").
RECITALS
A. Pursuant to the Agreement and Plan of Merger entered into as of November
16, 1999 (the "MERGER AGREEMENT") by and among the Company and Seller and
certain other parties named therein, Pegasus Worldwide, Inc., a Delaware
corporation and wholly owned subsidiary of the Company, shall merge with
and into Rez, Inc. ("REZ"), with Rez, Inc. being the surviving corporation
(the "MERGER");
B. The Merger Agreement provides, as a condition to the closing of the Merger
thereunder, that Seller shall execute and deliver this Agreement to, among
other matters, restrict the Seller's ability to perform activities included
in the Business (as defined below);
C. The agreements of Seller hereunder are an important aspect of the Merger,
and the Company would not consummate the Merger absent the execution and
delivery by Seller of this Agreement;
D. Seller and Seller's affiliates have substantial financial resources and the
ability to operate a business or businesses that could compete with the
Company in the Business following the Closing; and
E. The agreements of Seller hereunder are reasonable and necessary, both in
scope and duration, to protect the business and goodwill of the Company
that will be acquired pursuant to the Merger Agreement, and the Company
would suffer damages, including the loss of profits, if Seller or any of
Seller's affiliates engaged, directly or indirectly, in a competing
business with the Company.
AGREEMENT
For and in consideration of the premises and of the mutual covenants and
agreements contained herein and in the Merger Agreement and the documents
contemplated thereby, and of other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, and upon the terms and subject
to the conditions hereinafter set forth, the parties do hereby agree as follows:
1. DISCLOSURE OF CONFIDENTIAL INFORMATION. Seller shall not, directly or
indirectly, through any form of ownership, in any individual or representative
or affiliated capacity whatsoever, except as may be required by law, reveal,
divulge, disclose or communicate to any person or entity in any manner
whatsoever information of any kind, nature or description concerning: (i) any
plans, trade secrets or other data of any kind, nature or description, whether
tangible or intangible, of the Company, Rez or their respective businesses or
(ii) any other financial, operational, statistical or other information that the
Company or Rez, in either case, designates as confidential or proprietary
("CONFIDENTIAL INFORMATION"). Confidential Information shall not, however,
include any information that at the time of disclosure or thereafter is
generally available to and known by the public (other than as a result of a
disclosure directly or indirectly by Seller or its affiliates and in violation
of this Agreement) is subsequently acquired by Seller from a source not known by
Seller to be under an obligation of confidentiality to the Company or Rez, is
independently developed by or for Seller without use of Confidential
Information, or the disclosure of which is legally required. In the event that
the Seller is required by applicable law to disclose any of the information
described in this Section 1, the Seller agrees that it will provide the Company
with prompt notice of such requirement in order to enable the Company to seek an
appropriate protective order or other remedy, to consult with the Seller with
respect to the Company taking steps to resist or narrow the scope of such
request or legal process, or to waive compliance, in whole or in part, with the
terms of this Agreement. In the event that no such protective order or other
remedy is obtained, or that the Company waives compliance with the terms of this
Agreement, the Seller will use its reasonable best efforts to
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<PAGE> 273
disclose only that portion of such information which the Seller is advised by
counsel is legally required and will exercise all reasonable efforts to ensure
that all such information so disclosed will be accorded confidential treatment.
2. EMPLOYEES. If an employee of the Company becomes an employee or
independent contractor of Seller or one of Seller's affiliates (as the term
affiliate is defined under Rule 144 under the Securities Act of 1933, as
amended) during a period of five (5) years following the date hereof, Seller
shall cause such person not to perform directly or indirectly in his or her
capacity as an employee of Seller or an affiliate of Seller any activities which
are the same as or are substantially similar to the Business as conducted as of
the date of this Agreement (a "RESTRICTED BUSINESS").
3. NONCOMPETITION. Seller agrees that for a period of five (5) years
following the date hereof, Seller shall not:
(a) Engage directly or through a subsidiary in a business the same as
or substantially similar to the Business; or
(b) Hold equity securities or indebtedness or invest or lend money to
any person or entity that engages directly or indirectly in a business the
same as or substantially similar to the Business when the effect of such
investment of extension of credit would be that Seller would control such
person or entity.
4. For purposes of this Agreement, the term the "Business" means the
development or operation of any of the following:
(a) hotel central reservation system and property management systems;
(b) any business similar to the PayTell services of Rez as conducted
on the date of this Agreement;
(c) travel agency commissions processing services;
(d) hotel brand services, which means services provided by a third
party to a person or entity in connection with two or more hotel properties
that are affiliated for one or more of the following reasons (i) receiving
consulting services, (ii) enhancing the marketplace presence and product
distribution of the hotel properties, and (iii) leveraging resources; and
(e) hotel representation services substantially as conducted by Rez as
of the date hereof; and
(f) any reservation transaction processing services substantially as
conducted by Rez as of the date hereof.
(g) Notwithstanding the preceding provisions of this Section 4,
nothing in this Agreement shall prohibit Seller from continuing its
activities and business as conducted on the date of this Agreement, even if
such activities or business is the same as or substantially similar to the
Business.
(h) Notwithstanding anything to the contrary in the foregoing, the
parties stipulate that the following activities are not restricted under
Section 3 hereof:
(i) Preparation of advertising material for third parties
including, without limitation, advertorials, single-sponsor
publications, brochures or trade show displays for a Restricted
Business.
(ii) Providing consulting services with respect to the advertising
or marketing of a Restricted Business.
(iii) Licensing exhibition space to a Restricted Business.
(iv) Selling, advertising or marketing opportunities to a
Restricted Business on behalf of the Company or third parties.
(v) The provision of travel related data and/or destination or
editorial matter, by sale license or contribution.
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<PAGE> 274
(vi) Publication or other dissemination of advertisements for
Restricted Businesses in any medium, now known or hereafter developed.
(vii) Providing links from any website of the Company to any
website of a Restricted Business, allowing links from any website of a
Restricted Business to a website of the Company or participating in an
Internet portal with any Restricted Business.
(viii) Engaging in any activity which is the successor to any of
the preceding enumerated activities following changes in technology or
general business practices.
(ix) The development and marketing to third parties of travel
planning software which permits the user to interface with a lodging
establishment and/or Restricted Business in order to make reservations;
which may incidentally provide the capability of providing travel agency
commissions; provided, however, that before introducing any such
product, Seller shall notify the Company and shall engage in good faith
discussions with the Company (pursuant to a written non-disclosure
agreement on terms substantially similar to those on Section 7.16 of the
Merger Agreement, mutatis mudandis, or otherwise reasonably satisfactory
to the parties, if confidential information may be disclosed) regarding
possible cooperative technology, marketing or other mutual arrangements,
including, without limitation, subject to Seller's commitments existing
as of the Date of this Agreement, the possibility of utilizing the
electronic reservation processing services of the Company in connection
therewith.
5. ENFORCEMENT OF COVENANTS.
(a) Seller acknowledges that a violation or attempted violation of any
of the covenants and agreements in Sections 1, 2 and 3 above will cause
such damage to the Company as will be irreparable, the exact amount of
which would be difficult to ascertain and for which there will be no
adequate remedy at law, and accordingly, Seller agrees that the Company
shall be entitled as a matter of right to an injunction issued by any court
of competent jurisdiction, restraining such violation or attempted
violation of such covenants and agreements by Seller, or the affiliates,
partners or agents of such Seller, as well as recover from Seller any and
all costs and expenses sustained or incurred by the Company in obtaining
such an injunction, including, without limitation, reasonable attorneys'
fees. Seller agrees that no bond or other security shall be required in
connection with such injunction. Seller further agrees that the five (5)
year period of restriction set forth in Sections 2 and 3 above shall be
tolled during any period of violation thereof by Seller. Any exercise by
the Company of its rights pursuant to this Section 5 shall be cumulative
and in addition to any other remedies to which the Company may be entitled.
Each party represents and warrants that it has been, or has had the
opportunity to be, represented by counsel in the negotiation and execution
of this Agreement, including without limitation, the provisions set forth
above in this Section 5(a) concerning the recovery of attorneys' fees.
(b) Seller understands and acknowledges that the Company shall have
the right, in its sole discretion, to reduce the scope of any covenants set
forth in Sections 1, 2 and 3, or any portion thereof, without Seller's
consent, effective immediately upon receipt by Seller of written notice
thereof; and Seller agrees that Seller shall comply forthwith with any
covenant as so modified, which shall be fully enforceable as so revised in
accordance with the terms of this Agreement.
6. VALIDITY. To the extent permitted by applicable law, if it should ever
be held that any provision contained herein does not contain reasonable
limitations as to time, geographical area or scope of activity to be restrained,
then the court so holding shall at the request of the Company reform such
provisions to the extent necessary to cause them to contain reasonable
limitations as to time, geographical area and scope of activity to be restrained
and to give the maximum permissible effect to the intentions of the parties as
set forth herein; and the court shall enforce such provisions as so reformed.
If, notwithstanding the foregoing, any provision hereof is held to be illegal,
invalid or unenforceable under present or future laws effective during the term
hereof, such provision shall be fully severable; this Agreement shall be
construed and enforced as if such illegal, invalid or unenforceable provision
had never comprised a part
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<PAGE> 275
hereof; and the remaining provisions hereof shall remain in full force and
effect and shall not be affected by the illegal, invalid or unenforceable
provision or by its severance herefrom. Furthermore, in lieu of such illegal,
invalid or unenforceable provision there shall be added automatically by the
Company as a part hereof a provision as similar in terms to such illegal,
invalid or unenforceable provision as may be possible and be legal, valid and
enforceable, and the parties hereby agree to such provision.
7. NOTICE. Any notice, request, instruction, document or other
communication to be given hereunder by any party hereto to any other party
hereto shall be in writing and validly given if (a) delivered personally, (b)
sent by telecopy with electronic confirmation of receipt, (c) delivered by
overnight express, or (d) sent by registered or certified mail, postage prepaid,
as follows:
If to the Company: Pegasus Systems, Inc.
3811 Turtle Creek Blvd.
Suite 1100
Dallas, Texas 75219
Attention: Ric L. Floyd
Telecopy No.: (214) 522-8488
If to Seller: c/o Reed Elsevier Inc.
275 Washington Street
Newton, MA 02458
Attention: General Counsel
Facsimile: (617) 558-4649
or at such other address for a party as shall be specified by like notice.
Any notice that is delivered personally, or sent by telecopy or overnight
express in the manner provided herein shall be deemed to have been duly
given to the party to whom it is directed upon receipt by such party. Any
notice that is addressed and mailed in the manner herein provided shall be
conclusively presumed to have been given to the party to whom it is
addressed at the close of business, local time of the recipient, on the
three days after the day it is so placed in the mail.
8. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the
parties hereto with respect to the matters covered hereby, and supersedes all
prior agreements and understandings, both written and oral, between the parties
with respect to the subject matter hereof.
9. MODIFICATION AND WAIVER. No modification or amendment of any of the
terms, conditions or provisions in this Agreement may be made otherwise than by
written agreement signed by the parties hereto, except as provided in Sections
5(b) and 6 hereof. The waiver by any party to this Agreement of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach by any party nor shall such waiver constitute a continuing
waiver.
10. SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the parties hereto and their
respective successors and permitted assigns. Neither this Agreement nor any
rights, interests or obligations hereunder may be assigned by any party hereto
without the prior written consent of the other parties hereto, and any purported
assignment in violation of this Section 8 shall be null and void.
11. HEADINGS. The headings of the sections of this Agreement are inserted
for convenience of reference only and shall not be deemed to constitute part of
this Agreement or to affect the construction hereof.
12. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED, ENFORCED AND GOVERNED
BY THE INTERNAL LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO ITS CHOICE OF
LAW PRINCIPLES.
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<PAGE> 276
13. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, and such counterparts together
shall constitute one and the same instrument.
[THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK.]
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<PAGE> 277
IN WITNESS WHEREOF, the parties have duly caused this Agreement to be
executed as of the date first above written.
THE COMPANY:
PEGASUS SYSTEMS, INC.
By:
----------------------------------
Name:
---------------------------------
Title:
---------------------------------
SELLER:
REED ELSEVIER INC.
By:
----------------------------------
Name:
---------------------------------
Title:
---------------------------------
UTELL INTERNATIONAL GROUP, LTD.
By:
----------------------------------
Name:
---------------------------------
Title:
---------------------------------
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<PAGE> 278
APPENDIX G*
HAMBRECHT & QUIST LLC
ONE BUSH STREET
SAN FRANCISCO, CA 94104
(415) 439-3000
November 15, 1999
Confidential
The Board of Directors
Pegasus Systems, Inc.
3811 Turtle Creek Boulevard
Dallas, Texas 75219
Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to Pegasus Systems, Inc. ("PEGASUS" or the "COMPANY") of the consideration
to be paid by the Company in connection with the proposed acquisition by Pegasus
of the common stock of Rez, Inc. ("REZ") (the "PROPOSED TRANSACTION") under the
terms of an Agreement and Plan of Merger, to be dated as of November 16, 1999,
by and among Pegasus, Pegasus Worldwide, Inc., a wholly owned subsidiary of
Pegasus, Rez, Utell International Group, Ltd., and Reed Elsevier Inc. The
Agreement will provide, among other things, that Pegasus will pay to Rez, upon
consummation of the Proposed Transaction, $115 million in cash, a $20 million
promissory note, and 2.66 million shares of Pegasus common stock, subject to
adjustment based on Rez's closing balance sheet, as is more fully described in
the Agreement. We understand that the Proposed Transaction will be accounted for
as a purchase.
Hambrecht & Quist LLC ("HAMBRECHT & QUIST"), as part of its investment
banking services, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, strategic transactions,
corporate restructurings, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes. We have acted as a financial advisor to the Board of
Directors of Pegasus in connection with the Proposed Transaction, and we will
receive a fee for our services, which include the rendering of this opinion.
In the past, we have provided investment banking and other financial
advisory services to Pegasus and have received fees for rendering these
services. Specifically, Hambrecht & Quist served as lead-manager for the
Company's initial public offering in August 1997, as lead-manager for the
Company's follow-on offerings in February 1998 and May 1999, and as financial
advisor with respect to the Company's adoption of a Stockholder Rights Plan in
September 1998, and Hambrecht & Quist may provide additional investment banking
or other financial advisory services to Pegasus. In the ordinary course of
business, Hambrecht & Quist acts as a market maker and broker in the publicly
traded securities of Pegasus and receives customary compensation in connection
therewith, and also provides research coverage of Pegasus. In the ordinary
course of business, Hambrecht & Quist actively trades in the equity and
derivative securities of Pegasus for its own account and for the accounts of its
customers and, accordingly, may at any time hold a long or short position in
such securities. In addition, Hambrecht & Quist and/or affiliates thereof own
approximately 59,723 shares of Rez stock, which represents approximately 0.17%
of Rez's shares outstanding.
- ---------------
* Subsequent to November 15, 1999 the Pegasus board of directors declared a 3
for 2 stock split to be
effected in the form of a stock dividend on January 7, 2000 to all Pegasus
stockholders of record as of
December 20, 1999. Accordingly, the number of shares to be issued to REZ
stockholders in the merger
will be 3.99 million shares instead of the 2.66 million shares referenced
above.
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In connection with our review of the Proposed Transaction, and in arriving
at our opinion, we have, among other things:
(i) reviewed the publicly available financial statements of Pegasus
for recent years and interim periods to date and certain other relevant
financial and operating data of Pegasus made available to us from published
sources and from the internal records of Pegasus;
(ii) reviewed certain internal financial and operating information,
including certain projections, relating to Pegasus prepared by the
management of Pegasus;
(iii) discussed the business, financial condition and prospects of
Pegasus with certain members of senior management;
(iv) reviewed the financial statements of Rez for recent years and
interim periods to date and certain other relevant financial and operating
data of Rez made available to us from the internal records of Rez;
(v) reviewed certain internal financial and operating information,
including certain projections, relating to Rez prepared by, the management
of Rez;
(vi) discussed the business, financial condition and prospects of Rez
with certain members of senior management of Pegasus and Rez;
(vii) reviewed the recent reported prices and trading activity for the
common stock of Pegasus and compared such information and certain financial
information for Pegasus and Rez with similar information for certain other
companies engaged in businesses we believe to be generally comparable;
(viii) reviewed the financial terms, to the extent publicly available,
of certain comparable merger and acquisition transactions involving
companies engaged in businesses we believe to be generally comparable;
(ix) reviewed an November 13, 1999 draft of the Agreement (the "DRAFT
AGREEMENT");
and
(x) performed such other analyses and examinations and considered such
other information, financial studies, analyses and investigations and
financial, economic and market data as we deemed relevant.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all of the information concerning Pegasus or Rez considered in
connection with our review of the Proposed Transaction, and we have not assumed
any responsibility for independent verification of such information. We have not
undertaken any independent valuation or appraisal of any of the assets or
liabilities of Pegasus or Rez or concerning the solvency or fair value of
Pegasus or Rez; nor have we conducted a physical inspection of the properties
and facilities of either company. With respect to the financial forecasts and
projections or any financial or operating information made available to us and
used in our analysis, we have assumed that they reflect the best currently
available estimates and judgments of the competitive, operating and regulatory
environment and the expected future financial performance of Pegasus and Rez. We
assume no responsibility for and express no view as to such forecasts and
projections or the assumptions on which they are based. For purposes of this
opinion, we have assumed that neither Pegasus nor Rez is a party to any material
pending transactions, including external financings, recapitalizations or
mergers, other than the Proposed Transaction and those activities undertaken in
the ordinary course of conducting their respective businesses. Our opinion is
necessarily based upon market, economic, financial and other conditions as they
exist and can be evaluated as of the date of this letter and any change in such
conditions would require a reevaluation of this opinion. In rendering this
opinion, we have assumed that the Agreement in the form in which it is executed
will not differ in any material respects from the Draft Agreement and that the
Proposed Transaction will be consummated substantially
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on the terms discussed in the Agreement, without any waiver of any material
terms or conditions by any party thereto.
It is understood that this letter is for the information of the Company's
Board of Directors in connection with its evaluation of the Proposed Transaction
and may not be used for any other purpose without our prior written consent;
provided, however, that this letter may be reproduced in full in the S-4
Registration Statement, if necessary. This letter does not address the
underlying decision by Pegasus to engage in the Merger.
Based upon and subject to the foregoing and after considering such other
matters as we deem relevant, we are of the opinion that as of the date hereof
the consideration to be paid by Pegasus in the Proposed Transaction is fair to
the Company from a financial point of view.
Very truly yours,
HAMBRECHT & QUIST LLC
By: /s/ PAUL B. CLEVELAND
----------------------------------
Paul B. Cleveland
Managing Director
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APPENDIX H*
THOMAS WEISEL PARTNERS
MERCHANT BANKING
November 15, 1999
Board of Directors
REZ, Inc., formerly known as
REZsolutions, Inc.
11048 N. 23rd Avenue
Phoenix, Arizona 85029
Gentlemen:
We understand that REZ, Inc., formerly known as REZsolutions, Inc., a
Delaware corporation ("SELLER"), and Pegasus Systems Inc., a Delaware
corporation ("BUYER"), propose to enter into a Merger Agreement to be dated
November 16, 1999 (the "MERGER AGREEMENT"), pursuant to which a wholly owned
subsidiary of Buyer will be merged with and into Seller, which will be the
surviving entity and a wholly owned subsidiary of Buyer (the "MERGER"). Pursuant
to the Merger, as more fully described in the draft Merger Agreement provided to
us by management for Seller and as further described to us by management of
Seller, we understand that all of the common stock, $.01 par value per share
("SELLER COMMON STOCK"), of Seller will be converted into and exchangeable for
(1) 2,660,000 million shares of the common stock, $.01 par value per share
("BUYER COMMON STOCK"), of Buyer and (2) cash in the amount of $135 million,
subject to certain adjustments (the "CONSIDERATION"). The Majority Shareholder
of Seller has agreed to accept, in lieu of $20 million in cash, an unsecured,
subordinated Promissory Note in the principal amount of $20 million with an
interest rate of 8% per annum and a maturity date of the second anniversary date
of the closing date. The terms and conditions of the Merger are set forth in
more detail in the Merger Agreement.
You have asked us for our opinion as investment bankers as to whether the
Consideration to be received by the shareholders of Seller pursuant to the
Merger is fair to such shareholders, taken as a whole, from a financial point of
view, as of the date hereof.
In connection with our opinion, we have, among other things: (i) reviewed
certain publicly available financial and other data with respect to Seller and
Buyer, including the consolidated financial statements for recent years and
interim periods to September 30, 1999 and certain other relevant financial and
operating data relating to Seller and Buyer made available to us from published
sources and from the internal records of Seller and Buyer; (ii) reviewed the
financial terms and conditions of the Merger Agreement; (iii) reviewed certain
publicly available information concerning the trading of, and the trading market
for Buyer Common Stock; (iv) compared Seller and Buyer from a financial point of
view with certain other companies which we deemed to be relevant; (v) considered
the financial terms, to the extent publicly available, of selected recent
business combinations which we deemed to be comparable, in whole or in part, to
the Merger; (vi) reviewed and discussed with representatives of the management
of Seller and Buyer certain information of a business and financial nature
regarding Seller and Buyer, furnished to us by them, including financial
forecasts and related assumptions of Seller and Buyer; and (vii) performed such
other analyses and examinations as we have deemed appropriate.
In connection with our review, we have not assumed any obligation
independently to verify the foregoing information and have relied on its being
accurate and complete in all material respects. With
- ---------------
* Subsequent to November 15, 1999 the Pegasus board of directors declared a 3
for 2 stock split to be
effected in the form of a stock dividend on January 7, 2000 to all Pegasus
stockholders of record as of
December 20, 1999. Accordingly, the number of shares to be issued to REZ
stockholders in the merger
will be 3.99 million shares instead of the 2.66 million shares referenced
above.
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respect to the financial forecasts for Seller and Buyer provided to us by their
respective management, we have assumed for purposes of our opinion that the
forecasts have been reasonably prepared on bases reflecting the best available
estimates and judgments of their respective management at the time of
preparation as to the future financial performance of Seller and Buyer and that
they provide a reasonable basis upon which we can form our opinion. We have also
assumed that there have been no material changes in Seller's or Buyer's assets,
financial condition, results of operations, business or prospects since the
respective dates of their last financial statements made available to us. We
have assumed that the Merger will be consummated in a manner that complies in
all respects with the applicable provisions of the Securities Act of 1933, as
amended (the "SECURITIES ACT"), the Securities Exchange Act of 1934 and all
other applicable federal and state statutes, rules and regulations. In addition,
we have not assumed responsibility for making an independent evaluation,
appraisal or physical inspection of any of the assets or liabilities (contingent
or otherwise) of Seller or Buyer, nor have we been furnished with any such
appraisals. You have informed us, and we have assumed, that the Merger will be
recorded as a purchase under generally accepted accounting principles. Finally,
our opinion is based on economic, monetary and market and other conditions as in
effect on, and the information made available to us as of, the date hereof.
Accordingly, although subsequent developments may affect this opinion, we have
not assumed any obligation to update, revise or reaffirm this opinion.
We have further assumed that the Merger will be consummated in accordance
with the terms described in the Merger Agreement, without any further material
amendments thereto, and without waiver by Seller of any of the conditions to its
obligations thereunder.
We have acted as financial advisor to Seller in connection with the Merger
and will receive a fee for our services, including rendering this opinion, which
is contingent upon the consummation of the Merger.
Based upon the foregoing and in reliance thereon, it is our opinion as
investment bankers that the Consideration to be received by the shareholders of
Seller pursuant to the Merger is fair to such shareholders, taken as a whole,
from a financial point of view, as of the date hereof.
This opinion is directed to the Board of Directors of Seller in its
consideration of the Merger and is not a recommendation to any shareholder as to
how such shareholder should vote with respect to the Merger. Further, this
opinion addresses only the financial fairness of the Consideration to the
shareholders and does not address the relative merits of the Merger and any
alternatives to the Merger, Seller's underlying decision to proceed with or
effect the Merger, or any other aspect of the Merger. This opinion may not be
used or referred to by Seller, or quoted or disclosed to any person in any
manner, without our prior written consent.
We are not expressing an opinion regarding the price at which the Buyer
Common Stock may trade at any future time. The Consideration to be received by
the shareholders of Seller pursuant to the Merger is based upon a fixed exchange
ratio and, accordingly, the market value of the Consideration may vary
significantly.
Very truly yours,
By:
/s/ THOMAS WEISEL PARTNERS LLC
----------------------------------
THOMAS WEISEL PARTNERS LLC
- ---------------
* Subsequent to November 15, 1999 the Pegasus board of directors declared a 3
for 2 stock split to be
effected in the form of a stock dividend on January 7, 2000 to all Pegasus
stockholders of record as of
December 20, 1999. Accordingly, the number of shares to be issued to REZ
stockholders in the merger
will be 3.99 million shares instead of the 2.66 million shares referenced
above.
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APPENDIX I
DELAWARE GENERAL CORPORATE LAW
SECTION 262--APPRAISAL RIGHTS
SECTION 262 APPRAISAL RIGHTS. (a) Any stockholder of a corporation of this
State who holds shares of stock on the date of the making of a demand pursuant
to subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to sec. 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of the stockholder's shares of stock under
the circumstances described in subsections (b) and (c) of this section. As used
in this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec. 251(other than a merger effected pursuant to
sec. 251(g) of this title), sec. 252, sec. 254, sec. 257, sec. 258, sec. 263 or
sec. 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec. 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
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(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice of this section.
Each stockholder electing to demand the appraisal of such stockholder's
shares shall deliver to the corporation, before the taking of the vote on
the merger or consolidation, a written demand for appraisal of such
stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to sec. 228
or sec. 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that
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such notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent
corporation may fix, in advance, a record date that shall be not more than
10 days prior to the date the notice is given, provided, that if the notice
is given on or after the effective date of the merger or consolidation, the
record date shall be such effective date. If no record date is fixed and
the notice is given prior to the effective date, the record date shall be
the close of business on the day next preceding the day on which the notice
is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service, file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by one or more publication s
least one week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final
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determination of the stockholder entitled to an appraisal. Any stockholder whose
name appears on the list filed by the surviving or resulting corporation
pursuant to subsection (f) of this section and who has submitted such
stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding the Court of
Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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PART II
ITEM 20. 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 Pegasus may and, in some
cases, must be indemnified by Pegasus 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 Pegasus. 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
Pegasus, 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 Pegasus' Third Amended and Restated Certificate of
Incorporation provides that no director of Pegasus shall be liable to Pegasus 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 Pegasus' Third Amended and Restated Certificate of
Incorporation also provides that Pegasus may indemnify to the fullest extent
permitted by Delaware 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 Pegasus or any predecessor of Pegasus or
serves or served at any other enterprise as a director, officer, employee or
agent at the request of Pegasus or any other predecessor to Pegasus. In
addition, Section 7.7 of Pegasus' Amended and Restated Bylaws provides that
Pegasus shall indemnify to the fullest extent authorized or permitted by law any
current or former director or officer of Pegasus (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 Pegasus or is or was serving, at the request of Pegasus, as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, employee benefit plan, or other enterprise and that, subject to
applicable law, Pegasus may indemnify an employee or agent of Pegasus to the
extent that and with respect to such proceedings as, the Board of Directors may
determine by resolution, in its discretion.
Reference is also made to the Rights Agreement incorporated herein as
Exhibit 4.3 hereto, pursuant to which some holders of capital stock of Pegasus
named therein have agreed to indemnify officers and directors of Pegasus against
the liabilities under the Securities Act of 1933 or the Securities Exchange Act
of 1934 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 Pegasus.
Pegasus has purchased directors' and officers' liability insurance. Subject
to conditions, limitations and exclusions in the policy, the insurance covers
amounts required to be paid for a claim or claims made against directors and
officers for any act, error, omission, misstatement, misleading statement or
breach of duty by directors and officers in their capacity as directors and
officers of Pegasus.
II-1
<PAGE> 288
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) The following is a list of exhibits filed herewith or incorporated by
reference herein. Pegasus agrees to supply supplementally a copy of any omitted
schedule to the SEC upon request.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2.1 -- Contribution and Restructuring Agreement dated effective
as of July 21, 1995 by and among Pegasus Systems, Inc.
and all of the stockholders of Pegasus Systems, Inc.
*2.2 -- Agreement and Plan of Merger dated as of November 16,
1999, as amended and restated, by and among Pegasus
Systems, Inc., Pegasus Worldwide, Inc., REZ, Inc., Reed
Elsevier Inc. and Utell International Group, Ltd.
(attached as Appendix A to the information
statement/prospectus contained in this Registration
Statement).
++3.1 -- Third Amended and Restated Certificate of Incorporation,
as amended.
3.2 -- Second Amended and Restated Bylaws.
3.3 -- Form of Certification of Designation, Preferences and
Rights of Series A Preferred Stock of Pegasus Systems,
Inc. (incorporated by reference from Exhibit 2 of Pegasus
Systems, Inc.'s Form 8-A filed with the Commission on
October 9, 1998).
4.1 -- Specimen of Common Stock certificate.
4.2 -- Rights Agreement dated as of September 28, 1998 by and
between Pegasus Systems, Inc. and American Securities
Transfer & Trust, Inc. (incorporated by reference from
Exhibit 4 of Pegasus Systems, Inc.'s Current Report on
Form 8-K filed with the Commission on October 9, 1998).
4.3 -- Form of Rights Certificate (incorporated by reference
from Exhibit 3 of Pegasus Systems, Inc.'s Form 8-K filed
with the Commission on October 9, 1998).
4.4 -- Rights Agreement dated June 25, 1996 by and among Pegasus
Systems, Inc. and certain holders of capital stock of
Pegasus Systems, Inc.
4.5 -- Third Amendment and Restated Certificate of Incorporation
(see Exhibit 3.1).
4.6 -- Second Amended and Restated Bylaws (see Exhibit 3.2).
*5.1 -- Opinion of Locke Liddell & Sapp LLP, regarding the
legality of securities being issued.
*9.1 -- Voting Agreement dated as of November 16, 1999 between
Pegasus Systems, Inc. and the Majority Stockholder of
REZ, Inc., a Delaware corporation (attached as Appendix B
to the information statement/prospectus contained in this
Registration Statement).
*9.2 -- Form of Voting Agreement dated as of November 16, 1999
between Pegasus Systems, Inc. and the Parties other than
Majority Stockholder of REZ, Inc., a Delaware corporation
(attached as Appendix C to the information statement/
prospectus contained in this Registration Statement) and
a Schedule of Signatures.
*10.1 -- Employment Agreement dated January 1, 2000 between
Pegasus Systems, Inc. and John F. Davis, III.
*10.2 -- Employment Agreement dated January 1, 2000 between
Pegasus Systems, Inc. and Joseph W. Nicholson.
*10.3 -- Employment Agreement dated January 1, 2000 between
Pegasus Systems, Inc. and Jerome L. Galant.
*10.4 -- Employment Agreement dated August 1, 1999 between REZ,
Inc. and I. Malcolm Highet.
</TABLE>
II-2
<PAGE> 289
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
++10.5 -- 1996 Stock Option Plan, as amended.
10.6 -- 1997 Stock Option Plan, as amended (incorporated by
reference from Pegasus Systems, Inc.'s Proxy Statement
for its 2000 Annual Stockholders meeting filed with the
Commission on March 17, 2000).
10.7 -- Citibank Global Payments Service Agreement dated July 24,
1998 between the Hotel Clearing Corporation and Citibank,
N.A. (incorporated by reference to Exhibit 10.1 of
Pegasus Systems, Inc.'s 10-Q for the quarter ended
October 31, 1998, filed with the Commission on November
16, 1998).
10.8 -- Facilities Management Agreement dated January 1, 1996
between Pegasus Systems, Inc. and Anasazi, Inc.,
currently known as REZsolutions, Inc.
10.9 -- Service Agreement dated December 13, 1996 between Pegasus
Systems, Inc. and Comdisco, Inc.
10.10 -- Service Agreement dated January 17, 1997 between Pegasus
Systems, Inc. and Genuity, Inc.
++10.11 -- 1997 Employee Stock Purchase Plan, as amended.
*10.12 -- Office Lease dated October 1, 1995, First Amendment to
Office Lease dated February 25, 1998, Second Amendment to
Office Lease dated November 2, 1998 and Third Amendment
to Office Lease dated November 8, 1999 between Pegasus
Systems, Inc. and the Utah State Retirement Investment
Fund relating to property located at 3811 Turtle Creek
Blvd., Suite 1100, Dallas, Texas 75219
*10.13 -- Supplemental Employee Retirement Plan
*21.1 -- Subsidiaries of Pegasus Systems, Inc.
+23.1 -- Consent of PricewaterhouseCoopers LLP.
+23.2 -- Deloitte & Touche LLP Consent and Report on Schedule.
*23.3 -- Consent of Locke Liddell & Sapp LLP (included in its
opinion filed as Exhibit 5.1).
*23.4 -- Consent of Hambrecht & Quist LLC.
*23.5 -- Consent of Thomas Weisel Partners, LLC.
*24.1 -- Power of Attorney (included on signature page).
*27.1 -- Financial Data Schedule for year ended December 31, 1999.
</TABLE>
- ---------------
Unless otherwise indicated, exhibits are incorporated by reference to the
Registration Statement (File No. 333-28595) on Form S-1 declared effective by
the Commission on August 6, 1997.
* Previously filed.
+ Filed herewith.
++ Incorporated by reference to the Form 10-K for the fiscal year ended December
31, 1998.
II-3
<PAGE> 290
(b) Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts for the Years Ended
December 31, 1997, 1998 and 1999
Pegasus Systems, Inc.
REZ, Inc.
Schedules not listed above have been omitted because the information
required to be set forth therein is not required, not applicable or is shown in
the financial statements or is included elsewhere.
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any information statement/prospectus required by
section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the information statement/prospectus any facts
or events arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate represent a fundamental change in the
information set forth in the registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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;
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering;
(4) that prior to any public reoffering of the securities registered
hereunder through use of a information statement/prospectus which is a part
of this registration statement, by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c), such reoffering
information statement/prospectus will contain the information called for by
the applicable registration form with respect to reofferings by persons who
may be deemed underwriters, in addition to the information called for by
the other items of the applicable form;
(5) that every information statement/prospectus (i) that is filed
pursuant to paragraph (5) immediately preceding, or (ii) that purports to
meet the requirements of section 10(a)(3) of the Securities Act and is used
in connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the registration statement and will not
be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, each such
post-effective amendment 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;
(6) to respond to requests for information that is incorporated by
reference into the information statement/prospectus pursuant to Items 4,
10(b), 11, or 13 of the Form S-4, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration
statement through the date of responding to the request. This includes
II-4
<PAGE> 291
information contained in documents filed subsequent to the effective date
of the registration statement through the date of responding to the
request; and
(7) to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
II-5
<PAGE> 292
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this Amendment No. 4 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Dallas, State of Texas, on this 20th day of
March, 2000.
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 Amendment
No. 4 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
* Chief Executive Officer, March 20, 2000
- ----------------------------------------------------- President and Director
John F. Davis, III (Principal Executive Officer)
* Chief Financial Officer March 20, 2000
- ----------------------------------------------------- (Principal Financial and
Jerome L. Galant Accounting Officer)
* Director March 20, 2000
- -----------------------------------------------------
Michael A. Barnett
* Director March 20, 2000
- -----------------------------------------------------
Paul J. Brown
* Director March 20, 2000
- -----------------------------------------------------
Robert B. Collier
* Director March 20, 2000
- -----------------------------------------------------
William C. Hammett, Jr.
* Director March 20, 2000
- -----------------------------------------------------
Thomas F. O'Toole
* Director March 20, 2000
- -----------------------------------------------------
Bruce W. Wolff
*By: /s/ RIC L. FLOYD
------------------------------------------------
Attorney-In-Fact
</TABLE>
II-6
<PAGE> 293
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Pegasus Systems, Inc.
Our audits of the consolidated financial statements referred to in our
report dated February 10, 2000 appearing in this Registration Statement No.
333-92683 on Form S-4 of Pegasus Systems, Inc. also included an audit of the
financial statement schedule listed in such Registration Statement. In our
opinion, the financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
PricewaterhouseCoopers LLP
Dallas, Texas
February 10, 2000
S-1
<PAGE> 294
SCHEDULE II
PEGASUS SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO FROM BALANCE AT
BEGINNING COSTS AND ACQUIRED END OF
CLASSIFICATION OF PERIOD EXPENSES COMPANIES DEDUCTIONS PERIOD
- -------------- ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
December 31, 1997
Allowance for doubtful accounts....... $ 45 $ 81 $-- $ (48) $ 78
Income tax valuation allowance........ 4,549 -- -- (237) 4,312
------ ---- --- ------- ------
Total reserves and allowances......... 4,594 81 -- (285) 4,390
------ ---- --- ------- ------
December 31, 1998
Allowance for doubtful accounts....... 78 35 7 (21) 99
Income tax valuation allowance........ 4,312 270 -- (4,312) 270
------ ---- --- ------- ------
Total reserves and
allowances.................. 4,390 305 7 (4,333) 369
------ ---- --- ------- ------
December 31, 1999
Allowance for doubtful accounts....... 99 -- -- (17) 82
Income tax valuation allowance........ 270 -- -- (270) --
------ ---- --- ------- ------
Total reserves and
allowances.................. $ 369 $ -- $-- $ (287) $ 82
====== ==== === ======= ======
</TABLE>
(a) This schedule should be read in conjunction with the Company's audited
consolidated financial statements and related notes thereto.
S-2
<PAGE> 295
SCHEDULE II
REZ, INC. AND SUBSIDIARY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
------------------
BALANCE AT CHARGES TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES OTHER DEDUCTIONS OF PERIOD
----------- ---------- ---------- ----- ---------- ---------
<S> <C> <C> <C> <C> <C>
1997
Allowance for Doubtful Accounts.............. $4,345 $2,015 -- $(1,545) $4,815
====== ====== == ======= ======
1998
Allowance for Doubtful Accounts.............. $4,815 $1,581 -- $(1,526) $4,870
====== ====== == ======= ======
1999
Allowance for Doubtful Accounts.............. $4,870 $4,704 -- $(2,716) $6,858
====== ====== == ======= ======
</TABLE>
S-3
<PAGE> 296
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2.1 -- Contribution and Restructuring Agreement dated effective
as of July 21, 1995 by and among Pegasus Systems, Inc.
and all of the stockholders of Pegasus Systems, Inc.
*2.2 -- Agreement and Plan of Merger dated as of November 16,
1999, as amended and restated, by and among Pegasus
Systems, Inc., Pegasus Worldwide, Inc., REZ, Inc., Reed
Elsevier Inc. and Utell International Group, Ltd.
(attached as Appendix A to the information
statement/prospectus contained in this Registration
Statement).
++3.1 -- Third Amended and Restated Certificate of Incorporation,
as amended.
3.2 -- Second Amended and Restated Bylaws.
3.3 -- Form of Certification of Designation, Preferences and
Rights of Series A Preferred Stock of Pegasus Systems,
Inc. (incorporated by reference from Exhibit 2 of Pegasus
Systems, Inc.'s Form 8-A filed with the Commission on
October 9, 1998).
4.1 -- Specimen of Common Stock Certificate.
4.2 -- Rights Agreement dated as of September 28, 1998 by and
between Pegasus Systems, Inc. and American Securities
Transfer & Trust, Inc. (incorporated by reference from
Exhibit 4 of Pegasus Systems, Inc.'s Current Report on
Form 8-K filed with the Commission on October 9, 1998).
4.3 -- Form of Rights Certificate (incorporated by reference
from Exhibit 3 of Pegasus Systems, Inc.'s Form 8-K filed
with the Commission on October 9, 1998).
4.4 -- Rights Agreement dated June 25, 1996 by and among Pegasus
Systems, Inc. and certain holders of capital stock of
Pegasus Systems, Inc.
4.5 -- Third Amended and Restated Certificate of Incorporation
(see Exhibit 3.1).
4.6 -- Second Amended and Restated Bylaws (see Exhibit 3.2).
*5.1 -- Opinion of Locke Liddell & Sapp LLP, regarding the
legality of securities being issued.
*9.1 -- Voting Agreement dated as of November 16, 1999 between
Pegasus Systems, Inc. and the Majority Stockholder of
REZ, Inc., a Delaware corporation (attached as Appendix B
to the information statement/prospectus contained in this
Registration Statement).
*9.2 -- Form of Voting Agreement dated as of November 16, 1999
between Pegasus Systems, Inc. and the Parties other than
Majority Stockholder of REZ, Inc., a Delaware corporation
(attached as Appendix C to the information statement/
prospectus contained in this Registration Statement) and
a Schedule of Signatories.
*10.1 -- Employment Agreement dated January 1, 2000 between
Pegasus Systems, Inc. and John F. Davis, III.
*10.2 -- Employment Agreement dated January 1, 2000 between
Pegasus Systems, Inc. and Joseph W. Nicholson.
*10.3 -- Employment Agreement dated January 1, 2000 between
Pegasus Systems, Inc. and Jerome L. Galant.
*10.4 -- Employment Agreement dated August 1, 1999 between REZ,
Inc. and I. Malcolm Highet.
++10.5 -- 1996 Stock Option Plan, as amended.
</TABLE>
<PAGE> 297
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.6 -- 1997 Stock Option Plan, as amended (incorporated by
reference from Pegasus Systems, Inc.'s Proxy Statement
for its 2000 Annual Stockholders meeting filed with the
Commission on March 17, 2000).
10.7 -- Citibank Global Payments Service Agreement dated July 24,
1998 between the Hotel Clearing Corporation and Citibank,
N.A. (incorporated by reference to Exhibit 10.1 of
Pegasus Systems, Inc.'s 10-Q for the quarter ended
October 31, 1998, filed with the Commission on November
16, 1998).
10.8 -- Facilities Management Agreement dated January 1, 1996
between Pegasus Systems, Inc. and Anasazi, Inc.,
currently known as REZsolutions, Inc.
10.9 -- Service Agreement dated December 13, 1996 between Pegasus
Systems, Inc. and Comdisco, Inc.
10.10 -- Service Agreement dated January 17, 1997 between Pegasus
Systems, Inc. and Genuity, Inc.
++10.11 -- 1997 Employee Stock Purchase Plan, as amended
*10.12 -- Office Lease dated October 1, 1995, First Amendment to
Office Lease dated February 25, 1998, Second Amendment to
Office Lease dated November 2, 1998 and Third Amendment
to Office Lease dated November 8, 1999 between Pegasus
Systems, Inc. and the Utah State Retirement Investment
Fund relating to property located at 3811 Turtle Creek
Blvd., Suite 1100, Dallas, Texas 75219
*10.13 -- Supplemental Employee Retirement Plan
*21.1 -- Subsidiaries of Pegasus Systems, Inc.
+23.1 -- Consent of PricewaterhouseCoopers LLP.
+23.2 -- Deloitte & Touche LLP Consent and Report on Schedule.
*23.3 -- Consent of Locke Liddell & Sapp LLP (included in its
opinion filed as Exhibit 5.1).
*23.4 -- Consent of Hambrecht & Quist LLC.
*23.5 -- Consent of Thomas Weisel Partners, LLC.
*24.1 -- Power of Attorney (included on signature page).
*27.1 -- Financial Data Schedule for the year ended December 31,
1999.
</TABLE>
- ---------------
Unless otherwise indicated, exhibits are incorporated by reference to the
Registration Statement (File No. 333-28595) on Form S-1 declared effective by
the Commission on August 6, 1997.
* Previously filed
+ Filed herewith.
++ Incorporated by reference to the Form 10-K for the fiscal year ended December
31, 1998.
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Amendment No. 4 to Registration Statement
No. 333-92683 on Form S-4 of Pegasus Systems, Inc. of our reports dated February
10, 2000 relating to the financial statements and financial statement schedule
of Pegasus Systems, Inc. which appear in such Registration Statement. We also
consent to the reference to us under the heading "Experts" in such Registration
Statement.
PricewaterhouseCoopers LLP
Dallas, Texas
March 20, 2000
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
We consent to the use of this Pre-Effective Amendment No. 4 to Registration
Statement No. 333-92683 of Pegasus Systems, Inc. on Form S-4 of our report dated
February 21, 2000 (which expresses an unqualified opinion and includes an
explanatory paragraph relating to the restatement described in Note 11),
appearing in the information statement/prospectus, which is part of this
Registration Statement, and to the references to us under the heading "Experts"
in such information statement/prospectus.
Our audits of the consolidated financial statements referred to in our
aforementioned report also included the financial statement schedule of REZ,
Inc. and subsidiaries, listed in Item 21. This financial statement schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 20, 2000
