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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to 240.14a-11(C) or 240.14a-12
PEGASUS SYSTEMS, INC.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
(1) Title of each class of securities to which transaction
applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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PEGASUS SYSTEMS LOGO
3811 TURTLE CREEK BOULEVARD, SUITE 1100
DALLAS, TEXAS 75219
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 13, 1999
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To the Stockholders of
PEGASUS SYSTEMS, INC.
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Pegasus
Systems, Inc., a Delaware corporation (the "Company"), will be held at the
Crescent Hotel, 400 Crescent Court, Dallas, Texas, on Thursday, May 13, 1999, at
10:00 a.m., Dallas, Texas time, for the following purposes:
1. To elect three Class II directors to hold office for a term of
three years or until their respective successors are elected and qualified;
2. To approve amendments to the Amended 1997 Stock Option Plan that
increase the number of shares of common stock reserved for issuance under
the plan and limit the maximum number of options which may be granted to an
individual during a fiscal year to 500,000 shares; and
3. To transact such other business as properly may come before the
meeting or any adjournment thereof.
The close of business on March 15, 1999 has been fixed by the Board of
Directors as the record date for the Annual Meeting. Only stockholders of record
on that date will be entitled to notice of and to vote at the Annual Meeting or
any adjournment thereof, notwithstanding transfer of any stock on the books of
the Company after such record date. The stock transfer books will not be closed.
A Proxy Statement, form of Proxy and copy of the Annual Report on the
Company's operations during the fiscal year ended December 31, 1998 accompany
this notice.
It is important that your shares be represented at the Annual Meeting. If
you do not expect to attend in person, please sign and date the form of Proxy
and return it in the enclosed envelope. The form of Proxy is enclosed in the
mailing envelope in which this Proxy Statement is contained. Stockholders who
attend the Annual Meeting may revoke their proxies and vote in person if they
desire.
By Order of the Board of Directors
Ric L. Floyd,
Secretary
April 12, 1999
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PEGASUS SYSTEMS LOGO
3811 Turtle Creek Boulevard, Suite 1100
Dallas, Texas 75219
PROXY STATEMENT
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 13, 1999
SOLICITATION OF PROXIES
This Proxy Statement is furnished to stockholders of Pegasus Systems, Inc.,
a Delaware corporation (the "Company"), in connection with the solicitation of
proxies by the Board of Directors to be voted at the Annual Meeting of
Stockholders of the Company to be held at the Crescent Hotel, 400 Crescent
Court, Dallas, Texas, on Thursday, May, 13, 1999, at 10:00 a.m., Dallas, Texas
time, or at any adjournment thereof, for the purposes set forth in the
accompanying Notice of Annual Meeting of Stockholders. References herein to the
"Company" include Pegasus Systems, Inc. and its predecessors and consolidated
subsidiaries, unless the context otherwise requires.
This Proxy Statement and form of Proxy are being mailed to stockholders on
or about April 12, 1999. If the enclosed form of Proxy is executed and returned,
it may nevertheless be revoked by the stockholder at any time by filing with the
Secretary of the Company a written revocation or a duly executed Proxy bearing a
later date. A stockholder who attends the meeting in person may revoke his or
her Proxy at that time and vote in person if so desired. All proxies duly
signed, dated, and returned will be voted as specified therein, but unless
otherwise specified, will be deemed to grant authority to vote:
(1) FOR the election of the three nominees listed under "Election of
Directors" as nominees of the Company for election as directors;
(2) FOR the amendments to the Amended 1997 Stock Option Plan that
increase the number of shares of common stock reserved for issuance under
the plan and limit the maximum number of options which may be granted to an
individual during a fiscal year to 500,000 shares; and
(3) at the discretion of the persons named in the enclosed form of
Proxy, on any other matter that may properly come before the meeting or any
adjournment thereof.
The enclosed Proxy is solicited by and on behalf of the Board of Directors
of the Company. The Company is unaware of any additional matters not set forth
in the Notice of Annual Meeting of Stockholders that will be presented for
consideration at the Annual Meeting. If any other matters are properly brought
before the Annual Meeting and presented for a vote of the stockholders, the
persons named in the Proxy will vote in accordance with their best judgment upon
such matters, unless otherwise restricted by law.
The cost of solicitation of proxies will be borne by the Company. The
Company has engaged American Stock Transfer & Trust Company ("ASTT") to solicit
proxies from beneficial owners of shares standing in the name of brokers and
other nominees. The Company has agreed to pay ASTT an estimated $500 per month
for ASTT's fee and the amount of ASTT's expenses for such service. In addition
to the use of the mails, proxies may also be solicited by personal interview,
facsimile transmission, and telephone by directors, officers, employees, and
agents of the Company. The Company will also supply brokers, nominees or other
custodians with the numbers of Proxy forms, Proxy Statements, and Annual Reports
they may require for forwarding to beneficial owners, and the Company will
reimburse such persons for their expense in so doing.
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OUTSTANDING CAPITAL STOCK AND STOCK OWNERSHIP OF
DIRECTORS, CERTAIN EXECUTIVE OFFICERS
AND PRINCIPAL STOCKHOLDERS
The record date for the determination of the stockholders entitled to
notice of and to vote at the Annual Meeting has been established by the Board of
Directors as the close of business on March 15, 1999. As of the record date, the
Company had issued and outstanding and entitled to vote at the Annual Meeting
10,606,160 shares of common stock.
The following table sets forth information as of March 15, 1999, regarding
the beneficial ownership of the Company's common stock (i) by each person or
group known by management of the Company to own more than five percent of the
outstanding shares of common stock of the Company, (ii) by each of the Company's
executive officers named in the Summary Compensation Table under "Executive
Compensation and Other Matters", (iii) by each of the Company's directors and
nominees, and (iv) by all of its directors and executive officers as a group.
SHARES BENEFICIALLY
OWNED(1)
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NAME NUMBER PERCENT
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The TCW Group, Inc.(2)...................................... 1,304,602 12.3%
FMR Corp.(3)................................................ 926,860 8.7
Provident Investment Counsel, Inc.(4)....................... 812,736 7.7
J.P. Morgan & Co. Incorporated(5)........................... 746,800 7.0
John F. Davis, III(6)....................................... 226,572 2.1
Joseph W. Nicholson(7)...................................... 81,250 *
Jerome L. Galant(8)......................................... 27,180 *
William S. Lush(9).......................................... 18,285 *
Michael R. Donahue(10)...................................... 15,833 *
Michael A. Barnett(11)...................................... 41,132 *
Robert B. Collier........................................... 1,600 *
William C. Hammett, Jr.(12)................................. 7,765 *
Thomas F. O'Toole(13)....................................... 2,000 *
Mark C. Wells(14)........................................... 4,000 *
Bruce W. Wolff(15).......................................... 4,000 *
Directors and executive officers as a group (13
persons)(16).............................................. 447,658 4.1%
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* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission (the "Commission") and generally
includes voting or investment power with respect to securities. Except as
indicated by footnote and subject to community property law where
applicable, the Company believes, based on information furnished by such
persons, that the persons named in the table above have sole voting and
investment power with respect to all shares of common stock shown as
beneficially owned by them. Percentage of beneficial ownership is based on
10,606,160 shares of common stock outstanding as of March 15, 1999. In
computing an individual's beneficial ownership, the number of shares of
common stock subject to options held by that individual that are
exercisable as of or within 60 days of March 15, 1999, are deemed
outstanding. Such shares, however, are not deemed outstanding for the
purpose of computing the beneficial ownership of any other person.
(2) Information obtained from a filing with the Commission with an effective
date of December 31, 1998. The address of The TCW Group, Inc. is 865 South
Figueroa Street, Los Angeles, California 90017.
(3) Information obtained from a filing with the Commission with an effective
date of December 31, 1998. The address of FMR Corporation is 82 Devonshire
Street, Boston, Massachusetts 02109.
(4) Information obtained from a filing with the Commission with an effective
date of December 31, 1998. The address of Provident Investment Counsel,
Inc. is 300 Northlake Avenue, Pasadena, CA 91101.
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(5) Information obtained from a filing with the Commission with an effective
date of December 31, 1998. The address for J.P. Morgan & Co. Incorporated
is 60 Wall Street, New York, New York, 10260.
(6) Includes exercisable options held by Mr. Davis to purchase 200,000 shares
of common stock and options exercisable within sixty days of March 15, 1999
to purchase 12,500 shares of common stock.
(7) Represents exercisable options held by Mr. Nicholson to purchase 75,000
shares of common stock and options exercisable within sixty days of March
15, 1999 to purchase 6,250 shares of common stock.
(8) Represents exercisable options held by Mr. Galant to purchase 24,020 shares
of common stock and options exercisable within sixty days of March 15, 1999
to purchase 3,160 shares of common stock.
(9) Includes exercisable options held by Mr. Lush to purchase 17,528 shares of
common stock and options exercisable within sixty days of March 15, 1999 to
purchase 313 shares of common stock.
(10) Represents exercisable options held by Mr. Donahue to purchase 15,833
shares of common stock.
(11) Includes 41,132 shares of common stock held by Lodging Partners-Barnett
Joint Venture, a partnership controlled by Mr. Barnett.
(12) Includes exercisable options held by Mr. Hammett to purchase 2,000 shares
of common stock and options exercisable within sixty days of March 15, 1999
to purchase 2,000 shares of common stock.
(13) Represents options exercisable within sixty days of March 15, 1999 to
purchase 2,000 shares of common stock.
(14) Represents exercisable options held by Mr. Wells to purchase 2,000 shares
of common stock and options exercisable within sixty days of March 15, 1999
to purchase 2,000 shares of common stock.
(15) Represents exercisable options held by Mr. Wolff to purchase 2,000 shares
of common stock and options exercisable within sixty days of March 15, 1999
to purchase 2,000 shares of common stock.
(16) Includes exercisable options held by Messrs. Davis, Nicholson, Galant,
Steven L. Reynolds (Chief Information Officer), Lush, Donahue, Gideon Dean
(Vice President, International Operations), Hammett, Wells and Wolff as a
group to purchase 352,381 shares of common stock and options exercisable
within sixty (60) days of March 15, 1999 to purchase, as a group, 31,192
shares of common stock.
QUORUM AND VOTING
The presence, in person or by proxy, of the holders of a majority of the
shares of outstanding common stock entitled to vote is necessary to constitute a
quorum at the Annual Meeting. The affirmative vote of a plurality of the shares
of common stock represented at the meeting and entitled to vote is required for
the election of directors. Approval of the amendments to the Amended 1997 Stock
Option Plan will require the affirmative vote of a majority of the shares of
outstanding common stock represented at the meeting and entitled to vote. A
holder of shares of common stock will be entitled to one vote per share of
common stock as to each matter properly brought before the meeting. Cumulative
voting is not permitted in the election of directors. Abstentions and broker
non-votes are each included in the determination of the number of shares present
at the meeting for purposes of determining a quorum. Abstentions and broker
non-votes have no effect on determinations of plurality, except to the extent
that they affect the total votes received by any particular candidate. For any
matters requiring approval of a specified percentage of the outstanding shares
represented at the Annual Meeting and entitled to vote on such matter,
abstentions will have the effect of negative votes but broker non-votes will
have no effect since they are not treated as shares entitled to vote on such
matter.
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PROPOSAL ONE
ELECTION OF DIRECTORS
The Company's Third Amended and Restated Certificate of Incorporation
provides for classified directors with staggered terms. The Company currently
has authorized nine directors with seven directors holding office. The directors
are divided into three classes, and their terms expire as follows: Class I,
which consists of Messrs. Hammett and O'Toole, will expire at the Annual Meeting
of Stockholders to be held in 2001; Class II, which consists of Messrs. Collier,
Wells and Wolff, will expire at the Annual Meeting of Stockholders to be held on
May 13, 1999; and Class III, which consists of Messrs. Barnett and Davis, will
expire at the Annual Meeting of Stockholders to be held in 2000. At each annual
meeting of stockholders, the successors to directors whose terms will then
expire will be elected to serve from the time of election and qualification
until the third annual meeting following election and until their successors
have been duly elected and qualified, or until their earlier resignation or
removal. Vacancies on the Board of Directors or newly created directorships will
be filled by a vote of the majority of the directors then in office and any
director so chosen will hold office until the next election of the class for
which such director was chosen. Mr. Collier, who was elected to serve as a
director of the Company on July 7, 1998, has been nominated to serve as a Class
II director. Mr. Barnett was elected by the Board of Directors on February 11,
1999 to serve as a Class III director of the Company. Mr. Robert E. Dirks,
formerly a Class I director, resigned on June 9, 1998. Mr. I. Malcolm Highet,
formerly a Class II director, resigned on June 26, 1998. Messrs. Rockwell A.
Schnabel and Paul J. Travers, formerly Class III directors, resigned on July 31,
1998 and July 20, 1998, respectively.
At the Annual Meeting of Stockholders to be held on May 13, 1999, three
directors will be elected as Class II Directors for terms expiring at the Annual
Meeting of Stockholders to be held in 2002 and until their respective successors
are duly elected and qualified.
Shares represented by Proxies returned duly executed will be voted, unless
otherwise specified, in favor of the three nominees for the Board of Directors
named below. The Proxies cannot be voted for more than three nominees. The
nominees have indicated that they are able and willing to serve as directors. If
any (or all) such persons should be unable to serve, the persons named in the
enclosed Proxy will vote the shares covered thereby for such substitute nominee
(or nominees) as the Board of Directors may select. Stockholders may withhold
authority to vote for any nominee by marking the Proxy as indicated for such
purpose on the form of Proxy.
NOMINEES FOR DIRECTORS
ROBERT B. COLLIER, age 59, has served as a director of the Company 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 ("Inter-Continental"). From January 1994 to
January 1997, Mr. Collier served as Joint Managing Director of
Inter-Continental.
MARK C. WELLS, age 49, has served as a director of the Company since
September 1996. Since May 1998, 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 ("Promus"). From June 1993 to February 1996, Mr. Wells served as
Senior Vice President, Marketing for Promus.
BRUCE W. WOLFF, age 55, has served as a director of the Company since
October 1995. Mr. Wolff has served as Senior Vice President, Distribution, Sales
and Marketing for the lodging division of Marriott International, Inc.
("Marriott") since 1998. From 1986 to 1998, Mr. Wolff served as Vice President,
Distribution, Sales and Marketing for the lodging division of Marriott.
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DIRECTORS CONTINUING IN OFFICE
MICHAEL A. BARNETT, age 46, has served as a director of the Company 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 1984, 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 director of The Hotel Clearing Corporation, a predecessor of
the Company, from 1993 to 1996.
JOHN F. DAVIS, III, age 46, has served as the President and Chief Executive
Officer of the Company since February 1989 and as a director of the Company
since July 1995. Before joining the Company, 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.
WILLIAM C. HAMMETT, JR., age 52, has served as a director of the Company
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 the Company. 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. ("La Quinta"). From June 1992 to August 1996,
Mr. Hammett served as Senior Vice President, Accounting and Administration of La
Quinta.
THOMAS O'TOOLE, age 41, has served as a director of the Company since May
1998. Since March 1999, Mr. O'Toole has served as Senior Vice President,
Marketing for Hyatt Hotels Corporation ("Hyatt"). 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 (Americas).
MEETINGS AND COMMITTEES OF BOARD OF DIRECTORS
The Board of Directors held a total of six meetings in 1998. During 1998,
each director attended at least seventy-five percent (75%) of all of the
meetings held by the Board of Directors and meetings held by committees of the
Board on which he served. The Board of Directors has an Audit Committee,
consisting of Messrs. Hammett, O'Toole and Wolff and a Compensation Committee,
consisting of Messrs. Collier, Hammett and Wells. The Board of Directors has a
Nominating Committee consisting of Messrs. Davis, Hammett and O'Toole.
Audit Committee. The Audit Committee makes recommendations to the Board of
Directors regarding the selection of independent auditors, reviews the results
and scope of the audit and other accounting related services and reviews and
evaluates the Company's internal control functions. The Audit Committee met four
times during 1998.
Compensation Committee. The Compensation Committee makes recommendations to
the Board of Directors concerning salaries and incentive compensation for the
Company's officers and employees and administers the Company's 1996 Amended
Stock Option Plan, 1997 Amended Stock Option Plan and 1997 Amended Employee
Stock Purchase Plan. The Compensation Committee met two times during 1998.
Nominating Committee. The Nominating Committee makes recommendations to the
Board of Directors regarding nominees for election to the Company's Board of
Directors. The Nominating Committee was formed February 1999 and had no meetings
in 1998. The Nominating Committee does not currently consider nominations from
stockholders.
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PROPOSAL TWO
AMENDMENTS TO THE
AMENDED 1997 STOCK OPTION PLAN
The Amended 1997 Stock Option Plan (the "1997 Plan") was adopted by the
Board of Directors and stockholders on March 25, 1997 and was amended in
accordance with the stockholders' approval at the 1998 Annual Meeting of
Stockholders. Under the 1997 Plan, a total of 600,000 shares of common stock
have been reserved for issuance upon the exercise of stock options. At February
28, 1999, 537,072 shares of common stock had been allocated for options
previously issued under the 1997 Plan, leaving 62,928 shares of common stock
available for future grant.
On March 10, 1999, the Board of Directors adopted two proposed amendments
to the 1997 Plan, subject to stockholder approval, and directed that the
proposed amendments be considered at the 1999 Annual Meeting. Under one of the
amendments, the number of shares of common stock reserved for issuance under the
1997 Plan will be increased from 600,000 to 700,000 shares. Additionally, this
amendment provides that the number of shares reserved for issuance under the
1997 Plan would increase, as of the first day of each fiscal year commencing
January 1, 2000, by one percent (1%) of the number of shares outstanding as of
the date this amendment to the Plan is approved by the stockholders of the
Company; provided, however, that the total number of shares reserved for
issuance under the Plan, when aggregated with the number of shares reserved for
issuance under all other stock option plans sponsored by the Company, shall not
exceed fifteen percent (15%) of the number of shares outstanding as of the first
day of each fiscal year.
The Board of Directors believes that the use of long term incentives based
on the value of the common stock is helpful in attracting and retaining
qualified key executives and other key employees and motivating such personnel
to achieve long-range goals through providing compensation opportunities that
are competitive with those offered by other corporations similar to the Company.
The recommended increase in the number of shares reserved for issuance under the
1997 Plan has been proposed in order to enable the Company to continue to
provide stock-based incentives for the foreseeable future.
The other proposed amendment to the 1997 Plan would limit the maximum
number of stock options that may be granted to an individual during any fiscal
year to 500,000 shares. This amendment would enable the stock option grants
under the 1997 Plan to satisfy the requirements of Section 162(m) of the
Internal Revenue Code of 1986, as amended ("Section 162(m)"), as qualified
performance based awards. For federal income tax purposes, Section 162(m) limits
the Company to a $1,000,000 annual deduction ("Deductible Limit") for
compensation paid to each of the Company's five highest paid executive officers
("Named Executive Officers"). If the requirements of Section 162(m) are met,
then qualified performance based awards are exempt from this Deductible Limit.
Stockholder approval of this amendment is intended to allow the Company to
deduct the compensation expense paid upon the exercise of stock options granted
under the 1997 Plan without regard to the Deductible Limit.
If these amendments had been in effect during 1998, the benefits and
amounts received by the Company's directors and executive officers under the
1997 Plan would not have been different. On February 26, 1999, the closing price
of a share of the Company's common stock was $37.50, as reported on the Nasdaq
National Market.
DESCRIPTION OF THE 1997 PLAN
The following description of the 1997 Plan is qualified in its entirety by
reference to the full text of the 1997 Plan, a copy of which is attached as
Exhibit "A" to this Proxy Statement in the form as amended pursuant to this
proposal.
Scope. The 1997 Plan is designed to attract and retain qualified and
competent personnel for positions of substantial responsibility and to provide
additional incentive to employees, consultants and non-employee directors of the
Company. Options granted under the 1997 Plan may be Incentive Stock Options or
Non-qualified Stock Options, as determined by the Administrator (as hereinafter
defined) at the time of grant and subject to the applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code"). If an
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option granted under the 1997 Plan expires or becomes unexercisable without
having been exercised in full, or is otherwise surrendered, the unpurchased
shares may be available for future grants or sale under the 1997 Plan. The 1997
Plan will terminate on March 25, 2007.
Eligibility. Persons eligible to participate in the 1997 Plan include all
employees, consultants and non-employee directors of the Company. As of March
15, 1999, the Company has six non-employee directors and 135 employees.
Non-qualified Stock Options may be granted to employees, consultants and
non-employee directors. Incentive Stock Options may be granted only to
employees. During any fiscal year, not more than 500,000 stock options may be
awarded to any one employee, consultant or non-employee director.
Administration. The 1997 Plan is administered by the Board of Directors or
a committee appointed by the Board (the "Administrator"). Currently, the
Compensation Committee of the Board is the Administrator. The Administrator has
the authority to grant options under the 1997 Plan and to determine the vesting
schedule and the exercise price of the options. The Administrator also has full
power and authority to construe, interpret and administer the 1997 Plan.
Option Exercise Price. The exercise price per share for the shares to be
issued pursuant to exercise of an option under the 1997 Plan is determined by
the Administrator. The 1997 Plan requires that the exercise price per share be
at least 100% of the fair market value on the date of grant, with the following
limited exceptions. First, Incentive Stock Options awarded to an employee who
owns more than 10% of the voting power of all classes of stock of the Company
must have an exercise price of at least 110% of the fair market value on the
date of grant. Second, awards of Non-qualified Stock Options to non-employee
directors of 2,000 shares annually are made with an exercise price of 85% of the
fair market value on the date of grant. Third, pursuant to an amendment to the
1997 Plan recently approved by the Board of Directors, Non-qualified Stock
Options may be granted for not less than 85% of the fair market value of the
common stock on the date of grant if the grant is made to an employee expressly
in lieu of a reasonable amount of salary or cash bonus. Also, pursuant to an
amendment to the 1997 Plan recently authorized by the Board, the Administrator
may not reduce the exercise price of any stock option unless such reduction: (i)
affects less than 10% of the shares reserved for issuance under the 1997 Plan;
(ii) is for a legitimate corporate purpose such as retention of one or more key
persons; and (iii) is for the purpose of maintaining option value due to extreme
circumstances beyond management's control. For amendments to the 1997 Plan
approved by the Board, see "Executive Compensation and Other
Matters -- Amendments to Plans by Board of Directors."
Adjustments, Terminations and Amendment. In the event of any change in the
Company's capitalization, including any stock split, reverse stock split, stock
dividend, combination or reclassification of the common stock, or any other
increase or decrease in the number of issued shares of common stock effected
without receipt of consideration by the Company, appropriate adjustments will be
made to the number of shares available under the 1997 Plan as well as the price
per share of common stock covered by each outstanding option. Upon the
occurrence of an acquisition event ("Acquisition Event") which means (i) certain
mergers or consolidations of the Company with or into another corporation; (ii)
the sale of substantially all of the assets of the Company; (iii) the complete
liquidation of the Company; or (iv) the acquisition by another entity of
beneficial ownership of the Company's securities representing 50% or more of the
combined voting power of the Company's then outstanding securities, the Board of
Directors of the Company may (x) provide that each outstanding option shall be
assumed and/or an equivalent option be substituted by the successor corporation
or an affiliate thereof; (y) upon written notice to the optionees, provide that
all options then unexercised will become exercisable in full as of a specified
date prior to the Acquisition Event and will terminate immediately prior to the
consummation of such Acquisition Event; or (z) if holders of common stock will
receive a cash payment for each share of common stock surrendered, provide that
all outstanding options shall terminate upon consummation of such Acquisition
Event, and each optionee shall receive, in exchange therefor, a cash payment
equal to the amount (if any) by which the acquisition price multiplied by the
number of shares of common stock subject to such outstanding Options (whether or
not then exercisable), exceeds the aggregate exercise price of such options. The
1997 Plan may be suspended, terminated, altered or amended in any way by the
Board of Directors, provided that, stockholder approval of any plan amendment
will be required to the extent necessary and desirable to comply with applicable
provisions of the Securities Exchange Act of 1934, as amended (the "Act"), the
Code or other
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legal or regulatory requirements. No suspension, termination, alteration or
amendment of the 1997 Plan may alter or impair the rights of any optionee under
options previously granted.
For additional information concerning options granted to or held by
executive officers and directors of the Company, see "Executive Compensation and
Other Matters."
FEDERAL INCOME TAX CONSEQUENCES
The following summary of the federal income tax consequences of the 1997
Plan is not comprehensive and is based on current income tax laws, regulations
and rulings.
Incentive Stock Options. An optionee does not recognize income on the grant
of an ISO. Subject to the effect of the alternative minimum tax, discussed
below, if an optionee exercises an ISO and does not dispose of the shares
acquired within two years from the date of the grant of the option nor within
one year from the date of exercise, the optionee will not realize any income by
reason of the exercise and the Company will be allowed no deduction by reason of
the grant or exercise. The optionee's basis in the shares acquired upon exercise
will be the amount paid upon exercise. Provided the optionee holds the shares as
a capital asset at the time of sale or other disposition of the shares, his gain
or loss, if any, recognized on the sale or other disposition will be capital
gain or loss. The amount of his gain or loss will be the difference between the
amount realized on the disposition of the shares and his basis in the shares.
If an optionee disposes of the shares within two years from the date of
grant of the option or within one year from the date of exercise (an "Early
Disposition"), the optionee will realize ordinary income at the time of such
Early Disposition which will equal the excess, if any, of the lesser of (i) the
amount realized on the Early Disposition, or (ii) the fair market value of the
shares on the date of exercise, over the optionee's basis in the shares. The
Company will be entitled to a deduction in an amount equal to such income. The
excess, if any, of the amount realized on the Early Disposition of such shares
over the fair market value of the shares on the date of exercise will be
long-term or short-term capital gain, depending upon the holding period of the
shares, provided the optionee holds the shares as a capital asset at the time of
Early Disposition. If an optionee disposes of such shares for less than his
basis in the shares, the difference between the amount realized and his basis
will be a long-term or short-term capital loss, depending upon the holding
period of the shares, provided the optionee holds the shares as a capital asset
at the time of disposition.
The excess of the fair market value of the shares at the time the ISO is
exercised over the exercise price for the shares is an amount included in an
optionee's alternative minimum taxable income (the "Stock Option Preference").
Non-qualified Stock Options. Non-qualified stock options do not qualify for
the special tax treatment accorded to ISOs under the Code. Although an optionee
does not recognize income at the time of the grant of the option, he recognizes
ordinary income upon the exercise of a non-qualified option in an amount equal
to the difference between the fair market value of the stock on the date of
exercise of the option and the amount of the exercise price.
As a result of the optionee's exercise of a non-qualified stock option, the
Company will be entitled to deduct as compensation an amount equal to the amount
included in the optionee's gross income. The Company's deduction will be taken
in the Company's taxable year in which the option is exercised.
The excess of the fair market value of the stock on the date of exercise of
a non-qualified stock option over the exercise price is not an item of tax
preference.
Taxation of Preference Items. Section 55 of the Code imposes an alternative
minimum tax equal to the excess, if any, of (i) 26% of the optionee's
"alternative minimum taxable income" that does not exceed $175,000, plus 28% of
his "alternative minimum taxable income" in excess of $175,000, over (ii) his
"regular" federal income tax. Alternative minimum taxable income is determined
by adding the optionee's Stock Option Preference and any other items of tax
preference to the optionee's adjusted gross income and then subtracting certain
allowable deductions and an exemption amount. The exemption amount is $33,750
for single taxpayers, $45,000 for married taxpayers filing jointly, and $22,500
for married taxpayers filing separately.
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However, these exemption amounts are phased out beginning at certain levels of
alternative minimum taxable income.
Change of Control. If there is an acceleration of the vesting of benefits
and/or an acceleration of the exercisability of stock options upon a Change of
Control (as defined in the 1997 Plan), all or a portion of the accelerated
benefits may constitute "excess parachute payments" under Section 280G of the
Code. The employee receiving an excess parachute payment incurs an excise tax of
20% of the amount of the payment in excess of the employee's average annual
compensation over the five calendar years preceding the year of the Change of
Control, and the Company is not entitled to a deduction for such payment.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of a majority of the shares of common stock entitled
to vote on this proposal and represented in person or by proxy at the Annual
Meeting is required for approval.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE AMENDMENTS
TO THE 1997 PLAN.
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EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
NAME POSITION
---- --------
John F. Davis, III...... President, Chief Executive Officer and Director
Joseph W. Nicholson..... Chief Operating Officer
Jerome L. Galant........ Chief Financial Officer
Steven L. Reynolds...... Chief Information Officer
Michael R. Donahue...... Senior Vice President, Commission Processing Services
Gideon Dean............. Vice President, International Operations
William S. Lush......... Vice President, Business Development
Set forth below is information concerning the business experience of the
executive officers of the Company.
JOSEPH W. NICHOLSON, age 38, has served as the Chief Operating Officer of
the Company since September 1998. From September 1989 to September 1998, Mr.
Nicholson served as the Chief Information Officer of the Company.
JEROME L. GALANT, age 49, has served as the Chief Financial Officer of the
Company since September 1996. From April 1996 to September 1996, Mr. Galant
served as the Chief Financial Officer of Personnel Security & Safety Systems,
Inc., a technology development company. From 1990 to February 1996, Mr. Galant
served in a variety of positions for The SABRE Group, including Managing
Director, Finance.
STEVEN L. REYNOLDS, age 39, has served as the Chief Information Officer of
the Company since September 1998. From April 1996 to September 1998, Mr.
Reynolds served as Vice President of Information Technology of the Company. From
November 1992 to April 1996, Mr. Reynolds served as Director of Systems
Development of the Company.
MICHAEL R. DONAHUE, age 45, has served as Senior Vice President, Commission
Processing Services of the Company since June 1998. From May 1997 to June 1998,
Mr. Donahue served as Chief Marketing Officer of the Company. From 1988 to May
1997, Mr. Donahue served as Vice President of Marketing and Development for Lane
Hospitality, a hotel management firm.
GIDEON DEAN, age 34, has served in the Company's 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 for the
Company. Prior to joining the Company, 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, age 57, has served as Vice President, Business Development
of the Company since May 1995. From 1990 to May 1995, Mr. Lush served as Vice
President, Service Development in the travel management services group of
American Express Travel Related Services.
Information concerning the business experience of members of the Company's
Board of Directors is provided under the caption "Election of Directors" above.
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EXECUTIVE COMPENSATION AND OTHER MATTERS
EXECUTIVE COMPENSATION
The following table sets forth for the periods indicated the compensation
earned by the Company's Chief Executive Officer and the four other most highly
compensated executive officers (collectively, the "Named Executive Officers")
whose salary and bonus for the fiscal year ended December 31, 1998 were in
excess of $100,000 for services rendered in all capacities to the Company for
that year:
SUMMARY COMPENSATION TABLE(1)
LONG-TERM
ANNUAL COMPENSATION AWARDS
---------------------------------------- -----------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(2) OPTIONS(#) COMPENSATION(3)
- --------------------------- ---- -------- -------- ------------------ ----------- ------------------
John F. Davis, III(4)...... 1998 $300,000 $150,000 $8,000 80,000 $10,292
President and Chief 1997 275,385 175,000 7,917 -- 9,397
Executive Officer 1996 261,708 302,208 7,500 300,000 10,511
Joseph W. Nicholson(4)..... 1998 $195,833 $ 68,548 $8,000 40,000 $ 3,191
Chief Information Officer 1997 175,159 74,750 7,596 -- 2,847
1996 164,000 56,292 7,500 150,000 3,335
Jerome L. Galant(5)........ 1998 $163,625 $ 57,269 $8,000 16,000 $ 546
Chief Financial Officer 1997 147,944 69,167 7,523 16,000 --
1996 45,313 14,014 1,889 53,333 --
Michael R. Donahue(6)...... 1998 $170,500 $ 34,100 $8,000 -- $ 546
Senior Vice President, 1997 116,135 43,657 4,305 53,333 --
Commission Processing
Services
William S. Lush............ 1998 $132,267 $ 33,075 $6,613 -- $ 462
Vice President, Business 1997 128,000 41,140 6,229 5,000 438
Development 1996 115,838 27,000 5,677 46,667 399
- ---------------
(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 the Company, and may not include certain 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 the Company 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. The bonus of Mr. Davis
includes a one-time $200,000 employment agreement-signing bonus paid in
1996. See "-- Employment Agreements."
(5) The 1996 salary of Mr. Galant represents remuneration paid to him from
September 1996 to December 1996. Mr. Galant commenced employment with the
Company in September 1996.
(6) The 1997 salary of Mr. Donahue represents remuneration paid to him from May
1997 to December 1997. Mr. Donahue commenced employment with the Company in
May 1997.
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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, 1998 to the Named Executive Officers:
NUMBER OF EXERCISE GRANT DATE
SECURITIES % OF TOTAL PRICE PRESENT
UNDERLYING OPTIONS OPTIONS GRANTED PER EXPIRATION VALUE
NAME GRANTED(1) IN 1998(2) SHARE(3) DATE(4) (5)
---- ------------------ --------------- --------- ---------- ----------
John F. Davis, III............. 80,000 20.14% $ 9.50 12/31/06 $436,000
Joseph W. Nicholson............ 40,000 10.07% $ 9.50 12/31/06 $218,000
Jerome L. Galant............... 10,000 2.52% $ 9.50 12/31/06 $ 54,500
Jerome L. Galant............... 6,000 1.51% $11.50 12/31/06 $ 39,600
- ---------------
(1) The options held by Messrs. Davis, Nicholson and Galant 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 an
Acquisition Event as described under "Amendments to the Amended 1997 Stock
Option Plan -- Description of 1997 Plan."
(2) Based on an aggregate of 397,166 shares subject to options granted in 1998.
(3) The exercise prices for the common stock set forth in the table for Messrs.
Davis, Nicholson and Galant are based on and equal to the closing price of
the common stock as quoted on the Nasdaq National Market on the date of
grant as determined by the Compensation Committee of the Board.
(4) Options may terminate before their expiration date upon the death,
disability or termination of employment of the optionee.
(5) These values are determined using the Black-Scholes Option Pricing Model.
The Black-Scholes Option Pricing Model is one of the methods permitted by
the Commission for estimating the present value of options. The
Black-Scholes Option Pricing Model is based on assumptions as to certain
variables as described below and it is not intended to estimate, and has no
direct correlation to, the value of stock options that an individual will
actually realize. The actual value of the stock options that a Named
Executive Officer may realize, if any, will depend on the excess of the
market price on the date of exercise over the exercise price. The values
listed above for Messrs. Davis, Nicholson and Galant were based on the
following assumptions: volatility -- 72.8%; risk free rate of
return -- 4.4%; 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 1998 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, 1998.
NUMBER OF SECURITIES VALUE OF IN-THE-MONEY
SHARES UNDERLYING OPTIONS AT YEAR OPTIONS AT
ACQUIRED END(#) YEAR-END(2)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------------- ----------- ------------- ----------- -------------
John F. Davis, III....... -- -- 187,500 192,500 $6,373,125 $5,943,675
Joseph W. Nicholson...... -- -- 93,750 96,250 $3,186,563 $2,971,938
Jerome L. Galant......... 7,000 $162,805 27,666 49,647 $ 676,757 $1,418,602
Michael R. Donahue....... -- -- 19,999 33,334 $ 614,969 $1,025,021
William S. Lush.......... 3,000 $ 44,310 24,812 23,855 $ 797,142 $ 742,784
- ---------------
(1) Based on the difference between the option exercise price and the closing
sales price of the Company's common stock as reported on the Nasdaq National
Market on the exercise date.
(2) Based on the difference between the option exercise price and the closing
sale price of $36.00 of the Company's common stock as reported on the Nasdaq
National Market on December 31, 1998, the last trading day prior to the
closing of the Company's 1998 fiscal year multiplied by the number of shares
underlying the options.
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EMPLOYMENT AGREEMENTS
The Company is a party to employment agreements with each of Messrs. Davis
and Nicholson. Each agreement has a term extending through June 25, 2000 and
automatically renews for additional one-year terms if neither the Company nor
the employee has notified the other party 60 days prior to the date of renewal
of its intention to terminate the agreement. The agreements provide that Messrs.
Davis and Nicholson will receive base annual salaries of $275,000 and $175,000,
respectively, and will be eligible to receive incentive compensation determined
by the Compensation Committee of the Board of Directors based on the achievement
of performance objectives established by the Compensation Committee from time to
time. The base annual salaries are subject to increase annually at the
discretion of the Compensation Committee. The agreements also provide that
Messrs. Davis and Nicholson will receive options for a total of 300,000 and
150,000 shares of common stock, respectively, at an exercise price of $2.01 per
share. These options were granted on June 25, 1996. The options will fully vest
no later than June 25, 2000. Each agreement obligates the Company to the extent
commercially practicable to maintain life insurance with respect to Messrs.
Davis and Nicholson. The Company currently maintains coverage with respect to
Mr. Davis in the amount of $2.5 million with the Company as the sole beneficiary
and with respect to Mr. Nicholson in the amount of $2 million with the Company
as the sole beneficiary.
Each employment agreement provides that either the Company or the employee
has the right to terminate the employment at any time during the term of the
agreement with or without cause by delivering written notice of termination to
the other 30 days prior to the date of termination. Each agreement provides for
a severance payment if the agreement is terminated by the Company without cause.
Under such circumstances, Messrs. Davis and Nicholson would receive their base
annual salary for a period of 12 months following the date of termination,
payable over such 12-month period at such times as executives of the Company
receive their regular salary payments; all accrued salary, any benefits under
any plans of the Company in which the employee is a participant to the full
extent of such employee's rights under such plans and any appropriate
out-of-pocket business expense reimbursements; and, vesting of the options
granted under the applicable employment agreement shall accelerate so that (i)
if termination of employment occurs prior to July 25, 1999, such employee's
options shall vest for an additional 75,000 and 37,500 shares of common stock,
respectively (in addition to shares vested as of the date of termination), or
(ii) if termination of employment occurs on or after July 25, 1999, such
employee's options shall fully vest. If the agreements are terminated
voluntarily either by the employee or by the Company with cause, or by reason of
death or disability, then Mr. Davis or Mr. Nicholson, as the case may be, or
their respective estate will be entitled to payment of all accrued salary,
vesting of the options granted through the date of termination only, any further
benefits under any plans of the Company in which such person is a participant to
the full extent of such person's rights under such plans through the date of
termination only, and any appropriate out-of-pocket business expense
reimbursements.
On August 29, 1996, the Company entered into a letter agreement with Jerome
L. Galant, Chief Financial Officer. The agreement provides that Mr. Galant will
receive annual base salary of $145,000 (subject to adjustment), plus a bonus of
up to thirty percent (30%) of such annual base salary. Pursuant to this
agreement, Mr. Galant has been granted options to purchase up to 53,333 shares
of common stock at an exercise price of $2.01 per share.
On April 18, 1997, the Company entered into a letter agreement with Michael
R. Donahue. The agreement provides that Mr. Donahue will receive annual base
salary of $165,000 (subject to adjustment), and will be eligible to receive
incentive compensation based on the achievement of certain performance
objectives. Pursuant to this agreement, Mr. Donahue has been granted options to
purchase up to 53,333 shares of common stock at an exercise price of $5.25 per
share. These options will vest over four years. In addition, under certain
circumstances Mr. Donahue will receive a severance payment equal to (i) six-
months base salary if the employment terminates after 12 months; (ii)
nine-months base salary if employment terminates after 24 months; and (iii)
twelve-months base salary if employment terminates after 36 months.
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COMPENSATION OF DIRECTORS
Directors currently do not receive any cash compensation from the Company
for their service as members of the Board of Directors, although they are
reimbursed for all reasonable expenses incurred in connection with the
performance of their duties as directors of the Company. Under the 1997 Plan,
upon the election or re-election of directors to the Board of Directors, and on
the date of each Annual Meeting held during a director's multi-year term, each
non-employee director is granted options for 2,000 shares of common stock with
an option price of eighty-five (85%) of the closing price at the end of the
business day immediately preceding the date of grant and such options vest 12
months following such grant. If a director's service terminates six (6) months
or more following the date of grant, the grant will be partially vested as
follows: 50% following six (6) months of service and an additional 8.33% for
each additional completed month of service as a director following the date of
grant.
AMENDMENTS TO PLANS BY BOARD OF DIRECTORS
The Board of Directors has approved certain amendments to the 1997 Plan and
the Company's 1996 Stock Option Plan (the "1996 Plan") which do not require
stockholder approval. Under these amendments, the 1996 Plan and the 1997 Plan
each require Non-qualified Stock Options to be granted at not less than the fair
market value of the common stock on the date of grant except that grants may be
made at not less than 85% of the fair market value for Non-qualified Stock
Options granted to an employee expressly in lieu of a reasonable amount of
salary or cash bonus. The 1996 Plan and the 1997 Plan each also prohibit the
plan administrator from reducing the exercise price of any stock option unless
such reduction: (i) affects less than 10% of the shares reserved for issuance
under the plan, (ii) is for a legitimate corporate purpose such as retention of
one or more key persons; and (iii) is for the purpose of maintaining option
value due to extreme circumstances beyond management's control.
The Board of Directors has also approved certain amendments to the
Company's Employee Stock Purchase Plan (the "Purchase Plan"). Under these
amendments, the Company may permit employees to make, subject to certain
limitations, lump sum contributions by check payable to the Company in addition
to electing to participate by means of payroll deduction. Also, during the first
90 days of each Purchase Plan year, employees are allowed to make one change
(either to increase or decrease) in the amount of their payroll deductions. In
addition, any accumulated payroll deductions and other contributions that would
have been used to purchase fractional shares are retained in the account for the
subsequent Purchase Plan year unless the participant does not participate in the
subsequent year, and in such event, the balance is refunded to the participant.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Act requires that the Company's executive officers and
directors, and beneficial owners of more than ten percent (10%) of any class of
equity security registered pursuant to the Act, make certain filings with the
Commission and the Company. The Company believes, based on information provided
to the Company by the reporting persons, that during 1998, all directors,
officers and ten percent (10%) beneficial owners timely complied with such
filing requirements.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1998, Messrs. Collier, Hammett and Wells served on the Company's
Compensation Committee. None of these individuals was at any time, during 1998,
or at any other time, an officer or employee of the Company. There were no
"interlocks" with any other company within the meaning of the Act.
CERTAIN TRANSACTIONS
Mr. Wells is a director of the Company and is associated with Choice Hotels
International ("Choice"). In 1998, the Company received from Choice or its
affiliates as remuneration for services $416,971.
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Mr. Wolff is a director of the Company and is associated with Marriott
International, Inc. ("Marriott"). In 1998, the Company received from Marriott or
its affiliates as remuneration for services $253,571 and paid Marriott or its
affiliates as remuneration for services $1,126,367.
Mr. O'Toole is a director of the Company and is associated with Hyatt
Hotels Corporation ("Hyatt"). In 1998, the Company received from Hyatt or its
affiliates as remuneration for services $566,053.
REPORT ON EXECUTIVE COMPENSATION
Decisions on compensation of the Company's executive officers generally are
made by the three-member Compensation Committee of the Board. Each member of the
Compensation Committee is a non-employee director. All decisions by the
Compensation Committee relating to compensation of the Company's executive
officers are reviewed by the Board. Decisions with respect to awards under
certain of the Company's employee benefit plans are made solely by the
Compensation Committee in order for such awards to satisfy applicable legal and
regulatory considerations. Set forth below is a report prepared by Messrs.
Collier, Hammett and Wells in their capacity as all of the members the
Compensation Committee addressing the Company's compensation policies for 1998
as they affected the Company's executive officers, including the Company's Chief
Executive Officer, Mr. Davis.
The Compensation Committee's executive compensation policies are designed
to provide competitive levels of compensation that integrate pay with the
Company's annual and long-term performance goals, reward above average corporate
performance, recognize individual initiative and achievements, and assist the
Company in attracting and retaining qualified executives. Targeted levels of
total executive compensation are generally set at levels that the Compensation
Committee believes to be consistent with others in the Company's industry,
although actual compensation levels in any particular year may be above or below
those of the Company's competitors, depending upon the Company's performance.
The Compensation Committee endorses the position that stock ownership by
management and performance based compensation arrangements are beneficial in
aligning management's and stockholders' interests in enhancing the value of the
Company's common stock.
In addition to stock-based awards in the form of option grants, there are
two components of the Company's non-stock-based compensation program. First,
annual base salary which is believed to be consistent with similar positions in
the industry and in many cases is paid in accordance with the executive
officer's employment agreement. Secondly, each executive officer is eligible to
be awarded an annual bonus equal to a percentage of annual salary based upon
meeting and exceeding established financial and other corporate goals set by the
Compensation Committee. An executive's bonus increases to the extent the
established goals are exceeded up to a maximum bonus amount per year. The
Compensation Committee believes these principal components of the Company's
compensation plan are commensurate with others in the industry.
1998 CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. Davis' compensation for 1998 as Chief Executive Officer of the Company
principally consisted of a base salary and bonus. Mr. Davis' base salary for
1998 was established by the Compensation Committee based upon factors pursuant
to an employment agreement and described in "Executive Compensation and Other
Matters." The bonus paid to Mr. Davis in 1998 was determined considering the
terms of his employment agreement and utilizing the factors discussed above
relating to executive officers in general. On October 13, 1998, Mr. Davis
received a grant from the 1997 Plan of 80,000 shares of common stock at an
option price equal to the closing price on October 12, 1998. Mr. Davis received
other compensation in fiscal 1998 comprised of the Company's matching
contributions under its 401(k) Plan and the payment of certain life insurance
premiums. Mr. Davis does not participate in the Compensation Committee's
decision regarding his compensation.
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LIMIT ON THE DEDUCTIBILITY OF EXECUTIVE COMPENSATION
In 1993, Congress amended the Internal Revenue Code to add Section 162(m).
This Section of the Internal Revenue Code limits the deductibility of
compensation paid to specified executive officers to $1,000,000 per officer in
any one year. Compensation which qualifies as performance based compensation
does not have to be taken into account for the purposes of this limitation. As
discussed in Proposal Two of this Proxy Statement, the Company is attempting to
obtain stockholder approval of an amendment to the 1997 Plan to allow the
Company to deduct the compensation expense paid upon the exercise of stock
options granted under the 1997 Plan even if the compensation paid to any of the
Named Executive Officers exceeds the Deductible Limit. The Compensation
Committee intends to recommend further action in connection with the Company's
other benefit plans and salary and bonus policies to address this issue if and
when circumstances require.
Submitted by the Compensation
Committee
of the Board of Directors
Robert B. Collier
William C. Hammett, Jr.
Mark C. Wells
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PERFORMANCE GRAPH
The following graph compares the annual cumulative total stockholder return
on an investment of $100 on August 7, 1997 (the date of the Company's initial
public offering) in the Company's common stock, based on the market price of the
common stock, with the cumulative total return of a similar investment in
companies on the Russell 2000 Composite Stock Market Index and in a group of
peer companies selected by the Company on a line-of-business basis and weighted
for market capitalization. Peer companies included are PMT Services, Inc.,
QuickResponse Services, Inc., Transaction Network Services, Inc., ENVOY
Corporation, National Processing, Inc. and E Trade Group, Inc. The Company is
also included in the calculations of peer group cumulative total stockholder
return on investment.
COMPARISON OF 17 MONTH CUMULATIVE TOTAL RETURN*
AMONG PEGASUS SYSTEMS, INC., THE RUSSELL 2000 INDEX
AND A PEER GROUP
MEASUREMENT PERIOD PEGASUS
(FISCAL YEAR COVERED) SYSTEMS, INC. PEER GROUP RUSSELL 2000
8/07/97 100.00 100.00 100.00
12/31/97 114.42 90.69 106.10
12/31/98 276.92 143.57 105.40
*$100 INVESTED ON 8/7/97 IN STOCK AND ON 7/31/97 IN INDEX -- INCLUDING
REINVESTMENT OF DIVIDENDS.
ANNUAL REPORT ON FORM 10-K
UPON WRITTEN REQUEST OF ANY BENEFICIAL STOCKHOLDER OR STOCKHOLDER OF
RECORD, A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1998 (INCLUDING THE EXHIBITS, FINANCIAL STATEMENTS, AND THE
SCHEDULES THERETO) REQUIRED TO BE FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 13A-1 UNDER THE SECURITIES EXCHANGE ACT OF 1934, MAY
BE OBTAINED, WITHOUT CHARGE, FROM RIC L. FLOYD, SECRETARY, 3811 TURTLE CREEK
BOULEVARD, SUITE 1100, DALLAS, TEXAS 75219; FACSIMILE (214) 528-5675.
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INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers, LLP, independent accountants, served as independent
accountants for the Company for the fiscal year ended December 31, 1998, and are
expected to serve in such capacity for the current fiscal year. Representatives
of PricewaterhouseCoopers, LLP will be present at the Annual Meeting, will have
the opportunity to make a statement if they desire to do so, and will be
available to respond to appropriate questions presented at the Annual Meeting.
In January 1997, the Company advised Belew Averitt LLP ("Belew Averitt")
that it would not longer retain the firm as independent accountants. The reports
of Belew Averitt on the Company, formerly The Hotel Industry Switch Company and
The Hotel Clearing Corporation for previous years (1993, 1994 and 1995) did not
contain an adverse opinion or a disclaimer of opinion, nor were they qualified
or modified as to uncertainty, audit scope or accounting principles. The
decision to change accountants was precipitated by the Company's plan to
complete a public offering in 1997 and was approved by the Board of Directors on
January 7, 1997. During the periods audited by Belew Averitt and through January
7, 1997, there were no disagreements with Belew Averitt on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreement(s), if not resolved to the satisfaction
of Belew Averitt, would have caused it to make reference to the subject matter
of the disagreements in connection with its reports. PricewaterhouseCoopers LLP
was engaged by the Company as its independent accountants on January 7, 1997.
STOCKHOLDER PROPOSALS
Pursuant to Rule 14a-8 under the Securities Exchange Act of 1934,
stockholder proposals to be presented at the 2000 Annual Meeting of Stockholders
("2000 Annual Meeting"), for inclusion in the Company's Proxy Statement and form
of Proxy relating to that meeting, must be received by the Company at its
offices in Dallas, Texas, addressed to the Secretary of the Company, not later
than November 24, 1999. With respect to any stockholder proposal submitted
outside of Rule 14a-8, persons acting as proxies shall have discretionary
authority to vote against any such proposal presented at the 2000 Annual Meeting
unless notice is received by the Company not later than February 7, 2000 that
such proposal is to be presented at the 2000 Annual Meeting and certain other
requirements are met. Such proposals must comply with applicable Delaware law,
the Bylaws of the Company and the requirements of Regulation 14A of the Act.
OTHER MATTERS
At the date of this Proxy Statement, management was not aware that any
matters not referred to in this Proxy Statement would be presented for action at
the meeting. If any other matters should come before the meeting, the persons
named in the accompanying form of Proxy will have discretionary authority to
vote all proxies in accordance with their best judgment, unless otherwise
restricted by law.
By Order of the Board of Directors
RIC L. FLOYD,
Secretary
Dated: April 12, 1999
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APPENDIX A
THE 1997 AMENDED STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this Stock Option Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and any Parent or Subsidiary, to compensate Non-Employee Directors
of the Company and to promote the success of the Company's business. Options
granted under the Plan may be Incentive Stock Options or Nonstatutory Stock
Options, as determined by the Administrator at the time of grant of an option
and subject to the applicable provisions of Section 422 of the Code and the
regulations promulgated thereunder.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or the Compensation Committee
appointed by the Board.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means the Compensation Committee appointed by the
Board of Directors.
(e) "Common Stock" means the Common Stock of the Company.
(f) "Company" means Pegasus Systems, Inc.
(g) "Consultant" means any person who is engaged by the Company or any
Parent or Subsidiary to render consulting or advisory services and is
compensated for such services.
(h) "Continuous Status as an Employee or Consultant" means that the
employment or consulting relationship with the Company, any Parent or
Subsidiary is not interrupted or terminated. Continuous Status as an
Employee or Consultant shall not be considered interrupted in the case of
(i) any leave of absence approved by the Company or (ii) transfers between
locations of the Company or between the Company, its Parent, any
Subsidiary, or any successor. A leave of absence approved by the Company
shall include sick leave, military leave, or any other personal leave. For
purposes of Incentive Stock Options, no such leave may exceed 90 days,
unless reemployment upon expiration of such leave is guaranteed by statute
or contract, including Company policies. If reemployment upon expiration of
a leave of absence approved by the Company is not so guaranteed, on the
181st day of such leave any Incentive Stock Option held by the Optionee
shall cease to be treated as an Incentive Stock Option and shall be treated
for tax purposes as a Nonstatutory Stock Option.
(i) "Disability" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(j) "Employee" means any person, including officers and directors,
employed by the Company or any Parent or Subsidiary of the Company. The
payment of a director's fee by the Company shall not be sufficient to
constitute "employment" by the Company.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(l) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock exchange
or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock
Market, its Fair Market Value shall be the closing sales price for such
stock (or the closing bid, if no sales were reported) as quoted on such
exchange or system for the last market trading day prior to the time of
determination, as reported in The Wall Street Journal or such other
source as the Administrator deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market
Value shall be the mean between the high bid and low asked prices for
the Common Stock on the last market trading day prior to the day of
determination; or
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(iii) In the absence of an established market for the Common Stock,
the Fair Market Value shall be determined in good faith by the
Administrator.
(m) "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code.
(n) "Non-Employee Director" means any person who is a member of the
Board who is not an Employee.
(o) "Nonstatutory Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
(p) "Option" means a stock option granted pursuant to the Plan.
(q) "Optioned Stock" means the Common Stock subject to an Option.
(r) "Optionee" means an Employee, Consultant or Non-Employee Director
who receives an Option.
(s) "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(t) "Permitted Transferee" means a member of a holder's immediate
family, trusts for the benefit of such immediate family members, and
partnerships in which the holder and such immediate family members are the
only partners, provided that no consideration is provided for the transfer.
(u) "Plan" means this 1997 Amended Stock Option Plan.
(v) "Section 16(b)" means Section 16(b) of the Securities Exchange Act
of 1934, as amended.
(w) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 13 below.
(x) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 700,000 shares, increased, as of the first day of each fiscal
year commencing January 1, 2000, by one percent (1%) of the number of Shares
outstanding as of the date that the amendment to the Plan providing for such
increase is approved by the stockholders of the Company; provided, however, that
the total number of Shares available under the Plan, when aggregated with all
other stock option plans sponsored by the Company, shall not exceed fifteen
percent (15%) of the number of Shares outstanding as of the first day of each
fiscal year. The maximum number of Shares with respect to which Options may be
awarded under the Plan during any fiscal year to any Employee shall be 500,000.
The Shares may be authorized, but unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been exercised
in full, or is surrendered pursuant to an option exchange program authorized by
the Administrator, the unpurchased Shares which were subject thereto shall
become available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued under
the Plan shall not be returned to the Plan and shall not become available for
future distribution under the Plan, except that if unvested Shares are
repurchased by the Company at their original purchase price, such Shares shall
become available for future grant under the Plan.
4. Administration of the Plan.
(a) Plan Procedure. With respect to Option grants awarded to Employees,
Consultants or Non-Employee Directors, the Plan shall be administered by (A) the
Board or (B) the Compensation Committee designated by the Board, which committee
shall be constituted to satisfy the legal requirements, if any, relating to the
administration of incentive stock option plans of state corporate and securities
laws, of the
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Code, and of any stock exchange or national market system upon which the Common
Stock is then listed or traded (the "Applicable Laws"). Once appointed, such
Committee shall serve in its designated capacity until otherwise directed by the
Board. The Board may increase the size of the Committee and appoint additional
members, remove members (with or without cause) and substitute new members, fill
vacancies (however caused), and remove all members of the Committee and
thereafter directly administer the Plan, all to the extent permitted by
Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the Plan and
approval of any relevant authorities, including the approval, if required, of
any stock exchange or national market system upon which the Common Stock is then
listed, the Administrator shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(l) of the Plan;
(ii) to select the Consultants and Employees to whom Options may from
time to time be granted hereunder;
(iii) to determine whether and to what extent Options are granted
hereunder;
(iv) to determine the number of shares of Common Stock to be covered
by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any award granted hereunder. Such terms and
conditions may include, but are not limited to, the exercise price, the
time or times when Options may be exercised, any vesting acceleration or
waiver of forfeiture restrictions, and any restriction or limitation
regarding any Option or the Shares relating thereto, based in each case on
such factors as the Administrator, in its sole discretion, shall determine;
(vii) to determine whether and under what circumstances an Option may
be settled in cash under Section 10(e) instead of Common Stock;
(viii) to reduce the exercise price of any Option to the then current
Fair Market Value only in the event the reduction of the exercise price (i)
effects less than ten percent (10%) of the Shares authorized for grant
under the Plan, (ii) is for a legitimate corporate purpose such as
retention of one or more key persons and (iii) is for the purpose of
maintaining option value due to extreme circumstances beyond management's
control;
(ix) to provide for the early exercise of Options for the purchase of
unvested Shares, subject to such terms and conditions as the Administrator
may determine; and
(x) to construe and interpret the terms of the Plan and awards granted
pursuant to the Plan.
(c) Effect of Administrator's Decision. All decisions, determinations and
interpretations of the Administrator shall be final and binding on all Optionees
and any other holders of any Options.
5. Eligibility.
(a) Nonstatutory Stock Options may be granted to Employees, Consultants and
Non-Employee Directors. Incentive Stock Options may be granted only to
Employees. An Employee, Consultant or Non-Employee Director who has been granted
an Option may, if otherwise eligible, be granted additional Options.
(b) Each Option shall be designated in the written option agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options.
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For purposes of this Section 5(b), Incentive Stock Options shall be taken
into account in the order in which they were granted, and the Fair Market Value
of the Shares shall be determined as of the time the Option with respect to such
Shares is granted.
(c) The Plan shall not confer upon any Optionee any right with respect to
the continuation of the Optionee's employment or consulting relationship with
the Company, nor shall it interfere in any way with the Optionee's right or the
Company's right to terminate the Optionee's employment or consulting
relationship at any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to occur
of its adoption by the Board of Directors or its approval by the stockholders of
the Company, as described in Section 15 of the Plan. It shall continue in effect
for a term of ten (10) years unless sooner terminated under Section 15 of the
Plan.
7. Term of Option. The term of each Option shall be the term stated in the
Option Agreement; provided, however, that the term shall be no more than ten
(10) years from the date of grant thereof. However, in the case of an Incentive
Stock Option granted to an Optionee who, at the time the Option is granted, owns
stock representing more than ten percent (10%) of the voting power of all
classes of stock of the Company or any Parent or Subsidiary, the term of the
Option shall be five (5) years from the date of grant thereof or such shorter
term as may be provided in the Option Agreement.
8. Option Exercise Price and Consideration.
(a) The per share exercise price for the Shares to be issued pursuant to
exercise of an Option shall be such price as is determined by the Administrator,
but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the grant of such
Incentive Stock Option, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the per Share exercise price shall be no less than
110% of the Fair Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee described in the
preceding paragraph, the per Share exercise price shall be no less than
100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per share
exercise price shall be determined by the Administrator but shall not,
except as otherwise provided in Section 9, be less than one hundred percent
(100%) of the Fair Market Value per Share on the date of grant; provided,
however, that a per share exercise price of no less than eighty-five
percent (85%) of the Fair Market Value per Share on the date of grant shall
be permitted for a Nonstatutory Stock Option expressly awarded to an
Employee in lieu of a reasonable amount of salary or cash bonus.
(b) The consideration to be paid for the Shares to be issued upon exercise
of an Option, including the method of payment, shall be determined by the
Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option have been owned by the Optionee for more
than six months on the date of surrender and (y) have a Fair Market Value on the
date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (5) delivery of a properly executed
exercise notice together with such other documentation as the Administrator and
the broker, if applicable, shall require to effect an exercise of the Option and
delivery to the Company of the sale or loan proceeds required to pay the
exercise price, or (6) any combination of the foregoing methods of payment. In
making its determination as to the type of consideration to accept, the
Administrator shall consider if acceptance of such consideration may be
reasonably expected to benefit the Company.
9. Grants to Non-Employee Directors. Notwithstanding any other provision of
the Plan, each Non-Employee Director shall, on each date of election or
re-election as a Board member be granted a Nonstatutory
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Stock Option for two thousand (2,000) Shares of Common Stock of the Company at
an exercise price equal to eighty five percent (85%) of the Fair Market Value of
the Shares at the end of the business day immediately preceding the date of
election or re-election of the Non-Employee Director. Additionally, each
Non-Employee Director serving more than a one (1) year term shall, on the date
of each annual meeting of the Company's stockholders preceding each additional
year of office, be granted an additional Nonstatutory Stock Option for two
thousand (2,000) Shares of Common Stock of the Company at an exercise price
equal to eighty five percent (85%) of the Fair Market Value of the Shares at the
end of the business day immediately preceding the date of each meeting. Each
such Option shall become fully vested on the date the director completes one
year of service as a director following the date of grant. If a director's
service terminates six (6) months or more following the date of grant, then the
Option shall be partially vested upon termination, as follows: 50% following six
(6) months of service, and an additional 8.33% for each additional completed
month of service as a director following the date of grant. Each Non-Employee
Director Option shall have a term of three (3) years. Expiration of a
Non-Employee Director's term of office shall not affect a Non-Employee
Director's right to exercise its Option to the extent such Option is or becomes
vested at or prior to the expiration of the Director's term.
10. Exercise of Option.
(a) Procedure for Exercise; Rights as a Stockholder. Any Option granted
hereunder shall be exercisable at such times and under such conditions as
determined by the Administrator, including performance criteria with respect to
the Company and/or the Optionee, and as shall be permissible under the terms of
the Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause to
be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 13 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Employment or Consulting Relationship. Upon termination
of an Optionee's Continuous Status as an Employee or Consultant, other than upon
the Optionee's death or Disability, the Optionee may exercise his or her Option,
but only within such period of time as is specified in the Notice of Grant, and
only to the extent that the Optionee was entitled to exercise it at the date of
termination (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant). In the absence of a specified time
in the Notice of Grant, the Option shall remain exercisable for three (3) months
following the Optionee's termination. In the case of an Incentive Stock Option,
such period of time for exercise shall not exceed three (3) months from the date
of termination. If, on the date of termination, the Optionee is not entitled to
exercise the Optionee's entire Option, the Shares covered by the unexercisable
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified by the
Administrator, the Option shall terminate, and the Shares covered by such Option
shall revert to the Plan.
Notwithstanding the above, in the event of an Optionee's change in status
from Consultant to Employee or Employee to Consultant, an Optionee's Continuous
Status as an Employee or Consultant shall not automatically terminate solely as
a result of such change in status. However, in such event, an Incentive Stock
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Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option
three months and one day following such change of status.
The provisions of this Section 10(b) shall not be applicable to
Non-Employee Directors.
(c) Disability of Optionee. In the event of termination of an Optionee's
Continuous Status as an Employee or Consultant as a result of his or her
Disability, the Optionee may, but only within twelve (12) months from the date
of such termination (and in no event later than the expiration date of the term
of his or her Option as set forth in the Option Agreement), exercise the Option
to the extent the Optionee was otherwise entitled to exercise it on the date of
such termination. To the extent that the Optionee is not entitled to exercise
the Option on the date of termination, or if the Optionee does not exercise the
Option to the extent so entitled within the time specified herein, the Option
shall terminate, and the Shares covered by the Option shall revert to the Plan.
(d) Death of Optionee. In the event of the death of an Optionee, the Option
may be exercised at any time within twelve (12) months following the date of
death (but in no event later than the expiration of the term of such Option as
set forth in the Notice of Grant), by the Optionee's estate or by a person who
has acquired the right to exercise the Option by bequest or inheritance, but
only to the extent that the Optionee was entitled to exercise the Option at the
date of death. If, at the time of death, the Optionee was not entitled to
exercise his or her entire Option, the Shares covered by the unexercisable
portion of the Option shall immediately revert to the Plan. If, after death, the
Optionee's estate or a person who acquires the right to exercise the Option by
bequest or inheritance does not exercise the Option within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to buy out
for a payment in cash or Shares, an Option previously granted, based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
(f) Rule 16b-3. Options granted to persons subject to Section 16(b) of the
Exchange Act must comply with Rule 16b-3 and shall contain such additional
conditions or restrictions as may be required thereunder to qualify for the
maximum exemption from Section 16 of the Exchange Act with respect to Plan
transactions.
11. Stock Withholding to Satisfy Withholding Tax Obligations. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this Section 11. When an Optionee incurs tax liability in
connection with an Option which tax liability is subject to tax withholding
under applicable tax laws, and the Optionee is obligated to pay the Company an
amount required to be withheld under applicable tax laws, the Optionee may
satisfy the withholding tax obligation by electing to have the Company withhold
from the Shares to be issued upon exercise of the Option that number of Shares
having a Fair Market Value equal to the amount required to be withheld. The Fair
Market Value of the Shares to be withheld shall be determined on the date that
the amount of tax to be withheld is to be determined (the "Tax Date").
All elections by an Optionee to have Shares withheld for this purpose shall
be made in writing in a form acceptable to the Administrator and shall be
subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax Date;
(b) once made, the election shall be irrevocable as to the particular
Shares of the Option as to which the election is made;
(c) all elections shall be subject to the consent or disapproval of
the Administrator.
In the event the election to have Shares withheld is made by an Optionee
and the Tax Date is deferred under Section 83 of the Code because no election is
filed under Section 83(b) of the Code, the Optionee shall receive the full
number of Shares with respect to which the Option is exercised but such Optionee
shall be unconditionally obligated to tender back to the Company the proper
number of Shares on the Tax Date.
12. Transferability of Options and Rights. Incentive Stock Options granted
under the Plan shall not be transferable otherwise than by will or the laws of
descent and distribution, or pursuant to a qualified domestic relations order as
defined by the Code or Title I of the Employee Retirement Income Security Act of
1974, as
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amended, or the rules thereunder. Incentive Stock Options shall be exercisable
during the lifetime of the Employee only by the Employee or by the Employee's
guardian or legal representative (unless such exercise would disqualify it as an
Incentive Stock Option). Unless the Administrator otherwise provides in an
agreement regarding the award of non-qualified stock options or rights (not
granted in connection with an Incentive Stock Option), non-qualified stock
options or rights (not granted in connection with Incentive Stock Options) may
be transferred by the holder to Permitted Transferees, provided that there
cannot be any consideration for the transfer.
13. Adjustments Upon Changes in Capitalization or Merger.
(a) Changes in Capitalization. Subject to any required action by the
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, and the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, as well as the price per share of Common Stock covered
by each such outstanding Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed dissolution or
liquidation of the Company, the Administrator shall notify each Optionee as soon
as practicable prior to the effective date of such proposed transaction. The
Administrator in its discretion may provide for an Optionee to have the right to
exercise his or her Option until ten (10) days prior to such transaction as to
all of the Optioned Stock covered thereby, including Shares as to which the
Option would not otherwise be exercisable. In addition, the Administrator may
provide that any Company repurchase option applicable to any Shares purchased
upon exercise of an Option shall lapse as to all such Shares, provided the
proposed dissolution or liquidation takes place at the time and in the manner
contemplated. To the extent it has not been previously exercised, an Option will
terminate immediately prior to the consummation of such proposed action.
(c) Acquisition Events
(1) Consequences of Acquisition Events. Upon the occurrence of an
Acquisition Event (as defined below), or the execution by the Company of any
agreement with respect to an Acquisition Event, the Board shall take any one or
more of the following actions with respect to then outstanding Options: (i)
provide that outstanding Options shall be assumed or equivalent Options shall be
substituted by the acquiring or succeeding entity (or an affiliate thereof),
provided that any such Options substituted for Incentive Stock Options shall
satisfy, in the determination of the Board, the requirements of Section 422(a)
of the Code; (ii) upon written notice to the Optionees, provide that all then
unexercised Options will become exercisable in full as of a specified date (the
"Acceleration Date") prior to the Acquisition Event and will terminate
immediately prior to the consummation of such Acquisition Event, except to the
extent exercised by the Optionees between the Acceleration Date and the
consummation of the Acquisition Event or (iii) in the event of an Acquisition
Event under the terms of which holders of Common Stock will receive upon
consummation thereof a cash payment for each share of Common Stock surrendered
pursuant to such Acquisition Event (the "Acquisition Price") provide that all
outstanding Options shall terminate upon consummation of such Acquisition Event
and each Optionee shall receive, in exchange therefor, a cash payment equal to
the amount (if any) by which (A) the Acquisition Price multiplied by the number
of shares of Common Stock subject to such outstanding Options (whether or not
then exercisable), exceeds (B) the aggregate exercise price of such Options.
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An "Acquisition Event" shall mean: (a) any merger or consolidation which
results in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving or acquiring entity) less than
60% of the combined voting power of the voting securities of the Company or such
surviving or acquiring entity outstanding immediately after such merger or
consolidation; (b) any sale of all or substantially all of the assets of the
Company; (c) the complete liquidation of the Company; or (d) the acquisition of
"beneficial ownership" (as defined in Rule 13d-3 under the Exchange Act) of
securities of the Company representing 50% or more of the combined voting power
of the Company's then outstanding securities (other than through a merger or
consolidation or an acquisition of securities directly from the Company) by any
"person", as such term is used in Sections 13 (d) and 14 (d) of the Exchange Act
other than the Company, any trustee or other fiduciary holding securities under
an employee benefit plan of the Company, or any entity owned directly or
indirectly by the stockholders of the Company in substantially the same
proportion as their ownership of stock of the Company.
(2) Assumption of Options Upon Certain Events. The Board may grant options
under the Plan in substitution for stock and stock-based awards held by
employees of another entity who become Employees as a result of a merger or
consolidation of the employing entity with the Company or the acquisition by the
Company of property or stock of the employing entity. The substitute options
shall be granted on such terms and conditions as the Board considers appropriate
in the circumstances.
14. Time of Granting Options. The date of grant of an Option shall, for all
purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Administrator.
Notice of the determination shall be given to each Employee or Consultant to
whom an Option is so granted within a reasonable time after the date of such
grant.
15. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend, alter,
suspend or discontinue the Plan, but no amendment, alteration, suspension or
discontinuation shall be made which would impair the rights of any Optionee
under any grant theretofore made, without his or her consent. In addition, to
the extent necessary and desirable to comply with Rule 16b-3 under the Exchange
Act or with Section 422 of the Code (or any other applicable law or regulation,
including the requirements of any stock exchange or national market system upon
which the Common Stock is then listed), the Company shall obtain stockholder
approval of any Plan amendment in such a manner and to such a degree as
required.
(b) Effect of Amendment or Termination. Any such amendment or termination
of the Plan shall not affect Options already granted, and such Options shall
remain in full force and effect as if this Plan had not been amended or
terminated, unless mutually agreed otherwise between the Optionee and the Board,
which agreement must be in writing and signed by the Optionee and the Company.
16. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant
to the exercise of an Option unless the exercise of such Option and the issuance
and delivery of such Shares pursuant thereto shall comply with all relevant
provisions of law, including, without limitation, the Securities Act of 1933, as
amended, the Exchange Act, the rules and regulations promulgated thereunder, and
the requirements of any stock exchange or national market system upon which the
Common Stock is then listed or traded, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned relevant provisions of law.
17. Reservation of Shares. The Company, during the term of this Plan, shall
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares
A-8
29
hereunder, shall relieve the Company of any liability in respect of the failure
to issue or sell such Shares as to which such requisite authority shall not have
been obtained.
18. Agreements. Options shall be evidenced by written agreements in such
form as the Administrator shall approve from time to time.
19. Stockholder Approval. Continuance of the Plan shall be subject to
approval by the stockholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such stockholder approval shall be obtained
in the degree and manner required under applicable state and federal law and the
rules of any stock exchange or national market system upon which the Common
Stock is then listed or traded.
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30
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS OF PEGASUS SYSTEMS, INC.
The undersigned hereby appoints John F. Davis, III, Jerome L. Galant
and Ric L. Floyd or any one of them, as proxies, each with the power to appoint
his substitute, and hereby authorizes each of them to represent and to vote as
designated hereon and on the reverse side, all of the shares of common stock of
Pegasus Systems, Inc., held of record by the undersigned on March 15, 1999, at
the Annual Meeting of Stockholders to be held on May 13, 1999, or any
adjournment thereof.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE NOMINEES AND
THE PROPOSALS LISTED HEREON. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN
THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS
GIVEN, THIS PROXY WILL BE VOTED FOR THE NOMINEES AND THE PROPOSALS.
PLEASE MARK YOUR VOTES AS INDICATED IN THIS EXAMPLE [X]
1. To Elect Three Class II Directors:
[ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY to vote
(except as marked to the contrary) for all nominees listed below
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE A
LINE THROUGH THE NOMINEE'S NAME IN THE LIST BELOW:
Robert B. Collier, Mark C. Wells, Bruce W. Wolff
2. To approve amendments to the 1997 Amended Stock Option Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. In their discretion to vote upon such other business as may properly come
before the meeting.
DATED: , 1999
--------------------
-----------------------------------
(Signature of Stockholder)
-----------------------------------
(Signature if Held Jointly)
PLEASE SIGN EXACTLY AS NAME APPEARS
HEREON. WHEN SHARES ARE HELD BY
JOINT TENANTS BOTH SHOULD SIGN.
WHEN SIGNING AS ATTORNEY, EXECUTOR,
ADMINISTRATOR, TRUSTEE OR GUARDIAN,
PLEASE GIVE FULL TITLE AS SUCH. IF
A CORPORATION, PLEASE SIGN FULL
CORPORATE NAME BY PRESIDENT OR
OTHER AUTHORIZED OFFICER. IF A
PARTNERSHIP, PLEASE SIGN IN
PARTNERSHIP NAME BY AUTHORIZED
PERSON.