| PEGASUS SOLUTIONS INC Item 1A Risk Factors The following risk factors should be carefully considered in conjunction with the other information included or incorporated by reference in this report |
| If any of these risks occur, our business, financial condition, operating results, cash flows and securities’ market prices could be materially adversely affected |
| Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business, financial condition or trading price of our securities |
| Risks related to our industry As nearly all of our revenues are derived from the hotel industry, a downturn in the hotel industry would likely adversely affect our business |
| Nearly all of our revenues are directly or indirectly dependent on the hotel industry, which is highly sensitive to any change in the general economic climate as well as economic conditions affecting business and leisure travel in particular |
| The hotel industry is susceptible to rapid and unexpected downturns, as experienced after the events of September 11, 2001, the war in Iraq, and the SARS health crisis |
| In the event of any future downturn in the hotel industry, we would likely experience significantly reduced revenues, as the use of our services and the demand for our future services and solutions would decline |
| A continued downturn in the hotel industry or any reduction in hotel reservation volume, average daily room rates, or the demand for travel generally, would negatively impact our business, operating results and financial condition |
| Many factors affect the hotel industry, most of which are beyond our control |
| The hotel industry and demand for hotel rooms or travel may be affected by, among other things: • General economic conditions including recession, inflation and currency fluctuations • The existence or threat of military conflict, terrorism or political instability • Increased government regulation and enforcement • Natural disasters, such as hurricanes, earthquakes, and tsunamis, and any other unfavorable weather events or patterns • Global or regional health issues • Gasoline and aviation fuel price escalation • Labor strikes • Instability in the airline industry We may experience substantial period-to-period fluctuations in our results of operations as a consequence of these factors and others and the general economic conditions affecting the demand for hotel rooms and travel |
| Reductions in room rates and hotel commission payments would reduce our revenues and net income |
| Pegasus financial services, which includes our commission processing service, derives revenues based on the dollar value of travel agency commissions paid by hotels |
| The dollar value of these commissions is based on the number of reservations, the length of stay and the room rate |
| Hotels typically are under no contractual obligation to pay room reservation commissions to travel agencies |
| Hotels could elect to reduce the current industry customary commission rate of 10 percent, limit the maximum commission generally paid for a hotel room reservation or eliminate commissions entirely |
| Hotels increasingly utilize other direct distribution channels, like the Internet, or offer negotiated rates to major corporate customers that are non-commissionable to travel agencies |
| If there is any decline in average daily room rates, change in the commission payment 7 _________________________________________________________________ [64]Table of Contents process, reduction in the amount of commissions paid for reservations or any increase in the direct distribution of rooms by hotels, our revenues and net income could substantially decrease |
| Consolidation in the travel industry, including hotels, travel agencies and electronic reservation providers, could result in reduced revenues |
| Recent consolidation in the hotel industry has resulted in a higher percentage of discounted fees and this trend could continue |
| In addition, the GDS industry has consolidated into four major GDSs |
| If further consolidation occurs, the value of our services and the benefits to hotel operators of utilizing our GDS distribution service would be reduced |
| Any potential decrease in our customer base or any potential increase in the percentage of discounted fees may adversely affect the profitability of our business |
| Risks Related to the Company Our failure to close the acquisition of the Company as contemplated by the Agreement and Plan of Merger dated December 19, 2005 among Perseus Holding Corp, 406 Acquisition Corp |
| and the Company or delays with respect to such closing could adversely affect our business |
| Our announcement in April 2005 of our intent to explore strategic alternatives for the Company resulted in some level of uncertainty amongst our employees and some of our customers during the ensuing months the initiative was underway |
| Our announcement of an agreement to sell the Company helped to alleviate some of this uncertainty |
| If we fail to close the sale of the Company as contemplated or the closing is delayed, it likely would increase the level of uncertainty amongst our employees and some of our customers |
| This development may result in the following adverse effects upon our business, operating results and financial condition: • a less productive work force • loss of employees • delays in entering into or refusals to enter into contracts with some of our customers and third party service providers • continued management focus on the strategic alternative initiative rather than ongoing business initiatives • the incurrence of significant expenses relating to the failed transaction • possible litigation arising out of a failed transaction |
| If we fail to close the sale of the Company as contemplated or the closing is delayed, it likely would result in a drop and/or significant fluctuation in our stock price |
| If we do not develop new technologies and services that meet the changing needs of participants in the hotel industry or if the new technologies and services we develop are not utilized, we may be unable to compete effectively and our continuing operations may be adversely affected |
| Our future success depends on our ability to successfully develop leading technologies, enhance our existing services and develop and introduce new services |
| In particular, our technologies and services must meet the demands of our current and prospective customers on a timely and cost-effective basis, staying abreast of technological advances and evolving industry standards and practices |
| Although we strive to be a technological leader, future technology advances may not complement or be compatible with our services |
| In addition, we may be unable to economically and timely incorporate technology changes and advances into our business |
| We may be unsuccessful in effectively developing and implementing new technologies, adapting our services to emerging industry standards or developing, introducing and marketing service enhancements or new services in a timely manner and with acceptable performance levels |
| For example, during 2005, we discontinued our PMS services, a decision made in part because of the 8 _________________________________________________________________ [65]Table of Contents termination of an agreement with our largest PegasusCentral customer |
| We have completed the sale of two of our PMS systems and plan to sell our PegasusCentral software by June 30, 2006 |
| We also may experience difficulties that could delay or prevent the successful development or introduction of these services |
| It is also possible that a new service, while achieving a technological success, may fail to be accepted and utilized by prospective customers |
| If we are unable to successfully develop, introduce and implement new services or enhance existing services on a timely and cost-effective basis or if new services do not achieve market acceptance, it could adversely affect our ability to compete in the marketplace and negatively affect our business |
| Any such failures could have a material negative impact on our operating results and financial condition, including write-downs or write-offs related to impaired assets |
| If we are unable to effectively deliver services and solutions to the hotel industry in a timely manner with acceptable performance levels, we may be unable to compete effectively, lose market share and be forced to reduce the prices of our services |
| Service failures, delays in the implementation of our service offerings or our failure to deliver services in a timely manner with acceptable service levels could result in reduced revenues, particularly since our transaction-based revenues are dependent upon services being available, reduced pricing for our services, a loss of customers, an inability to effectively compete and breach of contract claims |
| Certain service failures could also require us to credit customers pursuant to service level agreements, which we intend to use more frequently in the future |
| We face significant competitive pressure |
| We compete in markets that are rapidly evolving, intensely competitive and involve continually changing technology and industry standards |
| We may experience increased competition from current and potential competitors, many of which have significantly greater financial, technical, marketing and other resources than we possess |
| Consolidation among our competitors may result in economies of scale, or broader or more comprehensive service offerings with which we may have difficulty competing |
| Competitive pressures have contributed to less profitable arrangements with some of our customers and could reduce our market share or require us to reduce the prices of our services |
| Consolidation among travel distribution companies, such as Cendant and Expedia, may increase competitive pressure with respect to our service offerings to travel distribution companies and the hotels that may utilize our distribution capabilities |
| Our inability to compete effectively with alternative service providers could adversely affect our business, operating results and financial condition |
| Loss of our arrangements with key customers could adversely affect our business |
| Our business is dependent upon our customer arrangements with hotel chains, independent hotels, hotel representation firms, travel management companies, travel agencies, travel agency consortia, global distribution systems, travel-related Internet sites and Internet-based information and reservation systems |
| In the future, our customers may elect to perform certain functions themselves, may circumvent our services, may select the services of competing companies, or we may otherwise be unable to continue or renew these arrangements on favorable terms or initiate new arrangements |
| In addition, customers may elect to utilize our lower cost service offerings over our higher-priced offerings that provide us with greater revenue |
| For example, our representation customers may switch from our Utell by Pegasus offering to our Unirez by Pegasus offering, resulting in less revenue to us |
| If we are unable to renew, continue or initiate customer arrangements on a favorable basis, it could result in a significant reduction in our customer base and revenue sources |
| Our reliance on third party service arrangements presents risks to our business and the loss of any of these third party service arrangements could adversely affect our business |
| We rely on certain third party arrangements for the provision of our services and increasingly for the development and enhancement of our services |
| Such “outsourcing” presents a number of risks primarily 9 _________________________________________________________________ [66]Table of Contents relating to our reduced control of the functions that are outsourced |
| Further, because much outsourcing occurs outside of the US, these activities are subject to the risks of international operations, including the risk of increased governmental regulation of these activities |
| We rely on third parties for many services, including remittance and worldwide currency exchange services for our commission processing service and for facility maintenance and enterprise resource planning system hosting |
| If we are unable to renew or extend our contracts with existing third-party service providers or enter into contracts with alternate service providers on favorable terms, it could adversely affect our business, operating results and financial condition |
| Our computer systems and databases may suffer system failures, business interruptions or security breaches that could impede our ability to service our customers and could negatively impact our business |
| Our operations depend on our ability to protect our computer systems and databases against damage or system interruptions from fire, earthquake, power loss, telecommunications failure, unauthorized entry, malfunctions, human error or other events beyond our control |
| A significant amount of our computer equipment is located in Scottsdale, Arizona |
| Any unanticipated problems may cause a significant system outage or data loss |
| Despite the implementation of security measures, our infrastructure may also be vulnerable to break-ins, computer viruses or other disruptions caused by our customers or others |
| Our infrastructure may also fail to provide consistent dependable service as a result of circumstances both in and out of our control |
| Any damage to our databases, failure of communication links, security breach or other factors that cause interruptions in our operations could adversely affect our business, operating results and financial condition |
| We may not have the resources to effectively manage our growth, and difficulties in managing and integrating organizations may cause future acquisitions or joint ventures to disrupt our operations and impede our operating results |
| Our potential future growth may place significant demands on management as well as on our administrative, operational and financial resources |
| Expanding our business to take advantage of new market opportunities will require significant management attention and Company resources, possibly adversely impacting our existing operations |
| In order to obtain certain distribution, supply or operations capabilities, our attempts to expand may involve an increased use of revenue sharing arrangements, which may affect our profitability or result in additional liabilities |
| We plan to expand our presence in international markets, particularly including the Asia-Pacific region in general and specifically China |
| In addition to being subject to the risks of international operations described below, it is costly to establish new international operations and our net sales from international market segments may not offset the expense of establishing and maintaining the operations |
| We have relatively little experience in marketing and distributing our services in many of these international markets, and we may not succeed in these efforts |
| We also regularly evaluate acquisition and strategic alliance opportunities and in the future may make additional acquisitions of other companies or technologies or enter into strategic alliances |
| Acquisitions and strategic alliances involve many risks including: • Difficulty in integrating or otherwise assimilating technologies, products, personnel and operations • Diversion of management’s attention from other business concerns • Issuance of dilutive equity securities and the incurrence of debt or contingent liabilities • Write-offs and amortization expense related to identifiable intangible assets • Loss of key employees of acquired organizations • Risks of entering markets in which we have no or limited prior experience • Payments of cash and the assumption of liabilities of other businesses 10 _________________________________________________________________ [67]Table of Contents • An inability to adequately protect our intellectual property • The failure of strategic alliances to perform as expected Our inability to manage growth or to integrate any acquisitions or strategic alliances could adversely affect our business, operating results and financial condition |
| Because our expenses are largely fixed in the short-term and we cannot accurately predict our competitive environment, unexpected revenue shortfalls and quarterly variations may adversely affect our business |
| Our expense levels are based primarily on our estimate of future revenues and are largely fixed in the short-term |
| In the future, we may not accurately predict the transaction volumes and room rates that directly impact our revenues, the introduction of new or enhanced services by us or our competitors or the degree of customer acceptance of new services |
| In the short-term, we may also be unable to adjust spending rapidly enough to compensate for any unexpected revenue shortfall |
| This could adversely impact our business, operating results and financial condition |
| Accordingly, we believe that period to period comparisons of our operating results should not be relied upon as an indication of future performance |
| We are exposed to credit risk from hotels, travel agencies and other customers |
| Many of our customers are independent hotels, travel agencies and other travel industry participants that are particularly exposed to any downturn in the economy and other factors that adversely impact the hotel industry |
| In some instances we may be unable to collect payments from these customers or we may extend credit to them in the form of unsecured promissory notes or otherwise |
| Our inability to collect payments from these customers in the future could result in a material adverse effect on our business, operating results and financial condition |
| Our international operations make us susceptible to currency fluctuations, global economic factors, foreign tax law issues, information privacy laws and foreign business practices, which could reduce our revenues, increase our cost of doing business and erode our profit margins |
| We derive a substantial portion of our revenue from customers located outside the United States, primarily in Europe |
| If the value of foreign currencies relative to the US dollar decreases, our revenues translate into a lower US dollar amount |
| Our international operations are also subject to other risks, including: • Impact of possible adverse political and economic conditions, including difficulties in the repatriation of investments or profits • Potentially adverse tax consequences • Impact of the policies and regulations of the United States and foreign governments on foreign trade and commerce, such as the USA PATRIOT Act and other laws enforced by the US Office of Foreign Assets Control • Compliance with information privacy laws and related enforcement actions • Reduced protection for intellectual property rights in some countries • Changes in regulatory requirements • Cost of adapting our services to foreign markets • High costs associated with office closures and personnel reductions We may be unable to adequately protect our intellectual property or prevent its unauthorized use, which could divert our financial resources and harm our business |
| Our success depends upon our proprietary technology and other intellectual property rights |
| We currently rely upon a combination of trademark, patents, copyright, trade secrets, confidentiality procedures and 11 _________________________________________________________________ [68]Table of Contents contractual provisions to protect our proprietary technology and other intellectual property |
| Despite our current efforts to protect our proprietary rights, these protective measures may not be enforceable or may not be adequate to prevent misappropriation or infringement of our technology |
| In addition, we may need to litigate claims against other parties to enforce our intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietary rights of others or defend against claims of infringement or invalidity |
| This litigation could result in substantial cost and diversion of management resources |
| A successful claim against us could effectively block our ability to use or license our technology and other intellectual property in the United States or abroad |
| If we cannot adequately protect our proprietary rights, it could adversely affect our competitive edge in the marketplace and consequently our business, operating results and financial condition |
| Our success significantly depends on the experience of our key personnel and our ability to attract and retain additional personnel |
| Our success depends on our ability to retain the services of our current executive officers and other key personnel, and to manage effectively any transition in the event of a change in such key personnel |
| We cannot guarantee that we will be able to successfully identify, attract, motivate and retain other highly skilled personnel in a timely and effective manner |
| Our failure to retain our officers and key personnel or to recruit new personnel could adversely affect our business, operating results and financial condition |
| Government regulation, taxes, new or amended laws and other legal uncertainties could force us to change our operations |
| Our operations are subject to the laws and regulations of the United States and numerous states and international jurisdictions |
| Changes regarding any of these laws and regulations, their enforcement or our understanding of the applicable requirements could force us to change our operations or result in other uncertain adverse consequences |
| Our efforts to comply with the requirements of the Sarbanes-Oxley Act of 2002, particularly the provisions of Section 404 regarding the certification and audit of our internal control over financial reporting, have resulted in material expenditures of financial and employee resources and may continue to do so in the future |
| Also, as a result of our customer relationships and our status as an intermediary with respect to certain services, federal, state or foreign governmental authorities, competitors or consumers could raise antitrust or anti-competitive concerns |
| In addition, we are subject to the same federal, state, local and foreign jurisdiction laws as other companies conducting business on the Internet and in e-commerce, including with respect to taxation, user privacy, data protection, consumer protection, payment processing, electronic contracts and other issues |
| Many of these laws and regulations are new, have not yet been thoroughly interpreted by the courts, and are subject to change by many jurisdictions, which could have a material adverse effect on our business, operating results and financial condition |
| Any change in tax laws, their interpretation or our legal conclusions regarding the collection of sales or similar taxes in connection with our services could result in substantial tax liabilities for past sales and decrease our profitability and revenues going forward |
| We have deterrents that may discourage a third party from acquiring control of Pegasus, and such deterrents may prevent an acquisition of Pegasus that may be in a stockholder’s best interest |
| We have provisions in our certificate of incorporation and bylaws that are intended to make it more difficult for a third party to acquire us |
| These provisions include the staggered terms of our Board of Directors, the exclusive right of the Board of Directors to fill vacancies on the board, and restrictions on the right of stockholders to remove members of the Board of Directors |
| We are also subject to the provisions of Delaware law that restrict certain business combinations with interested stockholders even if such a combination would be beneficial to stockholders |
| In addition, we have a stockholder rights plan |
| The rights are exercisable only if a person or group of affiliated persons acquires, or has announced the intent to acquire, 20 percent or more of our common stock |
| We also have certain payment and other obligations that are triggered by a change of control in connection with agreements with certain third parties and employees |
| 12 _________________________________________________________________ [69]Table of Contents In connection with the Merger Agreement, our board of directors approved and adopted the Merger Agreement in a manner such that the restrictions imposed on business combinations under Delaware law would not apply to the applicable merger transaction |
| Additionally, on December 19, 2005 Pegasus entered into an amendment to its rights agreement that provides that none of the execution, delivery or performance of the Merger Agreement or the closing of the merger or any of the other transactions contemplated by the merger agreement will trigger the separation or exercise of the rights under the rights agreement or any adverse event under the rights agreement |
| Except for agreements or amendments described in the preceding paragraph, these provisions will remain effective and could discourage potential acquisition proposals or delay or prevent a change in control transaction |
| They could also discourage others from making tender offers for our shares |
| These provisions may also prevent significant changes in our Board of Directors and our management |
| Litigation or other proceedings could result in substantial costs and divert our management’s time and attention |
| From time to time, we are involved in legal and other regulatory proceedings |
| We intend to defend our rights vigorously during any of these proceedings |
| Regardless of the merits of any issues raised in any of these proceedings, our involvement could result in substantial costs and other liabilities not covered by insurance as well as divert management’s time and attention from our business, which could adversely affect our business, financial condition and results of operations |
| We have material indebtedness in the form of convertible notes |
| In connection with the sale of the convertible notes in July 2003, we incurred dlra75 million of indebtedness which increased our interest payment obligations |
| The degree to which we are leveraged could adversely affect our ability to obtain further financing for working capital or other purposes and could make us more vulnerable to industry downturns and competitive pressures |
| Our ability to meet our debt service obligations will be dependent upon our future performance, which will be subject to the financial, business and other factors affecting our operations, many of which are beyond our control |
| We may be unable to generate sufficient cash flow to satisfy our operating costs and debt service obligations |
| Our ability to generate cash flow from operations to make interest payments on the convertible notes will depend on our future performance, which will be affected by a range of economic, competitive and business factors, many of which are beyond our control |
| If our operations do not generate sufficient cash flow from operations to satisfy our debt service obligations, we may need to borrow additional funds to make these payments or undertake alternative financing plans, such as refinancing or restructuring our debt, or reducing or delaying capital investments and acquisitions |
| We may secure a credit facility as additional protection against short-term liquidity concerns |
| However, such credit facility, other additional funds or alternative financing may not be available to us on favorable terms, or at all |
| Our inability to generate sufficient cash flow from operations or obtain additional funds or alternative financing on acceptable terms could have a material adverse effect on our business, financial condition and results of operations |
| We may be unable to repay or purchase the principal amount of the convertible notes |
| At maturity, the entire outstanding principal amount of the convertible notes will become due and payable by us |
| In addition, on July 16, 2008, July 16, 2013 and July 16, 2018 or if a fundamental change occurs, as defined in the indenture relating to the convertible notes, each holder of the convertible notes may require that we purchase all or a portion of that holder’s notes |
| The merger contemplated by the Merger Agreement constitutes such a fundamental change |
| While the debt financing anticipated in connection with this Merger Agreement contemplates the repayment of the amounts owing under the convertible notes, we 13 _________________________________________________________________ [70]Table of Contents cannot otherwise be assured that we will have sufficient funds or will be able to arrange for additional financing to pay the principal amount or purchase price due |
| In that case, our failure to repay the convertible notes at maturity or to purchase any tendered notes would constitute an event of default under the indenture |
| Our stock price has been and may continue to be significantly volatile due to many factors |
| Several factors have caused, and may in the future cause, our stock price to be significantly volatile, which may be unrelated to our operating performance in certain cases |
| Our stock price could be subject to wide fluctuations in response to a variety of factors including the following: • Uncertainty relating to the closing of the sale of the Company as provided in the Merger Agreement • General economic conditions • Acts of terrorism, retaliation for such acts, political instability, health epidemics, natural disasters, war and the prospect of war • Actual or anticipated variations in our quarterly operating results • Our ability to successfully develop, introduce and gain acceptance of new or enhanced products and services to the hotel industry on a timely basis • Unexpected changes in demand for our services and solutions • Adverse findings, conclusions or changes in requirements with respect to our internal controls assessment and audit pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 • Unpredictable volume and timing of customer revenues due to the terms of customer contracts, changes in the hotel industry and other factors • Purchasing and payment patterns, as well as pricing policies, of our competitors • Announcements of technological innovations or new services by us or our competitors • Changes in financial estimates, expectations and methodologies by securities analysts • Conditions, trends or perceived prospects in the Internet and online commerce industries • Changes in the market valuations of other similarly situated companies and hospitality and technology stocks in general • Announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments • Unscheduled system downtime • Lack of confidence in the Company’s ability to execute on certain products or services • Sales of substantial amounts of shares of our common stock in the public market, or the perception that those sales may occur Our investments could adversely affect our financial condition and results of operations |
| We have in the past and may in the future make investments in other companies and ventures |
| There can be no assurance of the success of any such investment |
| Additionally, Financial Accounting Standards Board Interpretation Nodtta 46, “Consolidation of Variable Interest Entities,” may require us to consolidate entities with which we have an affiliation but no voting or operational control |
| In doing so, we may have little or no control over the success of the company or venture and we may be required to record the losses of these consolidated entities in our financial statements |