UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q/A
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ___ to ___
____________________
Commission File Number 0-22935
PEGASUS SOLUTIONS, INC.
(Exact Name of Registrant as specified in its charter)
Delaware 75-2605174
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3811 Turtle Creek Boulevard, Suite 1100, Dallas, Texas 75219
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (214) 528-5656
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [ X ] No [ ]
The number of shares of the registrant's common stock outstanding as of May
10, 2001 was 24,474,000.
PEGASUS SOLUTIONS, INC.
FORM 10-Q/A
For the Quarter Ended March 31, 2001
The Registrant hereby amends the following sections of its Form 10-Q for the
quarter ended March 31, 2001.
Page
Part I. Financial Information ----
Item 1. Financial Statements (unaudited) 3
a) Condensed Consolidated Balance Sheets as of March 31,
2001 and December 31, 2000 4
b) Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2001 and 2000 5
c) Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2001 and 2000 6
d) Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Signatures 20
Part I - Financial Information
Item 1. Financial Statements
This Form 10-Q/A amends Pegasus' quarterly report on Form 10-Q for the
quarter ended March 31, 2001, as filed on May 15, 2001, to reflect a
revision of Pegasus' condensed consolidated financial statements as of and
for the quarter ended March 31, 2001. Only those sections of the Form 10-Q
filed on May 15, 2001 that have been amended by this report have been
included in this Form 10-Q/A. With the exception of the information
provided in note 5 to the condensed consolidated financial statements and
also in management's discussion and analysis under the heading "Recent
Developments," Pegasus has not updated disclosures in this Form 10-Q/A to
reflect any events subsequent to Pegasus' May 15, 2001 filing of the Form
10-Q.
PEGASUS SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
March 31,
2001
(unaudited December 31,
and amended) 2000
------------ ------------
ASSETS
Cash and cash equivalents $ 30,800 $ 32,576
Restricted cash 4,618 4,574
Short-term investments 5,808 1,563
Accounts receivable, net 36,007 29,889
Other current assets 3,805 4,189
------------ ------------
Total current assets 81,038 72,791
Property and equipment, net 61,844 64,434
Intangible assets, net 52,666 62,909
Goodwill, net 146,145 149,764
Other noncurrent assets 7,986 7,807
------------ ------------
Total assets 349,679 357,705
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities 45,989 42,309
Deferred tax liability 12,078 12,078
Unearned income 13,292 9,428
Other current liabilities 5,900 2,771
------------ ------------
Total current liabilities 77,259 66,586
Deferred tax liability 1,823 8,961
Note payable 20,000 20,000
Other noncurrent liabilities 2,593 1,586
Stockholders' equity:
Preferred stock, $.01 par value; 2,000
shares authorized; zero shares issued
and outstanding, - -
Common stock, $.01 par value; 50,000
shares authorized; 24,880 and 24,873
shares issued, respectively 249 249
Additional paid-in capital 288,495 288,422
Unearned compensation (124) (157)
Accumulated comprehensive loss (252) (265)
Accumulated deficit (37,584) (26,501)
Less treasury stock at cost (402 and
245 shares, respectively) (2,780) (1,176)
------------ ------------
Total stockholders' equity 248,004 260,572
------------ ------------
Total liabilities and
stockholders' equity $ 349,679 $ 357,705
============ ============
See accompanying notes to condensed consolidated financial statements
PEGASUS SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(Unaudited)
Three Months Ended
March 31,
-------------------------------
2001
(amended) 2000
------------ ------------
Net revenues $ 46,108 $ 10,661
Cost of services 26,259 3,431
Restructure costs 797 -
Research and development 1,994 603
General and administrative expenses 6,552 1,905
Marketing and promotion expenses 6,352 1,594
Depreciation and amortization 16,425 605
------------ ------------
Operating income (loss) (12,271) 2,523
Other income (expense):
Interest income, net 39 1,594
Loss on sale of business unit (671) -
Equity in loss of investee (298) -
Other (43) (6)
------------ ------------
Income (loss) before income taxes (13,244) 4,111
Income tax expense (benefit) (2,161) 1,090
------------ ------------
Net income (loss) $ (11,083) $ 3,021
============ ============
Other comprehensive income - change in
unrealized loss, net of tax 13 19
------------ ------------
Comprehensive income (loss) $ (11,070) $ 3,040
============ ============
Net income (loss) per share:
Basic $ (0.45) $ 0.15
============ ============
Diluted $ (0.45) $ 0.14
============ ============
Weighted average shares outstanding:
Basic 24,596 20,356
============ ============
Diluted 24,596 21,048
============ ============
See accompanying notes to condensed consolidated financial statements
PEGASUS SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
-----------------------
2001
(amended) 2000
-------- --------
Cash flows from operating activities:
Net income (loss) $ (11,083) $ 3,021
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 16,425 605
Loss on sale of business unit 671 -
Other 1,938 392
Changes in assets and liabilities:
Restricted cash (44) (631)
Accounts receivable (7,832) (1,357)
Other assets (2,107) (1,675)
Accounts payable and accrued liabilities 6,556 1,642
Unearned income 3,865 1,674
Other liabilities (3,863) 125
-------- --------
Net cash provided by operating activities 4,526 3,796
-------- --------
Cash flows from investing activities:
Proceeds from sale of business unit 2,894 -
Purchase of software, property and equipment (3,363) (1,319)
Purchase of marketable securities (7,699) -
Proceeds from maturity of marketable securities 2,000 27,794
Repayment of customer advance 1,500 -
-------- --------
Net cash provided by (used for)
investing activities (4,668) 26,475
-------- --------
Cash flows from financing activities:
Proceeds from issuance of stock 66 126
Purchase of treasury stock (1,604) -
Repayment of capital leases (96) (53)
-------- --------
Net cash provided by (used for)
financing activities (1,634) 73
-------- --------
Net increase (decrease) in cash and cash equivalents (1,776) 30,344
Cash and cash equivalents, beginning of period 32,576 104,616
-------- --------
Cash and cash equivalents, end of period $ 30,800 $ 134,960
======== ========
See accompanying notes to condensed consolidated financial statements
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
Pegasus is a leading provider of end-to-end reservation distribution
systems, reservation technology systems and hotel representation
services for the global hotel industry. Pegasus is organized into two
business segments - technology and hospitality. Pegasus' common stock
is traded on the Nasdaq National Market under the symbol PEGS. The
unaudited condensed consolidated financial statements include the
accounts of Pegasus Solutions, Inc. and its wholly owned subsidiaries
("Pegasus" or "the Company"). All significant intercompany balances
have been eliminated in consolidation.
In the opinion of management, the unaudited condensed consolidated
financial statements presented herein reflect all adjustments necessary
to fairly state the financial position, operating results, and cash
flows for the periods presented. Such adjustments are of a normal
recurring nature. The results for interim periods are not necessarily
indicative of results expected for the entire fiscal year. Certain
prior period amounts have been reclassified to conform to current period
presentation. The accompanying unaudited condensed consolidated
financial statements and the notes thereto should be read in conjunction
with the consolidated financial statements and notes thereto contained
in our annual report for the year ended December 31, 2000 on Form 10-K.
Pegasus management believes that the disclosures are sufficient for
interim financial reporting purposes.
2. EARNINGS PER SHARE
Basic net income (loss) per share for the three months ended March 31,
2001 and 2000 has been computed in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share," using the
weighted average number of common shares outstanding.
Diluted net income (loss) per share for the three months ended March 31,
2001 and 2000 gives effect to all dilutive potential common shares that
were outstanding during the respective periods. Outstanding options with
strike prices below the average fair market value of the Company's
common stock for the three months ended March 31, 2000 were included in
the diluted earnings per share ("EPS") calculation. Due to the
Company's net loss position for the three months ended March 31, 2001,
all outstanding options were excluded in the calculation of diluted net
loss per share because their effect would be anti-dilutive.
Approximately 2.9 million shares issuable upon the exercise of stock
options were not included in the calculation of diluted net loss per
share for the three months ended March 31, 2001.
3. SEGMENT INFORMATION
Based on the criteria set forth under Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information," Pegasus is organized into two business segments -
technology and hospitality.
* The technology segment provides central reservation systems
("CRS"), electronic distribution, commission processing, property
systems, TravelWeb.com and business intelligence services to the
global hotel industry.
* The hospitality segment provides hotel representation services
offered under the Utell and Golden Tulip brand names.
The Company is organized primarily on the basis of services provided.
Prior period segment information has been reclassified to conform to the
current period presentation. Segment data includes a charge allocating
all corporate costs to the operating segments. Management evaluates the
performance of its segments based on earnings before interest, income
tax, depreciation and amortization ("EBITDA"). Although EBITDA is not
calculated in accordance with generally accepted accounting principles,
the Company believes that EBITDA is widely used by analysts, investors
and others as a measure of operating performance. Nevertheless, this
measure should not be considered in isolation or as a substitute for
operating income, cash flows from operating activities or any other
measure for determining the Company's operating performance or liquidity
that is calculated in accordance with generally accepted accounting
principles. In addition, the Company's calculation of EBITDA is not
necessarily comparable to similarly titled measures reported by other
companies.
The following table presents information about reported segments for the
three months ended
March 31 (in thousands):
Technology Hospitality Total
---------- ----------- -----
2001
----
Net revenues $ 26,788 $ 19,320 $ 46,108
EBITDA 5,469 (1,315) 4,154
2000
----
Net revenues 10,661 -- 10,661
EBITDA 3,128 -- 3,128
A reconciliation of total segment EBITDA to total consolidated income
(loss) before income taxes for the three months ended March 31 is as
follows (in thousands):
2001
(amended) 2000
------- -------
Total EBITDA for reportable segments $ 4,154 $ 3,128
Depreciation and amortization (16,425) (605)
Interest income, net 39 1,594
Loss on sale of business unit (671) --
Equity in loss of investee (298) --
Other (43) (6)
------- -------
Consolidated income (loss) before
income taxes $(13,244) $ 4,111
======= =======
3. RESTRUCTURE COSTS
During the three months ended March 31, 2001, Pegasus incurred $797,000
of restructuring charges, including $576,000 related to the
consolidation of reservation centers and $221,000 related to severance
and other expenses associated with winding down our Business
Intelligence operations. As of March 31, 2001, unpaid restructure costs
were $778,000.
5. SALE OF BUSINESS UNIT
On January 10, 2001, Pegasus sold its Summit Hotels & Resorts and
Sterling Hotels & Resorts brand businesses to IndeCorp Corporation
("IndeCorp") for approximately $12 million, including scheduled future
payments due upon member hotel contract renewals. IndeCorp is a Chicago-
based holding company that owns and operates the luxury hotel brand
Preferred Hotels & Resorts Worldwide. In the first quarter of 2001,
Pegasus recognized a pre-tax gain of $4.8 million related to the sale of
these two brands. In addition, IndeCorp signed a five-year technology
services agreement and a three-year hotel representation agreement with
Pegasus. As part of the agreements, Pegasus is the exclusive provider of
reservation technology, electronic reservation processing and commission
processing services to the IndeCorp brands, which includes all Preferred
Hotels & Resorts, Summit Hotels & Resorts and Sterling Hotels & Resorts
member hotels. Pegasus also provides a host of other ancillary services
to the IndeCorp businesses.
At the time of the sale of the Summit and Sterling brand businesses,
Pegasus concluded that the scheduled future payments represented a
determinable payment stream. Pegasus has determined that the sale
agreement cannot be accounted for consistent with this initial
conclusion. On November 9, 2001, Pegasus and IndeCorp amended the
original sale agreement to provide for a promissory note in the
principal amount of $6 million payable by IndeCorp to Pegasus that
replaces the scheduled future payments under the original agreement with
a fixed and determinable payment stream for a period of eight years
commencing July 1, 2002 and bearing interest at 7 percent. The
discounted value of this promissory note is $5.5 million.
The amendment of the original sale agreement further provides that (1)
Pegasus receive from IndeCorp a $2.8 million promissory note to replace
outstanding trade receivables, and (2) the term of the existing
technology services and hotel representation agreements with IndeCorp be
extended for an additional 1.5 years. This promissory note requires
monthly payments for a period of eight years commencing July 1, 2002 and
bears interest at 7 percent.
Pegasus has revised the pre-tax gain on the sale of the Summit and
Sterling brand businesses recorded in the quarter ended March 31, 2001
to exclude the amounts related to the scheduled future payments.
Accordingly, the previously recognized pre-tax gain of $4.8 million has
been revised to a $671,000 pre-tax loss. To reflect the structure of
the amended sale agreement, Pegasus will recognize the $5.5 million pre-
tax gain on the sale related to the promissory note that replaces the
scheduled future payments in the quarter ended December 31, 2001. The
revision and the timing of the recognition of the gain in the quarter
ended December 31, 2001 is not expected to have any material impact on
the Company's consolidated statement of operations for the year ended
December 31, 2001.
6. STOCKHOLDERS' EQUITY
On August 9, 2000, the Board of Directors authorized the repurchase of
up to two million shares of the Company's common stock. The repurchase
is at the discretion of the Board of Directors' Stock Repurchase
Committee and may be made on the open market, in privately negotiated
transactions or otherwise, depending on market conditions, price, share
availability and other factors. Shares repurchased may be reserved for
later reissue in connection with employee benefit plans and other
general corporate purposes. As of March 31, 2001, the Company had
purchased 156,000 shares for an aggregate $1.6 million.
7. CONTINGENCIES
Pegasus is subject to certain legal proceedings, claims and disputes
that arise in the ordinary course of our business. Although management
cannot predict the outcomes of these legal proceedings, we do not
believe these actions will have a material adverse effect on our
financial position, results of operations or liquidity.
8. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133
requires that all derivative instruments be recorded on the balance
sheet at fair value. Changes in the fair value of derivative
instruments are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction. FAS 133, as amended by Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of Effective Date of FAS
133," was effective for Pegasus' first quarter financial statements in
fiscal 2001. The adoption of FAS 133 did not have a material impact on
our consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction with the
management's discussion and analysis of financial condition and results of
operations and the consolidated financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended December 31,
2000. This quarterly report on Form 10-Q/A contains forward-looking
statements including statements using terminology such as "may," "will,"
"expects," "plans," "anticipates," "estimates," "potential," or "continue,"
or the negative thereof or other comparable terminology regarding beliefs,
plans, expectations or intentions for the future. This discussion and
analysis contains certain forward-looking statements that involve risks and
uncertainties. Pegasus' actual results and the timing of certain events
could differ materially from those discussed in the forward-looking
statements as a result of many factors including those described under the
heading "Risk Factors" in our filings with the Securities and Exchange
Commission including our Annual Report on Form 10-K for the year ended
December 31, 2000.
Reorganization
On January 30, 2001, Pegasus announced the reorganization of its corporate
structure to realign its two business segments. We believe the
reorganization will provide greater focus and accountability for each
business. Prior period segment information has been reclassified to conform
to the current period presentation. The key differences created by the
reorganization are as follows:
* The technology company and the hospitality company are now operated
separately. Each has its own dedicated employees while some corporate
functions remain shared.
* Commission Processing and TravelWeb.com, formerly within the
hospitality company, are now part of the technology company.
Overview
Pegasus is a leading provider of hotel room reservation services,
reservation technology systems and hotel representation services for the
global hotel industry. Pegasus provides services to:
* More than 100,000 travel agencies, including nine of the 10 largest
U.S.-based travel agencies based on revenues;
* Nearly 40,000 hotels around the world, including 18 of the 20 largest
hotel companies based on revenues and total number of guest rooms; and
* Thousands of travel-related Web sites.
On April 3, 2000, Pegasus completed the acquisition of REZ, Inc., a leader
in providing distribution services and solutions for the hotel industry.
The acquisition added hotel representation, central reservation system and
property management system services to our existing electronic distribution,
commission processing and business intelligence services.
Pegasus is organized into two operating companies - technology and
hospitality. The technology company includes central reservation system, or
CRS, electronic distribution, commission processing, property management
systems, or PMS, TravelWeb.com and business intelligence services. The
hospitality company includes hotel representation services offered under the
Utell[R] and Golden Tulip[R] brand names, as well as Paytell[R], a service
that allows travelers' to prepay for reservations and manage their exposure
to foreign currency exchange rate fluctuations. For the three months ended
March 31, 2001, approximately 58 percent and 42 percent of Pegasus'
consolidated revenue was derived from the technology and hospitality
businesses, respectively.
Services
Technology
The technology company includes CRS, electronic distribution, commission
processing, PMS, TravelWeb.com and business intelligence services. Hotel
companies are placing an increasing emphasis on the use of technology as a
means of both increasing revenues as well as reducing costs. Increasingly,
hotel companies are realizing that internally developing and operating their
own technology solutions may not always be the most cost effective approach,
particularly as this relates to CRS and PMS functions. These systems tend
to be expensive to build, operate and update. As a result, many hotel
companies have chosen to utilize the services of a third party to provide
CRS and PMS capability.
Central Reservation System. Pegasus' CRS is provided on an application
service processing, or ASP, basis to more than 10,000 hotel properties,
representing over 2 million hotel rooms worldwide. During 2000, we
processed approximately 40 million hotel reservations through our CRS.
Pegasus also provides CRS software licenses to an additional 20 hotel
brands, representing 12,000 properties.
Our CRS business provides hotel customers with a license for our RezView[R]
CRS software as well as the hardware and facilities necessary to run their
CRS and process reservations. CRS also includes the following support
services:
* System administration
* Database administration
* Electronic distribution channel management
* Telecommunications management
* Private-label voice reservation services
CRS revenues consist of transaction fees as well as license, maintenance and
support fees related to our RezView software. CRS revenues represented
approximately 31 percent of total revenues for the three months ended March
31, 2001.
Electronic Distribution. Pegasus Electronic Distribution provides the
technology that facilitates electronic hotel room reservations. This
technology connects travel industry global distribution systems, or GDSs,
and travel-related Internet sites to a hotel's CRS. Pegasus Electronic
Distribution supports a variety of distribution channels including the
following:
* GDS connectivity - Pegasus Electronic Distribution is linked to all
major GDSs and connects our hotel customers to travel agent terminals
all over the world.
* Third-party Web sites - We provide travel-related Web sites access to
our hotel information database containing more than 40,000 properties
and on-line hotel reservation capability. We provide this service to
several of the top travel Web sites such as Expedia.com, HotWire.com,
Lastminute.com, Oracle e-Travel, Continental.com, Orbitz.com and our
own TravelWeb.com.
* Hotel Web sites - Our NetBookerTM service provides hotel companies with
a hotel information database and Internet reservation capabilities.
Hotel Web sites that are "Powered by Pegasus"[R] offer brand-loyal
Internet shoppers real-time rates, availability and booking
capabilities.
Pegasus Electronic Distribution revenues primarily consist of transaction
fees, commissions and monthly subscription or maintenance fees. In
addition, new hotel customers pay a one-time set-up fee for establishing the
connection between the hotel's CRS and the electronic distribution
technology. New third-party Web site customers pay a one-time set-up fee
for establishing the connection between a hotel's CRS and the third-party
Web site. Electronic Distribution revenues represented approximately 10
percent of total revenues for the three months ended March 31, 2001.
Commission Processing. Pegasus Commission Processing provides a
comprehensive and technologically advanced hotel commission processing
service by collecting and consolidating checkout information and travel
agency commissions on behalf of more than 32,000 properties representing a
significant number of major hotel brands. Each month Pegasus Commission
Processing consolidates and distributes millions of dollars in commission
payments to its participating travel agencies, which number over 100,000 in
more than 200 countries. This value-added commission consolidation and
reporting service facilitates more efficient and effective operation for
both hotel and travel agency participants by providing a single, monthly
commission payment to member travel agencies from participating hotels.
Pegasus Commission Processing processed approximately $488 million in hotel
commissions in 2000.
Pegasus Commission Processing revenues consist of both travel agency and
hotel fees. Travel agency fees are based on a percentage of the value of
hotel commissions processed by Pegasus on behalf of participating travel
agencies. Revenues from travel agency fees can vary substantially from
period to period based on the types of hotels at which reservations are made
and fluctuations in overall room rates. In addition, participating hotels
generally pay fees based on the number of commissionable transactions that
Pegasus processes for the respective hotel. Our commission processing
revenues represented approximately 15 percent of total revenues for the
three months ended March 31, 2001.
Property Systems and Services. As part of the REZ acquisition, we obtained
the GuestView[R] PMS software. Although we are still servicing existing
customers, we are not selling new licenses for the GuestView software. PMS
revenues for the three months ended March 31, 2001 primarily consisted of
maintenance and support fees related to the GuestView software.
In November 2000, we entered into an agreement to purchase all or part of
Global Enterprise Technology Solutions LLC, or GETS. As part of the
transaction, Pegasus obtained an exclusive license to the new Internet-based
ASP property management system currently under development by GETS. Pegasus
is currently funding and directing the development of the new system.
TravelWeb.com. TravelWeb.com is our interactive Internet site on which
consumers can research and reserve hotel rooms around the world.
TravelWeb.com contains detailed property information on more than 40,000
hotels and allows travelers to directly access hotels' CRSs to check room
availability and make or cancel a reservation. Other features include hotel
photos, maps, weather information and special discount programs. For hotel
reservations that originate on the TravelWeb.com Web site, Pegasus charges
the hotel either a transaction fee or a commission based on the value of the
guest stay.
Business Intelligence. Pegasus Business Intelligence provides customer
relationship management and marketing research and information services.
Business Intelligence revenues consist of fees charged to hotels for the
development of hotel databases and for consulting services. In March 2001,
Pegasus notified employees and customers that it would not be renewing
Business Intelligence contracts and would be winding down operations.
Hospitality
The hospitality company includes hotel representation services offered under
the Utell and Golden Tulip brand names, as well as Paytell, a service that
allows travelers to prepay for reservations and manage their exposure to
foreign currency exchange rate fluctuations.
Representation Services. In order to sell their rooms in the marketplace,
many independent hotels associate themselves with our hotel representation
services and use our systems and infrastructure to market and make
reservations for their rooms. Independent hotels join our hotel
representation service for the following reasons:
* To achieve a cost-effective presence in the primary electronic
distribution channels - GDS and Internet.
* To obtain a global voice reservation capability through which travel
agents can book their rooms over the telephone via a local call with
local language capabilities.
* To enhance the market image of the hotel by affiliation with a well-
known name in hotel distribution.
* To benefit from worldwide sales and marketing support.
Our core hotel representation service, offered under the Utell brand name,
provides hotel marketing, voice reservation, as well as GDS and Internet
representation services for more than 6,400 hotels in more than 180
countries. Utell is the oldest, largest and most diverse hotel
representation company in the world. It operates the Unison[R] CRS, a
sophisticated CRS offering advanced electronic distribution capabilities,
providing both a GDS and Internet presence for its member hotels.
We also offer branded hotel representation services under the Golden Tulip
and Tulip Inns[R] brand names. Affiliation with Golden Tulip allows member
hotels to adopt the brand name and quality standards of the well-known
Golden Tulip Worldwide brand. Golden Tulip Worldwide members include
approximately 400 hotels worldwide. Branded representation service
customers also receive hotel marketing, voice reservation as well as GDS and
Internet representation services similar to our Utell representation
customers.
Representation service revenues consist of reservation processing fees,
membership fees and fees for various marketing services. Our hotel
representation services represented approximately 42 percent of total
revenues for the three months ended March 31, 2001.
Paytell. Many international travelers who book rooms at hotels to which we
provide representation services utilize Paytell to prepay for hotel stays
and reduce their exposure to foreign currency fluctuations. Travelers using
our Paytell service prepay for hotel rooms in the traveler's local currency.
When a traveler arrives at the hotel, Pegasus remits the amount to the hotel
in the hotel's local currency. Revenues for this service are derived from
the difference in the exchange rate that the traveler actually paid and the
exchange rate when the guest stay occurs.
Other Services
Pegasus regularly seeks to develop new services to capitalize on its
existing technology and customer base and to provide additional electronic
hotel reservation capabilities and information services to its existing
customers and to other participants in the hotel room distribution process.
One such development is our strategic investment in GETS, a company that is
developing an Internet-based ASP property management system to which we have
an exclusive license. Pegasus has not received a material amount of revenue
from these services, and there can be no assurance that any of these
services will produce a material amount of revenue in the future.
Recent Developments
On January 10, 2001, Pegasus sold its Summit Hotels & Resorts and Sterling
Hotels & Resorts brand businesses to IndeCorp Corporation, or IndeCorp, for
approximately $12 million, including scheduled future payments due upon
member hotel contract renewals. IndeCorp is a Chicago-based holding company
that owns and operates the luxury hotel brand Preferred Hotels & Resorts
Worldwide. In the first quarter of 2001, Pegasus recognized a pre-tax gain
of $4.8 million related to the sale of these two brands. In addition,
IndeCorp signed a five-year technology services agreement and a three-year
hotel representation agreement with Pegasus. As part of the agreements,
Pegasus is the exclusive provider of reservation technology, electronic
reservation processing and commission processing services to the IndeCorp
brands, which includes all Preferred Hotels & Resorts, Summit Hotels &
Resorts and Sterling Hotels & Resorts member hotels. Pegasus also provides
a host of other ancillary services to the IndeCorp businesses.
At the time of the sale of the Summit and Sterling brand businesses, Pegasus
concluded that the scheduled future payments represented a determinable
payment stream. Pegasus has determined that the sale agreement can not be
accounted for consistent with this initial conclusion. On November 9, 2001,
Pegasus and IndeCorp amended the original sale agreement to provide for a
promissory note in the principal amount of $6 million payable by IndeCorp to
Pegasus that replaces the scheduled future payments under the original
agreement with a fixed and determinable payment stream for a period of eight
years commencing July 1, 2002 and bearing interest at 7 percent. The
discounted value of this promissory note is $5.5 million.
The amendment of the original sale agreement further provides that (1)
Pegasus receive from IndeCorp a $2.8 million promissory note to replace
outstanding trade receivables, and (2) the term of the existing technology
services and hotel representation agreements with IndeCorp be extended for
an additional 1.5 years. This promissory note requires monthly payments for
a period of eight years commencing July 1, 2002 and bears interest at 7
percent.
Pegasus has revised the pre-tax gain on the sale of the Summit and Sterling
brand businesses recorded in the quarter ended March 31, 2001 to exclude the
amounts related to the scheduled future payments. Accordingly, the
previously recognized pre-tax gain of $4.8 million has been revised to a
$671,000 pre-tax loss. To reflect the structure of the amended sale
agreement, Pegasus will recognize the $5.5 million pre-tax gain on the sale
related to the promissory note that replaces the scheduled future payments
in the quarter ended December 31, 2001. The revision and the timing of the
recognition of the gain in the quarter ended December 31, 2001 is not
expected to have any material impact on the Company's consolidated statement
of operations for the year ended December 31, 2001. The following table
illustrates the net change resulting from this revision (in thousands):
As of
--------------------
March 31, December 31,
2001 2001
--------------------
Balance sheet:
Total assets increase (decrease) $(5,460) $5,460
Total liabilities decrease (increase) 891 (891)
--------------------
Accumulated deficit decrease (increase) $(4,569) $4,569
====================
Quarter ended
--------------------
March 31, December 31,
2001 2001
--------------------
Statement of operations:
Gain on sale of business unit increase
(decrease) $(5,460) $ 5,460
Loss before income taxes decrease (increase) (5,460) 5,460
Income tax benefit decrease (increase) (891) 891
--------------------
Net loss decrease (increase) $(4,569) $ 4,569
====================
Basic and diluted net loss per share decrease
(increase) $ (0.19) $ 0.19*
====================
* Assumes weighted average shares outstanding of 24,600, which is not
expected to be materially different from weighted average shares
outstanding for the three months ended September 30, 2001.
On January 30, 2001, Pegasus announced the reorganization of its corporate
structure to realign its two business segments. As part of the
reorganization, our hotel representation business now operates under the
Utell name as a wholly owned subsidiary of Pegasus Solutions, Inc. and
represents our hospitality segment. Our technology segment consists of CRS,
electronic distribution, commission processing, PMS, TravelWeb.com and
business intelligence services. We began using this new organizational
structure for segment reporting in the first quarter of 2001.
We operate Golden Tulip under a brand license agreement with NH Hotels of
Madrid, or NH. Pursuant to the agreement, we are required to have at least
500 participating hotels by the end of 2001. We do not expect to meet that
requirement. While we continue to discuss alternatives with NH, we expect
to return the licenses and the brand business back to NH at the end of 2001.
Because of significant net operating losses, management decided in the
fourth quarter of 2000 not to seek new Business Intelligence customers and
only to service existing contracts. The Company determined that the net
book values of goodwill and certain other assets were impaired and recorded
an asset impairment charge of $3.0 million in the fourth quarter of 2000.
In March 2001, Pegasus notified employees and customers that it would not be
renewing contracts and would be winding down its Business Intelligence
operations. As a result, Pegasus incurred $221,000 of related severance and
other expenses during the three months ended March 31, 2001.
Results of Operations
The results of operations for the three months ended March 31, 2001 include
the effect of the REZ acquisition, which was completed on April 3, 2000.
Accordingly, REZ's results of operations subsequent to the acquisition are
included in the accompanying unaudited condensed consolidated financial
statements.
Net Revenues. Net revenues for the three months ended March 31, 2001
increased to $46.1 million from $10.7 million for the same period in 2000
primarily due to the acquisition of REZ. Excluding the effect of REZ,
revenues increased $2.1 million, or 19.5 percent primarily due to higher
transaction levels for Commission Processing.
Revenues for our technology segment were $26.8 million for the three months
ended March 31, 2001, including $14.0 million in technology revenue related
to REZ's operations. Excluding the effect of REZ, technology revenues
increased $2.1 million, or 19.5 percent, to $12.7 million for the three
months ended March 31, 2001 compared to $10.6 million for the same period in
2000.
Commission Processing revenues increased 32.3 percent for the three months
ended March 31, 2001 compared to the same period in 2000 as a result of an
18.6 percent increase in the value of commissions paid to member travel
agencies through our commission processing service. The value of
commissions paid increased because of an increase in the number of hotel
commission transactions processed combined with an increase in the average
value of commissions processed. In addition, revenue earned on the spread
between the currency in which the hotel commission is earned and the
currency paid to the travel agency increased. Incremental reconciliation
and tracking services revenue also contributed to the increase in commission
processing revenues.
Electronic Distribution revenues decreased $193,000, or 3.9 percent, to $4.7
million for the three months ended March 31, 2001 compared to $4.9 million
for the same period in 2000. Both transaction growth rates and revenue
growth was negatively impacted by the loss of business previously generated
from some hotel Web sites which terminated in the fall of 2000.
Business Intelligence revenues decreased $165,000, or 46.8 percent, to
$188,000 for the three months ended March 31, 2001 compared to $353,000 for
the same period in 2000. Because of significant operating losses, Pegasus
is winding down its Business Intelligence operations. The remaining
revenues consist of fees for database maintenance.
Revenues for our hospitality segment were $19.3 million for the three months
ended March 31, 2001, all of which is related to the hotel representation
business acquired from REZ.
Cost of services. Cost of services were $26.3 million for the three months
ended March 31, 2001, including $21.6 million in cost of services
attributable to REZ's operations. Excluding the effect of REZ, cost of
services increased $1.2 million for the three months ended March 31, 2001
compared to the same period in 2000. Cost of services increased primarily
due to an increase in headcount and salaries for Commission Processing and
Electronic Distribution, as well as additional bad debt and facilities
expense.
Restructure costs. During the three months ended March 31, 2001, Pegasus
incurred $797,000 of restructuring charges, including $576,000 related to
the consolidation of reservation centers and $221,000 related to severance
and other expenses associated with winding down our Business Intelligence
operations.
Research and development. Research and development expenses were $2.0
million for the three months ended March 31, 2001, including $1.5 million
related to REZ's operations. Excluding the effect of REZ, research and
development expenses decreased $141,000 for the three months ended March 31,
2001 compared to the same period in 2000.
General and administrative expenses. General and administrative expenses
were $6.6 million for the three months ended March 31, 2001, including $3.9
million related to REZ. Excluding the effect of REZ, general and
administrative expenses increased $709,000 primarily due to an increase in
headcount and related recruitment and travel costs. In addition,
professional fees increased because of higher audit and consulting fees
related to our enterprise-wide accounting and information system and a
review of employee benefits.
Marketing and promotion expenses. Marketing and promotion expenses were $6.4
million for the three months ended March 31, 2001, including $5.2 million in
marketing and promotion expenses attributable to REZ. Excluding the effect
of REZ, marketing and promotion expenses decreased $399,000 primarily due to
the reduction of our business intelligence sales force.
Depreciation and amortization. Depreciation and amortization expenses were
$16.4 million for the three months ended March 31, 2001 primarily due to
$13.2 million of amortization expense related to purchased intangibles and
goodwill related to the REZ acquisition. In addition, depreciation and
amortization expense for property and equipment increased to $3.2 million
for the three months ended March 31, 2001 from $521,000 for the same period
in 2000 primarily due to depreciation and amortization expense related to
REZ property and equipment.
Interest income, net. Net interest income decreased $1.5 million for the
three months ended March 31, 2001 compared to the same period in 2000.
Interest income decreased $1.1 million for the three months ended March 31,
2001 compared to the same period in 2000 as marketable securities held
during the three months ended March 31, 2000 were used to fund the REZ
acquisition on April 3, 2000. Interest expense increased $444,000 for the
three months ended March 31, 2001 compared to the same period in 2000
primarily due to $432,000 of accrued interest on a note payable to Reed
Elsevier plc, the majority REZ shareholder.
Loss on sale of business unit. In January 2001, Pegasus sold its Summit
Hotels & Resorts and Sterling Hotels & Resorts brand businesses to IndeCorp
Corporation for approximately $12 million, which included scheduled future
payments with an estimated net realizable value of $5.5 million. During the
three months ended March 31, 2001, Pegasus recognized a pre-tax loss of
$671,000 related to the sale of these two businesses.
Equity in loss of investee. During the three months ended March 31, 2001,
Pegasus incurred $298,000 of amortization expense for the excess cost over
net assets acquired for our investment in GETS. GETS has operated at
approximately break-even since Pegasus' initial 20 percent investment.
Provision for income taxes. Pegasus recorded an income tax benefit of $2.2
million for the three months ended March 31, 2001. Our effective rate
differed from the statutory rate primarily due to large non-deductible
expenses related to purchase accounting. Pegasus recorded an income tax
provision of $1.1 million for the three months ended March 31, 2000, an
effective tax rate of 26.5 percent of pretax income. The effective tax rate
for the three months ended March 31, 2000 differed from the statutory rate
primarily due to tax-exempt interest income.
Liquidity and Capital Resources
Pegasus' principal sources of liquidity at March 31, 2001 included cash and
cash equivalents of $30.8 million, short-term investments of $5.8 million,
restricted cash of $4.6 million and an unused revolving credit facility of
$30.0 million. Pegasus' principal sources of liquidity at December 31, 2000
included cash and cash equivalents of $32.6 million, short-term investments
of $1.6 million, restricted cash of $4.6 million and an unused revolving
credit facility of $30.0 million.
Restricted cash represents funds for travel agency commission checks that
were never submitted to the bank by travel agencies for payment within one
year of their original issuance. After one year, the bank places a stop on
the outstanding travel agency commission checks and returns the funds to
Pegasus. Pegasus records, in an accrued liability account, an amount equal
to the restricted cash recorded upon receipt of the funds from the bank.
The reasons for the checks not clearing include travel agencies going out of
business, change in address or the checks being lost. The returned funds
are repaid to the original travel agency if they can be located or if not
then to their state of residence as required by the unclaimed property laws
of their state.
Working capital decreased to $3.8 million at March 31, 2001 from $6.2
million at December 31, 2000, and net cash provided by operating activities
increased to $4.5 million in for the three months ending March 31, 2001 from
$3.8 million for the same period in 2000.
Capital expenditures consisted of purchases of software, furniture and
computer equipment as well as internally developed software costs and
amounted to $3.4 million for the three months ended March 31, 2001 compared
to $1.3 million for the same period in 2000. Additional uses of cash for
investing activities for the three months ended March 31, 2001 included the
purchase of marketable securities. Pegasus has financed its cash
requirements for investments primarily through cash generated from
operations, the sale of capital stock, the sale of the Summit and Sterling
brands and borrowings from its revolving credit facility. Pegasus estimates
that its capital expenditures during 2001 will range from approximately $12
to $14 million primarily related to adding capacity to existing systems and
software development.
In conjunction with the REZ acquisition, Pegasus entered into a credit
agreement on April 17, 2000. Under the terms of the credit agreement,
Pegasus has an aggregate $30 million revolving credit facility with Chase
Bank of Texas, Compass Bank and Wells Fargo Bank (Texas). The credit
agreement has a two-year term, and a current interest rate of LIBOR plus two
percent. There was no amount outstanding under the credit facility at May
10, 2001.
On August 9, 2000, the Board of Directors authorized the repurchase of up to
two million shares of the Company's common stock. The repurchase is at the
discretion of the Board of Directors' Stock Repurchase Committee and may be
made on the open market, in privately negotiated transactions or otherwise,
depending on market conditions, price, share availability and other factors.
Shares repurchased may be reserved for later reissue in connection with
employee benefit plans and other general corporate purposes. As of May 10,
2001, Pegasus had repurchased 156,000 shares at a cost of $1.6 million.
On November 1, 2000, Pegasus entered into an agreement to acquire all or
part ownership of Global Enterprise Technology Solutions, a provider of
hotel property management systems. Under the terms of the agreement,
Pegasus initiated the acquisition by acquiring a 20 percent interest for a
combination of Pegasus common stock and cash totaling $5 million. Pegasus
has the right to acquire full ownership of Phoenix-based GETS within the
next 24 months for Pegasus common stock and cash. As part of the
transaction, Pegasus obtained an exclusive license for the new Internet-
based application service provider property management system currently
under development by GETS. Pegasus is currently funding and directing the
development of the system. As of May 10, 2001, Pegasus had funded
development costs of $3.6 million.
Our future liquidity and capital requirements will depend on numerous
factors, including:
* Our profitability
* Operational cash requirements
* Competitive pressures
* Development of new services and applications
* Acquisition of complimentary businesses or technologies
* Response to unanticipated cash requirements
Pegasus believes that its cash flows from operations, together with funds
available from debt financing, will be sufficient to meet its foreseeable
operating and capital requirements through at least the end of 2001.
Pegasus may consider other financing alternatives to fund its requirements,
including possible public or private debt or equity offerings. However,
there can be no assurance that any financing alternatives sought by Pegasus
will be available or will be on terms that are attractive to Pegasus.
Further, any debt financing may involve restrictive covenants, and any
equity financing may be dilutive to stockholders.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," or FAS 133. FAS 133
requires that all derivative instruments be recorded on the balance sheet at
fair value. Changes in the fair value of derivative instruments are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge
transaction. FAS 133, as amended by Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of Effective Date of FAS 133," was effective for
Pegasus' first quarter financial statements in fiscal 2001. The adoption of
FAS 133 did not have a material impact on our consolidated financial
statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEGASUS SOLUTIONS, INC.
November 15, 2001 /s/ JOHN F. DAVIS, III
----------------------
John F. Davis, III,
Chairman and Chief
Executive Officer
November 15, 2001 /s/ SUSAN K. COLE
-----------------
Susan K. Cole,
Chief Financial Officer,
(principal accounting officer)