UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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
November 7, 2001 was 24,595,000.
PEGASUS SOLUTIONS, INC.
FORM 10-Q
For the Quarter Ended September 30, 2001
INDEX
Page
Part I. Financial Information ----
Item 1. Financial Statements
a) Condensed Consolidated Balance Sheets as of September 30,
2001 (unaudited) and December 31, 2000 3
b) Condensed Consolidated Statements of Operations and
Comprehensive Loss for the Three and Nine Months Ended
September 30, 2001 and 2000 (unaudited) 4
c) Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2001 and 2000 (unaudited) 5
d) Notes to Condensed Consolidated Financial Statements
(unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II. Other Information
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
Part I - Financial Information
Item 1. Financial Statements
PEGASUS SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
2001 2000
(unaudited)
------------ ------------
ASSETS
Cash and cash equivalents $ 10,431 $ 32,576
Restricted cash 5,993 4,574
Short-term investments 10,186 1,563
Accounts receivable, net 28,599 29,889
Other current assets 4,909 4,189
------------ ------------
Total current assets 60,118 72,791
Goodwill, net 154,574 149,764
Property and equipment, net 58,162 64,434
Intangible assets, net 38,717 62,909
Other noncurrent assets 4,699 7,807
------------ ------------
Total assets 316,270 357,705
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities 44,505 36,097
Deferred tax liability 12,065 12,078
Unearned income 9,855 9,428
Income tax payable - 6,212
Customer deposits 3,603 2,691
Other current liabilities 1,583 80
------------ ------------
Total current liabilities 71,611 66,586
Note payable - 20,000
Deferred tax liability 3,249 8,961
Other noncurrent liabilities 7,973 1,586
Stockholders' equity:
Preferred stock, $0.01 par value; 2,000
shares authorized; zero shares issued
and outstanding, - -
Common stock, $0.01 par value; 50,000
shares authorized; 25,037 and 24,873
shares issued, respectively 250 249
Additional paid-in capital 289,662 288,422
Unearned compensation (58) (157)
Accumulated comprehensive loss (272) (265)
Accumulated deficit (52,902) (26,501)
Less treasury stock at cost (442
and 245 shares, respectively (3,243) (1,176)
------------ ------------
Total stockholders' equity 233,437 260,572
------------ ------------
Total liabilities and
stockholders' equity $ 316,270 $ 357,705
============ ============
See accompanying notes to condensed consolidated financial statements
PEGASUS SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net revenues $ 45,226 $ 52,630 $ 141,102 $ 115,873
Cost of services 24,613 25,878 75,802 54,350
Research and development 2,313 2,676 5,886 6,038
General and administrative expenses 5,436 5,699 19,460 13,977
Marketing and promotion expenses 4,917 7,528 17,335 17,583
Depreciation and amortization 16,349 16,883 49,177 34,484
Restructure costs 6,302 - 7,099 -
Write-off of purchased in-process
research and development - - - 8,000
--------- --------- --------- ---------
Operating loss (14,704) (6,034) (33,657) (18,559)
Other income (expense):
Interest income (expense), net 362 52 575 1,609
Equity in loss of investee (179) - (634) -
Gain on sale of business units - - 78 -
Other (166) 69 (130) 184
--------- --------- --------- ---------
Loss before income taxes (14,687) (5,913) (33,768) (16,766)
Income tax benefit (3,836) (861) (7,367) (1,585)
--------- --------- --------- ---------
Net loss $ (10,851) $ (5,052) (26,401) (15,181)
========= ========= ========= =========
Other comprehensive income - change in
unrealized loss, net of tax (14) (698) (7) (136)
--------- --------- --------- ---------
Comprehensive loss $ (10,865) $ (5,750) $ (26,408) $ (15,317)
========= ========= ========= =========
Basic and diluted net loss per share $ (0.44) $ (0.21) $ (1.08) $ (0.66)
========= ========= ========= =========
Basic and diluted weighted average
shares outstanding 24,567 24,395 24,549 22,975
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements
PEGASUS SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
-----------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net loss $ (26,401) (15,181)
Adjustments to reconcile net loss to
net cash from operating activities:
Depreciation and amortization 49,177 34,484
Gain on sale of business units (78) -
Write-off of purchased in-process
research and development - 8,000
Provision for bad debt 3,009 1,614
Other 791 (8,645)
Changes in assets and liabilities:
Restricted cash (1,419) (1,076)
Accounts receivable (3,589) 3,605
Other assets (1,759) 5,477
Accounts payable and accrued liabilities 7,100 (8,441)
Unearned income 428 1,401
Other liabilities (1,604) 1,002
-------- --------
Net cash provided by operating activities 25,655 22,240
-------- --------
Cash flows from investing activities:
Purchase of software, property and equipment (11,385) (7,128)
Purchase of marketable securities (16,374) -
Proceeds from maturity of marketable securities 6,226 35,294
Proceeds from sale of business units 4,033 -
Purchase of Global Enterprise Technology
Solutions LLC (11,513) -
Purchase of REZsolutions, Inc. 852 (95,865)
Repayment of customer advance 1,500 -
Other 193 50
-------- --------
Net cash used for investing activities (26,468) (67,649)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of stock 831 418
Repayment of notes payable (20,000) (17,768)
Purchase of treasury stock (2,067) -
Repayment of capital leases (96) (53)
-------- --------
Net cash used for financing activities (21,332) (17,403)
-------- --------
Net decrease in cash and cash equivalents (22,145) (62,812)
Cash and cash equivalents, beginning of period 32,576 104,616
-------- --------
Cash and cash equivalents, end of period $ 10,431 $ 41,804
======== ========
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 the Company's annual report on Form 10-K for the year ended December
31, 2000. Pegasus management believes that the disclosures are
sufficient for interim financial reporting purposes.
2. EARNINGS PER SHARE
Basic net loss per share for the three and nine months ended September
30, 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.
Due to the Company's net loss position for the three and nine months
ended September 30, 2001 and 2000, all outstanding options were excluded
in the calculation of diluted net loss per share because their effect
would be anti-dilutive. Approximately 3.4 million and 3.1 million
shares issuable upon the exercise of stock options were excluded from
the calculation of diluted net loss per share for the three and nine
months ended September 30, 2001 and 2000, respectively.
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"), financial services, electronic distribution
and property systems services to the global hotel industry. The
hospitality segment provides hotel representation services offered under
the Utell and Golden Tulip brand names. The Company sold its Golden
Tulip business on June 29, 2001.
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 an allocation of all
corporate costs to the operating segments. Management evaluates the
performance of its segments based on earnings before interest, income
tax, depreciation, amortization and other non-operating income and
expense ("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 of, 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 September 30 (in thousands):
Technology Hospitality Total
2001 ---------- ----------- -----
----
Net revenues $ 27,435 $ 17,791 $ 45,226
EBITDA 4,214 (2,569) 1,645
2000
----
Net revenues 25,990 26,640 52,630
EBITDA 5,896 4,953 10,849
Segment EBITDA for the three months ended September 30, 2001 includes
$2.9 million and $3.4 million of restructuring costs related to the
technology and hospitality segments, respectively.
A reconciliation of total segment EBITDA to total consolidated loss
before income taxes for the three months ended September 30 is as
follows (in thousands):
2001 2000
------- -------
Total EBITDA for reportable segments $ 1,645 $ 10,849
Depreciation and amortization (16,349) (16,883)
Interest income, net 362 52
Equity in loss of investee (179) --
Other (166) 69
------- -------
Consolidated loss before income taxes $(14,687) $ (5,913)
======= =======
The following table presents information about reported segments for the
nine months ended September 30 (in thousands):
Technology Hospitality Total
2001 ---------- ----------- -----
----
Net revenues $ 81,867 $ 59,235 $ 141,102
EBITDA 17,299 (1,779) 15,520
2000
----
Net revenues 61,674 54,199 115,873
EBITDA 13,432 10,493 23,925
Segment EBITDA for the nine months ended September 30, 2001 includes
$3.1 million and $4.0 million of restructuring costs related to the
technology and hospitality segments, respectively.
A reconciliation of total segment EBITDA to total consolidated loss
before income taxes for the nine months ended September 30 is as follows
(in thousands):
2001 2000
------- -------
Total EBITDA for reportable segments $15,520 $23,925
Depreciation and amortization (49,177) (34,484)
Write-off of purchased in-process
research and development -- (8,000)
Interest income, net 575 1,609
Gain on sale of business units 78 --
Equity in loss of investee (634) --
Other (130) 184
------- -------
Consolidated loss before income taxes $(33,768) $(16,766)
======= =======
3. RESTRUCTURE COSTS
During the first quarter of 2001, Pegasus incurred $797,000 of
restructuring charges, consisting of $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 September 30, 2001, unpaid restructure
costs, which are classified as accrued liabilities, were $190,000 and
are expected to be paid within the next three months.
During the third quarter of 2001, Pegasus incurred $6.3 million of
restructuring charges, consisting of $4.3 million in severance and
outplacement costs and $2.0 million in redundant facilities and other
costs related to reorganizing its operations from a business unit
structure into distinct functional areas. As a result of the
reorganization plan, Pegasus is eliminating approximately 15 percent of
its workforce determined to be duplicative and consolidating certain
facilities and functions. The positions eliminated were primarily
related to call center and administrative functions and included both
domestic and international locations. As of September 30, 2001, unpaid
severance and outplacement costs were $2.3 million and unpaid redundant
facilities and other costs were $1.9 million. These unpaid costs are
classified as accrued liabilities and are expected to be paid within
nine months.
5. SALE OF BUSINESS UNITS
On June 29, 2001, Pegasus sold its Golden Tulip brand and licensing
business to Madrid-based NH Hoteles ("NH") for $2.0 million. As a
result of this transaction, Pegasus recognized a pre-tax gain of
$749,000 in the second quarter of 2001. In addition, NH signed one-year
agreements with Pegasus for reservation processing and hotel
representation services. Pursuant to the agreements, Pegasus is the
exclusive provider of reservations technology, voice and electronic
reservation processing and commission processing services to all Golden
Tulip Hotels and Tulip Inns, and Pegasus' Utell subsidiary provides
worldwide marketing, sales and distribution services and a host of other
ancillary services.
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. ACQUISITION
On September 1, 2001, Pegasus acquired the remaining 80 percent of the
outstanding common stock of Global Enterprise Technology Solutions LLC
("GETS"), a Tempe, Arizona-based provider of hotel property management
systems, for $11.5 million. Pegasus acquired the initial 20 percent
interest on November 1, 2000. The acquisition was accounted for under
the purchase method of accounting. Accordingly, GETS's results of
operations subsequent to the acquisition date are included in the
Company's unaudited condensed consolidated financial statements. The
total $22.0 million purchase price includes approximately $90,000 in
acquisition costs and was allocated to assets acquired and liabilities
assumed based on estimated fair value at the acquisition date. Pegasus
will engage an independent third-party to provide an independent
valuation of intangible assets related to the GETS acquisition in the
fourth quarter of 2001. Based on the Company's estimate, the
preliminary allocation of assets acquired and liabilities assumed at the
acquisition date is summarized below (in thousands):
Estimated fair value of GETS net tangible
assets purchased ......................... $ (1,381)
Software ................................... 6,022
Goodwill ................................... 17,376
7. 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 September 30, 2001, the Company had
purchased 196,000 shares for an aggregate $2.1 million pursuant to this
buyback program.
8. CONTINGENCIES
Pegasus is subject to certain legal proceedings, claims and disputes
that arise in the ordinary course of business. Although management
cannot predict the outcomes of these legal proceedings, management does
not believe these actions will have a material adverse effect on the
Company's financial position, results of operations or liquidity.
9. 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
the Company's consolidated financial statements.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 141, "Business Combinations" ("FAS 141") and No. 142,
"Goodwill and Other Intangibles" ("FAS 142"). FAS 141 prohibits the
pooling-of-interests method and addresses financial accounting and
reporting for goodwill and other intangible assets acquired in a
business combination at acquisition. The provisions of FAS 141
generally apply to all business combinations initiated after June 30,
2001. Accordingly, the Company will use the purchase method for all
business combinations initiated after June 30, 2001. FAS 142 addresses
financial accounting and reporting for intangible assets acquired
individually or with a group of other assets (but not those acquired in
a business combination) at acquisition and for goodwill and other
intangible assets subsequent to their acquisition. Pegasus will apply
the provisions of FAS 142 to any business combination initiated after
June 30, 2001 and to existing goodwill and intangible assets beginning
in 2002. The amount of goodwill included in the Company's condensed
consolidated balance sheet at September 30, 2001 relates to the REZ,
Inc. ("REZ") and GETS acquisitions. In accordance with FAS 142, the
Company will discontinue the amortization of goodwill related to the REZ
acquisition beginning in January 2002, and will not record goodwill
amortization for the GETS acquisition since it occurred after June 30,
2001. Furthermore, management believes there are no other identifiable
intangible assets included in the goodwill amount for REZ. Since the
GETS acquisition was completed late in the quarter, the Company intends
to obtain a third-party valuation of GETS during the fourth quarter and
reclassify amounts determined to be identifiable intangible assets.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-
Lived Assets" ("FAS 144"). FAS 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This
statement supersedes Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of" ("FAS 121") and related literature and
establishes a single accounting model, based on the framework
established in FAS 121, for long-lived assets to be disposed of by sale.
The Company is required to adopt FAS 144 beginning in January 2002. The
Company does not believe that the adoption of FAS 144 will have a
material impact on its 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 contains forward-looking
statements including statements using terminology such as "may," "will,"
"expects," "plans," "intends," "anticipates," "believes," "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 forward-looking statements
that involve risks and uncertainties such as adverse changes in general
market conditions for business and leisure travel as a result of additional
terrorist activities, action by U.S. military forces, changes in hotel room
rates, capacity adjustments by airlines, trends in the overall demand for
travel, and the inherent difficulty in making projections during this period
of uncertainty, as well as other risks and uncertainties described in this
discussion and analysis. 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.
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 the 10 largest U.S.-based
travel agencies based on revenues;
* Nearly 46,000 hotels around the world, including 48 of the 50 largest
hotel brands based on 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
and commission processing services.
Pegasus is organized into two operating segments - technology and
hospitality. For the nine months ended September 30, 2001, approximately 58
percent and 42 percent of Pegasus' consolidated revenue was derived from the
technology and hospitality businesses, respectively.
Technology
Our technology business includes central reservation system, or CRS,
electronic distribution, commission processing and property management
system, or PMS, 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 such as Pegasus to provide CRS and PMS capability.
Central Reservation System. Our RezView CRS is provided on an application
service provider, or ASP, basis to more than 10,000 hotel properties,
representing over 2.1 million hotel rooms worldwide. During the nine months
ended September 30, 2001, we processed approximately 32 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
central reservation systems 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 30 percent of total revenues for the nine months ended
September 30, 2001.
Financial Services. Pegasus Financial Services, which includes our
Commission Processing service, 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 our Commission Processing service 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. Our Commission Processing
service processed approximately $391 million in hotel commission payments
during the nine months ended September 30, 2001.
Financial Services 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 hotel. Financial Services revenues represented
approximately 16 percent of total revenues for the nine months ended
September 30, 2001.
Electronic Distribution. Our Electronic Distribution service 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 central reservation system.
Our Electronic Distribution service 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
worldwide.
* Third-party Web sites - We provide 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.
* 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' central
reservation systems to check room availability and make or cancel a
reservation. Other features include hotel photos, maps, weather
information and special discount programs.
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 central reservation system and the electronic
distribution technology. New third-party Web site customers typically pay a
one-time set-up fee for establishing the connection between a hotel's
central reservation system and the third-party Web site. Electronic
Distribution revenues represented approximately 10 percent of total revenues
for the nine months ended September 30, 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.
Property Systems and Services revenues for the nine months ended September
30, 2001 primarily consisted of maintenance and support fees related to the
GuestView software as well as revenues from the operations of Global
Enterprise Technology Solutions LLC, or GETS, subsequent to the September 1,
2001 acquisition date. In June 2001, Pegasus launched its new Web-based PMS
service PegasusCentral and announced that 6 Continents Hotels and Resorts,
formerly Bass Hotels and Resorts, had named it as one of two preferred PMS
standards for its 2,600-plus properties. Property Systems and Services
represented approximately 2 percent of total revenues for the nine months
ended September 30, 2001.
Hospitality
Our hospitality business includes hotel representation services offered
under the Utell brand name, as well as Paytell, a service that allows
travelers to prepay for reservations and manage their exposure to foreign
currency exchange rate fluctuations.
Hotel Representation. 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 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.
Utell, our hotel representation service, provides hotel marketing, voice
reservation, as well as GDS and Internet representation services for more
than 5,800 hotels in more than 180 countries. Utell is the oldest, largest
and most diverse hotel representation company in the world. It uses
Pegasus' CRS, offering advanced electronic distribution capabilities,
providing both GDS and Internet presence for its member hotels.
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 nine months ended September 30, 2001, which includes Golden
Tulip revenues for the six months ended June 30, 2001. Pegasus sold its
Golden Tulip brand business in June 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 between the date the traveler pays and
the date 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.
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 June 29, 2001, Pegasus sold its Golden Tulip brand and licensing business
to Madrid-based NH Hoteles, or NH, for $2.0 million. As a result of this
transaction, Pegasus recognized a pre-tax gain of $749,000 in the second
quarter of 2001. In addition, NH signed one-year agreements with Pegasus
for reservation and hotel representation services. Pursuant to the
agreements, Pegasus is the exclusive provider of reservations technology,
voice and electronic reservation processing and commission processing
services to all Golden Tulip Hotels and Tulip Inns, and Pegasus' Utell
subsidiary provides a host of other ancillary services.
On September 4, 2001, Pegasus announced its decision to reorganize its
operations from a business unit structure into distinct functional areas.
The restructuring plan, which includes the elimination of approximately 15
percent of its workforce determined to be duplicative and the consolidation
of certain facilities and functions, should be completed by early 2002 and
once fully implemented, is estimated to result in annual cost savings of
approximately $9 million to $11 million. During the three months ended
September 30, 2001, Pegasus incurred $6.3 million of restructuring charges,
primarily consisting of severance, outplacement and redundant facilities
costs.
On September 1, 2001, Pegasus acquired the remaining 80 percent of the
outstanding common stock of Global Enterprise Technology Solutions, or GETS,
a Tempe, Arizona-based provider of hotel property management systems, for
$11.5 million. Pegasus acquired the initial 20 percent interest on November
1, 2000. The acquisition was accounted for under the purchase method of
accounting. Accordingly, GETS's results of operations subsequent to the
acquisition date are included in the Company's unaudited condensed
consolidated financial statements. The total $22.0 million purchase price
includes approximately $90,000 in acquisition costs and was allocated to
assets acquired and liabilities assumed based on estimated fair value at the
acquisition date. Pegasus will engage a third-party to provide an
independent valuation of intangible assets related to the GETS acquisition
in the fourth quarter of 2001.
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.
Our business, particularly our hotel representation business, is sensitive
to changes in the demand for hotel rooms. Due to a weakened economic
climate, we have seen a slowing in the travel market. Business travel, in
particular, has been negatively impacted by companies' efforts to reduce
costs. The terrorist events of September 11 further weakened the demand for
travel. The adverse impact of both a soft economy and the September 11
events has resulted in a decrease in the demand for hotel rooms and,
therefore, has negatively impacted our revenues for the three and nine
months ended September 30, 2001. We expect this trend to continue at least
through the first six months of 2002.
Results of Operations
Pegasus completed the acquisition of REZ on April 3, 2000 and the
acquisition of GETS on September 1, 2001. Accordingly, REZ's and GETS's
results of operations subsequent to the acquisition dates are included in
the accompanying unaudited condensed consolidated financial statements.
Three Months Ended September 30, 2001 and 2000
Net Revenues. Net revenues for the three months ended September 30, 2001
decreased to $45.2 million from $52.6 million for the same period in 2000
primarily due to the sales of our Summit, Sterling and Golden Tulip brands
and lost revenues from our discontinued business intelligence operations.
Excluding the effect of businesses discontinued or sold, revenues decreased
$544,000, or 1.2 percent, comprised of a $2.2 million decrease in
hospitality revenues offset by a $1.7 million increase in technology
revenues. The net decrease is primarily due to reduced demand for travel as
a result of a weakened economy and the terrorist events on September 11,
2001.
Revenues for our technology segment increased $1.4 million, or 5.6 percent,
to $27.4 million for the three months ended September 30, 2001 compared to
$26.0 million for the same period in 2000.
CRS revenues increased $1.6 million, or 12.5 percent, to $14.2 million for
the three months ended September 30, 2001 compared to $12.6 million for the
same period in 2000 primarily due to adding new customers, such as Kimpton
Hotels, and providing more services to existing customers. The increase in
CRS revenues was offset by a significant reduction in net reservations
subsequent to September 11.
Financial Services revenues increased $597,000, or 8.9 percent, to $7.3
million for the three months ended September 30, 2001 compared to $6.7
million for the same period in 2000. The increase was primarily due to
growth in our reconciliation and tracking services revenue, which
contributes to higher average travel agency fees. This increase was offset
by a 4.8 percent decrease in the value of commissions paid to member travel
agencies through our Commission Processing service, as the events of
September 11 resulted in lower transaction volumes.
Electronic Distribution revenues decreased $719,000, or 12.8 percent, to
$4.9 million for the three months ended September 30, 2001 compared to $5.6
million for the same period in 2000. Both transaction growth rates and
revenue growth were negatively impacted by the loss of business previously
generated from some hotel Web sites, which terminated during the past year.
Electronic Distribution revenues were further reduced by a significant
reduction in net reservations subsequent to September 11.
Property Systems and Services generated revenues of $1.0 million for the
three months ended September 30, 2001 compared to $809,000 for the same
period in 2000. Current property system operations primarily consist of an
agreement with Marriott to maintain GuestView, the PMS product obtained in
the REZ acquisition. In addition, Property Systems and Services revenues
include approximately $300,000 representing GETS's revenues subsequent to
the September 1, 2001 acquisition date.
Revenues for our hospitality segment decreased $8.8 million, or 33.2
percent, to $17.8 million for the three months ended September 30, 2001
compared to $26.6 million for the same period in 2000. The sale of our
Summit, Sterling and Golden Tulip brands accounted for approximately $6.6
million of the decrease in revenues. Excluding the effect of the Summit,
Sterling and Golden Tulip sales, hotel representation revenues decreased by
$2.2 million, or 11.1 percent, primarily due to lower demand for travel and
lower room rates, both of which were further negatively impacted by the
events of September 11. To a lesser extent, a depressed Euro negatively
impacted hospitality revenues.
Cost of services. Cost of services decreased $1.3 million, or 4.9 percent,
to $24.6 million for the three months ended September 30, 2001 compared to
$25.9 million for the same period in 2000. This decrease is the result of a
decrease in headcount and a decrease in travel expense and other
controllable costs as well as the sales of Summit, Sterling and Golden
Tulip.
Research and development. Research and development expenses decreased
$363,000, or 13.6 percent, to $2.3 million for the three months ended
September 30, 2001 compared to $2.7 million for the same period in 2000.
The majority of our research and development costs for the three months
ended September 30, 2001 was related to our Web-based PMS and was
capitalized.
General and administrative expenses. General and administrative expenses
decreased $263,000, or 4.6 percent, to $5.4 million for the three months
ended September 30, 2001 compared to $5.7 million for the same period in
2000. General and administrative expenses decreased primarily due to lower
headcount and a decrease in travel expense and other controllable costs.
These decreases were partially offset by consulting fees incurred related to
our restructuring.
Marketing and promotion expenses. Marketing and promotion expenses decreased
$2.6 million, or 34.7 percent, to $4.9 million for the three months ended
September 30, 2001 compared to $7.5 million for the same period in 2000.
Marketing and promotion expenses decreased primarily due to the sales of
Summit, Sterling and Golden Tulip, a reduction in headcount and a decrease
in travel and other controllable costs. In addition, Utell is now
outsourcing some of its marketing functions thereby resulting in lower
costs.
Depreciation and amortization. Depreciation and amortization expenses
decreased $534,000, or 3.2 percent, to $16.3 million for the three months
ended September 30, 2001 compared to $16.9 million for the same period in
2000. The decrease was primarily due to a reduction in purchased intangible
assets associated with the sales of our Summit, Sterling and Golden Tulip
brands and was slightly offset by depreciation of property and equipment
additions.
Restructure costs. During the three months ended September 30, 2001,
Pegasus incurred $6.3 million of restructuring charges, primarily consisting
of severance, outplacement and redundant facilities costs related to
reorganizing its operations from a business unit structure into distinct
functional areas. As part of the reorganization plan, Pegasus is
eliminating approximately 15 percent of its workforce determined to be
duplicative and consolidating certain facilities and functions.
Interest income, net. Net interest income was $362,000 for the three months
ended September 30, 2001 compared to $52,000 for the same period in 2000.
The net change was primarily due to the payment of a note payable to Reed
Elsevier plc on June 14, 2001 and a decrease in interest expense related to
capital leases.
Equity in loss of investee. During the three months ended September 30,
2001, Pegasus incurred an expense of $179,000, representing its share of
GETS's net losses and amortization expense for the excess cost over net
assets acquired for our 20 percent investment in GETS prior to September 1,
2001 when the Company acquired the remaining 80 percent interest in GETS.
Provision for income taxes. Pegasus recorded an income tax benefit of $3.8
million, representing an effective tax rate of 26.1 percent, for the three
months ended September 30, 2001 compared to an income tax benefit of
$861,000, representing an effective tax rate of 14.6 percent, for the three
months ended September 30, 2000. The effective tax rates for the three
months ended September 30, 2001 and 2000 differed from the statutory rate
primarily due to large non-deductible expenses related to purchase
accounting.
Nine Months Ended September 30, 2001 and 2000
Net Revenues. Net revenues for the nine months ended September 30, 2001
increased to $141.1 million from $115.9 million for the same period in 2000
primarily due to the inclusion of a full nine months of revenue from the
acquisition of REZ on April 3, 2000. The increase was partially offset by
the sales of our Summit, Sterling and Golden Tulip brands and lost revenues
from our discontinued business intelligence operations.
Revenues for our technology segment increased to $81.9 million for the nine
months ended September 30, 2001 compared to $61.7 million for the same
period in 2000 primarily due to the acquisition of REZ and increased
revenues for CRS and Financial Services.
CRS revenues increased to $41.9 million for the nine months ended September
30, 2001 compared to $24.8 million for the same period in 2000, primarily
due to the inclusion of a full nine months of revenue from the REZ
acquisition. In addition, we added new CRS customers, such as Universal
Studios and Kimpton Hotels, and provided more services to existing
customers. The increase in CRS revenues was partially offset by a
significant reduction in net reservations subsequent to September 11.
Financial Services revenues increased $3.8 million, or 20.8 percent, to
$22.2 million for the nine months ended September 30, 2001 compared to $18.3
million for the same period in 2000. The increase was primarily due to a
7.1 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. 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. Growth in our reconciliation
and tracking services revenue also contributed to the increase in Financial
Services revenues. The increase in Financial Services revenues was
partially offset by a reduction in the value of commissions paid in
September 2001 due to the events of September 11.
Electronic Distribution revenues decreased $1.1 million, or 6.7 percent, to
$14.9 million for the nine months ended September 30, 2001 compared to $16.0
million for the same period in 2000. Both transaction growth rates and
revenue growth were negatively impacted by the loss of business previously
generated from some hotel Web sites, which terminated during the past year.
Electronic Distribution revenues were further reduced by a significant
reduction in net reservations subsequent to September 11.
Property Systems and Services generated revenues of $2.6 million for the
nine months ended September 30, 2001 compared to $1.5 million for the same
period in 2000. The increase was primarily due to the inclusion of a full
nine months of revenue from the REZ acquisition. Current property system
operations primarily consist of an agreement with Marriott to maintain
GuestView, the PMS product obtained in the REZ acquisition. In addition,
Property Systems and Services revenues include approximately $300,000 in
revenue from GETS's subsequent to its September 1, 2001 acquisition date.
Revenues for our hospitality segment increased to $59.2 million for the nine
months ended September 30, 2001 compared to $54.2 million for the same
period in 2000 primarily due to the inclusion of a full nine months of
revenue from the REZ acquisition. This increase was partially offset by a
decrease in revenues resulting from the sales of our Summit, Sterling and
Golden Tulip brands, lower demand for travel and lower room rates, both of
which were further negatively impacted by the events of September 11. To a
lesser extent, a depressed Euro negatively impacted hospitality revenues.
Cost of services. Cost of services increased to $75.8 million for the nine
months ended September 30, 2001, compared to $54.4 million for the same
period in 2000 primarily due to the inclusion of a full nine months of costs
from the REZ acquisition. In addition, increased salaries were partially
offset by a decrease in travel expense and other controllable costs as well
as the sales of Summit, Sterling and Golden Tulip.
Research and development. Research and development expenses decreased to
$5.9 million for the nine months ended September 30, 2001 compared to $6.0
million for the same period in 2000. The majority of our research and
development costs for the nine months ended September 30, 2001 was related
to our Web-based PMS and was capitalized.
General and administrative expenses. General and administrative expenses
increased to $19.5 million for the nine months ended September 30, 2001
compared to $14.0 million for the same period in 2000 primarily due to the
inclusion of a full nine months of costs from the REZ acquisition. In
addition, an increase in the use of professional services related to our
enterprise-wide accounting and information system and our restructuring plan
also resulted in increased general and administrative expenses and were
partially offset by a decrease in travel expense and other controllable
costs.
Marketing and promotion expenses. Marketing and promotion expenses decreased
to $17.3 million for the nine months ended September 30, 2001 compared to
$17.6 million for the same period in 2000 primarily due to the sales of
Summit, Sterling and Golden Tulip and a decrease in travel, other
controllable costs and headcount.
Depreciation and amortization. Depreciation and amortization expenses
increased to $49.2 million for the nine months ended September 30, 2001
compared to $34.5 million for the same period in 2000 primarily as a result
of the inclusion of a full nine months of depreciation from the REZ
acquisition and property and equipment additions. This increase was
partially offset by a reduction in purchased intangible assets associated
with the sales of our Summit, Sterling and Golden Tulip brand businesses.
Restructure costs. During the nine months ended September 30, 2001, Pegasus
incurred $7.1 million of restructuring charges, primarily consisting of
severance, outplacement and redundant facilities costs related to
reorganizing its operations from a business unit structure into distinct
functional areas, the consolidation of reservation centers and winding down
its Business Intelligence operations.
Write-off of purchased in-process research and development. During the nine
months ended September 30, 2000, Pegasus wrote-off $8.0 million for
REZsolutions research and development projects that had not yet reached
technological feasibility at the time of acquisition.
Interest income, net. Net interest income decreased to $575,000 for the
nine months ended September 30, 2001 compared to $1.6 million for the same
period in 2000. Interest income decreased $1.4 million due to the
utilization of our marketable securities to fund the REZ acquisition and was
partially offset by a $330,000 decrease in interest expense primarily
related to capital leases.
Gain on sale of business units. 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. In the
first quarter of 2001, the Company recognized a pre-tax loss of
approximately $671,000 related to this transaction. In the fourth quarter
of 2001, Pegasus has recognized an additional $5.5 million pre-tax gain,
making the total pre-tax gain on this transaction $4.8 million. For
disclosure regarding this transaction, see the "Recent Developments" section
of this management's discussion and analysis.
In June 2001, Pegasus sold its Golden Tulip brand and licensing business to
Madrid-based NH Hoteles, recognizing a pre-tax gain of $749,000 related to
this transaction.
Equity in loss of investee. During the nine months ended September 30,
2001, Pegasus incurred expense of $634,000, representing its share of GETS's
net losses and amortization expense for the excess cost over net assets
acquired for our 20 percent investment in GETS prior to September 1, 2001
when the Company acquired the remaining 80 percent interest in GETS.
Provision for income taxes. Pegasus recorded an income tax benefit of $7.4
million for the nine months ended September 30, 2001, representing an
effective tax rate of 21.8 percent. Our effective rate differed from the
statutory rate primarily due to large non-deductible expenses related to
purchase accounting. Pegasus recorded an income tax benefit of $1.6 million
for the nine months ended September 30, 2000, representing an effective tax
rate of 9.5 percent of pretax income. The effective tax rate for the nine
months ended September 30, 2000 differed from the statutory rate primarily
due to large non-deductible expenses related to purchase accounting and
partially offset by tax-exempt interest income.
Liquidity and Capital Resources
Pegasus' principal sources of liquidity at September 30, 2001 included cash
and cash equivalents of $10.4 million, short-term investments of $10.2
million, restricted cash of $6.0 million and an unused revolving credit
facility of $30.0 million, with $27.4 million available for borrowing.
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, all of which was available for borrowing.
Restricted cash represents funds for travel agency commission checks that
were not negotiated by travel agencies 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
a liability for 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. If the travel agency cannot be located, then the funds are paid to
their state of residence as required by the unclaimed property laws of their
state.
Pegasus had a working capital deficit of $11.5 million at September 30, 2001
compared to positive working capital of $6.2 million at December 31, 2000.
Working capital decreased primarily as a result of early payment of our $20
million note payable to Reed Elsevier as well as $11.5 million payment for
the GETS acquisition. Net cash provided by operating activities increased
to $25.7 million for the nine months ending September 30, 2001 from $22.2
million for the same period in 2000 primarily due to an increased focus on
cost containment and accounts receivable collections.
Capital expenditures consisted of purchases of software, furniture and
computer equipment as well as internally developed software costs and
amounted to $11.4 million for the nine months ended September 30, 2001
compared to $7.1 million for the same period in 2000. Additional uses of
cash for investing activities for the nine months ended September 30, 2001
included the purchase of marketable securities and the acquisition of GETS.
Pegasus has satisfied its cash requirements for investments primarily
through cash generated from operations, the sale of capital stock, the sale
of the Summit, Sterling and Golden Tulip brand businesses and borrowings
from its revolving credit facility. Pegasus estimates that its capital
expenditures for the remainder of 2001 will range from approximately $3.0 to
$4.0 million primarily related to adding capacity to existing systems and
software development. For 2002, Pegasus estimates capital expenditures will
range from approximately $18.0 million to $21.0 million. The estimated
year-over-year increase is primarily due to furniture, equipment and
leasehold improvements for our new Dallas and Phoenix offices as well as our
new data center in Phoenix. Capital expenditures for 2002 will also include
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
November 7, 2001.
In September 2001, Pegasus signed lease agreements for its new Dallas and
Phoenix offices. In conjunction with the lease agreements, Pegasus entered
into two irrevocable standby letter of credit agreements with Chase
Manhattan Bank totaling $2.6 million. The amount available to Pegasus under
the $30 million credit facility is reduced by these letters of credit.
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 November
7, 2001, Pegasus had repurchased 196,000 shares at a cost of $2.1 million.
Our future liquidity and capital requirements will depend on numerous
factors, including:
* Our profitability
* Operational cash requirements, including payments for severance and
redundant facilities related to our restructuring
* 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 next twelve months.
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.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations," or FAS 141, and No. 142, "Goodwill and
Other Intangibles," or FAS 142. FAS 141 prohibits the pooling-of-interests
method and addresses financial accounting and reporting for goodwill and
other intangible assets acquired in a business combination at acquisition.
The provisions of FAS 141 generally apply to all business combinations
initiated after June 30, 2001. Pegasus will use the purchase method for all
business combinations initiated after June 30, 2001. FAS 142 addresses
financial accounting and reporting for intangible assets acquired
individually or with a group of other assets (but not those acquired in a
business combination) at acquisition and for goodwill and other intangible
assets subsequent to their acquisition. Pegasus will apply the provisions
of FAS 142 to any business combination initiated after June 30, 2001 and to
existing goodwill and intangible assets beginning in 2002. The amount of
goodwill included in the Company's condensed consolidated balance sheet at
September 30, 2001 relates to the REZ and GETS acquisitions. In accordance
with FAS 142, the Company will discontinue the amortization of goodwill
related to the REZ acquisition beginning in January 2002, and will not
record goodwill amortization for the GETS acquisition since it occurred
after June 30, 2001. Furthermore, management believes there are no other
identifiable intangible assets included in the goodwill amount for REZ.
Since the GETS acquisition was completed late in the quarter, Pegasus
intends to obtain a third-party valuation of GETS during the fourth quarter
and reclassify amounts determined to be identifiable intangible assets.
In October 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
or FAS 144. FAS 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This statement supersedes
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," or FAS 121, and related literature and establishes a single accounting
model, based on the framework established in FAS 121, for long-lived assets
to be disposed of by sale. Pegasus is required to adopt FAS 144 beginning
in January 2002. Pegasus does not believe that the adoption of FAS 144 will
have a material impact on its consolidated financial statements.
Part II - Other Information
Item 1. Legal Proceedings - 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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.23 Office lease dated September 17, 2001 between the
Company and Dallas RPFIV Campbell Centre
Associates Limited Partnership relating to
property located at 8350 North Central
Expressway, Dallas, Texas 75206
10.24 Office lease dated September 14, 2001 between the
Company and Ryan Companies US, Inc. relating to
property located at 14000 North Pima Road,
Scottsdale, Arizona 85260
10.25 Form of Promissory Note agreement dated November
9, 2001 between the Company and IndeCorp
Corporation
10.26 Form of Promissory Note agreement dated November
9, 2001 between the Company and IndeCorp
Corporation
(a) Reports on Form 8-K
Not applicable
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)