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, 2000
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 9, 2000 was 24,646,811.
<PAGE>
PEGASUS SOLUTIONS, INC.
FORM 10-Q
For the Quarter Ended September 30, 2000
INDEX
Page
Part I. Financial Information ----
Item 1. Financial Statements (unaudited)
a) Consolidated Balance Sheets as of September 30,
2000 and December 31, 1999 3
b) Consolidated Statements of Operations for the Three
and Nine Months Ended September 30, 2000 and 1999 4
c) Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2000 and 1999 5
d) Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Part II. Other Information
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
<TABLE>
PEGASUS SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except for share amounts)
(Unaudited)
September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 41,804 $ 104,616
Restricted cash 4,004 2,929
Short-term investments 236 35,283
Accounts receivable, net 33,189 4,854
Other current assets 4,924 2,585
------------ ------------
Total current assets 84,157 150,267
Intangible assets, net 97,353 -
Property and equipment, net 33,613 4,856
Goodwill, net 154,640 2,890
Other noncurrent assets 4,578 5,527
------------ ------------
Total assets $ 374,341 $ 163,540
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 34,882 6,162
Deferred tax liability 12,253 -
Unearned income 10,162 63
Income tax payable 9,021 -
Customer deposits 5,054 384
Current portion of capital lease obligations 134 52
------------ ------------
Total current liabilities 71,506 6,661
Deferred tax liability 11,639 -
Note payable 20,000 -
Other noncurrent liabilities 680 107
Unearned income 1,052 -
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000
shares authorized; zero shares issued
and outstanding, - -
Common stock, $.01 par value; 50,000,000
shares authorized; 24,612,236 and
20,515,050 shares issued, respectively 246 205
Additional paid-in capital 284,712 156,978
Unearned compensation (207) (442)
Accumulated comprehensive loss (161) (25)
Retained earnings (deficit) (15,100) 82
Less treasury stock (174,726 shares,
at cost) (26) (26)
------------ ------------
Total stockholders' equity 269,464 156,772
------------ ------------
Total liabilities and
stockholders' equity $ 374,341 $ 163,540
============ ============
See accompanying notes to condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
PEGASUS SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues $ 52,418 $ 10,075 $ 115,442 $ 27,636
Cost of services 25,906 3,391 54,963 8,907
Research and development 2,248 658 5,164 1,888
Write-off of purchased in-process
research and development - - 8,000 -
General and administrative expenses 5,233 1,320 12,580 3,996
Marketing and promotion expenses 8,182 1,527 18,810 4,499
Depreciation and amortization 16,883 614 34,465 1,853
---------- ---------- ---------- ----------
Operating income (loss) (6,034) 2,565 (18,540) 6,493
Other income (expense):
Interest income, net 52 1,571 1,609 3,204
Write-off of minority interest investment - - - (1,100)
Other 69 - 164 -
---------- ---------- ---------- ----------
Income (loss) before income taxes (5,913) 4,136 (16,767) 8,597
Income taxes (861) 1,406 (1,586) 3,113
---------- ---------- ---------- ----------
Net income (loss) $ (5,052) $ 2,730 $ (15,181) $ 5,484
========== ========== ========== ==========
Other comprehensive loss - change in
unrealized loss, net of tax (698) - (136) -
---------- ---------- ---------- ----------
Comprehensive income (loss) $ (5,750) $ 2,730 $ (15,317) $ 5,484
========== ========== ========== ==========
Net income (loss) per share:
Basic $ (0.21) $ 0.14 $ (0.66) $ 0.30
========== ========== ========== ==========
Diluted $ (0.21) $ 0.13 $ (0.66) $ 0.29
========== ========== ========== ==========
Weighted average shares outstanding:
Basic 24,395 20,049 22,975 18,024
========== ========== ========== ==========
Diluted 24,395 20,916 22,975 19,207
========== ========== ========== ==========
See accompanying notes to condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
PEGASUS SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
--------------------------
2000 1999
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (15,181) $ 5,484
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 34,465 1,853
Write-off of purchased in-process
research and development 8,000 -
Write-off of minority interest investment - 1,100
Deferred taxes (9,902) -
Other 2,890 2,883
Changes in assets and liabilities:
Restricted cash (1,076) (334)
Accounts receivable 3,605 (1,629)
Other assets 5,477 (1,490)
Accounts payable and accrued liabilities (8,441) 2,074
Unearned income 1,401 560
Other liabilities 1,002 (27)
----------- ----------
Net cash provided by operating activities 22,240 10,474
----------- ----------
Cash flows from investing activities:
Purchase of REZsolutions, Inc. (95,865) -
Purchase of software, property and equipment (7,128) (3,096)
Purchase of marketable securities - (54,536)
Proceeds from maturity of marketable securities 35,294 22,581
Other 50 (100)
----------- ----------
Net cash used for investing activities (67,649) (35,151)
----------- ----------
Cash flows from financing activities:
Proceeds from issuance of stock 418 88,383
Repayment of note payable (17,768) -
Proceeds from credit facility 10,000 -
Repayment of credit facility (10,000) -
Payment on capital leases (53) (473)
----------- ----------
Net cash provided by (used for) financing activities (17,403) 87,910
----------- ----------
Net increase (decrease) in cash and cash equivalents (62,812) 63,233
Cash and cash equivalents, beginning of period 104,616 25,002
----------- ----------
Cash and cash equivalents, end of period $ 41,804 $ 88,235
=========== ==========
Supplemental disclosure of cash flow information:
Interest paid $ 339 $ 26
=========== ==========
Income taxes paid $ 785 $ 140
=========== ==========
See accompanying notes to condensed consolidated financial statements
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
On May 2, 2000, the stockholders of Pegasus Systems, Inc. approved
changing the Company's name to Pegasus Solutions, Inc. As a result of
the acquisition of REZ, Inc. on April 3, 2000, the new name is more
descriptive of the combined entity and our services. Pegasus' common
stock is traded on the Nasdaq National Market under the symbol PEGS.
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 - hospitality and technology. The 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 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 normally 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 with current period
presentation. The accompanying unaudited 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, 1999 on Form 10-K and our
Form S-4 (registration no. 333-92683) that was declared effective on
March 31, 2000. Pegasus management believes that the disclosures are
sufficient for interim financial reporting purposes.
2. EARNINGS PER SHARE
Basic and diluted net income (loss) per share for the three and nine
months ended September 30, 2000 and 1999 has been computed in accordance
with Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("FAS 128") using the weighted average number of common shares
outstanding.
Diluted net income (loss) per share for the three and nine months ended
September 30, 2000 and 1999 gives effect to all dilutive potential
common shares that were outstanding during the respective periods.
Outstanding options and warrants with strike prices below the average
fair market value of Pegasus common stock for the three and nine months
ended September 30, 1999 were included in the diluted earnings per share
("EPS") calculations for the respective periods. Because of net losses
for the three and nine months ended September 30, 2000, all outstanding
options and warrants were excluded in the calculation of diluted net
loss per share because their effect would be anti-dilutive.
<PAGE>
<TABLE>
The following table sets forth the options excluded from the diluted EPS
calculations for the periods ended September 30:
2000 1999
----------------------------------------- --------------------------------------
Three Weighted Weighted
Months Options Strike Average Options Strike Average
Ended Excluded Price Remaining Life Excluded Price Remaining Life
-------- -------- --------------- -------------- -------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
March 31 99,000 $25.25 - $29.02 6.6 years 1,500 $27.25 6.8 years
June 30 3,164,371 $ 1.34 - $29.02 7.8 years 9,000 $27.25-$31.17 6.5 years
September 30 3,073,893 $ 1.34 - $29.02 7.4 years 106,500 $25.25-$31.17 7.0 years
</TABLE>
<TABLE>
The following table sets forth the basic and diluted EPS computation for
the three and nine months ended September 30, 2000 and 1999 (in
thousands, except per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------
2000 1999 2000 1999
----------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $ (5,052) $ 2,730 $ (15,181) $ 5,484
========================================
Basic:
Weighted average number
of shares outstanding 24,395 20,049 22,975 18,024
----------------------------------------
Net income (loss) per share $ (0.21) $ 0.14 $ (0.66) $ 0.30
========================================
Diluted:
Weighted average number
of shares outstanding 24,395 20,049 22,975 18,024
Additional weighted
average shares from
assumed exercise of
dilutive stock options
and warrants, net of
shares to be repurchased
with exercise proceeds - 867 - 1,183
----------------------------------------
Weighted average number
of shares outstanding
used in the diluted net
income per share
calculation 24,395 20,916 22,975 19,207
----------------------------------------
Net income (loss) per share $ (0.21) $ 0.13 $ (0.66) $ 0.29
========================================
</TABLE>
<PAGE>
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 was organized into three reportable
segments prior to the REZ acquisition - Pegasus Electronic Distribution,
Pegasus Commission Processing and Pegasus Business Intelligence. As a
result of the REZ acquisition, Pegasus is now organized into two
reportable segments - hospitality and technology.
* The hospitality segment provides representation, branding, commission
processing and other financial services to the hotel industry
worldwide. The hospitality segment also includes our TravelWeb.com
Web site.
* The technology segment provides central reservation systems ("CRS"),
global distribution system ("GDS") connectivity, alternative
distribution services and data warehousing services to the global
hotel industry.
Pegasus is organized primarily on the basis of services provided.
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").
<TABLE>
The following table presents information about reported segments for the
three months ended September 30 (in thousands):
Hospitality Technology Other Total
----------- ---------- ----- -----
<S> <C> <C> <C> <C>
2000
----
Net revenues $ 33,563 $ 18,855 $ -- $ 52,418
EBITDA 7,640 3,112 97 10,849
1999
----
Net revenues 5,244 4,831 -- 10,075
EBITDA 2,118 1,077 (16) 3,179
</TABLE>
<PAGE>
<TABLE>
A reconciliation of total segment EBITDA to total consolidated income
(loss) before income taxes for the three months ended September 30, 2000
and 1999 is as follows (in thousands):
2000 1999
----------------------
<S> <C> <C>
Total EBITDA for reportable segments $ 10,849 $ 3,179
Depreciation and amortization (16,883) (614)
Interest income net 52 1,571
Other 69 --
----------------------
Consolidated income (loss) before income taxes $ (5,913) $ 4,136
======================
</TABLE>
<TABLE>
The following table presents information about reported segments for the
nine months ended September 30 (in thousands):
Hospitality Technology Other Total
----------- ---------- ----- -----
<S> <C> <C> <C> <C>
2000
----
Net revenues $ 73,358 $ 42,084 $ -- $ 115,442
EBITDA 17,937 6,089 (101) 23,925
1999
----
Net revenues 14,529 13,107 -- 27,636
EBITDA 5,410 2,952 (16) 8,346
</TABLE>
<TABLE>
A reconciliation of total segment EBITDA to total consolidated income
(loss) before income taxes for the nine months ended September 30, 2000
and 1999 is as follows (in thousands):
2000 1999
----------------------
<S> <C> <C>
Total EBITDA for reportable segments $ 23,925 $ 8,346
Depreciation and amortization (34,465) (1,853)
Write-off of purchased in-process research
and development (8,000) --
Interest income, net 1,609 3,204
Other 164 (1,100)
----------------------
Consolidated income (loss) before income taxes $ (16,767) $ 8,597
======================
</TABLE>
<PAGE>
4. ACQUISITION
On April 3, 2000, Pegasus completed the acquisition of REZ, Inc., also
known as REZsolutions. REZ now operates as a wholly owned subsidiary of
Pegasus. REZ stockholders received the following consideration on a pro
rata basis:
1) An aggregate 3.99 million shares of Pegasus common stock,
approximately 338,000 shares of which were placed in an
indemnification escrow account and approximately 123,000 shares of
which were placed in an escrow account pending the determination of
post-closing adjustments. No fractional shares were issued. REZ
stockholders received a cash payment in lieu of any fractional
shares.
2) Approximately $89 million in cash, $5.5 million of which is in an
indemnification escrow account.
3) A $20 million note payable to Utell International Group, Ltd. in lieu
of cash consideration otherwise receivable by Utell. Utell was the
majority REZ stockholder.
The acquisition was accounted for under the purchase method of
accounting. Accordingly, REZ's results of operations subsequent to the
acquisition date are included in the Company's unaudited consolidated
financial statements.
The $246.5 million purchase price includes approximately $11.0 million
in acquisition costs and was allocated to assets acquired and
liabilities assumed based on estimated fair value at the acquisition
date (note 8). The approximate fair value of assets acquired and
liabilities assumed at the acquisition date, excluding a write-off of
purchased in-process research and development, is summarized below (in
thousands):
Estimated fair value of REZ net tangible assets purchased $ 3,952
Deferred tax liability associated with the intangibles
acquired (42,179)
Customer relationships 59,600
Software 33,300
Workforce in-place 20,200
Non-compete agreement 3,700
Goodwill 159,902
The allocation of the purchase price to intangibles was based upon an
independent, third-party appraisal and management's estimates. The
intangible assets and goodwill have estimated useful lives and estimated
annual amortization as follows (in thousands):
Estimated Calculated
Useful Annual
Amount Life Amortization
-------- ------- ------------
Customer relationships $ 59,600 3 years $ 19,733
Software 33,300 3 years 11,048
Workforce in-place 20,200 3 years 6,815
Non-compete agreement 3,700 5 years 737
Goodwill 159,902 10 years 16,024
<PAGE>
The value assigned to purchased in-process research and development
("IPR&D") was determined by identifying research projects in areas for
which technological feasibility had not yet been established. These
projects totaled $8.0 million and include a customer reporting system
and Corporate Direct, a program for discounted corporate room rates on
the Internet. The value was determined by estimating the expected cash
flows from the projects once commercially viable, discounting the net
cash flows back to their present value and then applying a percentage of
completion to the calculated value as defined below.
Net Cash Flows. The net cash flows from the identified projects are
based on our estimates of revenues, cost of services, research and
development costs, marketing and promotion expenses, and general and
administrative expenses associated with each project. The research and
development costs included in the model reflect costs to sustain
projects, but exclude costs to bring in-process projects to
technological feasibility.
Discount Rate. The net cash flows were discounted back to their present
value using a 25% discount rate. This discount rate is higher than the
industry weighted average cost of capital due to inherent uncertainties
surrounding the successful development of the IPR&D, market acceptance
of the technology, the useful life of such technology and the
uncertainty of technological advances that could potentially impact the
estimates described above.
Percentage of Completion. The percentage of completion for each project
was determined using costs incurred to date on each project as compared
to the remaining research and development to be completed to bring each
project to technological feasibility. The percentage of completion
applied to the customer reporting and Corporate Direct projects were 65%
and 80%, respectively.
If the projects discussed above are not successfully developed, the
sales and profitability of the combined company may be adversely
affected in future periods.
Pro forma results of operations for the combined company as if the
transaction had occurred at the beginning of the earliest period
presented and carried forward into 2000 are as follows (in thousands):
Nine Months Year
Ended Ended
September 30, December 31,
2000 1999
-------- --------
Revenues $ 150,078 $ 184,024
Net loss (20,911) (35,261)
Basic and diluted net loss per share (0.86) (1.56)
5. CONTINGENCIES
Pegasus is subject to certain legal proceedings, claims and disputes
which 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.
<PAGE>
6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). FAS 133 requires that
all derivative instruments be recorded on the balance sheet at fair
value. Changes in the fair value of derivative instruments are recorded
each period in current earnings or other comprehensive income, depending
on whether the derivative is designated as part of a hedge transaction.
FAS 133, as amended by Statement of Financial Accounting Standards No.
137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of Effective Date of FAS 133," is effective for first quarter
financial statements in fiscal 2001. Pegasus currently accounts for its
hedging activities in accordance with Statement of Financial Accounting
Standards No. 52, "Foreign Currency Translation". Pegasus is currently
measuring the impact of adopting FAS 133.
On December 3, 1999, the Securities and Exchange Commission released
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements," which summarizes some of the Staff's views in
applying generally accepted accounting principles to revenue recognition
in financial statements. The Staff provided this guidance due, in part,
to the large number of revenue recognition issues that registrants
encounter. Pegasus is applying SAB 101 on a prospective basis beginning
in fiscal year 2000.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions
Involving Stock Compensation, an Interpretation of APB Opinion No. 25".
FIN 44 clarifies the application of APB Opinion No. 25 for (a) the
definition of an employee for purposes of applying APB Opinion No. 25,
(b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequences of various
modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 was effective July 1, 2000, but certain
conclusions cover specific events that occur after either December 15,
1998, or January 12, 2000. The Company accounts for stock-based
employee compensation arrangements in accordance with the provisions of
APB Opinion No. 25 and intends to follow the guidance included in FIN
44.
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, 2000, no shares have
been repurchased by Pegasus.
<PAGE>
8. SUBSEQUENT EVENTS
On October 18, 2000, Pegasus and REZ shareholders agreed to a settlement
of the balance sheet escrow. Under the agreement, the purchase price
was reduced by $1,150,000 because of post-closing balance sheet
adjustments. Pegasus will receive 70,767 shares of common stock from
the balance sheet escrow to effect this adjustment.
On November 1, 2000, Pegasus entered into an agreement to acquire all or
part ownership of Global Enterprise Technology Solutions LLC ("GETS"), a
provider of hotel property management systems to nearly 3,000 hotels
worldwide. Under the terms of the agreement, Pegasus initiated the
acquisition by acquiring a 20% 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 September
30, 2000, Pegasus had funded development costs of $800,000. Because the
agreement was signed after September 30, 2000, these costs are
classified as a note receivable and included in other current assets in
Pegasus' consolidated balance sheet as of September 30, 2000.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FORWARD-LOOKING STATEMENTS
The following discussion of the financial condition and results of
operations 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, 1999 and our Form S-4
(registration no. 333-92683) that was declared effective on March 31, 2000.
This quarterly report on Form 10-Q 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. Forward-looking statements
include statements regarding:
* revenue growth and operating margins
* revenue generated from new services
* the development of purchased in-process research and development
projects
* trends in the travel agency industry
* Pegasus Business Intelligence operating losses
* future liquidity and capital requirements
* the Euro's impact on future revenues
<PAGE>
These forward-looking statements involve risks and uncertainties and actual
results could differ materially from those discussed in the forward-looking
statements. These risks and uncertainties include, but are not limited to,
those described under the heading "Risk Factors" in our filings with the
Securities and Exchange Commission, including our Form 10-K for the year
ended December 31, 1999 and our Form S-4 (registration no. 333-92683) that
was declared effective on March 31, 2000.
OVERVIEW
Pegasus is a leading provider of end-to-end reservation distribution
systems, reservation technology systems and hotel representation services
for the global hotel industry. On April 3, 2000, Pegasus completed the
acquisition of REZ, Inc., a leader in providing distribution services and
solutions for the hotel industry. Prior to the acquisition, Pegasus was
organized into three reporting segments - Pegasus Electronic Distribution,
Pegasus Commission Processing and Pegasus Business Intelligence. As a
result of the acquisition, Pegasus is now organized into two reporting
segments - hospitality and technology.
Pegasus has experienced substantial growth since its inception. Because
REZ has historically experienced slower revenue growth and lower operating
margins than Pegasus, the combined company will likely experience slower
revenue growth and lower operating margins than Pegasus has experienced in
the past. If the combined company's revenue growth and operating margins do
not improve over REZ's historical operating performance, the combined
company's cash flow and operating results could be adversely affected.
Hospitality
Our hospitality segment includes hotel representation services, Pegasus
Financial Services and TravelWeb.com. Hospitality revenues represented
approximately 64% of consolidated revenue for the three months ended
September 30, 2000.
Representation Services. In order to sell their rooms in marketplaces
outside their locale, many independent hotels associate themselves with our
hotel representation services and use our systems and infrastructure to
market and make reservations for their rooms. Our core hotel representation
service, offered under the Utell[R] brand name, provides hotel marketing,
voice reservation and GDS and Internet representation services for more than
6,400 hotels in more than 180 countries.
<PAGE>
Pegasus offers branded hotel representation services under the Sterling
Hotels & Resorts[TM], Summit[R] Hotels & Resorts, Golden Tulip[TM] Hotels
and Tulip Inns[TM] brand names. Both the Sterling[TM] and Summit[R] brands
are "soft" brands offering independent hotels the ability to maintain their
own identity while being affiliated with the Sterling or Summit brand.
Sterling Hotels & Resorts include over 150 independent luxury hotels, and
Summit Hotels & Resorts include over 150 independent luxury hotels.
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 and GDS and Internet representation services similar to our
Utell representation customers. Representation revenues consist of
reservation processing fees, membership fees and fees for various marketing
services.
Our hotel representation services represented approximately 46% of
consolidated revenues for the three months ended September 30, 2000.
Pegasus Financial Services. Pegasus Financial Services includes Pegasus
Commission Processing and Paytell, a prepayment service that allows
travelers to prepay for a hotel stay, thus reducing their exposure to
foreign currency exchange rates.
Pegasus Commission Processing completes the hotel room reservation
transaction by collecting and consolidating hotel reservation commissions
due to each participating travel agency and providing transaction reports.
The value-added commission consolidation and reporting services that Pegasus
Commission Processing provides to both its hotel and travel agency
participants help both parties operate more efficiently and effectively.
More than 100,000 travel agencies and 30,000 hotels participate in our
commission processing service.
Pegasus Commission Processing revenues consist of both travel agency and
hotel fees. Travel agency fees are based on a percentage of the 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.
Many international travelers who book hotel rooms at our representation
service customers utilize our Paytell[TM] service to reduce their exposure
to foreign currency fluctuations. Travelers using our Paytell service
prepay for hotel rooms in the traveler's local currency. When the traveler
actually stays at the hotel ("guest stay"), Pegasus remits the amount to the
hotel in the hotel's local currency. Revenues for this service consist of a
fee based on a percentage of the exchange rate for the prepayment, interest
earned until the guest stay occurs, and the difference in the exchange rate
that the traveler paid and the exchange rate when the guest stay occurs.
<PAGE>
TravelWeb[TM].com. TravelWeb.com is an interactive Internet site on which
consumers can research and reserve hotel rooms around the world.
TravelWeb.com contains detailed property information on more than 39,000
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. For hotel reservations that originate on the
TravelWeb.com Web site, Pegasus charges the hotel either a transaction fee
based on the number of net reservations made at participating properties or
a commission based on the value of the guest stay.
Technology
Our technology segment includes application service processing, Pegasus
Electronic Distribution (excluding TravelWeb.com) and Pegasus Business
Intelligence services. Technology revenues represented approximately 36% of
consolidated revenues for the three months ended September 30, 2000.
Application Service Processing. Application Service Processing ("ASP") is a
service for hotel customers that require their own central reservation
systems ("CRS") and includes a license for our RezView[TM] CRS software as
well as the hardware and facilities necessary to run their CRS and process
reservations. ASP includes the following CRS support services:
* system administration
* database administration
* electronic distribution channel management
* telecommunications management
* private-label voice reservation services
ASP revenues consist of transaction fees as well as license, maintenance and
support fees related to our RezView software.
Pegasus Electronic Distribution. Pegasus Electronic Distribution provides
the technology that facilitates electronic hotel room reservations. This
technology connects travel industry global distribution systems ("GDS") and
travel-related Internet sites to a hotel's central reservation system.
Pegasus Electronic Distribution supports a variety of distribution channels
including the following:
* GDS connectivity - Pegasus Electronic Distribution is linked to all
major global distribution systems 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 37,000 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, TravelNow.com and our own
TravelWeb[TM].com.
* Hotel Web sites - Our NetBooker[TM] service provides hotel companies
with a hotel information database and Internet reservation capabilities
without making expensive technology investments. Hotel Web sites that
are "Powered by Pegasus[TM]," offer brand loyal Internet shoppers real-
time rates, availability and booking capabilities.
<PAGE>
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.
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 recently involved entering into an agreement to
purchase all or part of Global Enterprise Technology Solutions LLC ("GETS").
As part of the transaction, Pegasus obtained an exclusive license for 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. In addition, Pegasus Electronic Distribution
has introduced services that automate the processing of hotel reservations
for large meetings and conventions and for corporate travelers. Pegasus has
not received a material amount of revenue from these services, and there can
be no assurance that any of these services will produce a material amount of
revenue in the future.
Pegasus Business Intelligence. Pegasus Business Intelligence provides data
warehousing services and marketing research and information services. By
compiling aggregate guest usage, consumer profile and reservation
transaction information, Pegasus Business Intelligence provides database
marketing, market research and marketing information systems for the
hospitality industry. Business intelligence revenues consist of fees charged
to hotels for the development of hotel databases and for consulting
services.
REZ, INC. ACQUISITION
On April 3, 2000, Pegasus completed the acquisition of REZ, Inc. REZ now
operates as a wholly owned subsidiary of Pegasus.
The acquisition was accounted for under the purchase method of accounting.
Accordingly, REZ's results of operations subsequent to the acquisition date
are included in the Company's unaudited consolidated financial statements.
The $246.5 million purchase price includes approximately $11.0 million in
acquisition costs and was allocated to assets acquired and liabilities
assumed based on estimated fair value at the acquisition date (notes 4 and
8). The approximate fair value of assets acquired and liabilities assumed
at the acquisition date, excluding a write-off of purchased in-process
research and development, is summarized below (in thousands):
Estimated fair value of REZ net tangible assets purchased $ 3,952
Deferred tax liability associated with the intangibles
acquired (42,179)
Customer relationships 59,600
Software 33,300
Workforce in-place 20,200
Non-compete agreement 3,700
Goodwill 159,902
<PAGE>
The allocation of the purchase price to intangibles was based upon an
independent, third-party appraisal and management's estimates. The
intangible assets and goodwill have estimated useful lives and estimated
annual amortization as follows (in thousands):
Estimated Calculated
Amount Useful Annual
Life Amortization
------- ------- ------------
Customer relationships $ 59,600 3 years $ 19,733
Software 33,300 3 years 11,048
Workforce in-place 20,200 3 years 6,815
Non-compete agreement 3,700 5 years 737
Goodwill 159,902 10 years 16,024
The value assigned to purchased in-process research and development
("IPR&D") was determined by identifying research projects in areas for which
technological feasibility had not yet been established. These projects
totaled $8.0 million and include a customer reporting system and Corporate
Direct, a program for discounted corporate room rates on the Internet. The
value was determined by estimating the expected cash flows from the projects
once commercially viable, discounting the net cash flows back to their
present value and then applying a percentage of completion to the calculated
value as defined below.
Net Cash Flows. The net cash flows from the identified projects are based
on our estimates of revenues, cost of services, research and development
costs, marketing and promotion expenses, and general and administrative
expenses associated with each project. The research and development costs
included in the model reflect costs to sustain projects, but exclude costs
to bring in-process projects to technological feasibility.
Discount Rate. The net cash flows were discounted back to their present
value using a 25% discount rate. This discount rate is higher than the
industry weighted average cost of capital due to inherent uncertainties
surrounding the successful development of the IPR&D, market acceptance of
the technology, the useful life of such technology and the uncertainty of
technological advances which could potentially impact the estimates
described above.
Percentage of Completion. The percentage of completion for each project was
determined using costs incurred to date on each project as compared to the
remaining research and development to be completed to bring each project to
technological feasibility. The percentage of completion applied to the
customer reporting and Corporate Direct projects were 65% and 80%,
respectively.
If the projects discussed above are not successfully developed, the sales
and profitability of the combined company may be adversely affected in
future periods.
<PAGE>
RESULTS OF OPERATIONS
The results of operations for the three and nine months ended September 30,
2000 and 1999 include the effect of the REZ acquisition, which was completed
on April 3, 2000 and is discussed in Note 4 to the unaudited consolidated
financial statements contained herein. Accordingly, REZ's results of
operations subsequent to the acquisition date are included in the
accompanying unaudited consolidated financial statements.
Weakness of the Euro
Pegasus derives a substantial portion of its revenue from customers located
outside the United States, particularly in Europe. The weakness in the Euro
relative to the U.S. Dollar resulted in Pegasus earning approximately $2
million and $3 million less in revenue during the three and nine months
ended September 30, 2000, respectively, than it otherwise might have earned
if currency rates had remained comparable with currency rates for the same
periods in 1999. Because the Euro has continued to decline in value
relative to the U.S. Dollar, we anticipate continued pressure on
international revenues during the fourth quarter of 2000.
Three Months Ended September 30, 2000 and 1999
Net revenues. Net revenues for the three months ended September 30, 2000
increased to $52.4 million from $10.1 million for the three months ended
September 30, 1999. Revenues increased primarily due to the acquisition of
REZ. Excluding the effect of REZ, revenues increased $2.8 million, or 28.1%
primarily due to higher transaction levels for Pegasus Electronic
Distribution and Pegasus Commission Processing.
Revenues for our hospitality segment were $33.6 million for the three months
ended September 30, 2000. Included in the three months ended September 30,
2000 is $26.3 million in hospitality revenues related to REZ's operations
subsequent to the April 3, 2000 effective date of the acquisition.
Excluding the effect of REZ, hospitality revenues increased $2.0 million, or
38.6% for the three months ended September 30, 2000 compared to the same
period in 1999.
Pegasus Commission Processing revenues increased approximately 46.7% for the
three months ended September 30, 2000 compared to the same period in 1999
primarily due to a 34.7% increase in the value of commissions paid to member
travel agencies through our commission processing service. The increase in
the value of commissions paid was due to 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. Net revenues arising from the increase in commissions
paid was offset by a reduction in the average fee received from
participating travel agencies for consolidating and remitting hotel
commission payments. The decrease in the average travel agency fee is due
to consolidation within the travel agency industry. Pegasus expects this
trend to continue.
<PAGE>
Revenues for our technology segment were $18.9 million for the three months
ended September 30, 2000. Included in the three months ended September 30,
2000 is $13.2 million in technology revenue related to REZ's operations.
Excluding the effect of REZ, technology revenues increased $810,000, or
16.8% for the three months ended September 30, 2000 compared to the same
period in 1999.
Pegasus Electronic Distribution revenues increased 26.8% for the three
months ended September 30, 2000 as compared to the same period in 1999.
This increase resulted primarily from a 19.2% increase in the number of
hotel reservations made through our GDS and Internet-based distribution
services. Transaction revenue per transaction increased 4.8% due to an
increase in the number of Internet-based transactions, which generate more
revenue per transaction.
Pegasus Business Intelligence revenues were $236,000 for the three months
ended September 30, 2000, compared to $567,000 for the three months ended
September 30,1999. Pegasus Business Intelligence revenues consisted of fees
charged to hotels for the development and maintenance of hotel databases and
for consulting services.
Pegasus Business Intelligence had net pretax losses of approximately $1.3
million and $1.1 million for the three months ended September 30, 2000 and
1999, respectively. Pegasus expects this business to continue to have
losses in the foreseeable future.
Cost of services. Cost of services were $25.9 million for the three months
ended September 30, 2000. Included in the three months ended September 30,
2000 is $21.7 million in cost of services attributable to REZ's operations.
Excluding the effect of REZ, cost of services increased $821,000 for the
three months ended September 30, 2000 compared to the same period in 1999.
Cost of services for the old Pegasus business increased due to an increase
in headcount for electronic distribution and commission processing.
Research and development. Research and development expenses were $2.2
million for the three months ended September 30, 2000. Research and
development for the three months ended September 30, 2000 includes $1.4
million in research and development expenses related to REZ's operations.
Excluding the effect of REZ, research and development expenses increased
$216,000 for the three months ended September 30, 2000 compared to the same
period in 1999.
General and administrative expenses. General and administrative expenses
were $5.2 million for the three months ended September 30, 2000. General
and administrative expenses for the three months ended September 30, 2000
includes $3.2 million in general and administrative expenses related to REZ.
Excluding the direct effect of REZ, general and administrative expenses
increased $649,000 for the three months ended September 30, 2000 compared to
the same period in 1999. General and administrative expenses increased due
to an increase in headcount as well as other expenses that were incurred as
a result of the REZ acquisition but did not meet the criteria for
capitalization.
<PAGE>
Marketing and promotion expenses. Marketing and promotion expenses were $8.2
million for the three months ended September 30, 2000. Included in the
three months ended September 30, 2000 is $6.5 million in marketing and
promotion expenses attributable to REZ. Excluding the effect of REZ,
marketing and promotion expenses increased $109,000, for the three months
ended September 30, 2000 compared to the same period in 1999. Marketing and
promotion expenses for the old Pegasus business increased due to an increase
in headcount for commission processing, business intelligence and corporate
marketing.
Depreciation and amortization. Depreciation and amortization expenses were
$16.9 million for the three months ended September 30, 2000. For the three
months ended September 30, 2000, depreciation and amortization expense for
property and equipment increased to $3.2 million from $504,000 for the three
months ended September 30, 1999 primarily due to $2.6 million of
depreciation and amortization expense related to REZ property and equipment.
For the three months ended September 30, 2000, amortization expense related
to purchased intangibles and goodwill increased to $13.7 million from
$111,000 for the three months ended September 30, 1999 because of the REZ
acquisition.
Interest income (expense), net. Net interest income decreased $1.5 million
for the three months ended September 30, 2000 compared to the three months
ended September 30, 1999. Interest income decreased $1.0 million for the
three months ended September 30, 2000 compared to the same period in 1999 as
we utilized some of our marketable securities to fund the REZ acquisition.
Interest expense increased $502,000 for the three months ended September 30,
2000 compared to the same period in 1999 primarily due to $400,000 accrued
interest on the Utell note payable.
Provision for Income Taxes. Pegasus recorded an income tax benefit of
$861,000 for the three months ended September 30, 2000 primarily due to
large non-deductible expenses related to purchase accounting. Pegasus
recorded an income tax provision of $1.4 million for the three months ended
September 30, 1999, an effective tax rate of 34% of pretax income.
Nine Months Ended September 30, 2000 and 1999
Net revenues. Net revenues for the nine months ended September 30, 2000
increased to $115.4 million from $27.6 million for the nine months ended
September 30, 1999. Revenues increased primarily due to the acquisition of
REZ. Excluding the effect of REZ, revenues increased $8.2 million, or
29.7%, primarily due to higher transaction levels for Pegasus Electronic
Distribution and Pegasus Commission Processing.
Revenues for our hospitality segment were $73.4 million for the nine months
ended September 30, 2000. Included in the nine months ended September 30,
2000 is $54.0 million in hospitality revenue related to REZ's operations
subsequent to the April 3, 2000 effective date of the acquisition.
Excluding the effect of REZ, hospitality revenues increased $4.8 million, or
33.3% for the nine months ended September, 2000 compared to the same period
in 1999.
<PAGE>
Pegasus Commission Processing revenues increased 38.8% for the nine months
ended September 30, 2000 compared to the same period in 1999 as a result of
a 38.2% 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. Net revenues arising from the increase in commissions paid was
offset by a reduction in the average fee received from participating travel
agencies for consolidating and remitting hotel commission payments. The
decrease in the average travel agency fee is due to consolidation within the
travel agency industry. Pegasus expects this trend to continue.
Revenues for our technology segment were $42.1 million for the nine months
ended September 30, 2000. Included in the nine months ended September 30,
2000 is $25.6 million in technology revenue related to REZ's operations.
Excluding the effect of REZ, technology revenues increased $3.4 million, or
25.6% for the nine months ended September 30, 2000 compared to the same
period in 1999.
Pegasus Electronic Distribution revenues increased 32.1% for the nine months
ended September 30, 2000 as compared to the same period in 1999. This
increase resulted primarily from a 19.1% increase in the number of hotel
reservations made through our GDS and Internet-based distribution services.
Transaction revenue per transaction increased 7.9% due to an increase in the
number of Internet-based transactions, which generate more revenue per
transaction.
Pegasus Business Intelligence revenues decreased $401,000, or 28.4%, to $1.0
million for the nine months ended September 30, 2000 compared to $1.4
million for the nine months ended September 30,1999. Pegasus Business
Intelligence revenues consisted of fees charged to hotels for the
development and maintenance of hotel databases and for consulting services.
Pegasus Business Intelligence had net pretax losses of approximately $4.2
million and $3.1 million for the nine months ended September 30, 2000 and
1999, respectively. Pegasus expects this business to continue to have
losses in the foreseeable future.
Cost of services. Cost of services were $55.0 million for the nine months
ended September 30, 2000. Included in the nine months ended September 30,
2000 is $43.2 million in cost of services attributable to REZ's operations.
Excluding the effect of REZ, cost of services increased $2.8 million for the
nine months ended September 30, 2000 compared to the same period in 1999.
Cost of services for the old Pegasus business increased due to an increase
in headcount for electronic distribution and commission processing.
Research and development. Research and development expenses were $5.2
million for the nine months ended September 30, 2000. Research and
development expenses for the nine months ended September 30, 2000 include
$2.8 million related to REZ's operations. Excluding the effect of REZ,
research and development expenses increased $435,000 for the nine months
ended September 30, 2000 compared to the same period in 1999.
<PAGE>
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.
General and administrative expenses. General and administrative expenses
were $12.6 million for the nine months ended September 30, 2000. General
and administrative expenses for the nine months ended September 30, 2000
include $6.4 million related to REZ. Excluding the effect of REZ, general
and administrative expenses increased $2.1 million for the nine months ended
September 30, 2000 compared to the same period in 1999. General and
administrative expenses increased due to an increase in headcount as well as
other expenses that were incurred as a result of the acquisition but did not
meet the criteria for capitalization.
Marketing and promotion expenses. Marketing and promotion expenses were
$18.8 million for the nine months ended September 30, 2000. Included in the
nine months ended September 30, 2000 is $13.5 million in marketing and
promotion expenses attributable to REZ. Excluding the effect of REZ,
marketing and promotion expenses increased $802,000 for the nine months
ended September 30, 2000 compared to the same period in 1999. Marketing and
promotion expenses for the old Pegasus business increased due to an increase
in headcount for commission processing, business intelligence and corporate
marketing.
Depreciation and amortization. Depreciation and amortization expenses were
$34.5 million for the nine months ended September 30, 2000. For the nine
months ended September 30, 2000, depreciation and amortization expense for
property and equipment increased to $6.8 million from $1.5 million for the
nine months ended September 30, 1999 primarily due to $5.0 million of
depreciation and amortization expense related to REZ property and equipment.
For the nine months ended September 30, 2000, amortization expense related
to purchased intangibles and goodwill increased to $27.6 million from
$332,000 for the nine months ended September 30, 1999 because of the REZ
acquisition.
Interest income, net. Net interest income decreased $1.6 million for the
nine months ended September 30, 2000 compared to the nine months ended
September 30, 1999. Interest income decreased $452,000 for the nine months
ended September 30, 2000 compared to the same period in 1999 as we had less
marketable securities during the second and third quarters of 2000 due to
the REZ acquisition. Interest expense increased $1.1 million for the nine
months ended September 30, 2000 compared to the same period in 1999
primarily due to $800,000 accrued interest on the Utell note payable as well
as interest expense for outstanding balances on our Chase line of credit and
capital leases.
Provision for Income Taxes. Pegasus recorded an income tax benefit of $1.6
million for the nine months ended September 30, 2000 primarily due to large
non-deductible expenses related to purchase accounting. Pegasus recorded an
income tax provision of $3.1 million for the nine months ended September 30,
1999, an effective tax rate of 36.2% of pretax income. The effective tax
rate for the nine months ended September 30, 1999 differed from the
statutory rate primarily due to state income taxes.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Pegasus' principal sources of liquidity at September 30, 2000 included cash
and cash equivalents of $41.8 million, short-term investments of $236,000
and restricted cash of $4.0 million as well as a $30.0 million credit
facility with Chase Bank of Texas, N.A. Pegasus' principal sources of
liquidity at December 31, 1999 included cash and cash equivalents of $104.6
million, short-term investments of $35.3 million and restricted cash of $2.9
million.
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 funds from the bank.
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 $12.7 million at September 30, 2000 from $143.6
million at December 31, 1999. Net cash provided by operating activities was
$22.2 million for the nine months ended September 30, 2000 compared to $10.5
million for the same period in 1999.
Capital expenditures consisted of purchases of software, furniture and
computer equipment as well as internally developed software costs and
amounted to $7.1 million for the nine months ended September 30, 2000
compared to $3.1 million for the same period in 1999. Pegasus has financed
its cash requirements for investments primarily through cash generated from
operations, the sale of capital stock and borrowings from its revolving
credit facility. Pegasus estimates that its capital expenditures during
2000 will approximate $10.0 million and primarily relate to adding capacity
to existing systems.
Proceeds from the exercise of stock options and warrants were $418,000 for
the nine months ended September 30, 2000 compared to $3.9 million for the
same period in 1999.
Pegasus completed secondary public offerings of its common stock in February
1998, raising net proceeds to Pegasus of $4.2 million, and in May 1999,
raising net proceeds to Pegasus of $84.4 million. A portion of the proceeds
was used at the time of each offering to repay certain lease obligations,
for working capital and other general corporate purposes, with the remaining
proceeds placed in short-term marketable securities. On April 3, 2000,
Pegasus completed the acquisition of REZ, Inc. utilizing approximately $89
million of the net proceeds from its initial and secondary public offerings.
Other consideration included an aggregate of 3.99 million shares of Pegasus
common stock and a $20 million note payable to Utell, the majority REZ
stockholder.
<PAGE>
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 2%.
There was no amount outstanding under the credit facility at September 30,
2000.
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.
On November 1, 2000, Pegasus entered into an agreement to acquire all or
part ownership of Global Enterprise Technology Solutions LLC ("GETS"), a
provider of hotel property management systems to nearly 3,000 hotels
worldwide. Under the terms of the agreement, Pegasus initiated the
acquisition by acquiring a 20% 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 November 14,
2000, Pegasus had funded development costs of $1.3 million.
Our future liquidity and capital requirements will depend on numerous
factors, including:
* Our profitability
* Working capital requirements
* Competitive pressures
* Development of new services and applications
* Acquisition of complimentary businesses or technologies
* Response to unanticipated cash requirements
Pegasus believes that its liquidity and cash flow from operations together
with funds available from current and future 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.
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings - Pegasus is subject to certain legal
proceedings, claims and disputes which 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
Exhibit 10.16 - Global Enterprise Technology Solutions LLC
Purchase Agreement
Exhibit 10.17 - Global Enterprise Technology Solutions LLC
Development and Escrow Agreement
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
Not applicable
<PAGE>
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 14, 2000 /s/ JOHN F. DAVIS, III
----------------------
John F. Davis, III,
President and Chief
Executive Officer
November 14, 2000 /s/ JEROME L. GALANT
--------------------
Jerome L. Galant,
Chief Financial Officer,
(principal accounting officer)
<PAGE>
EXHIBIT INDEX
Exhibit Number Description of Exhibits
------------- -----------------------
10.16 Global Enterprise Technology Solutions LLC
Purchase Agreement
10.17 Global Enterprise Technology Solutions LLC
Development and Escrow Agreement
27 Financial Data Schedule
