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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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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
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
RIGHTS TO PURCHASE SERIES A PREFERRED STOCK
(TITLE OF CLASS)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value on March 15, 2001 of voting stock held by
non-affiliates of the registrant was $207,258,000.
The number of shares of the registrant's common stock, par value $0.01 per
share, outstanding as of March 15, 2001 was 24,698,089.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of our definitive proxy statement for the 2001 annual
meeting of stockholders to be held on May 8, 2001 are incorporated by reference
into Part III of this Form 10-K. We disclaim incorporation by reference of
information contained on any Internet site.
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PART I
ITEM 1. BUSINESS
Except where expressly indicated or the context otherwise requires, the
"Company," "Pegasus," "we," "our" or "us" when used in this report refers to
Pegasus Solutions, Inc., a Delaware corporation, and its predecessors and
consolidated subsidiaries. This report contains forward-looking statements
within the meaning of the federal securities laws. Actual results and the timing
of events could differ materially from those projected in or contemplated by the
forward-looking statements due to a number of factors, including those listed
herein under "Risk Factors".
OVERVIEW
Pegasus is a leading provider of hotel room reservation services,
reservation technology systems and hotel representation services for the global
hotel industry. Pegasus provides services to:
- More than 100,000 travel agencies, including nine of the 10 largest
U.S.-based travel agencies based on revenues;
- More than 40,000 hotels around the world, including 18 of the 20 largest
hotel companies based on revenues and total number of guest rooms; and
- Thousands of travel-related Web sites.
On April 3, 2000, Pegasus completed the acquisition of REZ, Inc., a leader
in providing distribution services and solutions for the hotel industry. The
acquisition added hotel representation, central reservation system and property
management system services to our existing electronic distribution, commission
processing and business intelligence services.
Pegasus is organized into two operating companies -- technology and
hospitality. The technology company includes central reservation system, or CRS,
electronic distribution, commission processing, property management systems, or
PMS, TravelWeb.com and business intelligence services. The hospitality company
includes hotel representation services offered under the Utell(R) and Golden
Tulip(R) brand names as well as Paytell, a service that allows travelers' to
prepay for reservations and manage their exposure to foreign currency exchange
rate fluctuations.
REORGANIZATION
On January 30, 2001, Pegasus announced the reorganization of its corporate
structure to realign its two business segments. We believe the reorganization
will provide greater focus and accountability for each business. The key
differences created by the reorganization are as follows:
- The technology company and the hospitality company will operate
separately. Each will have its own dedicated employees while some
administrative functions will remain shared.
- Commission Processing and TravelWeb.com, formerly within the hospitality
company, will be part of the technology company.
The new organizational structure will be used for segment reporting in the first
quarter of 2001. All references to the two operating companies in Item 1 of this
annual report on Form 10-K reflect the reorganization. All references to the two
operating companies in Items 7 and 8 of this annual report on Form 10-K do not
reflect the reorganization as these items contain historical information related
to periods ending prior to the reorganization.
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STRATEGY
Our goal is for our technology company to be the leading provider of
information services and technology solutions in the distribution of hotel rooms
and for our hospitality company to be the leading provider of hotel
representation and marketing services to independent hotels and small hotel
chains. We believe our central role as a service provider to the hotel industry
positions us to achieve this goal. Key elements of our strategy include the
following:
- Develop Leading Technologies. To be the leading provider of technology
services to the hotel industry, we must develop new technologies and
services to meet the changing needs of our current and prospective
customers. One such technology that we are currently developing is a
Web-based PMS with a comprehensive suite of hotel management, reservation
processing and customer relationship management tools.
- Grow Our Representation Business. To grow our hotel representation
business, we plan to increase the number of reservations made on behalf
of existing customers while expanding our customer base.
- Expand Hotel Room Distribution Channels. We will strive to continue to
expand our hotel information database and increase the number of
distribution channels providing hotel room reservation services for
individual travelers over the Internet, for convention and other large
meeting organizers and for corporate travel departments. We will also
work to continue to expand the use by third-party Web sites of our
private-label reservation service. Our services continue to create
transaction fee revenue opportunities through virtually all of the
distribution channels by which electronic hotel room reservations occur.
- Build Strategic Alliances and Pursue Acquisition Opportunities. To
enhance the functionality and market presence of our services, we intend
to build strategic alliances with other participants in the hotel
industry, including those providing information technology services and
travel-related Internet-based services. We believe that these
relationships will increase brand recognition of our services and help to
expand our customer base. We will also seek to acquire assets, technology
and businesses that provide complementary services or access to new
markets and customers.
- Expand Our Technology Customer Base. We intend to expand our customer
base domestically and internationally by adding customers and by
cross-selling new and existing services to our current and future
customers. Because of the fixed nature of many of our costs, the addition
of new customers and the increase in transaction volumes of new and
existing customers would enhance the profitability of our services.
SEASONALITY
Our business, particularly our hotel representation business, is sensitive
to seasonal changes in the demand for hotel rooms. The demand for business and
leisure travel is typically lower in the first and fourth quarters of the year;
and therefore, these quarters have historically been our weakest quarters.
Because the majority of our operating expenses are fixed, fluctuations in
revenue from quarter to quarter have a material effect on operating income for
the respective quarters.
INTERNATIONAL OPERATIONS
We derive a substantial portion of our revenue from customers located
outside the United States, particularly in Europe. Approximately 60 percent of
the hotels we represent within our hospitality company are in Europe.
Fluctuations in the value of foreign currencies relative to the U.S. Dollar
directly impact our revenues. More information regarding the specific risks
associated with our foreign operations is available under the heading "Risk
Factors".
SERVICES
Pegasus is organized into two operating companies -- technology and
hospitality.
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TECHNOLOGY
The technology company includes CRS, electronic distribution, commission
processing, PMS, TravelWeb.com and business intelligence services. Hotel
companies are placing an increasing emphasis on the use of technology as a means
of both increasing revenues as well as reducing costs. Increasingly, hotel
companies are realizing that internally developing and operating their own
technology solutions may not always be the most cost effective approach,
particularly as this relates to CRS and PMS functions. These systems tend to be
expensive to build, operate and update. As a result, many hotel companies have
chosen to utilize the services of a third party to provide CRS and PMS
capability.
Central Reservation System. Pegasus' CRS is provided on an application
service processing, or ASP, basis to more than 10,000 hotel properties,
representing over 2 million hotel rooms worldwide. During 2000, we processed
approximately 40 million hotel bookings 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(TM) CRS software as well as the hardware and facilities necessary to run
their CRS and process reservations. CRS also includes the following support
services:
- System administration
- Database administration
- Electronic distribution channel management
- Telecommunications management
- Private-label voice reservation services
CRS revenues consist of transaction fees as well as license, maintenance and
support fees related to our RezView software.
Electronic Distribution. Pegasus Electronic Distribution provides the
technology that facilitates electronic hotel room reservations. This technology
connects travel industry global distribution systems, or GDSs, and
travel-related Internet sites to a hotel's CRS. Pegasus Electronic Distribution
supports a variety of distribution channels including the following:
- GDS connectivity -- Pegasus Electronic Distribution is linked to all
major GDSs and connects our hotel customers to travel agent terminals
around the world.
- Third-party Web sites -- We provide travel-related Web sites access to
our hotel information database containing more than 40,000 properties and
on-line hotel reservation capability. We provide this service to several
of the top travel Web sites such as Expedia.com, HotWire.com,
Lastminute.com, Oracle e-Travel, Continental.com, Orbitz.com and our own
TravelWeb.com.
- Hotel Web sites -- Our NetBooker(TM) service provides hotel companies
with a hotel information database and Internet reservation capabilities.
Hotel Web sites that are "Powered by Pegasus"(TM) offer brand-loyal
Internet shoppers real-time rates, availability and booking capabilities.
Pegasus Electronic Distribution revenues primarily consist of transaction
fees, commissions and monthly subscription or maintenance fees. In addition, new
hotel customers pay a one-time set-up fee for establishing the connection
between the hotel's CRS and our 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.
Commission Processing. Pegasus Commission Processing provides a
comprehensive and technologically advanced hotel commission processing service
by collecting and consolidating check out information and travel agency
commissions on behalf of more than 32,000 properties representing a significant
number of major hotel brands. Each month Pegasus Commission Processing
consolidates and distributes millions of
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dollars in commission payments to its participating travel agencies, which
number over 100,000 in more than 200 countries. This value-added commission
consolidation and reporting service facilitates more efficient and effective
operation for both hotel and travel agency participants by providing a single,
monthly commission payment to member travel agencies from participating hotels.
Pegasus Commission Processing processed approximately $488 million in hotel
commission payments in 2000.
Pegasus Commission Processing revenues consist of both travel agency and
hotel fees. Travel agency fees are based on a percentage of the value of hotel
commissions processed by Pegasus on behalf of participating travel agencies.
Revenues from travel agency fees can vary substantially from period to period
based on the types of hotels at which reservations are made and fluctuations in
overall room rates. In addition, participating hotels generally pay fees based
on the number of commissionable transactions that Pegasus processes for the
respective hotel.
Property Systems and Services. As part of the REZ acquisition, we obtained
the GuestView PMS software. Although we are still servicing existing customers,
we are not selling new licenses for the GuestView software. PMS revenues in 2000
consisted of maintenance and support fees related to the GuestView software.
In November 2000, we entered into an agreement to purchase all or part of
Global Enterprise Technology Solutions LLC, or GETS. As part of the transaction,
Pegasus obtained an exclusive license to the new Internet-based ASP property
management system currently under development by GETS. Pegasus is currently
funding and directing the development of the new system.
TravelWeb.com. TravelWeb.com is our interactive Internet site on which
consumers can research and reserve hotel rooms around the world. TravelWeb.com
contains detailed property information on more than 40,000 hotels and allows
travelers to directly access hotels' CRSs to check room availability and make or
cancel a reservation. Other features include hotel photos, maps, weather
information and special discount programs. For hotel reservations that originate
on the TravelWeb.com Web site, Pegasus charges the hotel either a transaction
fee or a commission based on the value of the guest stay.
Business Intelligence. Pegasus Business Intelligence provides customer
relationship management and marketing research and information services. Pegasus
Business Intelligence revenues consist of fees charged to hotels for the
development of hotel databases and for consulting services. In March 2001,
Pegasus notified employees and customers that it would not be renewing Business
Intelligence contracts and would be winding down its Business Intelligence
operations.
HOSPITALITY
The hospitality company includes hotel representation services offered
under the Utell and Golden Tulip brand names as well as Paytell, a service that
allows travelers' to prepay for reservations and manage their exposure to
foreign currency exchange rate fluctuations.
Representation Services. In order to sell their rooms in the marketplace,
many independent hotels associate themselves with our hotel representation
services and use our systems and infrastructure to market and make reservations
for their rooms. Independent hotels join our hotel representation service for
the following reasons:
- To achieve a cost-effective presence in the primary electronic
distribution channels -- GDS and Internet.
- To obtain global voice reservation capability whereby travel agents can
book their rooms over the telephone via a local call with local language
capabilities.
- To enhance the market image of the hotel by affiliation with a well-known
name in hotel distribution.
- To benefit from worldwide sales and marketing support.
Our core hotel representation service, offered under the Utell brand name,
provides hotel marketing, voice reservation as well as GDS and Internet
representation services for approximately 6,400 hotels in more
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than 180 countries. Utell is the oldest, largest and most diverse hotel
representation company in the world. It operates the Unison CRS, a sophisticated
CRS offering advanced electronic distribution capabilities, providing both a GDS
and Internet presence for its member hotels.
We also offer branded hotel representation services under the Golden Tulip
and Tulip Inns(R) brand names. Affiliation with Golden Tulip allows member
hotels to adopt the brand name and quality standards of the well-known Golden
Tulip Worldwide brand. Golden Tulip Worldwide members include approximately 400
hotels worldwide. Branded representation service customers also receive hotel
marketing, voice reservation as well as GDS and Internet representation services
similar to our Utell representation customers.
Paytell. Many international travelers who book rooms at hotels to which we
provide representation services utilize Paytell to prepay for hotel stays and
reduce their exposure to foreign currency fluctuations. Travelers using our
Paytell service prepay for hotel rooms in the traveler's local currency. When a
traveler arrives at the hotel, Pegasus remits the amount to the hotel in the
hotel's local currency. Revenues for this service are derived from the
difference in the exchange rate that the traveler actually paid and the exchange
rate when the guest stay occurs.
OTHER SERVICES
Pegasus regularly seeks to develop new services to capitalize on its
existing technology and customer base and to provide additional
reservation-related capabilities and information services to its existing
customers and to other participants in the hotel room distribution process. One
such development recently involved a strategic investment in GETS, a company
that is developing an Internet-based ASP property management system to which we
have an exclusive license. Pegasus has not received a material amount of revenue
from these services, and there can be no assurance that any of these services
will produce a material amount of revenue in the future.
COMPETITION
Both of our operating companies face competition from within their
respective markets.
TECHNOLOGY
Central Reservation System. Our CRS business competes with hotel companies
that sell their own CRSs and third parties that provide CRSs. Our CRS
competitors include Computer Sciences Corporation and MICROS Systems, Inc.
Electronic Distribution. Pegasus Electronic Distribution supports a
variety of distribution channels, each with its own competition. For example:
- GDS connectivity -- Our GDS connectivity service competes with WizCom
International, Ltd. Customers may change their electronic reservation
interface to WizCom or to another similar service. Also, some hotels have
established a direct connection to one or more GDSs rather than through
an intermediary, such as Pegasus or WizCom. Other hotels may choose to
take the same action. If hotels establish this direct connection, they
would bypass our intermediary position and eliminate the need to pay our
fees.
- Third-party and hotel Web sites -- Our online distribution services face
competition in the online hotel room reservation business from current
competitors as well as potential new entrants, including other Web sites.
Several competitors have Web-based reservation services offering a more
comprehensive range of travel opportunities than we do. These Web sites
include Hotel Reservation Network, Travelocity.com and Expedia.com. The
costs of entry into the Internet hotel room reservation business are
relatively low.
Commission Processing. Pegasus Commission Processing faces competition
principally from National Processing Company, Net Trans, Citicorp and Perot
Systems, Inc. National Processing Company has traditionally provided car rental
and cruise line commission processing services. Net Trans, Citicorp and Perot
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Systems, Inc. have provided commission consolidation services to hotel chains.
In addition, hotels that are current or prospective customers of Pegasus
Commission Processing can decide to process commission payments without, or in
competition with, Pegasus Commission Processing.
Property Systems and Services. Our PMS business competes with hotel
companies that sell their own PMSs and third parties that provide PMSs. Our PMS
competitors include MICROS Systems, Inc., AremisSoft Hospitality and Ramesys
Hospitality.
TravelWeb.com. TravelWeb.com faces competition in the online hotel room
reservation business from current competitors as well as potential new entrants,
including other Web sites. Many competitors engage in significantly more
marketing efforts for their Web sites than we do. Several competitors have Web
sites offering a more comprehensive range of travel opportunities than we do.
These Web sites include Hotel Reservation Network, Travelocity.com and
Expedia.com. The costs of entry into the Internet hotel room reservation
business are relatively low.
HOSPITALITY
Our hotel representation services compete with hotel groups, franchisers,
consortia, reservation companies and other travel or hotel representation
companies. Utell's principal competitors are Lexington Services Corporation, VIP
International Corporation, SynXis Corporation, Unirez, Inc. and Sceptre
Hospitality Resources. Golden Tulip competes with traditional hotel companies
and hotel franchise companies like Choice Hotels International and Best Western
International.
There can be no assurance that any of our services will compete
successfully. Several factors affecting the competitive success of our services
include:
- Reliability
- Pricing structure
- The number of hotel properties using the service
- The ability of our technology services to provide a neutral,
comprehensive interface between hotels and other participants in the
distribution of hotel rooms
- The ability of our technology services to develop new technological
solutions
INTELLECTUAL PROPERTY
We are continually developing new technology and enhancing existing
proprietary technology. We have no patents. We primarily rely on a combination
of trademark, copyright, trade secrets, confidentiality procedures and
contractual provisions to protect our technology and other intellectual property
rights. Despite these protections, it may be possible for unauthorized parties
to copy, obtain or use certain portions of our proprietary technology. Any
misappropriation of our intellectual property could have a material adverse
effect on our competitive position.
RESEARCH AND DEVELOPMENT
Our research and development activities primarily consist of software
development, development of enhanced communication protocols and custom user
interfaces and database design and enhancement. Our total research and
development expense was $16.0 million, $2.5 million and $4.3 million for 2000,
1999 and 1998, respectively. Research and development expenses for 2000 included
an $8.0 million write-off of purchased in-process research and development
related to the acquisition of REZ, Inc. Research and development expenses for
1998 included a $1.5 million write-off of purchased in-process research and
development related to the acquisition of Driving Revenue L.L.C.
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EMPLOYEES
At February 28, 2001, we had 2,003 employees, 1,275 of which are located in
the United States and 728 of which are located outside the United States. We had
243 persons performing information technology functions, 1,511 persons
performing sales and marketing, customer relations and business development
functions and the remainder performing corporate, finance and administrative
functions. We have no unionized employees. We believe that our employee
relations are satisfactory.
RISK FACTORS
WE ARE GROWING RAPIDLY AND MAY NOT HAVE THE RESOURCES TO EFFECTIVELY MANAGE
ADDITIONAL GROWTH.
Our recent growth and potential future growth have placed significant
demands on management as well as on our administrative, operational and
financial resources. Expanding our business to take advantage of new market
opportunities will require significant management attention and financial
resources. To manage additional growth we must:
- Expand our sales, marketing and customer support organizations
- Attract and retain additional qualified personnel
- Expand our physical facilities
- Invest in the development or enhancement of our current services and
develop new services that meet changing industry needs
- Develop systems, procedures or controls to support the expansion of our
operations
Our inability to manage any additional growth could have a material adverse
effect on our business, operating results and financial condition.
BECAUSE OUR EXPENSES ARE LARGELY FIXED AND WE CANNOT ACCURATELY PREDICT OUR
COMPETITIVE ENVIRONMENT, UNEXPECTED REVENUE SHORTFALLS AND QUARTERLY
VARIATIONS MAY ADVERSELY AFFECT OUR BUSINESS.
Our expense levels are based primarily on our estimate of future revenues
and are largely fixed. In the future, we may not accurately predict the
introduction of new or enhanced services by us or our competitors or the degree
of customer acceptance of new services. We may also be unable to adjust spending
rapidly enough to compensate for any unexpected revenue shortfall. In addition,
our past and future operating results vary significantly from quarter to quarter
due to a variety of factors, many of which are outside of our control. It is
likely that in one or more future quarters our results may fall below the
expectations of securities analysts or investors. Any significant shortfall in
revenues in relation to our planned expenditures would reduce, and possibly
eliminate, any operating income. Due to the fixed nature of our costs, and
because operating costs are based on anticipated revenues, a decline in revenue
from even a limited number of transactions, failure to achieve expected revenue
in any fiscal quarter or unanticipated variation in the recognition of revenues
can cause significant variations in operating results from quarter to quarter.
This could result in losses in some future quarter or have a material adverse
effect on our business, operating results and financial condition. We believe
that period-to-period comparisons of our operating results should not be relied
upon as an indication of future performance.
OUR INTERNATIONAL OPERATIONS MAKE US SUSCEPTIBLE TO CURRENCY FLUCTUATIONS.
We derive a substantial portion of our revenue from customers located
outside the United States, particularly in Europe. Approximately 60 percent of
the hotels we represent within our hospitality business are in Europe. The
majority of our representation service revenues are earned in the hotel's local
currency. If the value of foreign currencies relative to the U.S. Dollar
decreases, our revenues translate to a lower U.S. Dollar amount. A decrease in
the value of foreign currencies relative to the U.S. Dollar would have a
material adverse effect on our business, operating results and financial
condition.
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OUR INTERNATIONAL OPERATIONS MAKE US SUSCEPTIBLE TO GLOBAL ECONOMIC FACTORS,
FOREIGN TAX LAW ISSUES AND FOREIGN BUSINESS PRACTICES.
Our international operations are subject to particular risks, including:
- Difficulties and costs of managing and staffing foreign operations
- Inexperience in managing foreign operations
- Impact of possible adverse political and economic conditions
- Potentially adverse tax consequences
- Impact of the policies of the United States and foreign governments on
foreign trade
- Reduced protection for intellectual property rights in some countries
- Unexpected changes in regulatory requirements
- Cost of adapting our services to foreign markets
If we do not realize our expected results from international operations, it
would have a material adverse effect on our business, operating results and
financial condition.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP NEW TECHNOLOGIES AND
SERVICES TO MEET THE CHANGING NEEDS OF THE PARTICIPANTS IN THE INTENSELY
COMPETITIVE HOTEL INDUSTRY.
Our future success depends on our ability to develop leading technologies,
enhance our existing services and develop and introduce new services. In
particular, our technologies and services must meet the needs of our current and
prospective customers. They also must continue to meet the demands of
technological advances and emerging industry standards and practices on a timely
and cost-effective basis. Although we strive to be a technological leader,
future technology advances may not complement or be compatible with our
services. In addition, we may be unable to economically and timely incorporate
technology changes and advances into our business. We may be unsuccessful in
effectively using new technologies, adapting our services to emerging industry
standards or developing, introducing and marketing service enhancements or new
services. We may also experience difficulties that could delay or prevent the
successful development, introduction or marketing of these services. If we are
unable to develop and introduce new services or enhance existing services on a
timely and cost-effective basis or if new services do not achieve market
acceptance, it could have a material adverse effect on our business, operating
results and financial condition.
WE MAY DEVELOP NEW SERVICES THAT WHILE TECHNOLOGICALLY SUCCESSFUL FAIL TO
ACHIEVE MARKET ACCEPTANCE.
We are continually evaluating new technologies and may develop new services
that utilize such technologies. It is possible that a new service, while
achieving a technological success, may fail to deliver sufficient benefit to
customers to warrant their use of the service. The failure of new services to
achieve market acceptance could have a material adverse effect on our business,
operating results and financial condition.
IF WE ARE UNABLE TO SUCCESSFULLY COMPETE IN THE INTENSELY COMPETITIVE HOTEL
INDUSTRY, WE MAY LOSE MARKET SHARE AND BE FORCED TO REDUCE THE PRICES OF OUR
SERVICES.
We compete in markets that are rapidly evolving, intensely competitive and
involve continually changing technology and industry standards. We may not be
successful in competing against our current and future competitors. Competitors
may be able to respond more quickly than we can to new or emerging technologies,
services or changes in customer requirements. We may experience increased
competition from current and potential competitors, many of which have
significantly greater financial, technical, marketing and other resources than
we do. Other participants in the industries in which we participate, as well as
new competitors, could create services that are more attractive than our
services. Competitive pressures could reduce our market share or require us to
reduce the prices of our services. Our inability to compete effectively with
these services could have a material adverse effect on our business, operating
results and financial condition.
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Each of our services faces competition from within its respective market.
For more information about the specific competitive forces facing our services
see the section in this Item 1 entitled "Competition".
AS NEARLY ALL OF OUR REVENUES ARE DERIVED FROM THE HOTEL INDUSTRY, A DOWNTURN
IN THE HOTEL INDUSTRY WOULD LIKELY ADVERSELY AFFECT OUR BUSINESS.
Nearly all of our revenues are directly or indirectly dependent on the
hotel industry. The hotel industry could experience rapid and unexpected
downturns. In the event of a downturn in the hotel industry, we would likely
experience significantly reduced demand for our services and solutions. Any
significant downturn in the hotel industry or any reduction in the demand for
hotel rooms and travel generally, would negatively impact our business,
operating results and financial condition. For instance, the hotel industry is
highly sensitive to any change in the economic conditions affecting business and
leisure travel as well as other unforeseen events. Many factors affect the hotel
industry, most of which are beyond our control. The hotel industry and demand
for hotel rooms or travel may be affected by, among other things:
- Political instability
- Regional hostilities
- Recession
- Gasoline and aviation fuel price escalation
- Inflation
- Labor strikes
We may experience substantial period-to-period fluctuations in our results of
operations as a consequence of these factors and others and the general economic
conditions affecting the demand for hotel rooms and travel.
A DECREASE IN AVAILABLE ROOM INVENTORY COULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR HOTEL REPRESENTATION BUSINESS.
We have little control over the number of rooms we can sell on behalf of
our hotel representation customers. Hotels may choose to not make rooms
available for us to sell. A decrease in the available room inventory would have
a material adverse effect on our business, operating results and financial
condition.
OUR BUSINESS IS SUBJECT TO SEASONALITY.
Our sales and earnings fluctuate based on seasonal patterns that vary in
different geographical markets. Historically, the demand for business and
leisure travel is typically lower in the first and fourth quarters. Because the
majority of our operating expenses are fixed, fluctuations in revenue from
quarter to quarter have a material effect on operating income for the respective
quarters. However, because of the seasonality of our business, results for any
quarter are not necessarily indicative of the results that may be achieved for a
full fiscal year and cannot be used to indicate financial performance for the
entire year.
REDUCTIONS IN HOTEL COMMISSION PAYMENTS WOULD REDUCE OUR REVENUES AND NET
INCOME.
Pegasus Commission Processing derives revenues based on the dollar value of
travel agency commissions paid by hotels. Approximately 15 percent of our
revenues is attributable to Pegasus Commission Processing. If there is any
change in the commission payment process, a reduction in the amount of
commissions paid to travel agencies or any increase in the direct distribution
of rooms by hotels, our revenues and net income could substantially decrease.
Hotels typically are under no contractual obligation to pay room reservation
commissions to travel agencies. Hotels could elect to reduce the current
industry customary commission rate of 10 percent, limit the maximum commission
generally paid for a hotel room reservation or eliminate commissions entirely.
For example, Marriott Hotels, a significant customer, has required travel
agencies to complete a training course and to sign an agreement in order to
continue to receive a 10 percent commission. Failure to do so may result in the
travel agency receiving reduced commissions. Hotels increasingly are
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utilizing other direct distribution channels, like the Internet, or offering
negotiated rates to major corporate customers that are non-commissionable to
travel agencies. Although we have not to date experienced any material reduction
in revenues due to these events, there can be no assurance that these or any
other efforts to reduce hotel reservation commissions would not adversely affect
our business, operating results and financial condition.
LOSS OF OUR ARRANGEMENTS WITH KEY CUSTOMERS AND THIRD-PARTY SERVICE
ARRANGEMENTS COULD ADVERSELY AFFECT OUR BUSINESS.
Our business is dependent upon our customer arrangements with hotel chains,
independent hotels, hotel representation firms, travel management companies,
travel agencies, travel agency consortia, global distribution systems and
Internet-based information and reservation systems. In the future, we may be
unable to continue or renew these arrangements on favorable terms or initiate
new arrangements. If we are unable to renew, continue or initiate customer
arrangements on a favorable basis, it could result in a significant reduction in
our customer base and revenue sources. We have not entered into any written
agreements with most of our travel agency customers relating to Pegasus
Commission Processing. We also rely on third parties to provide remittance and
worldwide currency exchange services for Pegasus Commission Processing and for
facility maintenance and disaster recovery services for the computer and
voice/data communications systems used in all of our services. If we are unable
to renew or extend our contracts with existing third-party service providers or
enter into contracts with alternate service providers on favorable terms, it
could have a material adverse effect on our business, operating results and
financial condition.
RAPID CONSOLIDATION IN THE HOTEL INDUSTRY COULD LOWER THE VALUE OF OUR
SERVICES.
We offer volume-based discounting of our fees. The recent consolidation in
the hotel industry has resulted in a higher percentage of discounted fees, and
this trend could continue. In addition, the GDS industry has consolidated into
four major GDS. If further consolidation occurs, the value of our services and
the benefits to hotel operators of utilizing our GDS electronic distribution
service would be reduced. Any potential decrease in our customer base or any
potential increase in the percentage of discounted fees may have a material
adverse effect on our business, operating results and financial condition.
OUR LIMITED EXPERIENCE IN MANAGING AND INTEGRATING ORGANIZATIONS MAY RESULT IN
FUTURE ACQUISITIONS OR JOINT VENTURES BEING DIFFICULT AND DISRUPTIVE.
We regularly evaluate acquisition and joint venture opportunities and in
the future expect to make acquisitions of other companies or technologies or
enter into joint ventures. These acquisitions or joint ventures may divert the
time and resources of our management. Further, we have limited experience in
integrating newly acquired organizations into our operations. Acquisitions
involve many risks including:
- Difficulty in integrating or otherwise assimilating technologies,
products, personnel and operations
- Diversion of management's attention from other business concerns
- Issuance of dilutive equity securities and incurrence of debt or
contingent liabilities
- Large write-offs and amortization expense related to goodwill and other
intangible assets
- Loss of key employees of acquired organizations
- Risks of entering markets in which we have no or limited prior experience
- Payments of cash, incurrence of debt or assumption of other liabilities
to acquire other businesses
The result of one or more of these factors could have a material adverse effect
on our business, operating results and financial condition.
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THE LOSS OF OUR BRAND LICENSE AGREEMENT FOR GOLDEN TULIP WOULD REDUCE OUR
REVENUES AND NET INCOME.
We operate Golden Tulip under a brand license agreement with NH Hotels of
Madrid, or NH. Pursuant to the agreement, we are required to have at least 500
participating hotels by the end of 2001. We do not expect to meet that
requirement. While we continue to discuss alternatives with NH, we expect to
return the licenses and the brand business back to NH at the end of 2001. The
loss of revenues generated from our Golden Tulip brand business could have a
material adverse effect on our business, operating results and financial
condition.
WE ARE EXPOSED TO CREDIT RISK FROM INDEPENDENT HOTELS.
Our hotel representation customers primarily consist of independent hotels
some of which may not be as financially viable as larger hotel chains. Even
though we have policies in place to reduce our exposure to credit risk, our
inability to collect payments from these independent hotels could negatively
impact the results of operations for our hotel representation business and may
result in a material adverse effect on our business, operating results and
financial condition.
OUR COMPUTER SYSTEMS AND DATABASES MAY SUFFER SYSTEM FAILURES, BUSINESS
INTERRUPTIONS OR SECURITY RISKS.
Our operations depend on our ability to protect our computer systems and
databases against damage or system interruptions from fire, earthquake, power
loss, telecommunications failure, unauthorized entry or other events beyond our
control. A significant amount of our computer equipment is located at a single
site in Phoenix, Arizona. Any unanticipated problems may cause a significant
system outage or data loss. Despite the implementation of security measures, our
infrastructure may also be vulnerable to break-ins, computer viruses or other
disruptions caused by our customers or others. Any damage to our databases,
failure of communication links, security breach or other loss that causes
interruptions in our operations could have a material adverse effect on our
business, operating results and financial condition.
MINORITY INTEREST INVESTMENTS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We may from time to time make investments in other companies and ventures.
If we do, we may have little or no control over the success of the company or
venture. There can be no assurance of the success of any such investment.
On November 1, 2000, we acquired a 20 percent interest in Global Enterprise
Solutions LLC, or GETS, a provider of hotel property management systems. Our
investment in GETS is accounted for under the equity method of accounting. We
have little control over the success of GETS, and there can be no assurance of
the success of this investment. The failure of GETS or any other company or
venture in which we invest could have a material adverse effect on our financial
condition and results of operations.
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE EXTREMELY VOLATILE DUE TO MANY
FACTORS.
Several factors have caused our stock price to be and in the future may be
extremely volatile. Our stock price could be subject to wide fluctuations in
response to a variety of factors including the following:
- Actual or anticipated variations in our quarterly operating results
- Our ability to successfully develop, introduce and market new or enhanced
products and services to the hotel industry on a timely basis
- Unexpected changes in demand for our services and solutions due to the
fixed nature of a large portion of our expenses
- Unpredictable volume and timing of customer revenues due to seasonality
in the travel industry, the terms of customer contracts and other factors
- Purchasing and payment patterns, as well as pricing policies, of our
competitors
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- Announcements of technological innovations or new services by us or our
competitors
- Changes in financial estimates by securities analysts
- Conditions or trends in the Internet and online commerce industries
- Changes in the market valuations of other similarly situated companies
- Development in Internet regulations
- Announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments
- Market fluctuations and performance of the hotel industry
- Unscheduled system downtime
In addition, the trading prices of Internet and technology stocks in general
have experienced extreme price and volume fluctuations in recent months. Any
negative changes in the public's perception of the prospects of Internet or
electronic commerce companies or other broad market and industry factors could
depress our stock price regardless of our operating performance. Market
fluctuations, as well as general political and economic conditions, such as
recession or interest rate or currency rate fluctuations, also may decrease the
market price of our common stock.
WE RELY ON TECHNOLOGY LICENSES FROM THIRD PARTIES, THE LOSS OF WHICH MAY HARM
OUR ABILITY TO DEVELOP AND SELL OUR SERVICES.
We currently and in the future may procure licenses from third parties
relating to our services or technology. Our inability to obtain or maintain such
licenses could impair our ability to develop and sell our services. Our
competitors may obtain licenses with lower royalty obligations or other terms
more favorable than those received by us. If we or our suppliers are unable to
obtain licenses, we could be forced to market services without certain
technological features. Our inability to obtain licenses or to obtain such
licenses on competitive terms could have a material adverse effect on our
business, operating results and financial condition.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS OR PREVENT THEIR
UNAUTHORIZED USE, WHICH COULD DIVERT OUR FINANCIAL RESOURCES AND HARM OUR
BUSINESS.
Our success depends upon our proprietary technology and other intellectual
property rights. We rely upon a combination of trademark, copyright, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary technology and other intellectual property. Despite our current
efforts to protect our proprietary rights, these protective measures may not be
enforceable or adequate to prevent misappropriation or independent third-party
development of our technology. Many foreign jurisdictions offer less protection
of intellectual property rights than the United States. Effective copyright,
trademark and trade secret protection may not be available in other
jurisdictions. In addition, we may need to litigate claims against third parties
to enforce our intellectual property rights, protect our trade secrets,
determine the validity and scope of the proprietary rights of others or defend
against claims of infringement or invalidity. This litigation could result in
substantial cost and diversion of management resources. A successful claim
against us could effectively block our ability to use or license our technology
and other intellectual property in the United States or abroad. If we cannot
adequately protect our proprietary rights, it could have a material adverse
effect on our business, operating results and financial condition.
OUR SUCCESS SIGNIFICANTLY DEPENDS ON THE EXPERIENCE OF OUR KEY PERSONNEL AND
OUR ABILITY TO ATTRACT AND RETAIN ADDITIONAL PERSONNEL.
Our success depends on the continued service of our executive officers and
other key personnel including our Chief Executive Officer John F. Davis, III and
our President Joseph W. Nicholson. Even though we currently have "key-man"
insurance covering Messrs. Davis and Nicholson, this insurance amount may not
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adequately compensate for the loss of their services. We believe that our future
business results also depend on our ability to identify, attract, motivate and
retain skilled technical personnel. Competition for personnel in the electronic
commerce industry is intense. We cannot guarantee that we will be able to
successfully identify, attract, motivate and retain other highly-skilled
personnel in a timely and effective manner. Our failure to retain our officers
and key personnel or to recruit new personnel could have a material adverse
effect on our business, operating results and financial condition.
LITIGATION MAY DIVERT OUR RESOURCES AND REDUCE THE MARKET PRICE OF OUR COMMON
STOCK.
In some instances, following declines in the market price of a company's
securities, securities class-action litigation often has been instituted against
that company. Litigation of this type, if instituted against us, could result in
substantial costs and a diversion of management's attention and resources, which
could have a material adverse effect on our business, operating results and
financial condition.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD FORCE US TO CHANGE OUR
OPERATIONS.
Although several aspects of the travel industry are heavily regulated by
the United States and other governments, we do not believe the services we offer
are currently subject to any material industry-specific government regulation.
Any future regulations implemented by federal, state or foreign governmental
authorities or affecting one or more of our current or future services could
have a material adverse effect on our operations.
Our primary customers are hotel chains, independent hotels, hotel
representation firms and travel agencies. Any federal, state or foreign
governmental authorities, competitors or consumers could raise anti-competitive
concerns regarding our relationship with our customers or otherwise. Any such
action or similar allegations by third parties could have a material adverse
effect on our business, operating results and financial condition.
WE COULD BE SUBJECT TO NEW LAWS AND REGULATIONS RELATING TO THE INTERNET.
We are subject to the same federal, state and local laws as other companies
conducting business on the Internet. Many of these laws and regulations are new
and have not yet been thoroughly interpreted by the courts. Accordingly, we face
numerous risks related to conducting business on the Internet that include:
- The applicability and reach of various laws and regulations is uncertain.
- Changes to existing laws or the passage of new laws intended to address
privacy issues could directly affect the way we do business and could
create uncertainty in the marketplace.
- Since our services are accessible worldwide via the Internet, foreign
jurisdictions may require that we comply with their laws. Our failure to
comply with foreign laws could subject us to penalties ranging from fines
to bans on our ability to offer our services.
- In the United States, companies are required to qualify as foreign
corporations in states where they are conducting business. As an Internet
company, it is unclear in which states we are actually doing business.
Our failure to qualify as a foreign corporation in a jurisdiction where
we are required to do so could subject us to taxes and penalties and
could result in our inability to enforce contracts in those
jurisdictions.
Any new legislation or regulation, or the application of laws or regulations
from jurisdictions whose laws do not currently apply to our business, could
adversely affect our business, operating results and financial condition.
THERE ARE DETERRENTS THAT MAY DISCOURAGE A THIRD PARTY FROM ACQUIRING CONTROL
OF PEGASUS, EVEN IF DOING SO WOULD BE BENEFICIAL TO OUR STOCKHOLDERS.
Provisions in our certificate of incorporation and bylaws could make it
more difficult for a third party to acquire us. Our certificate of incorporation
and bylaws provide for a classified board of directors serving
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staggered terms of three years, prevent stockholders from calling a special
meeting of stockholders and prohibit stockholder action by written consent. Our
certificate of incorporation also authorizes only the board of directors to fill
director vacancies, including newly created directorships, and states that
directors may be removed only for cause and only by the affirmative vote of
holders of at least two-thirds of the outstanding shares of the voting stock
voting together as a single class.
On September 28, 1998, our board of directors adopted a stockholder rights
plan and declared a dividend distribution of one right for each outstanding
share of our common stock to stockholders of record at the close of business on
October 13, 1998. The rights are exercisable only if a person or group of
affiliated persons acquires, or has announced the intent to acquire, 20 percent
or more of our common stock.
In addition, we are subject to the provisions of Delaware law that restrict
certain business combinations with interested stockholders even if such a
combination would be beneficial to stockholders. These provisions may inhibit a
non-negotiated merger or other business combination. The anti-takeover
provisions of the Delaware General Corporation Law prevent us from engaging in a
"business combination" with any "interested stockholder" for three years
following the date that the stockholder became an interested stockholder. Under
Delaware law, a Delaware corporation may opt out of the anti-takeover
provisions. We do not intend to opt out of these anti-takeover provisions.
These provisions could discourage potential acquisition proposals and could
delay or prevent a change in control transaction. They could also discourage
others from making tender offers for our shares. As a result, these provisions
may prevent the market price of our common stock from reflecting the effects of
actual or rumored takeover attempts. These provisions may also prevent
significant changes in our board of directors and our management.
ITEM 2. PROPERTIES
Our corporate headquarters is located in a leased facility with
approximately 59,000 square feet of space in Dallas, Texas. We also have
regional hubs in Phoenix, London and Singapore with approximately 121,000,
35,000 and 11,000 square feet of leased office space, respectively. In total, we
have 35 offices in 22 countries, all of which are leased facilities. We believe
that our existing facilities are well maintained and in good operating condition
and are adequate for our present anticipated levels of operations.
ITEM 3. LEGAL PROCEEDINGS
We are a party from time to time to certain routine legal proceedings
arising in the ordinary course of our business. Although the outcome of any
legal proceeding cannot be predicted accurately, we do not believe any liability
that might result from such proceedings could have a material adverse effect on
our business, operating results and financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our stockholders during the fourth
quarter of the fiscal year ended December 31, 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Our common stock has been traded on the Nasdaq National Market under
the symbol "PEGS" since August 7, 1997. At March 15, 2001, there were
approximately 438 record holders of our common stock although we believe that
the number of beneficial owners of our common stock is substantially greater.
The market prices set forth below have been adjusted to reflect a three-for-two
stock split effected on January 7, 2000 in the form of a stock dividend to all
stockholders of record on December 20, 1999.
HIGH LOW
------ ------
2000
Fourth quarter.............................................. $19.31 $ 5.81
Third quarter............................................... $21.00 $ 9.94
Second quarter.............................................. $20.75 $10.50
First quarter............................................... $40.67 $14.25
1999
Fourth quarter.............................................. $54.42 $24.17
Third quarter............................................... $29.75 $19.33
Second quarter.............................................. $32.92 $20.75
First quarter............................................... $30.67 $16.67
1998
Fourth quarter.............................................. $24.17 $ 5.92
Third quarter............................................... $17.92 $ 7.17
Second quarter.............................................. $20.67 $14.67
First quarter............................................... $18.08 $ 9.08
We intend to retain any future earnings for use in our business and do not
intend to pay cash dividends in the foreseeable future. The payment of future
dividends, if any, will be at the discretion of our board of directors and will
depend, among other things, upon future earnings, operations, capital
requirements, restrictions in financing agreements, our general financial
condition and general business conditions.
On September 28, 1998, our board of directors declared a dividend
distribution of one right for each outstanding share of our common stock to
stockholders of record at the close of business on October 13, 1998. Each right
entitles the registered holder to purchase from us one one-thousandth of a share
of our Series A Preferred Stock for each share of our common stock held at a
price of $90. The number of rights associated with shares of common stock has
been proportionally adjusted for the stock split effected in January 2000. The
rights are exercisable only if a person or group of affiliated persons acquires,
or has announced the intent to acquire, 20 percent or more of our common stock.
(b) The Securities and Exchange Commission on August 6, 1997 declared
effective the Registration Statement on Form S-1 (File No. 333-28595) relating
to the initial public offering of our common stock.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data as of and for the years
ended December 31, 2000 and 1999 and for the year ended December 31, 1998 are
derived from the consolidated financial statements of Pegasus that have been
audited by PricewaterhouseCoopers LLP, independent accountants, and are included
as Item 8 of this annual report on Form 10-K. Selected consolidated financial
data as of December 31, 1998 and as of and for the years ended December 31, 1997
and 1996 are derived from Pegasus' financial statements that have been audited
by PricewaterhouseCoopers LLP, but are not included herein. The data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included as Item 7 of this annual report on
Form 10-K and with Pegasus' consolidated financial statements and notes thereto
included as Item 8 of this annual report on Form 10-K.
2000 1999 1998 1997 1996
-------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues(1)............................ $161,534 $ 38,036 $29,064 $20,903 $15,869
Net income (loss)(2)....................... (26,582) 8,666 5,396 589 (3,485)
Net income (loss) per share(2)(3)
Basic.................................... (1.14) 0.47 0.34 0.05 (0.44)
Diluted.................................. (1.14) 0.44 0.32 0.05 (0.44)
Working capital............................ 6,205 143,606 44,398 38,397 2,068
Total assets............................... 357,705 163,540 60,320 49,923 13,892
Long-term obligations, net of current
portion.................................. 20,000 -- 58 661 6,353
Total stockholders' equity................. 260,572 156,772 54,264 43,478 1,954
- ---------------
(1) Pegasus' selected consolidated financial data includes net revenues related
to the acquisition of REZ, Inc. of $113.8 million in 2000.
(2) Pegasus' selected consolidated financial data includes the depreciation and
amortization of the following:
- Acquisition of 83.3% of the outstanding capital stock of The Hotel
Clearing Corporation, or HCC, in July 1995
- Acquisition of the remaining 16.7% of the outstanding capital stock of
HCC in June 1996
- Acquisition of Driving Revenue L.L.C. in August 1998
- Acquisition of REZ, Inc. in April 2000
Amortization applicable to the acquisition of HCC totaled approximately
$798,000, $1,534,000 and $1,412,000 in 1998, 1997 and 1996, respectively.
Amortization applicable to Driving Revenue totaled approximately $337,000,
$416,000 and $125,000 in 2000, 1999 and 1998, respectively. Amortization
applicable to REZ totaled approximately $41.0 million in 2000.
(3) Certain net income (loss) per share amounts were retroactively adjusted for
a one hundred-for-one stock split that occurred in June 1996, a
four-for-three stock split that occurred in August 1997 and a three-for-two
stock split that occurred in January 2000.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the selected consolidated financial data included as Item 6 of this annual
report on Form 10-K and the consolidated financial statements and notes thereto
included as Item 8 of this annual report on Form 10-K. This discussion and
analysis contains certain forward-looking statements that involve risks and
uncertainties. Pegasus' actual results and the timing of certain events could
differ materially from those discussed in the forward-looking statements as a
result of many factors including those set forth in Pegasus' filings with the
Securities and Exchange Commission, specifically including the risk factors set
forth under Item 1 of this annual report on Form 10-K.
REORGANIZATION
On January 30, 2001, Pegasus announced the reorganization of its corporate
structure to realign its two business segments. We believe the reorganization
will provide greater focus and accountability for each business. The key
differences created by the reorganization are as follows:
- The technology company and the hospitality company will operate
separately. Each will have its own dedicated employees while some
functions will remain shared.
- Commission Processing and TravelWeb.com, formerly within the hospitality
company, will be part of the technology company.
The new organizational structure will be used for segment reporting in the first
quarter of 2001. All references to the two operating companies in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" do not reflect the reorganization as this discussion contains
historical information related to periods ending prior to the reorganization.
OVERVIEW
Pegasus is a leading provider of hotel room reservation services,
reservation technology systems and hotel representation services for the global
hotel industry. Pegasus provides services to:
- More than 100,000 travel agencies, including nine of the 10 largest
U.S.-based travel agencies based on revenues;
- More than 40,000 hotels around the world, including 18 of the 20 largest
hotel companies based on revenues and total number of guest rooms; and
- Thousands of travel-related Web sites.
On April 3, 2000, Pegasus completed the acquisition of REZ, Inc., a leader
in providing distribution services and solutions for the hotel industry. The
acquisition added hotel representation, central reservation system and property
management system services to our existing electronic distribution, commission
processing and business intelligence services.
Pegasus is organized into two operating companies -- hospitality and
technology. The hospitality company includes hotel representation services
offered under the Utell, Summit Hotels & Resorts(R), Sterling(TM) Hotels &
Resorts and Golden Tulip brand names, commission processing, TravelWeb.com and
Paytell. The technology company includes CRS, electronic distribution, PMS and
business intelligence services. In 2000, approximately 64 percent and 36 percent
of Pegasus' consolidated revenue was derived from the hospitality and technology
groups, respectively.
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SERVICES
HOSPITALITY
The hospitality company includes hotel representation services offered
under the Utell, Summit, Sterling and Golden Tulip brand names, Commission
Processing, TravelWeb.com and Paytell.
Representation Services. In order to sell their rooms in the marketplace,
many independent hotels associate themselves with our hotel representation
services and use our systems and infrastructure to market and make reservations
for their rooms. Independent hotels join our hotel representation service for
the following reasons:
- To achieve a cost-effective presence in the primary electronic
distribution channels -- GDS and Internet.
- To obtain global voice reservation capability whereby travel agents can
book their rooms over the telephone via a local call with local language
capabilities.
- To enhance the market image of the hotel by affiliation with a well-known
name in hotel distribution.
- To benefit from worldwide sales and marketing support.
Our core hotel representation service, offered under the Utell brand name,
provides hotel marketing, voice reservation as well as GDS and Internet
representation services for approximately 6,400 hotels in more than 180
countries. Utell is the oldest, largest and most diverse hotel representation
company in the world. It operates the Unison CRS, a sophisticated CRS offering
advanced electronic distribution capabilities, providing both a GDS and Internet
presence for its member hotels.
We also offer branded hotel representation services under the Sterling
Hotels & Resorts, Summit Hotels & Resorts, Golden Tulip and Tulip Inns brand
names. Both the Sterling and Summit 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 as well as GDS and Internet representation services
similar to our Utell representation customers.
Representation service revenues consist of reservation processing fees,
membership fees and fees for various marketing services. Our hotel
representation services represented approximately 44 percent of revenues in
2000.
Commission Processing. Pegasus Commission Processing provides a
comprehensive and technologically advanced hotel commission processing service
by collecting and consolidating check out information and travel agency
commissions on behalf of more than 32,000 properties representing a significant
number of major hotel brands. Each month Pegasus Commission Processing
consolidates and distributes millions of dollars in commission payments to its
participating travel agencies, which number over 100,000 in more than 200
countries. This value-added commission consolidation and reporting service
facilitates more efficient and effective operation for both hotel and travel
agency participants by providing a single, monthly commission payment to member
travel agencies from participating hotels. Pegasus Commission Processing
processed approximately $488 million in hotel commission payments in 2000.
Pegasus Commission Processing revenues consist of both travel agency and
hotel fees. Travel agency fees are based on a percentage of the value of hotel
commissions processed by Pegasus on behalf of participating travel agencies.
Revenues from travel agency fees can vary substantially from period to period
based on the types of hotels at which reservations are made and fluctuations in
overall room rates. In addition, participating hotels generally pay fees based
on the number of commissionable transactions that Pegasus processes for the
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respective hotel. Our commission processing revenues represented approximately
15 percent of revenues in 2000.
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' CRS's to check room availability and make
or cancel a reservation. Other features include hotel photos, maps, weather
information and special discount programs. For hotel reservations that originate
on the TravelWeb.com Web site, Pegasus charges the hotel either a transaction
fee or a commission based on the value of the guest stay.
Paytell. Many international travelers who book rooms at hotels to which we
provide representation services utilize Paytell to prepay for hotel stays and
reduce their exposure to foreign currency fluctuations. Travelers using our
Paytell service prepay for hotel rooms in the traveler's local currency. When a
traveler arrives at the hotel, Pegasus remits the amount to the hotel in the
hotel's local currency. Revenues for this service are derived from the
difference in the exchange rate that the traveler actually paid and the exchange
rate when the guest stay occurs.
TECHNOLOGY
The technology company includes CRS, electronic distribution, PMS and
business intelligence services. Hotel companies are placing an increasing
emphasis on the use of technology as a means of both increasing revenues as well
as reducing costs. Increasingly, hotel companies are realizing that internally
developing and operating their own technology solutions may not always be the
most cost effective approach, particularly as this relates to CRS and PMS
functions. These systems tend to be expensive to build, operate and update. As a
result, many hotel companies have chosen to utilize the services of a third
party to provide CRS and PMS capability.
Central Reservation System. Pegasus' CRS is provided on an ASP basis to
more than 10,000 hotel properties, representing over 2 million hotel rooms
worldwide. During 2000, we processed approximately 40 million hotel bookings
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
CRS software as well as the hardware and facilities necessary to run their CRS
and process reservations. CRS also includes the following support services:
- System administration
- Database administration
- Electronic distribution channel management
- Telecommunications management
- Private-label voice reservation services
CRS revenues consist of transaction fees as well as license, maintenance and
support fees related to our RezView software. CRS revenues represented
approximately 22 percent of revenues for 2000.
Electronic Distribution. Pegasus Electronic Distribution provides the
technology that facilitates electronic hotel room reservations. This technology
connects travel industry GDSs and travel-related Internet sites to a hotel's
CRS. Pegasus Electronic Distribution supports a variety of distribution channels
including the following:
- GDS connectivity -- Pegasus Electronic Distribution is linked to all
major GDSs and connects our hotel customers to travel agent terminals
around the world.
- Third-party Web sites -- We provide travel-related Web sites access to
our hotel information database containing more than 40,000 properties and
on-line hotel reservation capability. We provide this service
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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 NetBooker service provides hotel companies with a
hotel information database and Internet reservation capabilities. Hotel
Web sites that are "Powered by Pegasus" offer brand-loyal Internet
shoppers real-time rates, availability and booking capabilities.
Pegasus Electronic Distribution revenues primarily consist of transaction
fees, commissions and monthly subscription or maintenance fees. In addition, new
hotel customers pay a one-time set-up fee for establishing the connection
between the hotel's CRS and our electronic distribution technology. New
third-party Web site customers pay a one-time set-up fee for establishing the
connection between a hotel's CRS and the third-party Web site. Electronic
Distribution revenues represented approximately 12 percent of revenues for 2000.
Property Systems and Services. As part of the REZ acquisition, we obtained
the GuestView PMS software. Although we are still servicing existing customers,
we are not selling new licenses for the GuestView software. PMS revenues in 2000
consisted of maintenance and support fees related to the GuestView software.
In November 2000, we entered into an agreement to purchase all or part of
GETS. As part of the transaction, Pegasus obtained an exclusive license to the
new Internet-based ASP property management system currently under development by
GETS. Pegasus is currently funding and directing the development of the new
system.
Business Intelligence. Pegasus Business Intelligence provides customer
relationship management and marketing research and information services. Pegasus
Business Intelligence revenues consist of fees charged to hotels for the
development of hotel databases and for consulting services.
OTHER SERVICES
Pegasus regularly seeks to develop new services to capitalize on its
existing technology and customer base and to provide additional electronic hotel
reservation capabilities and information services to its existing customers and
to other participants in the hotel room distribution process. One such
development recently involved a strategic investment in GETS, a company that is
developing an Internet-based ASP property management system to which we have an
exclusive license. Pegasus has not received a material amount of revenue from
these services, and there can be no assurance that any of these services will
produce a material amount of revenue in the future.
COSTS
Pegasus' cost of services consists principally of personnel costs relating
to information technology, customer service and telemarketing and facilities and
equipment maintenance costs. Research and development costs consist principally
of personnel costs, related overhead costs and fees paid to outside consultants.
General and administrative expenses are primarily personnel, office, legal and
accounting related. Marketing and promotion expenses consist primarily of
personnel costs, advertising, amortization of customer incentive contracts,
public relations and participation in trade shows and other industry events.
Depreciation and amortization expense includes depreciation of computer
equipment, office furniture, office equipment and leasehold improvements as well
as amortization of software, goodwill and other intangible assets. Interest
expense includes interest on a note payable to Utell and interest on payments
made under capital equipment leases.
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
consolidated financial statements.
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The $245.3 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. 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... $ 996
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.................................................... 161,708
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):
CALCULATED
ESTIMATED ANNUAL
AMOUNT USEFUL 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........................................... 161,708 10 years 16,191
The value assigned to purchased in-process research and development, or
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 percent 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 percent and 80 percent,
respectively.
Both projects were completed during 2000 although the scope of the customer
reporting project was reduced. Management does not expect this change in scope
to have a material impact on the Company's revenues, operating results and
financial condition.
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RECENT DEVELOPMENTS
On January 10, 2001, Pegasus sold its Summit Hotels & Resorts and Sterling
Hotels & Resorts brand business to IndeCorp Corporation for an estimated $12
million. 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 will recognize an after-tax gain of approximately $3 million
related to the sale of these two brands. In addition, IndeCorp signed a
five-year technology services agreement with Pegasus with an estimated value of
$40 million. As part of the agreement, Pegasus will be the exclusive provider of
reservation technology, voice and electronic reservation processing, commission
processing and a host of other ancillary services to IndeCorp brands, which
includes all Preferred Hotels & Resorts, Summit Hotels & Resorts and Sterling
Hotels & Resorts member hotels.
On January 30, 2001, Pegasus announced the reorganization of its corporate
structure to realign its two business segments. As part of the reorganization,
our hotel representation business will operate under the Utell name as a wholly
owned subsidiary of Pegasus Solutions, Inc. and will represent our hospitality
segment. Our technology segment will consist of CRS, electronic distribution,
commission processing, PMS, TravelWeb.com and business intelligence services. We
will begin using this new organizational structure for segment reporting in the
first quarter of 2001.
We operate Golden Tulip under a brand license agreement with NH Hotels of
Madrid, or NH. Pursuant to the agreement, we are required to have at least 500
participating hotels by the end of 2001. We do not expect to meet that
requirement. While we continue to discuss alternatives with NH, we expect to
return the licenses and the brand business back to NH at the end of 2001.
Because of significant net operating losses, management decided in the
fourth quarter of 2000 not to seek new Business Intelligence customers and only
to service existing contracts. At that time, the Company determined that the net
book values of goodwill and certain other assets were impaired, and recorded
asset impairment costs of $2.0 million in the fourth quarter of 2000. At
December 31, 2000, Pegasus was in negotiations to sell Business Intelligence. In
March 2001, these negotiations were terminated, and Pegasus notified employees
and customers that it would not be renewing contracts and would be winding down
its Business Intelligence operations. As a result, Pegasus recorded additional
asset impairment costs of $1.0 million in its statement of operations for the
year ended December 31, 2000. In addition, Pegasus expects to incur related
severance costs of approximately $300,000 in the first quarter of 2001.
YEARS ENDED DECEMBER 31, 2000 AND 1999
The results of operations for the year ended December 31, 2000 include the
effect of the REZ acquisition, which was completed on April 3, 2000 and is
discussed in Note 2 to the consolidated financial statements contained herein.
Accordingly, REZ's results of operations subsequent to the acquisition are
included in the accompanying consolidated financial statements.
Weakness of the Euro. Since the REZ acquisition, Pegasus derives a
substantial portion of its revenue from customers located outside the United
States, particularly in Europe. The weakness of the Euro relative to the U.S.
Dollar resulted in Pegasus earning less in revenue during the year ended
December 31, 2000 than it otherwise might have earned if currency rates had
remained comparable with currency rates for the year ended December 31, 1999.
Net Revenues. Net revenues in 2000 increased to $161.5 million from $38.0
million in 1999, primarily due to the acquisition of REZ. Excluding the effect
of REZ, revenues increased $9.7 million, or 25.5 percent, primarily due to
higher transaction levels for Electronic Distribution and Commission Processing.
Revenues for our hospitality segment were $103.3 million in 2000, including
$76.9 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 $6.4 million, or 32.2 percent, in 2000
compared to 1999.
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Commission Processing revenues increased 36.5 percent in 2000 compared to
1999 primarily as a result of a 32.6 percent increase in the value of
commissions paid to member travel agencies through our commission processing
service. The value of commissions paid increased because of an increase in the
number of hotel commission transactions processed combined with an increase in
the average value of commissions processed. In addition, revenue earned on the
spread between the currency in which the hotel commission is earned and the
currency paid to the travel agency increased. Incremental reconciliation and
tracking services revenue also contributed to the increase in commission
processing revenues. 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, primarily
due to consolidation within the travel agency industry. Pegasus expects this
trend to continue.
Revenues for our technology segment were $58.2 million in 2000, including
$36.9 million related to REZ's operations. Excluding the effect of REZ,
technology revenues increased $3.3 million, or 18.1 percent, in 2000 compared to
1999.
Electronic Distribution revenues increased 23.5 percent in 2000 as compared
to 1999, resulting primarily from a 17.2 percent increase in the number of hotel
reservations made through our GDS and Internet-based distribution services.
Transaction revenue per transaction increased 3.9 percent in 2000 as compared to
1999 due to an increase in the number of Internet-based transactions, which
generate more revenue per transaction.
Business Intelligence revenues decreased $506,000, or 25.8 percent, to $1.5
million in 2000 compared to $2.0 million in 1999. Pegasus Business Intelligence
revenues consisted of fees charged to hotels for the development and maintenance
of hotel databases and for consulting services.
Business Intelligence had net pretax losses of approximately $8.4 million
and $4.0 million in 2000 and 1999, respectively. Included in the 2000 pretax
loss for Business Intelligence was a $3.0 million charge related to asset
impairment.
Cost of services. Cost of services were $79.7 million in 2000, including
$64.1 million attributable to REZ's operations. Excluding the effect of REZ,
cost of services increased $2.9 million in 2000 compared to 1999 due to an
increase in headcount for Electronic Distribution and Commission Processing.
Restructure and asset impairment costs. During the fourth quarter of 2000,
we incurred $3.4 million of restructuring and asset impairment charges.
Approximately $3.0 million related to a write-down of goodwill and other assets
associated with Pegasus Business Intelligence, and approximately $419,000
related to consolidation of reservation centers in Europe and Latin America.
Research and development. Research and development expenses were $8.0
million in 2000, including $4.9 million related to REZ's operations. Excluding
the effect of REZ, research and development expenses increased $541,000 in 2000
compared to 1999.
Write-off of purchased in-process research and development. During 2000,
Pegasus wrote off $8.0 million for REZ research and development projects that
had not yet reached technological feasibility at the time of acquisition. For
more information on the write-off of purchased in-process research and
development see the caption "REZ, Inc. Acquisition" in this Management's
Discussion and Analysis.
General and administrative expenses. General and administrative expenses
were $20.4 million in 2000, including $11.9 million related to REZ. Excluding
the effect of REZ, general and administrative expenses increased $3.8 million in
2000 compared to 1999 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
$24.8 million in 2000, including $17.9 million attributable to REZ. Excluding
the effect of REZ, marketing and promotion expenses increased $884,000 in 2000
compared to 1999 due to an increase in headcount for commission processing,
business intelligence and corporate marketing.
Depreciation and amortization. Depreciation and amortization expenses were
$51.5 million in 2000. In 2000, depreciation and amortization expense for
property and equipment increased to $18.6 million from
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$2.0 million in 1999 primarily due to $16.2 million of depreciation and
amortization expense related to REZ property and equipment. In 2000,
amortization expense related to purchased intangibles and goodwill increased to
$32.9 million from $416,000 in 1999 because of the REZ acquisition.
Interest income. Interest income decreased $1.4 million in 2000 compared
to 1999 as we had less marketable securities during the second, third and fourth
quarters of 2000 due to the REZ acquisition.
Interest expense. Interest expense increased $1.7 million in 2000 compared
to 1999 primarily due to $1.2 million accrued interest on a note payable to Reed
Elsevier plc, the majority REZ shareholder, 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 $5.9
million in 2000. Our effective rate differed from the statutory rate primarily
due to large non-deductible expenses related to purchase accounting. Pegasus
recorded an income tax provision of $4.7 million in 1999, an effective tax rate
of 35.1 percent of pretax income. The effective tax rate for 1999 differed from
the statutory rate primarily due to state income taxes.
YEARS ENDED DECEMBER 31, 1999 AND 1998
Net revenues. Net revenues for 1999 increased to $38.0 million from $29.1
million in 1998, an increase of 30.9 percent. The increase in revenues was
primarily driven by higher transaction levels for Electronic Distribution and
Commission Processing as well as the acquisition of Driving Revenue in August
1998, which provided the majority of Business Intelligence revenues for 1999.
Electronic Distribution revenues increased $5.6 million, or 45.3 percent,
in 1999 compared to 1998. The increase resulted primarily from a 28.2 percent
increase in the number of hotel reservations made through the GDS and
Internet-based distribution services. Although GDS revenue per transaction
decreased in 1999 compared to 1998, total transaction revenue per transaction
increased 7.2 percent due to a higher percentage of Internet-based transactions,
which generate more revenue per transaction. A $1.7 million increase in non-
transaction related revenues also contributed to the increase in total
electronic distribution revenues. Non-transaction related revenues include
implementation fees, subscription fees and advertising revenues.
Commission Processing revenues increased 14.7 percent in 1999 compared to
1998 as a result of a 22.4 percent increase in the number of hotel commission
transactions processed. The increase in the number of transactions was due in
part to an increase in the number of hotel properties and travel agencies
participating in Pegasus Commission Processing. The value of commissions paid by
Pegasus increased 25.6 percent in 1999 compared to 1998 because of an increase
in the number of hotel commission transactions processed combined with an
increase in the average value of commissions processed. Net revenues arising
from the increase in commissions paid was somewhat offset by a reduction in the
average fee received from participating travel agencies for consolidating and
remitting hotel commission payments. Pegasus expects this trend to continue.
Business Intelligence revenues increased $1.1 million to $2.0 million in
1999 from $0.9 million for 1998 due to the acquisition of Driving Revenue L.L.C.
in August 1998. Business Intelligence revenues consisted of fees charged to
hotels for the development and maintenance of hotel databases and for consulting
services.
Business Intelligence had net pretax losses of approximately $4.0 million
and $2.8 million for 1999 and 1998, respectively. During 1999, Pegasus continued
to invest in technology and personnel to grow this segment. During 1999, Pegasus
also invested heavily in the development of marketing and sales personnel to
increase customer awareness of Business Intelligence services and products.
Pegasus expects this segment to continue to have losses in the foreseeable
future.
Cost of services. Cost of services increased by $2.7 million, or 26.8
percent, to $12.7 million in 1999 from $10.0 million in 1998. Cost of services
increased due to additional staffing primarily related to new business
intelligence services. The number of technology personnel increased 25.6 percent
at December 31, 1999 compared to December 31, 1998. In addition, Pegasus
incurred approximately $104,000 in 1999 for
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enhancing its infrastructure. These enhancements included upgrades to e-mail and
wide area networks. This increase was partially offset by a $727,000 decrease in
costs associated with Pegasus Commission Processing during the first half of
1999 as some functions that were previously outsourced were brought in-house at
a lower cost during the third quarter of 1998.
Research and development. Research and development expenses decreased
$263,000, or 9.4 percent, to $2.5 million in 1999 from $2.8 million in 1998. In
1999, research and development expenses were primarily related to the
development of business intelligence services while 1998 expenses included a
major commission processing project, which was completed in the third quarter
1998. This commission processing project was comprised of internally developed
software and procedures to sort and consolidate commissions by travel agency.
Prior to the completion of this project, this process was outsourced.
Write-off of purchased in-process research and development. During 1998,
Pegasus incurred a charge of $1.5 million to write-off purchased in-process
research and development related to the acquisition of Driving Revenue in August
1998.
Based on a third party valuation, approximately $1.5 million of the
purchase price was allocated to in-process research and development projects
that at the time of the acquisition had not reached technological feasibility
and had no probable alternative future use. In determining the valuation Pegasus
identified eight projects as in-process research and development. Of these
eight, three were associated with a market planner product, three with a
database product and two were Internet-enabled query tools. Each project was
estimated to have a specific revenue stream that was assumed to generate a 20
percent cash flow margin over a ten-year period. Each project was determined to
be at a certain stage of completion ranging from 10 to 70 percent, and these
factors were applied to the present value of each project's future cash flows
using a 30 percent discount rate. The resulting $1.5 million valuation was
charged to operations in 1998.
Subsequent to the Driving Revenue acquisition, Pegasus re-evaluated the
role of the market planner product. Since the market planner is a stand-alone
software sale that does not fit with Pegasus' business strategy, Pegasus has
elected to stop selling it and terminated work on the development of the three
market planner projects. Pegasus has elected to focus its efforts on projects
that better fit with its strategy of producing recurring revenues form
customers. Pegasus management believes that the decision not to develop the
acquired technology will have no impact on future results of operations or
financial position.
Pegasus has continued developing new database tools and has completed the
major elements of the new database project as of January 2000. The cost to
complete the project was approximately $1.0 million, which is roughly consistent
with Pegasus' earlier projections. The new database capability is being rolled
out to Pegasus' customer base.
Pegasus is continuing to work on Internet enabled query tools and expects
that these will be available in future years as estimated in the original cash
flows used in determining the purchased in-process research and development
charge in 1998.
General and administrative expenses. General and administrative expenses
increased $711,000, or 18.1 percent, to $4.6 million in 1999 from $3.9 million
in 1998. The increase was primarily due to higher personnel expenses and office
costs including telephone, travel and supplies associated with increased
headcount. Personnel and office costs increased approximately $841,000 in 1999
compared to 1998. In addition, accounting and legal expenses increased
approximately $113,000 as a result of additional reporting and consulting
services necessary due to increasingly complex tax, legal and reporting issues
associated with Pegasus' growth over the past year.
Marketing and promotion expenses. Marketing and promotion expenses
increased $1.2 million, or 23.6 percent, to $6.1 million in 1999 from $4.9
million in 1998. Marketing and promotion expenses increased primarily due to a
26.1 percent increase in the number marketing and sales personnel and the
related recruiting and relocation costs. The additional sales and marketing
personnel were needed to promote commission processing services, Internet-based
distribution services and new business intelligence services.
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Depreciation and amortization. Depreciation and amortization expenses
decreased $252,000, or 9.4 percent, to $2.4 million in 1999 from $2.7 million in
1998. Amortization expense decreased $507,000 in 1999 as compared to 1998
because goodwill and capitalized software associated with the purchase
accounting transaction that formed Pegasus was fully amortized as of the
beginning of the fourth quarter of 1998. The related amortization expense was
$798,000 in 1998. The decrease in amortization expense was somewhat offset of by
an additional $291,000 for the amortization of goodwill and software related to
the acquisition of Driving Revenue in August 1998. Depreciation expense
increased $253,000 in 1999 as compared to 1998 due to additions of property and
equipment. The increase in depreciation expense was partially offset because the
former computing platform for Pegasus Electronic Distribution was fully
depreciated and replaced in 1999 with less expensive equipment resulting in
lower depreciation expense.
Interest income. Interest income increased $2.3 million, or 92.9 percent,
to $4.8 million in 1999 from $2.5 million in 1998. Interest income increased as
Pegasus had additional cash available for short-term investment as of result of
the secondary public offering of common stock in May 1999. The increase was
partially offset by a decline in the prevailing interest rate level for
short-term investments during the first three quarters of 1999 combined with a
shift in the investment portfolio to include tax-exempt securities with lower
pre-tax yields.
Interest expense. Interest expense decreased $120,000, or 81.8 percent, to
$27,000 in 1999 from $147,000 in 1998. Interest expense reflects payments made
under capital equipment leases, and the decrease is due to the expiration of
some leases.
Write-off of minority interest investment. In September 1998, Pegasus
purchased a minority interest in Intermezzo, Inc. The Intermezzo board of
directors elected to cease operations in July 1999 and entered into an orderly
plan of liquidation. Pegasus wrote-off $1.1 million in the second quarter of
1999 representing its entire investment in Intermezzo.
Income taxes. Income taxes for 1999 reflect federal, state and foreign
income taxes payable. Income taxes for 1998, include only state and foreign as
Pegasus was able to realize the benefit of its federal net operating loss
carryforwards in 1998. The effective tax rate of approximately 35.1 percent for
1999 increased from the effective tax rate of approximately 3.5 percent for
1998. The lower effective tax rate in 1998 was due to Pegasus' ability to
realize the benefit of net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
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. 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 the funds from the bank. The reasons
for the checks not clearing include travel agencies going out of business,
change in address or the checks being lost. The returned funds are repaid to the
original travel agency if they can be located or if not then to their state of
residence as required by the unclaimed property laws of their sate.
Working capital decreased to $6.2 million in 2000 from $143.6 million in
1999, and net cash provided by operating activities increased to $22.7 million
in 2000 from $13.9 million in 1999 due to the REZ acquisition.
Capital expenditures consisted of purchases of software, furniture and
computer equipment as well as internally developed software costs and amounted
to $16.7 million in 2000 compared to $3.4 million in 1999. Additional uses of
cash for investing activities in 2000 included the purchase of REZ and a
strategic minority equity investment. Additional uses of cash for investing
activities in 1999 included the purchase of marketable securities. Pegasus has
financed its cash requirements for investments primarily through cash generated
from operations, the sale of capital stock and borrowings from its revolving
credit facility. Pegasus estimates that its
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capital expenditures during 2001 will range from approximately $12 to $14
million primarily related to adding capacity to existing systems.
Proceeds from the exercise of stock options were $1.3 million and $2.2
million in 2000 and 1999, respectively.
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 Reed Elsevier, the majority REZ
stockholder.
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 March 15, 2001.
On August 9, 2000, the board of directors authorized the repurchase of up
to two million shares of Pegasus common stock. The repurchase is at the
discretion of the board of directors' Stock Repurchase Committee and may be made
on the open market, in privately negotiated transactions or otherwise, depending
on market conditions, price, share availability and other factors. Shares
repurchased may be reserved for later reissue in connection with employee
benefit plans and other general corporate purposes. As of March 15, 2001,
Pegasus had repurchased 126,000 shares at a cost of $1.3 million.
On November 1, 2000, Pegasus entered into an agreement to acquire all or
part ownership of Global Enterprise Technology Solutions, a provider of hotel
property management systems. Under the terms of the agreement, Pegasus initiated
the acquisition by acquiring a 20 percent interest for a combination of Pegasus
common stock and cash totaling $5 million. Pegasus has the right to acquire full
ownership of Phoenix-based GETS within the next 24 months for Pegasus common
stock and cash. As part of the transaction, Pegasus obtained an exclusive
license for the new Internet-based ASP property management system currently
under development by GETS. Pegasus is currently funding and directing the
development of the system. As of March 15, 2001, Pegasus had funded development
costs of $2.9 million.
Our future liquidity and capital requirements will depend on numerous
factors, including:
- Our profitability
- Operational cash requirements
- Competitive pressures
- Development of new services and applications
- Acquisition of complimentary businesses or technologies
- Response to unanticipated cash requirements
Pegasus believes that its cash flows from operations, together with funds
available from debt financing, will be sufficient to meet its foreseeable
operating and capital requirements through at least the end of 2001. Pegasus may
consider other financing alternatives to fund its requirements, including
possible public or private debt or equity offerings. However, there can be no
assurance that any financing alternatives sought by Pegasus will be available or
will be on terms that are attractive to Pegasus. Further, any debt financing may
involve restrictive covenants, and any equity financing may be dilutive to
stockholders.
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INFLATION
Pegasus does not believe that inflation has materially impacted results of
operations during the past three years. Substantial increases in costs and
expenses could have a significant impact on its results of operations to the
extent such increases are not passed along to customers.
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," is effective for
Pegasus' 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 does not
believe the adoption of FAS 133 will have a material impact on our consolidated
financial statements.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, or 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 is providing this guidance due, in part, to the large number of
revenue recognition issues that registrants encounter. The application of SAB
101 to revenue recognition for one-time set-up fees had an immaterial effect on
Pegasus' consolidated statement of operations. Pegasus applied SAB 101 on a
prospective basis for fiscal years beginning after December 31, 1999.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, an Interpretation of APB
Opinion No. 25," or FIN 44. FIN 44 clarifies the application of APB No. 25 for
(a) the definition of an employee for purposes of applying APB 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 occurred after
either December 15, 1998 or January 12, 2000. The application of FIN 44 will not
have a significant impact on the Company's financial statements.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pegasus is exposed to certain market risks, including the effects of
movements in foreign currency exchange rates and uses derivative financial
instrument contracts to manage foreign exchange risks. Pegasus has established a
control environment that includes policies and procedures for risk assessment
and the approval, reporting and monitoring of derivative financial instrument
activities. Company policy prohibits holding or issuing derivative financial
instruments for trading purposes.
Pegasus has various foreign operations, primarily in North America, Europe,
Latin America and Asia. The U.S. Dollar is the functional currency for Pegasus'
foreign operations. To reduce the impact of changes in foreign exchange rates on
consolidated results of operations and future foreign currency denominated cash
flows, Pegasus was a party to various forward exchange contracts at December 31,
2000. These contracts reduce exposure to currency movements affecting existing
foreign currency denominated assets and liabilities primarily trade receivables
and payables.
A summary of forward exchange contracts in place at December 31, 2000
follows (in thousands):
SELL PURCHASE
------- --------
Australian Dollar........................................... $ 233 $ --
Canadian Dollar............................................. 623 --
Swiss Franc................................................. 502 270
Danish Krone................................................ 145 113
Euro........................................................ 7,734 --
British Pound............................................... 1,684 1,993
Greek Drachma............................................... -- 83
Hong Kong Dollar............................................ 63 --
Japanese Yen................................................ 842 --
Korean Won.................................................. 123 --
Norwegian Krona............................................. 489 --
New Zealand Dollar.......................................... 58 56
Swedish Krona............................................... 939 --
Singapore Dollar............................................ -- 253
Thai Baht................................................... 129 --
South African Rand.......................................... 64 --
------- ------
Total............................................. $13,628 $2,768
======= ======
A $338,000 contract to sell Japanese Yen has a contract maturity of March
2001. All other contracts mature in January 2001. Because of the short-term
nature of these contracts, the fair value approximates the contract value. The
difference between the fair value and contract value is included in the
consolidated balance sheet as accounts receivable and was not material at
December 31, 2000. For more information on derivative financial instruments see
Notes 1 and 7 to the consolidated financial statements included in Item 8 to
this annual report on Form 10-K.
30
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Pegasus Solutions, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows present fairly, in all material respects, the financial position
of Pegasus Solutions, Inc. and its subsidiaries at December 31, 2000 and 1999,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Dallas, Texas
February 6, 2001, except as to Note 19,
which is as of March 7, 2001
31
32
PEGASUS SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(IN THOUSANDS)
ASSETS
2000 1999
-------- --------
Cash and cash equivalents................................... $ 32,576 $104,616
Restricted cash............................................. 4,574 2,929
Short-term investments...................................... 1,563 35,283
Accounts receivable, net of allowance for doubtful accounts
of $7,159 and $82 at December 31, 2000 and 1999,
respectively.............................................. 29,889 4,854
Other current assets........................................ 4,189 2,585
-------- --------
Total current assets.............................. 72,791 150,267
Goodwill, net of accumulated amortization of $11,944 and
$938, respectively........................................ 149,764 2,890
Intangible assets, net of accumulated amortization of
$20,638................................................... 62,909 --
Property and equipment, net................................. 64,434 4,856
Other noncurrent assets..................................... 7,807 5,527
-------- --------
Total assets...................................... $357,705 $163,540
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 17,727 $ 3,523
Deferred tax liability...................................... 12,078 --
Accrued liabilities......................................... 11,651 1,527
Unearned income............................................. 9,428 63
Accrued payroll and benefits................................ 6,719 1,112
Income tax payable.......................................... 6,212 --
Other current liabilities................................... 2,771 436
-------- --------
Total current liabilities......................... 66,586 6,661
Note payable................................................ 20,000 --
Deferred tax liability...................................... 8,961 --
Other noncurrent liabilities................................ 1,586 107
Commitments and contingencies............................... -- --
Stockholders' equity:
Preferred stock, $.01 par value; 2,000 shares authorized;
Zero shares issued and outstanding..................... -- --
Common stock, $.01 par value; 50,000 shares authorized,
24,873 and 20,515 shares issued at December 31 2000 and
1999, respectively..................................... 249 205
Additional paid-in capital................................ 288,422 156,978
Unearned compensation..................................... (157) (442)
Accumulated comprehensive loss............................ (265) (25)
Retained earnings (deficit)............................... (26,501) 82
Treasury stock at cost; 245 and 175 shares at December 31,
2000 and 1999, respectively............................ (1,176) (26)
-------- --------
Total stockholders' equity........................ 260,572 156,772
-------- --------
Total liabilities and stockholders' equity........ $357,705 $163,540
======== ========
See accompanying notes to consolidated financial statements.
32
33
PEGASUS SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999 1998
-------- ------- -------
Net revenues................................................ $161,534 $38,036 $29,064
Cost of services............................................ 79,712 12,691 10,008
Restructure and asset impairment costs...................... 3,421 -- --
Research and development.................................... 8,033 2,546 2,809
Write-off of purchased in-process research and
development............................................... 8,000 -- 1,480
General and administrative expenses......................... 20,404 4,630 3,919
Marketing and promotion expenses............................ 24,843 6,079 4,920
Depreciation and amortization............................... 51,549 2,438 2,690
-------- ------- -------
Operating income (loss)..................................... (34,428) 9,652 3,238
Other income (expense):
Interest income........................................... 3,464 4,828 2,503
Interest expense.......................................... (1,687) (27) (147)
Other..................................................... 151 (1,100) --
-------- ------- -------
Income (loss) before income taxes........................... (32,500) 13,353 5,594
Income tax expense (benefit)................................ (5,918) 4,687 198
-------- ------- -------
Net income (loss)........................................... $(26,582) $ 8,666 $ 5,396
======== ======= =======
Other comprehensive loss -- change in unrealized loss, net
of tax of $171 and $13 in 2000 and 1999, respectively..... (240) (25) --
-------- ------- -------
Comprehensive income (loss)................................. $(26,822) $ 8,641 $ 5,396
======== ======= =======
Basic net income (loss) per share:
Basic..................................................... $ (1.14) $ 0.47 $ 0.34
======== ======= =======
Diluted................................................... $ (1.14) $ 0.44 $ 0.32
======== ======= =======
Weighted average shares outstanding:
Basic..................................................... 23,380 18,576 15,691
======== ======= =======
Diluted................................................... 23,380 19,689 16,795
======== ======= =======
See accompanying notes to consolidated financial statements.
33
34
PEGASUS SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
COMMON STOCK TREASURY STOCK UNREALIZED
------------------ ADDITIONAL ------------------- GAIN (LOSS) ON
NUMBER OF PAID-IN UNEARNED NUMBER OF MARKETABLE
SHARES AMOUNT CAPITAL COMPENSATION SHARES AMOUNT SECURITIES
--------- ------ ---------- ------------ --------- ------- --------------
(IN THOUSANDS)
Balance at December 31, 1997....... 15,446 $155 $ 58,068 $(739) (175) $ (26) $ --
------ ---- -------- ----- ---- ------- -----
Secondary offering................. 421 4 4,221 -- -- -- --
Windfall tax benefit of stock
options.......................... -- -- 404 -- -- -- --
Net change in unearned
compensation..................... -- -- 146 123 -- -- --
Exercise of stock options.......... 96 1 330 -- -- -- --
Issuance for stock purchase plan... 17 -- 161 -- -- -- --
Net income......................... -- -- -- -- -- -- --
------ ---- -------- ----- ---- ------- -----
Balance at December 31, 1998....... 15,980 160 63,330 (616) (175) (26) --
------ ---- -------- ----- ---- ------- -----
Secondary offering................. 3,450 35 84,408 -- -- -- --
Windfall tax benefit of stock
options.......................... -- -- 4,196 -- -- -- --
Net change in unearned
compensation..................... -- -- 150 174 -- -- --
Exercise of stock options.......... 542 5 2,191 -- -- -- --
Issuance of stock warrant.......... 519 5 2,484 -- -- -- --
Issuance for stock purchase plan... 24 -- 219 -- -- -- --
Change in unrealized gain (loss) on
marketable securities............ -- -- -- -- -- -- (25)
Net income......................... -- -- -- -- -- -- --
------ ---- -------- ----- ---- ------- -----
Balance at December 31, 1999....... 20,515 205 156,978 (442) (175) (26) (25)
------ ---- -------- ----- ---- ------- -----
Windfall tax benefit of stock
options.......................... -- -- 397 -- -- -- --
Net change in unearned
compensation..................... -- -- (6) 285 -- -- --
Exercise of stock options.......... 116 1 504 -- -- -- --
Issuance for stock purchase plan... 72 1 809 -- -- -- --
Issuance for REZ, Inc.
acquisition...................... 3,990 40 126,742 -- -- -- --
Issuance for investment in Global
EnterpriseTechnology Solutions
LLC.............................. 180 2 2,998 -- -- -- --
Shares received from REZ, Inc.
escrow settlement................ -- -- -- -- (70) (1,150) --
Change in unrealized gain (loss) on
marketable securities............ -- -- -- -- -- -- (240)
Dividend payable................... -- -- -- -- -- -- --
Net loss........................... -- -- -- -- -- -- --
------ ---- -------- ----- ---- ------- -----
Balance at December 31, 2000....... 24,873 $249 $288,422 $(157) (245) $(1,176) $(265)
====== ==== ======== ===== ==== ======= =====
RETAINED
EARNINGS
(DEFICIT) TOTAL
--------- --------
(IN THOUSANDS)
Balance at December 31, 1997....... $(13,980) $ 43,478
-------- --------
Secondary offering................. -- 4,225
Windfall tax benefit of stock
options.......................... -- 404
Net change in unearned
compensation..................... -- 269
Exercise of stock options.......... -- 331
Issuance for stock purchase plan... -- 161
Net income......................... 5,396 5,396
-------- --------
Balance at December 31, 1998....... (8,584) 54,264
-------- --------
Secondary offering................. -- 84,443
Windfall tax benefit of stock
options.......................... -- 4,196
Net change in unearned
compensation..................... -- 324
Exercise of stock options.......... -- 2,196
Issuance of stock warrant.......... -- 2,489
Issuance for stock purchase plan... -- 219
Change in unrealized gain (loss) on
marketable securities............ -- (25)
Net income......................... 8,666 8,666
-------- --------
Balance at December 31, 1999....... 82 156,772
-------- --------
Windfall tax benefit of stock
options.......................... -- 397
Net change in unearned
compensation..................... -- 279
Exercise of stock options.......... -- 505
Issuance for stock purchase plan... -- 810
Issuance for REZ, Inc.
acquisition...................... -- 126,782
Issuance for investment in Global
EnterpriseTechnology Solutions
LLC.............................. -- 3,000
Shares received from REZ, Inc.
escrow settlement................ -- (1,150)
Change in unrealized gain (loss) on
marketable securities............ -- (240)
Dividend payable................... (1) (1)
Net loss........................... (26,582) (26,582)
-------- --------
Balance at December 31, 2000....... $(26,501) $260,572
======== ========
See accompanying notes to consolidated financial statements.
34
35
PEGASUS SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net income (loss)......................................... $(26,582) $ 8,666 $ 5,396
Adjustments to reconcile net income to net cash provided
by operating activities:
Write-off of purchased in-process research and
development.......................................... 8,000 -- 1,480
Depreciation and amortization.......................... 51,549 2,438 2,690
Asset impairment....................................... 3,003 -- --
Bad debt expense....................................... 2,874 -- 35
Write-off of minority interest investment.............. -- 1,100 --
Deferred income taxes.................................. (9,865) (661) (2,084)
Decrease goodwill due to release of valuation
allowance............................................ -- -- 1,467
Other.................................................. 1,153 4,621 705
Changes in assets and liabilities, net of effects of
acquisitions:
Restricted cash...................................... (1,645) (822) (820)
Accounts receivable.................................. 6,664 (1,167) (1,601)
Other current and noncurrent assets.................. 2,438 (1,494) (808)
Accounts payable and accrued liabilities............. (11,741) 1,484 610
Unearned income...................................... (2,046) (196) (414)
Income tax payable................................... 1,827 -- 184
Other noncurrent liabilities......................... (2,897) (36) 9
-------- -------- --------
Net cash provided by operating activities......... 22,732 13,933 6,849
-------- -------- --------
Cash flows from investing activities:
Purchase of REZ, Inc., net of cash acquired............... (93,115) -- --
Purchase of software, property and equipment.............. (16,678) (3,383) (1,700)
Purchase of marketable securities......................... -- (54,536) (33,832)
Proceeds from maturity of marketable securities........... 35,294 34,893 27,416
Cash paid for customer advance............................ (1,500) -- --
Purchase of Driving Revenue L.L.C. ....................... -- -- (5,998)
Purchase of investments in unconsolidated companies....... (2,000) (100) (1,500)
-------- -------- --------
Net cash used in investing activities............. (77,999) (23,126) (15,614)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 1,301 89,347 4,717
Proceeds from line of credit.............................. 10,000 -- --
Repayments of line of credit.............................. (10,000) -- --
Repayments of notes payable assumed from acquisition...... (18,021) -- --
Repayments of capital leases.............................. (53) (540) (1,117)
-------- -------- --------
Net cash provided by (used in) financing
activities...................................... (16,773) 88,807 3,600
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ (72,040) 79,614 (5,165)
Cash and cash equivalents, beginning year................... 104,616 25,002 30,167
-------- -------- --------
Cash and cash equivalents, end of year...................... $ 32,576 $104,616 $ 25,002
======== ======== ========
Supplemental disclosure of cash flow information:
Interest paid............................................. $ 449 $ 28 $ 145
======== ======== ========
Income taxes paid......................................... $ 1,167 $ 1,117 $ 256
======== ======== ========
Supplemental schedule of noncash investing and financing
activities:
Common stock issued for purchase of REZ, Inc. ............ $125,632 $ -- $ --
======== ======== ========
Note payable issued for purchase of REZ, Inc. ............ $ 20,000 $ -- $ --
======== ======== ========
Common stock issued for investment in unconsolidated
company................................................ $ 3,000 $ -- $ --
======== ======== ========
See accompanying notes to consolidated financial statements.
35
36
PEGASUS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 April 3, 2000
acquisition of REZ, Inc., the new name is more descriptive of the combined
entity and its 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. Certain prior year amounts have been
reclassified to conform to current year presentation.
MANAGEMENT ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and disclosures of contingent assets and liabilities.
Actual results may differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less from the date of purchase to be cash equivalents.
RESTRICTED CASH
Funds for travel agency commission checks that have not cleared the
Company's processing bank after certain time periods are returned to the
Company. Any amounts that are not remitted to travel agents will be escheated to
the appropriate states, as required by the respective unclaimed property laws. A
liability equal to the restricted cash is recorded upon receipt of the funds
from the bank and is included in accrued liabilities on the consolidated balance
sheets.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
Marketable securities consist of corporate debt and equity securities. By
policy, the Company invests primarily in high-grade marketable securities. All
marketable securities are defined as available-for-sale under the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
Management determines the appropriate classification of its investments in
marketable securities at the time of purchase and re-evaluates such
determination at each balance sheet date. Debt securities that are bought with
the intent and ability to hold until maturity are classified as held-to-maturity
securities and are recorded at amortized cost. Debt securities that the Company
does not have the intent or ability to hold until maturity are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with changes in the unrealized gain or loss reported as a separate component of
stockholders' equity, net of tax.
CAPITALIZED SOFTWARE
Software development costs are accounted for in accordance with either
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or
36
37
PEGASUS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Otherwise Marketed," or with Statement of Position No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." Capitalized
software development costs are amortized on a product-by-product basis using the
greater of the amount computed by the ratio of current year net revenue to
estimated future net revenue, or the amount computed by the straight-line method
over a period which approximates the estimated economic life of the product. In
the event unamortized software costs exceed the net realizable value of the
software, the excess is written-off in the period the excess is determined.
Additionally, capitalized software includes software purchased from third
parties used in the operations of the Company.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight-line method over their estimated useful lives, ranging from three to
seven years. Leasehold improvements are amortized over the shorter of their
estimated useful lives or the life of the lease. Expenditures for maintenance
and repairs, as well as minor renewals, are charged to operations as incurred,
while betterments and major renewals are capitalized. Any gain or loss resulting
from the retirement or sale of an asset is credited or charged to operations.
The Company evaluates long-lived assets, including intangibles, to be held
and used in the business, or to be disposed of, for impairment whenever events
or changes in circumstances indicate that the net book value of the asset may
not be recoverable. Impairment is determined by comparing expected future cash
flows (undiscounted and before interest) to the net book value of the assets. If
impairment exists, the amount of impairment is measured as the difference
between the net book value of the assets and the estimated fair value of the
related assets.
GOODWILL
Goodwill represents the excess of the purchase price of acquisitions over
the fair value of the net assets acquired. Goodwill is amortized on a
straight-line basis over 10 to 15 years. Unamortized goodwill at December 31,
2000 and 1999, was $149.8 million and $2.9 million, respectively. The carrying
value of goodwill is evaluated periodically in relation to the operating
performance and anticipated future undiscounted net cash flows of the related
business. Amortization of goodwill was approximately $12,280,000, $416,000 and
$218,000 in 2000, 1999 and 1998, respectively.
OTHER INVESTMENTS
In June 1998, the Company purchased 250,000 shares of Series A Convertible
Preferred Stock of Customer Analytics, Inc. for $500,000 representing
approximately 7.1 percent interest. At December 31, 1999, the investment was
accounted for based on the lower of cost or fair value. After a series of
mergers, the Company's $500,000 investment is currently in Exchange
Applications, Inc., a provider of customer relationship marketing solutions.
Because Exchange Applications, Inc. is a public company traded on the Nasdaq
National Market under the symbol EXAP, the investment was classified as an
available-for-sale marketable security under the provisions of FAS 115 at
December 31, 2000.
In September 1998, the Company purchased 225,225 shares of Series B
Convertible Preferred Stock of Intermezzo Systems, Inc. for $1.0 million
representing approximately 10.6 percent interest. Intermezzo is a developer of
enterprise software solutions for the hospitality industry. The Intermezzo board
of directors elected to cease operations in July 1999 and entered into an
orderly plan of liquidation. As a result, Pegasus wrote-off $1.1 million in 1999
representing the Company's entire investment in Intermezzo.
37
38
PEGASUS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Under the terms of the agreement,
Pegasus initiated the acquisition by acquiring a 20 percent interest for a
combination of Pegasus common stock and cash totaling $5 million. Pegasus has
the right to acquire full ownership of Phoenix-based GETS within the next 24
months for Pegasus common stock and cash. The Company's investment in GETS will
be accounted for under the equity method.
At December 31, 2000, the Company had advanced $1.5 million to a customer.
The amount was included in short-term investments at December 31, 2000, and the
entire amount plus accrued interest at nine percent was repaid during the first
quarter of 2001.
REVENUES
Pegasus primarily derives its revenues from transaction fees, commissions,
membership fees, license fees and maintenance fees charged to participating
hotels and travel agencies. The Company's revenues are predominantly
transaction-based.
Hotel Representation. Hotel representation revenues consist of reservation
processing fees, membership fees and fees for various marketing services.
Reservation processing fees are recognized when the guest stay occurs or
transaction date depending on the contract terms. Membership fees are generally
billed quarterly and recognized ratably over the service period. Marketing
service revenues are recognized as the marketing services are provided.
Central Reservation Systems. Central Reservation System revenues consist
of transaction fees as well as license, maintenance and support fees related to
the Company's RezView software. Transaction fees are recognized when the guest
stay occurs or transaction date depending on the contract terms. License,
maintenance and support fees are recognized ratably over the term of the
customer contract.
Property Systems. Property system revenues consist of maintenance and
support fees related to the Company's GuestView software and are recognized
ratably over the term of the customer contract.
Pegasus Electronic Distribution. Pegasus derives revenues from its GDS
distribution service by charging hotel customers a fee based on the number of
reservations made, less the number cancelled ("net reservations"). In addition,
hotels pay fees for status messages sent to global distribution systems ("GDS")
through the GDS distribution service. Status messages are electronic messages
sent by hotels to GDS to update room rates, features and availability
information in GDS databases. As a hotel's cumulative volume of net reservations
increases during the course of the calendar year, its fee per transaction
decreases after predetermined transaction volume hurdles have been met. As a
result, for higher volume customers, unit transaction fees are higher at the
beginning of the year, when cumulative transactions are lower. The Company
recognizes revenues based on the fee per transaction that a customer is expected
to pay during the entire year. The Company's interim balance sheets reflect a
liability for the difference between the fee per transaction that Pegasus
actually bills a customer during the period and the average fee per transaction
that a customer is expected to pay for the entire year. The liability created
during the early periods of the year is eliminated by the end of the year as the
fee per transaction that Pegasus actually bills a customer falls below the
average fee per transaction for the entire year. Additionally, Pegasus generally
charges new participants in the GDS distribution service a one-time set-up fee
for work performed to establish the connection between a hotel's central
reservation system and the Pegasus electronic distribution technology. In 1999
and 1998, revenue for these one-time set-up fees was recognized ratably over the
set-up period, which generally ranges from two to four months. In 2000, the
Company recognized these one-time set-up fees over the life of the customer
contract in accordance with Staff Accounting Bulletin No. 101 ("SAB 101"),
"Revenue Recognition in Financial Statements." The application of SAB 101 to
revenue recognition for one-time set-up fees had an immaterial effect on the
Company's consolidated statement of operations. The Company also charges certain
38
39
PEGASUS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GDS a fee based on either the number of net reservations or the number of hotel
chains connected to the GDS through the Pegasus electronic distribution
technology to compensate for the management and consolidation of multiple
interfaces.
Pegasus derives its TravelWeb.com revenues by charging participating hotels
a combination of transaction fees or commissions. For reservations that
originate on the TravelWeb.com Web site, Pegasus charges either a transaction
fee for each net reservation made at participating properties or a commission
based on the value of the guest stay.
For reservations that originate on Web sites using the private-label
reservation service, Pegasus charges hotels transaction fees based on the number
of net reservations made at participating properties. Private-label reservation
customers also pay initial development fees and monthly subscription or
maintenance fees. In 1999 and 1998, initial development fees were recognized
ratably over the set-up period. In 2000, the Company recognized these initial
development fees over the life of the customer contract in accordance with SAB
101. The application of SAB 101 to revenue recognition for initial development
fees had an immaterial effect on the Company's consolidated statement of
operations.
Pegasus Commission Processing. Pegasus derives commission processing
revenues by charging each participating travel agency a fee equal to a
percentage of commissions paid to that agency through the commission processing
service. The Company also generally charges participating hotels a fee based on
the number of commissionable transactions processed. 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. Pegasus
recognizes revenues from its commission processing service in the month in which
the hotel stay occurs. In the immediate following month, Pegasus collects
commissions from the hotels by the 12th business day of such month and pays
commissions to travel agencies by the 15th business day of such month. If a
hotel fails to deliver funds to the Company, Pegasus is not obligated to deliver
commission payments on behalf of the hotel to travel agencies. For the years
ended December 31, 2000, 1999 and 1998, Pegasus Commission Processing revenues
from hotels are presented net of commission payments to travel agencies of
approximately $469 million, $352 million and $255 million, respectively.
Pegasus Business Intelligence. Pegasus derives its business intelligence
revenues by charging hotels fees for the development and maintenance of hotel
databases and for consulting services. Pegasus Business Intelligence recognizes
as revenue the portion of the total contract price that the cost expended to
date bears to the anticipated final cost, based on current estimates to
complete. Contract costs include all direct labor and benefits and direct
materials. Additional billings are included in revenues when awarded or
received. Revisions in estimates of costs and earnings during the course of the
work are reflected in the accounting period in which the facts that require the
revision become known. At the time a loss becomes known, the entire amount of
the estimated ultimate loss is recognized in the financial statements.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rate is recognized in income in the period that includes the
enactment date. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts more likely than not to be realized.
39
40
PEGASUS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVERTISING COSTS
Advertising and promotion-related expenses are charged to operations when
incurred. Advertising expense for 2000, 1999 and 1998 was approximately
$5,091,000, $982,000 and $1,105,000, respectively.
RESEARCH AND DEVELOPMENT
Research and development expenses are charged to operations when incurred.
FOREIGN CURRENCY
The Company has various foreign operations, primarily in North America,
Europe, Latin America and Asia. The U.S. Dollar is the functional currency for
the Company's foreign operations. Gains and losses from foreign currency
transactions are recognized in the period in which they occur and are included
in other income (expense).
FINANCIAL INSTRUMENTS
The Company uses derivative financial instrument contracts to manage
foreign exchange risks. Amounts receivable or payable under derivative financial
instrument contracts, are reported on the consolidated balance sheet. As
exchange rates fluctuate, gains and losses on contracts designated as hedges of
existing assets and liabilities are recognized in the statement of operations as
other income (expense).
The carrying amounts of the Company's financial instruments reflected in
the consolidated balance sheets at December 31, 2000 and 1999 approximate their
respective fair values.
CONCENTRATIONS OF CREDIT AND MARKET RISK
The Company's financial instruments exposed to concentrations of credit
risk consist primarily of cash, receivables and forward contracts to purchase or
sell foreign currencies.
Cash. Cash balances exceeding the federally insured limits are maintained
in financial institutions. However, management believes the institutions are of
high credit quality.
Accounts Receivable. Although the Company's largest hotel customers are
well-established entities in the travel industry, most of the Company's
representation customers are independent hotels, some of which are located
outside the United States and may not be as financially viable as larger hotel
companies. Even though the Company has policies in place to limit exposure from
concentrations of credit risks, management believes the Company has moderate
exposure to credit risk related to accounts receivable from its hotel
representation customers.
Foreign Currency Contracts. The counterparties to the Company's foreign
exchange contracts are substantial and creditworthy multinational commercial
banks or other financial institutions that are recognized market makers. Neither
the risks of counterparty nonperformance nor the economic consequences of
counterparty nonperformance associated with these contracts are considered by
the Company to be material.
The Company is exposed to certain market risks, including the effects of
movements in foreign currency exchange rates. The Company uses derivative
financial instrument contracts to manage foreign exchange risks. The Company has
established a control environment that includes policies and procedures for risk
assessment and the approval, reporting and monitoring of derivative financial
instrument activities. Company policy prohibits holding or issuing derivative
financial instruments for trading purposes.
40
41
PEGASUS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTING FOR STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123"), encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. Pro forma disclosure of net income based on the provisions
of FAS 123 is presented in Note 10. For financial reporting purposes, the
Company has elected to continue to account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), and related
Interpretations.
NET INCOME (LOSS) PER SHARE
Basic earnings per share is computed by dividing net income (loss)
available to common stockholders by the weighted average number of common shares
outstanding for the reporting period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. For the calculation
of diluted net income per share, the basic weighted average number of shares is
increased by the dilutive effect of stock options determined using the treasury
stock method. The effect of stock options would not be included in the
calculation of diluted net loss per share as the inclusion of stock options
would be anti-dilutive. The Company has no other potentially dilutive
securities.
COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. For the years ended December 31, 2000 and 1999, the
Company had marketable securities classified as available-for-sale. The change
in the unrealized gain (loss) is included as a component of stockholders' equity
and other comprehensive income, net of taxes. There were no items that qualified
for treatment as components of other comprehensive income for 1998.
CHANGE IN ACCOUNTING POLICY
On December 3, 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which summarizes certain 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. The application of SAB 101 to
revenue recognition for one-time set-up fees had an immaterial effect on the
Company's consolidated statement of operations for the years ended December 31,
1999 and 1998. The Company applied SAB 101 on a prospective basis for fiscal
years beginning after December 31, 1999.
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," is effective for
Pegasus' first quarter financial statements in fiscal 2001. Pegasus currently
accounts for its hedging activities in accordance
41
42
PEGASUS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
with Statement of Financial Accounting Standards No. 52, "Foreign Currency
Translation." The adoption of FAS 133 will not have a material impact on our
consolidated financial statements.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, an Interpretation of APB
Opinion No. 25," ("FIN 44"). FIN 44 clarifies the application of APB No. 25 for
(a) the definition of an employee for purposes of applying APB 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 occurred after
either December 15, 1998 or January 12, 2000. The application of FIN 44 will not
have a significant impact on the Company's financial statements.
2. ACQUISITIONS
DRIVING REVENUE L.L.C.
In August 1998, the Company acquired all of the equity interest in Driving
Revenue L.L.C. for approximately $6.0 million plus estimated expenses of less
than $100,000. The acquisition was recorded under the purchase method of
accounting. Accordingly, Driving Revenue's results of operations subsequent to
the acquisition date are included in the accompanying consolidated financial
statements. The purchase price has been allocated to assets acquired and
liabilities assumed based on estimated fair value at the date of acquisition.
The approximate fair value of assets acquired and liabilities assumed at the
date of acquisition, after giving effect to the write-off of certain purchased
research and development, is summarized as follows (in thousands):
Current assets.............................................. $ 176
Software.................................................... $ 344
Property and equipment...................................... $ 42
Goodwill.................................................... $4,296
Current liabilities......................................... $ 338
Approximately $1,480,000, based on a valuation performed by a third party,
was allocated to in-process research and development ("IPR&D") projects that at
the time of the acquisition had not reached technological feasibility and had no
probable alternative future use. Factors considered in determining the amount of
the purchase price allocated to IPR&D include the estimated stage of development
for each project at the acquisition date, the projected cash flows from the
expected revenues to be generated from each project and discounting the net cash
flows. Such amount of IPR&D was charged to expense at the date of acquisition.
The balance of the purchase price, approximately $4,296,000, was recorded as
goodwill and is being amortized on a straight-line basis over a ten year period
ending August 2008.
Subsequent to the acquisition, Business Intelligence, the Company's
business unit that includes Driving Revenue's operations, had significant net
operating losses. As a result, management decided not to seek new Business
Intelligence customers and only to service existing contracts. The Company
determined that the net book values of goodwill and certain other assets were
impaired, and recorded asset impairment costs of $2.0 million in the fourth
quarter of 2000 (see Note 19).
REZ, INC.
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
audited consolidated financial statements.
42
43
PEGASUS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The $245.3 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. The approximate fair
value of assets acquired and liabilities assumed at the acquisition date,
excluding a write-off of purchased IPR&D, is summarized below (in thousands):
Estimated fair value of REZ net tangible assets purchased... $ 996
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.................................................... 161,708
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):
CALCULATED
ESTIMATED ANNUAL
AMOUNT USEFUL 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........................................... 161,708 10 years 16,191
The value assigned to purchased 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.
The following unaudited pro forma summary combines the consolidated results
of operations of Pegasus and REZ for the year ended December 31, 2000 and 1999
as if the acquisition had occurred at the beginning of 2000 and 1999 after
giving effect to certain pro forma adjustments. The pro forma adjustments
include:
- amortization of excess purchase price allocated to other intangibles
- amortization of goodwill
- elimination of REZ's amortization expense related to existing intangible
assets
- financing costs including increased interest expense on note payable and
line of credit borrowings and decreased interest income
- elimination of intercompany amounts
- elimination of IPR&D due to its nonrecurring nature
- related income tax effects
43
44
PEGASUS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
This pro forma financial information is provided for informational purposes
only and may not be indicative of the results of operations as they would have
been had the transaction been effected on the assumed dates nor is it indicative
of the results of operations which may occur in the future.
UNAUDITED
-------------------
2000 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -------- --------
Net revenues................................................ $196,200 $184,024
Net loss.................................................... $(26,349) $(37,105)
Net loss per share.......................................... $ (1.13) $ (1.64)
In 2000, the Company incurred a $419,000 restructuring charge related to
consolidation of certain REZ reservation centers in Europe and Latin America.
Pegasus operates Golden Tulip under a brand license agreement with NH
Hotels of Madrid ("NH"). Pursuant to the agreement, the Company is required to
have at least 500 participating hotels by the end of 2001. Pegasus does not
expect to meet that requirement. While the Company continues to discuss
alternatives with NH, it expects to return the licenses and the brand business
back to NH at the end of 2001.
3. ACCOUNTS RECEIVABLE
The Company collects travel agents' commissions from hotel chains and,
after retaining a portion of these commissions as a fee, remits the net
commissions to the travel agents. At December 31, 2000 and 1999, trade accounts
receivable were stated net of commissions of approximately $32.8 million and
$29.2 million, respectively.
4. MARKETABLE SECURITIES
Marketable securities held by the Company at December 31, 2000 and 1999 are
classified as available-for-sale and consist of short-term corporate debt and
equity securities. The cost and fair value of marketable securities at December
31, 2000 and 1999 are as follows (in thousands):
2000 1999
----- -------
Cost........................................................ $ 500 $35,320
Gross unrealized holding losses............................. (437) (37)
----- -------
Fair value.................................................. $ 63 $35,283
===== =======
Realized gains and losses are determined on a specific identification basis.
There were no realized gains or losses from investment transactions in 2000,
1999 or 1998.
44
45
PEGASUS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consisted of the following (in
thousands):
2000 1999
-------- --------
Software.................................................... $ 65,941 $ 10,921
Computer equipment.......................................... 20,974 6,086
Furniture and equipment..................................... 2,868 1,032
Office equipment............................................ 4,925 1,796
Leasehold improvements...................................... 2,331 204
-------- --------
97,039 20,039
Less: accumulated depreciation.............................. (32,605) (15,183)
-------- --------
Property and equipment, net................................. $ 64,434 $ 4,856
======== ========
Depreciation expense for property and equipment was $18.6 million, $2.0 million
and $1.8 million for 2000, 1999 and 1998, respectively.
6. CAPITAL LEASES
Assets recorded under capital leases, primarily consisting of computer
equipment, are recorded at the lower of the present value of future minimum
lease payments or the fair value of the asset. Total assets recorded under
capital leases in 2000 and 1999 were approximately $626,000 and $470,000,
respectively, net of accumulated amortization of $612,000 and $470,000,
respectively. Amortization of assets under capital leases is included in
depreciation and amortization expense.
Future minimum lease payments total $141,000 and are all due in 2001.
Interest rates on capital leases range from approximately 7 percent to 23
percent. Interest expense on capital leases for the years ended December 31,
2000, 1999 and 1998 was approximately $103,000, $17,000 and $144,000,
respectively.
7. DERIVATIVE FINANCIAL INSTRUMENTS
To reduce the impact of changes in foreign exchange rates on consolidated
results of operations and future foreign currency denominated cash flows, the
Company was a party to various forward exchange contracts at December 31, 2000.
These contracts reduce exposure to currency movements affecting existing foreign
currency denominated assets and liabilities primarily trade receivables and
payables.
45
46
PEGASUS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of forward exchange contracts in place at December 31, 2000
follows (in thousands):
SELL PURCHASE
------- --------
Australian Dollar........................................... $ 233 $ --
Canadian Dollar............................................. 623 --
Swiss Franc................................................. 502 270
Danish Krone................................................ 145 113
Euro........................................................ 7,734 --
British Pound............................................... 1,684 1,993
Greek Drachma............................................... -- 83
Hong Kong Dollar............................................ 63 --
Japanese Yen................................................ 842 --
Korean Won.................................................. 123 --
Norwegian Krona............................................. 489 --
New Zealand Dollar.......................................... 58 56
Swedish Krona............................................... 939 --
Singapore Dollar............................................ -- 253
Thai Baht................................................... 129 --
South African Rand.......................................... 64 --
------- ------
Total............................................. $13,628 $2,768
======= ======
A $338,000 contract to sell Japanese Yen has a contract maturity of March
2001. All other contracts mature in January 2001. Because of the short-term
nature of these contracts, the fair value approximates the contract value. The
difference between the fair value and contract value is included in the
consolidated balance sheet as accounts receivable and was not material at
December 31, 2000.
8. DEBT
As part of the consideration paid for REZ, the Company has a $20 million
note payable to Reed Elsevier plc, the majority REZ shareholder. The note bears
an eight percent interest rate and is payable on April 3, 2002. The note was
issued in lieu of cash consideration otherwise receivable by Reed Elsevier.
The Company entered into a credit agreement in April 2000. Under the terms
of the agreement, the Company 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
December 31, 2000.
9. STOCKHOLDERS' EQUITY
Effective February 11, 1998, the Company completed a secondary public
offering of common stock. The Company sold 420,481 shares of common stock at
$11.67 per share. Net proceeds, after deducting the underwriting discount and
estimated offering expenses, were approximately $4.2 million. Selling
stockholders also sold 3,202,019 shares at $11.67 per share. The Company did not
receive any proceeds from the sales of shares by the selling stockholders.
In September 1998, the board of directors declared a dividend distribution
of one preferred stock purchase right for each outstanding share of the
Company's common stock. Each right will entitle stockholders to buy one
one-thousandth of a share of the Company's Series A preferred stock for each
share of the Company's common stock held at a price of $90.00. The number of
rights associated with shares of common stock has been proportionally adjusted
for the stock split effected in January 2000. The rights will be
46
47
PEGASUS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
exercisable only if a person or group of affiliated or associated persons
acquires, or has announced the intent to acquire, 20 percent or more of the
Company's common stock.
In May 1999, Pegasus completed a secondary public offering of common stock.
The effective date of the registration statement on Form S-3 was May 6, 1999.
Pegasus sold 3,450,000 shares of common stock at a price of $25.92 per share.
After deducting the underwriters' discounts and offering expenses, net proceeds
to Pegasus were approximately $84.4 million.
On December 8, 1999, the board of directors approved a three-for-two stock
split to be effected in the form of a stock dividend on January 7, 2000 to
stockholders of record on December 20, 1999. All references in the consolidated
financial statements to shares, share prices, per share amounts and stock plans
have been retroactively adjusted for the three-for-two stock split. In
connection with the stock split, $68,383 was reclassified to common stock from
additional paid-in capital in the December 31, 1999 balance sheet.
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 December 31, 2000, no
shares were repurchased by the Company.
10. STOCK-BASED COMPENSATION
In accordance with the Company's 1996 stock option plan ("1996 Plan"),
amended and approved in March 1997, options to purchase 1.3 million shares of
the Company's common stock may be granted to Company employees. In accordance
with the Company's 1997 stock option plan ("1997 Plan"), approved in March 1997,
options to purchase shares of the Company's common stock may be granted to
Company employees, non-employee directors and contractors. The 1997 Plan was
amended in May 2000 to provide that the number of shares reserved for issuance
would equal 15 percent of the number of shares outstanding as of the last
business day in April each year, less the number of shares reserved under all
Company stock option plans as of that date. The number of shares reserved for
issuance under both the 1996 and 1997 Plans (collectively, "Plans") as of
December 31, 2000 was approximately 3.9 million.
Options granted under the Plans may be in the form of incentive stock
options or nonqualified stock options. The compensation committee of the board
of directors ("Committee") administers the Plans and determines grant prices.
Options granted to Company employees generally vest over a four-year period.
Options granted to non-employee directors and contractors vest and expire as
determined by the Committee. Options granted under the 1996 Plan before
September 15, 1999 expire in December 2005. Options granted to Company employees
under the 1997 Plan before September 15, 1999 expire in December 2006. Options
granted to Company employees on or after September 15, 1999 under the Plans
expire ten years from the date of grant. The Company's authorized but unissued
or reacquired common stock is used for issuance of shares as stock options are
exercised.
In accordance with APB 25, the Company recorded unearned compensation of
approximately $250,000 and $241,000 in 1999 and 1998, respectively, related to
stock option grants. No unearned compensation was recorded in 2000. Unearned
compensation is being recognized ratably over the vesting period for the stock
option grants. Compensation expense of approximately $279,000, $323,000 and
$269,000 was charged to operations in 2000, 1999 and 1998, respectively.
As discussed in Note 1, the Company has adopted the disclosure-only
provision of FAS 123. Had compensation cost for the Company's stock option plans
been determined based on the fair value provisions of
47
48
PEGASUS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAS 123, the Company's net income (loss) and net income (loss) per share would
have been decreased (increased) to the pro forma amounts indicated below (in
thousands, except per share amounts):
2000 1999 1998
-------- ------ ------
Net income (loss) -- as reported......................... $(26,582) $8,666 $5,396
Net income (loss) -- pro forma........................... $(30,267) $7,572 $4,860
Net income (loss) per share -- as reported:
Basic.................................................. $ (1.14) $ 0.47 $ 0.34
Diluted................................................ $ (1.14) $ 0.44 $ 0.32
Net income (loss) per share -- pro forma:
Basic.................................................. $ (1.29) $ 0.41 $ 0.31
Diluted................................................ $ (1.29) $ 0.38 $ 0.29
The pro forma disclosures provided are not likely to be representative of the
effects on reported net income (loss) for future years due to future grants and
the vesting requirements of the Company's stock option plans.
The weighted average fair value for options with exercise prices equal to
the market price of stock at the grant date was $10.88, $14.55 and $4.54 in
2000, 1999 and 1998, respectively. The weighted average fair value for options
with exercise prices below the market price of stock at the grant date was
$13.72 in 1999 and $8.99 in 1998. There were no options granted in 2000 with
exercise prices below the market price of stock at the grant date. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
2000 1999 1998
--------- --------- ---------
Dividend yield..................................... -- -- --
Expected volatility................................ 83.0% 72.0% 72.8%
Risk-free rate of return........................... 6.4% 5.7% 4.6%
Expected life...................................... 4.0 years 4.0 years 4.0 years
The following table summarizes activity under the Company's stock option
plans during the years ended December 31 (in thousands, except per share
amounts):
WEIGHTED AVERAGE EXERCISE
NUMBER OF COMPANY OPTIONS PRICE PER SHARE
-------------------------- --------------------------
2000 1999 1998 2000 1999 1998
------ ------ ------ ------- ------- ------
Options outstanding at beginning of
year............................. 1,859 2,001 1,623 $10.71 $ 4.91 $3.83
Granted............................ 1,586 525 596 16.89 24.93 8.29
Exercised.......................... 110 544 100 4.26 4.02 3.73
Canceled........................... 266 123 118 17.69 6.64 8.13
----- ----- ----- ------ ------ -----
Options outstanding at end of
year............................. 3,069 1,859 2,001 $13.53 $10.71 $4.91
===== ===== ===== ====== ====== =====
Options exercisable at end of
year............................. 1,073 707 736 $ 6.99 $ 3.63 $2.95
===== ===== ===== ====== ====== =====
48
49
PEGASUS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information for stock options outstanding at
December 31, 2000 (in thousands, except per share amounts):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- --------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
EXERCISE PRICES OPTIONS CONTRACTUAL LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
- --------------- --------- ---------------- -------------- --------- --------------
$1.34.................. 464 5.0 years $ 1.34 464 $ 1.34
$2.07.................. 119 5.0 years 2.07 119 2.07
$6.33-$8.93............ 497 7.0 years 7.05 180 6.96
$9.69-$14.17........... 269 6.5 years 10.96 149 10.59
$14.66-$20.33.......... 1,203 9.2 years 17.79 26 16.88
$22.45-$29.02.......... 517 6.8 years 24.76 135 24.93
----- --------- ------ ----- ------
3,069 7.4 years $13.53 1,073 $ 6.99
===== ========= ====== ===== ======
The pro forma disclosures for 2000 and 1999 include approximately $366,000
and $108,000, respectively, of compensation expense related to the Company's
Employee Stock Purchase Plan. There was no compensation expense related to the
Company's Employee Stock Purchase Plan included in the pro forma disclosures for
1998. The fair value of shares issued under this plan was estimated using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
2000 1999
-------- --------
Dividend yield.............................................. -- --
Expected volatility......................................... 83.0% 72.0%
Risk-free rate of return.................................... 6.3% 4.5%
Expected life............................................... 1.0 year 1.0 year
11. INCOME TAXES
Pretax income (loss) from continuing operations for the years ended
December 31 was taxed under the following jurisdictions (in thousands):
2000 1999 1998
-------- ------- ------
Domestic................................................ $(34,325) $13,260 $5,496
Foreign................................................. 1,825 93 98
-------- ------- ------
$(32,500) $13,353 $5,594
======== ======= ======
49
50
PEGASUS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred taxes consisted of the following at December 31 (in thousands):
2000 1999
-------- ------
Deferred tax assets:
Net operating loss carryforward........................... $ 7,506 $1,721
Bad debt reserves......................................... 3,006 25
Income tax credits........................................ 800 192
Various expense accruals.................................. 1,045 81
Capital loss carryforward................................. 385 374
Stock option compensation expense......................... 213 128
Depreciation and amortization............................. -- 845
Other..................................................... 1,298 80
-------- ------
Gross deferred tax assets......................... 14,253 3,446
Valuation allowance............................... (50) --
-------- ------
Gross deferred tax assets, net of valuation
allowance....................................... 14,203 3,446
-------- ------
Deferred tax liabilities:
Acquired intangible assets................................ (34,309) --
Depreciation and amortization............................. (933) --
-------- ------
Gross deferred tax liabilities.................... (35,242) --
-------- ------
Net deferred tax assets (liabilities)....................... $(21,039) $3,446
======== ======
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon generation of future taxable income during the periods in which
those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. As of December 31, 2000,
management believes it is more likely than not that the net deferred tax assets
will be realized; therefore, except as noted below, no valuation allowance is
necessary. The valuation allowance at December 31, 2000 is related to various
deferred tax assets established with the acquisition of REZ.
At December 31, 2000 and 1999, the Company had federal net operating loss
carryforwards of approximately $18,343,000 and $5,062,000, respectively. The net
operating loss carryforwards that existed at December 31, 2000 will begin to
expire in 2010. Utilization of the net operating loss carryforwards may be
limited by the separate return loss year rules and could be affected by
ownership changes which have occurred or could occur in the future.
In 1997, the net deferred tax asset was fully reserved because of
uncertainty regarding the Company's ability to recognize the benefit of the
asset in future years. In the fourth quarter of 1998, the Company released a
significant portion of the valuation allowance as management believed it was
more likely than not that the net deferred tax asset would be realized. The
valuation allowance remaining at December 31, 1998 related to state net
operating loss carryforwards. This valuation allowance was removed in 1999
because the related state net operating loss carryforward expired. A portion of
the 1997 deferred tax asset was related to the net operating loss carryforwards
of The Hotel Clearing Corporation ("HCC") that existed at the time HCC was
acquired by the Company in 1995. Accordingly, approximately $1,467,000 of the
valuation allowance released in 1998 eliminated the remaining goodwill related
to the purchase of HCC.
The Company has not provided for foreign withholding taxes or United States
deferred income taxes on accumulated undistributed earnings of foreign
subsidiaries, as management does not intend to repatriate such
50
51
PEGASUS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
earnings. If such earnings were to be repatriated, such earnings could be
subject to foreign withholding tax and United States residual tax.
In 1999, the Company determined that amortization expense related to the
Driving Revenue acquisition would be deductible for tax purposes. As a result,
the Company established a deferred tax asset in the amount of approximately
$932,000 and reduced goodwill accordingly.
The components of the income tax provision for the years ended December 31
were as follows (in thousands):
2000 1999 1998
------- ------ -----
Current provision:
Federal.................................................. $ 3,185 $4,792 $ 381
State.................................................... 90 519 463
Foreign.................................................. 672 37 38
------- ------ -----
3,947 5,348 882
------- ------ -----
Deferred benefit:
Federal.................................................. (8,249) (579) (641)
State.................................................... (1,616) (82) (43)
------- ------ -----
(9,865) (661) (684)
------- ------ -----
Provision (benefit) for income taxes....................... $(5,918) $4,687 $ 198
======= ====== =====
A reconciliation of taxes based on the federal statutory rate of 35.0% or
34.0% and the provision (benefit) for income taxes is summarized as follows for
the years ended December 31:
2000 1999 1998
----- ---- -----
Expected income tax provision (benefit).................... (35.0)% 34.0% 34.0%
Non-deductible amortization of goodwill.................... 12.9% -- --
Write-off of purchased in-process research and
development.............................................. 8.6% -- 9.0%
Other permanent differences................................ (1.6)% (2.0)% 1.9%
Valuation allowance........................................ -- -- (46.7)%
State income taxes......................................... (3.1)% 2.2% 5.0%
Other, net................................................. -- 0.9% 0.3%
----- ---- -----
Provision (benefit) for income taxes....................... (18.2)% 35.1% 3.5%
===== ==== =====
12. COMMITMENTS AND CONTINGENCIES
The Company leases its corporate office space and certain office equipment
under non-cancelable operating leases. The Company incurred rent expense of
approximately $6,745,000, $1,039,000 and $731,000 in 2000, 1999 and 1998,
respectively.
51
52
PEGASUS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Approximate future minimum lease payments at December 31, 2000, under
non-cancelable operating leases with original terms exceeding one year, were as
follows (in thousands):
YEAR ENDING
DECEMBER 31,
- ------------
2001........................................................ $ 9,652
2002........................................................ 7,778
2003........................................................ 2,855
2004........................................................ 2,210
2005........................................................ 1,357
Thereafter.................................................. 4,492
-------
$28,344
=======
Future minimum lease payments due in foreign currencies were translated at the
rate in effect at December 31, 2000.
13. EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) defined contribution retirement plan ("401(k)
Plan") covering full-time employees who have attained the age of twenty-one. The
401(k) Plan allows eligible employees to defer receipt of up to 17 percent of
their compensation and contribute such amounts to various investment funds.
Eligible employees may elect to participate at the beginning of any quarter
after their hire date. Employee contributions vest immediately.
The Company makes discretionary matching contributions for employees'
annual contributions of up to five percent of employees' compensation. The
Company's matching contributions vest one-third a year for three years. After
three years of employment, an employee is fully vested in all matching
contributions. During 2000, 1999 and 1998, the Company contributed approximately
$1,050,000, $363,000 and $292,000, respectively, to the 401(k) Plan.
Pursuant to their employment agreements, certain Company officers are
eligible for additional retirement benefits to be paid by the Company under the
Supplemental Employee Retirement Plan ("SERP"). The SERP was effective January
1, 2000 and provides supplemental retirement benefits to certain officers of the
Company based on final average compensation.
52
53
PEGASUS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables provide a summary of the changes in the SERP's benefit
obligation and fair value of assets for the year ended December 31, 2000 and a
statement of funded status as of December 31, 2000 (in thousands):
2000
-------
Benefit obligation at beginning of year..................... $ --
Service cost................................................ 244
Interest cost............................................... 150
Plan participants' contributions............................ --
Amendments.................................................. 1,880
Actuarial loss.............................................. 240
Benefits paid............................................... --
-------
Benefit obligation at end of year........................... $ 2,514
=======
Fair value of plan assets at beginning of year.............. $ --
Actual return on plan assets................................ --
Employer contribution....................................... --
Plan participants' contributions............................ --
Benefits paid............................................... --
-------
Fair value of plan assets at end of year.................... $ --
=======
Funded status............................................... $(2,514)
Unrecognized actuarial loss................................. 240
Unrecognized prior service cost............................. 1,738
-------
Net amount recognized....................................... $ (536)
=======
The weighted average assumptions used in the measurement of the Company's
benefit obligation as of December 31, 2000 are as follows:
2000
----
Discount rate............................................... 7.5%
Expected return on plan assets.............................. N/A
Rate of compensation increase............................... 5.0%
The following table provides the components of net periodic benefit costs,
based on a discount rate of eight percent, for the year ended December 31, 2000
(in thousands):
2000
----
Service cost................................................ $244
Interest cost............................................... 151
Expected return on plan assets.............................. --
Amortization of prior service cost.......................... 141
Recognized net actuarial loss............................... --
----
Net periodic benefit cost................................... $536
====
14. STOCK PURCHASE PLAN
In May 1998, the Company's stockholders approved the Pegasus Solutions,
Inc. 1997 Employee Stock Purchase Plan ("Stock Plan"). The Company has reserved
750,000 shares of its common stock for purchase
53
54
PEGASUS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
by employees pursuant to the terms of the Stock Plan. Eligible participating
employees of the Company may elect to have an amount up to, but not in excess
of, 10 percent of their regular salary or wages withheld for the purpose of
purchasing the Company's common stock. Under the Stock Plan, an eligible
participating employee will be granted an option at the beginning of each plan
year (the "Offering Commencement Date") to purchase at the end of the plan year
(the "Offering Termination Date") shares of common stock using the amounts that
have accumulated from the employee's payroll deductions made during the plan
year at a price that is 85 percent of the closing price of the common stock on
the Nasdaq National Market or any other national securities exchange on the
Offering Commencement Date or the Offering Termination Date, whichever is lower.
15. RELATED PARTIES
Pegasus incurred rent expense of $630,000 in 2000 for an office lease owned
by Reed Elsevier Inc. The Company has a $20 million note payable to an affiliate
of Reed Elsevier Inc.
Persons related to an officer of the Company have provided printing,
interior design and procurement services to the Company. During 2000, 1999 and
1998, the Company paid approximately $7,000, $34,000 and $3,000, respectively,
related to these services, the majority of which related to capitalized
furniture purchases.
16. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share for the years ended December 31, 2000,
1999 and 1998 has been computed in accordance with FAS 128 using the weighted
average number of common shares outstanding after giving retroactive effect to
stock splits.
Diluted net income (loss) per share for the years ended December 31, 2000,
1999 and 1998 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 the Company's common stock
for the years ended December 31, 1999 and 1998 were included in the diluted
earnings per share ("EPS") calculations for the respective periods. Due to the
Company's net loss position for the year ended December 31, 2000, all
outstanding options were excluded in the calculation of diluted net loss per
share because their effect would be anti-dilutive. Weighted average shares
issuable upon the exercise of stock options that were not included in the
calculation were 3.1 million in 2000.
The following table sets forth the basic and diluted net income (loss) per
share computation for the years ended December 31 (in thousands, except per
share amounts):
2000 1999 1998
-------- ------- -------
Net income (loss)...................................... $(26,582) $ 8,666 $ 5,396
======== ======= =======
Basic:
Weighted average number of shares outstanding........ 23,380 18,576 15,691
-------- ------- -------
Net income (loss) per share.......................... $ (1.14) $ 0.47 $ 0.34
======== ======= =======
Diluted:
Weighted average number of shares outstanding........ 23,380 18,576 15,691
Additional weighted average shares from assumed
exercise of dilutive stock options and warrants,
net of shares to be repurchased with exercise
proceeds.......................................... -- 1,113 1,104
-------- ------- -------
Weighted average number of shares outstanding used in
the diluted net income (loss) per share
calculation....................................... 23,380 19,689 16,795
-------- ------- -------
Net income (loss) per share.......................... $ (1.14) $ 0.44 $ 0.32
======== ======= =======
54
55
PEGASUS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. SEGMENT INFORMATION
Based on the criteria set forth under FAS 131, the Company was organized
into three reportable segments prior to the REZ acquisition -- electronic
distribution, commission processing and business intelligence. As a result of
the REZ acquisition, the Company is now organized into two reportable segments
-- hospitality and technology.
- The hospitality segment provides representation, 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, GDS
connectivity, alternative distribution and data warehousing services to
the global hotel industry.
The Company is organized primarily on the basis of services provided. The
accounting policies of the segments are the same as those described in the Note
1. Prior years' segment information has been reclassified to conform with
current year presentation. Segment data includes a charge allocating all
corporate costs to the operating segments. The Company evaluates the performance
of its segments based on earnings before interest, income tax, depreciation and
amortization ("EBITDA"). Although EBITDA is not calculated in accordance with
generally accepted accounting principles, the Company believes that EBITDA is
widely used by analysts, investors and others as a measure of operating
performance. Nevertheless, this measure should not be considered in isolation or
as a substitute for operating income, cash flows from operating activities or
any other measure for determining the Company's operating performance or
liquidity that is calculated in accordance with generally accepted accounting
principles. In addition, the Company's calculation of EBITDA is not necessarily
comparable to similarly titled measures reported by other companies.
The following table presents information about reported segments for the
years ending December 31:
RECONCILING
HOSPITALITY TECHNOLOGY ITEMS TOTAL
----------- ---------- ----------- --------
2000
Net revenues.............................. $103,332 $58,202 $ -- $161,534
EBITDA.................................... 21,780 3,442 (101) 25,121
1999
Net revenues.............................. 20,016 18,020 -- 38,036
EBITDA.................................... 7,747 4,359 (16) 12,090
1998
Net revenues.............................. 17,041 12,023 -- 29,064
EBITDA.................................... 5,283 2,125 -- 7,408
Reconciling items for 2000 and 1999 include acquisition costs that did not meet
the criteria for capitalization and certain bank charges.
55
56
PEGASUS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of total segment EBITDA to total consolidated income
(loss) before income taxes for the years ended December 31 is as follows:
2000 1999 1998
-------- ------- -------
Total EBITDA for reportable segments................... $ 25,121 $12,090 $ 7,408
Write-off of purchased in-process research and
development.......................................... (8,000) -- (1,480)
Depreciation and amortization.......................... (51,549) (2,438) (2,690)
Interest income........................................ 3,464 4,828 2,503
Interest expense....................................... (1,687) (27) (147)
Other.................................................. 151 (1,100) --
-------- ------- -------
Consolidated income (loss) before income taxes......... $(32,500) $13,353 $ 5,594
======== ======= =======
The Company does not utilize or measure revenues by geographic location to
evaluate its business segments. A significant portion of the Company's revenues
for the year ended December 31, 2000 was derived from customers based outside
the United States, particularly in Europe. Prior to the REZ acquisition, the
Company's business was conducted principally in the United States. Because of
reporting procedures in place at REZ, it was impracticable to provide revenues
by geographic location for the year ended December 31, 2000. The Company intends
to provide revenue by geographic location for the year ended December 31, 2001.
18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes the unaudited consolidated quarterly results
of operations for 2000 and 1999 after giving retroactive effect to a
three-for-two stock split (in thousands, except per share amounts):
QUARTERS ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
2000
Revenues........................................ $10,661 $ 52,364 $52,418 $ 46,092
Income (loss) before provision for income
taxes......................................... $ 4,111 $(14,964) $(5,914) $(15,733)
Net income (loss)............................... $ 3,021 $(13,150) $(5,052) $(11,401)
Basic net income (loss) per share............... $ 0.15 $ (0.54) $ (0.21) $ (0.46)
Diluted net income (loss) per share............. $ 0.14 $ (0.54) $ (0.21) $ (0.46)
Basic weighted average shares outstanding....... 20,356 24,157 24,395 24,588
Diluted weighted average shares outstanding..... 21,048 24,157 24,395 24,588
1999
Revenues........................................ $ 8,372 $ 9,189 $10,075 $ 10,400
Income before provision for income taxes........ $ 2,432 $ 2,029 $ 4,136 $ 4,756
Net income...................................... $ 1,501 $ 1,253 $ 2,730 $ 3,182
Basic net income per share...................... $ 0.09 $ 0.07 $ 0.14 $ 0.16
Diluted net income per share.................... $ 0.09 $ 0.06 $ 0.13 $ 0.15
Basic weighted average shares outstanding....... 15,862 18,115 20,049 20,214
Diluted weighted average shares outstanding..... 17,304 19,363 20,916 21,120
In accordance with FAS 128, earnings per share are computed independently for
each of the quarters presented; therefore, the sum of the quarterly earnings per
share may not equal the annual earnings per share.
56
57
PEGASUS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. SUBSEQUENT EVENTS
In January 2001, Pegasus sold its Summit Hotels & Resorts and Sterling
Hotels & Resorts brands to IndeCorp Corporation for an estimated $12 million. As
a result of this transaction, Pegasus will recognize a gain of $3 million, net
of tax, in the first quarter of 2001.
In January 2001, Pegasus reorganized its corporate structure, realigning
into two distinct companies. Under the new organization, the Company's two
operating segments will remain technology and hospitality, but their components
will be different. The technology company includes Commission Processing,
TravelWeb.com, Electronic Distribution, Central Reservation Systems and
Services, Property Systems and Services and Business Intelligence and will
operate under Pegasus Solutions, Inc. Utell, the hospitality company, includes
the Utell and Golden Tulip hotel representation services and the Paytell
pre-payment service and will operate as a wholly owned subsidiary of the
Company. The Company's segment reporting will be changed to reflect the
reorganization in the first quarter of 2001.
At December 31, 2000, the Company was in negotiations to sell Business
Intelligence. In March 2001, these negotiations were terminated, and the Company
notified employees and customers that it would not be renewing contracts and
would be winding down its Business Intelligence operations. As a result, an
additional $1.0 million of asset impairment costs was recorded in the Company's
statement of operations for the year ended December 31, 2000. In addition, the
Company expects to incur related severance costs of approximately $300,000 in
the first quarter of 2001.
57
58
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item appears in our definitive proxy
statement for our 2001 annual meeting of stockholders under the captions
"Nominees for Directors," "Directors Continuing in Office" and "Executive
Officers," which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item appears in our definitive proxy
statement for our 2001 annual meeting of stockholders under the caption
"Executive Compensation," which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item appears in our definitive proxy
statement for our 2001 annual meeting of stockholders under the caption
"Directors' and Officers' Ownership of Our Common Stock," which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appears in our definitive proxy
statement for our 2001 annual meeting of stockholders under the caption "Certain
Transactions," which information is incorporated herein by reference.
58
59
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. The following Financial Statement Schedule is filed as part of this
annual report:
Report of Independent Accountants on Financial Statement
Schedule.................................................. Page S-1
Consolidated Valuation and Qualifying Accounts.............. Page S-2
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchanges Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.
2. The following documents are filed or incorporated by reference as
exhibits to this annual report:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 -- Contribution and Restructuring Agreement dated effective
as of July 21, 1995 by and among the Company and all of
the stockholders of the Company
2.2 -- Agreement and Plan of Merger dated November 16, 1999, as
amended and restated, among the Company, Pegasus
Worldwide, Inc., Rez, Inc., Reed Elsevier, Inc. and Utell
International Group, LTD. (incorporated by reference from
Appendix A of the Company's Registration Statement (File
No. 333-92683) on Form S-4 filed on December 14, 1999)
3.1 -- Fourth Amended and Restated Certificate of Incorporation
(incorporated by reference from Exhibit 3.1 of the
Company's Form 10-Q filed with the Commission on May 15,
2000)
3.2 -- Second Amended and Restated Bylaws
3.3 -- Form of Certification of Designation, Preferences and
Rights of Series A Preferred Stock of Pegasus Systems,
Inc. (incorporated by reference from Exhibit 2 of the
Company's Form 8-A filed with the Commission on October
9, 1998)
4.1 -- Specimen of Common Stock certificate
4.2 -- Fourth Amended and Restated Certificate of Incorporation
(See Exhibit 3.1) Second Amended Restated Bylaws (see
Exhibit 3.2)
4.3 -- Rights Agreement dated June 25, 1996 by and among the
Company and certain holders of capital stock of the
Company named therein
4.4 -- Common Stock Purchase Warrant issued to Holiday
Hospitality Corporation
4.5 -- Rights Agreement dated as of September 28, 1998 by and
between the Company and American Securities Transfer &
Trust, Inc. (incorporated by reference from Exhibit 4 of
the Company's Current Report on Form 8-K filed with the
Commission on October 9, 1998)
4.6 -- Form of Rights Certificate (incorporated by reference
from Exhibit 3 of the Company's Form 8-A filed with
Commission on October 9, 1998)
*10.1 -- Employment Agreement dated January 1, 2000 between the
Company and John F. Davis, III
*10.2 -- Employment Agreement dated January 1, 2000 between the
Company and Joseph W. Nicholson
*10.3 -- Employment Agreement dated January 1, 2000 between the
Company and Jerome L. Galant
*10.5 -- 1996 Stock Option Plan, as amended
59
60
EXHIBIT
NUMBER DESCRIPTION
------- -----------
*10.6 -- 1997 Stock Option Plan, as amended (incorporated by
reference from the Company's definitive proxy statement
filed with the Commission on March 17, 2000.)
10.7 -- Citibank Global Payments Service Agreement dated July 24,
1998 between The Hotel Clearing Corporation and Citibank,
N.A. (incorporated by reference to Exhibit 10.1 of the
Company's 10-Q for the quarter ended October 31, 1998,
filed with the Commission on November 16, 1998)
10.8 -- Facilities Management Agreement dated January 1, 1996
between the Company and Anasazi, Inc., currently know as
REZsolutions, Inc.
10.9 -- Service Agreement dated December 13, 1996 between the
Company and Comdisco, Inc.
10.10 -- Service Agreement dated January 17, 1997 between the
Company and Genuity, Inc.
*10.11 -- 1997 Employee Stock Purchase Plan, as amended
10.12 -- Office Lease dated October 1, 1995, First Amendment to
Office Lease dated February 25, 1998, Second Amendment to
Office Lease dated November 2, 1998 and Third Amendment
to Office Lease dated November 8, 1999 between the
Company and the Utah State Retirement Investment Fund
relating to property located at 3811 Turtle Creek Blvd.,
Suite 1100, Dallas, Texas 75219 (incorporated by
reference to the Company's Form S-4 filed with the
Commission on December 14, 1999)
+10.13 -- Office Lease dated, July 26, 1996, First Amendment to
Office Lease dated August 22, 1997 and Second Amendment
to Office Lease dated October 24, 2000 between the
Company and Pivotal Simon Office XVI, L.L.C. relating to
property located at 7500 N. Dreamy Draw., Suite 120,
Phoenix, Arizona 85020
10.14 -- Credit Agreement dated April 17, 2000, among the Company,
Chase Bank of Texas, N.A., Compass Bank and Wells Fargo
(incorporated by reference from Exhibit 10.14 of the
Company's Form 10-Q filed with the Commission on May 15,
2000)
10.15 -- Form of Security Agreement dated April 17, 2000, among
the Company, Chase Bank of Texas, N.A. and certain
guarantors (incorporated by reference from Exhibit 10.15
of the Company's Form 10-Q filed with the Commission on
May 15, 2000)
10.16 -- Purchase Agreement dated October 31, 2000, among the
Company, Global Enterprise Technology Solutions, LLC,
Enterprise Hospitality Solutions, Inc., The Rivadalla
Family Trust and Christian Rivadalla (incorporated by
reference from Exhibit 10.16 of the Company's Form 10-Q
filed with Commission on November 14, 2000)
10.17 -- Software Development and License Agreement dated October
31, 2000, among the Company and Global Enterprise
Technology Solutions, LLC, including Form of Escrow
Agreement (incorporated by reference from Exhibit 10.17
of the Company's Form 10-Q filed with Commission on
November 14, 2000)
+10.18 -- Office Lease dated January 31, 1997, First Amendment to
Office Lease dated August 7, 1997, Second Amendment to
Office Lease dated November 1, 1997 and Third Amendment
to Office Lease dated November 2, 1999 between the
Company and EastGroup Properties relating to property
located at 11048 N. 23rd Avenue, Phoenix, Arizona 85029
60
61
EXHIBIT
NUMBER DESCRIPTION
------- -----------
+10.19 -- Office Lease dated September 1, 1987 and First Amendment
to Office Lease dated October 26, 1989 between the
Company and Bridger Properties Limited relating to
property located at 2 Kew Bridge Road, Brentford
Middlesex
+*10.20 -- Employment agreement dated January 1, 2001 between the
Company and Ric L. Floyd
+*10.21 -- Employment agreement dated January 17, 2001 between the
Company and Mark C. Wells
+*10.22 -- Supplemental Employee Retirement Plan
+21.1 -- Subsidiaries of the Company
+23.1 -- Consent of PricewaterhouseCoopers LLP
+24.1 -- Power of Attorney (included on signature page)
- ---------------
Unless otherwise indicated, exhibits are incorporated by reference to the
Company's Registration Statement (File No. 333-28595) on Form S-1 declared
effective by the Commission on August 6, 1997.
+ Filed herewith.
* Management contract or compensatory plan or arrangement -- The Company will
furnish a copy of any exhibit listed above to any stockholder without charge
upon written request to Mr. Ric Floyd, Executive Vice President and General
Counsel, 3811 Turtle Creek Blvd., Suite 1100, Dallas, Texas 75219.
(b) Reports on Form 8-K
There were no reports on Form 8-K that were filed during the quarter ended
December 31, 2000.
61
62
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this annual report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Dallas, State of Texas, on this 22nd day of March, 2001.
PEGASUS SOLUTIONS, INC.
By: /s/ JOHN F. DAVIS, III
----------------------------------
John F. Davis, III
Chief Executive Officer
and Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
POWER OF ATTORNEY
KNOW ALL MEN AND WOMEN BY THESE PRESENTS that each person whose signature
appears below constitutes and appoints John F. Davis, III, Jerome L. Galant and
Ric L. Floyd, and each of them, such individual's true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for such individual and in his or her name, place and stead, in
any and all capacities, to sign any and all amendments to this annual report on
Form 10-K, with all exhibits thereto, and to file the same with all exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises as fully and to
intents and purposes as he might or could do in person hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ JOHN F. DAVIS, III Chief Executive Officer and March 22, 2001
- ----------------------------------------------------- Chairman (Principal Executive
John F. Davis, III Officer)
/s/ JEROME L. GALANT Chief Financial Officer (Principal March 22, 2001
- ----------------------------------------------------- Financial and Accounting
Jerome L. Galant Officer)
/s/ MICHAEL A. BARNETT Director March 22, 2001
- -----------------------------------------------------
Michael A. Barnett
/s/ PAUL J. BROWN Director March 22, 2001
- -----------------------------------------------------
Paul J. Brown
/s/ ROBERT B. COLLIER Director March 22, 2001
- -----------------------------------------------------
Robert B. Collier
/s/ WILLIAM C. HAMMETT, JR. Vice Chairman and Director March 22, 2001
- -----------------------------------------------------
William C. Hammett, Jr.
62
63
SIGNATURES TITLE DATE
---------- ----- ----
/s/ THOMAS F. O'TOOLE Director March 22, 2001
- -----------------------------------------------------
Thomas F. O'Toole
/s/ JEFFREY A. RICH Director March 22, 2001
- -----------------------------------------------------
Jeffrey A. Rich
/s/ BRUCE W. WOLFF Director March 22, 2001
- -----------------------------------------------------
Bruce W. Wolff
63
64
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Pegasus Solutions, Inc.:
Our audits of the consolidated financial statements of Pegasus Solutions,
Inc. referred to in our report dated February 6, 2001, except as to Note 19,
which is as of March 7, 2001, which report and consolidated financial statements
are included in this Annual Report on Form 10-K, also included an audit of the
financial statement schedule listed in Item 14(a)(1) of this Form 10-K. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
PricewaterhouseCoopers LLP
Dallas, Texas
February 6, 2001
S-1
65
SCHEDULE II
PEGASUS SOLUTIONS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 (IN THOUSANDS)
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO FROM BALANCE AT
BEGINNING COSTS AND ACQUIRED END OF
CLASSIFICATION OF PERIOD EXPENSES COMPANIES DEDUCTIONS PERIOD
- -------------- ---------- ---------- --------- ---------- ----------
December 31, 1998
Allowance for doubtful accounts....... $ 78 $ 35 $ 7 $ (21) $ 99
Income tax valuation allowance........ 4,312 270 -- (4,312) 270
------ ------ ------- ------- -------
Total reserves and allowances......... 4,390 305 7 (4,333) 369
------ ------ ------- ------- -------
December 31, 1999
Allowance for doubtful accounts....... 99 -- -- (17) 82
Income tax valuation allowance........ 270 -- -- (270) --
------ ------ ------- ------- -------
Total reserves and allowances......... 369 -- -- (287) 82
------ ------ ------- ------- -------
December 31, 2000
Allowance for doubtful accounts....... 82 2,874 11,924 (7,721) 7,159
Income tax valuation allowance........ -- -- 50 -- 50
------ ------ ------- ------- -------
Total reserves and allowances......... $ 82 $2,874 $11,974 $(7,721) $ 7,209
====== ====== ======= ======= =======
(a) This schedule should be read in conjunction with the Company's audited
consolidated financial statements and related notes thereto that appear in Item
8 of this annual report on Form 10-K.
S-2
66
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1 -- Contribution and Restructuring Agreement dated effective
as of July 21, 1995 by and among the Company and all of
the stockholders of the Company
2.2 -- Agreement and Plan of Merger dated November 16, 1999, as
amended and restated, among the Company, Pegasus
Worldwide, Inc., Rez, Inc., Reed Elsevier, Inc. and Utell
International Group, LTD. (incorporated by reference from
Appendix A of the Company's Registration Statement (File
No. 333-92683) on Form S-4 filed on December 14, 1999)
3.1 -- Fourth Amended and Restated Certificate of Incorporation
(incorporated by reference from Exhibit 3.1 of the
Company's Form 10-Q filed with the Commission on May 15,
2000)
3.2 -- Second Amended and Restated Bylaws
3.3 -- Form of Certification of Designation, Preferences and
Rights of Series A Preferred Stock of Pegasus Systems,
Inc. (incorporated by reference from Exhibit 2 of the
Company's Form 8-A filed with the Commission on October
9, 1998)
4.1 -- Specimen of Common Stock certificate
4.2 -- Fourth Amended and Restated Certificate of Incorporation
(See Exhibit 3.1) Second Amended Restated Bylaws (see
Exhibit 3.2)
4.3 -- Rights Agreement dated June 25, 1996 by and among the
Company and certain holders of capital stock of the
Company named therein
4.4 -- Common Stock Purchase Warrant issued to Holiday
Hospitality Corporation
4.5 -- Rights Agreement dated as of September 28, 1998 by and
between the Company and American Securities Transfer &
Trust, Inc. (incorporated by reference from Exhibit 4 of
the Company's Current Report on Form 8-K filed with the
Commission on October 9, 1998)
4.6 -- Form of Rights Certificate (incorporated by reference
from Exhibit 3 of the Company's Form 8-A filed with
Commission on October 9, 1998)
*10.1 -- Employment Agreement dated January 1, 2000 between the
Company and John F. Davis, III
*10.2 -- Employment Agreement dated January 1, 2000 between the
Company and Joseph W. Nicholson
*10.3 -- Employment Agreement dated January 1, 2000 between the
Company and Jerome L. Galant
*10.5 -- 1996 Stock Option Plan, as amended
*10.6 -- 1997 Stock Option Plan, as amended (incorporated by
reference from the Company's definitive proxy statement
filed with the Commission on March 17, 2000.)
10.7 -- Citibank Global Payments Service Agreement dated July 24,
1998 between The Hotel Clearing Corporation and Citibank,
N.A. (incorporated by reference to Exhibit 10.1 of the
Company's 10-Q for the quarter ended October 31, 1998,
filed with the Commission on November 16, 1998)
10.8 -- Facilities Management Agreement dated January 1, 1996
between the Company and Anasazi, Inc., currently know as
REZsolutions, Inc.
10.9 -- Service Agreement dated December 13, 1996 between the
Company and Comdisco, Inc.
67
EXHIBIT NO. DESCRIPTION
----------- -----------
10.10 -- Service Agreement dated January 17, 1997 between the
Company and Genuity, Inc.
*10.11 -- 1997 Employee Stock Purchase Plan, as amended
10.12 -- Office Lease dated October 1, 1995, First Amendment to
Office Lease dated February 25, 1998, Second Amendment to
Office Lease dated November 2, 1998 and Third Amendment
to Office Lease dated November 8, 1999 between the
Company and the Utah State Retirement Investment Fund
relating to property located at 3811 Turtle Creek Blvd.,
Suite 1100, Dallas, Texas 75219 (incorporated by
reference to the Company's Form S-4 filed with the
Commission on December 14, 1999)
+10.13 -- Office Lease dated, July 26, 1996, First Amendment to
Office Lease dated August 22, 1997 and Second Amendment
to Office Lease dated October 24, 2000 between the
Company and Pivotal Simon Office XVI, L.L.C. relating to
property located at 7500 N. Dreamy Draw., Suite 120,
Phoenix, Arizona 85020
10.14 -- Credit Agreement dated April 17, 2000, among the Company,
Chase Bank of Texas, N.A., Compass Bank and Wells Fargo
(incorporated by reference from Exhibit 10.14 of the
Company's Form 10-Q filed with the Commission on May 15,
2000)
10.15 -- Form of Security Agreement dated April 17, 2000, among
the Company, Chase Bank of Texas, N.A. and certain
guarantors (incorporated by reference from Exhibit 10.15
of the Company's Form 10-Q filed with the Commission on
May 15, 2000)
10.16 -- Purchase Agreement dated October 31, 2000, among the
Company, Global Enterprise Technology Solutions, LLC,
Enterprise Hospitality Solutions, Inc., The Rivadalla
Family Trust and Christian Rivadalla (incorporated by
reference from Exhibit 10.16 of the Company's Form 10-Q
filed with Commission on November 14, 2000)
10.17 -- Software Development and License Agreement dated October
31, 2000, among the Company and Global Enterprise
Technology Solutions, LLC, including Form of Escrow
Agreement (incorporated by reference from Exhibit 10.17
of the Company's Form 10-Q filed with Commission on
November 14, 2000)
+10.18 -- Office Lease dated January 31, 1997, First Amendment to
Office Lease dated August 7, 1997, Second Amendment to
Office Lease dated November 1, 1997 and Third Amendment
to Office Lease dated November 2, 1999 between the
Company and EastGroup Properties relating to property
located at 11048 N. 23rd Avenue, Phoenix, Arizona 85029
+10.19 -- Office Lease dated September 1, 1987 and First Amendment
to Office Lease dated October 26, 1989 between the
Company and Bridger Properties Limited relating to
property located at 2 Kew Bridge Road, Brentford
Middlesex
+*10.20 -- Employment agreement dated January 1, 2001 between the
Company and Ric L. Floyd
+*10.21 -- Employment agreement dated January 17, 2001 between the
Company and Mark C. Wells
+*10.22 -- Supplemental Employee Retirement Plan
+21.1 -- Subsidiaries of the Company
+23.1 -- Consent of PricewaterhouseCoopers LLP
+24.1 -- Power of Attorney (included on signature page)
68
- ---------------
Unless otherwise indicated, exhibits are incorporated by reference to the
Company's Registration Statement (File No. 333-28595) on Form S-1 declared
effective by the Commission on August 6, 1997.
+ Filed herewith.
* Management contract or compensatory plan or arrangement -- The Company will
furnish a copy of any exhibit listed above to any stockholder without charge
upon written request to Mr. Ric Floyd, Executive Vice President and General
Counsel, 3811 Turtle Creek Blvd., Suite 1100, Dallas, Texas 75219.