UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 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 ___
____________________
Commission File Number 0-22935
PEGASUS SOLUTIONS, INC.
(Exact Name of Registrant as specified in its charter)
Delaware 75-2605174
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3811 Turtle Creek Boulevard, Suite 1100, Dallas, Texas 75219
(Address of principal executive office)
(Zip Code)
Registrant's telephone number, including area code: (214) 528-5656
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [ X ] No [ ]
The number of shares of the registrant's common stock outstanding as of May
9, 2000 was 24,240,085.
PEGASUS SOLUTIONS, INC.
FORM 10-Q
For the Quarter Ended March 31, 2000
INDEX
Part I. Financial Information
Item 1. Financial Statements (unaudited) Page
a) Consolidated Balance Sheets
as of March 31, 2000 and December 31, 1999 3
b) Consolidated Statements of Operations for the
Three Months Ended March 31, 2000 and 1999 4
c) Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2000 and 1999 5
d) Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Part I - Financial Information
Item 1. Financial Statements
PEGASUS SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, 2000 December 31, 1999
------------ ------------
ASSETS
Cash and cash equivalents $ 134,959,771 $ 104,616,147
Restricted cash 3,559,420 2,928,680
Short-term investments 7,495,900 35,282,524
Accounts receivable, net 7,145,026 4,854,185
Other current assets 3,608,600 2,585,247
------------ ------------
Total current assets 156,768,717 150,266,783
Capitalized software, net 1,354,628 1,287,422
Property and equipment, net 4,300,323 3,568,212
Goodwill, net 2,805,900 2,890,077
Other noncurrent assets 5,266,617 5,527,274
------------ ------------
Total assets $ 170,496,185 $ 163,539,768
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 7,400,101 $ 6,162,314
Unearned income 1,767,544 62,640
Customer deposits 414,463 383,966
Current portion of capital lease
obligations - 52,564
------------ ------------
Total current liabilities 9,582,108 6,661,484
Other noncurrent liabilities 606,858 106,788
Stockholders' equity:
Preferred stock, $.01 par value;
2,000,000 shares authorized; zero
shares issued and outstanding, - -
Common stock, $.01 par value;
50,000,000 shares authorized;
20,557,285 and 20,515,050
shares issued, respectively 205,573 205,151
Additional paid-in capital 157,383,441 156,978,043
Unearned compensation (350,957) (442,106)
Accumulated comprehensive loss (6,148) (24,905)
Retained earnings 3,101,648 81,651
Less treasury stock (174,726
shares, at cost) (26,338) (26,338)
------------ ------------
Total stockholders' equity 160,307,219 156,771,496
------------ ------------
Total liabilities
and stockholders' equity $ 170,496,185 $ 163,539,768
============ ============
See accompanying notes to consolidated financial statements
PEGASUS SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
-------------------------
2000 1999
----------- ----------
Net revenues $ 10,660,714 $ 8,372,496
Cost of services 3,431,080 2,563,425
Research and development 602,398 611,443
General and administrative expenses 1,905,294 1,332,958
Marketing and promotion expenses 1,594,312 1,263,819
Depreciation and amortization 604,569 679,272
----------- ----------
Operating income 2,523,061 1,921,579
Other income (expense):
Interest income 1,594,363 528,709
Interest expense (6,130) (18,227)
----------- ----------
Income before income taxes 4,111,294 2,432,061
Income taxes 1,090,086 930,750
----------- ----------
Net income $ 3,021,208 $ 1,501,311
=========== ==========
Other comprehensive income - change in
unrealized gain 18,757 -
----------- ----------
Comprehensive income $ 3,039,965 $ 1,501,311
=========== ==========
Net income per share:
Basic $ 0.15 $ 0.09
=========== ==========
Diluted $ 0.14 $ 0.09
=========== ==========
Weighted average shares outstanding:
Basic 20,356,367 15,862,176
=========== ==========
Diluted 21,048,068 17,304,075
=========== ==========
See accompanying notes to consolidated financial statements
PEGASUS SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
--------------------------
2000 1999
----------- ----------
Cash flows from operating activities:
Net income $ 3,021,208 $ 1,501,311
Adjustments to reconcile net income to net cash
from operating activities:
Windfall tax benefit from employee exercise of
non-qualified stock options 281,929 843,753
Depreciation and amortization 604,569 679,272
Recognition of stock option compensation 89,166 80,752
Amortization of premiums on short-term investments 20,672 8,271
Changes in assets and liabilities:
Restricted cash (630,739) 117,439
Accounts receivable (1,357,124) (1,566,949)
Other current and noncurrent assets (1,674,807) 41,596
Accounts payable and accrued liabilities 1,642,034 (17,573)
Unearned income 1,673,637 1,000,375
Other noncurrent liabilities 125,108 (8,898)
----------- ----------
Net cash provided by operating activities 3,795,653 2,679,349
----------- ----------
Cash flows from investing activities:
Purchase of software, property and equipment (1,319,709) (917,476)
Purchase of marketable securities - (3,567,675)
Proceeds from maturity of marketable securities 27,794,372 11,404,912
Investment in minority interest - (50,110)
----------- ----------
Net cash provided by investing activities 26,474,663 6,869,651
----------- ----------
Cash flows from financing activities:
Net proceeds from issuance of stock 125,872 512,342
Repayment of capital leases (52,564) (262,622)
----------- ----------
Net cash provided by financing activities 73,308 249,720
----------- ----------
Net increase in cash and cash equivalents 30,343,624 9,798,720
Cash and cash equivalents, beginning of period 104,616,147 25,002,185
----------- ----------
Cash and cash equivalents, end of period $134,959,771 $34,800,905
=========== ==========
Supplemental disclosure of cash flow information:
Interest paid $ 3,204 $ 15,390
=========== ==========
Income taxes paid $ - $ -
=========== ==========
See accompanying notes to consolidated financial statements
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
Pegasus is a leading provider of transaction processing and electronic
commerce services to the hotel industry worldwide. Pegasus is organized
into three businesses: Pegasus Electronic Distribution, Pegasus
Commission Processing, and Pegasus Business Intelligence. The
consolidated financial statements include the accounts of Pegasus
Solutions, Inc. (Note 5) and its wholly owned subsidiaries. All
significant intercompany balances have been eliminated in consolidation.
In the opinion of management, the unaudited consolidated financial
statements presented herein reflect all adjustments necessary to fairly
state the financial position, operating results, and cash flows for the
periods presented. Such adjustments are of a normally recurring nature.
The results for interim periods are not necessarily indicative of
results expected for the entire fiscal year. The accompanying unaudited
consolidated financial statements and the notes thereto should be read
in conjunction with the consolidated financial statements and notes
thereto contained in our annual report for the year ended December 31,
1999 on Form 10-K. Pegasus management believes that the disclosures are
sufficient for interim financial reporting purposes.
2. EARNINGS PER SHARE
Basic net income per share for the three months ended March 31, 2000 and
1999 has been computed in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("FAS 128") using the
weighted average number of common shares outstanding.
Diluted net income per share for the three months ended March 31, 2000
and 1999 gives effect to all dilutive potential common shares that were
outstanding during the respective periods. Outstanding options and
warrants with strike prices below the average fair market value of
Pegasus common stock for the three months ended March 31, 2000 and 1999
were included in the diluted earnings per share ("EPS") calculations for
the respective periods.
The following table sets forth the options excluded from the diluted EPS
calculations for the three months ended March 31:
2000 1999
---- ----
Options excluded 99,000 1,500
Strike price $25.25 - $29.02 $27.25
The options were excluded because they were antidilutive. The options
excluded in 2000 expire from December 2006 to September 2009. The
options excluded in 1999 expire in December 2006.
The following table sets forth the basic and diluted EPS computation for
the three months ended March 31, 2000 and 1999:
Three Months Ended
March 31,
-------------------------
2000 1999
-------------------------
Net income $3,021,208 $1,501,311
=========================
Basic:
Weighted average number of
shares outstanding 20,356,367 15,862,176
-------------------------
Net income per share $ 0.15 $ 0.09
=========================
Diluted:
Weighted average number of
shares outstanding 20,356,367 15,862,176
Additional weighted average
shares from assumed exercise
of dilutive stock options and
warrants, net of shares to be
repurchased with exercise
proceeds 691,701 1,441,899
-------------------------
Weighted average number of 21,048,068 17,304,075
shares outstanding used in the
diluted net income per share
calculation
-------------------------
Net income per share $ 0.14 $ 0.09
=========================
3. SEGMENT INFORMATION
Based on the criteria set forth under Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information," Pegasus is organized into three reportable
segments:
* Pegasus Electronic Distribution - provides services that enable
travel agents and individual travelers to electronically access hotel
room inventory information and conduct reservation transactions;
* Pegasus Commission Processing - provides commission payment
processing services to the hotel industry and travel agencies; and
* Pegasus Business Intelligence - provides database marketing and
consulting services and is being expanded to provide data mining and
reporting services for benchmark analysis and strategic planning for
the hotel industry.
Pegasus is organized primarily on the basis of services provided.
Segment data includes a charge allocating all corporate costs to the
operating segments. Management evaluates performance of its segments
based on pretax income.
The following table presents information about reported segments for the
three months ended March 31:
Electronic Commission Business Reconciling
Distribution Processing Intelligence Items Total
---------- ---------- --------- --------- ----------
2000
----
Net revenues $ 5,238,694 $ 5,069,062 $ 352,958 $ --- $10,660,714
Income (loss)
before taxes 2,089,747 1,942,880 (1,412,100) 1,490,767 4,111,294
1999
----
Net revenues 3,964,052 3,985,189 423,255 --- 8,372,496
Income (loss)
before taxes 1,162,337 1,699,419 (925,992) 496,297 2,432,061
Reconciling items represent interest income earned on short-term
investment of operating cash balances and of a portion of proceeds from
our initial and secondary public offerings of common stock.
4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). FAS 133 requires that all
derivative instruments be recorded on the balance sheet at fair value.
Changes in the fair value of derivative instruments are recorded each
period in current earnings or other comprehensive income, depending on
whether the derivative is designated as part of a hedge transaction. FAS
133, as amended by Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral
of Effective Date of FAS 133," is effective for our first quarter
financial statements in fiscal 2001. Pegasus is not currently involved
in derivative instruments or hedging activities, and therefore, will
measure the impact of this statement as it becomes necessary.
On December 3, 1999, the Securities and Exchange Commission released
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements," which summarizes some of the Staff's views in
applying generally accepted accounting principles to revenue recognition
in financial statements. The Staff provided this guidance due, in part,
to the large number of revenue recognition issues that registrants
encounter. Pegasus is applying SAB 101 on a prospective basis beginning
in fiscal year 2000.
5. SUBSEQUENT EVENTS
On April 3, 2000, Pegasus completed the acquisition of REZ, Inc.,
formerly known as REZsolutions, Inc. REZ will operate as a wholly owned
subsidiary of Pegasus. REZ stockholders received the following merger
consideration on a pro rata basis:
1) An aggregate 3.99 million shares of Pegasus common stock,
approximately 338,000 shares of which were placed in an
indemnification escrow account and approximately 123,000 shares of
which were placed in an escrow account pending the determination
of post-closing adjustments. The aggregate 3.99 million shares
constitute 16.4% of the total Pegasus common shares outstanding at
March 31, 2000. No fractional shares will be issued. REZ
stockholders will receive a cash payment in lieu of any fractional
shares.
2) Approximately $89 million in cash, $5.5 million of which is in an
indemnification escrow account.
3) $20 million note payable to Utell International Group, Ltd., in
lieu of cash consideration otherwise receivable by Utell. Utell was
the majority REZ stockholder.
The acquisition will be recorded under the purchase method of
accounting. Accordingly, REZ's results of operations subsequent to the
acquisition date will be included in the Company's consolidated
financial statements for the three months ended June 30, 2000.
On May 2, 2000, the stockholders of Pegasus Systems, Inc. approved
changing the Company's name to Pegasus Solutions, Inc. With the
acquisition of REZ on April 3, 2000, the new name is more descriptive of
the combined entity and our services. Pegasus' common stock is still
traded on the Nasdaq National Market under the symbol PEGS.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FORWARD-LOOKING STATEMENTS
This Form 10-Q, including the following discussion, contains forward-looking
statements that involve risks and uncertainties. Actual results and the
timing of events could differ materially from those discussed in the
forward-looking statements as a result of certain factors. These factors
include those set forth under the heading "Risk Factors" in our filings with
the Securities and Exchange Commission, including our Form 10-K for the year
ended December 31, 1999 and the Form S-4 (registration no. 333-92683) that
was declared effective on March 31, 2000.
OVERVIEW
Pegasus is a leading provider of transaction processing and electronic
commerce services to the hotel industry worldwide. Pegasus is organized into
three businesses: Pegasus Electronic Distribution, Pegasus Commission
Processing and Pegasus Business Intelligence.
Pegasus Electronic Distribution. Pegasus Electronic Distribution includes
our GDS distribution service and Internet-based distribution services. These
services improve the efficiency and effectiveness of the hotel reservation
process by enabling travel agents and individual travelers to electronically
access hotel room inventory information and conduct reservation transactions.
Our GDS distribution service provides an electronic interface between a
hotel's central reservation system and the global distribution systems that
travel agents use to book hotel and airline reservations. Pegasus derives
revenues from this service by charging hotel participants a fee based on the
number of reservations made, less the number cancelled ("net reservations"),
and a fee for "status messages" processed through the GDS distribution
service. Status messages are electronic messages sent by hotels to global
distribution systems to update room rates, features and availability
information on global distribution system 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. Pegasus recognizes revenues based
on the fee per transaction that a customer is expected to pay during the
entire year. Pegasus' 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 each year
as the fee per transaction that Pegasus actually bills a customer falls
below the average fee per transaction for the entire year. Pegasus offers
volume-based discounting for GDS distribution fees. The recent
consolidation in the hotel industry has resulted in a lower average fee per
transaction for the GDS distribution service. Despite increases in the
number of transactions, revenues generated from the GDS distribution service
have remained consistent with prior periods. Pegasus expects this trend to
continue.
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, 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, revenue for these one-time set-up
fees is recognized over the contract term in accordance with SAB 101.
Pegasus also charges some global distribution systems a fee based on either
the number of net reservations or the number of hotels connected to the
global distribution system to compensate for the management and
consolidation of multiple interfaces.
Our Internet-based distribution services provide online hotel reservation
capabilities to travelers via our TravelWeb.com website (www.travelweb.com)
and our private-label reservation service. To participate in the Internet-
based distribution services, hotels pay Pegasus subscription fees based on
the number of the hotel company's properties in Pegasus' online distribution
database. For reservations that originate on the TravelWeb.com website,
Pegasus charges either a transaction fee based on the number of net
reservations made at participating properties or a commission based on the
value of the guest stay. For reservations that originate on websites using
the private-label reservation service, Pegasus charges transaction fees
based on the number of net reservations made at participating properties.
Private-label reservation customers also pay initial development fees and
either monthly subscription or maintenance fees. Initial development fees
are for establishing an electronic communication link between the hotel's
central reservation system and third-party websites. Maintenance fees are
for the management of the communication link and the online distribution
database.
Pegasus Commission Processing. Pegasus Commission Processing is the global
leader in hotel commission payment processing. Pegasus Commission Processing
improves the efficiency and effectiveness of the commission payment process
for participating hotels and travel agencies by consolidating payments,
paying in local currency and providing comprehensive transaction reports.
Pegasus Commission Processing derives revenues by charging a participating
travel agency a fee based on a percentage of the commissions paid by hotels
and hotel chains that are processed by Pegasus on behalf of that agency.
Pegasus also generally charges a participating hotel a fee based on the
number of commissionable transactions arising from that hotel that are
processed by Pegasus. 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
Commission Processing recognizes revenues in the month in which the hotel
stay occurs. In the following month, Pegasus collects commissions from the
hotels by the 12th business day of the month and pays commissions to travel
agencies by the 15th day of the month. If a hotel fails to deliver funds to
Pegasus, Pegasus is not obligated to deliver commission payments on behalf
of the hotel to travel agencies.
Pegasus Business Intelligence. Pegasus Business Intelligence provides
database marketing and consulting services and is being expanded to provide
data mining and reporting services that search and organize data into
meaningful information for competitive analysis and strategic planning for
the hotel industry. Pegasus Business Intelligence revenues consist of fees
charged to hotels for the development of hotel databases and for consulting
services.
Historically, Pegasus has derived a majority of its revenues from its
electronic distribution and commission processing services. Pegasus has
experienced substantial growth since its inception. However, there can be
no assurance that Pegasus will experience the same rate of revenue growth in
the future. Any significant decrease in the rate of revenue growth could
have a material adverse effect on Pegasus' operating results and financial
condition.
Pegasus has developed or is in the process of developing several new
services to capitalize on its existing technology and customer base and to
provide additional electronic hotel reservation capabilities and information
services to its existing customers and to other participants in the hotel
room distribution process. Pegasus Electronic Distribution has introduced
services that automate the processing of hotel reservations for large
meetings and conventions and for corporate travelers. Pegasus Business
Intelligence intends to introduce data mining and reporting services for
benchmark analysis and strategic planning for the hotel industry. Pegasus
has not received a material amount of revenue from these services, and there
can be no assurance that any of these services will produce a material
amount of revenue in the future.
Pegasus' future success will depend, in part, on its ability to :
* Develop leading technologies
* Enhance existing services
* Develop and introduce new services that address the increasingly
sophisticated and varied needs of current and prospective customers
* Respond to technological advances and emerging industry standards on
a timely and cost-effective basis.
RECENT DEVELOPMENTS
On April 3, 2000, Pegasus completed the acquisition of REZ, Inc., formerly
known as REZsolutions, Inc. REZ will operate as a wholly owned subsidiary
of Pegasus. REZ stockholders received the following merger consideration on
a pro rata basis:
1) An aggregate 3.99 million shares of Pegasus common stock,
approximately 338,000 shares of which were placed in an indemnification
escrow account and approximately 123,000 shares of which were placed in
an escrow account pending the determination of post-closing
adjustments. The aggregate 3.99 million shares constitute 16.4% of the
total Pegasus common shares outstanding at March 31, 2000. No
fractional shares will be issued. REZ stockholders will receive a cash
payment in lieu of any fractional shares.
2) Approximately $89 million in cash, $5.5 million of which is in an
indemnification escrow account.
3) $20 million note payable to Utell International Group, Ltd., in lieu
of cash consideration otherwise receivable by Utell. Utell was the
majority REZ stockholder.
The acquisition will be recorded under the purchase method of accounting.
Accordingly, REZ's results of operations subsequent to the acquisition date
will be included in the Company's consolidated financial statements for the
three months ended June 30, 2000.
On May 2, 2000, the stockholders of Pegasus Systems, Inc. approved changing
the Company's name to Pegasus Solutions, Inc. With the acquisition of REZ
on April 3, 2000, the new name is more descriptive of the combined entity
and our services.
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Net revenues. Net revenues for the three months ended March 31, 2000
increased to $10.7 million from $8.4 million for the three months ended
March 31, 1999, an increase of 27.3%. This increase in revenues was
primarily driven by higher transaction levels for Pegasus Electronic
Distribution and Pegasus Commission Processing.
Pegasus Electronic Distribution revenues increased 32.2% for the three
months ended March 31, 2000 as compared to the same period in 1999. This
increase resulted primarily from a 18.6% increase in the number of hotel
reservations made through our GDS and Internet-based distribution services.
Although GDS revenue per transaction decreased for the three months ended
March 31, 2000 compared to the same period in 1999, total transaction
revenue per transaction increased 12.6% due to an increase in the number of
Internet-based transactions, which generate more revenue per transaction.
A $188,000 increase in non-transaction related revenue also contributed to
the increase in total electronic distribution revenue. Non-transaction
related revenue includes implementation fees, license fees, subscription
fees and advertising revenue.
Pegasus Commission Processing revenues increased 27.2% for the three months
ended March 31, 2000 compared to the same period in 1999 as a result of a
39.3% 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
39.2% for the three months ended March 31, 2000 compared to the same period
in 1999 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. The decrease in travel agency fees is due to
consolidation within the travel agency industry. Pegasus expects this trend
to continue.
Pegasus Business Intelligence revenues decreased $70,000, or 16.6%, to
$353,000 for the three months ended March 31, 2000 compared to $423,000 for
the three months ended March 31,1999. Pegasus Business Intelligence
revenues consisted of fees charged to hotels for the development and
maintenance of hotel databases and for consulting services.
Pegasus Business Intelligence had net pretax losses of approximately $1.4
million and $925,000 for the three months ended March 31, 2000 and 1999,
respectively. Pegasus expects this segment to continue to have losses in
the foreseeable future. However, Pegasus expects the losses to decline as
this segment develops new products, builds its customer base and increases
revenues.
Cost of services. Cost of services increased by $868,000, or 33.9%, to $3.4
million for the three months ended March 31, 2000 from $2.6 million for the
three months ended March 31, 1999. Cost of services increased due to an
increase in the number of technology personnel as well as higher technology
salaries for the three months ended March 31, 2000 compared to the same
period in 1999.
Research and development. Research and development expenses decreased
slightly to $602,000 for the three months ended March 31, 2000 from $611,000
for the same period in 1999. An increase in headcount and salaries was
offset by $80,000 of capitalized software costs during the three months
ended March 31, 2000 and a $39,000 decrease in commission processing
consulting costs compared to the three months ended March 31, 1999.
General and administrative expenses. General and administrative expenses
increased $572,000, or 42.9%, to $1.9 million for the three months ended
March 31, 2000 from $1.3 million for the same period in 1999. This increase
was primarily due to an increase in personnel expenses and office costs
including rent, telephone, travel and supplies associated with increased
headcount. Personnel and office costs increased approximately $144,000 for
the three months ended March 31, 2000 compared to the same period in 1999.
As a result of a third-party review of executive compensation conducted at
the end of 1999, Pegasus now has a supplemental employee retirement plan for
four executives and a revised fee structure for its board of directors. The
funding for this plan, higher director compensation, and consulting fees
related to this review and the creation of the plan also contributed
$134,000, $35,000 and $47,000, respectively, to the increase in general and
administrative expenses. In addition, annual report expenses increased
$83,000 for the three months ended March 31, 2000 as compared to the same
period in 1999 because of a significant increase in the number of
shareholders.
Marketing and promotion expenses. Marketing and promotion expenses increased
$330,000, or 26.2%, to $1.6 million for the three months ended March 31,
2000 from $1.3 million for the same period in 1999. Marketing and promotion
expenses increased due to a 10.7% increase in the number of marketing and
sales personnel including an executive vice president and senior vice
president. In contemplation of the REZ acquisition, we hired an executive
vice president and incurred salary, benefits, recruiting and relocation
costs.
Depreciation and amortization. Depreciation and amortization expenses
decreased $75,000, or 11.0%, to $605,000 for the three months ended March
31, 2000 from $679,000 for the same period in 1999. Depreciation decreased
$48,000 for the three months ended March 31, 2000 compared to the same
period in 1999 because our old switch platform, the technology on which our
electronic distribution services are based, was fully depreciated and
replaced with less expensive equipment during 1999. This decrease was
partially offset by additions of property and equipment. Amortization
expense decreased $26,000 for the three months ended March 31, 2000 as
compared to the same period in 1999 because of an adjustment to the tax
basis of goodwill related to the 1998 acquisition of Driving Revenue L.L.C.
Interest income. Interest income increased $1.1 million to $1.6 for the
three months ended March 31, 2000 from $529,000 for the same period in 1999.
Interest income increased as Pegasus had additional cash available for
short-term investment as a result of the secondary public offering of common
stock in May 1999. In addition, there was an increase in the prevailing
interest rate level for short-term investments during the three months ended
March 31, 2000 compared to the same period in 1999. This increase was
partially offset by a shift in the investment portfolio to include tax-
exempt securities with lower pre-tax yields.
Interest expense. Interest expense decreased $12,000 to $6,000 for the three
months ended March 31, 2000 from $18,000 for the same period in 1999. The
expense reflects payments made under capital equipment leases.
Income taxes. Income taxes for the three months ended March 31, 2000 and
1999 reflect federal, state and foreign income taxes payable. The effective
tax rate of approximately 26.5% for the three months ended March 31, 2000
decreased from the effective tax rate of approximately 38.3% for the three
months ended March 31, 1999 because of tax-exempt interest income.
LIQUIDITY AND CAPITAL RESOURCES
Pegasus' principal sources of liquidity at March 31, 2000 included cash and
cash equivalents of $135.0 million, short-term investments of $7.5 million
and restricted cash of $3.6 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 funds from the bank.
Reasons for the checks not clearing include travel agencies going out of
business, change in address or the checks being lost. The returned funds
are repaid to the original travel agency if they can be located, or if not,
then to their state of residence as required by the unclaimed property laws
of their state.
Working capital increased to $147.2 million at March 31, 2000 from $143.6
million at December 31, 1999. Net cash provided by operating activities was
$3.8 million for the three months ended March 31, 2000 compared to $2.7
million for the same period in 1999 due to our improved operating
performance.
Capital expenditures consisted of purchases of software, furniture and
computer equipment as well as internally developed software costs and
amounted to $1.3 million for the three months ended March 31, 2000 compared
to $917,000 for the same period in 1999. Pegasus has financed its cash
requirements for investments primarily through cash generated from
operations and the sale of capital stock. Pegasus estimates that its
capital expenditures during 2000 will approximate $3.0 million and primarily
relate to adding capacity to existing systems.
Proceeds from the exercise of stock options were $126,000 for the three
months ended March 31, 2000 compared to $512,000 for the same period in
1999.
Pegasus completed secondary public offerings of its common stock in February
1998, raising net proceeds to Pegasus of $4.2 million, and in May 1999,
raising net proceeds to Pegasus of $84.4 million. A portion of the proceeds
was used at the time of each offering to repay certain lease obligations,
for working capital and other general corporate purposes, with the remaining
proceeds placed in short-term marketable securities. On April 3, 2000,
Pegasus completed the acquisition of REZ, Inc. utilizing approximately $89
million of the net proceeds from its initial and secondary public offerings.
Other consideration included an aggregate of 3.99 million shares of Pegasus
common stock and a $20 million note payable to Utell, the majority REZ
stockholder.
In conjunction with the REZ acquisition, Pegasus entered into a credit
agreement with Chase Bank of Texas, Compass Bank and Wells Fargo Bank
(Texas) on April 17, 2000. Under the terms of the credit agreement, Pegasus
has a $10 million revolving credit facility with each lender, or an
aggregate of $30 million credit facility. The credit agreement has a two-
year term, and the current interest rate is LIBOR plus 2%.
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 liquidity and cash flow from operations after the
closing of the REZ acquisition, together with funds available from current
and future debt financing, will be sufficient to meet its foreseeable
operating and capital requirements through at least the end of 2000.
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.
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds - 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 (IPO) of the Company's Common Stock. The
Company raised proceeds, net of offering expenses, of $40.5 million
from the IPO. Approximately, $5.2 million of these proceeds were used
to repay notes payable to stockholders and repay certain lease
obligations. $400,000 was used to acquire software assets of a third-
party company. $1.5 million was used to acquire minority interests in
a database management consulting company and a company that provides
software services to the hospitality industry. The Company also paid
$6.0 million to acquire a hotel database marketing and consulting
company. On April 3, 2000, Pegasus completed the acquisition of REZ,
Inc. utilizing approximately $89 million of cash, which constituted all
of the remaining net proceeds from its initial public offering and a
portion of the net proceeds from its secondary public offerings.
Other consideration included an aggregate of 3.99 million shares of
Pegasus common stock and a $20 million note payable to Utell, the
majority REZ stockholder.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 3.1 - Fourth Amended and Restated Certificate of
Incorporation
Exhibit 10.14 - Credit Agreement with Chase Bank of Texas, Compass
Bank and Wells Fargo Bank (Texas)
Exhibit 10.15 - Security Agreement with Chase Bank of Texas,
National Association
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
On April 18, 2000, Pegasus filed a current report on Form 8-K to
announce the completion of the REZ, Inc. acquisition. The financial
statements of the business acquired and pro forma financial
information are incorporated by reference to the Form S-4 declared
effective by the Commission on March 31, 2000 (registration no. 333-
92683).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEGASUS SOLUTIONS, INC.
May 12, 2000 /s/ JOHN F. DAVIS, III
----------------------
John F. Davis, III,
President and Chief
Executive Officer
May 12, 2000 /s/ JEROME L. GALANT
--------------------
Jerome L. Galant
Chief Financial Officer
(principal accounting officer)
EXHIBIT INDEX
Exhibit Number Description of Exhibits
-------------- -----------------------
3.1 Fourth Amended and Restated Certificate of
Incorporation
10.14 Credit Agreement with Chase Bank of Texas, Compass
Bank and Wells Fargo Bank (Texas)
10.15 Security Agreement with Chase Bank of Texas,
National Association
27 Financial Data Schedule