UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q/A
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ___ to ___
____________________
Commission File Number 0-22935
PEGASUS SOLUTIONS, INC.
(Exact Name of Registrant as specified in its charter)
Delaware 75-2605174
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3811 Turtle Creek Boulevard, Suite 1100, Dallas, Texas 75219
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (214) 528-5656
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [ X ] No [ ]
The number of shares of the registrant's common stock outstanding as of
August 10, 2001 was 24,240,000.
PEGASUS SOLUTIONS, INC.
FORM 10-Q/A
For the Quarter Ended June 30, 2001
The Registrant hereby amends the following sections of its Form 10-Q for the
quarter ended June 30, 2001.
Page
Part I. Financial Information ----
Item 1. Financial Statements 3
a) Condensed Consolidated Balance Sheets as of June 30, 2001
(unaudited) and December 31, 2000 4
b) Condensed Consolidated Statements of Operations and
Comprehensive Loss for the Three and Six Months Ended
June 30, 2001 and 2000 (unaudited) 5
c) Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2001 and 2000 (unaudited) 6
d) Notes to Condensed Consolidated Financial Statements
(unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II. Other Information
Item 5. Other Information 22
Signatures 23
Part I - Financial Information
Item 1. - Financial Statements
This Form 10-Q/A amends Pegasus' quarterly report on Form 10-Q for the
quarter ended June 30, 2001, as filed on August 14, 2001, to reflect a
revision of Pegasus' condensed consolidated financial statements as of and
for the six months ended June 30, 2001. Only those sections of the Form 10-
Q filed on August 14, 2001 that have been amended by this report have been
included in this Form 10-Q/A. With the exception of the information
provided in note 5 to the condensed consolidated financial statements and
also in management's discussion and analysis under the heading "Recent
Developments," Pegasus has not updated disclosures in this Form 10-Q/A to
reflect any events subsequent to Pegasus' August 14, 2001 filing of the Form
10-Q.
PEGASUS SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30,
2001
(unaudited December 31,
and amended) 2000
------------ ------------
ASSETS
Cash and cash equivalents $ 17,191 $ 32,576
Restricted cash 5,404 4,574
Short-term investments 9,836 1,563
Accounts receivable, net 30,190 29,889
Other current assets 3,518 4,189
------------ ------------
Total current assets 66,139 72,791
Goodwill, net 142,085 149,764
Property and equipment, net 60,737 64,434
Intangible assets, net 45,049 62,909
Other noncurrent assets 7,619 7,807
------------ ------------
Total assets $ 321,629 $ 357,705
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 33,780 $ 36,097
Deferred tax liability 12,074 12,078
Income tax payable 1,819 6,212
Unearned income 10,732 9,428
Customer deposits 4,977 2,691
Other current liabilities 1,444 80
------------ ------------
Total current liabilities 64,826 66,586
Note payable - 20,000
Deferred tax liability 5,212 8,961
Other noncurrent liabilities 8,011 1,586
Stockholders' equity:
Preferred stock, $0.01 par value; 2,000
shares authorized; zero shares issued
and outstanding, - -
Common stock, $0.01 par value; 50,000
shares authorized; 24,963 and 24,873
shares issued, respectively 249 249
Additional paid-in capital 288,974 288,422
Unearned compensation (91) (157)
Accumulated comprehensive loss (258) (265)
Accumulated deficit (42,051) (26,501)
Less treasury stock at cost (442 and
245 shares, respectively) (3,243) (1,176)
------------ ------------
Total stockholders' equity 243,580 260,572
------------ ------------
Total liabilities and
stockholders' equity $ 321,629 $ 357,705
============ ============
See accompanying notes to condensed consolidated financial statements
PEGASUS SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2001
2001 2000 (amended) 2000
--------- --------- --------- ---------
Net revenues $ 49,768 $ 52,582 95,876 $ 63,243
Cost of services 24,930 25,040 51,189 28,472
Restructure costs - - 797 -
Research and development 1,579 2,759 3,573 3,362
Write-off of purchased in-process
research and development - 8,000 - 8,000
General and administrative expenses 7,472 6,373 14,024 8,278
Marketing and promotion expenses 6,066 8,461 12,418 10,055
Depreciation and amortization 16,403 16,997 32,828 17,601
--------- --------- --------- ---------
Operating loss (6,682) (15,048) (18,953) (12,525)
Other income (expense):
Interest income (expense), net 174 (31) 213 1,557
Gain on sale of business units 749 - 78 -
Equity in loss of investee (157) - (455) -
Other 79 115 36 115
--------- --------- --------- ---------
Loss before income taxes (5,837) (14,964) (19,081) (10,853)
Income tax benefit (1,370) (1,814) (3,531) (724)
--------- --------- --------- ---------
Net loss $ (4,467) $ (13,150) $ (15,550) (10,129)
========= ========= ========= =========
Other comprehensive income - change in
unrealized loss, net of tax (6) 544 7 562
--------- --------- --------- ---------
Comprehensive loss $ (4,473) $ (12,606) $ (15,543) (9,567)
========= ========= ========= =========
Basic and diluted net loss per share $ (0.18) $ (0.54) $ (0.63) $ (0.46)
========= ========= ========= =========
Basic and diluted weighted average
shares outstanding $ 24,490 $ 24,157 $ 24,539 $ 22,257
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements
PEGASUS SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
-----------------------
2001
(amended) 2000
-------- --------
Cash flows from operating activities:
Net loss $ (15,550) $ (10,129)
Adjustments to reconcile net loss to
net cash from operating activities:
Depreciation and amortization 32,828 17,601
Gain on sale of business units (78) -
Write-off of purchased in-process
research and development - 8,000
Provision for bad debt 2,000 634
Other 630 (135)
Changes in assets and liabilities:
Restricted cash (830) (965)
Accounts receivable (2,515) 2,104
Other assets (1,783) 4,082
Accounts payable and accrued liabilities 1,430 (13,301)
Unearned income 1,304 1,866
Other liabilities 809 597
-------- --------
Net cash provided by operating activities 18,245 10,354
-------- --------
Cash flows from investing activities:
Proceeds from sale of business units 4,536 -
Purchase of REZsolutions, Inc. - (95,865)
Purchase of software, property and equipment (8,129) (2,703)
Purchase of marketable securities (12,716) -
Proceeds from maturity of marketable securities 2,976 35,294
Repayment of customer advance 1,500 -
Other 136 49
-------- --------
Net cash used for investing activities (11,697) (63,225)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of stock 230 162
Repayment of notes payable (20,000) (16,995)
Purchase of treasury stock (2,067) -
Repayment of capital leases (96) (328)
-------- --------
Net cash used for financing activities (21,933) (17,161)
-------- --------
Net decrease in cash and cash equivalents (15,385) (70,032)
Cash and cash equivalents, beginning of period 32,576 104,616
-------- --------
Cash and cash equivalents, end of period $ 17,191 $ 34,584
======== ========
See accompanying notes to condensed consolidated financial statements
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
Pegasus is a leading provider of end-to-end reservation distribution
systems, reservation technology systems and hotel representation
services for the global hotel industry. Pegasus is organized into two
business segments - technology and hospitality. Pegasus' common stock
is traded on the Nasdaq National Market under the symbol PEGS. The
unaudited condensed consolidated financial statements include the
accounts of Pegasus Solutions, Inc. and its wholly owned subsidiaries
("Pegasus" or "the Company"). All significant intercompany balances
have been eliminated in consolidation.
In the opinion of management, the unaudited condensed consolidated
financial statements presented herein reflect all adjustments necessary
to fairly state the financial position, operating results, and cash
flows for the periods presented. Such adjustments are of a normal
recurring nature. The results for interim periods are not necessarily
indicative of results expected for the entire fiscal year. Certain
prior period amounts have been reclassified to conform to current period
presentation. The accompanying unaudited condensed consolidated
financial statements and the notes thereto should be read in conjunction
with the consolidated financial statements and notes thereto contained
in the Company's Annual Report on Form 10-K for the year ended December
31, 2000. Pegasus management believes that the disclosures are
sufficient for interim financial reporting purposes.
2. EARNINGS PER SHARE
Basic net loss per share for the three and six months ended June 30,
2001 and 2000 has been computed in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share," using the
weighted average number of common shares outstanding.
Due to the Company's net loss position for the three and six months
ended June 30, 2001 and 2000, all outstanding options were excluded in
the calculation of diluted net loss per share because their effect would
be anti-dilutive. Approximately 3.6 million and 3.2 million shares
issuable upon the exercise of stock options were not included in the
calculation of diluted net loss per share for the three and six months
ended June 30, 2001 and 2000, respectively.
3. SEGMENT INFORMATION
Based on the criteria set forth under Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information," Pegasus is organized into two business segments -
technology and hospitality. The technology segment provides central
reservation systems ("CRS"), electronic distribution, commission
processing and property systems services to the global hotel industry.
The hospitality segment provides hotel representation services offered
under the Utell and Golden Tulip brand names.
The Company is organized primarily on the basis of services provided.
Prior period segment information has been reclassified to conform to the
current period presentation. Segment data includes an allocation of all
corporate costs to the operating segments. Management evaluates the
performance of its segments based on earnings before interest, income
tax, depreciation 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 of, or as a substitute
for, operating income, cash flows from operating activities or any other
measure for determining the Company's operating performance or liquidity
that is calculated in accordance with generally accepted accounting
principles. In addition, the Company's calculation of EBITDA is not
necessarily comparable to similarly titled measures reported by other
companies.
The following table presents information about reported segments for the
three months ended June 30 (in thousands):
Technology Hospitality Total
2001 ---------- ----------- -----
----
Net revenues $ 27,644 $ 22,124 $ 49,768
EBITDA 6,919 2,802 9,721
2000
----
Net revenues 25,023 27,559 52,582
EBITDA 3,857 6,092 9,949
A reconciliation of total segment EBITDA to total consolidated loss
before income taxes for the three months ended June 30 is as follows (in
thousands):
2001 2000
------- -------
Total EBITDA for reportable segments $ 9,721 $ 9,949
Depreciation and amortization (16,403) (16,997)
Write-off of purchased in-process
research and development -- (8,000)
Interest income, net 174 (31)
Gain on sale of business unit 749 --
Equity in loss of investee (157) --
Other 79 115
------- -------
Consolidated loss before income taxes $ (5,837) $(14,964)
======= =======
The following table presents information about reported segments for the
six months ended June 30 (in thousands):
Technology Hospitality Total
2001 ---------- ----------- -----
----
Net revenues $ 54,433 $ 41,443 $ 95,876
EBITDA 12,957 918 13,875
2000
----
Net revenues 35,684 27,559 63,243
EBITDA 6,984 6,092 13,076
A reconciliation of total segment EBITDA to total consolidated loss
before income taxes for the six months ended June 30 is as follows (in
thousands):
2001
(amended) 2000
------- -------
Total EBITDA for reportable segments $ 13,875 $ 13,076
Depreciation and amortization (32,828) (17,601)
Write-off of purchased in-process
research and development -- (8,000)
Interest income, net 213 1,557
Gain on sale of business units 78 --
Equity in loss of investee (455) --
Other 36 115
------- -------
Consolidated loss before income taxes $(19,081) $(10,853)
======= =======
3. RESTRUCTURE COSTS
During the first quarter of 2001, Pegasus incurred $797,000 of
restructuring charges, consisting of $576,000 related to the
consolidation of reservation centers and $221,000 related to severance
and other expenses associated with winding down our business
intelligence operations. As of June 30, 2001, unpaid restructure costs,
which are classified as accrued liabilities, were $312,000 and are
expected to be paid within the next six months.
5. SALE OF BUSINESS UNITS
On January 10, 2001, Pegasus sold its Summit Hotels & Resorts and
Sterling Hotels & Resorts brand businesses to IndeCorp Corporation
("IndeCorp") for approximately $12 million, including scheduled future
payments due upon member hotel contract renewals. IndeCorp is a Chicago-
based holding company that owns and operates the luxury hotel brand
Preferred Hotels & Resorts Worldwide. In the first quarter of 2001,
Pegasus recognized a pre-tax gain of $4.8 million related to the sale of
these two brands. In addition, IndeCorp signed a five-year technology
services agreement and a three-year hotel representation agreement with
Pegasus. As part of the agreements, Pegasus is the exclusive provider of
reservation technology, electronic reservation processing and commission
processing services to the IndeCorp brands, which includes all Preferred
Hotels & Resorts, Summit Hotels & Resorts and Sterling Hotels & Resorts
member hotels. Pegasus also provides a host of other ancillary services
to the IndeCorp businesses.
At the time of the sale of the Summit and Sterling brand businesses,
Pegasus concluded that the scheduled future payments represented a
determinable payment stream. Pegasus has determined that the sale
agreement cannot be accounted for consistent with this initial
conclusion. On November 9, 2001, Pegasus and IndeCorp amended the
original sale agreement to provide for a promissory note in the
principal amount of $6 million payable by IndeCorp to Pegasus that
replaces the scheduled future payments under the original agreement with
a fixed and determinable payment stream for a period of eight years
commencing July 1, 2002 and bearing interest at 7 percent. The
discounted value of this promissory note is $5.5 million.
The amendment of the original sale agreement further provides that (1)
Pegasus receive from IndeCorp a $2.8 million promissory note to replace
outstanding trade receivables, and (2) the term of the existing
technology services and hotel representation agreements with IndeCorp be
extended for an additional 1.5 years. This promissory note requires
monthly payments for a period of eight years commencing July 1, 2002 and
bears interest at 7 percent.
Pegasus has revised the pre-tax gain on the sale of the Summit and
Sterling brand businesses recorded in the quarter ended March 31, 2001
to exclude the amounts related to the scheduled future payments.
Accordingly, the previously recognized pre-tax gain of $4.8 million has
been revised to a $671,000 pre-tax loss. To reflect the structure of
the amended sale agreement, Pegasus will recognize the $5.5 million pre-
tax gain on the sale related to the promissory note that replaces the
scheduled future payments in the quarter ended December 31, 2001. The
revision and the timing of the recognition of the gain in the quarter
ended December 31, 2001 is not expected to have any material impact on
the Company's consolidated statement of operations for the year ended
December 31, 2001.
On June 29, 2001, Pegasus sold its Golden Tulip brand and licensing
business to Madrid-based NH Hoteles ("NH") for $2.0 million. As a
result of this transaction, Pegasus recognized a pre-tax gain of
$749,000 in the second quarter of 2001. In addition, NH signed one-year
agreements with Pegasus for reservation and Utell services. As part of
the agreements, Pegasus is the exclusive provider of reservations
technology, voice and electronic reservation processing and commission
processing services to all Golden Tulip Hotels and Tulip Inns. Pegasus'
Utell subsidiary also provides worldwide marketing, sales and
distribution services and a host of other ancillary services to all
Golden Tulip Hotels and Tulip Inns.
6. STOCKHOLDERS' EQUITY
On August 9, 2000, the Board of Directors authorized the repurchase of
up to two million shares of the Company's common stock. The repurchase
is at the discretion of the Board of Directors' Stock Repurchase
Committee and may be made on the open market, in privately negotiated
transactions or otherwise, depending on market conditions, price, share
availability and other factors. Shares repurchased may be reserved for
later reissue in connection with employee benefit plans and other
general corporate purposes. As of June 30, 2001, the Company had
purchased 196,000 shares for an aggregate $2.1 million pursuant to this
buyback program.
7. CONTINGENCIES
Pegasus is subject to certain legal proceedings, claims and disputes
that arise in the ordinary course of our business. Although management
cannot predict the outcomes of these legal proceedings, we do not
believe these actions will have a material adverse effect on our
financial position, results of operations or liquidity.
8. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133
requires that all derivative instruments be recorded on the balance
sheet at fair value. Changes in the fair value of derivative
instruments are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction. FAS 133, as amended by Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of Effective Date of FAS
133," was effective for Pegasus' first quarter financial statements in
fiscal 2001. The adoption of FAS 133 did not have a material impact on
the Company's consolidated financial statements.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 141, "Business Combinations" ("FAS 141") and No. 142,
"Goodwill and Other Intangibles" ("FAS 142"). FAS 141 prohibits the
pooling-of-interests method and addresses financial accounting and
reporting for goodwill and other intangible assets acquired in a
business combination at acquisition. The provisions of FAS 141
generally apply to all business combinations initiated after June 30,
2001. The Company will use the purchase method for all business
combinations initiated after June 30, 2001. FAS 142 addresses financial
accounting and reporting for intangible assets acquired individually or
with a group of other assets (but not those acquired in a business
combination) at acquisition and for goodwill and other intangible assets
subsequent to their acquisition. Pegasus will apply the provisions of
FAS 142 to any business combination initiated after June 30, 2001 and to
existing goodwill and intangible assets beginning in 2002. The amount
of goodwill included in the Company's condensed consolidated balance
sheet at June 30, 2001 relates to the REZ acquisition, and management
believes there are no other identifiable intangible assets included in
the goodwill amount. As such, the Company will discontinue the
amortization of goodwill beginning in January 2002.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction with the
management's discussion and analysis of financial condition and results of
operations and the consolidated financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended December 31,
2000. This quarterly report on Form 10-Q/A contains forward-looking
statements including statements using terminology such as "may," "will,"
"expects," "plans," "anticipates," "estimates," "potential," or "continue,"
or the negative thereof or other comparable terminology regarding beliefs,
plans, expectations or intentions for the future. This discussion and
analysis contains forward-looking statements that involve risks and
uncertainties. Pegasus' actual results and the timing of certain events
could differ materially from those discussed in the forward-looking
statements as a result of many factors including those described under the
heading "Risk Factors" in our filings with the Securities and Exchange
Commission including our Annual Report on Form 10-K for the year ended
December 31, 2000.
Reorganization
On January 30, 2001, Pegasus announced the reorganization of its corporate
structure to realign its two business segments. We believe the
reorganization will provide greater focus and accountability for each
business. Prior period segment information has been reclassified to conform
to the current period presentation. The key differences created by the
reorganization are as follows:
* The technology company and the hospitality company are now operated
separately. Each has its own dedicated employees while most corporate
functions remain shared.
* Commission Processing and TravelWeb.com, formerly within the
hospitality company, are now part of the technology company.
Overview
Pegasus is a leading provider of hotel room reservation services,
reservation technology systems and hotel representation services for the
global hotel industry. Pegasus provides services to:
* More than 100,000 travel agencies, including nine of the 10 largest
U.S.-based travel agencies based on revenues;
* Nearly 40,000 hotels around the world, including 18 of the 20 largest
hotel companies based on revenues and total number of guest rooms; and
* Thousands of travel-related Web sites.
On April 3, 2000, Pegasus completed the acquisition of REZ, Inc., a leader
in providing distribution services and solutions for the hotel industry.
The acquisition added hotel representation, central reservation system and
property management system services to our existing electronic distribution
and commission processing services.
Pegasus is organized into two operating companies - technology and
hospitality. For the six months ended June 30, 2001, approximately 57
percent and 43 percent of Pegasus' consolidated revenue was derived from the
technology and hospitality businesses, respectively.
Technology
The technology company includes central reservation system, or CRS,
electronic distribution, commission processing and property management
system, or PMS, services. Hotel companies are placing an increasing
emphasis on the use of technology as a means of both increasing revenues as
well as reducing costs. Increasingly, hotel companies are realizing that
internally developing and operating their own technology solutions may not
always be the most cost effective approach, particularly as this relates to
CRS and PMS functions. These systems tend to be expensive to build, operate
and update. As a result, many hotel companies have chosen to utilize the
services of a third party such as Pegasus to provide CRS and PMS capability.
Central Reservation System. Our RezView CRS is provided on an application
service provider, or ASP, basis to more than 10,000 hotel properties,
representing over 2.1 million hotel rooms worldwide. During 2000, we
processed approximately 40 million hotel reservations through our CRS.
Pegasus also provides CRS software licenses to an additional 20 hotel
brands, representing 12,000 properties.
Our CRS business provides hotel customers with a license for our RezView[R]
CRS software as well as the hardware and facilities necessary to run their
central reservation systems and process reservations. CRS also includes the
following support services:
* System administration
* Database administration
* Electronic distribution channel management
* Telecommunications management
* Private-label voice reservation services
CRS revenues consist of transaction fees as well as license, maintenance and
support fees related to our RezView software. CRS revenues represented
approximately 29 percent of total revenues for the six months ended June 30,
2001.
Electronic Distribution. Pegasus Electronic Distribution provides the
technology that facilitates electronic hotel room reservations. This
technology connects travel industry global distribution systems, or GDSs,
and travel-related Internet sites to a hotel's central reservation system.
Pegasus Electronic Distribution supports a variety of distribution channels
including the following:
* GDS connectivity - Pegasus Electronic Distribution is linked to all
major GDSs and connects our hotel customers to travel agent terminals
worldwide.
* Third-party Web sites - We provide Web sites access to our hotel
information database containing more than 40,000 properties and on-line
hotel reservation capability. We provide this service to several of
the top travel Web sites such as Expedia.com, HotWire.com,
Lastminute.com, Oracle e-Travel, Continental.com, Orbitz.com and our
own TravelWeb.com.
* Hotel Web sites - Our NetBookerTM service provides hotel companies with
a hotel information database and Internet reservation capabilities.
Hotel Web sites that are "Powered by Pegasus"[R] offer brand-loyal
Internet shoppers real-time rates, availability and booking
capabilities.
* TravelWeb.com - TravelWeb.com is our interactive Internet site on which
consumers can research and reserve hotel rooms around the world.
TravelWeb.com contains detailed property information on more than
40,000 hotels and allows travelers to directly access hotels' central
reservation systems to check room availability and make or cancel a
reservation. Other features include hotel photos, maps, weather
information and special discount programs.
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 central reservation system and the electronic
distribution technology. New third-party Web site customers pay a one-time
set-up fee for establishing the connection between a hotel's central
reservation system and the third-party Web site. Pegasus Electronic
Distribution revenues represented approximately 10 percent of total revenues
for the six months ended June 30, 2001.
Commission Processing. Pegasus Commission Processing provides a
comprehensive and technologically advanced hotel commission processing
service by collecting and consolidating checkout information and travel
agency commissions on behalf of more than 32,000 properties representing a
significant number of major hotel brands. Each month Pegasus Commission
Processing consolidates and distributes millions of dollars in commission
payments to its participating travel agencies, which number over 100,000 in
more than 200 countries. This value-added commission consolidation and
reporting service facilitates more efficient and effective operation for
both hotel and travel agency participants by providing a single, monthly
commission payment to member travel agencies from participating hotels.
Pegasus Commission Processing processed approximately $266 million in hotel
commissions during the six months ended June 30, 2001.
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 hotel. Our commission processing revenues
represented approximately 16 percent of total revenues for the six months
ended June 30, 2001.
Property Systems and Services. As part of the REZ acquisition, we obtained
the GuestView[R] PMS software. Although we are still servicing existing
customers, we are not selling new licenses for the GuestView software.
Property systems revenues for the six months ended June 30, 2001 primarily
consisted of maintenance and support fees related to the GuestView software.
In June 2001, Pegasus launched its new Web-based PMS service PegasusCentral
and announced that Bass Hotels and Resorts had named it as one of two
preferred PMS standards for its 2,600-plus properties.
Hospitality
The hospitality company includes hotel representation services offered under
the Utell brand name, as well as Paytell, a service that allows travelers to
prepay for reservations and manage their exposure to foreign currency
exchange rate fluctuations.
Hotel Representation. In order to sell their rooms in the marketplace, many
independent hotels associate themselves with our hotel representation
services and use our systems and infrastructure to market and make
reservations for their rooms. Independent hotels join our hotel
representation service for the following reasons:
* To achieve a cost-effective presence in the primary electronic
distribution channels - GDS and Internet.
* To obtain global voice reservation capability through which travel
agents can book their rooms over the telephone via a local call with
local language capabilities.
* To enhance the market image of the hotel by affiliation with a well-
known name in hotel distribution.
* To benefit from worldwide sales and marketing support.
Utell, our hotel representation service, provides hotel marketing, voice
reservation, as well as GDS and Internet representation services for more
than 6,000 hotels in more than 180 countries. Utell is the oldest, largest
and most diverse hotel representation company in the world. It uses
Pegasus' CRS, offering advanced electronic distribution capabilities,
providing both GDS and Internet presence for its member hotels.
Representation service revenues consist of reservation processing fees,
membership fees and fees for various marketing services. Our hotel
representation services represented approximately 43 percent of total
revenues for the six months ended June 30, 2001.
Paytell. Many international travelers who book rooms at hotels to which we
provide representation services utilize Paytell to prepay for hotel stays
and reduce their exposure to foreign currency fluctuations. Travelers using
our Paytell service prepay for hotel rooms in the traveler's local currency.
When a traveler arrives at the hotel, Pegasus remits the amount to the hotel
in the hotel's local currency. Revenues for this service are derived from
the difference in the exchange rate that the traveler actually paid and the
exchange rate when the guest stay occurs.
Other Services
Pegasus regularly seeks to develop new services to capitalize on its
existing technology and customer base and to provide additional electronic
hotel reservation capabilities and information services to its existing
customers and to other participants in the hotel room distribution process.
Pegasus has not received a material amount of revenue from these services,
and there can be no assurance that any of these services will produce a
material amount of revenue in the future.
Recent Developments
On January 10, 2001, Pegasus sold its Summit Hotels & Resorts and Sterling
Hotels & Resorts brand businesses to IndeCorp Corporation, or IndeCorp, for
approximately $12 million, including scheduled future payments due upon
member hotel contract renewals. IndeCorp is a Chicago-based holding company
that owns and operates the luxury hotel brand Preferred Hotels & Resorts
Worldwide. In the first quarter of 2001, Pegasus recognized a pre-tax gain
of $4.8 million related to the sale of these two brands. In addition,
IndeCorp signed a five-year technology services agreement and a three-year
hotel representation agreement with Pegasus. As part of the agreements,
Pegasus is the exclusive provider of reservation technology, electronic
reservation processing and commission processing services to the IndeCorp
brands, which includes all Preferred Hotels & Resorts, Summit Hotels &
Resorts and Sterling Hotels & Resorts member hotels. Pegasus also provides
a host of other ancillary services to the IndeCorp businesses.
At the time of the sale of the Summit and Sterling brand businesses, Pegasus
concluded that the scheduled future payments represented a determinable
payment stream. Pegasus has determined that the sale agreement
cannot be accounted for consistent with this initial conclusion. On
November 9, 2001, Pegasus and IndeCorp amended the original sale agreement
to provide for a promissory note in the principal amount of $6 million
payable by IndeCorp to Pegasus that replaces the scheduled future payments
under the original agreement with a fixed and determinable payment stream
for a period of eight years commencing July 1, 2002 and bearing interest at
7 percent. The discounted value of this promissory note is $5.5 million.
The amendment of the original sale agreement further provides that (1)
Pegasus receive from IndeCorp a $2.8 million promissory note to replace
outstanding trade receivables, and (2) the term of the existing technology
services and hotel representation agreements with IndeCorp be extended for
an additional 1.5 years. This promissory note requires monthly payments for
a period of eight years commencing July 1, 2002 and bears interest at 7
percent.
Pegasus has revised the pre-tax gain on the sale of the Summit and Sterling
brand businesses recorded in the quarter ended March 31, 2001 to exclude the
amounts related to the scheduled future payments. Accordingly, the
previously recognized pre-tax gain of $4.8 million has been revised to a
$671,000 pre-tax loss. To reflect the structure of the amended sale
agreement, Pegasus will recognize the $5.5 million pre-tax gain on the sale
related to the promissory note that replaces the scheduled future payments
in the quarter ended December 31, 2001. The revision and the timing of the
recognition of the gain in the quarter ended December 31, 2001 is not
expected to have any material impact on the Company's consolidated statement
of operations for the year ended December 31, 2001. The following table
illustrates the net change resulting from this revision (in thousands):
As of
--------------------
June 30, December 31,
2001 2001
--------------------
Balance sheet:
Total assets increase (decrease) $(5,460) $5,460
Total liabilities decrease (increase) 891 (891)
--------------------
Accumulated deficit decrease (increase) $(4,569) $4,569
====================
Quarter ended
--------------------
March 31, December 31,
2001 2001
--------------------
Statement of operations:
Gain on sale of business unit increase
(decrease) $(5,460) $5,460
Loss before income taxes decrease (increase) (5,460) 5,460
Income tax benefit decrease (increase) (891) 891
--------------------
Net loss decrease (increase) $(4,569) $4,569
====================
Basic and diluted net loss per share decrease
(increase) $ (0.19) $ 0.19*
====================
* Assumes weighted average shares outstanding of 24,600, which is not
expected to be materially different from weighted average shares
outstanding for the three months ended September 30, 2001.
On January 30, 2001, Pegasus announced the reorganization of its corporate
structure to realign its two business segments. As part of the
reorganization, our hotel representation business now operates under the
Utell name as a wholly owned subsidiary of Pegasus Solutions, Inc. and
represents our hospitality segment. Our technology segment consists of CRS,
electronic distribution, including TravelWeb.com, commission processing and
PMS services. We began using this new organizational structure for segment
reporting in the first quarter of 2001.
Management decided in the fourth quarter of 2000 not to seek new Pegasus
Business Intelligence customers. Pegasus determined that the net book
values of goodwill and certain other assets were impaired and recorded an
asset impairment charge of $3.0 million in the fourth quarter of 2000. In
March 2001, Pegasus notified employees and customers that it would be
winding down its business intelligence operations. As a result, Pegasus
incurred $221,000 of related severance and other expenses during the three
months ended March 31, 2001.
On June 29, 2001, Pegasus sold its Golden Tulip brand and licensing business
to Madrid-based NH Hoteles, or NH, for $2.0 million. As a result of this
transaction, Pegasus recognized a pre-tax gain of $749,000 in the second
quarter of 2001. In addition, NH signed one-year agreements with Pegasus
for reservation and Utell services. As part of the agreements, Pegasus is
the exclusive provider of reservations technology, voice and electronic
reservation processing and commission processing services to all Golden
Tulip Hotels and Tulip Inns. Pegasus' Utell subsidiary also provides a host
of other ancillary services to all Golden Tulip Hotels and Tulip Inns.
Our business, particularly our hotel representation business, is sensitive
to changes in the demand for hotel rooms. Due to a weakened economic
climate, we have seen a slowing in the travel market. Business travel, in
particular, has been negatively impacted by companies' efforts to reduce
costs. This decrease in the demand for hotel rooms negatively impacted our
revenues for the three months ended June 30 2001.
Results of Operations
Pegasus completed the acquisition of REZ on April 3, 2000. Accordingly,
REZ's results of operations subsequent to the acquisition are included in
the accompanying unaudited condensed consolidated financial statements.
Three Months Ended June 30, 2001 and 2000
Net Revenues. Net revenues for the three months ended June 30, 2001
decreased to $49.8 million from $52.6 million for the same period in 2000
primarily due to the sale of our Summit and Sterling brands and lost
revenues from our discontinued business intelligence operations. Excluding
the effect of businesses discontinued or sold, revenues increased $920,000
or 1.9 percent. An increase in revenues for CRS and commission processing
services was offset by a decrease in hotel representation revenues.
Revenues for our technology segment increased $2.6 million, or 10.5 percent,
to $27.6 million for the three months ended June 30, 2001 compared to $25.0
million for the same period in 2000.
CRS revenues increased $1.5 million, or 12.5 percent, to $13.7 million for
the three months ended June 30, 2001 compared to $12.2 million for the same
period in 2000 primarily due to adding new customers, such as Universal
Studios and Kimpton Hotels, and providing more services to existing
customers.
Commission processing revenues increased $1.2 million, or 18.1 percent, to
$7.8 million for the three months ended June 30, 2001 compared to $6.6
million for the same period in 2000. The increase was primarily due to a
9.3 percent increase in the value of commissions paid to member travel
agencies through our commission processing service. The value of
commissions paid increased because of an increase in the number of hotel
commission transactions processed. In addition, revenue earned on the
spread between the currency in which the hotel commission is earned and the
currency paid to the travel agency increased. Growth in our reconciliation
and tracking services revenue also contributed to the increase in commission
processing revenues.
Electronic distribution revenues were $5.2 million for the three months
ended June 30, 2001 compared to $5.1 million for the same period in 2000.
Both transaction growth rates and revenue growth were negatively impacted by
the loss of business previously generated from some hotel Web sites, which
terminated in the fall of 2000.
Property systems and services generated revenues of $893,000 for the three
months ended June 30, 2001 compared to $688,000 for the same period in 2000.
Current property system operations primarily consist of an agreement with
Marriott to maintain GuestView, the PMS product obtained in the REZ
acquisition.
Revenues for our hospitality segment decreased by $5.4 million, or 19.7
percent, to $22.1 million for the three months ended June 30, 2001 compared
to $27.6 million for the same period in 2000. The sale of our Summit and
Sterling brands accounted for approximately $3.4 million of the decrease in
revenues. Excluding the effect of the Summit and Sterling sale, hotel
representation revenues decreased by $2.0 million, or 8.5 percent, primarily
due to lower demand for travel, lower room rates and a depressed Euro.
Cost of services. Cost of services was $24.9 million for the three months
ended June 30, 2001 compared to $25.0 for the same period in 2000.
Increased salaries were offset by a decrease in travel expense and other
controllable costs as well as the sale of Summit and Sterling.
Research and development. Research and development expenses decreased $1.2
million, or 42.8 percent, to $1.6 million for the three months ended June
30, 2001 compared to $2.8 million for the same period in 2000. The majority
of our research and development costs for the three months ended June 30,
2001 was related to our Web-based PMS and was capitalized.
Write-off of purchased in-process research and development. During the
three months ended June 30, 2000, Pegasus wrote-off $8.0 million for
REZsolutions research and development projects that had not yet reached
technological feasibility at the time of acquisition.
General and administrative expenses. General and administrative expenses
increased $1.1 million, or 17.2 percent, to $7.5 million for the three
months ended June 30, 2001 compared to $6.4 million for the same period in
2000. General and administrative expenses increased primarily due to an
increase in the use of professional services related to our enterprise-wide
accounting and information system as well as increased payroll-related
costs. These increases were partially offset by a decrease in travel
expense and other controllable costs.
Marketing and promotion expenses. Marketing and promotion expenses decreased
$2.4 million, or 28.3 percent, to $6.1 million for the three months ended
June 30, 2001 compared to $8.5 million for the same period in 2000.
Marketing and promotion expenses decreased primarily due to a decrease in
travel and other controllable costs as well as the reduction of the Pegasus
Business Intelligence sales force. In addition, Utell is now outsourcing
some of its marketing functions thereby resulting in lower costs.
Depreciation and amortization. Depreciation and amortization expenses
decreased $594,000, or 3.5%, to $16.4 million for the three months ended
June 30, 2001 compared to $17.0 million for the same period in 2000. The
decrease was primarily due to a reduction in purchased intangible assets
associated with the sale of our Summit and Sterling brands and was slightly
offset by property and equipment additions.
Interest income, net. Net interest income was $174,000 for the three months
ended June 30, 2001 compared to net interest expense of $31,000 for the same
period in 2000. The net change was primarily due to the payment of a note
payable to Reed Elsevier plc on June 14, 2001, as well as a decrease in
interest expense on capital leases.
Gain on sale of business unit. During the three months ended June 30, 2001,
Pegasus sold its Golden Tulip brand and licensing business to Madrid-based
NH Hoteles. Proceeds from the sale were $2.0 million, and Pegasus
recognized a pre-tax gain of $749,000.
Equity in loss of investee. During the three months ended June 30, 2001,
Pegasus incurred an expense of $38,000, representing its share of Global
Enterprise Technology Solutions LLC, or GETS, net losses, and $119,000 of
amortization expense for the excess cost over net assets acquired for our 20
percent investment in GETS.
Provision for income taxes. Pegasus recorded an income tax benefit of $1.4
million, representing an effective tax rate of 23.5 percent, for the three
months ended June 30, 2001 compared to an income tax benefit of $1.8
million, representing an effective tax rate of 12.1 percent, for the three
months ended June 30, 2000. The effective tax rates for the three months
ended June 30, 2001 and 2000 differed from the statutory rate primarily due
to large non-deductible expenses related to purchase accounting.
Six Months Ended June 30, 2001 and 2000
Net Revenues. Net revenues for the six months ended June 30, 2001 increased
to $95.9 million from $63.2 million for the same period in 2000 primarily
due to the inclusion of a full six months of revenue from the acquisition of
REZ on April 3, 2000. The increase was offset by both the sale of our
Summit and Sterling brands and lost revenues from our discontinued business
intelligence operations.
Revenues for our technology segment increased to $54.4 million for the six
months ended June 30, 2001 compared to $35.7 million for the same period in
2000 primarily due to the acquisition of REZ and increased revenues for
commission processing and CRS services.
CRS revenues increased to $27.8 million for the six months ended June 30,
2001 compared to $12.2 million for the same period in 2000, primarily due to
the inclusion of a full six months of revenue from the REZ acquisition. In
addition, Pegasus added new customers, such as Universal Studios and Kimpton
Hotels, and provided more services to existing customers.
Commission processing revenues increased $3.2 million, or 27.6 percent, to
$14.9 million for the six months ended June 30, 2001 compared to $11.7
million for the same period in 2000. The increase was primarily due to a
13.6 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. In addition, revenue earned on the
spread between the currency in which the hotel commission is earned and the
currency paid to the travel agency increased. Growth in our reconciliation
and tracking services revenue also contributed to the increase in commission
processing revenues.
Electronic distribution revenues decreased $486,000, or 4.7 percent, to $9.9
million for the six months ended June 30, 2001 compared to $10.4 million for
the same period in 2000. Both transaction growth rates and revenue growth
were negatively impacted by the loss of business previously generated from
some hotel Web sites, which terminated in the fall of 2000.
Property systems and services generated revenues of $1.6 million for the six
months ended June 30, 2001 compared to $688,000 for the same period in 2000.
The increase was primarily due to the inclusion of a full six months of
revenue from the REZ acquisition. Current property system operations
primarily consist of an agreement with Marriott to maintain GuestView, the
PMS product obtained in the REZ acquisition.
Revenues for our hospitality segment increased to $41.4 million for the six
months ended June 30, 2001 compared to $27.6 million for the same period in
2000 primarily due to the inclusion of a full six months of revenue from the
REZ acquisition. This increase was offset by a decrease in revenues
resulting from the sale of our Summit and Sterling brands, lower demand for
travel, lower room rates and a depressed Euro.
Cost of services. Cost of services increased to $51.2 million for the six
months ended June 30, 2001, compared to $28.5 million for the same period in
2000 primarily due to the inclusion of a full six months of costs from the
REZ acquisition. In addition, increased salaries were offset by a decrease
in travel expense and other controllable costs as well as the sale of Summit
and Sterling.
Restructure costs. During the six months ended June 30, 2001, Pegasus
incurred $797,000 of restructuring charges, consisting of $576,000 related
to the consolidation of reservation centers and $221,000 related to
severance and other expenses associated with winding down our business
intelligence operations.
Research and development. Research and development expenses increased to
$3.6 million for the six months ended June 30, 2001 compared to $3.4 million
for the same period in 2000. This increase was primarily due to the
inclusion of a full six months of costs from the REZ acquisition. The
majority of our research and development costs for the six months ended June
30, 2001 was related to our Web-based PMS and was capitalized, partially
offsetting the increase in expense.
Write-off of purchased in-process research and development. During the six
months ended June 30, 2000, Pegasus wrote-off $8.0 million for REZsolutions
research and development projects that had not yet reached technological
feasibility at the time of acquisition.
General and administrative expenses. General and administrative expenses
increased to $14.0 million for the six months ended June 30, 2001 compared
to $8.3 million for the same period in 2000 primarily due to the inclusion
of a full six months of costs from the REZ acquisition. In addition, an
increase in the use of professional services related to our enterprise-wide
accounting and information system and increases in payroll-related costs
also resulted in increased general and administrative expenses and were
partially offset by a decrease in travel expense and other controllable
costs.
Marketing and promotion expenses. Marketing and promotion expenses increased
to $12.4 million for the six months ended June 30, 2001 compared to $10.1
million for the same period in 2000 primarily due to the inclusion of a full
six months of costs from the REZ acquisition. This increase was partially
offset by a decrease in travel and other controllable costs as well as the
reduction of the Pegasus Business Intelligence sales force. In addition,
Utell is now outsourcing some of its marketing functions thereby resulting
in lower costs.
Depreciation and amortization. Depreciation and amortization expenses
increased to $32.8 million for the six months ended June 30, 2001 compared
to $17.6 million for the same period in 2000 primarily as a result of the
inclusion of a full six months of depreciation from the REZ acquisition and
property and equipment additions. This increase was partially offset by a
reduction in purchased intangible assets associated with the sale of our
Summit and Sterling brands.
Interest income, net. Net interest income decreased to $213,000 for the six
months ended June 30, 2001 compared to $1.6 million for the same period in
2000. Interest income decreased $1.2 million due to the utilization of our
marketable securities to fund the REZ acquisition. Interest expense
increased $162,000 due to an additional three months of accrued interest on
a note payable to Reed Elsevier plc, the former majority REZ shareholder.
Gain on sale of business units. In January 2001, Pegasus sold its Summit
Hotels & Resorts and Sterling Hotels & Resorts brand business to IndeCorp
Corporation for approximately $12 million, which included scheduled future
payments with an estimated realizable value of $5.5 million. In June 2001,
Pegasus sold its Golden Tulip brand and licensing business to Madrid-based
NH Hoteles. During the six months ended June 30, 2001, Pegasus recognized a
pre-tax gain of $78,000 related to these two transactions.
Equity in loss of investee. During the six months ended June 30, 2001,
Pegasus incurred expense of $38,000, representing its share of GETS net
losses, and $417,000 of amortization expense for the excess cost over net
assets acquired for our investment in GETS.
Provision for income taxes. Pegasus recorded an income tax benefit of $3.5
million for the six months ended June 30, 2001, representing an effective
tax rate of 18.5 percent. Our effective rate differed from the statutory
rate primarily due to large non-deductible expenses related to purchase
accounting. Pegasus recorded an income tax benefit of $724,000 for the six
months ended June 30, 2000, representing an effective tax rate of 6.7
percent of pretax income. The effective tax rate for the six months ended
June 30, 2000 differed from the statutory rate primarily due to large non-
deductible expenses related to purchase accounting and offset by tax-exempt
interest income.
Liquidity and Capital Resources
Pegasus' principal sources of liquidity at June 30, 2001 included cash and
cash equivalents of $17.2 million, short-term investments of $9.8 million,
restricted cash of $5.4 million and an unused revolving credit facility of
$30.0 million. Pegasus' principal sources of liquidity at December 31, 2000
included cash and cash equivalents of $32.6 million, short-term investments
of $1.6 million, restricted cash of $4.6 million and an unused revolving
credit facility of $30.0 million.
Restricted cash represents funds for travel agency commission checks that
were not negotiated by travel agencies within one year of their original
issuance. After one year, the bank places a stop on the outstanding travel
agency commission checks and returns the funds to Pegasus. Pegasus records
a liability for an amount equal to the restricted cash recorded upon receipt
of the funds from the bank. The reasons for the checks not clearing include
travel agencies going out of business, change in address or the checks being
lost. If the travel agency cannot be located, then the funds are paid to
their state of residence as required by the unclaimed property laws of their
state.
Pegasus had working capital of $1.3 million at June 30, 2001 compared to
$6.2 million at December 31, 2000. Working capital decreased primarily as a
result of early payment of our $20 million note payable to Reed Elsevier.
Net cash provided by operating activities increased to $18.2 million for the
six months ending June 30, 2001 from $10.4 million for the same period in
2000 primarily due to an increased focus on cost containment.
Capital expenditures consisted of purchases of software, furniture and
computer equipment as well as internally developed software costs and
amounted to $8.1 million for the six months ended June 30, 2001 compared to
$2.7 million for the same period in 2000. Additional uses of cash for
investing activities for the six months ended June 30, 2001 included the
purchase of marketable securities. Pegasus has financed its cash
requirements for investments primarily through cash generated from
operations, the sale of capital stock, the sale of the Summit, Sterling and
Golden Tulip brands and borrowings from its revolving credit facility.
Pegasus estimates that its capital expenditures during 2001 will range from
approximately $14 to $16 million primarily related to adding capacity to
existing systems and software development.
In conjunction with the REZ acquisition, Pegasus entered into a credit
agreement on April 17, 2000. Under the terms of the credit agreement,
Pegasus has an aggregate $30 million revolving credit facility with Chase
Bank of Texas, Compass Bank and Wells Fargo Bank (Texas). The credit
agreement has a two-year term, and a current interest rate of LIBOR plus two
percent. There was no amount outstanding under the credit facility at
August 10, 2001.
On August 9, 2000, the Board of Directors authorized the repurchase of up to
two million shares of the Company's common stock. The repurchase is at the
discretion of the Board of Directors' Stock Repurchase Committee and may be
made on the open market, in privately negotiated transactions or otherwise,
depending on market conditions, price, share availability and other factors.
Shares repurchased may be reserved for later reissue in connection with
employee benefit plans and other general corporate purposes. As of August
10, 2001, Pegasus had repurchased 196,000 shares at a cost of $2.1 million.
On November 1, 2000, Pegasus entered into an agreement to acquire all or
part ownership of Tempe, Arizona-based 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 GETS for Pegasus common stock and cash. As part of the
transaction, Pegasus obtained an exclusive license for the new Internet-
based application service provider property management system developed by
GETS. Pegasus is currently funding and directing further development of the
system. As of August 10, 2001, Pegasus had funded development costs of $4.9
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 next twelve months.
Pegasus may consider other financing alternatives to fund its requirements,
including possible public or private debt or equity offerings. However,
there can be no assurance that any financing alternatives sought by Pegasus
will be available or will be on terms that are attractive to Pegasus.
Further, any debt financing may involve restrictive covenants, and any
equity financing may be dilutive to stockholders.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," or FAS 133. FAS 133
requires that all derivative instruments be recorded on the balance sheet at
fair value. Changes in the fair value of derivative instruments are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge
transaction. FAS 133, as amended by Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of Effective Date of FAS 133," was effective for
Pegasus' first quarter financial statements in fiscal 2001. The adoption of
FAS 133 did not have a material impact on our consolidated financial
statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations," or FAS 141, and No. 142, "Goodwill and
Other Intangibles," or FAS 142. FAS 141 prohibits the pooling-of-interests
method and addresses financial accounting and reporting for goodwill and
other intangible assets acquired in a business combination at acquisition.
The provisions of FAS 141 generally apply to all business combinations
initiated after June 30, 2001. Pegasus will use the purchase method for all
business combinations initiated after June 30, 2001. FAS 142 addresses
financial accounting and reporting for intangible assets acquired
individually or with a group of other assets (but not those acquired in a
business combination) at acquisition and for goodwill and other intangible
assets subsequent to their acquisition. Pegasus will apply the provisions
of FAS 142 to any business combination initiated after June 30, 2001 and to
existing goodwill and intangible assets beginning in 2002. The amount of
goodwill included in Pegasus' condensed consolidated balance sheet at June
30, 2001 relates to the REZ acquisition, and management believes there are
no other identifiable intangible assets included in the goodwill amount. As
such, Pegasus will discontinue the amortization of goodwill beginning in
January 2002.
Part II - Other Information
Item 5. Other Information
The Company's independent accountants have completed their review of
the Company's interim financial statements for the quarter ended June
30, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEGASUS SOLUTIONS, INC.
November 15, 2001 /s/ JOHN F. DAVIS, III
----------------------
John F. Davis, III,
Chairman and Chief
Executive Officer
November 15, 2001 /s/ SUSAN K. COLE
-----------------
Susan K. Cole,
Chief Financial Officer,
(principal accounting officer)