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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 JUNE 30, 2002
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.)
CAMPBELL CENTRE I, 8350 NORTH CENTRAL EXPRESSWAY, SUITE 1900, DALLAS, TEXAS
75206
(Address of principal executive office)
(Zip Code)
Registrant's telephone number, including area code: (214) 234-4000
3811 TURTLE CREEK BLVD., SUITE 1100, DALLAS, TEXAS 75219
(Former address of principal executive office)
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
2, 2002 was 24,860,082.
PEGASUS SOLUTIONS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2002
INDEX
Part I. Financial Information
Item 1. Financial Statements 3
a) Condensed Consolidated Balance Sheets as of June 30, 2002
and December 31, 2001 (unaudited) 3
b) Condensed Consolidated Statements of Operations and
Comprehensive Loss for the Three and Six Months Ended June 30,
2002 and 2001 (unaudited) 4
c) Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2002 and 2001 (unaudited)
5
d) Notes to the Condensed Consolidated Financial Statements (unaudited)
6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Part II. Other Information
Item 1. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders
21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEGASUS SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2002 2001
--------- ---------
ASSETS
Cash and cash equivalents $ 20,944 $ 13,438
Short-term investments 7,699 9,167
Accounts receivable, net 32,667 29,228
Other current assets 4,946 5,309
--------- ---------
Total current assets 66,256 57,142
Intangible assets, net 14,858 32,505
Property and equipment, net 68,215 67,365
Goodwill, net 141,594 136,921
Other noncurrent assets 11,729 9,737
--------- ---------
Total assets $302,652 $303,670
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 36,151 $ 39,203
Unearned income 10,573 8,585
Deferred tax liability 8,948 12,301
Customer deposits 4,036 2,170
Other current liabilities 1,010 424
--------- ---------
Total current liabilities 60,718 62,683
Uncleared commission checks 4,663 4,004
Other noncurrent liabilities 8,067 5,782
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $0.01 par value; 2,000,000 shares authorized;
zero shares issued and outstanding, - -
Common stock, $0.01 par value; 50,000,000 shares authorized;
25,356,715 and 25,136,100 shares issued, respectively 254 251
Additional paid-in capital 293,443 290,444
Unearned compensation (1,262) (34)
Accumulated comprehensive gain 1 21
Accumulated deficit (58,955) (56,238)
Treasury stock at cost; 513,119 and 441,619 shares, respectively (4,277) (3,243)
--------- ---------
Total stockholders' equity 229,204 231,201
--------- ---------
Total liabilities and stockholders' equity $302,652 $303,670
========= =========
See accompanying notes to condensed consolidated financial statements.
3
PEGASUS SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net revenues $ 44,863 $ 49,768 $ 90,287 $ 95,876
Cost of services 23,197 24,930 45,762 51,189
Research and development 1,280 1,579 3,289 3,573
General and administrative expenses 6,772 7,472 12,606 14,024
Marketing and promotion expenses 4,845 6,066 9,062 12,418
Depreciation and amortization 12,254 16,403 24,394 32,828
Restructure costs - - - 797
------------ ------------ ------------ ------------
Operating loss (3,485) (6,682) (4,826) (18,953)
Other income (expense):
Interest income, net 295 174 557 213
Equity in loss of investee - (157) - (455)
Gain on sale of business units - 749 - 78
Other (13) 79 (266) 36
------------ ------------ ------------ ------------
Loss before income taxes (3,203) (5,837) (4,535) (19,081)
Income tax benefit 1,285 1,370 1,818 3,531
------------ ------------ ------------ ------------
Net loss $ (1,918) $ (4,467) $ (2,717) $ (15,550)
============ ============ ============ ============
Other comprehensive income - change in
unrealized gain (loss), net of tax 7 (6) (20) 7
------------ ------------ ------------ ------------
Comprehensive loss $ (1,911) $ (4,473) $ (2,737) $ (15,543)
============ ============ ============ ============
Net loss per share:
Basic and diluted $ (0.08) $ (0.18) $ (0.11) $ (0.63)
============ ============ ============ ============
Weighted average shares outstanding:
Basic and diluted 24,836,834 24,490,191 24,784,649 24,539,350
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
4
PEGASUS SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------
2002 2001
--------- ---------
Cash flows from operating activities:
Net loss $ (2,717) $(15,550)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 24,394 32,828
Gain on sale of business units - (78)
Other 2,572 2,630
Changes in assets and liabilities:
Accounts receivable (4,870) (2,515)
Other assets (585) (1,783)
Accounts payable and accrued liabilities (3,252) 1,430
Unearned income 1,988 1,304
Other liabilities 3,639 809
--------- ---------
Net cash provided by operating activities 21,169 19,075
Cash flows from investing activities:
Proceeds from sale of business units - 4,536
Purchase of marketable securities (6,740) (12,716)
Proceeds from maturity of marketable securities 8,900 2,976
Purchase of property and equipment (15,991) (8,129)
Other - 1,636
--------- ---------
Net cash used in investing activities (13,831) (11,697)
Cash flows from financing activities:
Proceeds from issuance of common stock 1,241 230
Repayment of notes payable - (20,000)
Purchase of treasury stock (1,034) (2,067)
Other (39) (96)
--------- ---------
Net cash provided by (used in) financing activities 168 (21,933)
Net increase (decrease) in cash and cash equivalents 7,506 (14,555)
Cash and cash equivalents, beginning of period 13,438 37,150
--------- ---------
Cash and cash equivalents, end of period $ 20,944 $ 22,595
========= =========
See accompanying notes to condensed consolidated financial statements.
5
PEGASUS SOLUTIONS, INC.
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 primarily on the basis of services
provided, resulting in two reportable 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.
Certain prior year amounts have been reclassified to conform to current year
presentation. 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. 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, 2001.
2. GOODWILL AND OTHER INTANGIBLES
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangibles" ("FAS 142") and Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("FAS 141").
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. The Company's consolidated balance
sheet at December 31, 2001 included goodwill, net of accumulated amortization,
totaling $136.9 million, which is related to the REZ, Inc. ("REZ") and Global
Enterprise Technology Solutions, LLC ("GETS") acquisitions. Pegasus applied the
provisions of FAS 142 on January 1, 2002 and discontinued amortization of
goodwill from the REZ acquisition. In accordance with FAS 141, goodwill from
the GETS acquisition was never amortized. In addition, as required by FAS 141,
on January 1, 2002, workforce-in-place from the REZ acquisition was reclassified
as goodwill and will no longer be subject to amortization. At June 30, 2002,
goodwill totaled $141.6 million.
In accordance with FAS 142, goodwill is subject to an annual impairment test,
conducted at the business segment level. As detailed in Note 6, Pegasus is
organized in two business segments - technology and hospitality. Based on the
initial impairment test conducted as of January 1, 2002, the Company does not
believe goodwill for either business segment is impaired. The following table
presents goodwill, net of accumulated amortization, by business segment at June
30, 2002 and December 31, 2001 (amounts in thousands):
Technology Hospitality Total
----------- ------------ --------
June 30, 2002 $ 128,935 $ 12,659 $141,594
December 31, 2001 124,379 12,542 136,921
6
Pegasus' adoption of FAS 142 had no effect on the Company's acquired
identifiable intangible assets that are subject to amortization. The following
table presents those intangible assets at June 30, 2002 and December 31, 2001
(amounts in thousands):
June 30, 2002 December 31, 2001
------------- -----------------
Carrying Value Accumulated Amortization Carrying Value Accumulated Amortization
--------------- --------------------------
Customer relationships $ 52,376 $ (39,686) $ 52,376 $ (30,942)
Non-compete agreements 3,820 (1,686) 3,820 (1,305)
Other 48 (14) 48 (11)
Total $ 56,244 $ (41,386) $ 56,244 $ (32,258)
--------------- -------------------------- --------------- --------------------------
During the three and six months ended June 30, 2002, the Company recorded
amortization expense in relation to the above-listed intangible assets of $4.5
million and $9.1 million, respectively. The following table presents the
estimated amortization expense for these intangible assets for the years ended
December 31 (amounts in thousands):
2002 $ 17,973
2003 4,999
2004 769
2005 216
Thereafter 29
The following pro forma financial information compares the Company's net losses
for the three and six months ended June 30, 2002 and 2001 had the provisions of
FAS 142 been applied on January 1, 2001 (amounts in thousands except share
amounts):
Three months ended Six months ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Reported net loss $ (1,918) $ (4,467) $ (2,717) $ (15,550)
Goodwill amortization - 2,614 - 5,324
Workforce in-place amortization - 1,056 - 2,113
Adjusted net loss $ (1,918) $ (797) $ (2,717) $ (8,113)
------------ ------------ ------------ ------------
Basic and diluted earnings per share:
Reported net loss $ (0.08) $ (0.18) $ (0.11) $ (0.63)
Goodwill amortization - 0.11 - 0.22
Workforce in-place amortization - 0.04 - 0.09
Adjusted net loss $ (0.08) $ (0.03) $ (0.11) $ (0.32)
------------ ------------ ------------ ------------
Weighted average shares outstanding 24,836,834 24,490,191 24,784,649 24,539,350
3. RESTRUCTURING ACTIVITIES
During the years ended December 31, 2001 and 2000, the Company reorganized its
operations from a business unit structure into distinct functional areas,
consolidated its reservation centers outside of the United States and ceased
operations of its Business Intelligence division, resulting in restructuring
charges of $7.7 million and $3.4 million, respectively. As of June 30, 2002,
total unpaid severance and outplacement costs were $410,000 and total unpaid
redundant facilities and other costs were $830,000. These unpaid costs are
classified as accrued liabilities.
7
4. STOCKHOLDERS' EQUITY
On June 5, 2002, the Board of Directors authorized the repurchase of up to two
and a half million shares of the Company's common stock. During the three
months ended June 30, 2002, 71,500 shares were repurchased for an aggregate
value of $1.0 million. At June 30, 2002, cumulative repurchases of common stock
under board approved plans totaled approximately 513,000 shares at a value of
$4.3 million. Any future repurchases are 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.
In June 2002, the Compensation Committee of the Board of Directors granted
restricted stock representing 98,400 shares to certain executives and members of
the Board of Directors. Based on the market value of the Company's common
stock, the restricted stock grant was valued at $1.3 million. Compensation
expense related to the restricted stock grant will be recognized ratably over
the one year vesting period.
5. EARNINGS PER SHARE
Due to the Company's net loss position for the three and six months ended June
30, 2002 and 2001, all outstanding options were excluded in the calculation of
diluted net loss per share because their effect would be anti-dilutive.
Approximately 4.5 million shares issuable upon the exercise of stock options
were not included in the calculations of diluted net loss per share for the
three and six months ended June 30, 2002. For the same periods in 2001, 3.6
million shares were not included in the calculations of diluted net loss per
share.
6. 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,
electronic distribution, commission processing and property systems services to
the global hotel industry. The hospitality segment provides hotel
representation services offered under the Utell brand name. Hotel
representation services offered under the Golden Tulip brand name were sold in
June 2001.
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 and other
non-operating income and expense ("EBITDA"). The Company believes that EBITDA,
which is widely used by analysts and investors, is an appropriate 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
----------- ------------ -------
2002
-----------
Net revenues $ 27,171 $ 17,692 $44,863
EBITDA 4,724 4,045 8,769
=======
2001
-----------
Net revenues 27,644 22,124 49,768
EBITDA 6,919 2,802 9,721
=======
8
Reconciliations of total segment EBITDA to total consolidated loss before income
taxes for the three months ended June 30, 2002 and 2001 are as follows (in
thousands):
2002 2001
--------- ---------
Total EBITDA for reportable segments $ 8,769 $ 9,721
Depreciation and amortization (12,254) (16,403)
Interest income, net 295 174
Gain on sale of business unit - 749
Equity in loss of investee - (157)
Other (13) 79
Consolidated loss before income taxes $ (3,203) $ (5,837)
--------- ---------
The following table presents information about reported segments for the six
months ended June 30 (in thousands):
Technology Hospitality Total
----------- ------------ -------
2002
-----------
Net revenues $ 58,003 $ 32,284 $90,287
EBITDA 13,952 5,616 19,568
=======
2001
-----------
Net revenues 54,433 41,443 95,876
EBITDA 12,957 918 13,875
=======
Reconciliations of total segment EBITDA to total consolidated loss before income
taxes for the six months ended June 30, 2002 and 2001 are as follows (in
thousands):
2002 2001
--------- ---------
Total EBITDA for reportable segments $ 19,568 $ 13,875
Depreciation and amortization (24,394) (32,828)
Interest income, net 557 213
Gain on sale of business unit - 78
Equity in loss of investee - (455)
Other (266) 36
Consolidated loss before income taxes $ (4,535) $(19,081)
--------- ---------
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.
9
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, 2001. This
discussion and analysis contains forward-looking statements including statements
using terminology such as "may," "will," "expects," "plans," "intends,"
"anticipates," "believes," "estimates," "potential," or "continue," or a similar
negative phrase or other comparable terminology regarding beliefs, plans,
expectations or intentions for the future. This discussion and analysis
contains forward-looking statements that involve risks and uncertainties, such
as adverse changes in general market conditions for business and leisure travel
as a result of additional terrorist activities, action by U.S. military forces,
changes in hotel room rates, capacity adjustments by airlines, trends in the
overall demand for travel, and the inherent difficulty in making projections
during this period of uncertainty, as well as other risks and uncertainties
described in our Annual Report on Form 10-K for the year ended December 31,
2001. 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 in our filings with the Securities and
Exchange Commission, including our Annual Report on Form 10-K for the year ended
December 31, 2001.
OVERVIEW
We are a leading provider of hotel room reservation services, reservation
technology systems and hotel representation services for the global hotel
industry. Our customers include:
- - Tens of thousands of travel agencies around the world, including the 10
largest U.S.-based travel agencies based on revenues;
- - More than 48,000 hotels around the world, including the 50 largest hotel
companies based on total number of guest rooms; and
- - Thousands of travel-related Internet sites.
We are organized into two business segments - technology and hospitality. Our
technology segment provides central reservation system, or CRS, electronic
distribution, travel agent commission processing and property systems and
services to the global hotel industry. Our hospitality segment provides hotel
representation services offered under the Utell brand name. Hotel
representation services include marketing programs, sales representation, voice
reservations, a voice reservation network with local language capabilities in 41
countries, and distribution through all global distribution systems, or GDSs,
and thousands of Internet sites. For the six months ended June 30, 2002,
approximately 64 percent and 36 percent of our consolidated revenues were
derived from the technology and hospitality segments, respectively.
SERVICES
Technology
- ----------
Our technology segment provides CRS, electronic distribution, travel agent
commission processing and property systems and services to the global hotel
industry. Hotel companies are placing added 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 developed and operated technology
solutions may not always be cost-effective, particularly as it relates to CRS
and property system functions. These systems tend to be expensive to build,
operate and update. As a result, many hotel companies have chosen to utilize
our CRS, property management system, or PMS, and other services.
Beginning in 2002, our CRS and electronic distribution services are combined and
reported as reservation services. By realigning our technology segment on a
functional basis, we are now able to realize synergies between our CRS and
electronic distribution services resulting in increased efficiency and cost
savings.
10
Reservation Services. We were formed in 1988 by 16 of the world's leading hotel
and travel-related companies to be the world's premier service provider of a
streamlined and automated hotel reservation process. Our UltraSwitch(R)
technology provides a seamless electronic connection between a hotel's CRS and
the GDSs that travel agents use to book airline reservations. Our electronic
distribution service supports a variety of distribution channels including the
following:
- - GDS connectivity - Our electronic distribution service is linked to all
major GDSs and therefore connects our hotel customers to travel agents all over
the world.
- - Third-party Internet sites - We provide travel-related Internet sites
access to our hotel information database containing more than 44,000 properties
and on-line hotel reservation capability. We provide this service to several of
the leading travel Internet sites such as Expedia.com, HotWire.com,
Lastminute.com, Amadeus' e-Travel, Continental.com, Orbitz.com, Travelweb.com
and our own Utell.com.
- - Hotel Internet sites - Our NetBooker(TM) service provides hotel companies
with a hotel information database and Internet-based reservation capabilities.
Hotel Internet sites that are "Powered by Pegasus"(TM) offer brand-loyal
Internet shoppers real-time rates, availability and booking capabilities.
Our CRS is provided on an application service provider basis to more than 10,000
hotel properties, representing more than 2.1 million hotel rooms worldwide.
During the first half of 2002, we processed over 17.7 million hotel bookings
through our CRS. We also provide CRS software licenses to an additional 20
hotel brands, representing 12,000 properties.
Our CRS service provides hotel customers with a license for our RezView(TM) CRS
software as well as the hardware and facilities necessary to process
reservations. Our CRS service also includes the following support and
outsourcing services:
- - System administration
- - Database administration
- - Electronic distribution channel management
- - Telecommunications management
- - Private-label voice reservation services
Reservation Services revenues consist of transaction fees and commissions as
well as license, subscription, maintenance and support fees and represent
approximately 45 percent of total revenues for the six months ended June 30,
2002.
Financial Services. Financial Services provides comprehensive commission
payment, processing and management solutions to hotels and travel agencies in
more than 200 countries. Key services include commission processing, electronic
reconciliation and tracking and global commission solutions.
Each month, Pegasus consolidates, distributes, reconciles, tracks and reports
millions of dollars in commission payments to a significant number of travel
agencies worldwide on behalf of more than 32,000 participating hotel properties.
Traditionally, the process of reconciling and paying hotel commissions to travel
agencies was based on transaction-specific hotel data and consisted of a number
of relatively small payments to travel agencies, often including payments in
multiple currencies. Our 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 in their choice of currency.
Our commission processing service processed over $246 million in hotel
commissions during the first half of 2002.
Financial Services revenues consist of both travel agency and hotel fees.
Travel agency fees are primarily based on a percentage of the value of hotel
commissions processed by us 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 we process for the respective
hotel. Financial Services revenues represented approximately 16 percent of
total revenues for the six months ended June 30, 2002.
11
Property Systems and Services. PegasusCentral(TM) is our Internet-based PMS
service. Six Continents Hotels has named it as one of two preferred PMS
standards for its 2,500-plus Holiday Inn and Holiday Inn Express properties.
Traditionally, hotel CRSs and PMSs had separate databases that communicated only
intermittently, often resulting in unbalanced inventories. With PegasusCentral,
when a hotel reservation is made from a central reservations office, via the
Internet, or at the property, only one database is accessed. This centralized
inventory stores all pertinent information for both the central reservation and
property management functions and provides consistent, real-time access to
rates, availability and other detailed property information. PegasusCentral
benefits both hotel chains and independent properties by assisting in the
management and operation of many hotel functions, including:
- - Enhanced property management
- - Multi-property central reservation
- - Customer relationship management
- - Sales and catering
- - Point-of-sale
- - Back-office modules such as receivables, payables and purchasing
Particularly in today's economic climate, hotel companies can realize the
benefits of PegasusCentral through the following:
- - Reduced capital equipment expenditures - Other PMS services typically
require significant capital expenditures. Because PegasusCentral is
Internet-based, hotel properties will incur only the cost of a computer with
Internet access to operate this system. Centrally hosted hardware and data
services are located at Pegasus' data center, providing secure central storage
for applications and data.
- - Reduced employee training costs - PegasusCentral's Internet-based
technology is easy to use, offering convenient pull-down menus, substantially
reducing the customer's learning curve. In addition, users can take advantage
of interactive online training modules.
- - Reduced IT staffing costs - PegasusCentral performs system upgrades from a
centralized facility resulting in instant product roll-outs to all locations.
This reduces the need for on-site technical experts and eliminates long roll-out
schedules and complex system upgrades.
- - Per-transaction pricing - With per-transaction pricing, hotels pay
transaction fees only as their rooms are occupied, better aligning technology
costs with room revenues.
As part of the REZ acquisition, we obtained the GuestView(TM) PMS software.
Although we are still servicing existing customers, we are not selling new
licenses for the GuestView software. Revenues for the first six months of 2002
consisted of maintenance and support fees related to the GuestView software,
revenues from the operations of GETS and installation and training fee revenues
from our PegasusCentral service. Property Systems and Services revenues
represented approximately 3 percent of total revenues for the six months ended
June 30, 2002.
Hospitality
- -----------
Our hospitality segment includes hotel representation and marketing 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. Our hospitality segment represented
approximately 36 percent of total revenues for the six months ended June 30,
2002.
Hotel representation. Representation service revenues consist of reservation
processing fees, membership fees and fees for various marketing services. In
order to sell their rooms in the marketplace, many independent hotels and small
hotel chains associate themselves with our hotel representation service and use
our systems and infrastructure to market and make reservations for their rooms.
Hotels typically join our hotel representation service for the following
reasons:
12
- - To achieve a cost-effective presence in the primary electronic
distribution channels - GDS and Internet.
- - To obtain a 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 is the oldest, largest and most diverse hotel representation company in
the world providing hotel marketing, voice reservation and GDS and Internet
representation services for more than 5,000 hotels in 163 countries. Utell uses
Pegasus' CRS, which offers advanced electronic distribution capabilities and
provides both a GDS and Internet presence for member hotels. In addition, Utell
offers front-end commission processing services to encourage its hotel members
to pay travel agency commissions.
Paytell. Many international and domestic travelers who book rooms at hotels to
which we provide representation services utilize Paytell to prepay for hotel
stays. In some international markets, it is customary for travelers to prepay
hotel rooms and other travel arrangements. International travelers also benefit
by reducing 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.
DEPENDENCE ON THE HOTEL INDUSTRY AND IMPACT OF THE ECONOMIC RECESSION AND
SEPTEMBER 11, 2001 EVENTS
Our business, particularly our hospitality segment, is sensitive to changes in
the demand for hotel rooms. The travel industry has been adversely impacted by
the onset of the economic recession and other world events, including the
terrorist attacks of September 11, 2001, the following retaliation and the
continuing threat alerts. The overall long-term impact of these events on
Pegasus and the travel industry is uncertain. Both the number of reservations
and the average daily rate charged for hotel rooms have sharply declined
following September 11, 2001 due to the decrease in demand. Although the
recovery in the number of reservations, as compared to the prior year, has been
quicker than anticipated, average daily rates have not yet fully recovered and
continue to lag behind the recovery in transaction volumes. Since our
electronic distribution and CRS revenues are primarily transaction-based,
revenues for these services, which had sharp decreases immediately following
September 11, have recovered relatively quickly and, for the first half of 2002,
are close to the levels seen in the prior year. However, since our hospitality
and commission processing services are based in large part on a combination of
reservation volume and average daily rates, their recovery has been somewhat
slower. In addition, we experienced an increase in the sales cycle for some of
our services, as new customers were hesitant to sign new contracts given the
uncertain economic environment.
The adverse impact of both an economic recession and the September 11 events has
resulted in a decrease in the demand for hotel rooms and, therefore, has
negatively impacted our revenues. We expect this trend to continue at least
through the end of 2002.
Prior to the September 11 events, we completed a thorough review of our
operations and, in an effort to reduce our costs and improve operational
efficiencies, instituted a restructuring plan. We continue to monitor
reservations and other daily indicators and adjust our resources accordingly.
We will continue to focus on cost management and the development of new
business. However, additional terrorist activities or a delay in the economic
recovery could have a material adverse effect on our business, operating results
and financial condition.
STRENGTH OF THE EURO
Pegasus derives a significant portion of its revenue from customers located
outside the United States, particularly in Europe. Recently, the strength of
the Euro relative to the U.S. Dollar resulted in Pegasus earning more revenue
than it otherwise might have earned if currency rates had remained stable or
weakened.
13
RECENT DEVELOPMENTS
Travelweb LLC, formerly known as Hotel Distribution System, LLC
- -----------------------------------------------------------------------
On February 11, 2002, Pegasus and five hotel chains - Hilton Hotels, Hyatt
Corporation, Marriott International, Six Continents Hotels and Starwood Hotels -
announced the formation of Travelweb LLC, formerly known as Hotel Distribution
System, LLC. This new venture was formed to distribute discounted hotel rooms
over the Internet through multiple Internet sites using a merchant business
model. Under the merchant model, Travelweb receives hotel room inventory from
suppliers at wholesale or "net" rates. Travelweb then sets the retail price for
the hotel room and processes the transaction as the merchant of record enabling
Travelweb to receive a higher level of gross profit per transaction than in a
fee per booking arrangement. Under the merchant model, Travelweb generally is
not obligated to pay suppliers for unsold inventory. Travelweb utilizes our
technology to create a direct connection between hotel reservation systems and
Internet sites. Travelweb has signed an agreement with Orbitz, LLC to
distribute the room inventory on a non-exclusive basis, and our Utell subsidiary
is one of the first hotel suppliers to distribute room inventory through
Travelweb.
On April 4, 2002, we entered into a three-year technology agreement with
Travelweb to develop technology and provide services that automate the net-rate
reservation and merchant model processes for Travelweb and participating hotels.
In addition, we transferred our consumer Internet site, TravelWeb.com, as part
of our capital contribution to the venture. In May 2002, we delivered the first
phase of technology before the scheduled completion date.
Because we are equal partners with these five hotel companies and do not
exercise significant influence, our investment in Travelweb will be accounted
for under the cost method. As a result, we will not recognize any income or
loss related to this investment unless we receive dividends or we determine the
investment to be impaired.
PegsPay
- -------
In June 2002, Financial Services launched PegsPay(TM), an ASP-based service for
travel businesses that operate under the merchant model, which is being marketed
to travel distributors worldwide. The first of its kind, PegsPay automates the
exchange of funds and incentives between travel distributors such as tour
operators, online net rate providers, consolidators and wholesalers, and any
type of travel supplier, including hotels, car rental companies, airlines,
railways and cruise lines. PegsPay provides an automated, more efficient
process for both the travel distributor and the travel supplier, providing
confidence that the financial transactions supporting their relationship will be
complete, dependable and supported by quality service and information.
The new service allows the travel distributor to pay each travel supplier via
one consolidated payment in the travel supplier's choice of currency and in the
manner in which the supplier wishes to get paid (e.g., check or direct deposit).
Additionally, the travel supplier receives detailed reservation reporting that
allows them to better manage their net rate distribution programs.
REVENUE
Technology Revenue
- -------------------
Reservation Services. Reservation Services revenues consist of CRS and
electronic distribution revenues. CRS revenues consist of transaction fees as
well as license, maintenance and support fees related to our RezView software.
Electronic Distribution revenues primarily consist of transaction fees,
commissions and monthly subscription or maintenance fees. In addition, new
hotel customers pay a one-time fee for establishing the connection between the
hotel's central reservation system and the electronic distribution technology.
New third-party Internet site customers typically pay a one-time fee for
establishing the connection between the third-party Internet site and our
electronic distribution technology, which is amortized over the related contract
period. Reservation Services revenues represented approximately 45 percent of
total revenues for the six months ending June 30, 2002.
14
Financial Services. Financial Services revenues consist of both travel agency
and hotel fees. Travel agency fees are based on a percentage of the value of
hotel commissions processed by Pegasus on behalf of participating travel
agencies. Revenues from travel agency fees can vary substantially from period
to period based on the types of hotels at which reservations are made and
fluctuations in overall room rates. In addition, participating hotels generally
pay fees based on the number of commissionable transactions that Pegasus
processes for the hotel. Financial Services revenues represented approximately
16 percent of total revenues for the six months ending June 30, 2002.
Property Systems and Services. Property Systems and Services revenues consist
of maintenance and support fees related to the GuestView software as well as
revenues from the operations of GETS, subsequent to September 1, 2001, the
acquisition date. In addition, Property System revenues include transaction
fees from our PegasusCentral service, which are recognized monthly, based on
room occupancy rates, as well as PegasusCentral installation and training fees.
Property Systems and Services represented approximately 3 percent of total
revenues for the six months ending June 30, 2002.
Hospitality Revenue
- --------------------
Hospitality revenue represented approximately 36 percent of total revenues for
the six months ending June 30, 2002. Hotel representation service revenues
consist of reservation processing fees, membership fees and fees for various
marketing services. In addition, our Paytell services allow international
travelers, who book rooms at hotels to which we provide representation services,
to prepay for their 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.
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.
COSTS
Pegasus' cost of services consists principally of personnel costs relating to
information technology, customer service and telemarketing and facilities and
equipment maintenance costs. Research and development costs consist principally
of personnel costs, related overhead costs and fees paid to outside consultants.
General and administrative expenses are primarily personnel, office, legal and
accounting related. Marketing and promotion expenses consist primarily of
personnel costs, advertising, public relations and participation in trade shows
and other industry events. Depreciation and amortization expense includes
depreciation of computer equipment, office furniture, office equipment and
leasehold improvements as well as amortization of software and intangible
assets. In accordance with Statement of Financial Accounting Standards No. 142,
amortization of goodwill ceased on January 1, 2002.
15
RESULTS OF OPERATIONS
The results of operations for the three and six months ended June 30, 2002
include the effects of the GETS acquisition, which was completed September 1,
2001. Accordingly, GETS' results of operations, including its revenues of
$522,000 and $1.3 million for the three and six months ended June 30, 2002,
respectively, are included in the accompanying unaudited condensed consolidated
financial statements.
Three Months Ended June 30, 2002 and 2001
Net Revenues. Net revenues for the three months ended June 30, 2002 were $44.9
million, compared to $49.8 million for the same period in 2001. The decrease in
year-over-year net revenues was primarily due to the sale of the Golden Tulip
brand in June 2001. Excluding the results of businesses sold or discontinued,
net revenues decreased approximately $1.3 million, or 3 percent. The decrease
was caused by the continued downward pressure on average daily rates following
the terrorist attacks of September 11, 2001 and the termination in March 2002 of
a large CRS customer whose revenue has not yet been fully replaced by new
customers.
Changes in Pegasus' business are described in detail in the paragraphs that
follow the presentation of revenues below (amounts in thousands):
Three months ended
June 30,
2002 2001
Technology:
Reservation Services $18,195 $18,862
Financial Services 7,448 7,781
Property Systems & Services 1,528 933
Business Intelligence - 68
Total technology 27,171 27,644
------- -------
Continuing operations 27,171 27,576
Hospitality:
Utell 17,692 18,612
Golden Tulip --- 3,512
Total hospitality 17,692 22,124
Continuing operations 17,692 18,612
Total revenue $44,863 $49,768
Total continuing operations $44,863 $46,188
======= =======
Revenues for our technology segment decreased $473,000, or 2 percent, to $27.2
million for the three months ended June 30, 2002, compared to $27.6 million for
the same period in 2001.
Reservation Services revenues decreased $667,000, or 4 percent, to $18.2 million
for the three months ended June 30, 2002, compared to $18.9 million for the same
period in 2001. The decrease was primarily due to the loss of a customer in
March 2002 following the expected termination of their contract.
Financial Services revenues decreased $333,000, or 4 percent, to $7.4 million
for the three months ended June 30, 2002, compared to $7.8 million for the same
period in 2001. The decrease was primarily the result of a 5 percent reduction
in gross commissions processed resulting from a decrease in hotels' average
daily rate charged for rooms following September 11, 2001.
Property Systems and Services generated revenues of $1.5 million for the three
months ended June 30, 2002, compared to $933,000 for the same period in 2001.
The increase was primarily due to the September 1, 2001 acquisition of GETS,
which contributed approximately $552,000 in revenue during the three months
ended June 30, 2002. The remainder of the increase is attributable to revenue
generated by PegasusCentral installations.
16
Excluding Golden Tulip, revenues for our hospitality segment decreased by
$920,000, or 5 percent, to $17.7 million for the three months ended June 30,
2002, compared to $18.6 million for the same period in 2001. The decrease was
the result of a strategic initiative to reduce the number of hotels Utell
represents to improve margins and to upgrade the quality of the Utell member
hotels.
Cost of services. Cost of services was $23.2 million for the three months ended
June 30, 2002, compared to $24.9 million for the same period in 2001. The
decrease was primarily due to the absence of costs related to the Golden Tulip
brand and the results of the cost reduction measures enacted during the third
quarter 2001 restructuring. Cost of services as a percentage of revenue were 52
percent and 50 percent for the three months ended June 30, 2002 and 2001,
respectively.
Research and development. For the three months ended June 30, 2002, research
and development expense both in total and as a percentage of revenue were
consistent with the same period in 2001.
General and administrative expenses. General and administrative expenses were
$6.8 million for the three months ended June 30, 2002, compared to $7.5 million
for the same period in 2001. The decrease was primarily due to cost reduction
measures enacted during the third quarter 2001 restructuring. General and
administrative expenses as a percentage of revenue were 15 percent for the three
months ended June 30, 2002 and 2001.
Marketing and promotion expenses. Marketing and promotion expenses were $4.8
million for the three months ended June 30, 2002, compared to $6.1 million for
the same period in 2001. Marketing and promotion expenses decreased primarily
due to the absence of $856,000 of costs related to the Golden Tulip brand
incurred during 2001, and as the result of continuing the cost reduction
measures initiated during the third quarter 2001 restructuring. Marketing and
promotion expenses as a percentage of revenue were 11 percent and 12 percent for
the three months ended June 30, 2002 and 2001, respectively.
Depreciation and amortization. Depreciation and amortization expenses were
$12.3 million for the three months ended June 30, 2002, compared to $16.4
million for the same period in 2001. The decrease was due to Pegasus' adoption
of FAS 142 (see Note 2 to the Condensed Consolidated Financial Statements),
which resulted in the January 1, 2002 cessation of amortization of goodwill from
the REZ acquisition. For the three months ended June 30, 2001, goodwill
amortization was $4.2 million.
Interest income, net. Net interest income was $295,000 for the three months
ended June 30, 2002, compared to $174,000 for the same period in 2001. The net
change was primarily due to a reduction in interest expense in 2002, because of
the repayment of the $20 million note to Reed Elsevier plc on June 15, 2001.
Equity in loss of investee. During the three months ended June 30, 2001,
Pegasus incurred an expense of $38,000, representing its share of GETS' net
losses and $119,000 of amortization expense for the excess cost over net assets
acquired for our 20 percent investment in GETS. We acquired GETS in September
2001.
Gain on sale of business units. In June 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.
Income tax benefit. Pegasus recorded an income tax benefit of $1.3 million,
representing an effective tax rate of 40 percent, for the three months ended
June 30, 2002, compared to an income tax benefit of $1.4 million, representing
an effective tax rate of 23 percent, for the three months ended June 30, 2001.
The effective tax rate for the three months ended June 30, 2002 differed from
the statutory rate of 35 percent, primarily due to small non-deductible expenses
and the beneficial tax rate differential of certain foreign earnings. The
effective tax rate for the three months ended June 30, 2001 differed from the
statutory rate of 35 percent, primarily due to large non-deductible expenses
related to purchase accounting, partially offset by tax-exempt interest income.
17
Six Months Ended June 30, 2002 and 2001
Net Revenues. Net revenues for the six months ended June 30, 2002 were $90.3
million, compared to $95.9 million for the same period in 2001. Net revenues
for 2002 included a one-time $3.5 million termination fee received from a
customer following the termination of their contract in March 2002. The
decrease in year-over-year net revenues was primarily due to the sale of the
Golden Tulip brand in June 2001. Excluding the results of businesses sold or
discontinued, and the termination fee described above, net revenues decreased
approximately $2.2 million, or 2 percent. The primary reason for the decrease
in revenue was due to the decrease in transaction revenue following the early
termination of a customer contract, noted above, and the continued downward
pressure on average daily rates following the terrorist attacks of September 11,
2001.
Changes in Pegasus' business are described in detail in the paragraphs that
follow the presentation of revenues below (amounts in thousands):
Six months ended
June 30,
2002 2001
Technology:
Reservation Services $40,406 $37,605
Financial Services 14,396 14,877
Property Systems & Services 3,201 1,695
Business Intelligence - 256
Total technology 58,003 54,433
------- --------
Continuing operations 54,469 (1) 54,177
Hospitality:
Utell 32,284 34,767
Golden Tulip - 6,676
Total hospitality 32,284 41,443
Continuing operations 32,284 34,767
Total revenue $90,287 $95,876
Total continuing operations $86,753 (1) $88,944
======= =======
(1) Excludes the one-time $3.5 million termination
fee recognized in March 2002
Revenues for our technology segment increased $3.6 million, or 7 percent, to
$58.0 million for the six months ended June 30, 2002, compared to $54.4 million
for the same period in 2001.
Reservation Services revenues increased $2.8 million, or 7 percent, to $40.4
million for the six months ended June 30, 2002, compared to $37.6 million for
the same period in 2001. The increase in revenue was primarily due to the
one-time termination fee noted above, which more than offset the decline in
second quarter 2002 transaction revenue following their termination.
Financial Services revenues decreased $481,000, or 3 percent, to $14.4 million
for the six months ended June 30, 2002, compared to $14.9 million for the same
period in 2001. The decrease was primarily the result of a 7 percent decrease
in gross commissions processed for the six months ended June 30, 2002, compared
to the same period in 2001. The decrease in gross commissions was due to a
decrease in hotels' average daily rates following the events of September 11,
2001.
Property Systems and Services generated revenues of $3.2 million for the six
months ended June 30, 2002, compared to $1.7 million for the same period in
2001. The increase was primarily due to the September 1, 2001 acquisition of
GETS, which contributed approximately $1.3 million in revenue during the six
months ended June 30, 2002. The remainder of the increase was due to revenue
generated by PegasusCentral installations.
18
Excluding Golden Tulip, revenues for our hospitality segment decreased $2.5
million, or 7 percent, to $32.3 million for the six months ended June 30, 2002,
compared to $34.8 million for the same period in 2001. The decrease in revenue
was the result of a decrease in reservation fees, caused by the continuing
impact of September 11, 2001, and the decrease in the number of hotels Utell
represents. The decrease in the number of hotels represented by Utell is the
result of a planned strategic initiative to upgrade the portfolio of Utell
member hotels.
Cost of services. Cost of services was $45.8 million for the six months ended
June 30, 2002, compared to $51.2 million for the same period in 2001. The
decrease was primarily due to the absence of costs related to the Golden Tulip
brand and the results of the cost reduction measures enacted during the third
quarter 2001 restructuring, consisting primarily of a reduction in personnel and
facilities. Cost of services as a percentage of revenue were 51 percent and 53
percent for the six months ended June 30, 2002 and 2001, respectively.
Research and development. For the six months ended June 30, 2002, research and
development expense both in total and as a percentage of revenue were consistent
with the same period in 2001.
General and administrative expenses. General and administrative expenses were
$12.6 million for the six months ended June 30, 2002, compared to $14.0 million
for the same period in 2001. General and administrative expenses decreased
primarily due to the absence of significant professional fees that were incurred
in first quarter of 2001 with the implementation of our enterprise-wide
accounting and information system. Additional reductions were realized as the
result of the cost reduction measures enacted during the third quarter 2001
restructuring. General and administrative expenses as a percentage of revenue
were 14 percent and 15 percent for the six months ended June 30, 2002 and 2001,
respectively.
Marketing and promotion expenses. Marketing and promotion expenses were $9.1
million for the six months ended June 30, 2002, compared to $12.4 million for
the same period in 2001. Marketing and promotion expenses decreased primarily
due to the absence of $1.9 million of costs related to the Golden Tulip brand
incurred during 2001, and as the result of continuing the cost reduction
measures initiated during the third quarter 2001 restructuring. Marketing and
promotion expenses as a percentage of revenue were 10 percent and 13 percent for
the six months ended June 30, 2002 and 2001, respectively.
Depreciation and amortization. Depreciation and amortization expenses were
$24.4 million for the six months ended June 30, 2002, compared to $32.8 million
for the same period in 2001. The decrease was primarily due to Pegasus'
adoption of FAS 142 (see Note 2 to the Condensed Consolidated Financial
Statements), which resulted in the January 1, 2002 cessation of amortization of
goodwill from the REZ acquisition. For the six months ended June 30, 2001,
goodwill amortization was $8.6 million.
Interest income, net. Net interest income was $557,000 for the six months ended
June 30, 2002, compared to $213,000 for the same period in 2001. The net change
was primarily due to a reduction in interest expense in 2002, because of the
repayment of the $20 million note to Reed Elsevier plc on June 15, 2001.
Equity in loss of investee. During the six months ended June 30, 2001, Pegasus
incurred an 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 20 percent investment in GETS.
Gain on sale of business units. In January 2001, Pegasus sold its Summit Hotels
and Resorts and Sterling Hotels and Resorts brand business to IndeCorp
Corporation for approximately $12 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 gain of $78,000 related
to these two transactions.
Income tax benefit. Pegasus recorded an income tax benefit of $1.8 million,
representing an effective tax rate of 40 percent, for the six months ended June
30, 2002, compared to an income tax benefit of $3.5 million, representing an
effective tax rate of 19 percent, for the six months ended June 30, 2001. The
effective tax rate for the six months ended June 30, 2002 differed from the
statutory rate of 35 percent, primarily due to small non-deductible expenses and
the beneficial tax rate differential of certain foreign earnings. The effective
tax rate for the six months ended June 30, 2001 differed from the statutory rate
of 35 percent, primarily due to large non-deductible expenses related to
purchase accounting, partially offset by tax-exempt interest income.
19
LIQUIDITY AND CAPITAL RESOURCES
Pegasus' principal sources of liquidity at June 30, 2002 included cash and cash
equivalents of $20.9 million, short-term investments of $7.7 million and an
unused revolving credit facility of $30.0 million. Pegasus' principal sources
of liquidity at December 31, 2001 included cash and cash equivalents of $13.4
million, short-term investments of $9.2 million and an unused revolving credit
facility of $30.0 million.
Effective March 31, 2002, Pegasus amended and extended its $30 million revolving
credit facility with Chase Bank of Texas, Compass Bank and Wells Fargo Bank
(Texas) through March 31, 2004. The credit facility has an interest rate of
LIBOR plus 2 percent. There was no amount outstanding under the credit facility
at June 30, 2002 or December 31, 2001.
Pegasus has entered into two irrevocable standby letter of credit agreements
with Chase Manhattan Bank totaling $2.6 million related to the leases for its
new Dallas and Phoenix offices. The amount available to Pegasus under the $30
million credit facility is reduced by these letters of credit.
Pegasus had working capital of $5.5 million at June 30, 2002, compared to a
working capital deficit of $5.5 million at December 31, 2001. Working capital
increased primarily as a result of cash flows generated from operating
activities and net proceeds from the purchase and sale of marketable securities,
offset by capital expenditures. Net cash provided by operating activities
increased to $21.2 million for the six months ending June 30, 2002, from $19.1
million for the same period in 2001. This increase was primarily due to the
third quarter 2001 restructuring, which reduced headcount by approximately 15
percent, and a continued 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 $16.0
million for the six months ended June 30, 2002 compared to $8.1 million for the
same period in 2001. The increase was primarily due to furniture, equipment and
leasehold improvements for our new Dallas and Phoenix offices as well as costs
associated with our new data center in Phoenix. Pegasus expects to incur
incremental capital expenditures through the end of 2002 to add capacity to
existing systems and continued software development and for the Phoenix office
move. Operating leases continue to be the only off-balance sheet financing
arrangements Pegasus engages in.
Additional uses of cash for investing activities for the six months ended June
30, 2002 included purchases of marketable securities totaling $6.7 million,
compared to $12.7 million for the same period in 2001. Pegasus has satisfied
its cash requirements for investments primarily through cash generated from
operations.
On June 5, 2002, the Board of Directors authorized the repurchase of up to two
and a half million shares of Pegasus' common stock. During the three months
ended June 30, 2002, 71,500 shares were repurchased for an aggregate value of
$1.0 million. At June 30, 2002, cumulative repurchases of common stock under
board approved plans totaled approximately 513,000 shares at a value of $4.3
million. Any future repurchases are 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.
Our future liquidity and capital requirements will depend on numerous factors,
including:
- - Our profitability
- - Operational cash requirements, including payments for severance and
redundant facilities related to our restructuring
- - Competitive pressures
- - Development of new services and applications
- - Acquisition of and investment in complementary businesses or technologies
- - Response to unanticipated cash requirements
20
Pegasus believes its cash flows from operations, together with funds available
from debt financing and the sale of common stock, 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.
Other Matters
In the Proxy Statement for our 2002 annual meeting of stockholders, we described
certain "integrated" options associated with the Supplemental Employee
Retirement Plan ("SERP") and disclosed 176,275 options related to the SERP as
being granted to three Named Executive Officers under the heading entitled
"Options Grants In Last Fiscal Year." These options described in the Proxy
Statement are not outstanding. Neither the Board of Directors nor its
Compensation Committee authorized, or presently intends to authorize, these or
any other options in connection with the SERP. The impact of excluding these
options from theinformation contained in the Proxy Statement, Annual Report on
Form 10-K or our first quarter report on Form 10-Q is not material.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - Pegasus is subject to certain legal proceedings,
claims and disputes that arise in the ordinary course of our business. Although
management cannot predict the outcomes of these legal proceedings, we do not
believe these actions will have a material adverse effect on our financial
position, results of operations or liquidity.
Item 4. Submission of Matters to Vote of Security Holders
Pegasus held its annual meeting of stockholders on Tuesday, May 7, 2002. At
the annual meeting, Pegasus stockholders took the following actions:
1) By a vote of 23,283,745 for and 79,599 withheld, the stockholders elected
Robert B. Collier as Class II Director for a term expiring at the annual meeting
to be held in 2005 and until his successor is elected and qualified.
2) By a vote of 23,383,734 for and 79,610 withheld, the stockholders elected
Bruce W. Wolff as Class II Director for a term expiring at the annual meeting to
be held in 2005 and until his successor is elected and qualified.
3) By a vote of 13,091,476 for, 10,232,969 against and 38,899 abstaining,
the stockholders approved amendments to our 1997 Amended Stock Option Plan that
extend its terms to March 5, 2012, provide for the issuance of restricted stock
(in addition to incentive and non-qualified stock option grants currently
permitted) so long as the number of shares of restricted stock issued in any
calendar year does not exceed 2.5% of the number of shares reserved for issuance
under the plan, and rename the plan the "Pegasus Solutions, Inc. 2002 Stock
Incentive Plan."
Item 6. Exhibits and Reports on Form 8-K
21
a) Exhibits
Exhibit 99.1 - Certification of Chief Executive Officer, Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Exhibit 99.2 - Certification of Chief Financial Officer, Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
b) Form 8-Ks filed under Item 5 - Other Events
On May 23, 2002, Pegasus Solutions, Inc. filed a report on Form 8-K to notify
shareholders that John F. Davis III, Pegasus Solutions' Chairman of the Board
and Chief Executive Officer had entered into a Form 10b5-1, written trading
plan.
On June 21, 2002, Pegasus Solutions, Inc. filed a report on Form 8-K to announce
the authorization by the Board of Directors of the Company's new stock buy-back
program for the repurchase of up to 2.5 million shares of the Company's common
stock.
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.
August 6, 2002 /s/ JOHN F. DAVIS, III
------------------------
John F. Davis, III,
-------------------
Chairman and Chief
Executive Officer
August 6, 2002 /s/ SUSAN K. COLE
Susan K. Cole,
--------------
Executive Vice President
and Chief Financial Officer
(principal accounting officer)
22
EXHIBIT INDEX
Exhibit Number Description
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99.1 Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Pegasus Solutions, Inc. ("the
Company") on Form 10-Q for the period ending June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof ("the Report"), I, John F.
Davis, III, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
August 6, 2002 /s/ JOHN F. DAVIS, III
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John F. Davis, III,
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Chairman and Chief
Executive Officer
Exhibit 99.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Pegasus Solutions, Inc. ("the
Company") on Form 10-Q for the period ending June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof ("the Report"), I, Susan
K. Cole, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002, that:
1. The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
August 6, 2002 /s/ SUSAN K. COLE
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Susan K. Cole,
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Executive Vice President
and Chief Financial Officer
(principal accounting officer)