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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 SEPTEMBER 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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares of the registrant's common stock outstanding as of November
11, 2002 was 24,600,984.
PEGASUS SOLUTIONS, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements 3
a) Condensed Consolidated Balance Sheets as of September 30, 2002
and December 31, 2001 (unaudited) 3
b) Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss) for the Three and Nine Months Ended
September 30, 2002 and 2001 (unaudited) 4
c) Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 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 11
Item 4. Controls and Procedures 22
Part II. Other Information
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 25
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEGASUS SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2002 2001
--------- ---------
ASSETS
Cash and cash equivalents $ 25,932 $ 13,438
Short-term investments 1,022 9,167
Accounts receivable, net 29,171 29,228
Other current assets 6,080 5,309
--------- ---------
Total current assets 62,205 57,142
Intangible assets, net 10,436 32,505
Property and equipment, net 72,047 67,365
Goodwill, net 141,594 136,921
Other noncurrent assets 11,507 9,737
--------- ---------
Total assets $297,789 $303,670
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 11,813 $ 19,018
Accrued liabilities 18,962 20,185
Unearned income 9,060 8,585
Deferred tax liability 1,964 12,301
Customer deposits 3,931 2,170
Other current liabilities 745 424
--------- ---------
Total current liabilities 46,475 62,683
Uncleared commission checks 4,995 4,004
Other noncurrent liabilities 15,738 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;
25,431,900 and 25,136,100 shares issued, respectively 254 251
Additional paid-in capital 293,971 290,444
Unearned compensation (905) (34)
Accumulated comprehensive gain - 21
Accumulated deficit (58,283) (56,238)
Treasury stock at cost; 525,619 and 441,619 shares, respectively (4,456) (3,243)
--------- ---------
Total stockholders' equity 230,581 231,201
--------- ---------
Total liabilities and stockholders' equity $297,789 $303,670
========= =========
See accompanying notes to condensed consolidated financial statements.
3
PEGASUS SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net revenues $ 45,619 $ 45,226 $ 135,906 $ 141,102
Cost of services 21,471 24,613 67,233 75,802
Research and development 1,332 2,313 4,621 5,886
General and administrative expenses 5,053 5,436 17,659 19,460
Marketing and promotion expenses 4,560 4,917 13,622 17,335
Depreciation and amortization 12,058 16,349 36,452 49,177
Restructure costs - 6,302 - 7,099
------------ ------------ ------------ ------------
Operating income (loss) 1,145 (14,704) (3,681) (33,657)
Other income (expense):
Interest income, net 360 362 917 575
Equity in loss of investee - (179) - (634)
Gain on sale of business units - - - 78
Other (139) (166) (405) (130)
------------ ------------ ------------ ------------
Income (loss) before income taxes 1,366 (14,687) (3,169) (33,768)
Income tax expense (benefit) 694 (3,836) (1,124) (7,367)
------------ ------------ ------------ ------------
Net income (loss) $ 672 $ (10,851) $ (2,045) $ (26,401)
============ ============ ============ ============
Other comprehensive income - change in
unrealized gain (loss), net of tax 1 (14) (21) (7)
------------ ------------ ------------ ------------
Comprehensive income (loss) $ 673 $ (10,865) $ (2,066) $ (26,408)
============ ============ ============ ============
Net income (loss) per share:
Basic and diluted $ 0.03 $ (0.44) $ (0.08) $ (1.08)
============ ============ ============ ============
Weighted average shares outstanding:
Basic 24,880,158 24,566,715 24,816,835 24,548,572
============ ============ ============ ============
Diluted 25,641,729 24,566,715 24,816,835 24,548,572
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
4
PEGASUS SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
2002 2001
--------- ---------
Cash flows from operating activities:
Net loss $ (2,045) $(26,401)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 36,452 49,177
Gain on sale of business units - (78)
Bad debt expense 1,289 3,009
Other 1,746 791
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable (1,253) (3,589)
Other assets (1,539) (1,759)
Accounts payable and accrued liabilities (8,627) 7,100
Unearned income 475 428
Other liabilities 4,673 (1,604)
--------- ---------
Net cash provided by operating activities 31,171 27,074
Cash flows from investing activities:
Proceeds from sale of business units - 4,033
Purchase of marketable securities (8,786) (16,374)
Proceeds from maturity of marketable securities 16,400 6,226
Purchase of property and equipment (25,267) (11,385)
Purchase of Global Enterprise Technology Solutions, LLC - (11,512)
Investment in Travelweb, LLC (1,527) -
Purchase of REZsolutions, Inc., net of cash acquired - 852
Other 38 1,692
--------- ---------
Net cash used in investing activities (19,142) (26,468)
Cash flows from financing activities:
Proceeds from issuance of common stock 1,770 831
Repayment of notes payable - (20,000)
Purchase of treasury stock (1,213) (2,067)
Other (92) (96)
--------- ---------
Net cash provided by (used in) financing activities 465 (21,332)
Net increase (decrease) in cash and cash equivalents 12,494 (20,726)
Cash and cash equivalents, beginning of period 13,438 37,150
--------- ---------
Cash and cash equivalents, end of period $ 25,932 $ 16,424
========= =========
Supplemental schedule of noncash investing and financing activities:
Landlord paid tenant improvements $ 2,063 $ -
========= =========
Note received from sale of Summit and Sterling Hotels & Resorts $ - $ 7,000
========= =========
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,
effective January 1, 2002, workforce-in-place from the REZ acquisition was
reclassified as goodwill and will no longer be subject to amortization. At
September 30, 2002, goodwill totaled $141.6 million.
As detailed in Note 6, Pegasus is organized in two business segments -
technology and hospitality. In accordance with FAS 142, goodwill is subject to
an annual impairment test, conducted at the business segment level. Based on
the periodic impairment test conducted as of September 30, 2002, the Company
does not believe goodwill for either business segment is impaired. The
following table presents goodwill by business segment, net of accumulated
amortization, and reflecting the reclassification of workforce-in-place (amounts
in thousands):
Technology Hospitality Total
September 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 September 30, 2002 and December 31,
2001 (amounts in thousands):
September 30, 2002 December 31, 2001
Carrying Accumulated Carrying Accumulated
Value Amortization Value Amortization
Customer relationships $52,376 $ (43,915) $52,376 $ (30,942)
Non-compete agreements 3,820 (1,877) 3,820 (1,305)
Other 48 (16) 48 (11)
Total $56,244 $ (45,808) $56,244 $ (32,258)
------- -------------- ------- --------------
During the three and nine months ended September 30, 2002, the Company recorded
amortization expense in relation to the above-listed intangible assets of $4.4
million and $13.6 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 income
and losses for the three and nine months ended September 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 Nine months ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
----------- ------------ ------------ ------------
Reported net income (loss) $ 672 $ (10,851) $ (2,045) $ (26,401)
Goodwill amortization - 2,589 - 7,913
Workforce in-place amortization - 1,056 - 3,168
Adjusted net income (loss) $ 672 $ (7,206) $ (2,045) $ (15,320)
----------- ------------ ------------ ------------
Basic and diluted earnings per share:
Reported net income (loss) $ 0.03 $ (0.44) $ (0.08) $ (1.08)
Goodwill amortization - 0.11 - 0.32
Workforce in-place amortization - 0.04 - 0.13
Adjusted net income (loss) $ 0.03 $ (0.29) $ (0.08) $ (0.63)
----------- ------------ ------------ ------------
Weighted average shares outstanding:
Basic 24,880,158 24,566,715 24,816,835 24,548,572
Diluted 25,641,729 24,566,715 24,816,835 24,548,572
=========== ============ ============ ============
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 September 30,
2002, total unpaid severance and outplacement costs were approximately $61,000
and total unpaid redundant facilities and other costs were approximately
$615,000. 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 2.5
million shares of the Company's common stock. During the nine months ended
September 30, 2002, 84,000 shares were repurchased for an aggregate purchase
price of $1.2 million. At September 30, 2002, cumulative repurchases of common
stock under board approved plans totaled approximately 526,000 shares at an
aggregate purchase price of $4.5 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.
5. EARNINGS PER SHARE
For the three months ended September 30, 2002, the weighted average shares used
to compute diluted earnings per share include approximately 762,000 shares
representing the dilutive effect of stock options. Shares excluded from the
weighted average share calculation that related to potentially dilutive
securities total 3.5 million for the three months ended September 30, 2002.
Potentially dilutive securities represent stock options that are priced higher
than the average market value of the Company's common stock during that period.
Due to the Company's net loss position for the nine months ended September 30,
2002 and the three and nine months ended September 30, 2001, all outstanding
options were excluded in the calculation of diluted net loss per share because
their effect would be anti-dilutive. For the nine months ended September 30,
2002, 4.4 million shares issuable upon the exercise of stock options were not
included in the calculations of diluted net loss per share. Approximately 3.4
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 nine months
ended September 30, 2001.
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.
8
The following table presents information about reported segments for the three
months ended September 30 (in thousands):
Technology Hospitality Total
2002
- -----------
Net revenues $ 28,727 $ 16,892 $45,619
EBITDA 8,368 4,835 13,203
2001
- -----------
Net revenues 27,435 17,791 45,226
EBITDA 2,355 (710) 1,645
Reconciliations of total segment EBITDA to total consolidated income (loss)
before income taxes for the three months ended September 30, 2002 and 2001 are
as follows (in thousands):
2002 2001
Total EBITDA for reportable segments $ 13,203 $ 1,645
Depreciation and amortization (12,058) (16,349)
Interest income, net 360 362
Equity in loss of investee - (179)
Other (139) (166)
Consolidated income (loss) before income taxes $ 1,366 $(14,687)
--------- ---------
The following table presents information about reported segments for the nine
months ended September 30 (in thousands):
Technology Hospitality Total
2002
- -----------
Net revenues $ 86,730 $ 49,176 $135,906
EBITDA 22,320 10,451 32,771
2001
- -----------
Net revenues 81,867 59,235 141,102
EBITDA 13,772 1,748 15,520
Reconciliations of total segment EBITDA to total consolidated loss before income
taxes for the nine months ended September 30, 2002 and 2001 are as follows (in
thousands):
2002 2001
Total EBITDA for reportable segments $ 32,771 $ 15,520
Depreciation and amortization (36,452) (49,177)
Interest income, net 917 575
Gain on sale of business units - 78
Equity in loss of investee - (634)
Other (405) (130)
Consolidated loss before income taxes $ (3,169) $(33,768)
--------- ---------
9
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 STANDARD
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" (" FAS 146"). FAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and replaces Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The provisions of FAS
146 are effective, on a prospective basis, for exit or disposal activities
initiated by the Company after December 31, 2002.
10
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.
Statements made in this discussion and analysis that are not purely historical
are forward-looking statements. These statements include statements regarding
Pegasus' or management's expectations, beliefs, hopes, intentions or strategies
regarding the future. Because such statements deal with future events, they are
subject to various risks and uncertainties and actual results could differ
materially from our current expectations. Factors that could cause or
contribute to such difference include, but are not limited to, terrorist acts or
war, variation in demand for and acceptance of our products and services and
timing of sales, general economic conditions including a slowdown in technology
spending by our current and prospective customers, failure to maintain
successful relationships with and to establish new relationships with customers,
the success of our international operations, the level of product and price
competition from existing and new competitors, changes in our level of operating
expenses and our ability to control costs, delays in developing, marketing and
deploying new products and services and risks identified in our Securities and
Exchange Commission filings, including those appearing under the caption Risk
Factors in our 2001 Annual Report on Form 10-K and Quarterly Reports on Form
10-Q filed since the Annual Report.
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 agency locations around the world, including
the 10 largest U.S.-based travel agencies based on revenues;
- - More than 48,000 hotel properties around the globe, including the 50
largest hotel brands in the world based on total number of guest rooms; and
- - Thousands of Web sites have their hotel reservations "Powered by
Pegasus"(TM).
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, a
voice reservation network with local language capabilities in 41 countries, and
distribution through all global distribution systems, or GDSs, and a proprietary
Internet booking site, www.Utell.com, with thousands of linked third-party
Internet sites. For the nine months ended September 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.
11
Beginning in 2002, our CRS and electronic distribution services were combined
and are 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.
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 around
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" offer brand-loyal Internet
shoppers real-time rates, availability and booking capabilities.
Our CRS is provided on an application service provider basis to approximately
8,000 hotel properties, representing more than 2.1 million hotel rooms
worldwide. During the first nine months of 2002, we processed over 24.4 million
hotel bookings through our CRS. We also provide CRS software licenses to an
additional 20 hotel brands, representing approximately 13,000 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
Financial Services. Financial Services provides comprehensive commission
processing and payment solutions to hotels and travel agencies in more than 200
countries. Key services include commission processing, reconciliation and
tracking for member agencies, global commission solutions for participating
hotels and, beginning in June 2002, PegsPay, our payment service targeted at
travel distributors. More information is provided below under the heading
"Recent Developments".
Each month, Pegasus consolidates, distributes, reconciles, tracks and reports
millions of dollars in commission payments to a significant number of travel
agency locations 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
$375 million in hotel commissions during the first nine months of 2002.
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:
12
- - 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.
In addition to PegasusCentral, we obtained two proprietary software solutions as
part of the REZ, Inc., or REZ, and Global Enterprise Technology Solutions, or
GETS, acquisitions. Revenues for the first nine months of 2002 consisted of
maintenance and support fees related to the PMS software, revenues from the
operations of GETS and installation and training fee revenues from our
PegasusCentral service.
Hospitality
- -----------
Our hospitality segment includes hotel representation, marketing and financial
services offered under the Utell brand name. 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:
- - 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 sales, marketing, voice reservation and GDS and
Internet services for nearly 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 two financial services, Paytell and TravelCom, to
facilitate payment to its hotel members and commission payments to travel
agencies. Paytell is a service that allows travelers to prepay for reservations
and manage their exposure to foreign currency exchange rate fluctuations. 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. TravelCom is an Internet-based proprietary system that
allows member hotels to expedite commission payments to travel agents.
13
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, the
continuing threat alerts, and the possibility of war with Iraq and other
military actions. 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, transatlantic business travel and 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, 2001, recovered relatively quickly and, for
the first nine months 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, 2001
events have 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
into 2003.
Prior to the September 11, 2001 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 periodic indicators and adjust our resources accordingly.
We will continue to focus on cost management and the development of new
business. However, additional terrorist activities, escalation of hostilities
in the Middle East or elsewhere or further delays in the economic recovery could
have a material adverse effect on our business, operating results and financial
condition.
FLUCTUATION OF FOREIGN CURRENCIES
Pegasus (in particular, the Hospitality segment) derives a significant portion
of its revenue from customers located outside the United States. Particularly
in Europe, fluctuations of foreign currencies such as the Euro and the British
Pound relative to the U.S. Dollar result in Pegasus earning more or less revenue
than it otherwise might have earned if currency rates had remained stable.
14
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
was 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.
During the nine months ended September 30, 2002, we contributed an additional
$1.2 million in cash and $360,000 in development costs to Travelweb, LLC.
Because we are equal partners with five hotel companies and do not exercise
significant influence, our investment in Travelweb is 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, 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 43 percent of
total revenues for the nine months ending September 30, 2002.
15
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 demand for hotel rooms, the types of hotels (i.e.
upscale, economy, etc.) 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 17 percent of
total revenues for the nine months ending September 30, 2002.
Property Systems and Services. Property Systems and Services revenues consist
of maintenance and support fees related to our GuestView software as well as
revenues from the operations of GETS, subsequent to September 1, 2001, the
acquisition date. In addition, Property Systems and Services 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 4
percent of total revenues for the nine months ending September 30, 2002.
Hospitality Revenue
- --------------------
Hotel representation service revenues consist of reservation processing fees,
based on the value of each reservation processed, quarterly membership fees and
marketing fees. Hospitality revenue is also generated as a result of two
financial service products, Paytell and TravelCom. Paytell is a prepayment
process in which a markup or transaction fee is applied to cross-currency
reservations. In addition, the Hospitality segment earns a transaction fee for
each travel agent commission paid through TravelCom. Hospitality revenue
represented approximately 36 percent of total revenues for the nine months
ending September 30, 2002.
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.
RESULTS OF OPERATIONS
The results of operations for the three and nine months ended September 30, 2002
include the effects of the GETS acquisition, which was completed September 1,
2001. Accordingly, GETS' results of operations, including its revenues of
$519,000 and $1.8 million for the three and nine months ended September 30,
2002, respectively, are included in the accompanying unaudited condensed
consolidated financial statements.
16
Three Months Ended September 30, 2002 and 2001
Net Revenues. Overall, year-over-year revenue comparisons are impacted by the
events of September 11, 2001, which had a direct and immediate negative impact
in 2001 and continue to have a lingering negative effect on the general economy
and hospitality industry during the current year. Net revenues for the three
months ended September 30, 2002 were $45.6 million, compared to $45.2 million
for the same period in 2001.
Changes in Pegasus' business are described in detail in the paragraphs that
follow the presentation of revenues below (amounts in thousands):
Three months ended
September 30,
2002 2001
Technology:
Reservation Services $18,722 $19,094
Financial Services 8,198 7,283
Property Systems & Services 1,807 1,058
Total technology 28,727 27,435
Hospitality (Utell) 16,892 17,791
Total revenue $45,619 $45,226
------- -------
Revenues for our technology segment increased $1.3 million, or 5 percent, to
$28.7 million for the three months ended September 30, 2002, compared to $27.4
million for the same period in 2001.
Reservation Services revenues decreased $372,000, or 2 percent, to $18.7 million
for the three months ended September 30, 2002, compared to $19.1 million for the
same period in 2001. The decrease was primarily due to the loss of a CRS
customer in March 2002 following the expected termination of their contract.
Financial Services revenues increased $915,000, or 13 percent, to $8.2 million
for the three months ended September 30, 2002, compared to $7.3 million for the
same period in 2001. The increased revenue was primarily attributable to
increases in the average travel agent fee and member transaction volume
resulting from new travel agency locations being added to the customer base,
offset by declines in hotels' average daily rate charged per room.
Property Systems and Services generated revenues of $1.8 million for the three
months ended September 30, 2002, compared to $1.0 million for the same period in
2001. The increase was primarily attributable to new installations of the
PegasusCentral product offering, which contributed an incremental $410,000. The
remainder of the increase was attributable to revenue from the September 1, 2001
acquisition of GETS.
Revenues for our hospitality segment decreased by $900,000, or 5 percent, to
$16.9 million for the three months ended September 30, 2002, compared to $17.8
million for the same period in 2001. The decrease in revenues was due to a
decrease in reservation fees, caused primarily by the continuing negative impact
of September 11, 2001 and a 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 Utell's hotel portfolio with a focus on
maximizing revenue and margins on a per hotel basis.
17
Cost of services. Cost of services was $21.5 million for the three months ended
September 30, 2002, compared to $24.6 million for the same period in 2001. The
decrease was primarily due to 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 revenues was 47
percent and 54 percent for the three months ended September 30, 2002 and 2001,
respectively.
Research and development. Research and development expenses were $1.3 million
for the three months ended September 30, 2002, compared to $2.3 million in the
same period in 2001. The decrease was primarily due to an increase in the
capitalization of payroll costs associated with software development efforts in
2002, which include internal-use systems and external-use systems, such as
PegasusCentral. Research and development expenses as a percentage of revenues
were 3 percent and 5 percent, for the three months ended September 30, 2002 and
2001, respectively.
General and administrative expenses. General and administrative expenses were
$5.1 million for the three months ended September 30, 2002, compared to $5.4
million for the same period in 2001. General and administrative expenses as a
percentage of revenues were 11 percent and 12 percent for the three months ended
September 30, 2002 and 2001, respectively.
Marketing and promotion expenses. Marketing and promotion expenses were $4.6
million for the three months ended September 30, 2002, compared to $4.9 million
for the same period in 2001. Marketing and promotion expenses as a percentage
of revenues were 10 percent and 11 percent for the three months ended September
30, 2002 and 2001, respectively.
Depreciation and amortization. Depreciation and amortization expenses were
$12.1 million for the three months ended September 30, 2002, compared to $16.3
million for the same period in 2001. The decrease was due to Pegasus' adoption
of FAS 142 (see Note 2 to the Unaudited 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 September 30,
2001, goodwill and workforce-in-place amortization was $5.9 million.
Restructure costs. During the three months ended September 30, 2001, Pegasus
incurred $6.3 million of restructuring charges, primarily consisting of
severance, outplacement and redundant facilities costs related to reorganizing
its operations from a business unit structure into distinct functional areas.
As part of the reorganization plan, Pegasus has eliminated approximately 15
percent of its workforce determined to be duplicative, which has resulted from
consolidating certain facilities and functions.
Interest income, net. Net interest income was $360,000 for the three months
ended September 30, 2002, compared to $362,000 for the same period in 2001.
Equity in loss of investee. During the three months ended September 30, 2001,
Pegasus incurred an expense of $179,000, representing its share of GETS' net
losses and amortization expense for the excess cost over net assets acquired for
our 20 percent investment in GETS, prior to the acquisition of the remaining 80
percent on September 1, 2001.
Income tax expense (benefit). Pegasus recorded income tax expense of $694,000,
representing an effective tax rate of 51 percent, for the three months ended
September 30, 2002, compared to an income tax benefit of $3.8 million,
representing an effective tax rate of 26 percent, for the three months ended
September 30, 2001. The effective tax rate for the three months ended September
30, 2002 differed from the statutory rate of 35 percent, primarily due to small
non-deductible expenses and adjustments to 2001 tax provision entries to reflect
actual amounts reported on the 2001 income tax returns, partially offset by the
beneficial tax rate differential of certain foreign earnings. The effective tax
rate for the three months ended September 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.
18
Nine Months Ended September 30, 2002 and 2001
Net Revenues. Overall, year-over-year revenue comparisons are impacted by the
events of September 11, 2001, which had a direct and immediate negative impact
in 2001 and continues to have a lingering negative effect on the general economy
and hospitality industry during the current year. Net revenues for the nine
months ended September 30, 2002 were $135.9 million, compared to $141.1 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. Excluding the results of businesses sold or
discontinued, and the termination fee described above, net revenues decreased
approximately $1.7 million, or 1 percent. The decrease in revenue was primarily
due to a decrease in transaction revenues following the early termination of the
customer contract noted above and the continued low demand for business travel
as a by-product of the sluggish economy and terrorism threats.
Changes in Pegasus' business are described in detail in the paragraphs that
follow the presentation of revenues below (amounts in thousands):
Nine months ended
September 30,
2002 2001
Technology:
Reservation Services $ 59,120 $ 56,808
Financial Services 22,594 22,158
Property Systems & Services 5,016 2,643
Business Intelligence - 258
Total technology 86,730 81,867
-------- --------
Technology continuing operations (1) 83,195 81,609
Hospitality:
Utell 49,176 52,505
Golden Tulip - 6,730
Total hospitality 49,176 59,235
Hospitality continuing operations 49,176 52,505
Total revenue $135,906 $141,102
-------- --------
Total continuing operations (1) $132,371 $134,114
-------- --------
(1) Excludes the one-time $3.5 million termination fee recognized in March 2002
Revenues for our technology segment increased $4.9 million, or 6 percent, to
$86.7 million for the nine months ended September 30, 2002, compared to $81.9
million for the same period in 2001.
Reservation Services revenues increased $2.3 million or 4 percent, to $59.1
million for the nine months ended September 30, 2002, compared to $56.8 million
for the same period in 2001. Excluding the impact of the one-time termination
fee noted above, reservation service revenues decreased primarily due to the
March 2002 termination of a client whose revenue has not yet been fully replaced
by new customers.
Financial Services revenues increased $436,000, or 2 percent, to $22.6 million
for the nine months ended September 30, 2002, compared to $22.2 million for the
same period in 2001. The increase in revenue was primarily attributable to
increases in the average travel agent fee and member transaction volume as a
result of new travel agency locations added to the customer base, offset by
declines in hotels' average daily room rates.
19
Property Systems and Services generated revenues of $5 million for the nine
months ended September 30, 2002, compared to $2.6 million for the same period in
2001. The increase was primarily due to the September 1, 2001 acquisition of
GETS, which contributed approximately $1.8 million in revenue during the nine
months ended September 30, 2002. The remainder of the increase was due to
revenue generated by PegasusCentral installations.
Excluding Golden Tulip, revenues for our hospitality segment decreased $3.3
million, or 6 percent, to $49.2 million for the nine months ended September 30,
2002, compared to $52.5 million for the same period in 2001. The decrease in
revenue was the result of a decrease in reservation fees, caused primarily by
the continuing negative impact of September 11, 2001, and the decrease in the
number of hotels Utell represents. The decrease was also the result of a
strategic initiative to upgrade Utell's hotel portfolio with a focus on
maximizing revenue and margins on a per-hotel basis.
Cost of services. Cost of services was $67.2 million for the nine months ended
September 30, 2002, compared to $75.8 million for the same period in 2001. The
decrease was primarily due to the results of the cost reduction measures enacted
during the third quarter 2001 restructuring, consisting primarily of a reduction
in personnel and facilities, and the absence of costs related to the Golden
Tulip brand. Cost of services as a percentage of revenues were 49 percent and
54 percent for the nine months ended September 30, 2002 and 2001, respectively.
Research and development. For the nine months ended September 30, 2002,
research and development expenses were $4.6 million compared to $5.9 million in
the same period in 2001. The decrease is primarily due to an increase in the
capitalization of payroll costs associated with software development efforts in
2002, which include internal-use systems and external-use systems, such as
PegasusCentral.
General and administrative expenses. General and administrative expenses were
$17.7 million for the nine months ended September 30, 2002, compared to $19.5
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 2001 with the implementation of our enterprise-wide accounting
and information system and consulting related to the 2001 restructuring.
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 revenues were 13 percent and 14 percent for the nine
months ended September 30, 2002 and 2001, respectively.
Marketing and promotion expenses. Marketing and promotion expenses were $13.6
million for the nine months ended September 30, 2002, compared to $17.3 million
for the same period in 2001. Marketing and promotion expenses decreased
primarily due to the absence of costs related to the Golden Tulip brand incurred
during 2001. Marketing and promotion expenses as a percentage of revenues were
10 percent and 12 percent for the nine months ended September 30, 2002 and 2001,
respectively.
Depreciation and amortization. Depreciation and amortization expenses were
$36.5 million for the nine months ended September 30, 2002, compared to $49.2
million for the same period in 2001. The decrease was primarily due to Pegasus'
adoption of FAS 142 (see Note 2 to the Unaudited Condensed Consolidated
Financial Statements), which resulted in the January 1, 2002 cessation of
amortization of goodwill from the REZ acquisition. For the nine months ended
September 30, 2001, goodwill and workforce-in-place amortization was $17.9
million.
Restructure costs. During the nine months ended September 30, 2001, Pegasus
incurred $7.1 million of restructuring charges, primarily consisting of
severance, outplacement and redundant facilities costs related to reorganizing
its operations from a business unit structure into distinct functional areas,
the consolidation of reservation centers and winding down its Business
Intelligence operations.
Interest income, net. Net interest income was $917,000 for the nine months
ended September 30, 2002, compared to $575,000 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.
20
Equity in loss of investee. During the nine months ended September 30, 2001,
Pegasus incurred an expense of $634,000, representing its share of GETS' net
losses and amortization expense for the excess cost over net assets acquired for
our 20 percent investment in GETS, prior to acquiring the remaining 80 percent
on September 1, 2001.
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 $12.0 million. In June 2001, Pegasus sold its
Golden Tulip brand and licensing business to Madrid-based NH Hoteles. During
the nine months ended September 30, 2001, Pegasus recognized a gain of $78,000
related to these two transactions.
Income tax expense (benefit). Pegasus recorded an income tax benefit of $1.1
million, representing an effective tax rate of 36 percent, for the nine months
ended September 30, 2002, compared to an income tax benefit of $7.4 million,
representing an effective tax rate of 22 percent, for the nine months ended
September 30, 2001. The effective tax rate for the nine months ended September
30, 2002 differed from the statutory rate of 35 percent, primarily due to small
non-deductible expenses, adjustments to 2001 tax provision entries to reflect
actual amounts reported on the 2001 income tax returns, partially offset by the
beneficial tax rate differential of certain foreign earnings. The effective tax
rate for the nine months ended September 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.
LIQUIDITY AND CAPITAL RESOURCES
Pegasus' principal sources of liquidity at September 30, 2002 included cash and
cash equivalents of $25.9 million, short-term investments of $1.0 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 September 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 $15.7 million at September 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 was somewhat offset by capital expenditures. Net cash provided
by operating activities increased to $31.2 million for the nine months ending
September 30, 2002, from $27.1 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.
Pegasus has satisfied its cash requirements for investing activities primarily
through cash generated from operations. Capital expenditures consisted of
purchases of software, furniture and computer equipment as well as internally
developed software costs and amounted to $25.3 million for the nine months ended
September 30, 2002 compared to $11.4 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, and an increase in capitalized software development.
Through September 30, 2002, capital expenditures include funded tenant
improvement allowances totaling approximately $2.7 million, which represent
improvements that we were reimbursed for by the lessor.
21
Pegasus expects to incur continued 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.
On June 5, 2002, the Board of Directors authorized the repurchase of up to 2.5
million shares of Pegasus' common stock. During the nine months ended September
30, 2002, 84,000 shares were repurchased for an aggregate purchase price of $1.2
million. At September 30, 2002, cumulative repurchases of common stock under
board approved plans totaled approximately 526,000 shares at an aggregate
purchase price of $4.5 million. Through November 13, 2002, we have repurchased
an additional 308,000 shares at an aggregate purchase price of $3.2 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
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.
RECENTLY ISSUED ACCOUNTING STANDARD
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities," or FAS 146. FAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and replaces Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The provisions of FAS
146 are effective, on a prospective basis, for exit or disposal activities
initiated by the Company after December 31, 2002.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Within the 90 days
prior to the filing of this report, Pegasus carried out an evaluation, under the
supervision and with the participation of Pegasus' management, including its
Chief Executive Officer and Chief Financial Officer, of the effectiveness of
Pegasus' disclosure controls and procedures. Based upon that evaluation,
Pegasus' Chief Executive Officer and Chief Financial Officer concluded that
Pegasus' disclosure controls and procedures, as defined in Rules 13(a) - 14(c)
and 15(d) - 14(c) under the Securities Exchange Act of 1934, are effective in
timely alerting them to material information required to be included in Pegasus'
periodic Securities and Exchange Commission reports.
(b) Changes in internal controls. There have been no significant changes in
Pegasus' internal controls or in other factors that could significantly affect
these controls subsequent to the date Pegasus carried out its evaluation.
22
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 6. Exhibits and Reports on Form 8-K
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) Reports on Form 8-K
None.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEGASUS SOLUTIONS, INC.
November 14, 2002 /s/ JOHN F. DAVIS, III
John F. Davis, III,
---------------------
Chairman and Chief
Executive Officer
November 14, 2002 /s/ SUSAN K. COLE
Susan K. Cole,
---------------------
Executive Vice President
and Chief Financial Officer
(principal accounting officer)
24
PEGASUS SOLUTIONS, INC.
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, John F. Davis, III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pegasus Solutions,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ JOHN F. DAVIS, III _
- -------------------------------------------
John F. Davis, III
Chairman and Chief Executive Officer
25
PEGASUS SOLUTIONS, INC.
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Susan K. Cole, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pegasus Solutions,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ SUSAN K. COLE _
- -------------------------------------
Susan K. Cole
Executive Vice President and Chief Financial Officer
26
EXHIBIT INDEX
Exhibit Number Description
- --------------- -----------
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 September 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.
November 14, 2002 /s/ JOHN F. DAVIS, III
John F. Davis, III,
---------------------
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 September 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.
November 14, 2002 /s/ SUSAN K. COLE
Susan K. Cole,
------------------
Executive Vice President
and Chief Financial Officer
(principal accounting officer)