UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 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.)
3811 Turtle Creek Boulevard, Suite 1100, Dallas, Texas 75219
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (214) 528-5656
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [ X ] No [ ]
The number of shares of the registrant's common stock outstanding as of
April 23, 2002 was 24,796,000.
PEGASUS SOLUTIONS, INC.
FORM 10-Q
For the Quarter Ended March 31, 2002
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements 3
a) Condensed Consolidated Balance Sheets as of March 31,
2002 (unaudited) and December 31, 2001 3
b) Condensed Consolidated Statements of Operations and
Comprehensive Loss for the Three Months Ended March 31,
2002 and 2001 (unaudited) 4
c) Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 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 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Part I. Financial Information
Item 1. Financial Statements
PEGASUS SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
March 31, December 31,
2002 2001
------------ ------------
ASSETS
Cash and cash equivalents $ 19,618 $ 13,438
Short-term investments 5,039 9,167
Accounts receivable, net 34,007 29,228
Other current assets 3,575 5,309
------------ ------------
Total current assets 62,239 57,142
Intangible assets, net 19,352 32,505
Property and equipment, net 65,360 67,365
Goodwill, net 141,594 136,921
Other noncurrent assets 10,224 9,737
------------ ------------
Total assets $ 298,769 $ 303,670
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 33,415 $ 39,203
Unearned income 10,298 8,585
Deferred tax liability 8,944 12,301
Other current liabilities 4,343 2,594
------------ ------------
Total current liabilities 57,000 62,683
Uncleared commission checks 4,289 4,004
Other noncurrent liabilities 6,265 5,782
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $0.01 par value; 2,000
shares authorized; zero shares issued
and outstanding, - -
Common stock, $0.01 par value; 50,000
shares authorized; 25,231 and 25,136
shares issued, respectively 252 251
Additional paid-in capital 291,272 290,444
Unearned compensation (21) (34)
Accumulated comprehensive gain (loss) (6) 21
Accumulated deficit (57,039) (56,238)
Treasury stock at cost; 441 shares (3,243) (3,243)
------------ ------------
Total stockholders' equity 231,215 231,201
------------ ------------
Total liabilities and
stockholders' equity $ 298,769 $ 303,670
============ ============
See accompanying notes to condensed consolidated financial statements.
PEGASUS SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands except per share amounts)
(Unaudited)
Three Months Ended
March 31,
-------------------------------
2002 2001
------------ ------------
Net revenues $ 45,424 $ 46,108
Cost of services 22,565 26,259
Research and development 2,010 1,994
General and administrative expenses 5,834 6,552
Marketing and promotion expenses 4,217 6,352
Depreciation and amortization 12,140 16,425
Restructure costs - 797
------------ ------------
Operating loss (1,342) (12,271)
Other income (expense):
Interest income, net 261 39
Equity in loss of investee - (298)
Loss on sale of business unit - (671)
Other (253) (43)
------------ ------------
Loss before income taxes (1,334) (13,244)
Income tax benefit 533 2,161
------------ ------------
Net loss $ (801) $ (11,083)
============ ============
Other comprehensive income - change in
unrealized gain (loss), net of tax (27) 13
------------ ------------
Comprehensive loss $ (828) $ (11,070)
============ ============
Net loss per share:
Basic and diluted $ (0.03) $ (0.45)
============ ============
Weighted average shares outstanding:
Basic and diluted 24,732 24,596
============ ============
See accompanying notes to condensed consolidated financial statements.
PEGASUS SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
-----------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net loss $ (801) $ (11,083)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 12,140 16,425
Equity in loss of investee - 298
Loss on sale of business unit - 671
Other 1,857 1,640
Changes in assets and liabilities:
Accounts receivable (5,754) (7,832)
Other assets 783 (2,107)
Accounts payable and accrued liabilities (5,987) 6,556
Unearned income 1,713 3,865
Other liabilities 2,494 (3,863)
-------- --------
Net cash provided by operating activities 6,445 4,570
Cash flows from investing activities:
Proceeds from sale of business unit - 2,894
Purchase of marketable securities (2,104) (7,699)
Proceeds from maturity of marketable securities 6,970 2,000
Purchase of property and equipment (5,518) (3,363)
Other - 1,500
-------- --------
Net cash used in investing activities (652) (4,668)
Cash flows from financing activities:
Proceeds from issuance of common stock 403 66
Purchase of treasury stock - (1,604)
Other (16) (96)
-------- --------
Net cash provided by (used in)
financing activities 387 (1,634)
Net increase (decrease) in cash and cash equivalents 6,180 (1,732)
Cash and cash equivalents, beginning of period 13,438 37,150
-------- --------
Cash and cash equivalents, end of period $ 19,618 $ 35,418
======== ========
See accompanying notes to condensed consolidated financial statements
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
Pegasus is a leading provider of end-to-end reservation distribution
systems, reservation technology systems and hotel representation services
for the global hotel industry. Pegasus is organized 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. ACCOUNTING CHANGES
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 with a net book
value of $8.5 million was reclassified as goodwill and will no longer be
subject to amortization. At March 31, 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 March 31, 2002 and December 31, 2001 (amounts in
thousands):
Technology Hospitality Total
-------- -------- --------
March 31, 2002 $ 128,935 $ 12,659 $ 141,594
December 31, 2001 124,379 12,542 136,921
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 March 31, 2002 and
December 31, 2001 (amounts in thousands):
March 31, 2002 December 31, 2001
----------------------- ------------------------
Carrying Accumulated Carrying Accumulated
Value Amortization Value Amortization
-------- -------- -------- --------
Customer
relationships $ 52,376 $ (35,384) $ 52,376 $ (30,942)
Non-compete
agreements 3,820 (1,496) 3,820 (1,305)
Other 48 (12) 48 (11)
-------- -------- -------- --------
Total $ 56,244 $ (36,892) $ 56,244 $ (32,258)
During the three months ended March 31, 2002, the Company recorded total
amortization expense of $4.6 million in relation to the above-listed
intangible assets. The following table presents the estimated amortization
expense for these intangible assets for the years ended December 31 (amounts
in thousands):
2002 $ 18,538
2003 5,448
Thereafter --
The following pro forma financial information compares the Company's net
losses for the three months ended March 31, 2002 and 2001 had the provisions
of FAS 142 been applied on January 1, 2001 (amounts in thousands except per
share items):
2002 2001
------ --------
Reported net loss $ (801) $ (11,083)
Goodwill amortization -- 4,370
Workforce in-place amortization -- 1,704
------ --------
Adjusted net loss $ (801) $ (5,009)
====== ========
Basic and diluted earnings per
share:
Reported net loss $ (0.03) $ (0.45)
Goodwill amortization -- 0.18
Workforce in-place amortization -- 0.07
------ --------
Adjusted net loss $ (0.03) $ (0.20)
====== ========
Weighted average shares outstanding 24,732 24,596
====== ========
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
March 31, 2002, total unpaid severance and outplacement costs were $1.0
million and total unpaid redundant facilities and other costs were $1.0
million . These unpaid costs are classified as accrued liabilities.
4. DEBT
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 March 31, 2002 or December 31, 2001.
5. EARNINGS PER SHARE
Due to the Company's net loss position for the three months ended March 31,
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 885,000 and 2.9 million shares issuable upon the exercise of
stock options were not included in the calculation of diluted net loss per
share for the three months ended March 31, 2002 and 2001, respectively.
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 Summit Hotels & Resorts and
Sterling Hotels & Resorts brand names were sold in January 2001, and the
Golden Tulip representation service was 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
("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 March 31 (in thousands):
Technology Hospitality Total
------- ------- -------
2002
----
Net revenues $ 30,832 $ 14,592 $ 45,424
EBITDA 9,228 1,570 10,798
2001
----
Net revenues 26,788 19,320 46,108
EBITDA 5,469 (1,315) 4,154
Reconciliations of total segment EBITDA to total consolidated loss before
income taxes for the three months ended March 31, 2002 and 2001 are as
follows (in thousands):
2002 2001
-------- --------
Total EBITDA for reportable segments $ 10,798 $ 4,154
Depreciation and amortization (12,140) (16,425)
Interest income, net 261 39
Loss on sale of business unit -- (671)
Equity in loss of investee -- (298)
Other (253) (43)
-------- --------
Consolidated loss before income taxes $ (1,334) $ (13,244)
======== ========
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 November 2001, the FASB Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue 01-9, "Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of the Vendor's Products)." This
EITF consensus concludes that consideration from a vendor to a customer is a
reduction of the selling price of the vendor's products or services and,
therefore, should be characterized as a reduction of revenue when recognized
in the vendor's income statement. The Company's adoption of EITF 01-9 on
January 1, 2002 had no material impact on its financial statements.
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 of 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:
* A significant number of travel agencies around the world, including
the 10 largest U.S.-based travel agencies based on revenues;
* More than 46,000 hotels around the world, including the 50 largest
hotel companies based on total number of guest rooms; and
* More than 1,000 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 GDSs and
thousands of Internet sites. For the three months ended March 31, 2002,
approximately 68 percent and 32 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 reservations 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
all over the world.
* Third-party Internet sites - We provide travel-related Internet sites
access to our hotel information database containing more than 42,000
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 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 2001, we processed approximately 44.8 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. Reservation
Services revenues represented approximately 49 percent of total revenues for
the three months ended March 31, 2002.
Financial Services. Our Financial Services provide comprehensive commission
payment, processing and management solutions to hotel and travel agency
customers 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 approximately $500 million in hotel commissions
in 2001.
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
that we process for the respective hotel. Financial Services revenues
represented approximately 15 percent of total revenues for the three months
ended March 31, 2002.
Property Systems and Services. In June 2001, we launched our new Internet-
based PMS service, PegasusCentral, and announced that Six Continents Hotels
had named it as one of two preferred PMS standards for its 2,600-plus
Holiday Inn and Holiday Inn Express properties. Traditionally, hotel CRSs
and PMSs had separate databases which 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 in 2001 consisted of
maintenance and support fees related to the GuestView software, and revenues
from the operations of GETS subsequent to its September 1, 2001 acquisition.
In addition, property system and services revenues include transaction fees
from our PegasusCentral service, which are recognized monthly, based on room
occupancy rates. Property Systems and Services represented approximately 4
percent of total revenues for the three months ended March 31, 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 hotel representation service
revenues consist of reservation processing fees, membership fees and fees
for various marketing services. Our hospitality segment represented
approximately 32 percent of total revenues for the three months ended March
31, 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:
* 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 approximately 5,400 hotels in 150
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. We
derive revenues for this service from the difference in the exchange rate
between the date the traveler pays and the date the guest stay occurs.
Dependence on the Hotel Industry and Impact of September 11, 2001 Events
Our business, particularly our hospitality segment, is sensitive to changes
in the demand for hotel rooms. During 2001 and continuing into 2002, the
travel industry, which had already been adversely impacted by the onset of
the economic recession and other world events, has been further weakened by
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 each hotel room 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,
at the start 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. Property Systems and
Services revenues, which are primarily fixed, have not been significantly
impacted. 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 a soft economy 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 first six months 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, continued terrorist activities or a
delay in the economic recovery could have a material adverse effect on our
business, operating results and financial condition.
Weakness of the Euro
Pegasus derives a substantial portion of its revenue from customers located
outside the United States, particularly in Europe. The weakness of the Euro
relative to the U.S. Dollar resulted in Pegasus earning less revenue than it
otherwise might have earned if currency rates had remained stable or
strengthened.
Recent Developments
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 newly formed Hotel Distribution System, LLC, or HDS.
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, HDS receives hotel room inventory from suppliers
at wholesale or "net" rates. HDS then sets the retail price for the hotel
room and processes the transaction as the merchant of record enabling HDS to
receive a higher level of gross profit per transaction than in a fee per
booking arrangement. Under the merchant model, HDS generally is not
obligated to pay suppliers for unsold inventory. HDS will utilize our
technology to create a direct connection between hotel reservation systems
and Internet sites. HDS has recently signed an agreement with Orbitz, LLC
to distribute the room inventory on a non-exclusive basis, and our Utell
subsidiary will be one of the first hotel suppliers to distribute room
inventory through HDS.
On April 4, 2002, we entered into a three-year technology agreement with HDS
to develop technology and provide services that will automate the net-rate
reservation and merchant model processes for HDS and participating hotels.
In addition, we transferred our consumer Internet site TravelWeb.com to HDS
as part of our capital contribution to the venture.
Because we are equal partners with these five hotel companies, our
investment in HDS 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.
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. Reservation
Services revenues represented approximately 49 percent of total revenues for
the three months ending March 31, 2002.
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 15 percent of total revenues for the three months
ending March 31, 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. Property Systems and Services
represented approximately 4 percent of total revenues for the three months
ending March 31, 2002.
Hospitality Revenue
Hospitality revenue represented approximately 32 percent of total revenues
for the three months ending March 31, 2002. Hotel representation service
revenues consist of reservation processing fees, membership fees and fees
for various marketing services. In addition, Pegasus allows 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. Revenues for this service are derived from
the difference in the exchange rate between the date the traveler pays and
the date the guest stay occurs.
Other Services
Pegasus regularly seeks to develop new services to capitalize on its
existing technology and customer base and to provide additional electronic
hotel reservation capabilities and information services to its existing
customers and to other participants in the hotel room distribution process.
Pegasus has not received a material amount of revenue from these services,
and there can be no assurance that any of these services will produce a
material amount of revenue in the future.
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 months ended March 31, 2002 include
the effect of the GETS acquisition, which was completed September 1, 2001.
Accordingly, GETS' results of operations subsequent to the acquisition are
included in the accompanying unaudited condensed consolidated financial
statements for the three months ended March 31, 2002.
Net Revenues. Net revenues for the three months ended March 31, 2002 were
$45.4 million, compared to $46.1 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 early termination of their contract. The
decrease in year-over-year net revenues was primarily due to the sale of the
Golden Tulip brand in June 2001 and discontinued business intelligence
operations. The decrease was also caused by the continued downward pressure
on average daily rates following the terrorist attacks of September 11,
2001. Excluding the results of businesses sold or discontinued, and the
termination fee described above, net revenues decreased approximately
$800,000, or 2 percent.
Changes in Pegasus' business are described in detail in the paragraphs that
follow the presentation of revenues below (amounts in millions):
Three months ended
March 31,
2002 2001
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Technology:
Reservation Services $ 22.2 $ 18.7
Financial Services 6.9 7.1
Property Systems & Services 1.7 0.8
Business Intelligence - 0.2
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Total technology 30.8 26.8
Continuing operations 27.3 (1) 26.6
Hospitality:
Utell 14.6 16.1
Golden Tulip - 3.2
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Total hospitality 14.6 19.3
Continuing operations 14.6 16.1
Total revenue $ 45.4 $ 46.1
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Total continuing operations $ 41.9 (1) $ 42.7
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(1) Excludes the one-time $3.5 million termination fee
Revenues for our technology segment increased $4.0 million, or 15 percent,
to $30.8 million for the three months ended March 31, 2002, compared to
$26.8 million for the same period in 2001.
Reservation Services revenues increased $3.5 million, or 18 percent, to
$22.2 million for the three months ended March 31, 2002, compared to $18.7
million for the same period in 2001. The increase in revenue was due to the
one-time termination fee noted above.
Financial Services revenues decreased $200,000, or 2 percent, to $6.9
million for the three months ended March 31, 2002, compared to $7.1 million
for the same period in 2001. The decrease was primarily the result of a 10
percent reduction in gross commissions processed for the three months ended
March 31, 2002, compared to the same period in 2001. The decrease in gross
commissions was due to a decrease in hotels' average daily rate charged for
rooms following September 11, 2001.
Property Systems and Services generated revenues of $1.7 million for the
three months ended March 31, 2002, compared to $800,000 for the same period
in 2001. The increase was primarily due to the September 1, 2001
acquisition of GETS, which contributed approximately $750,000 in revenue
during the three months ended March 31, 2002.
Excluding Golden Tulip, revenues for our hospitality segment decreased by
$1.5 million, or 10 percent, to $14.6 million for the three months ended
March 31, 2002, compared to $16.1 million for the same period in 2001. The
decrease in revenue was the result of an 8 percent reduction in reservations
caused by the strategic reduction of the number of hotels Utell represents,
and a decrease in the average daily rates charged by hotels following the
events of September 11, 2001.
Cost of services. Cost of services was $22.6 million for the three months
ended March 31, 2002, compared to $26.3 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. As a percentage of revenue, excluding
the one-time termination fee, cost of services for the three months ended
March 31, 2002 decreased to 54 percent, from 57 percent during the same
period in 2001.
Research and development. For the three months ended March 31, 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 $5.8 million for the three months ended March 31, 2002, compared to
$6.6 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 the three months ended March 31, 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. As a
percentage of revenue, excluding the one-time termination fee, general and
administrative expenses for the three months ended March 31, 2002 and 2001
were 14 percent.
Marketing and promotion expenses. Marketing and promotion expenses were $4.2
million for the three months ended March 31, 2002, compared to $6.4 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 and
as the result of continuing the cost reduction measures initiated during the
third quarter 2001 restructuring. As a percentage of revenue, excluding the
one-time termination fee, marketing and promotion expenses for the three
months ended March 31, 2002 decreased to 10 percent, from 14 percent in the
same period in 2001.
Depreciation and amortization. Depreciation and amortization expenses were
$12.1 million for the three months ended March 31, 2002, compared to $16.4
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 three months
ended March 31, 2001, goodwill amortization was $4.4 million.
Interest income, net. Net interest income was $261,000 for the three months
ended March 31, 2002, compared to $39,000 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.
Income tax benefit. Pegasus recorded an income tax benefit of $533,000,
representing an effective tax rate of 40.0 percent, for the three months
ended March 31, 2002, compared to an income tax benefit of $2.2 million,
representing an effective tax rate of 16.3 percent, for the three months
ended March 31, 2001. The effective tax rate for the three months ended
March 31, 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
March 31, 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 March 31, 2002 included cash and
cash equivalents of $19.6 million, short-term investments of $5.0 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 March 31, 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 $5.2 million at March 31, 2002, compared to a
working capital deficit of $5.5 million at December 31, 2001. Accounts
receivable at March 31, 2002 included the one-time termination fee of $3.5
million, which was collected subsequent to the balance sheet date. Working
capital increased primarily as a result of cash flows from operating
activities and net proceeds from the purchase and sale of marketable
securities. Net cash provided by operating activities increased to $6.4
million for the three months ending March 31, 2002 from $4.6 million for the
same period in 2001, 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 $5.5 million for the three months ended March 31, 2002 compared
to $3.4 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. Pegasus expects this increase to continue through the remainder of
2002, while Pegasus also adds capacity to existing systems and continues
software development. Operating leases are the only off-balance sheet
financing arrangements Pegasus engages in. Additional uses of cash for
investing activities for the three months ended March 31, 2002 included
purchases of marketable securities totaling $2.1 million, compared to $7.7
million for the same period in 2001. Pegasus has satisfied its cash
requirements for investments primarily through cash generated from
operations, the sale of capital stock and the sale of non-core businesses.
On August 9, 2000, the Board of Directors authorized the repurchase of up to
two million shares of Pegasus' common stock. While no shares were
repurchased during the three months ended March 31, 2002 and Pegasus
currently has no plans to repurchase stock, 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. As of April
23, 2002, Pegasus had repurchased 196,000 shares under this current plan at
a cost of $2.1 million.
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 November 2001, the FASB Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue 01-9, "Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of the Vendor's Products)." This
EITF consensus concludes that consideration from a vendor to a customer is a
reduction of the selling price of the vendor's products or services and,
therefore, should be characterized as a reduction of revenue when recognized
in the vendor's income statement. The Company's adoption of EITF 01-9 on
January 1, 2002 had no material impact on its financial statements.
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
10.1 Employment Agreement dated August 1, 2001 between the Company and
John F. Davis, III
10.2 Employment Agreement dated August 1, 2001 between the Company and
Joseph W. Nicholson
10.4 Employment Agreement dated August 1, 2001 between the Company and
Susan K. Cole
10.12 Amended and Restated Credit Agreement with Chase Bank of Texas,
Compass Bank and Wells Fargo Bank (Texas), dated August 31, 2001
10.17 Employment Agreement dated August 1, 2001 between the Company and
Ric L. Floyd
10.18 Employment Agreement dated August 1, 2001 between the Company and
Mark C. Wells
10.24 1st Amendment to the Amended and Restated Credit Agreement with
Chase Bank of Texas, Compass Bank and Wells Fargo Bank (Texas), dated
March 31, 2002
b) Reports on Form 8-K
not applicable
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEGASUS SOLUTIONS, INC.
May 1, 2002 /s/ JOHN F. DAVIS, III
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John F. Davis, III,
Chairman and Chief
Executive Officer
May 1, 2002 /s/ SUSAN K. COLE
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Susan K. Cole,
Executive Vice President
and Chief Financial Officer
(principal accounting officer)