UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q
(Mark one)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
The number of shares of the registrant's common stock, par value $0.01 per
share, outstanding as of May 4, 2004 was 23,250,733.
PEGASUS SOLUTIONS, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2004
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements (Unaudited) 3
a) Condensed Consolidated Balance Sheets as of March 31, 2004
and December 31, 2003 3
b) Condensed Consolidated Statements of Operations and
Comprehensive Loss for the three months ended
March 31, 2004 and 2003 4
c) Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 2004 and 2003 5
d) Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 4. Controls and Procedures 13
Part II. Other Information
Item 1. Legal Proceedings 13
Item 2. Changes in Securities, Use of Proceeds and
Issuer Purchases of Equity Securities 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
PEGASUS SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
March 31, December 31,
2004 2003
---------- -------------
ASSETS
Cash and cash equivalents $ 39,505 $ 58,983
Short-term investments 5,094 4,046
Accounts receivable, net 28,265 22,298
Other current assets 11,088 11,092
---------- -------------
Total current assets 83,952 96,419
Goodwill, net 164,120 164,120
Intangible assets, net 7,330 7,831
Property and equipment, net 75,952 75,474
Other noncurrent assets 20,144 22,716
---------- -------------
Total assets $ 351,498 $ 366,560
========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 25,889 $ 24,672
Unearned income 7,023 7,213
Other current liabilities 6,399 5,477
---------- -------------
Total current liabilities 39,311 37,362
Noncurrent uncleared commission checks 4,758 4,545
Other noncurrent liabilities 20,385 20,997
Convertible debt 75,000 75,000
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; 23,807,876 and 25,091,248 shares issued
and outstanding, respectively 238 251
Additional paid-in capital 275,182 290,828
Accumulated other comprehensive loss (808) (834)
Accumulated deficit (62,568) (61,589)
---------- -------------
Total stockholders' equity 212,044 228,656
---------- -------------
Total liabilities and stockholders' equity $ 351,498 $ 366,560
========== =============
<FN>
See accompanying notes to condensed consolidated financial statements.
3
PEGASUS SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
March 31,
2004 2003
------- --------
Revenues:
Service revenues $ 41,845 $ 38,390
Customer reimbursements 3,479 2,523
------- --------
Total revenues 45,324 40,913
Costs of services:
Cost of services 24,320 21,490
Customer reimbursements 3,479 2,523
------- --------
Total costs of services 27,799 24,013
Research and development 1,403 1,513
General and administrative expenses 6,357 6,135
Marketing and promotion expenses 4,713 4,238
Depreciation and amortization 5,882 12,118
Restructure costs - 3,193
------- -------
Operating loss (830) (10,297)
Other income (expense):
Interest income (expense), net (501) 380
Other (207) (34)
------- --------
Loss before income taxes (1,538) (9,951)
Income tax benefit 559 3,674
------- --------
Net loss $ (979) $ (6,277)
======= ========
Other comprehensive income:
Change in unrealized gain on investments, net of tax 27 3
------- --------
Comprehensive loss $ (952) $ (6,274)
======= ========
Net loss per share:
Basic and diluted $ (0.04) $ (0.25)
======= ========
Weighted average shares outstanding:
Basic and diluted 24,456 24,651
======= ========
<FN>
See accompanying notes to condensed consolidated financial statements.
4
PEGASUS SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
March 31,
2004 2003
-------- --------
Cash flows from operating activities:
Net loss $ (979) $ (6,277)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 5,882 12,118
Other (495) 414
Changes in assets and liabilities:
Accounts receivable (5,993) (2,864)
Other current and noncurrent assets (315) (2,304)
Accounts payable and accrued liabilities 1,217 (1,851)
Unearned income (190) 3,693
Other current and noncurrent liabilities 1,238 (144)
-------- --------
Net cash provided by operating activities 365 2,785
Cash flows from investing activities:
Purchase of marketable securities (532) -
Proceeds from maturity of marketable securities 2,084 1,000
Purchase of property and equipment (5,233) (6,335)
Collections of note receivable 230 214
Other 15 19
-------- --------
Net cash used in investing activities (3,436) (5,102)
Cash flows from financing activities:
Proceeds from issuance of common stock 2,455 97
Purchase of treasury stock (18,703) -
Other (159) (48)
-------- --------
Net cash provided by (used in) financing activities (16,407) 49
Net decrease in cash and cash equivalents (19,478) (2,268)
Cash and cash equivalents, beginning of period 58,983 19,893
-------- --------
Cash and cash equivalents, end of period $ 39,505 $ 17,625
======== ========
Supplemental schedule of noncash investing activities:
Landlord paid tenant improvements $ 799 $ -
<FN>
See accompanying notes to condensed consolidated financial statements.
5
PEGASUS SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview and basis of presentation
Pegasus Solutions, Inc. is a leading global provider of hotel
reservations-related services and technology. Pegasus was formed in 1989 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. Pegasus' services include central reservation systems, electronic
distribution services, commission processing and payment services, property
management systems, and marketing representation services. 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.
Pegasus' common stock is traded on the Nasdaq National Market under the symbol
PEGS.
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, 2003.
Stock-based employee compensation
The Company accounts for stock-based compensation utilizing the intrinsic value
method in accordance with the provisions of Accounting Principles Board Opinion
No. 25 (APB 25), "Accounting for Stock Issued to Employees" and related
Interpretations. Accordingly, no compensation expense is recognized for fixed
option plans because the exercise prices of employee stock options equal or
exceed the market prices of the underlying stock on the dates of grant. The
Company maintains stock incentive and employee stock purchase plans.
Compensation expense recorded for the stock incentive plan was zero and $334,000
for the three months ended March 31, 2004 and 2003, respectively.
The following table represents the effect on net loss and net loss per share if
the Company had applied the fair value based method and recognition provisions
of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," to stock-based employee compensation (in thousands,
except per share amounts):
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
---- ----
Net loss, as reported $ (979) $ (6,277)
Add: Stock-based employee
compensation expense included in
reported loss, net
of related tax effects - 203
Deduct: Total stock-based employee
compensation expense determined under
fair value based methods for all awards,
net of related tax effects (1,136) (1,565)
-------- --------
Pro forma net loss $ (2,115) $ (7,639)
--------- ---------
Net loss per share, basic and diluted:
As reported $ (0.04) $ (0.25)
======== ========
Pro forma $ (0.09) $ (0.31)
======== ========
6
The pro forma disclosures provided may not be representative of the effects on
reported net income (loss) for future years due to future grants and the vesting
requirements of the Company's stock incentive plans. For purposes of pro forma
disclosures, the estimated fair value of stock-based compensation plans is
amortized over the vesting period.
2. STOCKHOLDERS' EQUITY
On November 5, 2003, the Board of Directors renewed its authorization for the
repurchase of up to 2.5 million shares of Pegasus' common stock. The Company
repurchased 1.6 million shares for an aggregate purchase price of $18.7 million
during the three months ending March 31, 2004. From April 1, 2004 through May
7, 2004, the Company repurchased the remaining 894,000 shares authorized under
Board approved plans for an aggregate purchase price of $10.3 million. Once
approved by the Board, 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 under Board
approved plans are immediately cancelled.
3. NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding for the
reporting period. The effect of stock options is not included in the
calculation of diluted net loss per share for the three months ended March 31,
2004 and 2003, as the effect would be anti-dilutive. Shares issuable upon the
exercise of stock options that were excluded from the calculation were 4.6
million and 5.0 million for the three months ended March 31, 2004 and 2003,
respectively. No dilution for convertible debt was included in the 2004
calculation as those securities are contingently convertible.
4. EMPLOYEE DEFINED BENEFIT PLANS
Pursuant to their employment agreements, certain Company officers are eligible
for additional retirement benefits to be paid by the Company under the
Supplemental Executive Retirement Plan ("SERP"). The SERP became effective on
January 1, 2000 and provides supplemental retirement benefits to certain
officers of the Company based on their compensation and years of service, as
defined under the SERP. As a result of changes in executive management, during
the three months ended March 31, 2004, Pegasus recognized a curtailment gain of
$162,000 for the SERP under Statement of Financial Accounting Standards No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits."
In the United Kingdom, the Company operates a defined benefit plan, which is
only open to employees who were part of the Reed Elsevier Pension Scheme in
December 1997 (the "Utell Defined Benefit Plan"). The Utell Defined Benefit
Plan provides supplemental retirement benefits to its members, based on final
average compensation.
The following table provides the components of net periodic benefit costs for
the three months ended March 31, 2004 and 2003 (in thousands):
Utell Defined
SERP Benefit Plan
---- ------------
2004 2003 2004 2003
----- ----- ----- -----
Service cost $ 51 $ 45 $ 72 $ 119
Interest cost 59 56 134 146
Expected return on plan assets - - (171) (133)
Amortization of prior service cost . (11) (12) - -
Recognized net actuarial loss . 31 29 - 122
Curtailment gain . (162) - - -
----- ----- ----- -----
Net periodic benefit cost $ (32) $ 118 $ 35 $254
======= ==== ===== ====
7
5. RECENTLY ISSUED ACCOUNTING STANDARDS
Financial Accounting Standards Board ("FASB") Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46") was issued in January
2003 and requires that if an entity is the primary beneficiary of a variable
interest entity, the assets, liabilities and results of operations of the
variable interest entity should be included in the consolidated financial
statements of the entity. The provisions of FIN 46, as amended by FIN 46R for
variable interest entities, are effective at the end of the first interim or
annual period ending after March 15, 2004 for arrangements entered into prior to
January 31, 2003. Pegasus has determined that it has no variable interest
entities subject to the provisions of FIN 46R.
In December 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 132 (revised 2003), "Employers' Disclosures about Pensions and
Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88 and
106, and a revision of FASB Statement No. 132" ("SFAS 132 (revised 2003)").
This Statement revises employers' disclosures about pension plans and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans required by SFAS No. 87, "Employers' Accounting for Pensions,"
No. 88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits" and No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The new rules
require additional disclosures about the assets, obligations, cash flows and net
periodic benefit cost of defined benefit pension plans and other postretirement
benefit plans. The required information will be provided separately for pension
plans and for other postretirement benefit plans. This includes expanded
disclosure on an interim basis as well. SFAS 132 (revised 2003) was effective
for financial statements with fiscal years ended after December 15, 2003, except
that disclosure of information about foreign plans required by this Statement is
effective for fiscal years ending after June 15, 2004. The interim-period
disclosures required by this Statement are effective for interim periods
beginning after December 15, 2003, and are reflected in Note 4, above.
6. CONTINGENCIES
The Company 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, it does not believe these
actions will have a material adverse effect on the Company's financial position,
results of operations or liquidity.
7. SUBSEQUENT EVENT
On May 3, 2004 (the "Closing Date"), Pegasus and four other parties
(collectively, the "Sellers") in Travelweb, LLC ("Travelweb") sold their
interests to an affiliate of Priceline.com, Inc. ("Priceline"). Among other
provisions, the purchase agreement provides that Pegasus and each other Seller
(1) assign to Priceline each of their 14.286% interests on the Closing Date, and
(2) will each receive (a) on the Closing Date, approximately $4.2 million in
cash, and (b) on approximately the one year anniversary of the Closing Date, if
certain conditions are met, including Travelweb performance targets, shares of
Priceline common stock with a value of approximately $4.7 million as of the
Closing Date. The Priceline common shares are subject to certain restrictions
on transfer for a period ending on the second anniversary of the Closing Date.
The total amount of Pegasus' investment in Travelweb as of March 31, 2004 was
approximately $2.2 million and was included in other noncurrent assets. Pegasus
expects to record a gain of approximately $2.0 million on the sale of its
investment in Travelweb during the second quarter of 2004.
8
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, 2003. 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, hopes, plans,
expectations or intentions for the future. Forward-looking statements involve
various risks and uncertainties. Our ability to predict results or the actual
effect of future plans or strategies is inherently uncertain and the actual
results and timing of certain events could differ materially from our current
expectations. Factors that could cause or contribute to such a difference
include, but are not limited to, changes in general economic conditions,
variation in demand for our products and services and in the timing of our
sales, changes in product and price competition for existing and new
competitors, changes in our level of operating expenditures, delays in
developing, marketing and deploying new products and services, terrorist
activities, action by U.S. or other military forces, global health epidemics,
changes in hotel room rates, capacity adjustments by airlines, negative trends
in the overall demand for travel, other adverse changes in general market
conditions for business and leisure travel, as well as other risks and
uncertainties, including those appearing under the caption "Risk Factors" set
forth under Item 1 of our 2003 Annual Report on Form 10-K. We undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
OVERVIEW
Pegasus is a leading global provider of hotel reservations-related services and
technology. Founded in 1989, Pegasus' customers include a majority of the
world's travel agencies and more than 50,000 hotel properties around the globe.
Pegasus' services include central reservation systems, electronic distribution
services, commission processing and payment services, property management
systems, and marketing representation services. The company's representation
services are used by approximately 7,300 member hotels in approximately 140
countries, making Pegasus the hotel industry's largest third-party marketing and
reservations provider. Pegasus has 17 offices in 12 countries, including
regional hubs in London, Scottsdale and Singapore.
DEPENDENCE ON THE HOTEL INDUSTRY
Our business is sensitive to changes in the demand for, and average daily rates
associated with, hotel rooms. Historically, after periods of low demand for
hotel rooms, average daily rates have lagged behind the recovery in transaction
volumes. Since our distribution and reservation services revenues are primarily
transaction-based, revenues for these services have recovered more quickly than
our hotel representation and financial services, which are based in large part
on a combination of reservation volume and average daily rates. In addition, we
have experienced a lengthening in the sales cycle for some of our services, as
new customers are hesitant to sign new contracts in an uncertain economic
environment.
RECENT DEVELOPMENTS
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 travel distribution process. On March 13, 2004,
Pegasus announced PegsTour(TM), a new service which will automate bookings by
wholesale travel companies and tour operators with hotel reservation systems.
On May 3, 2004 (the "Closing Date"), Pegasus and four other parties
(collectively, the "Sellers") in Travelweb, LLC ("Travelweb") sold their
interests to an affiliate of Priceline.com, Inc. ("Priceline"). Among other
provisions, the purchase agreement provides that Pegasus and each other Seller
(1) assign to Priceline each of their 14.286% interests on the Closing Date, and
(2) will each receive (a) on the Closing Date, approximately $4.2 million in
cash, and (b) on approximately the one year anniversary of the Closing Date, if
certain conditions are met, including Travelweb performance targets, shares of
Priceline common stock with a value of approximately $4.7 million as of the
Closing Date. The Priceline common shares are subject to certain restrictions
on transfer for a period ending on the second anniversary of the Closing Date.
The total amount of Pegasus' investment in Travelweb as of March 31, 2004 was
approximately $2.2 million and was included in other noncurrent assets. Pegasus
expects to record a gain of approximately $2.0 million on the sale of its
investment in Travelweb during the second quarter of 2004.
9
FLUCTUATION OF FOREIGN CURRENCIES
Pegasus 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 and expending more or less in
expenses than it otherwise might have earned or expended if currency rates had
remained stable.
RESULTS OF OPERATIONS
Revenues. As reflected in the table below, total revenues for the first quarter
2004 increased to $45.3 million from $40.9 million for the first quarter 2003.
Total service revenues increased $3.5 million, or 9 percent, to $41.8 million
for the first quarter 2004, compared to $38.4 million for the first quarter
2003. The increase in service revenues was primarily due to the results of
operations of our connectivity-only representation service, Unirez by Pegasus,
which contributed $3.2 million in revenue (Pegasus acquired Unirez on December
1, 2003). In addition, a 7 percent increase in reservations for the company's
full-service offering, Utell by Pegasus, combined with a strong euro and British
pound also contributed to the increase in representation service revenues.
Revenues for the first quarter 2003 were negatively impacted by the war with
Iraq and the emergence of SARS.
Other changes in the business are described in the paragraphs that follow the
presentation of service line revenues below (in thousands).
Three months ended March 31,
2004 2003
-------- --------
Representation services $ 16,453 $ 13,033
Reservation services 9,352 9,947
Financial services 7,581 7,234
Distribution services 7,065 6,698
Property services 1,394 1,478
------- -------
Total service revenues 41,845 38,390
Customer reimbursements 3,479 2,523
-------- --------
Total revenues $ 45,324 $ 40,913
-------- --------
Representation services revenues increased $3.4 million, or 26 percent, to $16.5
million for the first quarter 2004, compared to $13.0 million for the first
quarter 2003. The increase was primarily due to our new Unirez by Pegasus
representation service, which contributed $3.2 million in revenue. In addition,
a 7 percent increase in reservations for the company's full-service offering,
Utell by Pegasus, combined with a strong euro and British pound also contributed
to the increase in representation service revenues. Partially offsetting this
increase was a decrease in membership fees due to a 8 percent decrease in the
number of hotels in the full-service portfolio, as well as a decrease in
commissions earned for our full-service offering due to pricing pressure. We
expect this trend to continue for at least the remainder of the year.
Reservation services revenues decreased $595,000, or 6 percent, to $9.4 million
for the first quarter 2004, compared to $9.9 million for the first quarter 2003,
despite a 13 percent increase in net transactions processed. The decrease was
primarily due to pricing pressure, which was expected because of contract
negotiations and will continue throughout the year.
Financial services revenues increased $347,000, or 5 percent, to $7.6 million
for the first quarter 2004, compared to $7.2 million for the first quarter 2003.
The increased revenue was primarily attributable to a 5 percent increase in
gross commissions processed.
10
Distribution services revenues increased $367,000, or 5 percent, to $7.1 million
for the first quarter 2004, compared to $6.7 million for the first quarter 2003.
The increase was primarily due to increases in GDS and Internet transactions.
These increases were partially offset by the loss of Unirez as a distribution
services customer, which provided $355,000 of revenue in the first quarter 2003,
and a decrease in revenue per transaction.
Property services revenues decreased $84,000, or 6 percent, to $1.4 million for
the first quarter 2004, compared to $1.5 million for the first quarter 2003.
The decrease was primarily due to a reduction in revenues from our Web-based
property management system, PegasusCentral. One of the company's top priorities
in 2004 is the redeployment of PegasusCentral. Pegasus delivered for testing an
upgraded version of PegasusCentral to Intercontinental Hotel Group, its largest
PegasusCentral customer, in the first quarter 2004. The upgrade not only
corrected previously identified issues with the software but also included
increased functionality. Full deployment of the upgraded version of
PegasusCentral in existing Holiday Inn Express properties is planned to be
completed in June 2004. Additionally, new installations with further
functionality are planned to commence during the third quarter 2004.
Customer reimbursements increased to $3.5 million for the first quarter 2004,
compared to $2.5 million for the first quarter 2003, due to the results of
operations of our new Unirez by Pegasus representation service and an overall
increase in our customers' GDS costs because of an increase in GDS transactions.
Cost of services. Cost of services, excluding customer reimbursements, were
$24.3 million for the first quarter 2004, compared to $21.5 million for the
first quarter 2003. The increase was primarily due to $1.9 million of severance
and related costs incurred in 2004 related to a strategic change in the
Company's information technology organization. The remaining increase in cost
of services was primarily due to the added expenses of Unirez, slightly offset
by cost savings realized from the 2003 restructuring. Cost of services as a
percentage of service revenues was 58 percent and 56 percent for the first
quarter 2004 and 2003, respectively.
Research and development. Research and development expenses were $1.4 million
for the first quarter 2004, compared to $1.5 million for the first quarter 2003.
The decrease was primarily due to cost savings realized from the 2003
restructuring, slightly offset by the added expenses of our Unirez by Pegasus
representation service. Research and development expenses as a percentage of
service revenues were 3 percent and 4 percent for the first quarter 2004 and
2003, respectively.
General and administrative expenses. General and administrative expenses were
$6.4 million for the first quarter 2004, compared to $6.1 million for the first
quarter 2003. The increase was primarily due to $465,000 of severance and
related costs incurred in 2004 related to a strategic change in the Company's
information technology organization and the added expenses of Unirez. These
increases were partially offset by a $280,000 decrease in compensation expense
for restricted stock, which fully amortized in the second quarter 2003, and a
curtailment gain of $162,000 on the Supplemental Executive Retirement Plan that
was recognized in the first quarter 2004 due to changes in executive management.
General and administrative expenses as a percentage of service revenues were 15
percent and 16 percent for the first quarter 2004 and 2003, respectively.
Marketing and promotion expenses. Marketing and promotion expenses were $4.7
million for the first quarter 2004, compared to $4.2 million for the first
quarter 2003. The increase was primarily due to the added expenses of our
Unirez by Pegasus representation service and additional personnel present in the
first quarter 2004. Marketing and promotion expenses as a percentage of service
revenues were 11 percent for the first quarter 2004 and 2003.
Depreciation and amortization. Depreciation and amortization expenses were $5.9
million for the first quarter 2004, compared to $12.1 million for the first
quarter 2003. The decrease is primarily because in March 2003, we completed the
amortization for certain purchased intangible assets related to the REZ, Inc.
acquisition. This $7.0 million decrease was partially offset by an increase of
$610,000 related to intangible assets from the Unirez acquisition.
Restructure costs. During the first quarter 2003, Pegasus incurred $3.2 million
of restructuring charges related to the reorganization of its operations from a
business unit structure into distinct functional areas.
11
Interest income (expense), net. Net interest expense of $501,000 for the
first quarter 2004 was the result of interest expense of $800,000, primarily
related to interest and amortization of capitalized debt issuance costs for the
July 2003 convertible debt offering. These costs were offset by interest income
of $299,000 on the Company's investments. In the first quarter 2003, interest
income on the Company's investments was the primary component of net interest
income of $380,000.
Income tax benefit. Pegasus recorded income tax benefit of $559,000 and $3.7
million for the first quarter 2004 and 2003, respectively, reflecting effective
rates of 36 percent and 37 percent, respectively. The effective rate in the
first quarter 2004 differed from the statutory rate of 35 percent, primarily due
to nondeductible expenses, partially offset by the benefit of lower foreign tax
rates.
LIQUIDITY AND CAPITAL RESOURCES
Pegasus' principal sources of capital at March 31, 2004 included cash and cash
equivalents of $39.5 million, short-term marketable securities of $5.1 million
and long-term marketable securities of $4.1 million. Pegasus had working
capital of $44.6 million at March 31, 2004, compared to working capital of $59.1
million at December 31, 2003. This decrease in working capital from December
31, 2003 to March 31, 2004 was primarily due to repurchases of Pegasus' common
stock for an aggregate purchase price of $18.7 million, discussed below.
Pegasus has two existing irrevocable standby letter of credit agreements with
JPMorgan Chase Bank collateralizing the leases for the Dallas and Scottsdale
offices. On March 1, 2004, as a result of the annual decrease to one of the
letters of credit, the total amount available under these letters of credit was
reduced by $450,000 to $1.7 million.
Net cash provided by operating activities decreased to $365,000 for the first
quarter 2004, from $2.8 million for the first quarter 2003, primarily due to
higher operating expenses in 2004 and changes in working capital, including an
increase in accounts receivable.
Net cash used in investing activities decreased to $3.4 million for the first
quarter 2004, from $5.1 million for the first quarter 2003. This decrease was
primarily the result of a $1.1 million decrease in property and equipment
purchases, as well as an increase in maturities of marketable securities.
Net cash used in financing activities was $16.4 million for the first quarter
2004, compared to net cash provided by financing activities of $49,000 for the
first quarter 2003. During the first quarter 2004, Pegasus received $2.5
million from the issuance of common stock associated with stock options and
repurchased 1.6 million shares of common stock for an aggregate purchase price
of $18.7 million. From April 1, 2004 through May 7, 2004, the Company
repurchased the remaining 894,000 shares authorized under Board approved plans
for an aggregate purchase price of $10.3 million. These shares were repurchased
under Board-approved corporate 10b5-1 stock repurchase plans.
Our future liquidity and capital requirements will depend on numerous factors,
including:
- - Our profitability
- - Operational cash requirements
- - Competitive pressures
- - Development of new services and applications
- - Acquisition of and investment in complementary businesses or technologies
- - Common stock repurchases
- - Response to unanticipated cash requirements
12
We believe that the Company's financial condition is strong and that its cash
and cash flows from operations will be sufficient to meet its foreseeable
operating and capital requirements through at least the next twelve months.
Although we do not expect to raise any external capital in the next year,
Pegasus could in the future 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.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to ensure that
it is able to collect the information it is required to disclose in the reports
it files with the SEC, and to process, summarize and disclose this information
within the time periods specified in the rules of the SEC. The Company's Chief
Executive and Chief Financial Officers are responsible for establishing and
maintaining these procedures, and, as required by the rules of the SEC,
evaluating their effectiveness. Based on their evaluation of the Company's
disclosure controls and procedures which took place as of the end of the period
covered by this report, the Chief Executive and Chief Financial Officers believe
that these procedures are effective to ensure that the Company is able to
collect, process and disclose the information it is required to disclose in the
reports it files with the SEC within the required time periods.
In designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
The Company maintains a system of internal controls designed to provide
reasonable assurance that transactions are executed in accordance with
management's general or specific authorization and that transactions are
recorded as necessary:
- - to permit preparation of financial statements in conformity with generally
accepted accounting principles, and
- - to maintain accountability for assets.
Since the date of the most recent evaluation of the Company's internal controls
by the Chief Executive and Chief Financial Officers, there have been no
significant changes in such controls or in other factors that could have
significantly affected those controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
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 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.
13
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Issuer Purchases of Equity Securities (1)
----------------------------------
Maximum
number
Total number of shares
of shares that may
purchased yet be
Total as part of purchased
number Average publicly under
of shares price paid announced plans the plans
Period purchased per share or programs or programs
- ------ ------- ---------- ------------ ------------
January 1, 2004 through
January 31, 2004 0 NA 0 2,500,000
February 1, 2004 through
February 29, 2004 697,680 $ 11.58 697,680 1,802,320
March 1, 2004 through
March 31, 2004 908,663 11.69 908,663 893,657
__________ ________ _________ _______
Total (2) 1,606,343 $ 11.64 1,606,343 893,657
========= ======= ========= =======
(1) On February 3, 2004, the Company announced its intention to repurchase up
to 2.5 million shares of the Company's common stock. As of March 31, 2004,
the Company had repurchased all 1.0 million shares under a 10b5-1 stock
repurchase plan authorized November 5, 2003 and approximately 606,000
shares under a second 10b5-1 stock repurchase plan authorized on
March 9, 2004. The repurchase of the remaining 894,000 shares authorized
under the second stock repurchase plan was completed on May 7, 2004.
Repurchases have and will be made in accordance with applicable securities
laws in the open market or in private transactions from time to time,
depending on market conditions.
(2) All shares were purchased pursuant to the publicly announced programs.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit 10.1 - Employment agreement dated January 19, 2004 between the Company
and John F. Cole.
Exhibit 10.2 - Employment settlement agreement and release dated February 3,
2004 between the Company and Mark C. Wells.
Exhibit 31.1 - Certification of Chief Executive Officer, Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 - Certification of Chief Financial Officer, Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 - Certification of Chief Executive Officer and 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
On February 3, 2004 Pegasus Solutions, Inc. filed a report on Form 8-K which
furnished information under Item 12 - Results of Operations and Financial
Condition for its press release announcing its financial results for the fourth
quarter and year ended December 31, 2003.
14
On February 13, 2004 Pegasus Solutions, Inc. filed a Form 8-K/A, amending its
Form 8-K filed with the Commission on December 3, 2003, under Item 7 - Financial
Statements, Pro Forma Financial Information and Exhibits for (A) the audited
financial statements of Unirez at and for the years ended December 31, 2002 and
2001 and unaudited financial statements of Unirez as of September 30, 2003 and
December 31, 2002 and for the nine months ended September 30, 2003 and 2002, and
for (B) the unaudited pro forma financial information required to be filed
pursuant to Article 11 of Regulation S-X as of September 30, 2003 and for the
nine months and year ended September 30, 2003 and December 31, 2002,
respectively.
On April 27, 2004 Pegasus Solutions, Inc. filed a report on Form 8-K which
furnished information under Item 12 - Results of Operations and Financial
Condition for its press release announcing its financial results for the first
quarter ended March 31, 2004.
On May 6, 2004 Pegasus Solutions, Inc. filed a report on Form 8-K which
furnished information under Item 12 - Results of Operations and Financial
Condition for its press release announcing the sale of its stake in Travelweb,
LLC to Priceline.com.
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 7, 2004 /s/ JOHN F. DAVIS III
-----------------------
John F. Davis III,
President, Chief Executive Officer
and Chairman
(Principal Executive Officer)
May 7, 2004 /s/ SUSAN K. COLE
-----------------------
Susan K. Cole,
Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)
15
EXHIBIT INDEX
Exhibit Number Description
- --------------- -----------
10.1 Employment agreement dated January 19, 2004 between the
Company and John F. Cole.
10.2 Employment settlement agreement and release dated
February 3, 2004 between the Company and Mark C. Wells.
31.1 Certification of Chief Executive Officer, Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer, Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and 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 10.1
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into as of the 19th day of January, 2004 (the
"Effective Date"), by and between Pegasus Solutions, Inc., a Delaware
corporation (the "Company") and John Cole (the "Executive").
WHEREAS, the Board of Directors of the Company (the "Board") has determined
that it is essential and in the best interest of the Company and its
stockholders to enter into this Agreement to retain the services of the
Executive and to ensure his continued dedication and efforts; and
WHEREAS, in order to induce the Executive to enter into and continue
employment by the Company, the Company desires to provide the Executive with
certain benefits during the term of his employment and, in the event his
employment is terminated, to provide the Executive with the benefits and
payments described herein.
NOW, THEREFORE, in consideration of the respective agreements of the
parties contained herein, it is agreed as follows:
1. EMPLOYMENT TERM.
The initial term of employment shall commence on the Effective Date and
shall expire on the first anniversary of the Effective Date (the "Initial Term")
provided that in the event neither party provides Notice of Termination (as
hereinafter defined) at least 30 days prior to the expiration of the Initial
Term, such term will be automatically renewed and extended for successive 30 day
periods thereafter until terminated as provided herein.
2. EMPLOYMENT.
(a) While employed by the Company, Executive shall perform the duties,
undertake the responsibilities as assigned by the Company and exercise the
authority customarily performed, undertaken and exercised by persons situated in
a similar executive capacity and, excluding periods of vacation and sick
leave to which the Executive is entitled, the Executive agrees to devote
reasonable attention and time during usual business hours to the business and
affairs of the Company to the extent necessary to discharge the responsibilities
assigned to the Executive.
3. COMPENSATION.
(a) Base Salary. The Company agrees to pay or cause to be paid to the
Executive an annual base salary as mutually agreed, and as may be increased from
time to time by mutual agreement (hereinafter referred to as the "Base
Salary"). Such Base Salary shall be payable in accordance with the Company's
customary practices applicable to its executives.
(b) Annual Bonus. In addition to Base Salary, the Executive may be
awarded, for each fiscal year ending during the Employment Term, an annual
discretionary bonus (the "Annual Bonus") in accordance with the terms and
conditions of the bonus plan approved by the Company. Any actual payment or
award under such Annual Bonus plan, and the size of any payment or award, will
be in accordance with the terms of the plan. Each such Annual Bonus shall be
paid no later than the end of the third (3rd) month of the fiscal year next
following the fiscal year for which the Annual Bonus is awarded.
4. EMPLOYEE BENEFITS.
The Executive shall be entitled to participate in all employee benefit
plans, practices and programs maintained by the Company and made available to
all employees generally, including, without limitation, all pension, retirement,
profit sharing, savings, medical, hospitalization, disability, dental, life or
travel accident insurance benefit plans. The Company may reduce benefit levels
if such changes are part of broad-based changes in the Company's benefit
programs offered generally to all employees. Notwithstanding the foregoing,
except as otherwise set forth herein, nothing herein shall obligate the Company
to adopt such plans, practices or programs.
1
5. OTHER BENEFITS.
(a) Fringe Benefits and Perquisites. The Executive shall be entitled to
participate in the Executive Perquisite Plan of the Company as described in
Attachment A hereto (the "Perquisite Plan").
(b) Expenses. The Executive shall be entitled to receive reimbursement of
all expenses reasonably incurred by him in connection with (1) any single
relocation of his primary residence, provided such expense does not exceed an
amount equal to Executive's base salary for one month and (2) the performance of
his duties hereunder including promoting, pursuing or otherwise furthering
the business or interests of the Company in accordance with the accounting
procedures and expense reimbursement policies of the Company as it shall adopt
from time to time.
6. VACATION AND SICK LEAVE.
During the Employment Term, at such reasonable times as the Chief Executive
Officer shall in his discretion permit, the Executive shall be entitled without
loss of pay, to absent himself voluntarily from the performance of his
employment under this Agreement, provided that:
(a) The Executive shall be entitled to annual vacation in accordance with
Company policies as in effect from time to time.
(b) The Executive shall be entitled to sick leave (without loss of pay) in
accordance with the Company's policies as in effect from time to time.
7. TERMINATION.
(a) In the event of a Change In Control (as hereinafter defined)
resulting in Executive giving Notice of Termination occurring while this
Agreement is in effect, the Company shall pay and provide the following benefits
to Executive:
(1) the Company shall continue to pay Executive as severance pay and in
lieu of any further compensation a monthly payment for a period of twelve
(12) months following the Termination Date an amount equal to
Executive's monthly Base Salary and Perquisite Plan in effect for the
month immediately preceding the Termination Date,.
(2) during the twelve (12) month period immediately following the
Termination Date, the Company shall at its expense continue on behalf
of the Executive and his dependents and beneficiaries the benefit plans
(except life insurance and disability insurance, if any, will not be
continued) and the medical, dental and hospitalization benefits provided
to the Executive immediately prior to the Termination Date. The
Company's obligation hereunder with respect to the foregoing benefits
shall terminate in the event the Executive obtains any such benefits
(regardless of level and scope of coverage) pursuant to a subsequent
employer's benefit plans.
(b) In the event Executive is terminated by the Company prior to the
expiration of the Initial Term of this Agreement, the Company shall pay and
provide the following benefits to Executive during the period between the
Termination Date and the expiration date of the Initial Term:
(1) Base Salary and Perquisite Plan, and
(2) the Company shall at its expense continue on behalf of the Executive
And his dependents and beneficiaries the benefit plans (except life insurance
And disability insurance, if any, will not be continued) and the medical, dental
And hospitalization benefits provided to the Executive immediately prior to
The Termination Date. The Company's obligation hereunder with respect to the
foregoing benefits shall terminate in the event the Executive obtains any such
benefits (regardless of level and scope of coverage) pursuant to a subsequent
employer's benefit plans.
2
The Executive hereby acknowledges that full payment and/or performance by the
Company of its obligations as set forth in Section 7(a) or (b) hereof shall be
in lieu of any other remedy or cause of action the Executive may have, either at
law or in equity, as a result of the termination of the Executive's employment
pursuant to such Section.
8. DEFINITIONS.
(a) Notice of Termination. A Notice of Termination is a written notice
given by the Company to the Executive or by the Executive to the Company
terminating this Agreement and the Executives' employment. The Notice of
Termination must be given at least 30 in advance of the Termination Date (as
hereinafter defined).
(b) Termination Date. For purposes of this Agreement, "Termination
Date" shall mean the date specified in the Notice of Termination provided that
if the Executive's employment is terminated because of a Change In Control, the
date specified in the Notice of Termination shall be not more than thirty (30)
days from the date the Notice of Termination is given to the Company.
(c) Change In Control. For purposes of this Agreement, a "Change in
Control" shall mean any of the following events:
(1) An acquisition of any voting securities of the Company (the "Voting
Securities") by any "Person" (as the term person is used for purposes of Section
12(d) or 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) other than any parent, subsidiary or affiliate of the Company immediately
after which such Person has "Beneficial Ownership" (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of more than fifty percent (50%) of
the combined voting power of the Company's then outstanding Voting Securities;
provided, however, in determining whether a Change in Control has occurred,
Voting Securities which are acquired in a "Non-Control Acquisition" (as
hereinafter defined) shall not constitute an acquisition which would cause a
Change in Control. A "Non-Control Acquisition" shall mean an acquisition by (i)
an employee benefit plan (or a trust forming a part thereof) maintained by (A)
the Company or (B) any corporation or other Person of which a majority of its
voting power or its voting equity securities or equity interest is owned,
directly or indirectly, by the Company (for purposes of this definition, a
"Subsidiary") or (ii) the Company or its Subsidiaries,
(2) The individuals who, as of the date of this Agreement is approved by
The Board, are members of the Board (the "Incumbent Board") cease for any reason
To constitute at least one half (1/2) of the members of the Board; provided,
however, that if the election, or nomination for election of any new director
was approved by a vote of the members of the Board as provided by the Company's
Bylaws, such new director shall, for purposes of this Agreement, be considered
as a member of the Incumbent Board; provided, however, that no individual shall
be considered a member of the Incumbent Board if such individual initially
assumed office as a result of either an actual or threatened "Election Contest"
(as described in Rule 14a-11 promulgated under the Exchange Act) or other actual
or threatened solicitation of proxies or consents by or on behalf of a Person
other than the Board (a "Proxy Contest") including by reason of any agreement
intended to avoid or settle any Election Contest or Proxy Contest, or
(3) Approval by the stockholders of the Company of:
(i) A complete liquidation or dissolution of the Company, or
(ii) An agreement for the sale or other disposition of all or
substantially all of the assets of the Company to any Person
(other than a transfer to a Subsidiary or a parent in a Non-
Control Acquisition).
3
9. SUCCESSORS AND ASSIGNS.
(a) This Agreement shall be binding upon and shall inure to the benefit of
the Company, its successors and assigns and the Company shall require any
successor or assign to expressly assume and agree to perform this Agreement in
the same manner and to the same extent that the Company would be required to
perform if no such succession or assignment had taken place. The term "Company"
as used herein shall include such successors and assigns. The term
"successors and assigns" as used herein shall mean a corporation or other entity
acquiring all or substantially all the assets and business of the Company
(including this Agreement) whether by operation of law or otherwise.
(b) Neither this Agreement nor any right or interest hereunder shall be
assignable or transferable by the Executive, his beneficiaries or legal
representatives, except by will or by the laws of descent and distribution.
This Agreement shall inure to the benefit of and be enforceable by the
Executive's legal personal representative.
10. FEES AND EXPENSES.
The Company shall pay all legal fees and related expenses (including the
costs of experts, evidence and counsel) incurred by the Executive as a result of
the breach or default by the Company of the terms hereof.
11. NOTICE.
For purposes of this Agreement, notice and all other communications
provided for in the Agreement (including the Notice of Termination) shall be in
writing and shall be deemed to have been duly given when personally delivered or
sent by certified mail, return receipt requested, postage prepaid, addressed to
the respective addresses last given by each party to the other, provided that
all notices to the Company shall be directed to the attention of the Board with
a copy to the Secretary of the Company. All notices and communications shall be
deemed to have been received on the date of delivery thereof or on the third
(3rd) business day after the mailing thereof, except that notice of change of
address shall be effective only upon receipt.
12. MISCELLANEOUS.
No provision of this Agreement may be modified, waived or discharged unless
such waiver, modification or discharge is agreed to in writing and signed by the
Executive and the Company. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not expressly set forth in this Agreement.
13. GOVERNING LAW.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Texas without giving effect to the
conflict of law principles thereof. Subject to Section 16 of this Agreement,
any action brought by any party to this Agreement shall be brought and
maintained in a court of competent jurisdiction in Dallas County, Texas.
14. SEVERABILITY.
The provisions of this Agreement shall be deemed severable and the
invalidity or unenforceability of any provisions hereof shall not affect the
validity or enforceability of the other provisions hereof.
15. ENTIRE AGREEMENT.
4
This Agreement constitutes the entire agreement between the parties hereto
and supersedes all prior agreements, if any, understandings and arrangements,
oral or written, between the parties hereto with respect to the subject matter
hereof.
16. ARBITRATION.
Any dispute or controversy arising out of or relating to this Agreement,
except the right to injunctive relief, shall be determined and settled by
arbitration in the City of Dallas, Texas, in accordance with the Employment
Dispute Resolution Rules of the American Arbitration Association then in effect,
and judgement upon the award rendered by the arbitrator may be entered in any
court of competent jurisdiction, hereby expressly waiving the right to jury
trial. Such arbitrator shall have no power to modify any of the provisions of
this Agreement, and his or her jurisdiction is limited accordingly. A party
requesting arbitration hereunder shall give ten (10) days' written notice to the
other party to request such arbitration. Unless the arbitrator decides
otherwise, the successful party in any such arbitration shall be entitled to
reasonable attorneys' fees and costs associated with such arbitration. If the
parties hereto cannot agree upon an arbitrator, then one shall be appointed by
the governing office of the American Arbitration Association. Any arbitrator so
appointed shall have extensive experience in a profession connected with the
subject matter of the dispute. Whenever any action is required to be taken
under this Agreement within a specified period of time and the taking of such
action is materially affected by a matter submitted to arbitration, such period
shall automatically be extended by the number of days plus ten (10) that are
taken for the determination of that matter by the arbitrator.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by
its Chairman of the Board or Chairman of the Compensation Committee and the
Executive has executed this Agreement as of the date and year first above
written.
PEGASUS SOLUTIONS, INC. EXECUTIVE:
By: _____________________________ By:_____________________________
John Cole
Print: _____________________________
Title: _____________________________
5
Exhibit 10.2
SETTLEMENT AGREEMENT AND RELEASE
This Settlement Agreement and Release (this "Settlement Agreement") is made as
of February 3, 2004, between Pegasus Solutions, Inc. ("Company") and Mark C.
Wells ("Executive").
Whereas, Executive's employment with Company has terminated; and
Whereas, to achieve certainty and avoid possible dispute, Company and Executive
wish to specify and settle all amounts to be paid by Company to or on behalf of
Executive as a result of such termination of employment.
Now, therefore, in consideration of the foregoing recitals, the covenants and
agreements set forth herein and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, Company and Executive
agree as follows:
1. Defined Terms.
--------------
(a) "Employment Agreement" means the Employment Agreement between Company
and Executive dated as of December 1, 2002.
(b) All capitalized terms used in this Settlement Agreement but not
Defined herein shall have the meanings set forth elsewhere in the
Employment Agreement.
2. Termination Date. Company and Executive agree that the Termination Date
-----------------
is January 31, 2004.
3. Payments. Company will pay the following amounts to or on behalf of
--------
Executive:
(a) For a period of twenty-four (24) months following the Termination
Date, Company will pay to Executive a monthly payment of $29,866.67.
(b) During the twelve (12) month period immediately following the
Termination Date, Company will:
(i) pay to Executive a monthly payment of $2,916.67 in satisfaction
of its obligation to continue on behalf of the Executive and
Executive's dependents and beneficiaries the Executive Benefit
and Perquisites Plan; and
(ii) at its expense continue on behalf of Executive and
Executive's dependents and beneficiaries the medical, dental
and hospitalization benefits provided to Executive immediately
prior to the Termination Date by reimbursing Executive for the
monthly premiums paid by Executive during the Continuation
Period for such coverages under the Consolidated Omnibus
Budget Reconciliation Act of 1986 (COBRA); provided that
Company's obligation under this subparagraph is conditioned
upon Executive electing to continue such coverages during the
Continuation Period under COBRA.
The Company's obligation hereunder with respect to the foregoing
coverages, benefits and perquisites will terminate in the event the
Executive obtains any such benefits (regardless of level and scope
of coverage) pursuant to a subsequent employer's benefit plans.
(c) For a period of two (2) years after the Termination Date, Company
will contribute a total of $129,651 to Executive's Deferred
Compensation Plan account in accordance with the terms of the
Deferred Compensation Plan.
1
(d) For a period of two (2) years after the Termination Date, Company
Will continue the accrual of Executive's benefits under the
Supplemental Executive Retirement Plan in accordance with the
terms of that plan.
(e) Company will reimburse Executive the costs of any outplacement
services incurred by Executive, up to a maximum amount of
Fifteen Thousand Dollars ($15,000.00).
4. Stock Options. Any outstanding stock options (including restricted stock
-------------
and granted performance shares or units) granted to Executive under any
stock option plans or under any other incentive plan or arrangement will
become, as of the Termination Date, one hundred percent (100%) vested,
and all restrictions on the exercise of such grants will be removed until
their expiration in accordance with the governing stock option
agreement(s) and plan(s).
5. Performance of Obligations. Company and Executive agree that full
----------------------------
payment and/or performance by Company of its obligations as set
forth in paragraphs 3 and 4 hereof will (a) constitute full performance
and satisfaction by Company of its obligations under Section 8(d) of
the Employment Agreement; and (b) be in lieu of any other remedy or
cause of action Executive may have, either at law or in equity, as
a result of the termination of Executive's employment with Company.
6. Release. As a material inducement to Company to enter into this
-------
Settlement Agreement, Executive for himself and on behalf of his heirs,
assigns and representatives hereby releases, acquits and forever
discharges Company and its subsidiaries and affiliates, and the
directors, officers, employees, agents, successors and assigns of each
of Company, its subsidiaries and affiliates (the "Released Parties"),
from any and all claims or causes of action of any kind whatsoever,
known or unknown and whether now existing or arising hereafter,
including without limitation any tort, contractual, quasi-contractual,
statutory or equitable claim, that Executive has or may have, arising
from, relating to or in connection with (a) Executive's employment
with the Company or the termination of that employment, or (b) the
Employment Agreement. Company and Executive agree that any claim or
cause of action arising from, relating to or in connection with this
Settlement Agreement shall not be subject to the release set forth in
this paragraph 6. Executive represents and warrants to Company that he
has not, and covenants that he will not, file any charge, complaint,
suit or other claim of any type against the Released Parties
arising from, relating to or in connection with the matters released
hereby. Executive agrees that Company's payments under, and the
settlement of the matters set forth in, this Settlement Agreement are
good and valuable consideration for the release and obligations set forth
in this paragraph 6 and constitute consideration in addition to any
consideration to which Executive may otherwise be entitled.
7. Confidentiality and Non-Disparagement. Executive agrees to keep the
---------------------------------------
existence and terms of this Settlement Agreement confidential and to not
disclose the provisions hereof to anyone except Executive's spouse,
relevant legal or financial advisors or as required by law. Executive
agrees not to make negative or disparaging remarks to any person
about Company, Executive's employment with Company, or the events which
led to this Settlement Agreement, and agrees that he will not speak
publicly to the media or anyone else, individually or through his legal
or other representatives, about these matters or this Settlement
Agreement.
8. Arbitration. Any dispute or controversy arising out of or relating to
-----------
this Settlement Agreement shall be determined and settled by arbitration
in the City of Dallas, Texas, in accordance with the Employment
Dispute Resolution Rules of the American Arbitration Association then in
effect, and judgement upon the award rendered by the arbitrator may be
entered in any court of competent jurisdiction. Such arbitrator shall
have no power to modify any of the provisions of this Settlement
Agreement, and his or her jurisdiction is limited accordingly. A party
requesting arbitration hereunder shall give ten (10) days' written notice
to the other party to request such arbitration. Unless the
arbitrator decides otherwise, the successful party in any such
arbitration shall be entitled to reasonable attorneys' fees and costs
associated with such arbitration. If the parties hereto cannot agree
upon an arbitrator, then one shall be appointed by the governing
office of the American Arbitration Association. Any arbitrator so
appointed shall have extensive experience in a profession connected with
the subject matter of the dispute.
2
9. Miscellaneous. This Settlement Agreement sets forth the entire agreement
-------------
between the parties hereto and fully supersedes any and all prior
agreements or understandings, written or oral, between the parties
hereto pertaining to the subject matter hereof. No change,
modification, or waiver of any term or condition in this Settlement
Agreement shall be valid or binding upon either party, unless such
change, modification, or waiver is in writing, signed by each
party. This Settlement Agreement shall be governed by and
interpreted in accordance with the laws of the State of Texas,
without reference to its conflict of laws principles.
PEGASUS SOLUTIONS, INC. MARK C. WELLS :
By: ___________________________ ___________________________
Name: ___________________________
Title: ___________________________
3
Exhibit 31.1
CERTIFICATION 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 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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
report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 7, 2004
/s/ JOHN F. DAVIS III
- -------------------------------------------
John F. Davis III
President, Chief Executive Officer and Chairman
Exhibit 31.2
CERTIFICATION 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 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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
report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 7, 2004
/s/ SUSAN K. COLE
- -------------------------------------
Susan K. Cole
Executive Vice President and Chief Financial Officer
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND
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 March 31, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), we, the
undersigned, 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.
May 7, 2004 /s/ JOHN F. DAVIS III
-----------------------
John F. Davis III,
President, Chief Executive Officer
and Chairman
May 7, 2004 /s/ SUSAN K. COLE
-----------------------
Susan K. Cole,
Executive Vice President
and Chief Financial Officer