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 JUNE 30, 2005
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 August 1, 2005 was 20,761,305.
PEGASUS SOLUTIONS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2005
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements (Unaudited) 3
a) Condensed Consolidated Balance Sheets as of
June 30, 2005 and December 31, 2004 3
b) Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss) for the three and six months
ended June 30, 2005 and 2004 4
c) Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 2005 and 2004 5
d) Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 4. Controls and Procedures 19
Part II. Other Information
Item 1. Legal Proceedings 20
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits 21
Signatures 22
2
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
PEGASUS SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
June 30, December 31,
2005 2004
----------- -----------
ASSETS
Cash and cash equivalents $ 21,683 $ 17,599
Auction rate securities 5,000 5,650
Short-term investments - 6,001
Accounts receivable, net 27,149 28,551
Other current assets 8,086 9,061
------------ ----------
Total current assets 61,918 66,862
Goodwill 163,585 163,585
Intangible assets, net 4,978 5,827
Property and equipment, net 62,954 80,326
Other noncurrent assets 21,679 12,614
---------- -----------
Total assets $ 315,114 $ 329,214
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and
accrued liabilities $ 29,998 $ 29,531
Unearned revenue 6,768 6,763
Other current liabilities 7,424 5,621
----------- -----------
Total current liabilities 44,190 41,915
Noncurrent uncleared commission checks 4,966 5,576
Other noncurrent liabilities 19,206 19,407
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;
20,715,500 and 21,105,815 shares issued
and outstanding, respectively 207 211
Additional paid-in capital 237,120 242,112
Unearned compensation (370) (408)
Accumulated other comprehensive loss (954) (995)
Accumulated deficit (64,251) (53,604)
--------- ---------
Total stockholders' equity 171,752 187,316
--------- ---------
Total liabilities and
stockholders' equity $ 315,114 $ 329,214
=========== ===========
See accompanying notes to condensed consolidated financial statements.
3
PEGASUS SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2005 2004 2005 2004
--------- -------- ---------- --------
Revenues:
Service revenues $ 42,515 $44,498 $ 79,605 $84,949
Customer reimbursements 4,806 4,141 8,714 7,620
--------- -------- ---------- --------
Total revenues 47,321 48,639 88,319 92,569
Costs of services:
Cost of services (exclusive of
depreciation and amortization shown
separately below) 21,133 22,098 42,108 44,807
Customer reimbursements 4,806 4,141 8,714 7,620
--------- -------- ---------- --------
Total costs of services 25,939 26,239 50,822 52,427
Research and development 876 1,041 1,583 2,363
General and administrative expenses 5,933 6,045 11,946 12,426
Marketing and promotion expenses 5,638 4,981 10,949 9,694
Depreciation and amortization 4,659 4,591 8,935 9,291
--------- -------- ---------- --------
Operating income 4,276 5,742 4,084 6,368
Other income (expense):
Gain on sale of Travelweb, LLC - 1,961 - 1,961
Interest expense, net (382) (524) (727) (1,025)
Other (35) (86) 139 (293)
--------- -------- ---------- --------
Income from continuing operations
before income taxes 3,859 7,093 3,496 7,011
Income tax expense (1,168) (2,687) (1,286) (2,690)
--------- -------- ---------- --------
Income from continuing operations 2,691 4,406 2,210 4,321
Discontinued operations, net of tax (11,697) (1,003) (12,857) (1,897)
--------- -------- ---------- --------
Net income (loss) ($9,006) $ 3,403 ($10,647) $ 2,424
========= ======== ========== ========
Other comprehensive income (loss):
Change in unrealized gain (loss) on
investments, net of tax 2 (39) 41 (12)
--------- -------- ---------- --------
Comprehensive income (loss) ($9,004) $ 3,364 ($10,606) $ 2,412
========= ======== ========== ========
Basic income (loss) per common share:
Continuing operations $ 0.13 $ 0.19 $ 0.11 $ 0.18
Discontinued operations ($0.56) ($0.04) ($0.62) ($0.08)
--------- -------- ---------- --------
Net income (loss) ($0.43) $ 0.15 ($0.51) $ 0.10
========= ======== ========== ========
Diluted income (loss) per common share:
Continuing operations $ 0.13 $ 0.18 $ 0.11 $ 0.18
Discontinued operations ($0.48) ($0.04) ($0.62) ($0.08)
--------- -------- ---------- --------
Net income (loss) ($0.35) $ 0.14 ($0.51) $ 0.10
========= ======== ========== ========
Weighted average shares outstanding:
Basic 20,707 23,230 20,734 23,974
========= ======== ========== ========
Diluted 24,639 27,253 20,989 24,277
========= ======== ========== ========
See accompanying notes to condensed consolidated financial statements.
4
PEGASUS SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended
June 30,
--------------------
2,005 2,004
--------- ---------
Cash flows from operating activities:
Net income (loss) $(10,647) $ 2,424
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 11,452 11,676
Non-cash asset impairment discontinued operations 16,630 -
Non-cash exit and transition costs discontinued operations 951 -
Gain on sale of Travelweb, LLC - (1,961)
Deferred income taxes (7,446) (211)
Other 827 1,489
Changes in assets and liabilities:
Accounts receivable 999 (7,311)
Other current and noncurrent assets 285 (139)
Accounts payable and accrued liabilities 1,874 1,615
Unearned revenue 355 (748)
Other current and noncurrent liabilities 386 973
Landlord paid tenant improvements - 799
--------- ---------
Net cash provided by operating activities 15,666 8,606
Cash flows from investing activities:
Proceeds from sale of Travelweb, LLC - 4,167
Proceeds from maturity of marketable securities, including
auction rate securities 15,456 27,488
Purchase of marketable securities, including
auction rate securities (7,652) (12,679)
Purchase of property and equipment (14,637) (9,034)
Other 498 500
Landlord paid tenant improvements - (799)
--------- ---------
Net cash provided by (used in) investing activities (6,335) 9,643
Cash flows from financing activities:
Repurchase of common stock (6,245) (33,049)
Proceeds from issuance of common stock 1,065 4,598
Other (67) (283)
--------- ---------
Net cash used in financing activities (5,247) (28,734)
Net increase (decrease) in cash and cash equivalents 4,084 (10,485)
Cash and cash equivalents, beginning of period 17,599 42,039
Cash and cash equivalents, end of period $ 21,683 $ 31,554
========= =========
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 global leader in providing technology and services
to hotels and travel distributors. 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, and marketing
representation services, including the consumer Web site hotelbook.com. 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. The Company operates under one reportable segment. 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, 2004.
Reclassifications
In 2004, the Company concluded that it was appropriate to classify certain
auction rate securities that had been previously classified as cash and cash
equivalents as a separately stated current asset. The Company has made
adjustments to the Condensed Consolidated Statement of Cash Flows for the six
months ended June 30, 2004 to reflect the gross purchases and sales of these
securities as investing activities rather than a component of cash and cash
equivalents. This change in classification does not affect previously reported
cash flows from operations or from financing activities in the Condensed
Consolidated Statements of Cash Flows or in previously reported Condensed
Consolidated Statements of Operations for any period. The Company has also made
an adjustment to the Condensed Consolidated Statement of Cash Flows for the six
months ended June 30, 2004 to reflect landlord paid tenant improvements as a
cash inflow in net cash provided by operating activities and a cash outflow in
net cash provided by investing activities, rather than a noncash investing
activity.
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 stock
option awards 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. Total
compensation expense for these plans was $32,000 and $10,000 for the three
months ended June 30, 2005 and 2004, respectively, and $62,000 and $131,000 for
the six months ended June 30, 2005 and 2004, respectively.
The following table represents the effect on net income (loss) and net income
(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):
6
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2005 2004 2005 2004
-------- ------ --------- --------
Net income (loss), as reported ($9,006) $3,403 ($10,647) $ 2,424
Add: Stock-based employee
compensation expense included in
reported income (loss), net of related
tax effects 19 6 38 81
Deduct: Total stock-based employee
compensation expense determined
under fair value based methods for all
awards, net of related tax effects (756) (1,029) (1,599) (2,717)
-------- ------- ------- -------
Pro forma net income (loss) ($9,743) $2,380 ($12,208) ($212)
======== ====== ========= ========
Net income (loss) per share, as reported:
Basic ($0.43) $ 0.15 ($0.51) $ 0.10
======== ====== ========= ========
Diluted ($0.35) $ 0.14 ($0.51) $ 0.10
======== ====== ========= ========
Net income (loss) per share, pro forma:
Basic ($0.47) $ 0.10 ($0.59) ($0.01)
======== ====== ========= ========
Diluted ($0.46) $ 0.10 ($0.58) ($0.01)
======== ====== ========= ========
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 awards. For purposes of pro forma
disclosures, the estimated fair value of stock-based compensation awards is
amortized over the vesting period.
2. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
In June 2005, the Board of Directors of the Company approved and committed to a
formal plan to exit the property management systems (PMS) business by selling
the Company's PMS operations. These operations include the PegasusCentral PMS
and two other private-label property management products, Guestview and
NovaPlus, that support both hotel chains and independent customers. The Company
expects to sell the PMS business within one year in a single transaction or a
series of transactions.
The Company also reached an agreement with its primary PegasusCentral customer,
InterContinental Hotel Group (IHG), to discontinue the use of PegasusCentral.
Accordingly, the PegasusCentral PMS will no longer be used in the Holiday Inn
Express properties currently using the system, and there will be no new
installations. The decision to exit the PMS business was made considering the
termination of the IHG agreement and the overall expected profitability of the
remaining PMS operations.
The PMS operations have been classified as discontinued operations for all
periods presented and the PMS assets are classified as assets held for sale at
June 30, 2005. In classifying the PMS assets as held for sale, the Company
concluded that the carrying amount of these assets exceeded the estimated fair
value less cost to sell such assets. Accordingly, in the second quarter of
2005, the Company recognized a $16.6 million pre-tax impairment charge to write
down the assets to an estimated net realizable value of $1.9 million. In
addition, the Company recorded an approximately $1.0 million pre-tax charge for
exit and transition costs. These charges are included in the Condensed
Consolidated Statements of Operations and Comprehensive Income (Loss) as
discontinued operations, net of tax. Assets held for sale of $1.9 million are
included in other noncurrent assets in the Condensed Consolidated Balance Sheet
as of June 30, 2005. Liabilities related to held-for-sale assets of $1.1
million are included in other current liabilities in the Condensed Consolidated
Balance Sheet as of June 30, 2005. The Company will continue to analyze whether
the PMS operations meet the criteria to be presented as discontinued operations
for one year.
7
Condensed income statement data for the discontinued operations is presented
below (in thousands). The income tax benefit is calculated using a discrete
statutory tax rate approach for discontinued operations.
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2005 2004 2005 2004
---------- --------- ---------- ---------
Revenues $ 691 $ 1,362 $ 1,330 $ 2,756
========== ========= ========== =========
Operating loss ($19,043) ($1,632) ($20,931) ($3,088)
Income tax benefit 7,346 629 8,074 1,191
---------- --------- ---------- ---------
Loss related to discontinued operations,
net of tax
($11,697) ($1,003) ($12,857) ($1,897)
========== ========= ========== =========
3. STRATEGIC ALTERNATIVES
On April 11, 2005, the Company announced that its board of directors is
exploring various strategic alternatives to enhance shareholder value. Some
possible alternatives include joint ventures, divestitures, alliances with
strategic partners, taking the Company private, selling the Company to a third
party, or merging with another company. The Company's board of directors has
retained Bear, Stearns & Co. Inc. as its financial advisor to assist in this
effort. There can be no assurance that this process will result in any specific
transaction.
4. INTANGIBLE ASSETS
Pegasus has acquired identifiable intangible assets that are subject to
amortization. The following table presents carrying values of those intangible
assets at June 30, 2005 and December 31, 2004 (in thousands):
June 30, 2005 December 31, 2004
------------- -----------------
Carrying Accumulated Carrying Accumulated
Value Amortization Value Amortization
------- ------------- ------- -------------
Customer relationships $56,996 ($53,421) $56,996 ($53,091)
Non-compete agreements 6,000 (4,610) 6,120 (4,215)
Other 48 (35) 48 (31)
------- ------------- ------- -------------
Total $63,044 ($58,066) $63,164 ($57,337)
======= ============= ======= =============
Amortization expense for those intangible assets was $317,000 and $501,000 for
the three months ended June 30, 2005 and 2004, respectively, and was $818,000
and $1.0 million for the six months ended June 30, 2005 and 2004, respectively.
5. STOCKHOLDERS' EQUITY
On November 5, 2004, the Board of Directors approved a share buy-back plan for
the repurchase of up to 1.5 million shares of Pegasus' common stock. Share
buy-backs under this plan have been made under a Securities and Exchange Act of
1934 Rule 10b5-1 share repurchase plan, which allowed Pegasus to repurchase
shares, subject to certain limitations, even during blackout periods. During
the first six months of 2005, the Company purchased approximately 518,000 shares
for an aggregate cost of $6.2 million. On April 12, 2005, the Rule 10b5-1 stock
repurchase plan was terminated. The Company had total repurchases under the
plan of approximately 1.2 million shares for a total aggregate value of $13.9
million. Shares repurchased under Board-approved plans have all been cancelled.
8
6. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted income
(loss) per common share (in thousands, except per share data):
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2005 2004 2005 2004
--------- -------- ---------- --------
Income from continuing operations (a) $ 2,691 $ 4,406 $ 2,210 $ 4,321
Discontinued operations, net of tax (b) (11,697) (1,003) (12,857) (1,897)
--------- -------- ---------- --------
Net income (loss) (c) ($9,006) $ 3,403 ($10,647) $ 2,424
========= ======== ========== ========
Income from continuing operations (a) $ 2,691 $ 4,406 $ 2,210 $ 4,321
Adjustment for interest on convertible
debt, net of tax 414 460 - -
------- --------- -------- ----------
Income from continuing operations,
as adjusted (d) $ 3,105 $ 4,866 $ 2,210 $ 4,321
========= ======== ========== ========
Net income (loss) (c) ($9,006) $ 3,403 ($10,647) $ 2,424
Adjustment for interest on convertible
debt, net of tax 414 460 - -
------- --------- -------- ----------
Net income (loss), as adjusted (e) ($8,592) $ 3,863 ($10,647) $ 2,424
========= ======== ========== ========
Basic income (loss) per share:
Continuing operations (a)/(f) $ 0.13 $ 0.19 $ 0.11 $ 0.18
Discontinued operations (b)/(f) ($0.56) ($0.04) ($0.62) ($0.08)
--------- -------- ---------- --------
Net income (loss) (c)/(f) ($0.43) $ 0.15 ($0.51) $ 0.10
========= ======== ========== ========
Diluted income (loss) per share:
Continuing operations (d)/(g) $ 0.13 $ 0.18 $ 0.11 $ 0.18
Discontinued operations (b)/(g) ($0.48) ($0.04) ($0.62) ($0.08)
--------- -------- ---------- --------
Net income (loss) (e)/(g) ($0.35) $ 0.14 ($0.51) $ 0.10
========= ======== ========== ========
Basic weighted average shares
outstanding (f) 20,707 23,230 20,734 23,974
Dilutive effect of stock options (1) 206 297 255 303
Dilutive effect of convertible debt (2) 3,726 3,726 - -
------- --------- -------- ----------
Dilutive weighted average shares
outstanding (g) 24,639 27,253 20,989 24,277
========= ======== ========== ========
(1) Weighted average shares issuable upon exercise of stock options that were
excluded from the calculation as their effect would have been anti-dilutive to
income from continuing operations were 3.6 million and 2.2 million for the
quarters ended June 30, 2005 and 2004, respectively, and 3.1 million and 2.6
million for the six months ended June 30, 2005 and 2004, respectively.
(2) Subject to certain conditions, the Company's convertible debt is
convertible into common stock at a conversion price of approximately $20.13 per
share, equal to approximately 3.7 million shares. No dilution for convertible
debt was included in the calculation for the six months ended June 30, 2005 and
2004 as the effect would be anti-dilutive to income from continuing operations
for these periods.
9
7. 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 first quarter 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" ("SFAS 88"). The Company has made cash contributions
of approximately $460,000 to a trust associated with the SERP during the six
months ended June 30, 2005. No further contributions are expected to be made
during 2005.
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 Company expects to make cash contributions of
approximately $290,000 to the Utell Defined Benefit Plan during 2005. For the
six months ended June 30, 2005, cash contributions of approximately $134,000
were made.
The following table provides the components of net periodic benefit costs for
the three months and six months ended June 30, 2005 and 2004 (in thousands):
SERP Utell Defined Benefit Plan
----------------------------- -----------------------------
Three month Six months Three months Six months
ended June 30, ended June 30, ended June 30, ended June 30,
------------- -------------- ------------- --------------
2005 2004 2005 2004 2005 2004 2005 2004
------ ------ ------ ------ ----- ----- ----- -----
Service cost $ 50 $ 50 $ 100 $ 101 $ 90 $ 72 $ 180 $ 144
Interest cost 64 58 128 117 186 134 372 268
Expected return on plan assets. . . - - - - (206) (171) (412) (342)
Amortization of prior service cost. (10) (11) (20) (22) - - - -
Recognized net actuarial loss. 32 30 64 61 - - - -
Curtailment gain. - - - (162) - - - -
-------------- -------------- ------------ -------------
Net periodic benefit cost $ 136 $ 127 $ 272 $ 95 $ 70 $ 35 $ 140 $ 70
====== ====== ====== ====== ===== ===== ===== ======
8. 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.
9. NEW ACCOUNTING GUIDANCE
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based
Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees." In March 2005, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 107, "Share-Based Payment," which provides
interpretive guidance related to SFAS 123R. SFAS 123R requires compensation
costs related to share-based payment transactions to be recognized in financial
statements. With limited exceptions, the amount of compensation cost is
measured based on the fair value of the equity or liability instrument issued on
the grant date. SFAS 123R requires liability awards to be remeasured each
reporting period and compensation costs to be recognized over the period that an
employee provides service in exchange for the award. In April 2005, the SEC
delayed the effective date of SFAS 123R to the beginning of the annual reporting
period that begins after June 15, 2005. The Company is currently evaluating
SFAS 123R to determine the impact on its consolidated financial statements.
However, it is expected to have a negative effect on consolidated net income.
10
In May 2005, the FASB issued Statement of Financial Accounting Standards No.
154, "Accounting Changes and Error Corrections-A Replacement of APB Opinion No.
20 and FASB Statement No. 3" ("SFAS 154"). SFAS 154 requires retrospective
application to prior periods' financial statements of changes in accounting
principle. It also requires that the new accounting principle be applied to the
balances of assets and liabilities as of the beginning of the earliest period
for which retrospective application is practicable and that a corresponding
adjustment be made to the opening balance of retained earnings for that period
rather than being reported in an income statement. The statement will be
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. The Company does not expect the adoption of
SFAS 154 to have a material effect on the Company's consolidated financial
position or results of operations.
On October 22, 2004, the President of the United States signed the American Jobs
Creation Act of 2004 (the "Act"). The Act creates a temporary incentive for
United States corporations to receive repatriations of accumulated earnings of
foreign subsidiaries by providing an 85 percent dividends received deduction for
certain qualifying dividends from certain qualifying foreign corporations. The
deduction is subject to a number of limitations, and uncertainty presently
remains about how to interpret and implement numerous provisions in the Act. As
of June 30, 2005, the Company has not provided for foreign withholding taxes or
United States deferred income taxes on accumulated undistributed earnings of
foreign subsidiaries, as management does not presently intend to repatriate such
earnings. The Company has not yet determined and is presently unable to estimate
the magnitude of the benefit, if any, it may receive under these provisions of
the Act. An analysis of the potential tax impact will be completed as further
guidance is provided by the Department of Treasury. If undistributed earnings of
foreign subsidiaries were to be repatriated, such earnings could be subject to
foreign withholding taxes and residual income taxes.
11
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, 2004. This
discussion and analysis contains forward-looking statements within the meaning
of the federal securities laws, 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, any strategic
alternative undertaken by the company, the inability of the company to sell the
property management systems (PMS) operations, risks associated with a PMS sale
transaction and the inability of the company to terminate the PMS service as
expected, as well as other risks and uncertainties, including those appearing in
under the caption "Risk Factors" in the company's Annual Report on Form 10-K for
the year ended December 31, 2004.
OVERVIEW
Pegasus is a global leader in providing technology and services to hotels and
travel distributors. Founded in 1989, Pegasus' customers include a majority of
the world's travel agencies and more than 60,000 hotel properties around the
globe. Pegasus' services include central reservation systems, electronic
distribution services, commission processing and payment services, and marketing
representation services, including the consumer Web site hotelbook.com. The
company's representation services, including Utell by Pegasus and Unirez by
Pegasus , are used by nearly 7,000 member hotels in approximately 140 countries,
making Pegasus the hotel industry's largest third-party marketing and
reservations provider. Pegasus has 18 offices in 13 countries, with corporate
headquarters in Dallas and regional hubs in London, Scottsdale and Singapore.
STRATEGIC ALTERNATIVES
On April 11, 2005, we announced that our board of directors is exploring various
strategic alternatives to enhance shareholder value. Some possible alternatives
include joint ventures, divestitures, alliances with strategic partners, taking
the company private, selling the company to a third party, or merging with
another company. Our board of directors has retained Bear, Stearns & Co. Inc. as
its financial advisor to assist in this effort. There can be no assurance that
this process will result in any specific transaction.
DISCONTINUED OPERATIONS
In June 2005, our Board of Directors approved and committed to a formal plan to
exit the property management systems (PMS) business by selling the PMS
operations. These operations include the PegasusCentral PMS and two other
private-label property management products, Guestview and NovaPlus, that support
both hotel chains and independent customers. We expect to sell the PMS business
within one year in a single transaction or a series of transactions.
We also reached an agreement with our primary PegasusCentral customer,
InterContinental Hotel Group (IHG), to discontinue the use of PegasusCentral.
Accordingly, the PegasusCentral PMS will no longer be used in the Holiday Inn
Express properties currently using the system, and there will be no new
installations. The decision to exit the PMS business was made considering the
termination of the IHG agreement and the overall expected profitability of the
remaining PMS operations.
12
The PMS operations have been classified as discontinued operations for all
periods presented and the PMS assets are classified as assets held for sale at
June 30, 2005. In classifying the PMS assets as held for sale, we concluded
that the carrying amount of these assets exceeded the estimated fair value less
cost to sell such assets. Accordingly, in the second quarter of 2005, we
recognized a $16.6 million pre-tax impairment charge to write down the assets to
an estimated net realizable value of $1.9 million. In addition, the Company
recorded an approximately $1.0 million pre-tax charge for exit and transition
costs. We will continue to analyze whether the PMS operations meet the criteria
to be presented as discontinued operations for one year.
For further information, please see Note 2 to the Condensed Consolidated
Financial Statements.
OPERATING TRENDS
The following are trends that we have experienced or anticipate. Certain of
these trends have or may have a negative impact on our revenues and
profitability.
- - We have experienced a lengthening in the implementation cycle for our
services, and once implemented, contracts in some instances are taking
longer than anticipated to ramp up to expected transaction volumes.
- - Revenues from new product offerings are lower than previously anticipated.
For instance, PegsTour , a new service which automates hotel reservations
by tour operators and wholesale travel distributors, has experienced delays
due to the implementation effort required by travel distributors and hotels
(including development of an interface and business process changes).
- - In many instances, our service offerings continue to experience lower
pricing on new contracts and contract renewals, arising from increased
competition from lower-cost competitors and hotel and travel agency
consolidations.
- - We continue to see an increase in the percentage of Internet reservations
made at hotel chain Internet sites versus third-party Internet sites that
utilize our services.
- - We continue to experience losses in our portfolio of customers, as some
larger customers cease to outsource some of the services we offer or
outsource to our competitors. For our commission processing service line,
this trend has resulted in the loss of hotel participants, which could
affect whether our travel agent customers continue to use our service.
- - We are experiencing a year-over-year decline in our revenues.
Positive operating trends include:
- - Average daily room rates (ADR) are improving.
- - We are experiencing continued favorable foreign currency exchange rates.
- - Pricing for Internet distribution is increasing.
- - We have established business partners in key regions around the world
expanding our market reach in Latin America, Asia and Eastern Europe.
NEW PRODUCT DEVELOPMENT AND GROWTH INITIATIVES
Our future success depends on our ability to successfully develop leading
technologies, enhance our existing services and develop and introduce new
services to meet the changing needs of our current and prospective customers.
We rely on third party arrangements for much of the development and enhancement
of our services, including outsourcing outside of the U.S.
During the first quarter, we launched weekly commission processing. With this
enhancement to our commission processing service, both hotels and travel
agencies benefit from more efficient cash flow. During the second quarter, we
launched hotelbook.com , which creates another way for independent hoteliers to
compete online with the major hotel brand Web sites. We also expanded our
presence in China by opening an office in Beijing, which is a key part of our
strategy to expand our business in the Asia-Pacific region. Additionally, we
have delivered a new release of our internet booking engine, Netbooker, and a
new rate tracking service, as well as established a strategic relationship with
Open Hospitality for Web services.
13
We are in the development phase of an automated system that will enable us to
expand the use of our financial services into other travel markets, such as car
rental and cruises, enhance the functionality of our weekly commission
processing, and increase our financial services operating efficiency. We are
currently evaluating funding and development alternatives related to this
technology, including collaboration with outside parties. Such collaboration may
result in changes in the development, integration and deployment of this
software and may result in alternate financing arrangements such as future
revenue sharing. The carrying value of this technology is $8.3 million as of
June 30, 2005. Changes in strategy, market condition or other assumptions may
significantly impact our determinations regarding whether an impairment exists
and could significantly reduce the carrying value associated with this project.
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 our earning more or less revenue and expending higher or lower
expenses than we otherwise might have earned or spent if currency exchange rates
had remained stable.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2005 AND 2004
Revenues. The table and discussion below address revenues by service line for
the three months ended June 30, 2005 and 2004 (dollars in thousands).
Three Months Ended
June 30, Variance
-------- --------
2005 2004 $ %
------- ------- --------- ---
Representation services $18,301 $19,292 ($991) -5%
Reservation services 8,286 9,139 (853) -9%
Financial services 8,800 8,765 35 -
Distribution services 7,128 7,302 (174) -2%
------- ------- --------- ---
Service revenues 42,515 44,498 (1,983) -4%
Customer reimbursements 4,806 4,141 665 16%
------- ------- --------- ---
Total revenues $47,321 $48,639 ($1,318) -3%
======= ======= ========= ===
Representation services revenues decreased primarily due to continued impact of
reduced pricing and the transition of a significant Unirez by PegasusTM customer
to our central reservation service. A 4 percent increase in ADR for our Utell
by Pegasus offering was offset by a decrease in reservation volumes and the
average commission earned percentage.
Reservation services revenues decreased primarily due to the loss of a customer
and continued pricing pressure on contract renewals. Partially offsetting these
decreases was the transition of one customer from Unirez by Pegasus to our
reservations services late in 2004. Net transactions decreased compared to the
same quarter last year; however, excluding these two customers, net transactions
processed increased 6 percent.
Financial services revenues were positively impacted by approximately $600,000
of incremental revenues earned in the month of conversion, as hotel companies
switched from monthly to weekly commission processing. The financial impact of
implementing weekly commission processing in March 2005 was substantially
complete by the end of the second quarter of 2005, as the majority of expected
customer conversions to weekly commission processing were completed. Aside from
this impact, financial services revenues were affected by reduced transactions
and pricing, resulting from travel agency consolidations, partially offset by
the continued benefit from improved ADR.
Distribution services revenues were down slightly compared to the prior year
quarter. Global Distribution Services (GDS) transactions increased 8% and
Internet transactions decreased 2 percent. The decrease in Internet
transactions reflects an increase in the percentage of Internet bookings made at
hotel companies' proprietary Web sites that do not utilize Pegasus' Internet
distribution service. In addition, reduced volume and pricing resulting from
the second quarter 2004 sale of Travelweb, LLC to Priceline.com negatively
affected year-over-year comparisons.
14
Customer reimbursements increased due to an overall increase in our customers'
GDS costs because of an increase in GDS transactions and GDS pricing.
Operating Expenses. The table and discussion below address operating expenses
for the three months ended June 30, 2005 and 2004 (dollars in thousands).
Three Months Ended
June 30, Variance
---------------- --------------
2005 2004 $ %
------- ------- ------- ----
Cost of services $21,133 $22,098 ($965) -4%
Customer reimbursements 4,806 4,141 665 16%
------- ------- ------- ----
Total costs of services 25,939 26,239 (300) -1%
Research and development 876 1,041 (165) -16%
General and administrative expenses 5,933 6,045 (112) -2%
Marketing and promotion expenses 5,638 4,981 657 13%
Depreciation and amortization 4,659 4,591 68 1%
------- ------- ------- ----
Total operating expenses $43,045 $42,897 $ 148 -
======= ======= ======= ====
Operating expenses for the quarter ended June 30, 2005, were comparable to the
prior year. The following factors contributed most significantly to the year
over year impact:
- - Headcount and employee-related expenses were lower year-over-year;
- - We have actively been managing all operating costs; and
- - Marketing and promotion expenses increased as we remain committed to sales
and marketing efforts.
Cost of services expenses, excluding customer reimbursements, decreased in the
second quarter 2005 primarily due to lower customer incentives, communications
expenses, and processing costs, commensurate with the decrease in revenues.
Partially offsetting these decreases was an increase of approximately $150,000
related to the implementation of weekly commission processing in our financial
services offering. Consistent with the change in timing of service performance,
approximately $150,000 of customer incentives that would previously have been
recognized in March 2005 were incurred in the second quarter. Cost of services,
excluding customer reimbursements, as a percentage of service revenues was 50
percent for the second quarter in both 2005 and 2004.
Customer reimbursements increased primarily due to an overall increase in our
customers' GDS costs because of an increase in GDS transactions and GDS pricing.
Research and development expenses were down year over year, primarily due to
lower headcount and employee-related expenses. Research and development
expenses as a percentage of service revenues were 2 percent for the second
quarter in both 2005 and 2004.
General and administrative expenses decreased due to lower third-party costs
incurred, primarily related to tax and audit professional services. General and
administrative expenses as a percentage of service revenues were 14 percent for
the second quarter in both 2005 and 2004.
Marketing and promotion expenses increased primarily due to additional personnel
and consultant costs arising from a greater focus on sales, marketing and
promotion activities. Marketing and promotion expenses as a percentage of
service revenues were 13 percent and 11 percent for the three months ended June
30, 2005 and 2004, respectively.
Depreciation and amortization expenses increased slightly due to depreciation
and amortization related to new capital expenditures.
15
Gain on Sale. On May 3, 2004, Pegasus sold its interest in Travelweb, LLC to an
affiliate of Priceline.com, Inc. and received $4.2 million in cash, recognizing
a gain of approximately $2.0 million.
Interest expense, net. Net interest expense decreased from $524,000 to $382,000
for the second quarter 2005 compared to the second quarter 2004 due to higher
capitalization of interest related to our software development efforts.
Income tax expense. Pegasus recorded income tax expense on continuing
operations of $1.2 million and $2.7 million for the second quarter 2005 and
2004, respectively, reflecting year-to-date effective rates of 37 percent and 38
percent, respectively. The effective rate for 2005 differed from the statutory
rate of 35 percent, primarily due to the geographic apportionment of profits and
losses and the impact of state income taxes, nondeductible expenses, and foreign
taxes. Tax expense (benefit) is calculated using the estimated annual effective
tax rate approach on continuing operations and a discrete statutory tax rate
approach on discontinued operations.
Discontinued operations. For further information regarding discontinued
operations, please see Note 2 to the Condensed Consolidated Financial
Statements.
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
Revenues. The table and discussion below address revenues by service line for
the six months ended June 30, 2005 and 2004 (dollars in thousands).
Six Months Ended
June 30, Variance
-------- --------
2005 2004 $ %
------- ------- --------- ----
Representation services $34,133 $35,745 ($1,612) -5%
Reservation services 17,223 18,491 (1,268) -7%
Financial services 14,401 16,346 (1,945) -12%
Distribution services 13,848 14,367 (519) -4%
------- ------- --------- ----
Service revenues 79,605 84,949 (5,344) -6%
Customer reimbursements 8,714 7,620 1,094 14%
------- ------- --------- ----
Total revenues $88,319 $92,569 ($4,250) -5%
======= ======= ========= ====
Representation services revenues decreased primarily due to continued impact of
reduced pricing and the transition of a significant Unirez by PegasusTM customer
to our central reservation service. A 5 percent increase in ADR for our Utell
by Pegasus offering was offset by a decrease in reservation volumes and the
average commission earned percentage.
Reservation services revenues decreased primarily due to the loss of a customer,
continued pricing pressure on contract renewals, and a 22 percent decrease in
net transactions processed. Partially offsetting these decreases was the
transition of one customer from Unirez by Pegasus to our reservations services
late in 2004.
Financial services revenues decreased primarily due to an impact of
approximately $1.5 million associated with the initial implementation of weekly
commission processing in March 2005. While this enhancement to our commission
processing service will benefit both hotels and travel agencies, its initial
implementation impacted the timing of services we normally would have performed
in March. Under the new process and technology, once commission data is input
into the system, it is automatically included in the next weekly cycle. Because
of the timing of data submission and when we provided our services, revenues for
only approximately three weeks of data were recognized in March related to
hotels that elected to utilize our weekly commission processing. Further,
revenues decreased related to hotels that elected to stay on a monthly
commission processing schedule because we were unable to provide services to or
process any of the data submitted by these hotels until April. Offsetting the
first quarter negative impact to revenues of approximately $2.1 million was the
$600,000 positive impact in the second quarter of 2005, representing incremental
revenues earned, in the month of conversion, as hotel companies switched from
monthly to weekly commission processing. The financial impact of implementing
weekly commission processing was substantially complete by the end of the second
quarter of 2005, as the majority of expected customer conversions to weekly
commission processing were completed. Aside from this impact, financial
services revenues were affected by reduced transactions and pricing, resulting
from travel agency consolidations, partially offset by the continued benefit
from improved ADR.
16
Distribution services revenues decreased primarily due to a 4% decrease in the
number of Internet transactions. The decrease in Internet transactions reflects
an increase in the percentage of Internet bookings made at hotel companies'
proprietary Web sites that do not utilize Pegasus' Internet distribution
service. In addition, reduced pricing from the second quarter 2004 sale of
Travelweb LLC to Priceline.com negatively affected year-over-year comparisons.
Improved pricing on Internet transactions and a 7 percent increase in GDS
transactions partially offset these decreases.
Customer reimbursements increased due to an overall increase in our customers'
GDS costs because of an increase in GDS transactions and GDS pricing.
Operating Expenses. The table and discussion below address operating expenses
for the six months ended June 30, 2005 and 2004 (dollars in thousands).
Six Months Ended
June 30, Variance
-------- --------
2005 2004 $ %
------- ------- --------- ----
Cost of services $42,108 $44,807 ($2,699) -6%
Customer reimbursements 8,714 7,620 1,094 14%
------- ------- --------- ----
Total costs of services 50,822 52,427 (1,605) -3%
Research and development 1,583 2,363 (780) -33%
General and administrative expenses 11,946 12,426 (480) -4%
Marketing and promotion expenses 10,949 9,694 1,255 13%
Depreciation and amortization 8,935 9,291 (356) -4%
------- ------- --------- ----
Total operating expenses $84,235 $86,201 ($1,966) -2%
======= ======= ========= ====
Operating expenses for the six months ended June 30, 2005 decreased 2% from the
prior year. The following factors contributed most significantly to the year
over year impact:
- - Prior year expenses included severance and related costs of $2.4 million
related to a first quarter 2004 strategic change in our information
technology organization;
- - Headcount and employee-related expenses were lower year-over-year;
- - We have actively been managing all operating costs; and
- - Marketing and promotion expenses increased as we remain committed to sales
and marketing efforts.
Cost of services expenses, excluding customer reimbursements, for the prior year
included severance and related costs of $1.9 million related to a first quarter
2004 strategic change in our information technology organization. Cost of
services also decreased as a result of the implementation of weekly commission
processing in our financial services offering. Consistent with the change in
timing of revenue recognition, customer incentives were reduced by approximately
$150,000 during the six months ended June 30, 2005. The remainder of the
decrease is due to lower customer incentives, communications expenses, and
processing costs, commensurate with the decrease in revenues. Cost of services,
excluding customer reimbursements, as a percentage of service revenues was 53
percent for the six months ended June 30, 2005 and 2004.
Customer reimbursements increased primarily due to an overall increase in our
customers' GDS costs because of an increase in GDS transactions and GDS pricing.
Research and development expenses were down year over year, primarily due to
lower headcount and employee-related expenses. Research and development
expenses as a percentage of service revenues were 2 percent and 3 percent for
the six months ended June 30, 2005 and 2004, respectively.
17
General and administrative expenses for the prior year included severance and
related costs of $465,000 related to a first quarter 2004 strategic change in
our information technology organization offset by a first quarter curtailment
gain of $162,000 for the Supplemental Executive Retirement Plan due to changes
in executive management. Expenses also decreased due to lower third-party costs
incurred, primarily related to tax and audit professional services. General and
administrative expenses as a percentage of service revenues were 15 percent for
the six months ended June 30, 2005 and 2004.
Marketing and promotion expenses increased primarily due to additional personnel
and consultant costs arising from a greater focus on sales, marketing and
promotion activities. Marketing and promotion expenses as a percentage of
service revenues were 14 percent and 11 percent for the six months ended June
30, 2005 and 2004, respectively.
Depreciation and amortization decreased primarily due to completing the
amortization of a software asset in the second quarter of 2004, which accounted
for $460,000 in amortization in 2004. This decrease was partially offset by
depreciation and amortization related to new capital expenditures.
Gain on Sale. On May 3, 2004, Pegasus sold its interest in Travelweb, LLC to an
affiliate of Priceline.com, Inc. and received $4.2 million in cash, recognizing
a gain of approximately $2.0 million.
Interest expense, net. Net interest expense decreased from $1.0 million to
$727,000 for the six months ended June 30, 2005 compared to the six months ended
June 30, 2004 due to higher capitalization of interest related to our software
development efforts.
Income tax expense. Pegasus recorded income tax expense on continuing
operations of $1.3 million and $2.7 million for the six months ended June 30,
2005 and 2004, respectively, reflecting year-to-date effective rates of 37
percent and 38 percent, respectively. The effective rate for 2005 differed from
the statutory rate of 35 percent, primarily due to the geographic apportionment
of profits and losses and the impact of state income taxes, nondeductible
expenses, and foreign taxes. Tax expense (benefit) is calculated using the
estimated annual effective tax rate approach on continuing operations and a
discrete statutory tax rate approach on discontinued operations.
Discontinued operations. For further information regarding discontinued
operations, please see Note 2 to the Condensed Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
Historically, Pegasus has primarily relied on cash flows from operations and, to
a lesser extent, proceeds from stock option exercises to provide working capital
for current and future operations and for capital investments. From time to
time, we have also utilized bank lines of credit, proceeds from equity and debt
offerings and private debt to supplement our ability to fund operating cash
requirements, capital investments and acquisitions.
We assess our liquidity in terms of our ability to generate cash to fund our
operating and investing activities. Key indicators we use to make this
assessment are current assets, current liabilities and net cash flow from
operating activities.
Our principal source of capital during the first six months of 2005 included
cash and cash equivalents of $21.7 million and auction rate securities of $5.0
million. Our cash flows from operations of $15.7 million included $5.4 million
related to our commission processing service. Excluding this factor, cash flows
from operations of $10.3 million were sufficient to provide for working capital
requirements. Other sources of cash in during the first six months of 2005 were
$7.8 million net proceeds from the sale or maturity of marketable securities and
$1.1 million of proceeds from stock option exercises.
Cash outlays in the first six months of 2005 included the repurchase of
approximately 518,000 shares of common stock for $6.2 million. The common stock
repurchases were made under a Rule 10b5-1 stock repurchase plan that was
approved on November 5, 2004 and terminated effective April 12, 2005.
Another component of our cash outlays included capital expenditures of $14.6
million consistent with our capital strategy of investing in software
development projects meeting our return on investment criteria. Our capital
expenditures primarily consist of personnel costs, interest expense and outside
consultant costs for software development, computer hardware, furniture,
fixtures and other office equipment.
18
We expect to continue incurring capital expenditures related to software
development and the addition of capacity to existing systems. We estimate full
year 2005 capital expenditures will total approximately $20 million. We may
also collaborate with outside parties for software development or other business
needs. The potential capital required for such arrangements is uncertain.
Our future liquidity and capital requirements will depend on numerous factors,
including:
- - Our profitability;
- - Seasonality of our operations;
- - Operational cash requirements;
- - Competitive pressures;
- - Development of new services and applications;
- - Timing of capital expenditures;
- - Proceeds and timing of a sale of PMS assets;
- - Response to unanticipated cash requirements; and
- - Potential impact of strategic alternatives.
On April 11, 2005, we announced that our board of directors is exploring various
strategic alternatives to enhance shareholder value. Some possible alternatives
include joint ventures, divestitures, alliances with strategic partners, taking
the Company private, selling the Company to a third party, or merging with
another company. There can be no assurance that this process will result in any
specific transaction.
We believe that we will be able to generate cash flows from operations
sufficient to meet our operating and capital requirements through at least the
next twelve months. In addition to exploring strategic alternatives as discussed
above, we may in the future also consider financing alternatives to fund our
requirements, including possible public or private debt or equity offerings.
However, there can be no assurance that any financing alternatives sought by us
will be available or will be on terms that are attractive to us. Further, any
debt financing may involve restrictive covenants, and any equity financing may
be dilutive to stockholders.
Pegasus had two irrevocable standby letter of credit agreements with JPMorgan
Chase Bank totaling $1.7 million at December 31, 2004, collateralizing the
leases for the Dallas and Scottsdale offices. During the first quarter of 2005,
the letter of credit was reduced by $450,000, releasing the letter of credit for
the Dallas facility in full and replacing it with a deposit of $181,000.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. The Company maintains disclosure controls
and procedures designed to ensure that it is able to record the information it
is required to disclose in the reports it files with the SEC, and to process,
summarize and report this information within the time periods specified in the
rules and forms 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 concluded that the Company's disclosure controls
and procedures are effective to ensure that the Company is able to record,
process, summarize and report the information it is required to disclose in the
reports it files with the SEC within the required time periods and to ensure
that information required to be disclosed in the Company's Exchange Act reports
is accumulated and communicated to management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
Changes in Internal Control over Financial Reporting. During the quarter ended
June 30, 2005, there have been no changes in the Company's internal control over
financial reporting identified in connection with the evaluation described above
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
19
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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities (1)
-----------------------------------------
Total number
of shares
purchased Maximum number
as part of shares that may
Total number Average of publicly yet be purchased
of shares price paid announced plans under the plans
Period purchased per share or programs or programs
- ------ ------------ ---------- -------------- -----------------
April 1, 2005
through
April 12, 2005 (2) (3) 30,000 $11.86 30,000 -
(1) During the quarter ended June 30, 2005, the Company repurchased 30,000
shares for an aggregate purchase price of approximately $356,000.
Repurchases were made under a Rule 10b5-1 stock repurchase plan approved on
November 5, 2004, which authorized the repurchase of up to 1.5 million
shares.
(2) All shares were purchased pursuant to the publicly announced programs.
(3) As of April 12, 2005, the company terminated the share repurchase plan
authorized in November 2004. A total of 1.2 million shares were repurchased
under this plan for a total aggregated cost of approximately $13.9 million.
No shares were repurchased after April 12, 2005.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pegasus held its annual meeting of stockholders on May 10, 2005. At the annual
meeting, Pegasus stockholders took the following actions:
1) By a vote of 18,074,159 for, none against and 858,715 withheld, the
stockholders elected Robert B. Collier as Class II Director for a term expiring
at the annual meeting to be held in 2008 and until his successor is elected and
qualified.
2) By a vote of 18,633,847 for, none against and 299,027 withheld, the
stockholders elected Pamela H. Patsley as Class II Director for a term expiring
at the annual meeting to be held in 2008 and until her successor is elected and
qualified.
3) By a vote of 18,076,637 for, none against and 856,237 withheld, the
stockholders elected Bruce W. Wolff as Class II Director for a term expiring at
the annual meeting to be held in 2008 and until his successor is elected and
qualified.
4) By a vote of 18,503,942 for, 428,252 against and 680 withheld, the
stockholders ratified the appointment of PricewaterhouseCoopers LLP as the
independent registered public accounting firm for the Company to audit its
consolidated financial statements and internal controls over financial reporting
for 2005.
20
ITEM 6. EXHIBITS
a) Exhibits
*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.
* Filed herewith.
** Furnished herewith.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEGASUS SOLUTIONS, INC.
August 9, 2005 /s/ JOHN F. DAVIS, III
--------------------------------
John F. Davis, III,
President, Chief Executive Officer
and Chairman
August 9, 2005 /s/ SUSAN K. CONNER
---------------------------------
Susan K. Conner,
Executive Vice President
and Chief Financial Officer
22
EXHIBIT INDEX
Exhibit Number Description
- --------------- -----------
*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.
* Filed herewith.
** Furnished herewith.
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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) 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) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles; and
c) 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
d) 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: August 9, 2005
/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. Conner, 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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) 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) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles; and
c) 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
d) 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: August 9, 2005
/s/ SUSAN K. CONNER
- ---------------------------------------
Susan K. Conner
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 ended June 30, 2005 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.
August 9, 2005 /s/ JOHN F. DAVIS, III
------------------------------------
John F. Davis, III,
President, Chief Executive Officer
and Chairman
August 9, 2005 /s/ SUSAN K. CONNER
------------------------------------
Susan K. Conner,
Executive Vice President
and Chief Financial Officer