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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 SEPTEMBER 30, 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 October 27, 2004 was 21,748,615.
PEGASUS SOLUTIONS, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2004
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements (Unaudited) 3
a) Condensed Consolidated Balance Sheets as of
September 30, 2004 and December 31, 2003 3
b) Condensed Consolidated Statements of Operations
and Comprehensive Income (Loss) for the three
and nine months ended September 30, 2004 and 2003 4
c) Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 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 10
Item 4. Controls and Procedures 17
Part II. Other Information
Item 1. Legal Proceedings 19
Item 2. Changes in Securities, Use of Proceeds and
Issuer Purchases of Equity Securities 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
PEGASUS SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
September 30, December 31,
2004 2003
---- ----
ASSETS
Cash and cash equivalents $ 28,814 $ 58,983
Short-term investments 7,033 4,046
Accounts receivable, net 29,108 22,298
Other current assets 12,126 11,092
--------------- -----------------
Total current assets 77,081 96,419
Goodwill, net of accumulated
amortization of $40,225 164,120 164,120
Intangible assets, net 6,328 7,831
Property and equipment, net 75,095 75,474
Other noncurrent assets 12,884 22,716
--------------- ---------------
Total assets $ 335,508 $ 366,560
=============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and
accrued liabilities $ 28,323 $ 24,672
Unearned income 7,130 7,213
Other current liabilities 5,693 5,477
--------------- -----------------
Total current liabilities 41,146 37,362
Noncurrent uncleared commission checks 5,267 4,545
Other noncurrent liabilities 21,032 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;
21,746,847 and 25,091,248 shares
issued and outstanding, respectively 218 251
Additional paid-in capital 249,499 290,828
Unearned compensation (437) -
Accumulated other comprehensive loss (838) (834)
Accumulated deficit (55,379) (61,589)
--------------- -----------------
Total stockholders' equity 193,063 228,656
--------------- ---------------
Total liabilities and
stockholders' equity $ 335,508 $ 366,560
===============- ================
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 Nine Months Ended
September 30, September 30,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Revenues:
Service revenues $ 45,574 $ 42,868 $133,279 $121,362
Customer reimbursements 3,929 2,892 11,549 8,242
--------- --------- -------- --------
Total revenues 49,503 45,760 144,828 129,604
Costs of services:
Cost of services 23,191 21,141 71,491 64,283
Customer reimbursements 3,929 2,892 11,549 8,242
--------- --------- -------- --------
Total costs of services 27,120 24,033 83,040 72,525
Research and development 758 949 3,289 3,545
General and administrative expenses 5,589 5,543 17,813 17,925
Marketing and promotion expenses 4,815 3,531 14,509 11,946
Depreciation and amortization 5,401 5,185 17,077 22,459
Restructure costs - 80 - 5,949
--------- --------- -------- -------
Operating income (loss) 5,820 6,439 9,100 (4,745)
Other income (expense):
Gain on sale - - 1,961 -
Interest income (expense), net (498) (254) (1,523) 346
Other 159 240 (134) 270
--------- --------- -------- --------
Income (loss) before income taxes 5,481 6,425 9,404 (4,129)
Income tax benefit (expense) (1,695) (2,578) (3,194) 1,682
--------- --------- -------- --------
Net income (loss) $ 3,786 $ 3,847 $ 6,210 $ (2,447)
========== ========== ======== =========
Other comprehensive income (loss):
Change in unrealized gain on
investments, net of tax 8 11 (4) 11
--------- --------- -------- --------
Comprehensive income (loss) $ 3,794 $ 3,858 $ 6,206 $ (2,436)
========== ========= ======== =========
Net income (loss) per share:
Basic $0.17 $0.15 $0.27 $(0.10)
========= ========= ======== =========
Diluted $0.17 $0.15 $0.26 $(0.10)
========= ========= ======== =========
Weighted average shares outstanding:
Basic 22,131 24,986 23,355 24,803
========= ========= ======== =========
Diluted 22,498 25,711 23,680 24,803
========= ========= ======== =========
See accompanying notes to condensed consolidated financial statements.
4
PEGASUS SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
September 30,
2004 2003
--------- ----------
Cash flows from operating activities:
Net income (loss) $ 6,210 $ (2,447)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 17,077 22,460
Gain on sale (1,961) -
Other 3,201 1,344
Changes in assets and liabilities:
Accounts receivable (7,292) 2,264
Other current and noncurrent assets (1,028) (3,908)
Accounts payable and accrued liabilities 3,868 (5,247)
Unearned income (83) 1,432
Other current and noncurrent liabilities (362) 2,040
------- -------
Net cash provided by operating activities 19,630 17,938
Cash flows from investing activities:
Proceeds from sale of Travelweb, LLC 4,167 -
Proceeds from maturity of marketable securities 5,232 3,000
Purchase of marketable securities (1,652) (12,212)
Purchase of property and equipment (15,036) (14,959)
Proceed from sale of property and equipment - 110
Collections of note receivable 702 1,655
Other 40 -
------- -------
Net cash used in investing activities (6,547) (22,406)
Cash flows from financing activities:
Repurchase of common stock (48,004) -
Proceeds from issuance of common stock 5,138 1,770
Proceeds from convertible debt issuance - 75,000
Debt issuance costs - (2,540)
Other (386) (141)
------- -------
Net cash provided by (used in)
financing activities (43,252) 74,089
Net increase (decrease) in cash and
cash equivalents (30,169) 69,621
Cash and cash equivalents, beginning of period 58,983 19,893
------- -------
Cash and cash equivalents, end of period $ 28,814 $ 89,514
======== =========
Supplemental schedule of noncash investing activities:
Landlord paid tenant improvements $ 799 $ 524
======== =========
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, 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. 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, 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 stock
option awards because the exercise prices of employee stock options equal or
exceed the market price of the underlying stock on the dates of grant. The
Company also maintains an employee stock purchase plan, for which no
compensation expense is recognized pursuant to APB 25. The Company maintains a
stock incentive plan, under which compensation expense was recorded for $30,000
and zero for the third quarter 2004 and 2003, respectively, and $40,000 and
$571,000 for the nine months ended September 30, 2004 and 2003, 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss), as reported $ 3,786 $ 3,847 $ 6,210 $ (2,447)
Add: Stock-based employee
compensation expense included
in reported income (loss), net
of related tax effects 18 - 24 347
Deduct: Total stock-based
employee compensation expense
determined under fair value
based methods for all awards,
net of related tax effects (1,034) (1,482) (3,188) (4,573)
-------- ------- ------- --------
Pro forma net income (loss) $ 2,770 $ 2,365 $ 3,046 $(6,673)
======== ======= =======- ========
Net income (loss) per share,
as reported:
Basic $0.17 $0.15 $0.27 $(0.10)
======== ======= =======- ========
Diluted $0.17 $0.15 $0.26 $(0.10)
======== ======= ======== ========
Net income (loss) per share,
pro forma:
Basic $0.13 $0.09 $0.13 $(0.27)
======== ======= ======== ========
Diluted $0.12 $0.09 $0.13 $ (0.27)
======== ======= ======== ========
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 plans is
amortized over the vesting period.
On May 25, 2004, the Compensation Committee of the Board of Directors granted
41,875 shares of restricted stock to certain executives. The restricted stock
will vest in full on May 25, 2008. Based on the market value of the Company's
common stock, the restricted stock grant was valued at approximately $477,000,
and compensation expense will be recognized ratably over the four-year period.
2. INTANGIBLE ASSETS
Pegasus has acquired identifiable intangible assets that are subject to
amortization. The following table presents carrying values of those intangible
assets at September 30, 2004 and December 31, 2003 (in thousands):
SEPTEMBER 30, 2004 DECEMBER 31, 2003
========================= =========================
CARRYING ACCUMULATED CARRYING ACCUMULATED
VALUE AMORTIZATION VALUE AMORTIZATION
------- ------------- ------- -------------
Customer relationships $56,996 $(52,926) $56,996 $(52,431)
Non-compete agreements 6,120 (3,881) 6,120 (2,878)
Other 48 (29) 48 (24)
------- ------------- ------- -------------
Total $63,164 $(56,836) $63,164 $(55,333)
========== ============== ========= ==========
Amortization expense for those intangible assets was $501,000 and $192,000 for
the three months ended September 30, 2004 and 2003, respectively, and was $1.5
million and $4.8 million for the nine months ended September 30, 2004 and 2003,
respectively.
7
3. 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. On May 25,
2004, the Board of Directors authorized the repurchase of an additional 1.5
million shares of Pegasus' common stock. As of September 30, 2004, the Company
had repurchased all 2.5 million shares under the 10b5-1 stock repurchase plan
authorized November 5, 2003 for an aggregate purchase price of $29.0 million and
all 1.5 million shares under the 10b5-1 stock repurchase plan authorized May 25,
2004 for an aggregate purchase price of $19.0 million. Shares repurchased under
Board approved plans are immediately cancelled.
4. GAIN ON SALE
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 provided that Pegasus and each other Seller
(1) assign to Priceline each of their 14.286% interests on the Closing Date, and
(2) 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. Pegasus'
investment in Travelweb prior to sale was $2.2 million and was included in other
noncurrent assets. Pegasus recorded a gain of approximately $2.0 million on the
sale of its investment in Travelweb during the second quarter 2004.
5. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss)
available to common stockholders by the weighted average number of common shares
outstanding for the reporting period. For calculations of diluted net income
per share for the third quarter and nine months ended September 30, 2004,
weighted average shares outstanding are increased by approximately 367,000 and
325,000 shares, respectively, reflecting the dilutive effect of stock options
and unvested restricted stock. Additionally, 1.8 million and 2.4 million shares
issuable upon the exercise of stock options were excluded from the weighted
average share calculation for the third quarter and nine months ended September
30, 2004, respectively, as their effect would be anti-dilutive. For the diluted
net income per share calculation for the third quarter 2003, weighted average
shares outstanding are increased by 725,000 shares, reflecting the dilutive
effect of the stock options and unvested restricted stock. The effect of 1.1
million and 1.9 million shares issuable upon the exercise of stock options were
excluded from the weighted average share calculation for diluted net income
(loss) per share for the third quarter and nine months ended September 30, 2003,
as their effect would be anti-dilutive. No dilution for convertible debt was
included in the nine months ended September 30, 2003 and the 2004 calculations,
as those securities are contingently convertible.
6. 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 ("SFAS 88"),
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits." The Company has made cash
contributions of approximately $235,000 to a trust associated with the SERP
during the nine months ended September 30, 2004. No further contributions are
expected to be made during 2004.
8
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. As a result of the Company's 2003 strategic integration
plan, in the second quarter 2003 there was a significant decrease in the number
of participants in the Utell Defined Benefit Plan and the Company recognized a
curtailment gain of $508,000 and a settlement loss of $261,000 under SFAS 88.
The Company expects to make cash contributions of approximately $217,000 to the
Utell Defined Benefit Plan during 2004. For the nine months ended September 30,
2004, cash contributions of $163,000 have been made.
The following table provides the components of net periodic benefit costs for
the third quarter and nine months ended September 30, 2004 and 2003 (in
thousands):
SERP Utell Defined Benefit Plan
----------------------------- -------------------------------
Three months Nine months Three months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
------------- ------------- ------------- -------------
2004 2003 2004 2003 2004 2003 2004 2003
----------- ------------ ------------ -------------
Service cost $ 50 $ 45 $ 151 $ 135 $ 72 $ 119 $ 216 $ 357
Interest cost 58 56 175 168 134 146 402 438
Expected return
on plan assets - - - - (172) (133) (514) (399)
Amortization of
prior service cost (11) (12) (33) (36) - - - -
Recognized net
actuarial loss 30 29 91 87 - 122 - 366
Curtailment gain - - (162) - - - - (508)
Settlement loss - - - - - - - 261
----------- ------------ ------------ -------------
Net periodic
benefit cost $ 127 $ 118 $ 222 $ 354 $ 34 $ 254 $ 104 $ 515
============ ============ ============= =============
7. 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.
8. RECENTLY ISSUED ACCOUNTING STANDARDS
During the September 2004 meeting of the Emerging Issues Task Force ("EITF"), a
Consensus was reached on EITF Issue 04-8. The Effect of Contingently Convertible
Debt on Diluted Earnings per Share. EITF 04-8 requires companies to include
certain convertible debt and equity instruments previously excluded into their
calculations of diluted earnings per share. EITF 04-8 will be effective for
periods ending after December 15, 2004, and must be applied by restating all
periods during which time the applicable convertible instruments were
outstanding. Our contingently convertible debt issued in 2003 may be included
in the Company's diluted net income per share calculations in the future,
however we do not believe that the application of EITF 04-8 will impact the
calculation of net income per share for the year ended December 31, 2003.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and notes thereto included
in our Annual Report on Form 10-K for the year ended December 31, 2003. This
discussion and analysis contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements
include statements regarding our expectations, beliefs, hopes, intentions or
strategies regarding the future. 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 terrorist acts or war, global health epidemics,
variation in demand for and acceptance of the company's products and services,
the level of product and price competition from existing and new competitors,
delays in developing, marketing, and deploying new products and services, as
well as other risks identified in the Company's Securities and Exchange filings,
including those appearing under the caption Risk Factors in the company's Annual
Report on Form 10-K for the year ended December 31, 2003.
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 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 nearly 8,000 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, with
corporate headquarters in Dallas and 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 and implementation cycle for some of
our services.
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. Earlier this year,
Pegasus introduced PegsTour , a new service which will automate hotel bookings
by wholesale travel companies and tour operators. PegsTour is not expected to
yield significant revenues this year. However, the product has generated strong
interest in the marketplace and is expected to contribute to distribution
services revenues in 2005.
10
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 incurring higher or lower
expenses than it otherwise might have earned or spent if currency rates had
remained stable.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Overall, the third quarter 2004 results reflect the addition of Unirez by
Pegasus operations and, in general, increased reservation volumes and average
daily hotel room rates over the third quarter 2003. However, reservation
volumes did not grow at the same rate as we experienced in the first half of the
year. We believe that the war in Iraq had a greater impact on our results for
the first half of 2003 than it did in the second half of the year. For our
distribution service line, an increase in the percentage of Internet bookings
made at hotel companies' proprietary Web sites continued to have a negative
impact on Internet transaction volumes and revenues. In addition, reduced
pricing on new contracts and renewals prevented us from realizing the full
benefit of the improved economy.
Operating expenses increased 11 percent in the third quarter 2004 over the third
quarter 2003, as expected. The increase primarily related to the following:
- - The addition of Unirez by Pegasus operations;
- - An increase in the number of and rates for incentive-based payments to
third parties;
- - An increase in sales and marketing efforts with a focus on increasing
revenues; and
- - An increase in audit fees and other related internal and external costs
associated with the Sarbanes-Oxley Act of 2002.
Revenues. The table and discussion below address revenues by service line for
the three months ended September 30, 2004 and 2003 (dollars in thousands).
Three Months Ended
September 30, Variance
---------------------- -----------------
2004 2003 $ %
--------- --------- -------- ------
Representation services $ 18,652 $ 14,716 $ 3,936 27%
Reservation services 9,303 10,035 (732) (7%)
Financial services 9,358 8,159 1,199 15%
Distribution services 7,157 8,330 (1,173) (14%)
Property services 1,104 1,628 (524) (32%)
--------- --------- -------- ------
Service revenues 45,574 42,868 2,706 6%
Customer reimbursements 3,929 2,892 1,037 36%
--------- --------- -------- ------
Total revenues $ 49,503 $ 45,760 $ 3,743 8%
=========- ========= ======== =====
Representation services revenues increased primarily due to our new Unirez by
Pegasus representation service, which contributed $4.1 million in revenue.
Offsetting this increase was a $190,000 decrease in the Company's full service
offering, Utell by Pegasus. Reservation revenues for full service
representation services were up 5 percent, driven by a 2 percent increase in
number of reservations and an increase in average daily room rate (ADR). This
was partially offset by a 5 percent decrease in the average commission earned
percentage and a 6 percent decrease in the number of properties. However,
non-reservation revenues decreased 11 percent, offsetting the growth in
reservation revenues.
11
Reservation services revenues decreased despite a slight increase in net
transactions processed. The decrease in revenues was primarily due to reduced
pricing on contract renewals, as expected. We expect this trend to continue to
impact year-over-year comparisons for the remainder of the year.
Financial services revenues increased primarily due to a 10 percent increase in
gross commissions processed, resulting from improved ADR. The trend of
processing more foreign currency payments, which earn additional revenues, also
contributed to the increase.
Distribution services revenues decreased primarily due to a 9 percent decrease
in Internet transactions. The decrease in Internet transactions reflects an
increase in the percentage of Internet bookings made at hotel companies'
proprietary Web sites; these transactions do not utilize Pegasus' Internet
distribution service. In addition, the loss of Unirez as a distribution
customer and reduced pricing resulting from an amended agreement with
Priceline.com in connection with the purchase of Travelweb LLC negatively
affected year-over-year comparisons, as expected. Global Distribution Services
(GDS) transactions increased 6 percent, partially offsetting lower Internet
volumes.
Property services revenues decreased primarily due to a reduction in revenues
from our Web-based property management system, PegasusCentral. One of the
Company's top priorities in 2004 has been the redeployment of PegasusCentral.
We have completed two upgrades to PegasusCentral and are in the process of
redeploying the second upgraded version to the Holiday Inns using the product.
We expect to deliver another upgraded version in the fourth quarter of 2004 and
a version is to be more widely commercially available in the first half of 2005.
Additional decreases in property services revenue related to the transition of
one customer away from our Guestview property management system.
Customer reimbursements increased due to the 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.
Operating Expenses. The table and discussion below address operating expenses
for the three months ended September 30, 2004 and 2003 (dollars in thousands).
Three Months Ended
September 30, Variance
---------------------- -----------------
2004 2003 $ %
--------- --------- -------- ------
Cost of services $ 23,191 $ 21,141 $ 2,050 10%
Customer reimbursements 3,929 2,892 1,037 36%
--------- --------- -------- ------
Total costs of services 27,120 24,033 3,087 13%
Research and development 758 949 (191) (20%)
General and administrative
expenses 5,589 5,543 46 1%
Marketing and promotion
expenses 4,815 3,531 1,284 36%
Depreciation and
amortization 5,401 5,185 216 4%
Restructure costs - 80 (80) (100%)
--------- --------- -------- ------
Total operating expenses $ 43,683 $ 39,321 $ 4,362 11%
========= ========= ======== ======
Cost of services, excluding customer reimbursements, increased primarily due to
$1.1 million of added expenses for our Unirez by Pegasus representation service;
a $562,000 increase in incentive-based payments to third parties because of new
contracts and higher rates; and increased consulting costs for information
technology (IT) initiatives. Cost of services as a percentage of service
revenues was 51 percent and 49 percent for the third quarter 2004 and 2003,
respectively.
Pegasus makes incentive-based payments to some demand generators, including
third-party Web sites, because they provide the Company with access to higher
transaction volumes for its services than Pegasus could get otherwise. Pegasus
also makes incentive-based payments to some suppliers because they generate high
commission volumes for its financial services. These incentive-based payments
are generally either based on transaction volumes that are expensed as incurred
or consist of lump sum payments that are set up as an asset and expensed over
the contract term.
12
Research and development expenses were down year over year, primarily due to
cost savings realized from the 2003 restructuring, offset by the added expenses
of our Unirez by Pegasus representation service. Research and development
expenses as a percentage of service revenues were 2 percent for the third
quarter 2004 and 2003.
General and administrative expenses were flat as increased payroll costs and
audit and other fees related to the internal controls requirements of the
Sarbanes-Oxley Act were offset by decreased benefit plan costs because of a
decrease in benefit plan participants. General and administrative expenses as a
percentage of service revenues were 12 percent and 13 percent for the third
quarter 2004 and 2003, respectively.
Marketing and promotion expenses increased primarily due to additional personnel
costs arising from a greater focus on marketing and promotion activities
including additional expenses related to Unirez by Pegasus and the cost of a new
sales incentive compensation program that was launched in January 2004.
Marketing and promotion expenses as a percentage of service revenues were 11
percent and 8 percent for the third quarter 2004 and 2003, respectively.
Depreciation and amortization expenses increased primarily due to $583,000 of
depreciation and amortization expense in the third quarter 2004 related to
assets from the Unirez, Inc. acquisition, including intangible assets.
Interest income (expense), net. Net interest expense increased for the third
quarter 2004 as a result of a $177,000 reduction in interest income as the
Company's funds available for investment decreased in conjunction with the stock
repurchase plan cash outlays of $48.0 million in 2004. Interest expense for the
third quarter 2004 and 2003 is primarily related to interest and amortization of
capitalized debt issuance costs for the July 2003 convertible debt offering.
Income tax benefit (expense). Pegasus recorded income tax expense of $1.7
million and $2.6 million for the third quarter 2004 and 2003, respectively,
reflecting year-to-date effective rates of 31 percent and 40 percent,
respectively. The effective rate for 2004 differed from the statutory rate of
35 percent, primarily due to the benefit of lower foreign tax rates, partially
offset by nondeductible expenses.
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Overall, the year-to-date results reflect the addition of Unirez by Pegasus
operations and, in general, increased reservation volumes and average daily
hotel room rates over the nine months ended September 30, 2003. Year-over-year
comparisons were favorable in large part due to the war in Iraq, particularly
for the first half of 2003. For our distribution service line, an increase in
the percentage of Internet bookings made at hotel companies' proprietary Web
sites continued to have a negative impact on Internet transaction volumes and
revenues. In addition, reduced pricing on new contracts and renewals prevented
us from realizing the full benefit of the improved economy.
Operating expenses increased 1 percent for the nine months ended September 30,
2004 over the nine months ended September 30, 2003, as expected. The increase
primarily related to the following:
- - The addition of Unirez by Pegasus operations;
- - An increase in the number of and rates for incentive-based payments to
third parties, as well as an increase in transaction volume;
- - An increase in sales and marketing efforts with a focus on increasing
revenues; and
- - An increase in audit fees and other internal and external costs associated
with the internal controls requirements of the Sarbanes-Oxley Act of 2002.
These increases in expenses were partially offset by the absence of restructure
costs in the current year.
Revenues. The table and discussion below address revenues by service line for
the nine months ended September 30, 2004 and 2003 (dollars in thousands).
13
Nine Months Ended
September 30, Variance
---------------------- -----------------
2004 2003 $ %
--------- --------- -------- ------
Representation services $ 54,397 $ 42,067 $ 12,330 29%
Reservation services 27,794 29,537 (1,743) (6%)
Financial services 25,704 22,757 2,947 13%
Distribution services 21,524 22,192 (668) (3%)
Property services 3,860 4,809 (949) (20%)
--------- --------- --------- ------
Service revenues 133,279 121,362 11,917 10%
Customer reimbursements 11,549 8,242 3,307 40%
--------- --------- --------- ------
Total revenues $144,828 $129,604 $ 15,224 12%
=========- ======== ========= =====
Representation services revenues increased primarily due to our new Unirez by
Pegasus representation service, which contributed $11.4 million in revenue. In
addition, a 2 percent increase in reservations and improved ADR for our
full-service offering, Utell by Pegasus, combined with a strong euro and British
pound, also contributed to the increase in representation service revenues. We
expect the year-over-year impact of the strong euro and British pound to be less
of a factor on revenues during the remainder of 2004. Partially offsetting this
increase was a decrease in Utell by Pegasus membership fees due to a 6 percent
decrease in the number of hotels represented, and a decrease in the average
commission percentage earned, due to lower pricing on new contracts and contract
renewals, as expected, due to increased competition from lower-cost competitors.
We expect this trend to continue for at least the remainder of the year.
Reservation services revenues decreased primarily due to reduced pricing on
contract renewals, even though net transactions increased 7 percent. We expect
this trend to continue to impact year-over-year comparisons for the remainder of
the year.
Financial services revenues increased primarily due to a 9 percent increase in
gross commissions processed, resulting from both higher ADR and an increased
volume. The trend of processing more foreign currency payments, which earn
additional fees, also contributed to the increase.
Distribution services revenues decreased slightly despite increased GDS and
Internet transactions. This decrease was primarily due to the loss of Unirez as
a distribution services customer, which provided $1.2 million of revenue in the
nine months ended September 30, 2003, reduced pricing resulting from
Priceline.com's purchase of Travelweb LLC, and a decrease in revenue per
transaction. During 2004, we have been impacted by the effects of increased
bookings on hotel companies' proprietary Web sites; such transactions do not
utilize Pegasus' Internet distribution services. We expect this trend to
continue.
Property services revenues decreased primarily due to a reduction in revenues
from our Web-based property management system, PegasusCentral and the transition
of one customer away from our Guestview property management system.
Customer reimbursements increased primarily due to 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.
Operating Expenses. The table and discussion below address operating expenses
for the nine months ended September 30, 2004 and 2003 (dollars in thousands).
Nine Months Ended
September 30, Variance
---------------------- -----------------
2004 2003 $ %
--------- --------- -------- ------
Cost of services $ 71,491 $ 64,283 $ 7,208 11%
Customer reimbursements 11,549 8,242 3,307 40%
--------- --------- -------- ------
Total costs of services 83,040 72,525 10,515 14%
Research and development 3,289 3,545 (256) (7%)
General and administrative expenses 17,813 17,925 (112) (1%)
Marketing and promotion expenses 14,509 11,946 2,563 21%
Depreciation and amortization 17,077 22,459 (5,382) (24%)
Restructure costs - 5,949 (5,949) (100%)
--------- --------- -------- ------
Total operating expenses $ 135,728 $ 134,349 $ 1,379 1%
========== ========== ========= ======
14
Cost of services, excluding customer reimbursements, increased primarily due to
$3.1 million of added expenses for our Unirez by Pegasus representation service;
$1.9 million of severance and related costs incurred in the first quarter of
2004 related to a strategic change in the Company's IT organization; a $1.4
million increase in incentive-based payments to third parties because of new
contracts and increases in transaction volumes and rates; and increased
consulting costs for IT initiatives. Cost of services as a percentage of
service revenues was 54 percent and 53 percent for the nine months ended
September 30, 2004 and 2003, respectively.
Research and development expenses decreased 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 2 percent and 3 percent for the nine
months ended September 30, 2004 and 2003, respectively.
General and administrative expenses decreased slightly primarily due to a
decrease in payroll related expenses and benefit plan costs because of a
decrease in headcount during 2004. These decreases were partially offset by
$465,000 of severance and related costs incurred in the first quarter 2004
related to a strategic change in the Company's IT organization, the added
expenses of Unirez by Pegasus and increased audit and other fees related to the
internal controls requirements of the Sarbanes-Oxley Act. General and
administrative expenses as a percentage of service revenues were 13 percent and
15 percent for the nine months ended September 30, 2004 and 2003, respectively.
Marketing and promotion expenses increased primarily due to additional personnel
costs arising from the additional expenses related to Unirez by Pegasus, a
greater focus on marketing and promotion activities, and the cost of a new sales
incentive compensation program that was launched in January 2004. Marketing and
promotion expenses as a percentage of service revenues were 11 percent and 10
percent for the nine months ended September 30, 2004 and 2003, respectively.
Depreciation and amortization expenses decreased primarily due to the March 2003
completion of amortization of certain intangible assets related to the REZ, Inc.
acquisition, partially offset by amortization expense in the nine months ended
September 30, 2004 related to intangible assets from the Unirez acquisition.
During the nine months ended September 30, 2003, Pegasus incurred $5.9 million
of restructuring charges related to the reorganization of its operations from a
business unit structure into distinct functional areas.
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 income (expense), net. Net interest expense of $1.5 million for the
nine months ended September 30, 2004 was the result of interest expense of $2.3
million, 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 $780,000 on the Company's investments as the
Company's funds available for investment decreased in conjunction with the stock
repurchase plan cash outlays of $48.0 million in 2004. In the nine months ended
September 30, 2003, interest income on the Company's investments was the primary
component of net interest income of $346,000.
Income tax benefit (expense). Pegasus recorded income tax expense of $3.2
million and income tax benefit of $1.7 million for the nine months ended
September 30, 2004 and 2003, respectively, reflecting effective rates of 34
percent and 41 percent, respectively. The effective rate in the nine months
ended September 30, 2004 differed from the statutory rate of 35 percent,
primarily due to the benefit of lower foreign tax rates, partially offset by
nondeductible expenses.
15
LIQUIDITY AND CAPITAL RESOURCES
Pegasus' principal sources of capital at September 30, 2004 included cash and
cash equivalents of $28.8 million, short-term marketable securities of $7.0
million and long-term marketable securities of $1.0 million. 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.
Pegasus had working capital of $35.9 million at September 30, 2004, compared to
working capital of $59.1 million at December 31, 2003. This decrease in working
capital from December 31, 2003 to September 30, 2004 was primarily due to
repurchases of Pegasus' common stock for an aggregate purchase price of $48.0
million, partially offset by proceeds from the Company's issuance of Common
Stock from stock option plans, sale of its ownership in Travelweb, LLC, and an
increase in cash flows from operations and other factors discussed below.
Net cash provided by operating activities increased to $19.6 million for the
nine months ended September 30, 2004, from $17.9 million for the nine months
ended September 30, 2003, primarily due to the results of operations offset by
the net change in working capital accounts.
Net cash used in investing activities decreased to $6.5 million for the nine
months ended September 30, 2004, from $22.4 million for the nine months ended
September 30, 2003. This decrease in cash used was primarily the result of $4.2
million of proceeds from the Company's sale of its ownership in Travelweb, LLC,
and a $12.8 million positive impact from the change in net cash flow related to
our investments in marketable securities. The changes in the maturities and
balances of the Company's investments in marketable securities caused short-term
investments to increase by $3.0 million and other non current assets to decrease
by $6.2 million, as compared to December 31, 2003.
Net cash used in financing activities was $43.3 million for the nine months
ended September 30, 2004, compared to net cash provided by financing activities
of $74.1 million for the nine months ended September 30, 2003, which included
$72.5 million of net proceeds from the July 2003 convertible debt issuance.
During 2004, Pegasus received $5.1 million from the issuance of common stock
associated with stock options and the employee stock purchase plan and
repurchased 4.0 million shares of common stock for an aggregate purchase price
of $48.0 million. These shares were all repurchased under Board-approved
corporate 10b5-1 stock repurchase plans, which were completed as of September
30, 2004.
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
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.
16
CRITICAL ACCOUNTING ESTIMATES
Preparation of our financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
judgments that affect the reported financial position and results of operations
during the reporting period. Our estimates and judgments are continually
evaluated based on available information and experience. Because the use of
estimates is inherent in the financial reporting process, actual results could
differ from estimates. If there is a significant unfavorable change to current
conditions, it will likely result in a material adverse impact to our business,
operating results and financial condition.
Certain accounting policies require higher degrees of judgment than others in
their application. Pegasus considers the following to be critical accounting
policies due to the estimation processes involved in each. For a detailed
discussion of Pegasus' accounting policies, see Note 1 to the Consolidated
Financial Statements in Item 8 of the Company's annual report on Form 10-K for
the year ended December 31, 2003.
Our senior management has discussed the development and selection of these
critical accounting estimates, and the disclosure in this section of this report
regarding them, with our Audit Committee.
Impairment of assets
As of September 30, 2004, Pegasus has goodwill totaling approximately
$164.1 million related to its acquisitions of REZ in 2000, Global Enterprise
Technology Solutions, LLC, or GETS, in 2001 and Unirez in 2003. Under the
guidance of FAS 142, goodwill is periodically analyzed for impairment. These
practices require significant estimates and judgments by management, involving
the carrying value and the estimated fair value of the Company. The estimate of
fair value requires significant judgment in estimating future cash flows from
operations for the various services provided by Pegasus. While the most-recent
periodic impairment analysis conducted in the quarter ended September 30, 2004,
indicated that no impairment of goodwill exists, variances in actual growth
rates, operating margins or other assumptions may impact future impairment
analyses and affect the carrying values of goodwill.
As of September 30, 2004, Pegasus has unamortized capitalized software costs
totaling $52.6 million, which we review periodically for impairment. This
impairment analysis requires the comparison of unamortized carrying values to
estimated net realizable values. The estimated net realizable value is based on
significant judgments such as estimated future cash flows from the related
services, or expected benefits of the software and is based on available
information and experience. While the most-recent periodic impairment analyses
conducted in the quarter ended September 30, 2004, indicated that no impairment
of capitalized software costs exists, changes in strategy, market conditions or
other assumptions may significantly impact these judgments and affect the
carrying values of capitalized software costs.
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.
17
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
materially affected those controls, including any corrective actions with regard
to significant deficiencies and material weaknesses.
18
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. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Issuer Purchases of Equity Securities (1)
-------------------------------------
Total number Maximum number
of shares of shares that
purchased as may yet be
Total number Average part of publicly purchased
of shares price paid announced plans under the plans
Period purchased per share or programs or programs
- ------ --------- ---------- ------------ ------------
July 1, 2004 through
July 31, 2004 564,398 $12.79 564,398 613,128
August 1, 2004 through
August 31, 2004 542,714 12.59 542,714 70,414
September 1, 2004 through
September 30, 2004 70,414 12.81 70,414 0
------ ------ -------- -------
Total (2) (3) 1,177,526 $12.70 1,177,526 0
========= ====== ========= =======
(1) During the quarter ended September 30, 2004, the Company repurchased
approximately 1.2 million shares authorized under a 10b5-1 stock repurchase
plan authorized on May 25, 2004 for an aggregate purchase price of
$15.0 million. 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.
(3) As of September 30, 2004, the Company had repurchased all 1.5 million
shares under the 10b5-1 stock repurchase plan authorized May 25, 2004
for an aggregate purchase price of $19.0 million. Shares repurchased
under Board approved plans are immediately cancelled.
19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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.
b) Reports on Form 8-K
On July 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
Second quarter and year-to-date ended June 30, 2004.
On October 26, 2004 Pegasus Solutions, Inc. filed a report on Form 8-K which
furnished information under Item 2.02 - Results of Operations and Financial
Condition for its press release announcing its financial results for the
Third quarter and year-to-date ended September 30, 2004.
20
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.
October 29, 2004 /s/ JOHN F. DAVIS, III
------------------------------------
John F. Davis, III,
President, Chief Executive Officer
and Chairman
(Principal Executive Officer)
October 29, 2004 /s/ SUSAN K. COLE
------------------------------------
Susan K. Cole,
Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)
21
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.
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
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in
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: October 29, 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
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in
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: October 29, 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 September 30, 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.
October 29, 2004 /s/ JOHN F. DAVIS, III
----------------------------------
John F. Davis, III,
President, Chief Executive Officer
and Chairman
October 29, 2004 /s/ SUSAN K. COLE
----------------------------------
Susan K. Cole,
Executive Vice President
and Chief Financial Officer