<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
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 SYSTEMS, INC.
(Exact Name of Registrant as specified in its charter)
DELAWARE 75-2605174
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3811 TURTLE CREEK BOULEVARD, SUITE 1100, DALLAS, TEXAS 75219
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (214) 528-5656
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No[ ]
The number of shares of the registrant's common stock outstanding as of August
9, 1998 was 10,509,793.
<PAGE> 2
PEGASUS SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
a) Consolidated Balance Sheets
as of June 30, 1998 and December 31, 1997 ..................................3
b) Consolidated Statements of Operations
for the Three and Six Months Ended June 30, 1998 and 1997....................4
c) Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1998 and 1997..............................5
d) Notes to Consolidated Financial Statements ......................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................................10
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........................14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................15
Item 2. Changes in Securities and Use of Proceeds............................................15
Item 3. Defaults Upon Senior Securities......................................................15
Item 4. Submission of Matters to a Vote of Security Holders..................................15
Item 5. Other Information....................................................................15
Item 6. Exhibits and Reports on Form 8-K.....................................................16
SIGNATURES.............................................................................................17
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEGASUS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 34,954,961 $ 30,166,793
Restricted cash 1,856,577 1,286,032
Short-term investments 10,505,322 9,380,050
Accounts receivable, net of allowance for doubtful
accounts of $77,860 and $77,860, respectively 3,681,087 1,972,135
Other current assets 1,174,063 1,232,874
------------- -----------------
Total current assets 52,172,010 44,037,884
Capitalized software, net 534,744 1,183,453
Property and equipment, net 2,691,524 2,712,091
Goodwill, net of accumulated amortization of
$366,251 and $303,815, respectively 1,498,464 1,560,900
Other noncurrent assets 1,034,908 428,981
------------- -----------------
Total assets $ 57,931,650 $ 49,923,309
============= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 4,897,782 $ 4,115,037
Unearned income 1,179,065 477,688
Current portion of capital lease obligations 889,004 1,048,179
------------- -----------------
Total current liabilities 6,965,851 5,640,904
Capital lease obligations, net of current portion 242,189 661,049
Other noncurrent liabilities 155,564 143,612
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares authorized;
zero shares issued and outstanding, -- --
Common stock, $.01 par value; 50,000,000 shares authorized;
10,622,469 and 10,297,529 shares issued, respectively 106,224 102,975
Additional paid-in capital 62,769,766 58,120,337
Unearned compensation (597,881) (738,533)
Accumulated deficit (11,683,725) (13,980,697)
Less treasury stock (116,484 shares, at cost) (26,338) (26,338)
------------- -----------------
Total stockholders' equity 50,568,046 43,477,744
------------- -----------------
Total liabilities and stockholders' equity $ 57,931,650 $ 49,923,309
============= =================
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 4
PEGASUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net revenues $ 6,781,393 $ 5,081,257 $ 12,948,660 $ 9,457,820
Cost of services 2,407,794 1,799,496 4,574,176 3,357,152
Research and development 624,985 609,513 1,225,467 1,232,240
General and administrative expenses 1,038,459 816,254 2,093,163 1,671,785
Marketing and promotion expenses 1,177,726 1,052,842 2,419,850 1,918,149
Depreciation and amortization 762,460 720,527 1,515,736 1,427,985
------------ ----------- ------------ -----------
Operating income (loss) 769,969 82,625 1,120,268 (149,491)
Other income (expense):
Interest income 653,173 43,937 1,297,048 99,839
Interest expense (40,958) (203,284) (88,440) (415,434)
------------ ----------- ------------ -----------
Income (loss) before income taxes 1,382,184 (76,722) 2,328,876 (465,086)
Income taxes 25,004 16,000 31,904 16,000
------------ ----------- ------------ -----------
Net income (loss) $ 1,357,180 $ (92,722) $ 2,296,972 $ (481,086)
============ =========== ============ ===========
Net income (loss) per share:
Basic $ 0.13 $ (0.02) $ 0.22 $ (0.09)
============ =========== ============ ===========
Diluted $ 0.12 $ (0.02) $ 0.21 $ (0.09)
============ =========== ============ ===========
Weighted average shares outstanding:
Basic 10,490,936 5,191,249 10,408,191 5,191,249
============ =========== ============ ===========
Diluted 11,269,257 5,191,249 11,154,474 5,191,249
============ =========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
PEGASUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------
1998 1997
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,296,972 $ (481,086)
Adjustments to reconcile net income (loss) to net cash from operating
activities:
Accrued interest reclassified to notes payable -- 46,170
Windfall tax benefit from employee exercise of non-qualified stock options 271,383 --
Depreciation and amortization 1,515,736 1,427,985
Recognition of stock option compensation 141,384 74,988
Amortization of premiums on short-term investments 16,784 --
Gain on sale of property and equipment (838) --
Changes in assets and liabilities:
Restricted cash (570,545) (344,608)
Accounts receivable (1,708,952) (1,178,509)
Other current and noncurrent assets (47,116) (306,376)
Accounts payable and accrued liabilities 782,745 535,579
Unearned income 701,376 624,450
Other noncurrent liabilities 11,952 11,951
------------ -----------
Net cash provided by operating activities 3,410,881 410,544
------------ -----------
Cash flows from investing activities:
Purchase of software, property and equipment (797,026) (633,161)
Purchase of marketable securities (14,906,516) (1,476,691)
Proceeds from maturity of marketable securities 13,764,461 3,688,681
Purchase of minority interest (500,000) --
Proceeds from sale of property and equipment 13,840 --
------------ -----------
Net cash provided by (used in) investing activities (2,425,241) 1,578,829
------------ -----------
Cash flows from financing activities:
Net proceeds from issuance of stock 4,380,563 --
Repayment of notes payable to affiliates -- (381,707)
Repayment of capital leases (578,035) (546,994)
Proceeds from capital leases -- 3,913
------------ -----------
Net cash provided by (used in) financing activities 3,802,528 (924,788)
------------ -----------
Net increase in cash and cash equivalents 4,788,168 1,064,585
Cash and cash equivalents, beginning of period 30,166,793 1,796,311
------------ -----------
Cash and cash equivalents, end of period $ 34,954,961 $ 2,860,896
============ ===========
Supplemental disclosure of cash flow information:
Interest paid $ 95,119 $ 371,198
============ ===========
Income taxes paid $ 102,998 $ --
============ ===========
Supplemental schedule of noncash investing and financing activities:
Common stock warrants issued in exchange for customer contract asset $ -- $ 238,000
============ ===========
Acquisition of equipment under capital leases $ -- $ 79,144
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
In July 1995, Pegasus Systems, Inc. (Pegasus or the Company) was formed
as a Delaware holding company to combine the operations of two existing
companies operating in the same industry, The Hotel Industry Switch
Company, Inc. (THISCO) and The Hotel Clearing Corporation (HCC). For
accounting purposes, the combination was recorded as a purchase of HCC.
The accompanying financial statements include the consolidated accounts
of Pegasus and its wholly owned subsidiaries, THISCO, HCC and Pegasus IQ.
THISCO is consolidated with its wholly owned subsidiary, TravelWeb, Inc.
(TravelWeb), and HCC is consolidated with its wholly owned subsidiary,
Pegasus Systems Inc. (UK) Limited (Pegasus UK, formerly The Hotel
Clearing Corporation (UK) Limited) (collectively, the Company). All
significant intercompany balances have been eliminated in consolidation.
THISCO was formed in September 1988 as a Delaware corporation. The
Company's THISCO service provides an electronic interface from hotel
central reservation systems to travel agencies through Global
Distribution Systems ("GDSs"), which are electronic travel information
and reservation systems such as SABRE.
HCC, acquired by the Company in July 1995, was formed in July 1991 as a
Delaware corporation. The Company's HCC service consolidates commissions
paid by participating hotels to a participating travel agency into a
single monthly payment and provides participants with comprehensive
transaction reports. Hotel properties and travel agencies worldwide
utilize the HCC service to increase the efficiency and reduce costs
associated with preparing, paying and reconciling the hotel room
reservation commissions.
Pegasus UK, a wholly owned subsidiary of HCC, was formed in September
1993 in England to market and provide services for travel agents and
hotel chains operating in Europe, Africa and Asia.
TravelWeb was formed in October 1995 as a Delaware corporation. The
Company's TravelWeb service provides individual travelers direct access
to online hotel information and the ability to make reservations
electronically at hotel properties. In addition, through its NetBooker
service, the Company offers TravelWeb's comprehensive hotel database and
Internet hotel reservation capabilities to third-party web sites.
Pegasus IQ was formed in November 1997 as a Delaware corporation. When
operational, Pegasus IQ is expected to provide a wide array of hotel
industry data, research and reporting services for benchmark analysis and
strategic planning purposes.
6
<PAGE> 7
The financial information presented herein should be read in
conjunction with the Company's annual consolidated financial statements
for the year ended December 31, 1997 and the notes thereto, which have
been filed with the Securities and Exchange Commission on Form 10-K as of
and for the year ended December 31, 1997. The foregoing unaudited
consolidated financial statements as of June 30, 1998 and December 31,
1997 and for the three and six months ended June 30, 1998 and 1997
reflect all adjustments (all of which are of a normal recurring nature)
which are, in the opinion of management, necessary for a fair
presentation of the results of the interim periods. The results for
interim periods are not necessarily indicative of results to be expected
for the year.
2. SECONDARY PUBLIC OFFERING
The Company completed a secondary offering ("Secondary") in February
1998. The Company's Registration Statement on Form S-1 with respect to
the Secondary was declared effective on February 11, 1998. The Company
sold 280,321 shares of common stock at a price of $17.50 per share. Net
proceeds to the Company, after deduction of the underwriting discount and
estimated IPO expenses, were approximately $4.2 million. Selling
stockholders also sold 2,134,679 shares at a price of $17.50 per share.
The Company did not receive any proceeds from the sale of shares by the
selling stockholders.
3. EARNINGS PER SHARE
The following table sets forth the basic and diluted net income (loss)
per share computation for the three and six months ended June 30, 1998
and 1997:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) $ 1,357,180 ($ 92,722) $ 2,296,972 ($ 481,086)
----------- ----------- ----------- -----------
Basic:
Weighted average number of shares outstanding 10,490,936 5,191,249 10,408,191 5,191,249
----------- ----------- ----------- -----------
Net income (loss) per share $ 0.13 ($ 0.02) $ 0.22 ($ 0.09)
----------- ----------- ----------- -----------
Diluted:
Weighted average number of shares outstanding 10,490,936 5,191,249 10,408,191 5,191,249
----------- ----------- ----------- -----------
Additional weighted average shares from assumed
exercise of dilutive stock options and warrants, net
of shares to be repurchased with exercise proceeds 778,321 -- 746,283 --
----------- ----------- ----------- -----------
Weighted average number of shares outstanding used
in the diluted net income (loss) per share calculation 11,269,257 5,191,249 11,154,474 5,191,249
----------- ----------- ----------- -----------
Net income (loss) per share $ 0.12 ($ 0.02) $ 0.21 ($ 0.09)
----------- ----------- ----------- -----------
</TABLE>
All outstanding options and warrants were included in the diluted EPS
calculation for the three and six months ended June 30, 1998, as the average
fair market value of the Company's common
7
<PAGE> 8
stock for the period was higher than the strike price of the underlying options
and warrants. There were 1,538,462 shares of Series A preferred stock
outstanding at June 30, 1997, which were not included in the calculation of
diluted EPS.
Options and warrants granted during 1996 and the first six months of 1997, which
were not included in the calculation of diluted EPS for the three and six months
ended June 30, 1997, were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number of Exercise Price
Options/Warrants Per Share Date of Grant Expiration Date
- ----------------- -------------- -------------- ----------------
<S> <C> <C> <C>
450,000 Options $ 2.01 June 1996 December 2005
53,333 Options $ 2.01 December 1996 December 2005
258,405 Options $ 3.11 December 1996 December 2005
53,333 Options $ 5.25 May 1997 December 2005
345,723 Warrants $ 7.20 May 1997 May 1999
- --------------------------------------------------------------------------------
</TABLE>
4. OTHER INVESTMENTS
An equity investment in Customer Analytics, Inc. of $500,000 for the
purchase of 250,000 preferred shares was completed in June 1998. Customer
Analytics, Inc. is a new database marketing applications and solutions
provider specializing in the area of customer relationship marketing. The
investment will be accounted for on the lower of cost or market value.
5. STOCKHOLDERS' EQUITY
In May 1998, the stockholders approved an amendment to the Company's
Second Amended and Restated Certificate of Incorporation that decreases
the number of authorized shares of common stock, $.01 par value per
share, of the Company from 100 million to 50 million. The financial
statements have been retroactively adjusted to reflect the reduction in
authorized shares. The stockholders also approved amendments to the
Company's 1997 Stock Option Plan that increase the number of shares of
Common Stock reserved for issuance under the Plan and that provide for
grants of options to the Company's non-employee directors; and the
stockholders approved the adoption of the 1997 Employee Stock Purchase
Plan.
6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earning per Share" (FAS 128). FAS 128 simplifies the standards for
computing EPS previously found in Accounting Principles Board No. 15,
"Earnings per Share" (APB 15), and makes them comparable to international
EPS standards by replacing the presentation of primary EPS with a
presentation of basic EPS. The provisions and disclosure requirements for
FAS 128 were required to be adopted for interim and annual periods ending
after December 15, 1997, with restatement of EPS for prior periods.
Accordingly, EPS data for all periods presented has been restated to
reflect the computation of EPS in accordance with the provisions of FAS
128.
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (FAS 130) which was issued in June
1997. FAS 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements. It
requires all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. FAS 130 is effective for fiscal years beginning
after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comparative purposes is required upon
8
<PAGE> 9
adoption. There were no items, which qualified for treatment as
components of comprehensive income for the periods presented.
In June 1997, Statement of Financial Accounting Standards No. 131,
"Disclosure About Segments of an Enterprise and Related Information" (FAS
131) was issued. FAS 131 establishes standards for the way that public
business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports issued to stockholders. FAS 131 is effective for periods
beginning after December 15, 1997. The Company will adopt FAS 131 in its
financial statements for the year ending December 31, 1998.
On March 4, 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position No. 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 requires
computer software costs related to internal use software that are
incurred in the preliminary project stage should be expensed as services
consumed in developing or obtaining internal-use computer software;
payroll and payroll-related costs for employees who are directly
associated with and who devote time to the internal-use computer software
project (to the extent of the time spent directly on the project); and
interest costs incurred when developing computer software for internal
use should be capitalized. SOP 98-1 is effective for financial statements
for fiscal years beginning after December 15, 1998. Accordingly, the
Company will adopt SOP 98-1 in its financial statements for the year
ending December 31, 1999. The Company dose not believe the adoption of
SOP 98-1 will have a material effect on the Company's results of
operations or financial condition.
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133). FAS 133 is
effective for all fiscal quarters of all fiscal years beginning after
June 15, 1999 (January 1, 2000 for the Company). FAS 133 requires that
all derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each period
in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. Management of the Company anticipates
that, since it does not use derivative instruments, the adoption of FAS
133 will have no effect on the Company's results of operations or its
financial position.
9
<PAGE> 10
6. SUBSEQUENT EVENT
In August 1998, the Company acquired Driving Revenue LLC, a hotel
industry database marketing and consulting firm based in Rockville,
Maryland. The Company paid $6.0 million cash plus estimated expenses of
less than $100,000. As a result of the acquisition, the Company will
incur a one-time charge for the acquired in-process research and
development of approximately $2.7 million and will record goodwill of
approximately $2.9 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
Net revenues. The Company's revenues for the three months ended June
30, 1998 increased to $6.8 million from $ 5.1 million for the three months ended
June 30, 1997, an increase of 33.5%. This increase in revenues was primarily
driven by higher transaction levels for the Company's Electronic Reservations
services (consisting of THISCO, TravelWeb and NetBooker) and Payment and Data
Systems service (consisting of HCC).
Revenues contributed by the Electronic Reservations service increased by 16.0%
in the three months ended June 30, 1998 as compared to the three months ended
June 30, 1997. This increase resulted primarily from an increase in the number
of hotel reservations made through the Company's site on the Internet
(www.travelweb.com) as well as reservations made by other sites that use the
Company's NetBooker service. In addition, more hotel companies paid fees to be
listed in the Company's hotel database. Net reservations made through the
Company's THISCO service increased by 16.8%, but this increase was offset by a
reduction in the revenues earned by the Company for the processing of status
messages sent by its hotel companies through the THISCO system. The reduction in
the revenue from status messages was primarily a result of a reduction in the
volume of status messages sent by hotels as well as a 10% reduction in the
charge per status message that became effective July 1, 1997. As a result, net
revenues from the THISCO service for the three months ended June 30, 1998
declined by 4.6% compared to the three months ended June 30, 1997.
Revenues contributed by Payment and Data Systems service in the three months
ended June 30, 1998 increased by 50.3% compared to the three months ended June
30, 1997 as a result of a 47.9% increase in hotel commission transactions
processed. These increases are due in part to the addition of hotel properties,
including those of Marriott Corporation, and travel agencies participating in
the HCC service. The value of commissions paid by the Company increased by 66.5%
in the three months ended June 30, 1998 as compared to the three months ended
June 30, 1997 because of an increase in the number of hotel commission
transactions processed by the Company. Also contributing to the increase in the
value of commissions paid is an increase in the average value of the commissions
processed, due to rising overall hotel average daily rates and a
10
<PAGE> 11
higher proportion of the Company's transactions generated by full-service and
luxury hotel chains. Net revenues arising from the increase in commissions paid
was somewhat offset by a reduction in the average fee received by the Company
from participating travel agencies for consolidating and remitting hotel
commission payments. The Company reduced the fees it charges to certain travel
agency customers of HCC beginning in July 1997 in recognition of the
significantly higher dollar volume of commissions being processed on behalf of
these agencies.
Cost of Services. Cost of services increased by $608,000, or 33.8%, to
$2.4 million in the three months ended June 30, 1998 from $1.8 million in the
three months ended June 30, 1997. Cost of services increased due to additional
staffing, the increased number of transactions processed through the HCC service
and the introduction of enhanced content to the TravelWeb site.
Research and Development. Research and development expenses increased
$15,000, or 2.5%, to $625,000 in the three months ended June 30, 1998 from
$610,000 in the three months ended June 30, 1997. This increase was primarily
due to the commencement of work on Pegasus IQ; a proposed data warehousing and
data mining service focused on the hospitality industry.
General and administrative expenses. General and administrative
expenses increased $222,000, or 27.2%, to $1.0 million in the three months ended
June 30, 1998 from $816,000 in the three months ended June 30, 1997. This
increase was primarily driven by higher legal, accounting, insurance, printing
and reporting costs associated with operating as a public company.
Marketing and promotion expenses. Marketing and promotion expenses
increased $125,000, or 11.9%, to $1.2 million in the three months ended June 30,
1998 from $1.1 million in the three months ended June 30, 1997. Marketing and
promotion expenses grew primarily due to the addition of Sales and Marketing
staff, the promotion of the TravelWeb service and amortization of new customer
contract incentives.
Depreciation and amortization. Depreciation and amortization expenses
increased $41,000, or 5.8%, to $762,000 in the three months ended June 30, 1998
from $721,000 in the three months ended June 30, 1997. This increase was
primarily due to the amortization of software purchased from a third-party in
December 1997.
Interest income. During the three months ended June 30, 1998, the
Company realized $653,000 in interest income primarily as a result of short-term
investments of operating cash balances.
Interest expense. Interest expense decreased $162,000, or 79.9%, to
$41,000 in the three months ended June 30, 1998 from $203,000 in the three
months ended June 30, 1997. The expense reflects payments made under capital
equipment leases. The Company repaid all of its promissory notes payable to
certain stockholders of the Company on August 15, 1997 using a portion of the
proceeds from its initial public offering of common stock on August 6, 1997.
11
<PAGE> 12
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Net revenues. The Company's revenues for the six months ended June 30,
1998 increased to $12.9 million from $ 9.5 million for the six months ended June
30, 1997, an increase of 36.9%. This increase in revenues was primarily driven
by higher transaction levels for the Company's Electronic Reservations and
Payment and Data Systems services.
Revenues contributed by the Electronic Reservations service increased by 18.4%
in the six months ended June 30, 1998 as compared to the six months ended June
30, 1997. This increase resulted primarily from an increase in the number of
hotel reservations made through the Company's site on the Internet
(www.travelweb.com) as well as reservations made by other sites that use the
Company's NetBooker service. In addition, more hotel companies paid fees to be
listed in the Company's hotel database. Net reservations made through the
Company's THISCO service increased by 17.6%, but this increase was offset by a
reduction in the revenues earned by the Company for the processing of status
messages sent by its hotel companies through the THISCO system. The reduction in
the revenue from status messages was primarily a result of a reduction in the
volume of status messages sent by hotels as well as a 10% reduction in the
charge per status message that became effective July 1, 1997. As a result, net
revenues from the THISCO service for the six months ended June 30, 1998 declined
by 2.4%.
Payment and Data Systems service revenues increased by 56.1% during the six
months ended June 30, 1998 as compared to the six months ended June 30, 1997 as
a result of a 54.0% increase in hotel commission transactions processed. This
increase is due in part to the addition of hotel properties, including those of
Marriott Corporation, and travel agencies participating in the HCC service. The
value of commissions paid by the Company increased by 76.2% in the six months
ended June 30, 1998 as compared to the six months ended June 30, 1997 because of
an increase in the number of hotel commission transactions processed by the
Company. Also, contributing to the increase in the value of commissions paid is
an increase in the average value of the commissions processed, due to rising
overall hotel average daily rates and a higher proportion of the Company's
transactions generated by full-service and luxury hotel chains. Net revenues
arising from the increase in commissions paid was somewhat offset by a reduction
in the average fee received by the Company from participating travel agencies
for consolidating and remitting hotel commission payments. . The Company reduced
the fees it charges to certain travel agency customers of HCC beginning in July
1997 in recognition of the significantly higher dollar volume of commissions
being processed on behalf of these agencies.
Cost of Services. Cost of services increased by $1.2 million, or 36.3%,
to $4.6 million in the six months ended June 30, 1998 from $3.4 million in the
six months ended June 30, 1997. Cost of services increased due to additional
staffing, the increased number of transactions processed through the HCC service
and the introduction of enhanced content to the TravelWeb site.
Research and Development. Research and development expenses remained at
$1.2 million in the six months ended June 30, 1998 and the six months ended June
30, 1997. This was primarily due to the fact that a significant amount of
expense was incurred in the six months
12
<PAGE> 13
ended June 30, 1997 in conjunction with the design and implementation of the new
TravelWeb database. The reduction in TravelWeb related spending in the six
months ended June 30, 1998 was partially offset by a higher level of
expenditures relating to the development of Pegasus I Q, the Company's new data
warehousing and data mining service.
General and administrative expenses. General and administrative
expenses increased $421,000, or 25.2%, to $2.1 million in the six months ended
June 30, 1998 from $1.7 million in the six months ended June 30, 1997. This
increase was primarily driven by higher legal, accounting, insurance, printing
and reporting costs associated with operating as a public company.
Marketing and promotion expenses. Marketing and promotion expenses
increased $502,000, or 26.2%, to $2.4 million in the six months ended June 30,
1998 from $1.9 million in the six months ended June 30, 1997. Marketing and
promotion expenses grew primarily due to the addition of Sales and Marketing
staff, the promotion of the TravelWeb service and amortization of new customer
contract incentives.
Depreciation and amortization. Depreciation and amortization expenses
increased $88,000, or 6.1%, to $1.5 million in the six months ended June 30,
1998 from $1.4 million in the six months ended June 30, 1997. This increase was
primarily due to the amortization of software purchased from a third-party in
December 1997.
Interest income. During the six months ended June 30, 1998 the Company
realized $1.3 million in interest income as a result of short-term investments
of operating cash balances.
Interest expense. Interest expense decreased $327,000, or 78.7%, to
$88,000 in the six months ended June 30, 1998. The expense reflects payments
made under capital equipment leases. The Company repaid all of its promissory
notes payable to certain stockholders of the Company on August 15, 1997 using a
portion of the proceeds from its Initial Public Offering of common stock on
August 6, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $3.4 million for the six months ended
June 30, 1998 compared to net cash provided of $411,000 in the six months ended
June 30, 1997. This increase was primarily due to a $2.8 million increase in
profitability.
Net cash used in investing activities for the purchase of software, furniture
and equipment amounted to $797,000 in the six months ended June 30, 1998
compared to $633,000 in the six months ended June 30, 1997. The Company acquired
equipment under capital leases with a principal value of $79,000 in the six
months ended June 30, 1997. In addition, the Company purchased $15.0 million of
marketable securities and realized net proceeds of $13.8 million from the
maturity of marketable securities in the six months ended June 30,1998. For the
six months ended June 30, 1997, the Company purchased $1.5 million of marketable
securities and realized net proceeds of $3.7 million from the maturity of
marketable securities.
13
<PAGE> 14
The Company completed a secondary offering ("Secondary") in February 1998,
raising proceeds, net of offering expenses, of $4.2 million. The proceeds have
been invested in short-term marketable securities.
In June 1998, the Company purchased for $500,000 a minority interest in Customer
Analytics, Inc., a new database marketing applications and solutions provider
specializing in the area of customer relationship marketing.
The Company's principal sources of liquidity at June 30,1998 included cash and
cash equivalents of $35.0 million, short-term investments of $10.5 million and
restricted cash of $1.9 million. Restricted cash represents funds for travel
agency commission checks that have not cleared HCC's processing bank and are
returned to HCC. Any of such amounts, which are not remitted to travel agents,
will be escheated to the appropriate state, as required.
The Company believes that its cash and liquidity portion is adequate to fund
operating needs for the foreseeable future.
YEAR 2000 COMPLIANCE.
The Company has implemented a program designed to ensure that all software used
in connection with the Company's services will manage and manipulate data
involving the transition of dates from 1999 to 2000 without functional or data
abnormality and without inaccurate results related to such dates. The Company
has dedicated both equipment and personnel to its program for achieving Year
2000 compliance for all of its operating systems. However, other participants in
the travel industry have announced that their software may experience
abnormalities unless significant resources are devoted to the Year 2000 problem.
To address this, the Company is working with its customers to test their
interfaces between customer and Company systems. Any failure on the part of the
Company, or its travel-related customers to ensure that any such software
complies with year 2000 requirements, regardless of when such travel
reservations occur, could have a material adverse effect on the financial
condition and results of operations of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK -
Not Applicable
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - The Securities and
Exchange Commission on August 6, 1997 declared effective
the Registration Statement on Form S-1 (File No. 333-28595)
relating to the initial public offering ("IPO") of the
Company's Common Stock. The Company raised proceeds, net of
offering expenses, of $40.5 million from the IPO.
Approximately, $5.2 million of these proceeds were used to
repay notes payable to stockholders and repay certain lease
obligations. $400,000 was used to acquire the software
assets of a third-party company. Also, $500,000 was used to
acquire a minority interest in a database management
consulting company. The remainder of these proceeds has
been placed in short-term marketable securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Not applicable
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS - The Company held
its Annual Meeting of Stockholders on Tuesday, May 5, 1998.
At the Annual Meeting the Company's stockholders took the
following actions:
(i) by a vote of 6,212,257 for and none withheld for each
candidate, the stockholders elected Robert Dirks, William C.
Hammett, Jr., and Thomas O'Toole as Class I directors of the
Company to hold office for a term of three years or until
their respective successors are elected and qualified;
(ii) by a vote of 6,207,957 for, none against, none abstaining
and 4,300 non-votes, the stockholders approved an amendment to
the Company's Second Amended and Restated Certificate of
Incorporation that decreases the number of authorized shares
of common stock, $.01 par value per share, of the Company from
100 million to 50 million;
(iii) by a vote of 4,055,831 for, 836,600 against, none
abstaining and 1,319,826 non-votes, the stockholders approved
amendments to the Company's 1997 Stock Option Plan that
increase the number of shares of Common Stock reserved for
issuance under the Plan and that provide for grants of options
to the Company's non-employee directors; and
(iv) by a vote of 4,386,431 for, 510,300 against, none
abstaining and 1,315,526 non-votes, the stockholders approved
the adoption of the 1997 Employee Stock Purchase Plan.
ITEM 5. OTHER INFORMATION - Not applicable
15
<PAGE> 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
(b) REPORTS ON FORM 8-K - Not applicable
16
<PAGE> 17
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 SYSTEMS, INC.
August 13, 1998 /s/ John F. Davis, III
----------------------
John F. Davis, III,
President and Chief
Executive Officer
August 13, 1998 /s/ Jerome L. Galant
--------------------
Jerome L. Galant
Chief Financial Officer
(principal financial officer)
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
------- -----------------------
<S> <C>
27 - FINANCIAL DATA SCHEDULE
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM COMPANY'S
FORM 10-Q FOR THE 6 MONTHS ENDED JUNE 30, 1998 FILED AUGUST 13, 1998 WITH
SECURITIES AND EXCHANGE COMMISSION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 36,812
<SECURITIES> 10,505
<RECEIVABLES> 3,759
<ALLOWANCES> (78)
<INVENTORY> 0
<CURRENT-ASSETS> 52,172
<PP&E> 16,864
<DEPRECIATION> (13,638)
<TOTAL-ASSETS> 57,932
<CURRENT-LIABILITIES> 6,966
<BONDS> 0
0
0
<COMMON> 106
<OTHER-SE> 50,462
<TOTAL-LIABILITY-AND-EQUITY> 57,932
<SALES> 0
<TOTAL-REVENUES> 12,949
<CGS> 0
<TOTAL-COSTS> 4,574
<OTHER-EXPENSES> 1,225
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 88
<INCOME-PRETAX> 2,329
<INCOME-TAX> 32
<INCOME-CONTINUING> 2,297
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,297
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.21
</TABLE>
