<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 MARCH 31, 1999
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 May 12,
1999 was 12,976,110.
<PAGE> 2
PEGASUS SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) PAGE
----
<S> <C> <C>
a) Consolidated Balance Sheets
as of March 31, 1999 and December 31, 1998 ..........3
b) Consolidated Statements of Operations
for the Three Months Ended March 31, 1999 and 1998....4
c) Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1999 and 1998....5
d) Notes to Consolidated Financial Statements .............6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................9
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.................13
Item 6. Exhibits and Reports on Form 8-K..........................14
SIGNATURES...................................................................15
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEGASUS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
------------------ ---------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 34,800,905 $ 25,002,185
Restricted cash 1,989,237 2,106,676
Short-term investments 7,922,891 15,768,400
Accounts receivable, net 5,254,467 3,687,518
Other current assets 3,687,012 3,689,254
------------ ------------
Total current assets 53,654,512 50,254,033
Capitalized software, net 853,352 869,619
Property and equipment, net 3,000,133 2,635,068
Goodwill, net 4,127,478 4,238,071
Other noncurrent assets 2,334,376 2,323,620
------------ ------------
Total assets $ 63,969,851 $ 60,320,411
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 4,584,664 $ 4,715,018
Unearned income 1,259,043 258,667
Customer deposits 460,203 347,422
Current portion of capital lease obligations 321,158 535,072
------------ ------------
Total current liabilities 6,625,068 5,856,179
Other noncurrent liabilities 133,482 142,380
Capital lease obligations, net of current portion 8,926 57,634
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;
10,739,818 and 10,653,371 shares issued, respectively 107,398 106,533
Additional paid-in capital 64,768,548 63,383,905
Unearned compensation (564,298) (615,636)
Accumulated deficit (7,082,935) (8,584,246)
Less treasury stock (116,484 shares, at cost) (26,338) (26,338)
------------ ------------
Total stockholders' equity 57,202,375 54,264,218
------------ ------------
Total liabilities and stockholders' equity $ 63,969,851 $ 60,320,411
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 4
PEGASUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
1999 1998
----------- ------------
<S> <C> <C>
Net revenues $ 8,372,496 $ 6,167,267
Cost of services 2,563,425 2,166,382
Research and development 611,443 600,482
General and administrative expenses 1,332,958 1,054,704
Marketing and promotion expenses 1,263,819 1,242,124
Depreciation and amortization 679,272 753,276
------------ ------------
Operating income 1,921,579 350,299
Other income (expense):
Interest income 528,709 643,875
Interest expense (18,227) (47,482)
------------ ------------
Income before income taxes 2,432,061 946,692
Income taxes 930,750 6,900
------------ ------------
Net income $ 1,501,311 $ 939,792
Net income per share:
Basic $ 0.14 $ 0.09
============ ============
Diluted $ 0.13 $ 0.09
============ ============
Weighted average shares outstanding:
Basic 10,574,784 10,324,526
============ ============
Diluted 11,536,050 11,038,325
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
PEGASUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,501,311 $ 939,792
Adjustments to reconcile net income to net cash from operating activities:
Windfall tax benefit from employee exercise of non-qualified stock options 843,753 118,154
Depreciation and amortization 679,272 753,276
Recognition of stock option compensation 80,752 66,179
Amortization of premiums on short-term investments 8,271 3,605
Changes in assets and liabilities:
Restricted cash 117,439 (298,217)
Accounts receivable (1,566,949) (1,509,695)
Other current and noncurrent assets 41,596 207,565
Accounts payable and accrued liabilities (17,573) 12,408
Unearned income 1,000,375 759,663
Other noncurrent liabilities (8,898) 5,975
------------ ------------
Net cash provided by operating activities 2,679,349 1,058,705
------------ ------------
Cash flows from investing activities:
Purchase of software, property and equipment (917,476) (230,930)
Purchase of marketable securities (3,567,675) (9,902,199)
Proceeds from maturity of marketable securities 11,404,912 4,500,000
Investment in minority interest (50,110) --
------------ ------------
Net cash provided by (used in) investing activities 6,869,651 (5,633,129)
------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of stock 512,342 4,301,304
Repayment of capital leases (262,622) (315,334)
------------ ------------
Net cash provided by financing activities 249,720 3,985,970
------------ ------------
Net increase (decrease) in cash and cash equivalents 9,798,720 (588,454)
Cash and cash equivalents, beginning of period 25,002,185 30,166,793
------------ ------------
Cash and cash equivalents, end of period $ 34,800,905 $ 29,578,339
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 15,390 $ 56,348
============ ============
Income taxes paid $ -- $ 65,000
============ ============
</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 (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, Pegasus IQ,
Inc. (Pegasus IQ) and Driving Revenue L.L.C. (Driving Revenue)
(collectively, Pegasus or the Company). 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). All significant intercompany balances have been
eliminated in consolidation.
In the opinion of management, the unaudited 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 normally recurring nature.
The results for interim periods are not necessarily indicative of results
expected for the entire fiscal year. The accompanying unaudited
consolidated financial statements and the notes thereto should be read in
conjunction with the consolidated financial statements and notes thereto
contained in our annual report for the year ended December 31, 1998 on
Form 10-K. Pegasus management believes that the disclosures are
sufficient for interim financial reporting purposes.
2. EARNINGS PER SHARE
Basic net income per share for the three months ended March 31, 1999 and
1998 has been computed in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (FAS 128) using the
weighted average number of common shares outstanding.
Diluted net income per share for the three months ended March 31, 1999
and 1998 gives effect to all dilutive potential common shares that were
outstanding during the respective periods. Outstanding options and
warrants with strike prices below the average fair market value of
Pegasus common stock for the three months ended March 31, 1999 and 1998
were included in the diluted earnings per share (EPS) calculations for
the respective periods. Options for 1,000 shares of Pegasus common stock
at a strike price of $40.88 were excluded from the diluted EPS
calculation for the three months ended March 31, 1999 because they were
antidilutive. The excluded options expire December 2006. All outstanding
options and warrants were included in the diluted EPS calculation for the
three months ended March 31, 1998.
6
<PAGE> 7
The following table sets forth the basic and diluted EPS computation for
the three months ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net income $ 1,501,311 $ 939,792
=========== ===========
Basic:
Weighted average number of shares outstanding 10,574,784 10,324,526
----------- -----------
Net income per share $ 0.14 $ 0.09
=========== ===========
Diluted:
Weighted average number of shares outstanding 10,574,784 10,324,526
Additional weighted average shares from assumed
exercise of dilutive stock options and warrants, net 961,266 713,799
of shares to be repurchased with exercise proceeds
----------- -----------
Weighted average number of shares outstanding used
in the diluted net income per share calculation 11,536,050 11,038,325
----------- -----------
Net income per share $ 0.13 $ 0.09
=========== ===========
</TABLE>
3. SEGMENT INFORMATION
In 1998, Pegasus adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related
Information". The prior year's segment information has been restated to
present our three reportable segments:
o Pegasus Electronic Distribution - provides services that enable travel
agents and individual travelers to electronically access hotel room
inventory information and conduct reservation transactions;
o Pegasus Commission Processing - provides commission payment processing
services to the hotel industry and travel agencies; and
o Pegasus Business Intelligence - provides database marketing and
consulting services and is being expanded to provide data mining and
reporting services for benchmark analysis and strategic planning for
the hotel industry.
Pegasus is organized primarily on the basis of services provided. Segment
data includes a charge allocating all corporate costs to the operating
segments. Management evaluates performance of its segments based on
pretax income.
7
<PAGE> 8
The following table presents information about reported segments for the
three months ended March 31:
<TABLE>
<CAPTION>
Electronic Commission Business Reconciling
Distribution Processing Intelligence Items Total
------------ ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
1999
----
Net revenues $ 3,964,052 $ 3,985,189 $ 423,255 $ -- $ 8,372,496
Income (loss) before taxes 1,162,337 1,699,419 (925,992) 496,297 2,432,061
1998
----
Net revenues 2,796,748 3,370,519 -- -- 6,167,267
Income (loss) before taxes 50,548 498,694 (213,066) 610,516 946,692
</TABLE>
Reconciling items represent interest income earned on short-term
investment of operating cash balances and a portion of proceeds from our
initial and secondary public offerings of common stock.
4. MINORITY INTEREST INVESTMENTS
In September 1998, Pegasus purchased for $1.0 million a minority interest
in Intermezzo, Inc., a developer of hotel reservation and property
management systems and software. Intermezzo has incurred operating losses
in excess of its plan and as a result has experienced liquidity problems.
In addition to our initial investment, Pegasus loaned $50,000 to
Intermezzo as part of an investor bridge loan as of March 31, 1999.
Subsequent to March 31, 1999 Pegasus loaned Intermezzo an additional
$50,000. Intermezzo is seeking additional long-term financing. However,
Pegasus can give no assurance that Intermezzo will be able to obtain
additional financing or what the terms of any such financing might be. If
Intermezzo fails to obtain additional financing or if the terms of any
new financing are unfavorable to the original stockholders, our
investment in Intermezzo could be significantly impaired.
As of March 31, Pegasus has paid $200,000 to Intermezzo as advance
payment for various software development projects. Pegasus expects
Intermezzo to deliver these projects during the second and third quarters
of 1999.
5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1998, 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 that certain costs related to the development or purchase
of internal-use software be capitalized and amortized over the estimated
useful life of the software. SOP 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998.
Accordingly, Pegasus will adopt SOP 98-1 in its 1999 annual financial
statements. Pegasus does not believe the adoption of SOP 98-1 will have a
material impact on our results of operations or financial condition.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133).
8
<PAGE> 9
FAS 133 requires that all derivative instruments be recorded on the
balance sheet at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether the derivative is designated as part of a hedge
transaction. FAS 133 is effective for our first quarter financial
statements in fiscal 2000. Pegasus is not currently involved in
derivative instruments or hedging activities, and therefore, will measure
the impact of this statement as it becomes necessary.
6. SUBSEQUENT EVENTS
On May 6, 1999, the Securities and Exchange Commission declared effective
a registration statement for a secondary public offering of Pegasus
common stock. Pegasus sold 2,000,000 shares of common stock at a per
share price of $38.88. After deducting the underwriters' discounts and
estimated expenses, net proceeds to Pegasus were approximately $73.4
million. The underwriters have an option for a period of 30 days to
purchase up to 300,000 additional shares of common stock at a per share
price of $38.88.
On May 10, 1999 a customer exercised a warrant to purchase 345,723
shares of Pegasus common stock for $7.20 per share.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Pegasus is a leading provider of transaction processing and electronic commerce
services to the hotel industry worldwide. Pegasus is organized into three
businesses: Pegasus Electronic Distribution, Pegasus Commission Processing and
Pegasus Business Intelligence.
Pegasus Electronic Distribution. Pegasus Electronic Distribution includes our
GDS distribution service and Internet distribution services. These services
improve the efficiency and effectiveness of the hotel reservation process by
enabling travel agents and individual travelers to electronically access hotel
room inventory information and conduct reservation transactions.
Our GDS distribution service, formerly referred to as THISCO, provides an
electronic interface between hotel central reservation systems and the global
distribution systems that travel agents use to book hotel and airline
reservations. This interface enables the processing of hotel reservations as
well as the transmission of electronic status messages, which are used to update
room rates, features and availability information on global distribution system
databases.
Pegasus offers volume-based discounting for GDS distribution fees. The recent
consolidation in the hotel industry has resulted in a lower average fee per
transaction for the GDS distribution service. Pegasus expects this trend to
continue.
Our Internet-based distribution services provide online hotel reservation
capabilities to travelers via our TravelWeb.com website (www.travelweb.com) and
our private-label reservation service, formerly referred to as NetBooker. In
addition, Pegasus is developing services that will automate the hotel
reservation process for conventions and large meetings as well as for corporate
travel departments.
Pegasus Commission Processing. Pegasus Commission Processing, formerly referred
to as HCC, is the global leader in hotel commission payment processing. Pegasus
Commission Processing improves the
9
<PAGE> 10
efficiency and effectiveness of the commission payment process for participating
hotels and travel agencies by consolidating payments and providing comprehensive
transaction reports.
Pegasus Business Intelligence. Pegasus Business Intelligence, formerly referred
to as Pegasus IQ and Driving Revenue, provides database marketing and consulting
services and is being expanded to provide data mining and reporting services for
benchmark analysis and strategic planning for the hotel industry.
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Net revenues. Net revenues for the three months ended March 31, 1999 increased
to $8.4 million from $6.2 million for the three months ended March 31, 1998, an
increase of 35.8%. This increase in revenues was primarily driven by higher
transaction levels for Pegasus Electronic Distribution and Pegasus Commission
Processing as well as Pegasus Business Intelligence revenues for the three
months ended March 31, 1999.
Pegasus Electronic Distribution revenues increased 41.7% for the three months
ended March 31, 1999 as compared to the same period in 1998. This increase
resulted primarily from an increase in the number of hotel reservations made
through our Internet website (www.travelweb.com) as well as reservations made
through other websites that use our private-label reservation service. In
addition, more hotel companies paid fees to be listed in our online distribution
database. Net reservations made through our GDS distribution service increased
by 48.0%, but this increase was partially offset by a reduction in the average
fee per reservation. Approximately one half of the increase in net reservations
was attributable to Bass Hotels and Resorts, which began using our GDS
distribution service in May 1998.
Pegasus Commission Processing revenues increased 18.2% for the three months
ended March 31, 1999 compared to the same period in 1998 as a result of a 18.8%
increase in the number of hotel commission transactions processed. The increase
in the number of transactions was due in part to an increase in the number of
hotel properties and travel agencies participating in Pegasus Commission
Processing. The value of commissions paid by Pegasus increased 24.3% for the
three months ended March 31, 1999 as compared to the same period in 1998 because
of an increase in the number of hotel commission transactions processed combined
with an increase in the average value of commissions processed. The average
value of commissionable transactions processed by Pegasus increased due to
rising overall daily rates for hotel rooms as well as a higher proportion of
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 from participating travel agencies for consolidating
and remitting hotel commission payments.
Pegasus Business Intelligence revenues were $423,000 for the three months ended
March 31,1999 and were due to the acquisition of Driving Revenue in August 1998.
Pegasus Business Intelligence revenues consisted of fees charged to hotels for
the development and maintenance of hotel databases and for consulting services.
Cost of services. Cost of services increased by $397,000, or 18.3%, to $2.6
million for the three months ended March 31, 1999 from $2.2 million for the
three months ended March 31, 1998. Cost of services increased due to additional
staffing primarily related to the acquisition of Driving Revenue. This increase
was offset by reduced costs associated with Pegasus Commission Processing as
certain functions that were previously outsourced are now performed in-house at
a lower cost.
10
<PAGE> 11
Research and development. Research and development expenses increased slightly
to $611,000 for the three months ended March 31, 1999 from $600,000 for the same
period in 1998. This increase was primarily related to the development of
Pegasus Business Intelligence.
General and administrative expenses. General and administrative expenses
increased $278,000, or 26.4%, to $1.3 million for the three months ended March
31, 1999 from $1.1 million for the same period in 1998. This increase was
primarily due to higher office costs including rent, telephone, travel and
supplies associated with increased headcount. Pegasus also launched a new
corporate identity and branding strategy during the first quarter, which
resulted in additional costs for the transition to our new company logo. In
addition, accounting and legal expenses increased due to additional reporting
and consulting services as well as the timing of certain legal and accounting
services. The additional services were necessary due to increasingly complex
tax, legal and reporting issues associated with our growth over the past year.
Marketing and promotion expenses. Marketing and promotion expenses increased
slightly to $1.3 million for the three months ended March 31, 1999 from $1.2
million for the same period in 1998. Marketing and promotion expenses increased
primarily due to the promotion of new Pegasus Business Intelligence services.
Depreciation and amortization. Depreciation and amortization expenses decreased
$74,000, or 9.8%, to $679,000 for the three months ended March 31, 1999 from
$753,000 for the same period in 1998. Depreciation and amortization decreased
primarily because goodwill and capitalized software associated with the purchase
accounting transaction that formed Pegasus was fully amortized as of the
beginning of the fourth quarter of 1998. This decrease was partially offset by
additional amortization of goodwill and software related to the acquisition of
Driving Revenue in August 1998.
Interest income. Interest income decreased $115,000, or 17.9%, to $529,000 for
the three months ended March 31, 1999 from $644,000 for the same period in 1998.
The decrease was due to a decline in interest rates for our short-term
investments.
Interest expense. Interest expense decreased $29,000, or 61.6%, to $18,000 for
the three months ended March 31, 1999 from $47,000 for the same period in 1998.
The expense reflects payments made under capital equipment leases.
Income taxes. Income taxes for the three months ended March 31, 1999 reflect
federal, state and foreign income taxes payable. Income taxes for the three
months ended March 31, 1998 include only state and foreign income taxes payable
as the Company was able to realize the benefit of its federal net operating loss
carryforwards in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Pegasus' principal sources of liquidity at March 31, 1999 included cash and cash
equivalents of $34.8 million, short-term investments of $7.9 million and
restricted cash of $2.0 million. Restricted cash represents funds for travel
agency commission checks that have not cleared the processing bank and are
returned to Pegasus. The portion of restricted cash amounts not remitted to
travel agents will be escheated to the appropriate state, as required. Pegasus
has financed its cash requirements for investments primarily through cash
generated from operations, sale of capital stock and capital lease financing.
11
<PAGE> 12
Working capital increased to $47.0 million at March 31, 1999 from $44.4 million
at December 31, 1998. Cash provided by operating activities was $2.7 million for
the three months ended March 31, 1999 compared to net cash provided of $1.1
million for the same period in 1998 due to our improved operating performance.
Capital expenditures consist of purchases of software, furniture and computer
equipment and were $917,000 for the three months ended March 31, 1999 compared
to $231,000 for the same period in 1998.
Pegasus believes that our existing cash and liquidity position combined with
expected operating cash flows are sufficient to adequately manage the operation
of the business in the foreseeable future.
YEAR 2000 COMPLIANCE
The year 2000 computer issue is primarily the result of information technology
(IT) or non-IT systems and programs with date sensitive devices, such as
embedded chips or code using only the last two digits to refer to a year. The
failure of these devices to interpret dates beyond the year 1999 could cause a
system failure or other errors, with the resultant disruption in the operation
of such systems.
State of Readiness. Beginning in July 1997, Pegasus established internally
staffed project teams to address year 2000 issues related to services provided
to customers as well as any IT and non-IT internal systems supporting our
operations. Pegasus is currently in the process of testing and upgrading, if
necessary, its systems and processes to comply with the requirements of the year
2000 date transition. Pegasus personnel are researching internal IT and non-IT
hardware, software and data issues related to dates and date range processing,
and each product line is undergoing extensive internal and external testing. Any
non-compliant hardware or software discovered during testing will be upgraded or
replaced. This process includes contacting material third-party suppliers and
customers to assess their year 2000 readiness. The following is a table showing
our state of year 2000 readiness based on management's assessment:
STATE OF READINESS
Internal IT and Non-IT Systems and Equipment
<TABLE>
<CAPTION>
Percent Estimated
Phase Complete Completion Date
----- -------- ---------------
<S> <C> <C>
Awareness 100% Complete
Assessment of changes required 100% Complete
Remediation or replacement 90% June 1999
Testing 85% June 1999
Contingency planning 50% June 1999
</TABLE>
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Suppliers, Customers and Third-Party Providers
<TABLE>
<CAPTION>
Percent Estimated
Phase Complete Completion Date
----- -------- ---------------
<S> <C> <C>
Awareness 100% Complete
Assessment questionnaires 100% Complete
Detail assessment review with third-party
providers 75% June 1999
Contract review 75% June 1999
Contingency planning 50% June 1999
Testing as applicable 85% June 1999
</TABLE>
Costs. During the three months ended March 31, 1999, the Company expensed
approximately $28,000 in labor costs associated with its year 2000 efforts. For
the years ended December 31, 1998 and 1997, Pegasus expensed approximately
$258,000 and $108,000, respectively, in labor costs associated with year 2000
efforts. Total labor costs for 1999 related to year 2000 efforts are expected to
be less than those incurred in 1998 and comparable to those incurred in 1997. In
addition, Pegasus anticipates incurring approximately $13,000 for the lease of
additional testing hardware in 1999. In 1998, Pegasus capitalized $48,000 of
computer equipment. This computer equipment was purchased to address the year
2000 issue, and upon the completion of year 2000 testing it is anticipated that
such equipment will be used to support the growth of the current systems.
Pegasus does not anticipate incurring a material amount of additional costs
related to the purchase of IT and non-IT hardware for the purpose of addressing
the year 2000 issue. Cash required to fund these matters is expected to be
generated from operations. To date, no IT development projects have been delayed
due to year 2000 remediation efforts.
Risks/Contingency Plans. Even though Pegasus is undertaking efforts to ensure
that all its systems and programs are year 2000 compliant, Pegasus has no
control over services, functions and data provided by third-party vendors and
others which may result in the inability to provide services. Pegasus has
contacted and is working with its material customers and vendors to verify their
degree of year 2000 compliance. Pegasus has requested end-to-end testing with
those systems that interface with our systems. However, Pegasus has no control
over year 2000 compliance for third parties. To date, Pegasus has received
responses from substantially all of its material third-party customers and
vendors. The extent to which third-party customers and vendors do not become
year 2000 compliant in a timely manner may have a material adverse effect on our
cash flow and results of operations.
Pegasus derives nearly all revenues from processing electronic reservations or
consolidating hotel commissions electronically. Our inability or limitation of
our ability to process electronic reservations or consolidate hotel commissions
due to year 2000 problems would have a material impact on our revenues and cash
flow. Due to the electronic medium used by Pegasus to conduct the majority of
our business, any interruption or outage of telecommunications, electricity or
other basic utility services may also adversely impact our ability to do
business. As discussed above, efforts have begun to evaluate the readiness of
these critical suppliers.
Pegasus services the travel industry and is dependent on the continued health of
the industry. Any general disruption of travel due to year 2000 issues that
adversely affects other travel vendors such as airlines, hotels and travel
agency systems would have a material adverse effect on our cash flows and
results of operations.
Pegasus is currently developing contingency plans and determining the extent of
such plans.
PART II - OTHER INFORMATION
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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 27 - Financial Data Schedule
(b) REPORTS ON FORM 8-K - Not applicable
14
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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.
May 13, 1999 /s/ John F. Davis, III
----------------------
John F. Davis, III,
President and Chief
Executive Officer
May 13, 1999 /s/ Jerome L. Galant
--------------------
Jerome L. Galant
Chief Financial Officer
(principal accounting officer)
15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<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 THREE MONTHS ENDED MARCH 31, 1999 FILED MAY 13, 1999 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 36,790
<SECURITIES> 7,923
<RECEIVABLES> 5,342
<ALLOWANCES> (88)
<INVENTORY> 0
<CURRENT-ASSETS> 53,655
<PP&E> 19,021
<DEPRECIATION> (15,168)
<TOTAL-ASSETS> 63,970
<CURRENT-LIABILITIES> 6,625
<BONDS> 0
0
0
<COMMON> 107
<OTHER-SE> 57,095
<TOTAL-LIABILITY-AND-EQUITY> 63,970
<SALES> 0
<TOTAL-REVENUES> 8,372
<CGS> 0
<TOTAL-COSTS> 2,563
<OTHER-EXPENSES> 611
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18
<INCOME-PRETAX> 2,432
<INCOME-TAX> 931
<INCOME-CONTINUING> 1,501
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,501
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.13
</TABLE>
