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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ___ to ___
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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 [ ] No [X]
The number of shares of the registrant's common stock outstanding as of
September 19, 1997 was 10,179,712.
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PEGASUS SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
a) Consolidated Balance Sheets
as of June 30, 1997, Pro Forma June 30, 1997, and December 31, 1996 ...........3
b) Consolidated Statements of Operations
for the Three and Six Months Ended June 30, 1997 and 1996......................4
c) Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1997 and 1996.................................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..............................13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................14
Item 2. Changes in Securities...................................................................14
Item 3. Defaults Upon Senior Securities.........................................................14
Item 4. Submission of Matters to a Vote of Security Holders.....................................14
Item 5. Other Information.......................................................................14
Item 6. Exhibits and Reports on Form 8-K........................................................14
SIGNATURES.................................................................................................15
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEGASUS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
Pro Forma
June 30, June 30, December 31,
1997 1997 1996
------------ ------------ ------------
ASSETS
Cash and cash equivalents ....................................................... $ 2,860,896 $ 2,860,896 $ 1,796,311
Restricted cash ................................................................. 1,034,814 1,034,814 690,206
Short-term investments .......................................................... 493,087 493,087 2,705,076
Accounts receivable, net of allowance for doubtful
accounts of $24,202, $24,202 and $44,805, respectively ................... 1,505,441 1,505,441 924,951
Accounts receivable from affiliates ............................................. 1,352,424 1,352,424 754,405
Other current assets ............................................................ 287,428 287,428 190,976
------------ ------------ ------------
Total current assets ..................................................... 7,534,090 7,534,090 7,061,925
Software development costs, net ................................................. 1,469,314 1,469,314 2,113,758
Property and equipment, net ..................................................... 2,992,212 2,992,212 3,001,012
Goodwill, net of accumulated amortization of
$241,379, $241,379 and $178,943, respectively ............................ 1,623,336 1,623,336 1,685,772
Other noncurrent assets ......................................................... 477,193 477,193 29,269
------------ ------------ ------------
Total assets ........................................................ $ 14,096,145 $ 14,096,145 $ 13,891,736
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities ........................................ $ 3,081,556 $ 3,081,556 $ 2,574,186
Accounts payable to affiliates .................................................. 143,258 143,258 115,049
Unearned income ................................................................. 1,330,332 1,330,332 470,588
Current portion of capital lease obligations .................................... 1,061,118 1,061,118 1,048,238
Current portion of notes payable to affiliates .................................. 827,676 827,676 785,517
------------ ------------ ------------
Total current liabilities ................................................ 6,443,940 6,443,940 4,993,578
Capital lease obligations, net of current portion ............................... 1,273,082 1,273,082 1,749,899
Notes payable to affiliates, net of current portion ............................. 4,225,873 4,225,873 4,603,568
Unearned income ................................................................. 235,294 235,294 470,588
Other noncurrent liabilities .................................................... 131,660 131,660 119,709
Shareholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares authorized; 1,538,463;
zero and 1,538,463 shares issued and outstanding,
respectively .......................................................... 15,385 - 15,385
Common stock, $.01 par value; 100,000,000 shares authorized;
5,307,733; 6,846,196 and 5,307,733 shares issued, respectively ........ 53,077 68,462 53,077
Additional paid-in capital ............................................... 17,353,030 17,353,030 16,968,364
Unearned compensation .................................................... (557,615) (557,615) (485,937)
Accumulated deficit ...................................................... (15,051,243) (15,051,243) (14,570,157)
Less treasury stock (116,484 shares, at cost) ............................ (26,338) (26,338) (26,338)
------------ ------------ ------------
Total shareholders' equity .......................................... 1,786,296 1,786,296 1,954,394
------------ ------------ ------------
Total liabilities and shareholders' equity .......................... $ 14,096,145 $ 14,096,145 $ 13,891,736
============ ============ ============
See accompanying notes to consolidated financial statements
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PEGASUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
Net revenues
Shareholder ..................................$ 3,952,926 $ 3,093,404 $ 7,073,618 $ 6,145,616
Nonshareholder ............................... 1,128,331 911,668 2,384,202 1,662,623
----------- ----------- ----------- -----------
Total revenues .......................... 5,081,257 4,005,072 9,457,820 7,808,239
Cost of services .................................... 1,799,496 1,482,683 3,357,152 3,120,553
Research and development ............................ 609,513 565,036 1,232,240 1,192,148
General and administrative .......................... 816,254 1,119,765 1,671,785 1,811,836
Marketing and promotion ............................. 1,052,842 693,233 1,918,149 1,337,117
Depreciation and amortization ....................... 720,527 923,627 1,427,985 1,833,120
----------- ----------- ----------- -----------
Operating income (loss) ............................. 82,625 (779,272) (149,491) (1,486,535)
Other (income) expense:
Interest expense ............................. 203,284 188,098 415,434 399,671
Interest income .............................. (43,937) (4,006) (99,839) (4,006)
----------- ----------- ----------- -----------
Loss before income taxes and minority interest ...... (76,722) (963,364) (465,086) (1,882,200)
Income taxes ........................................ 16,000 -- 16,000 --
----------- ----------- ----------- -----------
Loss before minority interest ....................... (92,722) (963,364) (481,086) (1,882,200)
Minority interest ................................... -- (57,602) -- (105,563)
----------- ----------- ----------- -----------
Net loss ............................................$ (92,722) $(1,020,966) $ (481,086) $(1,987,763)
=========== =========== =========== ===========
Pro forma data (Notes 4 and 5):
Pro forma net loss per share ........................$ (0.01) $ (0.17) $ (0.07) $ (0.33)
=========== =========== =========== ===========
Weighted average shares outstanding used in the
pro forma net loss per share calculation ..... 6,729,712 6,030,083 6,729,712 6,011,780
=========== =========== =========== ===========
Supplemental pro forma net income (loss) per share ..$ 0.00 $ (0.14) $ (0.03) $ (0.27)
=========== =========== =========== ===========
Weighted average shares outstanding used in the
supplemental pro forma net income (loss) per
share calculation ............................ 7,900,999 6,425,893 7,125,522 6,407,590
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements
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PEGASUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
--------------------------
1997 1996
----------- -----------
Cash flows from operating activities:
Net loss ................................................................................. $ (481,086) $(1,987,763)
Adjustments to reconcile net loss to net cash provided by operating activities:
Minority interest .................................................................... -- 105,563
Accrued interest reclassified to notes payable ....................................... 46,170 45,788
Write off of in-process research and development costs ............................... -- 244,600
Adjustment for discontinued software projects ........................................ -- 316,698
Loss on sale of equipment ............................................................ -- 9,988
Depreciation and amortization ........................................................ 1,427,985 1,833,120
Recognition of stock option compensation ............................................. 74,988 --
Changes in assets and liabilities:
Restricted cash ................................................................... (344,608) (168,466)
Accounts receivable ............................................................... (580,490) (297,972)
Accounts receivable from affiliates ............................................... (598,019) (491,051)
Other current and noncurrent assets ............................................... (306,376) (47,516)
Accounts payable and accrued liabilities .......................................... 507,370 626,906
Accounts payable to affiliates .................................................... 28,209 (204,188)
Unearned income ................................................................... 624,450 137,318
Other noncurrent liabilities ...................................................... 11,951 74,930
----------- -----------
Net cash provided by operating activities ..................................... 410,544 197,955
----------- -----------
Cash flows from investing activities:
Purchase of software, property and equipment ............................................. (633,161) (198,361)
Proceeds from sale of software, property and equipment ................................... -- 132,328
Purchase of marketable securities ........................................................ (1,476,691) --
Proceeds from sale of marketable securities .............................................. 3,688,681 --
----------- -----------
Net cash provided by (used in) investing activities ............................... 1,578,829 (66,033)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of stock .......................................................... -- 7,500,005
Purchase of minority interest ............................................................ -- (2,000,000)
Repayment on notes payable to affiliates ................................................. (381,707) (235,000)
Repayment of capital leases .............................................................. (546,994) (365,737)
Purchase of treasury stock ............................................................... -- (25,656)
Proceeds from line of credit ............................................................. -- 175,000
Proceeds from capital leases ............................................................. 3,913 87,624
----------- -----------
Net cash provided by (used in) financing activities .................................. (924,788) 5,136,236
----------- -----------
Net increase in cash and cash equivalents ..................................................... 1,064,585 5,268,158
Cash and cash equivalents, beginning of period ................................................ 1,796,311 93,831
----------- -----------
Cash and cash equivalents, end of period ...................................................... $ 2,860,896 $ 5,361,989
=========== ===========
Supplemental schedule of noncash investing and financing activities:
Acquisition of equipment under capital leases ............................................ $ 79,144 $ 664,001
=========== ===========
Issuance of common stock for acquisitions ................................................ $ -- $ 278,622
=========== ===========
Common stock warrants issued in exchange for customer contract asset ..................... $ 238,000 $ --
=========== ===========
See accompanying notes to consolidated financial statements
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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 and HCC. 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 recently
introduced NetBooker service, the Company offers TravelWeb's
comprehensive hotel database and Internet hotel reservation capabilities
to third-party Web sites.
The financial information presented herein should be read in conjunction
with the Company's annual consolidated financial statements for the year
ended December 31, 1996 and the notes thereto, which have been filed
with the Securities and Exchange Commission in a Registration Statement
on Form S-1 (File No. 333-28595) that was declared effective
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on August 6, 1997. The foregoing unaudited interim consolidated
financial statements 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. INITIAL PUBLIC OFFERING
The Company completed an initial public offering ("IPO") in August 1997.
The Company's Registration Statement on Form S-1 (File No. 333-28595)
with respect to the IPO was declared effective on August 6, 1997 and the
Company's stock began trading on the Nasdaq National Market under the
symbol PEGS on August 7, 1997. The Company sold 3,450,000 shares of
common stock at a per share price of $13.00. Net proceeds to the
Company, after deduction of the underwriting discount and estimated IPO
expenses, were approximately $40.5 million. Selling shareholders also
sold 659,000 shares at a per share price of $13.00. Net proceeds to the
shareholders after deduction of the underwriting discount were
approximately $8.0 million. The Company did not receive any proceeds
from the sale of shares by the selling shareholders.
3. STOCK SPLITS
A one hundred-for-one stock split was effected in June 1996. All
references in the consolidated financial statements to shares, share
prices, per share amounts and stock plans have been adjusted
retroactively for the one hundred-for-one stock split.
In May 1997, the board of directors approved the declaration of a
four-for-three stock split of the outstanding common and preferred stock
effected in the form of a dividend to stockholders of record on the
effective date of the Registration Statement on Form S-1 with respect to
the IPO. Concurrently with the IPO, the number of authorized shares of
common stock of the Company increased from 20 million to 100 million
while the number of authorized shares of preferred stock remained two
million. All references in the consolidated financial statements to
shares, share prices, per share amounts and stock plans have been
adjusted retroactively for the four-for-three stock split.
4. PRO FORMA NET LOSS PER SHARE
Historical loss per share has been excluded from the Company's
statements of operations on the basis that it is irrelevant due to the
conversion of all outstanding Series A preferred stock to common stock
on a one-for-one basis concurrent with the effectiveness in August 1997
of the Company's IPO. Pro forma net loss per share for 1996 has been
computed using the weighted average number of common shares outstanding
after giving retroactive effect to the four-for-three stock split
effected in August 1997 upon effectiveness of the Company's Registration
Statement on Form S-1 and assuming that (i) all shares of Series A
preferred stock had been converted to shares of common stock as of date
of issuance (see Note 10), and (ii) all shares, options and warrants
issued during the twelve months prior to
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the August 1997 effectiveness of the Company's Registration Statement at
an exercise price less than 85% of the IPO price were issued at
January 1, 1996.
Pro forma net loss per share for 1997 has been computed in accordance
with Accounting Principles Board Opinion #15, "Earnings Per Share" (APB
15) using the weighted average number of common shares outstanding after
giving retroactive effect to the four-for-three stock split effected in
August 1997 upon effectiveness of the Company's Registration Statement
on Form S-1 and assuming that all shares of Series A preferred stock had
been converted to shares of common stock as of date of issuance (see
Note 10). No shares, options or warrants outstanding at June 30, 1997
were included in the calculation since they were anti-dilutive.
5. SUPPLEMENTAL PRO FORMA NET INCOME (LOSS) PER SHARE
Supplemental pro forma net income (loss) per share is based on the
weighted average number of shares of common stock used in the
calculation of pro forma net loss per share, plus the number of shares
(395,810) that the Company would need to issue to repay $5,145,525 of
indebtedness outstanding under notes payable to certain shareholders of
the Company and certain capital lease obligations as of June 30, 1997.
For purposes of computing supplemental pro forma net income (loss) per
share, the pro forma net loss for the three months ended June 30, 1997
and 1996 was reduced by $127,553, and the pro forma net loss for the six
months ended June 30, 1997 and 1996 was reduced by $251,853,
representing elimination of the related interest expense on such notes
payable and capital lease obligations.
Additionally, the Company has a supplemental net income for the three
months ended June 30, 1997 after the interest expense adjustment
discussed above. The options and warrants outstanding with an exercise
price below the fair value of the common stock were included in the
weighted average shares outstanding used in the supplemental pro forma
net income per share calculation for the three months ended June 30,
1997, since they are dilutive.
6. EARNINGS PER SHARE
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (FAS 128), was issued. FAS 128 specifies the
computation, presentation and disclosure requirements for earnings per
share (EPS) for entities with publicly held common stock or potential
common stock. FAS 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods;
earlier application is not permitted. Once adopted, FAS 128 requires
restatement of all prior-period EPS data presented. The Company will
adopt FAS 128 in the year ending December 31, 1997 and, based on current
circumstances, does not believe the effect of adoption will be material.
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7. COMPREHENSIVE INCOME
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (FAS 130) was issued. 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. The
Company will adopt this Statement in the year ending December 31, 1998.
Reclassification of financial statements for earlier periods provided
for comparative purposes is required upon adoption.
8. SEGMENT REPORTING
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 shareholders. FAS 131 is effective for
financial statements for periods beginning after December 15, 1997. The
Company will adopt FAS 131 in the year ending December 31, 1998.
9. WARRANT
In May 1997, the Company issued a warrant to a customer for the purchase
of 345,723 shares of the Company's common stock as part of a five year
contract involving a wide range of the Company's services. The warrant
is exercisable during the two year period ended May 12, 1999 at an
exercise price of $7.20 per share. The Company used the Black-Scholes
option pricing model to value the warrant. A contract asset of $238,000
was recorded in May 1997, which will be amortized ratably over the five
year contract period.
10. PRO FORMA BALANCE SHEET
All outstanding shares of Series A preferred stock were converted on a
one-for-one basis to common stock concurrent with the IPO in August
1997. Accordingly, the pro forma balance sheet at June 30, 1997 gives
effect to the conversion of the 1,538,463 shares of Series A preferred
stock to 1,538,463 shares of the Company's common stock as if such
conversion had occurred as of the balance sheet date.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company is a leading provider of transaction processing services to the
hotel industry worldwide. The Company's THISCO and TravelWeb hotel reservation
services improve the effectiveness of the hotel reservation process by enabling
travel agents and individual travelers to electronically access hotel room
inventory information and conduct reservation transactions. The Company's HCC
service, the global leader in hotel commission payment processing, improves the
efficiency and effectiveness of the commission payment process for
participating hotels and travel agencies by consolidating payments and
providing comprehensive transaction reports. The Company has developed or is in
the process of developing several new services, including NetBooker, UltraRes,
UltraDirect and Pegasus Information Services, to capitalize on its existing
technology and customer base to provide additional electronic hotel reservation
capabilities and information services to existing Pegasus customers and to
other participants in the hotel room distribution process. Historically, the
Company has derived a majority of its revenues from its THISCO and HCC
services.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AND 1996
Net revenues. The Company's revenues increased by $1.1 million, or
26.9%, to $5.1 million for the three months ended June 30, 1997 from $ 4.0
million for the three months ended June 30, 1996. This increase in revenues was
primarily driven by higher transactions levels for both the THISCO and HCC
services.
THISCO revenues increased as a result of a 27.3% increase in net reservations
made in the three months ended June 30,1997 as compared to the three months
ended June 30, 1996. Additionally, the average fee paid by hotels using the
THISCO service increased during the three months ended June 30,1997 as a result
of an increase in total status messages processed. HCC revenues grew as a
result of a 25.8% increase in hotel commission transactions processed during
the three months ended June 30,1997 as compared to the three months ended June
30,1996, due in part to the addition of hotel properties, including those of
Marriott International, Inc., and travel agencies participating in the HCC
service. The net revenues to the Company per commissionable transaction
increased in the three months ended June 30,1997 because of an increase in
overall hotel average daily rates. Revenues contributed by the TravelWeb
service declined 37.2% in the three months ended June 30,1997 as compared to
the three months ended June 30,1996. This decrease resulted primarily from the
Company's transitioning its hotels participating in the TravelWeb service to a
subscription fee arrangement and the Company's increasing reliance on
subscription fees and recurring transaction fees rather than page building and
set-up fees.
Cost of services. Cost of services increased by $317,000, or 21.4%, to
$1.8 million in the three months ended June 30,1997 from $1.5 million in the
three months ended June 30,1996.
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Cost of services increased due to additional staffing and the increased number
of transactions processed through the HCC service.
Research and development. Research and development expenses increased
$44,000, or 7.9%, to $610,000 in the three months ended June 30,1997. After
eliminating the effect of the one-time charges taken in the three months ended
June 30, 1996 for research and development expenses relating to the acquisition
of HCC, research and development expenses increased $289,000, or 90.2%, to
$610,000 in the three months ended June 30, 1997 from $320,000 in the three
months ended June 30, 1996. This increase was primarily due to additional work
on TravelWeb.
General and administrative. General and administrative expenses
decreased $304,000, or 27.1%, to $816,000 in the three months ended June 30,
1997 from $1.1 million in the three months ended June 30, 1996. This decrease
was primarily due to a number of non-recurring expenses incurred in 1996
associated with the closing of a financing transaction.
Marketing and promotion. Marketing and promotion expenses increased
$360,000, or 51.9%, to $1.1 million in the three months ended June 30,1997 from
$693,000 in the three months ended June 30, 1996. Marketing and promotion
expenses grew primarily due to the promotion of the TravelWeb service and to a
lesser degree the promotion of the THISCO and HCC services.
Depreciation and amortization. Depreciation and amortization expenses
decreased $203,000, or 22.0%, to $721,000 in the three months ended June 30,
1997 from $924,000 in the three months ended June 30, 1996. This decrease was
primarily due to the completion in 1996 of the amortization of previously
capitalized software.
Interest expense. Interest expense increased $15,000, or 8.1%, to
$203,000 in the three months ended June 30, 1997. The expense reflects interest
accrued on promissory notes payable to certain shareholders of the Company and
payments made under capital equipment leases.
Interest income. During the three months ended June 30, 1997 the
Company realized $44,000 in interest income as a result of short term
investments of operating cash balances on the proceeds from the sale of shares
of the Company's Series A preferred stock in June 1996.
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Net revenues. The Company's revenues increased by $1.7 million, or
21.1%, to $9.5 million for the six months ended June 30, 1997 from $7.8 million
for the six months ended June 30, 1996. This increase in revenues was primarily
driven by higher transactions levels for both the THISCO and HCC services.
THISCO revenues increased as a result of a 22.7% increase in net reservations
made in the six months ended June 30,1997 as compared to the six months ended
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June 30,1996. Additionally, the average fee paid by hotels using the THISCO
service increased during the six months ended June 30,1997 as a result of an
increase in total status messages processed. HCC revenues grew as a result of a
19.1% increase in hotel commission transactions processed during the six months
ended June 30,1997 as compared to the six months ended June 30,1996, due in
part to the addition of hotel properties, including those of Marriott
International, Inc., and travel agencies participating in the HCC service. The
net revenues to the Company per commissionable transaction increased in the six
months ended June 30,1997 because of an increase in overall hotel average daily
rates. Revenues contributed by the TravelWeb service declined 33.3% in the six
months ended June 30,1997 as compared to the six months ended June 30,1996.
This decrease resulted primarily from the Company's transitioning its hotels
participating in the TravelWeb service to a subscription fee arrangement and
the Company's increasing reliance on subscription fees and recurring
transaction fees rather than page building and set-up fees.
Cost of services. Cost of services increased by $237,000, or 7.6%, to
$3.4 million in the six months ended June 30,1997 from $ 3.1 million in the six
months ended June 30,1996. Cost of services increased due to additional
staffing and the increased number of transactions processed through the HCC
service.
Research and development. Research and development expenses increased
$40,000, or 3.4%, to $1.2 million in the six months ended June 30,1997. After
eliminating the effect of the one-time charges taken in the six months ended
June 30, 1996 for research and development expenses relating to the acquisition
of HCC, research and development expenses increased $285,000, or 30.0%, to $1.2
million in the six months ended June 30, 1997 from $948,000 in the six months
ended June 30, 1996. This increase was primarily due to additional work on
TravelWeb including the implementation of an improved hotel database usable for
TravelWeb and other third party hotel booking sites.
General and administrative. General and administrative expenses
decreased $140,000, or 7.7%, to $1.7 million in the six months ended June 30,
1997 from $1.8 million in the six months ended June 30, 1996. This decrease was
primarily due to a number of non-recurring expenses incurred in 1996 associated
with the closing of a financing transaction.
Marketing and promotion. Marketing and promotion expenses increased
$581,000, or 43.5%, to $1.9 million in the six months ended June 30,1997 from
$1.3 million in the six months ended June 30, 1996. Marketing and promotion
expenses grew primarily due to the promotion of the TravelWeb service and to a
lesser degree the promotion of the THISCO and HCC services.
Depreciation and amortization. Depreciation and amortization expenses
decreased $405,000, or 22.1%, to $1.4 million in the six months ended June 30,
1997 from $1.8 million in the six months ended June 30, 1996. This decrease was
primarily due to the completion in 1996 of the amortization of previously
capitalized software.
Interest expense. Interest expense increased $16,000, or 3.9%, to
$415,000 in the six months ended June 30, 1997. The expense reflects interest
accrued on promissory notes payable to certain shareholders of the Company and
payments made under capital equipment leases.
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Interest income. During the six months ended June 30, 1997, the
Company realized $100,000 in interest income as a result of short term
investments of operating cash balances from the proceeds of the sale of shares
of the Company's Series A preferred stock in June 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its cash requirements for operations and investments
in equipment primarily through sales of capital stock, borrowings from
stockholders and capital lease financing. Cash flows from the sale of capital
stock amounted to $7.5 million in 1996, of which $2.0 was used to purchase a
minority interest in a subsidiary and $235,000 was used to repay notes payable
to stockholders.
Net cash provided by operating activities was $411,000 for the six months ended
June 30, 1997 compared to net cash provided of $198,000 during the same period
in 1996.
Net cash used in investing activities for the purchase of software, furniture
and equipment amounted to $633,000 in the six months ended June 30, 1997
compared to $198,000 for the same period in 1996. In addition, the Company
purchased $1.5 million of marketable securities and realized net proceeds of
$3.7 million from the maturity of marketable securities in the six months
ended June 30, 1997.
The Company's principal sources of liquidity at June 30,1997 included cash and
cash equivalents of $2.9 million, short-term investments of $493,000 and
restricted cash of $1.0 million which represents funds for travel agency
commission checks that have not cleared HCC's processing bank and are returned
to HCC. Any of such restricted cash amounts which are not remitted to travel
agents will be escheated to the appropriate state, as required.
The Company completed an initial public offering of its common stock ("IPO")in
August 1997 receiving approximately $41.7 million in net proceeds after
deduction of the underwriting discount. Prior to the filing of this report, the
Company has used approximately $5.2 million to repay indebtedness outstanding
under notes payable to certain shareholders of the Company and certain capital
lease obligations. Also, approximately $1.2 million of IPO related expenses
have been paid.
Item 3. Quantitative and Qualitative Disclosures about Market Risk - Not
Applicable
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - Not applicable
ITEM 2. CHANGES IN SECURITIES - Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Not applicable
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS - Not applicable
ITEM 5. OTHER INFORMATION - Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT 11 - STATEMENT REGARDING COMPUTATION OF PER SHARE
INCOME (LOSS).
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
(b) REPORTS ON FORM 8-K - Not applicable
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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.
September 22, 1997 /s/ John F. Davis, III
----------------------
John F. Davis, III,
President and Chief
Executive Officer
September 22, 1997 /s/ Jerome L. Galant
--------------------
Jerome L. Galant
Chief Financial Officer
(principal financial officer)
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EXHIBIT INDEX
Exhibit
Number Description of Exhibits
- ------- -----------------------
11 - Statement Regarding Computation of Per Share Income (Loss).
27 - Financial Data Schedule
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