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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 MARCH 31, 1998
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 [X] No [ ]
The number of shares of the registrant's common stock outstanding as of May 10,
1998 was 10,490,289.
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PEGASUS SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
a) Consolidated Balance Sheets
as of March 31, 1998, and December 31, 1997 .........................................3
b) Consolidated Statements of Operations
for the Three Months Ended March 31, 1998 and 1997....................................4
c) Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 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....................................12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................................................13
Item 2. Changes in Securities and Use of Proceeds.....................................................13
Item 3. Defaults Upon Senior Securities...............................................................13
Item 4. Submission of Matters to a Vote of Security Holders...........................................13
Item 5. Other Information.............................................................................13
Item 6. Exhibits and Reports on Form 8-K..............................................................13
SIGNATURES......................................................................................................14
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEGASUS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, 1998 December 31, 1997
-------------- -----------------
ASSETS
Cash and cash equivalents $ 29,578,339 $ 30,166,793
Restricted cash 1,584,249 1,286,032
Short-term investments 14,778,643 9,380,050
Accounts receivable, net of allowance for doubtful
accounts of $77,860 and $77,860, respectively 1,791,209 1,200,162
Accounts receivable from affiliates 1,690,621 771,973
Other current assets 1,035,298 1,232,874
------------ ------------
Total current assets 50,458,359 44,037,884
Capitalized software, net 800,115 1,183,453
Property and equipment, net 2,604,302 2,712,091
Goodwill, net of accumulated amortization of
$335,033 and $303,815, respectively 1,529,682 1,560,900
Other noncurrent assets 418,993 428,981
------------ ------------
Total assets $ 55,811,451 $ 49,923,309
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 4,085,129 $ 4,072,919
Accounts payable to affiliates 42,316 42,118
Unearned income 1,237,351 477,688
Current portion of capital lease obligations 1,017,848 1,048,179
------------ ------------
Total current liabilities 6,382,644 5,640,904
Capital lease obligations, net of current portion 376,049 661,049
Other noncurrent liabilities 149,585 143,612
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares authorized;
zero shares issued and outstanding, -- --
Common stock, $.01 par value; 100,000,000 shares authorized;
10,603,387 and 10,297,529 shares issued, respectively 106,034 102,975
Additional paid-in capital 62,474,336 58,120,337
Unearned compensation (609,954) (738,533)
Accumulated deficit (13,040,905) (13,980,697)
Less treasury stock (116,484 shares, at cost) (26,338) (26,338)
------------ ------------
Total stockholders' equity 48,903,173 43,477,744
------------ ------------
Total liabilities and stockholders' equity $ 55,811,451 $ 49,923,309
============ ============
See accompanying notes to consolidated financial statements
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PEGASUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
------------------------------------
1998 1997
----------- -----------
Net revenues $ 6,167,267 $ 4,376,563
Cost of services 2,166,382 1,557,656
Research and development 600,482 622,727
General and administrative expenses 1,054,704 855,531
Marketing and promotion expenses 1,242,124 865,307
Depreciation and amortization 753,276 707,458
----------- -----------
Operating income (loss) 350,299 (232,116)
Other income (expense):
Interest income 643,875 55,901
Interest expense (47,482) (212,150)
----------- -----------
Income (loss) before income taxes 946,692 (388,365)
Income taxes 6,900 --
----------- -----------
Net income (loss) $ 939,792 $ (388,365)
=========== ===========
Net income (loss) per share:
Basic $ 0.09 $ (0.07)
=========== ===========
Diluted $ 0.09 $ (0.07)
=========== ===========
Weighted average shares outstanding:
Basic 10,324,526 5,191,249
=========== ===========
Diluted 11,038,325 5,191,249
=========== ===========
See accompanying notes to consolidated financial statements
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PEGASUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
------------------------------
1998 1997
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 939,792 $ (388,365)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Accrued interest reclassified to notes payable -- 22,671
Windfall tax benefit from employee exercise of non-qualified stock options 118,154 --
Depreciation and amortization 753,276 707,458
Recognition of stock option compensation 66,179 34,449
Amortization of premiums on short-term investments 3,605 --
Changes in assets and liabilities:
Restricted cash (298,217) (155,459)
Accounts receivable (591,047) (264,937)
Accounts receivable from affiliates (918,648) (506,836)
Other current and noncurrent assets 207,565 (79,028)
Accounts payable and accrued liabilities 12,210 (75,121)
Accounts payable to affiliates 198 25,680
Unearned income 759,663 440,872
Other noncurrent liabilities 5,975 5,976
------------ ------------
Net cash provided by (used in) operating activities 1,058,705 (232,640)
------------ ------------
Cash flows from investing activities:
Purchase of software, property and equipment (230,930) (407,291)
Purchase of marketable securities (9,902,199) (983,605)
Proceeds from maturity of marketable securities 4,500,000 2,705,076
------------ ------------
Net cash provided by (used in) investing activities (5,633,129) 1,314,180
------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of stock 4,301,304 --
Repayment of notes payable to affiliates -- (188,928)
Repayment of capital leases (315,334) (251,362)
Proceeds from capital leases -- 3,913
------------ ------------
Net cash provided by (used in) financing activities 3,985,970 (436,377)
------------ ------------
Net increase (decrease) in cash and cash equivalents (588,454) 645,163
Cash and cash equivalents, beginning of period 30,166,793 1,796,311
------------ ------------
Cash and cash equivalents, end of period $ 29,578,339 $ 2,441,474
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 56,348 $ 183,279
============ ============
Income taxes paid $ 65,000 $ --
============ ============
Supplemental schedule of noncash investing and financing activities:
Acquisition of equipment under capital leases $ -- $ 79,144
============ ============
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, 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 recently
introduced NetBooker service, the Company offers TravelWeb's
comprehensive hotel database and Internet hotel reservation capabilities
to third-party Web sites.
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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. 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 price of $13.00 per
share. Net proceeds to the Company, after deduction of the underwriting
discount and IPO expenses, were approximately $40.5 million. Selling
stockholders also sold 659,000 shares at a price of $13.00 per share. The
Company did not receive any proceeds from the sale of shares by the
selling stockholders. Concurrent with the completion of the Company's
IPO, a 4-for-3 split of the Company's outstanding common and Series A
preferred stock was effected and all outstanding shares of Series A
preferred stock were converted into shares of common stock.
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 and for the three months ended March 31, 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 share 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.
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3. STOCK SPLITS
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. Concurrent 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. EARNINGS PER SHARE
The following table sets forth the basic and diluted net income (loss)
per share computation for the quarters ended March 31, 1998 and 1997:
Three Months Ended
March 31,
---------------------------
1998 1997
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Net income (loss) $ 939,792 $ (338,364)
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Basic:
Weighted average number of shares outstanding 10,324,526 5,191,249
----------- -----------
Net income (loss) per share $ 0.09 $ (0.07)
----------- -----------
Diluted:
Weighted average number of shares outstanding 10,324,526 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 713,799 --
----------- -----------
Weighted average number of shares outstanding used in the
diluted net income (loss) per share calculation 11,038,325 5,191,249
----------- -----------
Net income (loss) per share $ 0.09 $ (0.07)
----------- -----------
All outstanding options and warrants were included in the diluted EPS
calculation for the three months ended March 31, 1998, as the average fair
market value of the Company's common 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 March 31, 1997 which were not
included in the calculation of diluted EPS.
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Options and warrants granted during 1996 and the first three months of 1997,
which were not included in the calculation of diluted EPS for the three months
ended March 31, 1997, were as follows:
- ---------------------------------------------------------------------------------------------------------------------
Exercise Price
Number of Options Per Share Date of Grant Expiration Date
- ---------------------------------------------------------------------------------------------------------------------
450,000 $ 2.01 June 1996 December 2005
53,333 $ 2.01 December 1996 December 2005
266,406 $ 3.11 December 1996 December 2005
- ---------------------------------------------------------------------------------------------------------------------
5. 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
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.
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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's NetBooker reservation service provides
third-party Web sites direct access to the extensive TravelWeb hotel database
and UltraSwitch's hotel reservation and confirmation capabilities. The NetBooker
service enables the users of the third-party Web sites to shop and query room
availability and to electronically book a reservation in seconds. The Company
has developed or is in the process of developing several new services, including
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 March 31, 1998 and 1997
Net revenues. The Company's revenues for the three months ended March
31, 1998 increased to $6.2 million from $4.4 million for the three months ended
March 31, 1997, an increase of 40.9%. This increase in revenues was primarily
driven by higher transactions levels for the Company's Electronic Reservations
service (consisting of THISCO, TravelWeb, and NetBooker) and Payment/Data
Systems service (consisting of HCC).
Revenues contributed by the Electronic Reservations service increased by 20.9%
in the three months ended March 31, 1998 as compared to the three months ended
March 31, 1997. This increase resulted primarily from an increase in the number
of hotel reservations made through the Company's Web site on the Internet
(located at www.travelweb.com), an increased number of hotel reservations made
by other Web sites that use the Company's NetBooker service, higher fees paid by
hotel companies to participate in the Company's hotel database and, to a lesser
degree, an increase in the number of hotel reservations made through the
Company's THISCO service.
Payment/Data Systems service revenues increased by 63.4% during the three months
ended March 31, 1998 compared to the three months ended March 31, 1997. This
increase primarily was as a
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result of a 60.0% increase in hotel commission transactions processed during the
three months ended March 31, 1998 as compared to the three months ended March
31, 1997, which was due in part, to the addition of hotel properties, including
those of Marriott Corporation and an increase in the number of travel agencies
participating in the HCC service. The value of commissions paid by the Company
on member hotels' behalf increased by 89.4% in the three months ended March 31,
1998 as compared to the three months ended March 31, 1997 due to an increase in
the number of hotel commission transactions processed by the Company combined
with an increase in the average value of the commission 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. 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.
Cost of Services. Cost of services increased by $609,000, or 39.1%, to
$2.2 million in the three months ended March 31, 1998 from $1.6 million in the
three months ended March 31, 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 decreased
$22,000, or 3.6%, to $601,000 in the three months ended March 31, 1998 from
$623,000 in the three months ended March 31, 1997. This decrease was primarily
due to the fact that significant research and development expenses were incurred
in the three months ended March 31, 1997 in conjunction with the design and
implementation of the new TravelWeb database.
General and administrative expenses. General and administrative
expenses increased $199,000, or 23.3%, to $1.1 million in the three months ended
March 31, 1998 from $856,000 in the three months ended March 31, 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 $377,000, or 43.5%, to $1.2 million in the three months ended March
31, 1998 from $865,000 in the three months ended March 31, 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. The Company also took a charge of approximately $130,000 in
the three months ended March 31, 1998 for severance payments and other costs in
the Company's Sales and Marketing Department.
Depreciation and amortization. Depreciation and amortization expenses
increased $46,000, or 6.5%, to $753,000 in the three months ended March 31, 1998
from $707,000 in the three months ended March 31, 1997. This increase was
primarily due to the amortization of software purchased from a third party in
December 1997.
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Interest income. Interest income increased $588,000 to $644,000 in the
three months ended March 31, 1998 from $56,000 in the three months ended March
31, 1997 as a result of the investment of the proceeds from the Company's IPO.
Interest expense. Interest expense decreased $165,000, or 77.6%, to
$47,000 in the three months ended March 31, 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 IPO on August 6, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its cash requirements for operations and investments in
equipment primarily through the sale of capital stock, borrowings from
stockholders and capital lease financing.
Cash provided by operating activities was $1.1 million for the three months
ended March 31, 1998 compared to net cash utilized of $233,000 in the three
months ended March 31, 1997.
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.
Net cash used in investing activities for the purchase of software, furniture
and equipment amounted to $231,000 in the three months ended March 31, 1998
compared to $407,000 in the three months ended March 31, 1997. In addition, the
Company acquired equipment under capital leases with a principal value of
$79,000 during the three months ended March 31, 1997.
The Company's principal sources of liquidity at March 31,1998 included cash and
cash equivalents of $29.6 million, short-term investments of $14.8 million and
restricted cash of $1.6 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 amounts which are not remitted to travel agents will be
escheated to the appropriate state, as required.
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 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 of the Company's Common Stock.
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 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.
May 14, 1998 /s/ John F. Davis, III
----------------------
John F. Davis, III,
President and Chief
Executive Officer
May 14, 1998 /s/ Jerome L. Galant
--------------------
Jerome L. Galant
Chief Financial Officer
(principal financial officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 - FINANCIAL DATA SCHEDULE