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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 SEPTEMBER 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 ___
--------------------
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 November
12, 1997 was 10,179,712.
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PEGASUS SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements PAGE
----
<S> <C>
a) Consolidated Balance Sheets
as of September 30, 1997, and December 31, 1996 .............................. 3
b) Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 1997 and 1996............... 4
c) Consolidated Statements of Cash Flows
for the Nine Months Ended September 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 .................................................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................. 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 15
Item 2. Changes in Securities and Use of Proceeds.............................................. 15
Item 3. Defaults Upon Senior Securities........................................................ 15
Item 4. Submission of Matters to a Vote of Security Holders.................................... 15
Item 5. Other Information...................................................................... 15
Item 6. Exhibits and Reports on Form 8-K....................................................... 16
SIGNATURES................................................................................................ 17
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEGASUS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
ASSETS ------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 39,222,651 $ 1,796,311
Restricted cash 1,221,677 690,206
Short-term investments -- 2,705,076
Accounts receivable, net of allowance for doubtful
accounts of $54,463 and $44,805, respectively 1,615,830 924,951
Accounts receivable from affiliates 1,301,884 754,405
Other current assets 667,474 190,976
------------ ------------
Total current assets 44,029,516 7,061,925
Software development costs, net 1,140,566 2,113,758
Property and equipment, net 2,674,894 3,001,012
Goodwill, net of accumulated amortization of
$272,597 and $178,943, respectively 1,592,118 1,685,772
Other noncurrent assets 453,071 29,269
------------ ------------
Total assets $ 49,890,165 $ 13,891,736
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 3,748,661 $ 2,574,186
Accounts payable to affiliates 83,604 115,049
Unearned income 1,077,685 470,588
Current portion of capital lease obligations 1,048,689 1,048,238
Current portion of notes payable to affiliates -- 785,517
------------ ------------
Total current liabilities 5,958,639 4,993,578
Capital lease obligations, net of current portion 937,470 1,749,899
Notes payable to affiliates, net of current portion -- 4,603,568
Unearned income 117,647 470,588
Other noncurrent liabilities 137,637 119,709
Shareholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares authorized;
zero and 1,538,463 shares issued and outstanding,
respectively -- 15,385
Common stock, $.01 par value; 100,000,000 shares authorized;
10,296,196 and 5,307,733 shares issued, respectively 102,962 53,077
Additional paid-in capital 57,944,711 16,968,364
Unearned compensation (642,942) (485,937)
Accumulated deficit (14,639,621) (14,570,157)
Less treasury stock (116,484 shares, at cost) (26,338) (26,338)
------------ ------------
Total shareholders' equity 42,738,772 1,954,394
------------ ------------
Total liabilities and shareholders' equity $ 49,890,165 $ 13,891,736
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
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PEGASUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues
Shareholder $ 4,427,522 $ 2,986,309 $ 11,500,913 $ 9,131,927
Nonshareholder 1,350,624 989,788 3,735,053 2,652,409
------------ ------------ ------------ ------------
Total revenues 5,778,146 3,976,097 15,235,966 11,784,336
Cost of services 2,113,973 1,564,209 5,471,125 4,684,762
Research and development 585,834 398,746 1,818,074 1,590,894
General and administrative 939,779 913,511 2,611,564 2,725,350
Marketing and promotion 1,068,263 647,143 2,986,413 1,984,260
Depreciation and amortization 862,784 768,474 2,290,768 2,601,593
------------ ------------ ------------ ------------
Operating income (loss) 207,513 (315,986) 58,022 (1,802,523)
Other (income) expense:
Interest expense 128,398 221,856 543,832 621,526
Interest income (342,507) (55,037) (442,346) (59,043)
------------ ------------ ------------ ------------
Income (loss) before income taxes and minority interest 421,622 (482,805) (43,464) (2,365,006)
Income taxes 10,000 -- 26,000 --
------------ ------------ ------------ ------------
Income (loss) before minority interest 411,622 (482,805) (69,464) (2,365,006)
Minority interest -- -- -- (105,563)
============ ============ ============ ============
Net income (loss) $ 411,622 $ (482,805) $ (69,464) $ (2,470,569)
============ ============ ============ ============
Pro forma data (Notes 4 and 5):
Pro forma net income (loss) per share $ 0.04 $ (0.06) $ (0.01) $ (0.38)
============ ============ ============ ============
Weighted average shares outstanding used in the
pro forma net income (loss) per share calculation 9,658,012 7,622,273 7,417,212 6,565,988
============ ============ ============ ============
Supplemental pro forma net income (loss) per share $ 0.05 $ (0.05) $ 0.03 $ (0.31)
============ ============ ============ ============
Weighted average shares outstanding used in the
supplemental pro forma net income (loss) per
share calculation 10,058,012 8,022,273 8,642,503 6,965,988
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
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PEGASUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (69,464) $ (2,470,569)
Adjustments to reconcile net loss to net cash provided by operating activities:
Minority interest -- 105,563
Accrued interest reclassified to notes payable 58,049 68,858
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 2,290,768 2,601,593
Recognition of stock option compensation 122,342 30,789
Changes in assets and liabilities:
Restricted cash (531,471) (166,694)
Accounts receivable (690,879) (251,977)
Accounts receivable from affiliates (547,479) (604,497)
Other current and noncurrent assets (662,300) (77,348)
Accounts payable and accrued liabilities 1,174,475 524,559
Accounts payable to affiliates (31,445) (204,188)
Unearned income 254,156 (42,871)
Other noncurrent liabilities 17,928 97,319
------------ ------------
Net cash provided by operating activities 1,384,680 181,823
------------ ------------
Cash flows from investing activities:
Purchase of software, property and equipment (818,661) (400,821)
Proceeds from sale of software, property and equipment -- 132,328
Purchase of marketable securities (1,476,691) --
Proceeds from sale of marketable securities 4,181,767 --
------------ ------------
Net cash provided by (used in) investing activities 1,886,415 (268,493)
------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of stock 40,493,500 7,500,005
Purchase of minority interest -- (2,000,000)
Proceeds from stock subscription -- 1,900
Repayment of notes payable to affiliates (5,447,134) (235,000)
Purchase of treasury stock -- (25,656)
Proceeds from line of credit -- 175,000
Repayment of line of credit -- (175,000)
Proceeds from capital leases 3,913 90,899
Repayment of capital leases (895,034) (707,755)
------------ ------------
Net cash provided by financing activities 34,155,245 4,624,393
------------ ------------
Net increase in cash and cash equivalents 37,426,340 4,537,723
Cash and cash equivalents, beginning of period 1,796,311 93,831
------------ ------------
Cash and cash equivalents, end of period $ 39,222,651 $ 4,631,554
============ ============
Supplemental schedule of noncash investing and financing activities:
Acquisition of equipment under capital leases $ 79,144 $ 706,594
============ ============
Issuance of common stock for acquisitions $ -- $ 278,622
============ ============
Common stock warrants issued in exchange for customer contract asset $ 238,000 $ --
============ ============
</TABLE>
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
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in a Registration Statement on Form S-1 (File No. 333-28595) that was
declared effective on August 6, 1997. All outstanding shares of Series A
preferred stock were converted on a one-for-one basis to common stock
concurrent with the Company's IPO in August 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 shareholders 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. PRO FORMA NET INCOME (LOSS) PER SHARE
Historical income (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)
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all shares of Series A preferred stock had been converted to shares of
common stock as of date of issuance of the preferred stock (see Note 1),
and (ii) all shares, options and warrants issued during the twelve months
prior to 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 income (loss) per share for 1997 has been computed in
accordance with Accounting Principles Board Opinion No. 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 1). The Company has net income for the three months
ended September 30, 1997. 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 pro forma net income
per share calculation for the three months ended September 30, 1997,
since they are dilutive. The Company has a net loss for the nine months
ended September 30, 1997. No options or warrants outstanding at September
30, 1997 were included in this pro forma net loss per share calculation
for the nine months ended September 30, 1997, 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 income (loss) per share, plus the number of shares
(400,000) that the Company would need to issue to repay $5.2 million of
indebtedness outstanding under notes payable to certain shareholders of
the Company and certain capital lease obligations which were repaid
during the third quarter of 1997. For purposes of computing supplemental
pro forma net income (loss) per share, the net income (loss) for the
three months ended September 30, 1997 and 1996 was reduced by $63,972,
and the net loss for the nine months ended September 30, 1997 and 1996
was reduced by $327,708, representing elimination of the related interest
expense on such notes payable and capital lease obligations.
Additionally, the Company has supplemental net income for the three and
nine months ended September 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 and nine months
ended September 30, 1997, since they are dilutive.
6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (FAS 128), was issued. FAS 128 specifies the
computation, presentation and
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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.
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.
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.
7. 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 associated
five year contract period.
8. STOCK OPTIONS
The Company's 1997 stock option plan was approved by the board of
directors and shareholders in March 1997 and authorizes the issuance of
up to 333,333 shares of the Company's common stock in the form of
incentive stock options and nonqualified stock options to employees of
the Company. The board of directors amended the 1997 stock option plan in
September 1997, subject to shareholder approval which is expected to
occur
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at the 1998 annual shareholders meeting, to provide for the annual grant
to the Company's non-employee directors of options to purchase the
Company's common stock. In September 1997, options to purchase an
aggregate of 203,000 shares of common stock at an exercise price of 85%
of the closing price of $18.00 as of September 22, 1997 ($15.30) were
issued under such plan to executives and employees. Also, options to
purchase an aggregate of 16,000 shares of common stock at the same
exercise price of $15.30 were issued under such plan to non-employee
directors. The executive and employee options will become exercisable
over a period of four years. The non-employee director options will
become exercisable at the 1998 annual shareholders meeting, which is a
period of approximately eight months from the date of grant. The Company
has accounted for these options using the intrinsic value method
prescribed in APB 25. Accordingly, unearned compensation related to the
non-employee directors options is being recognized ratably over the eight
months.
9. STOCK PURCHASE PLAN
In September 1997, the Company's Board of Directors adopted the Pegasus
Systems, Inc. 1997 Employee Stock Purchase Plan subject to shareholder
approval which is expected to occur at the 1998 annual meeting of the
Company's shareholders. The Company has reserved 500,000 shares of its
common stock for purchase by its employees pursuant to the terms of this
plan. Eligible participating employees of the Company may elect to have
an amount up to, but not in excess of, 10% of their regular salary or
wages withheld for the purpose of purchasing the Company's common stock.
Under the 1997 Employee Stock Purchase Plan, an eligible employee who
participates in the Plan will be granted an option at the beginning of
each year of the Plan (the "Offering Commencement Date") to purchase at
the end of that year (the "Offering Termination Date") shares of common
stock using the amounts that have accumulated from the employee's payroll
deductions made during that year at a price that is 85% of the closing
price of the common stock on the Nasdaq National Market or any other
national securities exchange on the Offering Commencement Date or the
Offering Termination Date, whichever is lower.
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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. This 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 SEPTEMBER 30, 1997 AND 1996
Net revenues. The Company's revenues for the three months ended
September 30, 1997 increased to $5.8 million from $ 4.0 million for the three
months ended September 30, 1996, an increase of 45.3%. This increase in revenues
was primarily driven by higher transactions levels for all of the Company's
services including THISCO, HCC and TravelWeb.
THISCO revenues increased as a result of a 32.0% increase in net reservations
made in the three months ended September 30,1997 as compared to the three months
ended September 30, 1996. HCC revenues grew as a result of a 51.5% increase in
hotel commission transactions processed during the three months ended September
30,1997 as compared to the three months ended September 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
September 30,1997 because of an increase in overall hotel average daily rates.
Revenues contributed by the TravelWeb service increased by 138% in the three
months ended September 30,1997 as compared to the three months ended September
30,1996. This increase resulted primarily from an increase in the number of
hotel reservations made through the Company's site on the Internet
(www.travelweb.com) as well as reservations made by other sites that use the
Company's NetBooker service.
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Cost of Services. Cost of services increased by $550,000, or 35.1%, to
$2.1 million in the three months ended September 30,1997 from $1.6 million in
the three months ended September 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
$187,000, or 46.9%, to $586,000 in the three months ended September 30,1997.
This increase was primarily due to additional work on the TravelWeb service.
General and administrative expenses. General and administrative
expenses increased $26,000, or 2.9%, to $940,000 in the three months ended
September 30, 1997 from $914,000 in the three months ended September 30, 1996.
Marketing and promotion expenses. Marketing and promotion expenses
increased $421,000, or 65.1%, to $1.1 million in the three months ended
September 30,1997 from $647,000 in the three months ended September 30, 1996.
Marketing and promotion expenses grew primarily due to the addition of Sales and
Marketing staff, 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
increased $94,000, or 12.2%, to $863,000 in the three months ended September 30,
1997 from $768,000 in the three months ended September 30, 1996. This increase
was primarily due to a write-down of $139,000 in the carrying value of certain
computer equipment being leased by the Company.
Interest expense. Interest expense decreased $93,000, or 42.1%, to
$128,000 in the three months ended September 30, 1997. Interest expense
represents interest accrued on promissory notes payable to certain shareholders
of the Company and payments made under capital equipment leases. The Company
repaid all of these promissory notes on August 15, 1997 using some of the
proceeds from its initial public offering of common stock effected in August
1997.
Interest income. During the three months ended September 30, 1997 the
Company realized $343,000 in interest income as a result of short term
investments of operating cash balances.
NINE MONTHS ENDED SEPTEMBER 30,1997 AND 1996
Net revenues. The Company's revenues for the nine months ended
September 30, 1997 increased to $15.2 million from $11.8 million for the nine
months ended September 30, 1996, an increase of 29.3%. This increase in revenues
was primarily driven by higher transactions levels for all of the Company's
services including THISCO, HCC and TravelWeb.
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THISCO revenues increased as a result of a 25.8% increase in net reservations
made in the nine months ended September 30,1997 as compared to the nine months
ended September 30, 1996. HCC revenues grew as a result of a 31.6% increase in
hotel commission transactions processed during the nine months ended September
30,1997 as compared to the nine months ended September 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 nine months ended
September 30,1997 because of an increase in overall hotel average daily rates.
Revenues contributed by the TravelWeb service decreased by 18.0% in the nine
months ended September 30,1997 as compared to the nine months ended September
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 $786,000, or 16.8%, to
$5.5 million in the nine months ended September 30,1997 from $4.7 million in the
nine months ended September 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
$227,000, or 14.3%, to $1.8 million in the nine months ended September 30,1997
from $1.6 million in the nine months ended September 30, 1996. After eliminating
the effect of the one-time charges taken in the nine months ended September 30,
1996 for research and development expenses relating to the acquisition of HCC,
research and development expenses increased $472,000, or 25.9%, to $1.8 million
in the nine months ended September 30, 1997. This increase was primarily due to
additional work on the TravelWeb service.
General and administrative expenses. General and administrative
expenses decreased $114,000, or 4.2%, to $2.6 million in the nine months ended
September 30, 1997 from $2.7 million in the nine months ended September 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 expenses. Marketing and promotion expenses
increased $1.0 million, or 50.6%, to $3.0 million in the nine months ended
September 30,1997 from $2.0 million in the nine months ended September 30, 1996.
Marketing and promotion expenses grew primarily due to the addition of Sales and
Marketing staff, 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 $311,000, or 12.0%, to $2.3 million in the nine months ended September
30, 1997 from $2.6 million in the nine months ended September 30, 1996. This
decrease was primarily due to the completion in 1996 of the amortization of
previously capitalized software.
13
<PAGE> 14
Interest expense. Interest expense decreased $78,000, or 12.5%, to
$544,000 in the nine months ended September 30, 1997. The expense reflects
interest accrued on promissory notes payable to certain shareholders of the
Company and payments made under capital equipment leases. The Company repaid all
of these promissory notes in August 1997 using some of the proceeds from its
initial public offering of common stock in August.
Interest income. During the nine months ended September 30, 1997 the
Company realized $442,000 in interest income as a result of short term
investment of operating cash balances, including the proceeds of its initial
public offering of common stock in August.
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 shareholders
and capital lease financing.
Cash provided by operating activities was $1.4 million for the nine months ended
September 30, 1997 compared to $182,000 for the same period in 1996.
The Company completed an initial public offering of its common stock in August
1997, raising proceeds, net of offering expenses, of approximately $40.5
million. Approximately $5.2 million of these proceeds were used to repay notes
payable to shareholders and to repay certain lease obligations. The remainder of
the proceeds have been invested in short-term marketable securities.
Net cash used in investing activities for the purchase and sale of software,
furniture, and equipment amounted to $819,000 in the nine months ended September
30, 1997 compared to $268,000 for the same period in 1996. The Company has
acquired equipment under capital leases of $79,000 for the nine months ended
September 30, 1997 compared to $707,000 for the nine months ended September 30,
1996.
The Company's principal sources of liquidity at September 30,1997 included cash
and cash equivalents of $39.2 million and restricted cash of $1.2 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
14
<PAGE> 15
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - On August 6, 1997, the
Company issued 3,450,000 shares in an IPO. Proceeds net of expenses totaled
$40.5 million. In the third quarter of 1997, $5.2 million of the proceeds were
used to repay notes payable and buyout certain leases. The remainder of the
proceeds have been invested in short-term marketable securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Not applicable
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS - Not applicable
ITEM 5. OTHER INFORMATION - On September 23, 1997, the Company's board of
directors (the "Board"), subject to stockholder approval which is expected to
occur at the 1998 annual stockholders meeting, amended the Company's 1997 Stock
Option Plan to provide for the annual grant to the Company's non-employee
directors of options to purchase the Company's common stock. In addition to the
other grants of options to purchase the Company's common stock under the 1997
Stock Option Plan, the Amended 1997 Stock Option Plan authorizes the grant to
each non-employee director, on each date of election or re-election as a Board
member, of a nonstatutory stock option to purchase 2,000 shares of common stock
at an exercise price of 85% of the fair market value of the shares at the end of
the business day immediately preceding the date of grant (a "Non-Employee
Director Grant") with such option fully vesting one year from the date of grant.
Furthermore, each non-employee director serving for more than a one-year term
will receive on the date of each annual meeting of stockholders preceding each
additional year of office a Non-Employee Director Grant which vests one year
from the date of grant. As of September 23, 1997, each incumbent non-employee
director of the Company received a Non-Employee Director Grant, and any
non-employee director who takes office between September 23, 1997 and the 1998
annual stockholders meeting will receive a Non-Employee Director Grant which
vests on the later of (i) the date of the Company's annual stockholder meeting
during 1998 or (ii) six (6) months following the date of the grant. If the
amendment to the 1997 Stock Option Plan is not approved by the Company's
stockholders, the options granted to the non-employee directors as described
herein will terminate.
In addition, on September 23, 1997 the Board adopted, subject to
stockholder approval which is expected to occur at the 1998 annual stockholders
meeting, the Company's 1997 Employee Stock Purchase Plan. Under the 1997
Employee Stock Purchase Plan, an eligible employee who participates in the Plan
will be granted an option at the beginning of each year of the Plan (the
"Offering Commencement Date") to purchase at the end of that year (the "Offering
Termination Date") shares of common stock using the amounts that have
accumulated from the employee's payroll deductions made during that year at a
price that is 85% of the closing price of the common stock on the Nasdaq
National Market or any other national securities exchange on the Offering
Commencement Date or the Offering Termination Date, whichever is lower. Under
the
15
<PAGE> 16
terms of the 1997 Employee Stock Purchase Plan, if such Plan is not approved
by the Company's stockholders, it would be deemed not to have become effective
and all amounts held in participating employees' accounts would be refunded to
such employees, with interest.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT 10.1 - AMENDED 1997 STOCK OPTION PLAN
(INCORPORATED BY REFERENCE TO EXHIBIT
99.1 TO THE REGISTRATION STATEMENT ON FORM
S-8 (REG. NO. 333-40033) FILED ON NOVEMBER
12, 1997, WITH RESPECT TO SUCH PLAN).
EXHIBIT 10.2 - 1997 EMPLOYEE STOCK PURCHASE PLAN
(INCORPORATED BY REFERENCE TO EXHIBIT 99.1
TO THE REGISTRATION STATEMENT ON FORM S-8
(REG. NO. 333-40035) FILED ON NOVEMBER 12,
1997, WITH RESPECT TO SUCH PLAN).
EXHIBIT 11 - STATEMENT REGARDING COMPUTATION OF PER
SHARE INCOME (LOSS).
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
(b) REPORTS ON FORM 8-K - Not applicable
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEGASUS SYSTEMS, INC.
November 12, 1997 /s/ JOHN F. DAVIS, III
----------------------
John F. Davis, III,
President and Chief
Executive Officer
November 12, 1997 /s/ JEROME L. GALANT
----------------------
Jerome L. Galant
Chief Financial Officer
(principal financial officer)
17
<PAGE> 18
EXHIBIT INDEX
Exhibit
Number Description of Exhibits
------ -----------------------
10.1 - AMENDED 1997 STOCK OPTION PLAN (INCORPORATED
BY REFERENCE TO EXHIBIT 99.1 TO THE
REGISTRATION STATEMENT ON FORM S-8 (REG. NO.
333-40033) FILED ON NOVEMBER 12, 1997, WITH
RESPECT TO SUCH PLAN).
10.2 - 1997 EMPLOYEE STOCK PURCHASE PLAN
(INCORPORATED BY REFERENCE TO EXHIBIT 99.1 TO
THE REGISTRATION STATEMENT ON FORM S-8 (REG.
NO. 333-40035) FILED ON NOVEMBER 12, 1997,
WITH RESPECT TO SUCH PLAN).
11 - STATEMENT REGARDING COMPUTATION OF PER SHARE
INCOME (LOSS).
27 - FINANCIAL DATA SCHEDULE
18
<PAGE> 1
EXHIBIT 11 - COMPUTATION OF PER SHARE INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTER QUARTER 9 MONTHS 9 MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
PRO FORMA NET INCOME (LOSS) PER SHARE:
Net income (loss) $ 412 $ (483) $ (69) $(2,471)
Weighted average common shares
outstanding (excluding options and
common share equivalents) 7,254 5,283 5,879 5,230
Assumed conversion of series A
preferred stock into common stock
on date of issuance 1,538 1,538 1,538 535
Application of SAB 83 for preferred
stock, common stock, stock options
and warrants issued subsequent to
June 5, 1996 -- 801 -- 801
Additional weighted average shares from
assumed exercise of dilutive stock options
and warrants, net of shares assumed to be
repurchased with exercise proceeds 866 -- -- --
------- ------- ------- -------
Pro forma weighted average number of
common shares and common share
equivalents outstanding 9,658 7,622 7,417 6,566
======= ======= ======= =======
Pro forma net income (loss) per common share $ 0.04 $ (0.06) $ (0.01) $ (0.38)
======= ======= ======= =======
SUPPLEMENTAL PRO FORMA NET INCOME
(LOSS) PER SHARE
Net income (loss) $ 412 $ (483) $ (69) $(2,471)
Pro forma interest expense adjustment
reflecting repurchase of debt with
proceeds from offering $ 64 $ 64 $ 328 $ 328
------- ------- ------- -------
Supplemental pro forma net income (loss) $ 476 $ (419) $ 259 $(2,143)
======= ======= ======= =======
Weighted average common shares
outstanding (excluding options and
common share equivalents) 7,254 5,283 5,879 5,230
Assumed conversion of series A
preferred stock into common stock
on date of issuance 1,538 1,538 1,538 535
Application of SAB 83 for preferred
stock, common stock, stock options
and warrants issued subsequent to
June 5, 1996 -- 801 -- 801
Additional weighted average shares from
assumed exercise of dilutive stock options
and warrants, net of shares assumed to be
repurchased with exercise proceeds 866 -- 826 --
Assumed issuance of shares needed to
repurchase debt of $5.2 million 400 400 400 400
------- ------- ------- -------
Supplemental pro forma weighted average number
of common shares and common share
equivalents outstanding 10,058 8,022 8,643 6,966
======= ======= ======= =======
Supplemental pro forma net income (loss) per
common share $ 0.05 $.(0.05) $ 0.03 $ (0.31)
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM COMPANY'S
FORM 10Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997 FILED NOVEMBER 13, 1997 WITH
SECURITIES AND EXCHANGE COMMISSION AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 40,444
<SECURITIES> 0
<RECEIVABLES> 2,972
<ALLOWANCES> 54
<INVENTORY> 0
<CURRENT-ASSETS> 44,030
<PP&E> 15,320
<DEPRECIATION> 11,505
<TOTAL-ASSETS> 49,890
<CURRENT-LIABILITIES> 5,959
<BONDS> 937
0
0
<COMMON> 103
<OTHER-SE> 42,636
<TOTAL-LIABILITY-AND-EQUITY> 49,890
<SALES> 0
<TOTAL-REVENUES> 15,236
<CGS> 0
<TOTAL-COSTS> 5,471
<OTHER-EXPENSES> 1,818
<LOSS-PROVISION> 56
<INTEREST-EXPENSE> 544
<INCOME-PRETAX> (43)
<INCOME-TAX> 26
<INCOME-CONTINUING> (69)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (69)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
