-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GmuUdGdgsip9uy9uVLrKUI3hCxJNmbuhfTE2fUTxOWL9OeRCrOUz+Bf3K74bIIIk p1m8NS3i0/KWlaUQGEdKKw== 0001029869-97-000991.txt : 19970815 0001029869-97-000991.hdr.sgml : 19970815 ACCESSION NUMBER: 0001029869-97-000991 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEGASYSTEMS INC CENTRAL INDEX KEY: 0001013857 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 042787865 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11859 FILM NUMBER: 97662712 BUSINESS ADDRESS: STREET 1: 101 MAIN ST CITY: CAMBRIDGE STATE: MA ZIP: 02142-1590 BUSINESS PHONE: 6173749600 MAIL ADDRESS: STREET 1: 101 MAIN ST CITY: CAMBRIDGE STATE: MA ZIP: 02142-1590 10-Q 1 FORM 10-Q QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [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_____________ Commission File Number: 1-11859 PEGASYSTEMS INC. (Exact name of Registrant as specified in its charter) Massachusetts 04-2787865 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization ) 101 Main Street Cambridge, MA 02142-1590 (Address of principal executive offices) (zip code) (617) 374-9600 (Registrant's telephone number including area code) 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 --- ---- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. There were 28,487,600 shares of the Registrant's common stock, $.01 par value per share, outstanding on June 30, 1997. PEGASYSTEMS INC. AND SUBSIDIARY Index to Form 10-Q Part I - Financial Information Page ---- Item 1. Financial Statements Condensed Consolidated Balance Sheets at December 31, 1996 3 and June 30, 1997 Condensed Consolidated Statements of Income for the three 4 and six months ended: June 30, 1996 and June 30, 1997 Condensed Consolidated Statements of Cash Flows for the six 5 months ended: June 30, 1996 and June 30, 1997 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial 7 Condition and Results of Operations Part II - Other Information Item 1. Legal Proceedings 11 Item 2. Changes in Securities 11 Item 3. Defaults upon Senior Securities 11 Item 4. Submission of Matters to a Vote of Security Holders 11 Item 5. Other Information 11 Item 6. Exhibits and Reports on Form 8-K 11 SIGNATURES 12 Form 10-Q Page 3 of 12 PEGASYSTEMS INC. Condensed Consolidated Balance Sheets (in thousands, except share-related amounts) (Unaudited)
December 31, June 30, 1996 1997 -------- --------- Assets Current assets: Cash and cash equivalents $24,201 $ 72,511 Trade and installment accounts receivable, net of allowance for doubtful accounts of $939 at December 31, 1996 and $671 at June 30, 1997 14,582 22,744 Prepaid expenses and other assets 1,235 1,620 --------- ---------- Total current assets 40,018 96,875 Long-term license installments, net 23,802 27,604 Equipment and improvements, net 3,035 3,832 --------- ---------- Total assets $66,855 $128,311 ========= ========== Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accrued expenses $ 2,697 $ 3,250 Deferred revenue 53 2,176 Deferred income taxes 2,904 3,765 --------- ---------- Total current liabilities 5,654 9,191 --------- ---------- Deferred income taxes 8,816 10,406 --------- ---------- Stockholders' Equity: Preferred stock, $.01 par value, 1,000,000 shares authorized; no shares issued and outstanding -- -- Common stock, $.01 par value, 45,000,000 shares authorized; 26,392,200 shares and 28,487,600 shares issued and outstanding at December 31, 1996 and June 30, 1997, respectively 264 287 Additional paid-in capital 30,206 82,584 Deferred compensation (73) (63) Retained earnings 22,022 26,021 Cumulative foreign currency translation adjustment (34) (115) --------- ---------- Total stockholders' equity 52,385 108,714 --------- ---------- Total liabilities and stockholders' equity $66,855 $128,311 ========= ==========
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Form 10-Q Page 4 of 12 PEGASYSTEMS INC. Condensed Consolidated Statements of Income (in thousands, except per share amounts) (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, 1996 1997 1996 1997 -------- -------- -------- -------- Revenue Software license $3,874 $ 8,983 $ 6,394 $15,462 Services 2,575 3,250 4,996 6,004 -------- -------- -------- -------- Total revenue 6,449 12,233 11,390 21,466 -------- -------- -------- -------- Cost of revenue Cost of software license 118 10 236 20 Cost of services 1,584 2,346 2,989 4,365 -------- -------- -------- -------- Total cost of revenue 1,702 2,356 3,225 4,385 -------- -------- -------- -------- Gross Profit 4,747 9,877 8,165 17,081 Operating expenses Research and development 1,918 3,015 3,522 5,426 Selling and marketing 1,282 4,081 2,256 6,590 General and administrative 399 595 788 1,158 -------- -------- -------- -------- Total operating expenses 3,599 7,691 6,566 13,174 -------- -------- -------- -------- Income from operations 1,148 2,186 1,599 3,907 License interest income 378 421 746 796 Other interest income 11 998 23 1,747 Interest expense (30) -- (69) -- -------- -------- -------- -------- Income before provision for income taxes 1,507 3,605 2,299 6,450 Provision for income taxes 588 1,370 899 2,451 -------- -------- -------- -------- Net income $ 919 $ 2,235 $ 1,400 $ 3,999 ======== ======== ======== ======== Net income per common and common equivalent share $ 0.04 $ 0.08 $ 0.06 $ 0.14 ======== ======== ======== ======== Weighted average number of common and common equivalent shares outstanding 25,359 29,674 25,432 29,413 ======== ======== ======== ========
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Form 10-Q Page 5 of 12 PEGASYSTEMS INC. Condensed Consolidated Statements of Cash Flows (in thousands) (Unaudited)
Six Months Ended June 30, 1996 1997 --------- -------- Operating Activities Net income $ 1,400 $ 3,999 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for deferred income taxes 686 2,451 Depreciation and amortization 756 783 Changes in operating assets and liabilities: Increase in trade and installment accounts receivable (2,248) (11,963) Decrease (increase) in prepaid expenses and other assets 2 (385) Increase (decrease) in accounts payable and accrued expenses (24) 553 Increase in deferred revenue 409 2,123 -------- --------- Net cash provided (used) by operating activities 981 (2,439) -------- --------- Investing Activities Purchase of equipment and improvements (529) (1,571) -------- --------- Net cash used by investing activities (529) (1,571) -------- --------- Financing Activities Repayments of long-term debt (391) -- Issuance of common stock, net -- 52,067 Exercise of stock options 1 334 -------- --------- Net cash provided (used) by financing activities (390) 52,401 Effect of exchange rate on cash (16) (81) -------- --------- Net increase in cash and equivalents 46 48,310 Cash and cash equivalents at beginning of period 511 24,201 -------- --------- Cash and cash equivalents at end of period $ 557 $ 72,511 ======== =========
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Form 10-Q Page 6 of 12 PEGASYSTEMS INC. Notes to Condensed Consolidated Interim Financial Statements June 30, 1997 (Unaudited) Note A - Basis of Presentation The accompanying unaudited condensed consolidated financial statements of Pegasystems Inc. (the "Company") presented herein have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six-month periods ended June 30, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. The Company suggests that these interim condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 1996, included in the Company's Annual Report to Stockholders filed with the Securities and Exchange Commission. Note B - Net Income Per Share Net income per common share is based on the weighted average number of common shares and common share equivalents. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share," which is effective for the Company beginning with its December 31, 1997 annual report. The Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. There is no change to either primary or fully diluted net income per share for the quarters ended June 30, 1996 and June 30, 1997 using the new method. Form 10-Q Page 7 of 12 PEGASYSTEMS INC. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Three and Six Months Ended June 30, 1997 Compared to Three and Six Months Ended June 30, 1996 Revenue Total revenue for the three months ended June 30, 1997 (the "1997 Three Month Period") increased 89.7% to $12.2 million from $6.4 million for the three months ended June 30, 1996 (the "1996 Three Month Period"). Total revenue for the six months ended June 30, 1997 (the "1997 Six Month Period") increased 88.5% to $21.5 million from $11.4 million for the six months ended June 30, 1996 (the "1996 Six Month Period"). These increases were primarily due to an increase in software license revenue. Software license revenue for the 1997 Three Month Period increased 131.9% to $9.0 million from $3.9 million for the 1996 Three Month Period. Software license revenue for the 1997 Six Month Period increased 141.8% to $15.5 million from $6.4 million for the 1996 Six Month Period. The increase in software license revenue was primarily attributable to software license acceptances by new customers, software license agreement renewals, and extended software usage by existing customers. Services revenue for the 1997 Three Month Period increased 26.2% to $3.3 million from $2.6 million for the 1996 Three Month Period. Services revenue for the 1997 Six Month Period increased 20.2% to $6.0 million from $5.0 million for the 1996 Six Month Period. The increase in services revenue was primarily attributable to increased implementation services for new customers, additional consulting services provided to existing customers, and to a lesser extent, increased maintenance revenue from a larger installed product base. Cost of Revenue Cost of software license for the 1997 Three Month Period decreased 91.7% to $0.01 million from $0.1 million for the 1996 Three Month Period, and decreased as a percentage of total revenue from 1.8% for the 1996 Three Month Period to 0.1% for the 1997 Three Month Period. As a percentage of software license revenue, cost of software license decreased from 3.1% for the 1996 Three Month Period to 0.1% for the 1997 Three Month Period. As a percentage of software license revenue, cost of software license decreased from 3.7% for the 1996 Six Month Period to 0.1% for the 1997 Six Month Period. Software development costs were fully amortized during 1996 and no software development costs were capitalized during the 1997 Three or Six Month Period. Cost of services for the 1997 Three Month Period increased 48.2% to $2.3 million from $1.6 million for the 1996 Three Month Period. Cost of services for the 1997 Six Month Period increased 46.0% to $4.4 million from $3.0 million for the 1996 Six Month Period. Cost of services as a percentage of total revenue decreased from 24.6% for the 1996 Three Month Period to 19.2% for the 1997 Three Month Period. This decrease was due to the growth in the Company's total revenue. Cost of services as a percentage of total revenue decreased from 26.3% for the 1996 Six Month Period to 20.3% for the 1997 Six Month Period. Cost of services as a percentage of services revenue increased from 61.5% for the 1996 Three Month Period to 72.2% for the 1997 Three Month Period. Cost of services as a percentage of services revenue increased from 59.8% for the 1996 Six Month Period to 72.7% for the 1997 Six Month Period. These increases were both primarily due to the buildup of new staff, primarily in the Company's regional offices, and use of the Company's service personnel to build templates which can be reused in other customer applications. Form 10-Q Page 8 of 12 Operating Expenses Research and development expenses for the 1997 Three Month Period increased 57.2% to $3.0 million from $1.9 million for the 1996 Three Month Period. Research and development expenses for the 1997 Six Month Period increased 54.0% to $5.4 million from $3.5 million for the 1996 Six Month Period. The level of increase in research and development expenses reflects the Company's strategy of leveraging existing product functionality by shifting its historical investment in research and development to a more sales-oriented focus. As a percentage of total revenue, research and development expenses declined from 29.8% for the 1996 Three Month Period to 24.7% for the 1997 Three Month Period. As a percentage of total revenue, research and development expenses declined from 30.9% for the 1996 Six Month Period to 25.3% for the 1997 Six Month Period. Both of these declines were due to the growth in the Company's total revenue. Selling and marketing expenses for the 1997 Three Month Period increased 218.4% to $4.1 million from $1.3 million for the 1996 Three Month Period. As a percentage of total revenue, selling and marketing expenses increased from 19.9% for the 1996 Three Month Period to 33.4% for the 1997 Three Month Period. Selling and marketing expenses for the 1997 Six Month Period increased 192.3% to $6.6 million from $2.3 million for the 1996 Six Month Period. As a percentage of total revenue, selling and marketing expenses increased from 19.8% for the 1996 Six Month Period to 30.7% for the 1997 Six Month Period. These increases were primarily attributable to the hiring of additional direct sales and marketing personnel, commission payments on new sales increased investment in marketing support activities and materials, additional trade show activities, preparations for the Company's User Meetings, and the opening of additional regional offices. General and administrative expenses for the 1997 Three Month Period increased 49.2% to $0.6 million from $0.4 million for the 1996 Three Month Period. General and administrative expenses for the 1997 Six Month Period increased 47.2% to $1.2 million from $0.8 million for the 1996 Six Month Period. These increases were due to increased investment in the infrastructure needed to support the Company's accelerated growth. General and administrative expenses declined as a percentage of total revenue from 6.2% for the 1996 Three Month Period to 4.9% for the 1997 Three Month Period and from 6.9% for the 1996 Six Month Period to 5.4% for the 1997 Six Month Period due to the growth in the Company's total revenue. License Interest Income License interest income which is the portion of all license fees due under software license agreements which was not recognized upon product acceptance or license renewal increased 11.3% from $0.38 million for the 1996 Three Month Period to $0.42 million for the 1997 Three Month Period. License interest income increased 6.6% from $0.75 million for the 1996 Six Month Period to $0.80 million for the 1997 Six Month Period due to the increase in the Company's installed customer base. Provision for Income Taxes The provisions for federal, state and foreign taxes were $0.6 million and $1.4 million for the 1996 Three Month Period and the 1997 Three Month Period, respectively. The provisions for federal, state and foreign taxes were $0.9 million and $2.5 million for the 1996 Six Month Period and the 1997 Six Month Period, respectively. The effective tax rate decreased from 39.0% for 1996 Three and Six Month Periods to 38.0% for the 1997 Three and Six Month Periods. These decreases were due to the reinstatement by the Internal Revenue Service of the research and development tax credit in May 1996 and tax benefits to the Company following employee stock option exercises. Liquidity and Capital Resources Since its inception, the Company had funded its operations primarily through cash flow from operations and bank borrowings. In July 1996, the Company issued and sold 2.7 million shares of Common Stock in connection with its initial public offering. Proceeds to the Company from such offering were approximately $30.1 million. In Form 10-Q Page 9 of 12 January 1997, the Company issued and sold 1.8 million shares of Common Stock in connection with a second public offering. Proceeds to the Company from such offering were approximately $52.4 million. At June 30, 1997, the Company had cash and cash equivalents of approximately $72.5 million and working capital of approximately $87.7 million. The Company's approach of charging license fees payable in installments over the term of its licenses has historically deferred the receipt of cash and, prior to its initial public offering, had limited the availability of working capital. Net cash used by operating activities for the 1997 Six Month period was $2.4 million, primarily due to an increase in accounts receivable, partially offset by an increase in deferred revenue and accounts payable and accrued expenses. Net cash used by investing activities was $1.6 million during the 1997 Six Month Period due to the purchase of property and equipment consisting mainly of computer hardware and software and furniture and fixtures to support the Company's growing employee base. Net cash provided by financing activities was $52.4 million during the 1997 Six Month Period mainly due to the completion of the Company's second public offering. The Company's capital commitments consist primarily of operating leases for office space and equipment. At June 30, 1997, the Company's commitments under non-cancellable operating leases for office space with terms in excess of one year totaled $0.7 million, $1.4 million and $0.6 million for 1997, 1998 and 1999, respectively. The Company's total payments under such leases was $0.7 million for the 1997 Six Month Period. The Company's $5.0 million revolving credit line, which expired on June 30, 1997, was renewed with the same bank and has a maturity date of June 30, 1999. At June 30, 1997, the Company had no borrowings under its revolving credit line. The Company's credit agreement prohibits the payment of dividends, has profitability requirements and requires maintenance of specified levels of tangible net worth and certain financial ratios. The Company recorded no bad debt expense in the 1997 Six Month Period. The Company believes that the net proceeds from its two recent public offerings together with cash generated by operations and availability under its bank credit facility will be sufficient to fund the Company's operations for at least the next year. However, there can be no assurance that additional capital beyond the amounts currently forecasted by the Company will not be required or that any such required additional capital will be available on reasonable terms, if at all, at such time as required by the Company. Inflation Inflation has not had a significant impact on the Company's operating results to date, nor does the Company expect it to have a significant impact in the future due to the fact that the Company's license and maintenance fees are typically subject to annual increases based on recognized inflation indexes. Forward-Looking Statements Certain statements contained in this Form 10-Q are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. These statements involve various risks and uncertainties which could cause the Company's actual results to differ from those expressed in such forward-looking statements. These risks and uncertainties include the seasonal variation of the Company's operations and fluctuations in the Company's quarterly results, rapid technological change involving the Company's products, delays in product development and implementation, the technological compatibility of the Company's products with its customers' systems, the Company's dependence on customers in the financial services market, intense competition in the markets for the Company's products, risk of non-renewal by current customers, Form 10-Q Page 10 of 12 management of the Company's growth, and other risks and uncertainties. Words such as "expects," "anticipates," "intends," "plans," "believes," "estimates," and "should" and similar words and expressions are intended to identify the forward-looking statements contained in this Form 10-Q. These statements are based on estimates, projections, beliefs, and assumptions of the Company and its management and are not guarantees of future performance. Further information regarding those factors which could cause the Company's actual results to differ materially from any forward-looking statements contained herein is included in the Company's filings with the Securities and Exchange Commission. Form 10-Q Page 11 of 12 PEGASYSTEMS INC. Part II - Other Information: Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders was held on May 13, 1997. The following matters were voted upon: (1) Thomas E. Swithenbank and Alan Trefler were both re-elected to serve as Directors of the Company to hold office until the 2000 annual meeting of stockholders and until their successors are duly elected and qualified. The following Directors' respective terms of office continued after the Annual Meeting: Edward A. Maybury, Leonard A. Schlesinger, Edward B. Roberts and Ira Vishner. Both Mr. Swithenbank and Mr. Trefler were elected with 26,847,332 votes for, 78,510 votes against and 0 broker non-votes. (2) The stockholders ratified the appointment by the Board of Directors of Ernst & Young LLP, independent auditors, to audit the financial statements of the Company for the fiscal year ending December 31, 1997, with 26,925,237 votes for, 605 votes against and 0 broker non-votes. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27.1 Financial Data Schedule. (b) Reports on Form 8-K: None Form 10-Q Page 12 of 12 PEGASYSTEMS INC. 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. Pegasystems Inc. Date: August 14, 1997 /s/ Ira Vishner ---------------------------------- Ira Vishner Vice President, Corporate Services, Treasurer, Chief Financial Officer and Director (principal financial officer and chief accounting officer) EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1000 U.S. DOLLARS 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 1 72,511 0 22,744 671 0 96,875 7,054 (3,222) 128,311 9,191 0 0 0 287 82,584 128,311 21,466 21,466 4,385 4,385 13,174 0 0 6,450 2,451 3,999 0 0 0 3,999 0.14 0.14
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