-----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, Wkfq3iqZO0daBVJbBaqX+ZszqzisrXlSO9s+/oISbF8sxB+SpeJLf4njrONDPCpI B0uRF6gQ6NxafS113QFEUg== 0001029869-97-001336.txt : 19971120 0001029869-97-001336.hdr.sgml : 19971120 ACCESSION NUMBER: 0001029869-97-001336 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971119 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: SEC FILE NUMBER: 001-11859 FILM NUMBER: 97724478 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 PEGASYSTEMS, INC. FORM 10-Q 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 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: 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 28,541,000 shares of the Registrant's common stock, $.01 par value per share, outstanding on September 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 September 30, 1997 Condensed Consolidated Statements of Income for the three 4 and nine months ended: September 30, 1996 and September 30, 1997 Condensed Consolidated Statements of Cash Flows for the nine 5 months ended: September 30, 1996 and September 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, September 30, 1996 1997 ------------------ ------------------- Assets Current assets: Cash and cash equivalents $24,201 $ 54,555 Trade and installment accounts receivable, net of allowance for doubtful accounts of $939 at December 31, 1996 and $545 at September 30, 1997 14,582 20,431 Prepaid expenses and other assets 1,235 4,616 ------------------ ------------------- Total current assets 40,018 79,602 Long-term license installments, net 23,802 27,141 Equipment and improvements, net 3,035 4,679 Purchased software, net -- 9,601 ------------------ ------------------- Total assets $66,855 $121,023 ================== =================== Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accrued expenses $ 2,697 $ 2,566 Deferred revenue 53 1,291 Deferred income taxes 2,904 814 ------------------ ------------------- Total current liabilities 5,654 4,671 ------------------ ------------------- Deferred income taxes 8,816 10,085 ------------------ ------------------- 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 28,541,000 shares issued and outstanding at December 31, 1996 and September 30, 1997, respectively 264 287 Additional paid-in capital 30,206 82,782 Deferred compensation (73) (59) Stock warrant -- 2,897 Retained earnings 22,022 20,682 Cumulative foreign currency translation adjustment (34) (322) ------------------ ------------------- Total stockholders' equity 52,385 106,267 ------------------ ------------------- Total liabilities and stockholders' equity $66,855 $121,023 ================== ===================
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 Nine Months Ended September 30, September 30, Revenue 1996 1997 1996 1997 -------------- -------------- ------------- ------------- Software license $6,502 $ 3,273 $12,896 $13,734 Services 3,064 3,737 8,060 9,742 -------------- -------------- ------------- ------------- Total revenue 9,566 7,010 20,956 23,476 -------------- -------------- ------------- ------------- Cost of revenue Cost of software license 118 86 354 106 Cost of services 2,017 2,786 5,006 7,151 -------------- -------------- ------------- ------------- Total cost of revenue 2,135 2,872 5,360 7,257 -------------- -------------- ------------- ------------- Gross Profit 7,431 4,138 15,596 16,219 Operating expenses Research and development 2,361 3,992 5,883 9,418 Selling and marketing 1,614 4,480 3,870 11,070 General and administrative 541 675 1,329 1,833 -------------- -------------- ------------- ------------- Total operating expenses 4,516 9,147 11,082 22,321 -------------- -------------- ------------- ------------- Income from operations 2,915 (5,009) 4,514 (6,102) License interest income 381 476 1,127 1,271 Other interest income 273 922 296 2,669 Interest expense (16) -- (85) -- -------------- -------------- ------------- ------------- Income before provision for income taxes 3,553 (3,611) 5,852 (2,162) Provision for income taxes 1,386 (1,372) 2,285 (822) -------------- -------------- ------------- ------------- Net income $2,167 $(2,239) $ 3,567 $(1,340) ============== ============== ============= ============= Net income per common and common equivalent share $ 0.08 $ (0.08) $ 0.14 $ (0.05) ============== ============== ============= ============= Weighted average number of common and common equivalent shares outstanding 26,991 29,756 25,952 29,528 ============== ============== ============= =============
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)
Nine Months Ended September 30, 1996 1997 -------------------- ------------------- Operating Activities Net income $ 3,567 $ (1,340) Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for deferred income taxes 2,037 (821) Depreciation and amortization 1,152 1,647 Changes in operating assets and liabilities: Increase in trade and installment accounts receivable (8,438) (9,188) Increase in prepaid expenses and other assets (116) (484) Decrease in accounts payable and accrued expenses (198) (131) Increase in deferred revenue 149 1,238 -------------------- ------------------- Net cash provided (used) by operating activities (1,847) (9,079) -------------------- ------------------- Investing Activities Purchase of equipment and improvements (1,067) (2,878) Purchased software -- (10,000) -------------------- ------------------- Net cash used by investing activities (1,067) (12,878) -------------------- ------------------- Financing Activities Repayments of long-term debt (1,598) -- Issuance of common stock, net 29,396 52,067 Exercise of stock options 60 532 -------------------- ------------------- Net cash provided (used) by financing activities 27,858 52,599 Effect of exchange rate on cash (36) (288) -------------------- ------------------- Net increase in cash and equivalents 24,908 30,354 Cash and cash equivalents at beginning of period 511 24,201 -------------------- ------------------- Cash and cash equivalents at end of period $25,419 $ 54,555 ==================== ===================
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 September 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 nine-month periods ended September 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 September 30, 1996 and September 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 Nine Months Ended September 30, 1997 Compared to Three and Nine Months Ended September 30, 1996 Revenue Total revenue for the three months ended September 30, 1997 (the "1997 Three Month Period") decreased 26.7% to $7.0 million from $9.6 million for the three months ended September 30, 1996 (the "1996 Three Month Period"). This decrease was primarily due to a decrease in software license revenue. Total revenue for the nine months ended September 30, 1997 (the "1997 Nine Month Period") increased 12.0% to $23.5 million from $21.0 million for the nine months ended September 30, 1996 (the "1996 Nine Month Period"). This increase was primarily due to an increase in software license revenue. Software license revenue for the 1997 Three Month Period decreased 49.7% to $3.3 million from $6.5 million for the 1996 Three Month Period. This decrease in software license revenue for the 1997 Three Month Period was primarily attributable to fewer renewals of licenses by existing customers. Software license revenue for the 1997 Nine Month Period increased 6.5% to $13.7 million from $12.9 million for the 1996 Nine Month Period. This increase in software license revenue for the 1997 Nine Month Period 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 22.0% to $3.7 million from $3.1 million for the 1996 Three Month Period. Services revenue for the 1997 Nine Month Period increased 20.9% to $9.7 million from $8.1 million for the 1996 Nine 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 27.2% to $0.09 million from $0.12 million for the 1996 Three Month Period, and remained constant as a percentage of total revenue at 1.2% for the 1997 Three Month Period and for the 1996 Three Month Period. As a percentage of software license revenue, cost of software license increased to 2.6% for the 1997 Three Month Period from 1.8% for the 1996 Three Month Period. Cost of software license for the 1997 Nine Month Period decreased 70.1% to $0.11 million from $0.35 million for the 1996 Nine Month Period, and decreased as a percentage of total revenue to 0.5% for the 1997 Nine Month Period from 1.7% for the 1996 Nine Month Period. As a percentage of software license revenue, cost of software license decreased to 0.8% for the 1997 Nine Month Period from 2.8% for the 1996 Nine Month Period. During the 1997 Three Month Period, the Company began accruing expense to cover a stock warrant to First Data Resources Corporation ("FDR") with a value of approximately $2.9 million. Stock warrant amortization commenced in the 1997 Three Month Period and the Company expects to continue to incur these stock warrant amortization costs until December 31, 2002. These amortization costs are being treated as a cost of software license. Cost of services for the 1997 Three Month Period increased 38.1% to $2.8 million from $2.0 million for the 1996 Three Month Period, and increased as a percentage of total revenue to 39.8% for the 1997 Three Month Period from 21.1% for the 1996 Three Month Period. As a percentage of service revenue, cost of services increased to 74.6% for the 1997 Three Month Period from 65.8% for the 1996 Three Month Period. Cost of services for the 1997 Nine Month Period increased 42.8% to $7.2 million from $5.0 million for the 1996 Nine Month Period, and Form 10-Q Page 8 of 12 increased as a percentage of total revenue to 30.5% for the 1997 Nine Month Period from 23.9% for the 1996 Nine Month Period. As a percentage of service revenue, cost of services increased to 73.4% for the 1997 Nine Month Period from 62.1% for the 1996 Nine Month Period. These increases were 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. Operating Expenses Research and development expenses for the 1997 Three Month Period increased 69.1% to $4.0 million from $2.4 million for the 1996 Three Month Period. As a percentage of total revenue, research and development expenses increased to 57.0% for the 1997 Three Month Period from 24.7% for the 1996 Three Month Period. Research and development expenses for the 1997 Nine Month Period increased 60.1% to $9.4 million from $5.9 million for the 1996 Nine Month Period. As a percentage of total revenue, research and development expenses increased to 40.1% for the 1997 Nine Month Period from 28.1% for the 1996 Nine Month Period. During the 1997 Three Month Period, the Company received from FDR a license to the requirements, designs, specifications, and code of FDR's ESP product for which the Company paid $10.0 million, and which will be used to support the development of the Company's software products. The Company capitalized this software in the 1997 Three Month Period. The Company commenced the amortization of these software amortization costs in the 1997 Three Month Period, and expects to continue to amortize these software amortization costs until December 31, 2002. Selling and marketing expenses for the 1997 Three Month Period increased 177.6% to $4.5 million from $1.6 million for the 1996 Three Month Period. As a percentage of total revenue, selling and marketing expenses increased to 63.9% for the 1997 Three Month Period from 16.9% for the 1996 Three Month Period. Selling and marketing expenses for the 1997 Nine Month Period increased 186.1% to $11.1 million from $3.9 million for the 1996 Nine Month Period. As a percentage of total revenue, selling and marketing expenses increased to 47.2% for the 1997 Nine Month Period from 18.5% for the 1996 Nine 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. Although selling and marketing expenses increased as a percentage of total revenue for both the Three Month and Nine Month Periods, these increases were mainly due to slower growth in the Company's total revenue. General and administrative expenses for the 1997 Three Month Period increased 24.9% to $0.7 million from $0.5 million for the 1996 Three Month Period. As a percentage of total revenue, general and administrative expenses increased to 9.6% for the 1997 Three Month Period from 5.7% for the 1996 Three Month Period. General and administrative expenses for the 1997 Nine Month Period increased 38.1% to $1.8 million from $1.3 million for the 1996 Nine Month Period. As a percentage of total revenue, general and administrative expenses increased to 7.8% for the 1997 Nine Month Period from 6.3% for the 1996 Nine Month Period. These increases were due to increased investment in the infrastructure needed to support the Company's growth. Although general and administrative expenses increased as a percentage of total revenue for both the Three Month and Nine Month Periods, these increases were mainly due to slower 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 24.7% to $0.5 million for the 1997 Three Month Period from $0.4 million for the 1996 Three Month Period. License interest income increased 12.7% to $1.3 million for the 1997 Nine Month Period from $1.1 million for the 1996 Nine Month Period due to the increase in the Company's installed customer base. Form 10-Q Page 9 of 12 Provision for Income Taxes The provision for federal, state and foreign taxes was $1.4 million for the 1996 Three Month Period. For the 1997 Three Month Period, there was a tax benefit of $1.4 million. The provision for federal, state and foreign taxes was $2.3 million for the 1996 Nine Month Period. For the 1997 Nine Month Period, there was a tax benefit of $0.8 million. The effective tax rate decreased from 39.0% for 1996 Three and Nine Month Periods to 38.0% for the 1997 Three and Nine 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 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 September 30, 1997, the Company had cash and cash equivalents of approximately $54.6 million and working capital of approximately $74.9 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 Nine Month period was $9.1 million, primarily due to an increase in accounts receivable, prepaid expenses and other assets, and a decrease in accounts payable and accrued expenses, partially offset by an increase in deferred revenue. Net cash used by investing activities was $12.9 million during the 1997 Nine 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. The Company also used cash by investing in FDR's ESP software. Net cash provided by financing activities was $52.6 million during the 1997 Nine 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 September 30, 1997, the Company's commitments under non-cancellable operating leases for office space with terms in excess of one year totaled $0.4 million, $1.5 million and $0.6 million for 1997, 1998 and 1999, respectively. The Company's total payments under such leases was $1.1 million for the 1997 Nine 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 September 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 Nine 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. Form 10-Q Page 10 of 12 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, 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 None 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: November 19, 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 1,000 U.S. DOLLARS 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 1 54,555 0 20,431 545 0 79,602 18,366 (4,086) 121,023 4,671 0 0 0 287 82,782 106,267 23,476 23,476 7,257 7,257 22,321 0 0 (2,162) (822) (1,340) 0 0 0 (1,340) (0.05) (0.05)
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