-----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, TAF3N5dRGSahLTsOYeWQpdhe6d3tsRBt9b87vh7n1XeFD323DRuT+L+dtuycEQbl jxd4bBYQfTBwg3km9+KmVA== 0001029869-99-000043.txt : 19990121 0001029869-99-000043.hdr.sgml : 19990121 ACCESSION NUMBER: 0001029869-99-000043 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19990120 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/A SEC ACT: SEC FILE NUMBER: 001-11859 FILM NUMBER: 99508834 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/A 1 PEGASYSTEMS INC. FORM 10-Q/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A (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, 1998 or [ ] Transition Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the transition period from to _______ 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 28,607,200 shares of the Registrant's common stock, $.01 par value per share, outstanding on June 30, 1998. PEGASYSTEMS INC. AND SUBSIDIARY Index to Form 10-Q/A Part I - Financial Information
Page ---- Item 1. Financial Statements Consolidated Balance Sheets at June 30, 1998 3 and December 31, 1997 Consolidated Statements of Income for the three 4 and six months ended: June 30, 1998 and June 30, 1997 Consolidated Statements of Cash Flows for the six 5 months ended: June 30, 1998 and June 30, 1997 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial 11 Condition and Results of Operations Part II - Other Information Item 1. Legal Proceedings 15 Item 2. Changes in Securities 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 15 SIGNATURES 16
Form 10-Q/A Page 3 of 18 PEGASYSTEMS INC. Consolidated Balance Sheets (in thousands, except share-related amounts) (Unaudited)
June 30, December 31, 1998 1997 ------------- ------------ (As Restated) Assets Current assets: Cash and cash equivalents $43,898 $52,005 Trade and installment accounts receivable, net of allowance for doubtful accounts of $2,390 at June 30, 1998 and $2,200 at December 31, 1997 30,025 20,319 Prepaid expenses and other current assets 2,121 1,514 -------- -------- Total current assets 76,044 73,838 Long-term license installments, net 48,133 36,403 Equipment and improvements, net 6,883 5,578 Purchased software, net 10,524 11,701 -------- -------- Total assets $141,584 $127,520 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accrued expenses $ 9,259 $ 5,398 Deferred revenue 11,265 1,754 Deferred income taxes 4,240 3,978 -------- -------- Total current liabilities 24,764 11,130 -------- -------- Deferred income taxes 3,669 3,669 -------- -------- 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; 28,607,200 shares and 28,545,100 shares issued and outstanding in 1998 and 1997, respectively 286 285 Additional paid-in capital 87,133 86,841 Deferred compensation (45) (55) Stock warrant 2,897 2,897 Retained earnings 23,257 23,107 Cumulative foreign currency translation adjustment (377) (354) -------- -------- Total stockholders' equity 113,151 112,721 -------- -------- Total liabilities and stockholders' equity $141,584 $127,520 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. Form 10-Q/A Page 4 of 18 PEGASYSTEMS INC. Consolidated Statements of Income (in thousands, except per share amounts) (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 ------------- ------------- ------------- -------------- (As Restated) (As Restated) (As Restated) (As Previously Restated) Revenue: Software license $ 9,956 $ 2,220 $ 18,165 $ 7,511 Services 8,201 3,052 14,226 5,719 ------- ------- -------- ------- Total revenue 18,157 5,272 32,391 13,230 ------- ------- -------- ------- Cost of revenue: Cost of software license 735 10 881 20 Cost of services 5,445 2,386 9,529 4,536 ------- ------- -------- ------- Total cost of revenue 6,180 2,396 10,410 4,556 ------- ------- -------- ------- Gross Profit 11,977 2,876 21,981 8,674 Operating expenses: Research and development 5,310 3,253 10,521 5,839 Selling and marketing 5,825 4,403 11,112 7,096 General and administrative 1,237 641 2,486 1,246 ------- ------- -------- ------- Total operating expenses 12,372 8,297 24,119 14,181 ------- ------- -------- ------- Loss from operations (395) (5,421) (2,138) (5,507) License interest income 604 421 1,153 795 Other interest income 598 998 1,227 1,748 ------- ------- -------- ------- Income (loss) before provision (benefit) for income taxes 807 (4,002) 242 (2,964) Provision (benefit) for income taxes 307 (1,520) 92 (1,126) ------- ------- -------- ------- Net income (loss) $500 $(2,482) $150 $(1,838) ======= ======= ======== ======= Earnings (loss) per share: Basic $0.02 $(0.09) $0.01 $(0.07) ======= ======= ======== ======= Diluted $0.02 $(0.09) $0.01 $(0.07) ======= ======= ======== ======= Weighted average number of common and potential common shares outstanding: Basic 28,573 28,452 28,560 28,134 ======= ======= ======== ======= Diluted 30,781 28,452 30,463 28,134 ======= ======= ======== ======= The accompanying notes are an integral part of these consolidated financial statements.
Form 10-Q/A Page 5 of 18 PEGASYSTEMS INC. Consolidated Statements of Cash Flows (in thousands)
Six Months Ended June 30, 1998 1997 ------------- -------------- (As Restated) (As Previously Restated) Cash Flows from Operating Activities: Net income (loss) $150 $(1,838) Adjustments to reconcile net income (loss) to net cash used in operating activities: Provision (benefit) for deferred income taxes 262 (1,126) Depreciation and amortization 2,646 804 Provision for doubtful accounts 300 815 Changes in operating assets and liabilities: Trade and installment accounts receivable (21,736) (3,668) Prepaid expenses and other current assets (607) (385) Accounts payable and accrued expenses 3,861 963 Deferred revenue 9,511 2,024 ------- ------- Net cash used in operating activities (5,613) (2,411) ------- ------- Cash Flows from Investing Activities: Purchase of equipment and improvements (2,764) (1,565) ------- ------- Net cash used in investing activities (2,764) (1,565) ------- ------- Cash Flows from Financing Activities: Issuance of common stock, net -- 51,943 Exercise of stock options 293 424 ------- ------- Net cash provided by financing activities 293 52,367 Effect of exchange rate on cash and cash equivalents (23) (81) ------- ------- Net increase (decrease) in cash and cash equivalents (8,107) 48,310 Cash and cash equivalents, at beginning of period 52,005 24,201 ------- ------- Cash and cash equivalents, at end of period $43,898 $72,511 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. Form 10-Q/A Page 6 of 18 PEGASYSTEMS INC. Notes to Consolidated Interim Financial Statements June 30, 1998 (Unaudited) Note A - Basis of Presentation The accompanying unaudited 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, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. 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, 1997, included in the Company's 1997 Annual Report to Stockholders filed with the Securities and Exchange Commission. Note B - Subsequent Event On October 29, 1998, the Company publicly announced its preliminary, unaudited results of operations for the three and nine-month periods ended September 30, 1998. Subsequently, based on information that had not previously come to the attention of the Company or its independent auditors, the Company determined that it may not have accounted properly for certain revenue transactions. As a result, the Company, with the assistance of its independent auditors, conducted a comprehensive review of those transactions and others relating to the three months ended September 30, 1998 and other periods in 1998 and 1997. Based on such review, the Company concluded that it was necessary to revise its previously disclosed preliminary, unaudited results of operations for the three and nine-month periods ended September 30, 1998 and to restate its consolidated financial statements for the first and second quarters of each of 1998 and 1997. The revision and restatements primarily reflect changes in the timing of revenue recognition. The revenue changes are principally reversals of revenue arising from the inability to reasonably estimate the fair market value of undelivered elements in connection with software licenses, issues surrounding the timing of delivery or acceptance of licensed software, certain project milestones not being completed and billing errors or delays. The revenue changes also reflect an increase in revenue reserves. In the opinion of management, all material adjustments necessary to correct the consolidated financial statements have been recorded. A summary of the impact of such restatements on the consolidated financial statements for the unaudited three and six-month periods ended June 30, 1998 is as follows: Form 10-Q/A Page 7 of 18 PEGASYSTEMS INC. Notes to Consolidated Financial Statements - Continued June 30, 1998 Note B - Subsequent Event - continued
Unaudited Three Months Ended June 30, 1998 (in thousands, except per share data) As Previously As Restated Reported ------------- ----------- Software license revenue $ 14,534 $ 9,956 Services revenue $ 9,005 $ 8,201 Total revenue $ 23,539 $ 18,157 Income (loss) from operations $ 5,115 $ (395) Net income $ 3,916 $ 500 Earnings per share: Basic $ 0.14 $ 0.02 Earnings per share: Diluted $ 0.13 $ 0.02 Total assets $142,685 $141,584
Unaudited Six Months Ended June 30, 1998 (in thousands, except per share data) As Previously Reported As Restated ------------ ----------- Software license revenue $ 25,922 $ 18,165 Services revenue $ 15,584 $ 14,226 Total revenue 41,506 $ 32,391 Income (loss) from operations 7,130 $ (2,138) Net income $ 5,896 $ 150 Earnings per share: Basic $ 0.21 $ 0.01 Earnings per share: Diluted $ 0.19 $ 0.01 Total assets $142,685 $141,584
Form 10-Q/A Page 8 of 18 PEGASYSTEMS INC. Notes to Consolidated Financial Statements - Continued June 30, 1998 Note C - Earnings Per Share The Company follows the provisions of Statement of Financial Standards (SFAS) No. 128, "Earnings Per Share." SFAS No. 128 establishes standards for computing and presenting earnings per share and applies to entities with publicly held common stock or potential common stock. The Company has applied the provisions of SFAS No. 128 retroactively to all periods presented. Calculations of basic and diluted net income (loss) per share and potential common shares are as follows:
Three Months Ended Six Months Ended June 30, June 30, (in thousands, except per share data) 1998 1997 1998 1997 ------------- ------------- ------------- ------------- (As Restated) (As Restated) (As Restated) (As Restated) Basic Net income (loss) $ 500 $ (2,482) $ 150 $ (1,838) ====== ======== ====== ======== Weighted average common shares outstanding 28,573 28,452 28,560 28,134 ====== ======== ====== ======== Basic earnings (loss) per share $ 0.02 $ (0.09) $ 0.01 $ (0.07) ====== ======== ====== ======== Diluted Net income (loss) $ 500 $ (2,482) $ 150 $ (1,838) ====== ======== ====== ======== Weighted average common shares outstanding 28,573 28,452 28,560 28,134 Effect of: Assumed exercise of stock options 2,208 -- 1,903 -- ------ -------- ------ -------- Weighted average common shares outstanding, Assuming dilution 30,781 28,452 30,463 28,134 ====== ======== ====== ======== Diluted earnings (loss) per share $ 0.02 $ (0.09) $ 0.01 $ (0.07) ====== ======== ====== ========
For the three-month periods ended June 30, 1998 and 1997, 295,970 and 77,368 options, respectively, were excluded from the weighted average common shares outstanding, assuming dilution, as their effect would be anti-dilutive. For the six-month periods ended June 30, 1998 and 1997, 577,025 and 77,564 options, respectively, were excluded from the weighted average common shares outstanding, assuming dilution, as their effect would be anti-dilutive. Form 10-Q/A Page 9 of 18 PEGASYSTEMS INC. Notes to Consolidated Interim Financial Statements - Continued June 30, 1998 Note D - New Accounting Standards The Company adopted SFAS No. 130, "Reporting Comprehensive Income", effective January 1, 1998. SFAS 130 establishes standards for reporting and display of comprehensive income and its components in financial statements. The components of the Company's comprehensive income are as follows:
Three Months Ended Six Months Ended June 30, June 30, (in thousands) (in thousands) 1998 1997 1998 1997 ------------- ------------- ------------- ------------- (As Restated) (As Restated) (As Restated) (As Restated) Net income (loss) $ 500 $ (2,482) $ 150 $(1,838) Foreign currency translation adjustments, net of income taxes 23 23 50 50 ----- -------- ----- ------- Comprehensive income (loss) $ 523 $ (2,459) $ 200 $(1,788) ===== ======== ===== =======
In February 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 132, "Employers' Disclosures about Pensions and other post-Retirement Benefits." SFAS No. 132 is effective for fiscal years beginning after December 15, 1997. The Company does not expect the adoption of this Statement to have a significant impact on its financial position or results of operations. In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires computer software costs associated with internal use software to be expensed as incurred until certain capitalization criteria are met. The Company will adopt SOP 98-1 prospectively beginning January 1, 1999. The Company does not expect the adoption of this Statement to have a significant impact on its financial position or results of operations. In April 1998, the AICPA issued Statement of Position 98-5 ("SOP 98-5"), Reporting on the Costs of Start-Up Activities." SOP 98-5 requires all costs associated with pre-opening, pre-operating and organization activities to be expensed as incurred. The Company will adopt SOP 98-5 beginning January 1, 1999. The Company does not expect the adoption of this Statement to have a significant impact on its financial position or results of operations. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging instruments. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement applies to all entities and is effective for all fiscal quarters beginning after June 15, 1999. Initial application of this Statement should be as of an entity's fiscal quarter. As of June 30, 1998 and during the quarter then ended, the Company did not hold any derivative instruments or have any hedging activities. The Company does not expect the adoption of this Statement to have a significant impact on its financial position or results of operations. Form 10-Q/A Page 10 of 18 PEGASYSTEMS INC. Notes to Consolidated Interim Financial Statements - Continued June 30, 1998 Note E - 1997 Restatement On April 15, 1998, the Company restated its consolidated financial statements for the three-month periods ended March 31, 1997, June 30, 1997 and September 30, 1997. The restatements reflected revenue adjustments, as a result of a change in the timing of revenue recognition on certain contracts. These adjustments resulted in revenue reversals or in an increase of deferred revenue. Also included in the restated consolidated financial statements were operating expenses, including a provision for bad debts not previously recorded by the Company and the recording of certain other expenses and reserves. As discussed above in Note B, as a result of a further review of prior revenue transactions, the Company determined that one revenue transaction was improperly recognized in the three-month period ended March 31, 1997, but should have been recognized in the three-month period ended June 30, 1997. Accordingly, the Company has again restated its consolidated financial statements for the unaudited three-month period ended June 30, 1997. In the opinion of management, all material adjustments necessary to correct the financial statements have been recorded. A summary of the impact of such restatement on the financial statements for the three and six-month periods ended June 30, 1997 is as follows:
Three Months Ended June 30, 1997 As Previously As Restated (in thousands, except per share data) Restated ---------- ----------- Software license revenue $ 1,696 $ 2,220 Services revenue $ 3,052 $ 3,052 Total revenue $ 4,748 $ 5,272 Loss from operations $ (5,945) $ (5,421) Net loss $ (2,806) $ (2,482) Loss per share: Basic $ (0.10) $ (0.09) Loss per share: Diluted $ (0.10) $ (0.09) Total assets $132,106 $132,106
Six Months Ended June 30, 1997 As Previously As Reported Previously (in thousands, except per share data) Restated ------------- ---------- Software license revenue $ 10,462 $ 7,511 Services revenue $ 6,004 $ 5,719 Total revenue $ 16,466 $ 13,230 Loss from operations $ (1,093) $ (5,507) Net income (loss) $ 899 $ (1,838) Earnings (loss) per share: Basic $ 0.03 $ (0.07) Earnings (loss) per share: Diluted $ 0.03 $ (0.07) Total assets $123,311 $132,106
Form 10-Q/A Page 11 of 18 PEGASYSTEMS INC. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Three and Six Months Ended June 30, 1998 Compared to Three and Six Months Ended June 30, 1997 On April 15, 1998, the Company restated its consolidated financial statements for the three - month and six - month periods ended June 30, 1997. The restatements reflected revenue adjustments as a result of a change in the timing of revenue recognition on certain contracts. Also included in the restated consolidated financial statements were operating expenses, including a provision for bad debts not previously recorded by the Company and the recording of certain other expenses and reserves. On October 29, 1998, the Company publicly announced its preliminary, unaudited results of operations for the three and nine-month periods ended September 30, 1998. Subsequently, based on information that had not previously come to the attention of the Company or its independent auditors, the Company determined that it may not have accounted properly for certain revenue transactions. As a result, the Company, with the assistance of its independent auditors, conducted a comprehensive review of those transactions and others relating to the three months ended September 30, 1998 and other periods in 1998 and 1997. Based on such review, the Company concluded that it was necessary to revise its previously disclosed preliminary, unaudited results of operations for the three and nine-month periods ended September 30, 1998 and to restate its consolidated financial statements for the first and second quarters of each of 1998 and 1997. The revision and restatements primarily reflect changes in the timing of revenue recognition. The revenue changes are principally reversals of revenue arising from the inability to reasonably estimate the fair market value of undelivered elements in connection with software licenses, issues surrounding the timing of delivery or acceptance of licensed software, certain project milestones not being completed and billing errors or delays. The revenue changes also reflect an increase in revenue reserves. In the opinion of management, all material adjustments necessary to correct the consolidated financial statements have been recorded. Revenue Total revenue for the three months ended June 30, 1998 (the "1998 Three Month Period") increased 244.4% to $18.2 million from $5.3 million for the three months ended June 30, 1997 (the "1997 Three Month Period"). Total revenue for the six months ended June 30, 1998 (the "1998 Six Month Period") increased 144.8% to $32.4 million from $13.2 million for the six months ended June 30, 1997 (the "1997 Six Month Period"). These increases were due to increases in both software license and services revenue. Software license revenue for the 1998 Three Month Period increased 348.5% to $10.0 million from $2.2 million for the 1997 Three Month Period. Software license revenue for the 1998 Six Month Period increased 141.8% to $18.2 million from $7.5 million for the 1997 Six Month Period. These increases in software license revenue were primarily attributable to software license acceptances by new customers, software license agreement renewals, and extended software usage by existing customers. Form 10-Q/A Page 12 of 18 PEGASYSTEMS INC. Management's Discussion and Analysis of Financial Condition and Results of Operations Services revenue for the 1998 Three Month Period increased 168.7% to $8.2 million from $3.1 million for the 1997 Three Month Period. Services revenue for the 1998 Six Month Period increased 148.7% to $14.2 million from $5.7 million for the 1997 Six Month Period. These increases in services revenue were primarily attributable to additional consulting services provided to existing customers, increased implementation services for new customers, and to a lesser extent, increased maintenance revenue from a larger installed product base. Cost of Revenue Cost of software license for the 1998 Three Month Period increased 7,250.0% to $0.7 million from $0.01 million for the 1997 Three Month Period. As a percentage of software license revenue, cost of software license increased to 7.4% for the 1998 Three Month Period from 0.5% for the 1997 Three Month Period. Cost of software license for the 1998 Six Month Period increased 4,305.0% to $0.9 million from $0.02 million for the 1997 Six Month Period. As a percentage of software license revenue, cost of software license increased to 4.8% for the 1998 Six Month Period from 0.3% for the 1997 Six Month Period. These increases were primarily due to licensing third party software and amortization costs associated with a stock purchase warrant issued by the Company in June 1997. Cost of services for the 1998 Three Month Period increased 128.2% to $5.4 million from $2.4 million for the 1997 Three Month Period. Cost of services for the 1998 Six Month Period increased 110.1% to $9.5 million from $4.5 million for the 1997 Six Month Period. These increases were due to costs associated with increased staffing in the Company's Client Services group. Cost of services as a percentage of services revenue decreased to 66.4% for the 1998 Three Month Period from 78.2% for the 1997 Three Month Period. Cost of services as a percentage of services revenue decreased to 67.0% for the 1998 Six Month Period from 79.3% for the 1997 Six Month Period. These improved gross margins, for both the 1998 Three and Six Month Periods, were due to more effective use of a larger Consulting Services staff. Operating Expenses Research and development expenses for the 1998 Three Month Period increased 63.2% to $5.3 million from $3.3 million for the 1997 Three Month Period. Research and development expenses for the 1998 Six Month Period increased 80.2% to $10.5 million from $5.8 million for the 1997 Six Month Period. These increases were primarily due to costs associated with increased staffing in the Company's research and development group and amortization costs associated with the acquisition of FDR's ESP Software. As a percentage of total revenue, research and development expenses decreased to 29.2% for the 1998 Three Month Period from 61.7% for the 1997 Three Month Period. As a percentage of total revenue, research and development expenses decreased to 32.5% for the 1998 Six Month Period from 44.1% for the 1997 Six Month Period. These decreases were due to increased growth in the Company's total revenue. Selling and marketing expenses for the 1998 Three Month Period increased 32.3% to $5.8 million from $4.4 million for the 1997 Three Month Period. Selling and marketing expenses for the 1998 Six Month Period increased 56.6% to $11.1 million from $7.1 million for the 1997 Six Month Period. These increases were primarily due to costs associated with increased staffing in the Company's selling and marketing group. As a percentage of total revenue, selling and marketing expenses decreased to 32.1% for the 1998 Three Month Period from 83.5% for the 1997 Three Month Period. As a percentage of total revenue, selling and marketing expenses decreased to 34.3% for the 1998 Six Month Period from 53.6% for the 1997 Six Month Period. These decreases were due to increased growth in the Company's total revenue. Form 10-Q/A Page 13 of 18 PEGASYSTEMS INC. Management's Discussion and Analysis of Financial Condition and Results of Operations General and administrative expenses for the 1998 Three Month Period increased 93.0% to $1.2 million from $0.6 million for the 1997 Three Month Period. General and administrative expenses for the 1998 Six Month Period increased 99.5% to $2.5 million from $1.2 million for the 1997 Six Month Period. These increases were due to increased investment in the infrastructure needed to support the Company's growth, and increased professional fees incurred as a result of the change in the Company's independent public accountants. General and administrative expenses decreased as a percentage of total revenue to 6.8% for the 1998 Three Month Period from 12.2% for the 1997 Three Month Period and to 7.7% for the 1998 Six Month Period from 9.4% for the 1997 Six Month Period. These decreases were due to increased 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 that was not recognized upon product acceptance or license renewal, increased 43.5% to $604,000 for the 1998 Three Month Period from $421,000 for the 1997 Three Month Period. License interest income increased 45.0% to $1.2 million for the 1998 Six Month Period from $795,000 for the 1997 Six Month Period. These increases were due to an increase in the Company's installed customer base. Provision for Income Taxes The tax provision for federal, state and foreign taxes was $.3 million for the 1998 Three Month Period. The tax benefit for the 1997 Three Month Period was $1.5 million. The tax provision for federal, state and foreign taxes was $.1 million for the 1998 Six Month Period. The tax benefit for the 1997 Six Month Period was $1.1 million. The effective tax rate has remained constant at 38.0% for the 1998 and 1997 Three and Six Month Periods. Liquidity and Capital Resources Since its inception, the Company has funded its operations primarily through cash flows 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. Net proceeds to the Company from this offering were approximately $29.4 million. In January 1997, the Company issued and sold 1.8 million shares of Common Stock in connection with a second public offering. Net proceeds to the Company from this second offering were approximately $51.9 million. At June 30, 1998, the Company had cash and cash equivalents of approximately $43.9 million and working capital of approximately $51.3 million. Net cash used in operating activities for the 1998 Six Month period was $5.6 million, primarily due to an increase in accounts receivable partially offset by increases in deferred income taxes, accounts payable and accrued expenses, depreciation and amortization, and deferred revenue. Net cash used in investing activities was $2.8 million during the 1998 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 expansion of certain facilities and the Company's growing employee base. Net cash provided by financing activities was $292,000 during the 1998 Six Month Period due to the exercise of stock options. The Company's capital commitments consist primarily of operating leases for office space and equipment. At June 30, 1998, the Company's commitments under non-cancellable operating leases for office space with terms in Form 10-Q/A Page 14 of 18 PEGASYSTEMS INC. Management's Discussion and Analysis of Financial Condition and Results of Operations excess of one year totaled $2.9 million, $3.8 million and $3.6 million for 1998, 1999 and 2000, respectively. The Company's total payments under such leases was $1.6 million for the 1998 Six Month Period. The Company's $5.0 million revolving credit line has a maturity date of June 30, 1999. At June 30, 1998, the Company had no borrowings under such facility. 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 bad debt expense of $300,000 in the 1998 Six Month Period as a result of indications that certain receivables relating primarily to consulting and installation services rendered by the Company would not be collected in full. The Company believes that the net proceeds from its two 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 twelve months. 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. The "Year 2000 Issue" refers to the problems associated with computer programs having been written using two digits rather than four to define the applicable year. The Company has performed an assessment of the software it uses internally and the software it licenses to customers and such assessment has not revealed any outstanding problems in this regard. There can be no assurance that such problems will not develop or be revealed in the future which could materially and adversely affect the Company's business, operating results, and financial condition. 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. 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/A Page 15 of 18 PEGASYSTEMS INC. Part II - Other Information: Item 1. Legal Proceedings Disclosure concerning certain litigation pending against the Company is contained in the Company's Form 10-K filed April 15, 1998. There have been no material developments with respect to such litigation since such date. In April 1998, a complaint purporting to be a class action was filed with the United States District Court for the District of Massachusetts alleging that the Company and several of its officers violated section 10(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), Rule 10b-5 promulgated by the Commission thereunder, and section 20(a) of the Securities Exchange Act. The complaint names the Company itself, Alan Trefler, Ira Vishner, Kenneth W. Olson and Michael R. Pyle, four officers of the Company, as defendants. The Complaint alleges that the defendants issued false and misleading financial statements and press releases concerning the Company's publicly reported earnings. The Complaint seeks certification of a class of persons who purchased the Company's Common Stock between April 28, 1997 and April 2, 1998, and does not specify the amount of damages sought. The defendants have served upon counsel for the plaintiffs a motion to dismiss the Complaint, and expects the defendants to file a response to the motion. The defendants have not filed an answer or any other responsive pleadings in this litigation. The Company intends to defend this matter vigorously. 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 *10.1 Amended and Restated 1994 Long-Term Incentive Plan 27.1 Financial Data Schedule. (b) Reports on Form 8-K: None - ------------ *Previously filed. Form 10-Q/A Page 16 of 18 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: January 20, 1999 /s/ Richard B. Goldman -------------------------------- Richard B. Goldman Chief Financial Officer (principal financial officer and chief accounting officer) EX-27.1 2 PEGASYSTEMS FINANCIAL DATA SCHEDULE
5 1,000 U.S. Dollars 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 1 43,898 0 32,415 2,390 0 76,044 25,637 8,230 141,584 24,764 0 0 0 286 87,133 141,584 32,391 32,391 10,410 10,410 24,119 0 0 242 92 150 0 0 0 150 0.01 0.01
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