-----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, KTLLhVNwZ9Bcv/X53ZguyTJuWt5GYtNMMLpstd0ZMX1CeaV3wIRD9gT36B93sPoe zZZWorp2HLDYszMBQTXMaQ== 0001047469-99-031970.txt : 19990816 0001047469-99-031970.hdr.sgml : 19990816 ACCESSION NUMBER: 0001047469-99-031970 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: 99689302 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 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, 1999 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 28,788,994 shares of the Registrant's common stock, $.01 par value per share, outstanding on June 30, 1999. PEGASYSTEMS INC. AND SUBSIDIARIES INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Balance Sheets at June 30, 1999 and December 31, 1998 3 Consolidated Statements of Operations for the three and six month periods ended June 30, 1999 and June 30, 1998 4 Consolidated Statements of Cash Flows for the six month periods ended June 30, 1999 and June 30, 1998 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 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 15 SIGNATURES 16
PEGASYSTEMS INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE-RELATED AMOUNTS)
June 30, December 31, 1999 1998 ------- ------- ASSETS Current assets: Cash and cash equivalents $ 30,425 $ 24,806 Trade and installment accounts receivable, net of allowance for doubtful accounts of $3,791 in 1999 and $2,753 in 1998 27,482 43,478 Prepaid expenses and other current assets 1,718 2,427 -------- -------- Total current assets 59,625 70,711 -------- -------- Long-term license installments, net 50,179 49,000 Equipment and improvements, net 9,185 10,044 Purchased software and other assets, net 8,543 9,505 -------- -------- Total assets $127,532 $139,260 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 15,484 $ 14,842 Deferred revenue 14,165 21,424 Current portion of capital lease obligations 107 123 -------- -------- Total current liabilities 29,756 36,389 Commitments and contingencies (Note E) Deferred income taxes 750 750 Capital lease obligations, net of current portion 168 202 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; 28,788,994 shares and 28,683,100 shares issued and outstanding in 1999 and 1998, respectively 288 287 Additional paid-in capital 88,106 87,757 Deferred compensation (26) (36) Stock warrant 2,897 2,897 Retained earnings 5,804 11,489 Cumulative foreign currency translation adjustment (211) (475) -------- -------- Total stockholders' equity 96,858 101,919 -------- -------- Total liabilities and stockholders' equity $127,532 $139,260 -------- -------- -------- --------
The accompanying notes are an integral part of these consolidated financial statements. 3 PEGASYSTEMS INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1999 1998 1999 1998 ------- ------- ------- ------- REVENUE: Software license $ 9,125 $ 9,956 $15,145 $18,165 Services 12,222 8,201 21,267 14,226 ------- ------- ------- ------- Total revenue 21,347 18,157 36,412 32,391 ------- ------- ------- ------- COST OF REVENUE: Cost of software license 586 735 1,171 881 Cost of services 7,118 5,445 15,389 9,529 ------- ------- ------- ------- Total cost of revenue 7,704 6,180 16,560 10,410 ------- ------- ------- ------- GROSS PROFIT 13,643 11,977 19,852 21,981 OPERATING EXPENSES: Research and development 4,548 5,310 9,359 10,521 Selling and marketing 5,047 5,825 10,269 11,112 General and administrative 4,246 1,237 8,036 2,486 ------- ------- ------- ------- Total operating expenses 13,841 12,372 27,664 24,119 ------- ------- ------- ------- LOSS FROM OPERATIONS (198) (395) (7,812) (2,138) License interest income 837 604 1,665 1,153 Other interest income 162 598 327 1,227 Other income 224 -- 135 -- ------- ------- ------- ------- INCOME (LOSS) BEFORE PROVISION FOR 1,025 807 (5,685) 242 INCOME TAXES Provision for income taxes -- 307 -- 92 ------- ------- ------- ------- NET INCOME (LOSS) $ 1,025 $ 500 ($5,685) $ 150 ------- ------- ------- ------- EARNINGS (LOSS) PER SHARE: Basic $ 0.04 $ 0.02 ($0.20) $ 0.01 ------- ------- ------- ------- Diluted $ 0.03 $ 0.02 ($0.20) $ 0.01 ------- ------- ------- ------- WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: Basic 28,752 28,573 28,732 28,560 ------- ------- ------- ------- Diluted 30,291 30,781 28,732 30,463 ------- ------- ------- -------
The accompanying notes are an integral part of these consolidated financial statements. 4 PEGASYSTEMS INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED JUNE 30, 1999 1998 -------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ($5,685) $ 150 Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Provision from deferred income taxes -- 262 Depreciation and amortization 3,378 2,646 Provision for doubtful accounts 1,429 300 Issuance of compensatory stock options 21 -- Changes in operating assets and liabilities: Trade and installment accounts receivable 13,388 (21,736) Prepaid expenses and other current assets 709 (607) Accounts payable and accrued expenses 642 3,861 Deferred Revenue (7,259) 9,511 -------- ------- Net cash provided by (used in) operating activities 6,623 (5,613) -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment and improvements (1,340) (2,764) Purchased software and other assets (207) -- -------- ------- Net cash used in investing activities (1,547) (2,764) -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments of capital lease obligation (50) -- Exercise of stock options 329 293 -------- ------- Net cash provided by financing activities 279 293 -------- ------- Effect of exchange rate on cash and cash equivalents 264 (23) -------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,619 (8,107) -------- ------- CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD 24,806 52,005 -------- ------- CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 30,425 $43,898 -------- ------- -------- -------
The accompanying notes are an integral part of these consolidated financial statements. 5 PEGASYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (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 and with the instructions to Form 10-Q and Article 10 of Regulation S-X. 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, 1999 are not necessarily indicative of the results that may be expected for the full year ended December 31, 1999. The Company suggests that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 1998, and the Company's 1998 Annual Report on Form 10-K/A filed with the Securities and Exchange Commission. NOTE B - EARNINGS (LOSS) 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. In accordance with the Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No. 98, the Company has determined that there were no nominal issuances of common stock or potential common stock in the period prior to the Company's initial public offering (IPO). The Company has applied the provisions of SFAS No. 128 and SAB No. 98 to all periods presented.
(in thousands, except per share data) Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ------- ------- ------- ------ Basic Net income (loss) $ 1,025 $ 500 ($5,685) $ 150 ------- ------- ------- ------- ------- ------- ------- ------- Weighted average common shares outstanding 28,752 28,573 28,732 28,560 ------- ------- ------- ------- ------- ------- ------- ------- Basic earnings (loss) per share $ 0.04 $ 0.02 ($0.20) $ 0.01 ------- ------- ------- ------- ------- ------- ------- ------- Diluted Net income (loss) $ 1,025 $ 500 ($5,685) $ 150 ------- ------- ------- ------- ------- ------- ------- ------- Weighted average common shares outstanding 28,752 28,573 28,732 28,560 Effect of: Assumed exercise of stock options 1,539 2,208 -- 1,903 ------- ------- ------- ------- Weighted average common shares outstanding, Assuming dilution 30,291 30,781 28,732 30,463 ------- ------- ------- ------- ------- ------- ------- ------- Diluted earnings (loss) per share $ 0.03 $ 0.02 ($0.20) $ 0.01 ------- ------- ------- ------- ------- ------- ------- -------
6 For the three-month periods ended June 30, 1999 and 1998, 3,778,686 and 295,970 options and warrants, 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, 1999 and 1998, 4,141,343 and 577,025 options and warrants, respectively, were excluded from the weighted average common shares outstanding, assuming dilution, as their effect would be anti-dilutive. NOTE C - COMPREHENSIVE INCOME The Company adopted SFAS No. 130, "Reporting Comprehensive Income," effective January 1, 1998. SFAS No. 130 establishes standards for reporting and displaying 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) 1999 1998 1999 1998 ------ ------ ------- ------ Net income (loss) $1,025 $500 ($5,685) $150 ------ ------ ------- ------ Foreign currency translation adjustments, net of income taxes 200 (32) 264 (14) ------ ------ ------- ------ Comprehensive loss $1,225 $468 ($5,421) $136 ------ ------ ------- ------ ------ ------ ------- ------
NOTE D- SEGMENT REPORTING During 1998, the Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 requires certain financial and supplementary information to be disclosed on an annual and interim basis for each reportable operating segment of an enterprise, as defined. Based on the criteria set forth in SFAS No. 131, the Company currently operates in one operating segment, customer service software. 7 NOTE E - COMMITMENTS AND CONTINGENCIES LEGAL PROCEEDINGS CHELVERUS CASE: In November 1997 and January 1998, complaints purporting to be class actions were filed with the United States District Court for the District of Massachusetts (the "Court") 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 Exchange Act. A third complaint was filed in April 1998 but has been voluntarily dismissed without prejudice. In December 1998, the plaintiffs in the remaining class actions filed their First Amended Consolidated Complaint (the "Amended Complaint") which names the Company, the Company's President (Alan Trefler) and a former officer and director (Ira Vishner), as defendants. The Amended Complaint alleges that the defendants issued false and misleading financial statements and press releases concerning the Company's publicly reported earnings. The Amended Complaint seeks certification of a class of persons who purchased the Company's Common Stock between July 2, 1997 and October 29, 1997, and does not specify the amount of damages sought. The court has denied the defendants' motion to dismiss the Amended Complaint. Discovery has recently commenced. The matter is in a very preliminary stage of litigation, and the Company gives no assurance as to its eventual outcome. The Company intends to defend this matter vigorously. GELFER CASE: In December 1998, a complaint also purporting to be a class action was filed with the Court after the Company's announcement on November 24, 1998 that it might be recording revenue adjustments to prior periods. In April 1999, the plaintiffs filed their First Amended Class Action Complaint ("Gelfer Complaint") in that action. The Gelfer Complaint alleges that the Company, Mr. Trefler and Mr. Vishner violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated by the Commission thereunder, and that the individuals also violated Section 20(a) of the Exchange Act. The Gelfer Complaint is filed on behalf of a purported class of persons who purchased the Company's common stock between April 2, 1998 through November 24, 1998 and does not specify the amount of damages sought. The defendants have filed a motion to dismiss, which is pending, however. The matter is in a very preliminary stage of litigation, and the Company gives no assurance as to its eventual outcome. FORMAL ORDER OF PRIVATE INVESTIGATION: In May, 1999, the Boston office of the Securities and Exchange Commission issued a Formal Order of Private Investigation of the Company and unidentified individuals, currently or formerly associated with the Company, which concerns past accounting matters, financial reports, other public disclosures and trading activity in the Company's securities during 1997 and 1998. The Company has been cooperating fully with the Commission. The investigation is confidential and ongoing. 8 PEGASYSTEMS INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE AND SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE AND SIX MONTHS ENDED JUNE 30, 1998 REVENUE Total revenue for the three-month period ended June 30, 1999 (the "1999 Three Month Period") increased 17.6% to $21.3 million from $18.2 million for the three-month period ended June 30, 1998 (the "1998 Three Month Period"). Total revenue for the six-month period ended June 30, 1999 (the "1999 Six Month Period") increased 12.4% to $36.4 million from $32.4 million for the six-month period ended June 30, 1998 (the "1998 Six Month Period"). These increases were due to an increase in services revenue partially offset by a decrease in software license revenue. Software license revenue for the 1999 Three Month Period decreased 8.3% to $9.1 million from $10.0 million for the 1998 Three Month Period. Software license revenue for the 1999 Six Month Period decreased 16.6% to $15.1 million from $18.2 million for the 1998 Six Month Period. The decrease in software license revenue is due to prospect hesitance to expend resources due to their own concern regarding the "Year 2000" problem, prospect hesitance in transacting business with the Company in late 1998 and early 1999 while the Company was late in its SEC filings, turnover in the Company's sales force and the allocation of software license revenue to services revenue as required by Statement of Position 97-2, "Software Revenue Recognition," as issued by the American Institute of Certified Public Accountants, ("SOP 97-2"). Services revenue for the 1999 Three Month Period increased 49.0% to $12.2 million from $8.2 million for the 1998 Three Month Period. Services revenue for the 1999 Six Month Period increased 49.5% to $21.3 million from $14.2 million for the 1998 Six Month Period. These increases in services revenue were primarily attributable to additional consulting services provided to existing customers and the completion of projects which had previously been deferred and the allocation of software license revenue to services revenue as required by SOP 97-2. 9 COST OF REVENUE Cost of software license revenue for both the 1999 and 1998 Three and Six Month Periods remained constant. Cost of services for the 1999 Three Month Period increased 30.7% to $7.1 million from $5.4 million for the 1998 Three Month Period. Cost of services for the 1999 Six Month Period increased 61.5% to $15.4 million from $9.5 million for the 1998 Six Month Period. These increases were due to costs associated with increased staffing in the Company's Client Services and Software Services groups worldwide. Cost of services as a percentage of services revenue decreased to 58.2% for the 1999 Three Month Period from 66.4% for the 1998 Three Month Period. This increase in gross margin was primarily due to the recognition of previously deferred services revenue and the allocation of software license revenue to services revenue as required by SOP 97-2, both with no current period cost. Cost of services as a percentage of services revenue increased to 72.4% for the 1999 Six Month Period from 67.0% for the 1998 Six Month Period. This decrease in gross margin was due to the Company incurring unrecoverable costs on contracts where fixed fees were exceeded and the services revenue was deferred, partially offset by the allocation of software license revenue to services revenue as required by SOP 97-2, with no current period cost. OPERATING EXPENSES Research and development expenses for the 1999 Three Month Period decreased 14.4% to $4.5 million from $5.3 million for the 1998 Three Month Period. Research and development expenses for the 1999 Six Month Period decreased 11.0% to $9.4 million from $10.5 million for the 1998 Six Month Period. As a percentage of total revenue, research and development expenses decreased to 21.3% for the 1999 Three Month Period from 29.2% for the 1998 Three Month Period. As a percentage of total revenue, research and development expenses decreased to 25.7% for the 1999 Six Month Period from 32.5% for the 1998 Six Month Period. These decreases were primarily due to a transfer of certain of the research and development staff to the Company's Client Services Group early in the 1999 Six Month period. During the 1998 Three and Six Month Periods, the Company had recorded approximately $0.5 and $0.9 million, respectively, of software amortization costs associated with the Company's acquisition of FDR's ESP software product in research and development expenses. During the second half of 1998 the Company had its first sale of software which included components of the ESP software product. Consistent with Financial Accounting Standards Board ("FASB") No. 86 - "Accounting for Computer Software to Be Sold, Leased of Otherwise Marketed" the Company recorded these amortization costs in cost of software license during the 1999 Three Month and Six Month periods. Selling and marketing expenses for the 1999 Three Month Period decreased 13.4% to $5.0 million from $5.8 million for the 1998 Three Month Period. Selling and marketing expenses for the 1999 Six Month Period decreased 7.6% to $10.3 million from $11.1 million for the 1998 Six Month Period. As a percentage of total revenue, selling and marketing expenses decreased to 23.6% for the 1999 Three Month Period from 32.1% for the 1998 Three Month Period. As a percentage of total revenue, selling and marketing expenses decreased to 28.2% for the 1999 Six Month Period from 34.3% for the 1998 Six Month Period. These decreases were due primarily to a reduction in the Company's sales force and a reduction in expenses relating to advertising and trade shows. General and administrative expenses for the 1999 Three Month Period increased 243.2% to $4.2 million from $1.2 million for the 1998 Three Month Period. General and administrative expenses for the 1999 Six Month Period increased 223.3% to $8.0 million from $2.5 million for the 1998 Six Month Period. As a percentage of total revenue, general and administrative expenses increased to 19.9% for the 1999 Three Month Period from 6.8% for the 1998 Three Month Period. 10 As a percentage of total revenue, general and administrative expenses increased to 22.1% for the 1999 Six Month Period from 7.7% for the 1998 Six Month Period. These increases were primarily due to increased bad debt expenses to recognize potentially uncollectable accounts, professional fees, and higher staffing costs in the Company's General and Administrative Group. Increased professional fees were incurred as a result of additional legal and accounting costs associated with ongoing class action litigation and prior period restatements. LICENSE INTEREST INCOME License interest income, which is the portion of all license fees due and received under software license agreements that was not recognized upon product acceptance or license renewal, increased to $0.8 million for the 1999 Three Month Period from $0.6 million for the 1998 Three Month Period. License interest income increased to $1.7 for the 1999 Six Month Period from $1.2 million for the 1998 Six Month Period. These changes were primarily due to the increase in Company's installed customer base. PROVISION FOR INCOME TAXES As of June 30, 1999, the Company has net operating loss and tax credit carryforwards available to offset future taxable income, if any. The Company has provided a full valuation allowance against these deferred tax assets as their realizability is uncertain. As a result, the Company has not provided a tax benefit for the net loss incurred during the six-month period ended June 30, 1999. The tax provision for federal, state and foreign taxes was $0.3 million for the 1998 Three Month Period and $0.1 million for the 1998 Six Month Period. The effective tax rate remained constant at 38.0% for the 1998 Three and Six Month Periods. LIQUIDITY AND CAPITAL RESOURCES Since its inception, the Company has funded its operations primarily through cash flow from operations and bank borrowings and proceeds from the Company's public stock offerings. At June 30, 1999, the Company has cash and cash equivalents of approximately $30.4 million and working capital of approximately $29.9 million. The Company's approach of charging license fees payable in installments over the term of its license has historically deferred the receipt of cash and limits the availability of working capital. Net cash provided by operating activities for the 1999 Six Month Period was $6.6 million, as compared to $5.6 million of net cash used for the 1998 Six Month Period. This increase in cash was primarily due to a decrease in accounts receivable, and prepaid expenses and other current assets, partially offset by the operating loss, net of non-cash items. Net cash used in investing activities was approximately $1.5 million during the 1999 Six Month Period, as compared to $2.8 million for the 1998 Six Month Period. This decrease in cash used was mainly due to fewer purchases of property and equipment, consisting mainly of computer hardware and software, and furniture and fixtures. 11 Net cash provided by financing activities was $0.3 million for both the 1999 and 1998 Six Month Periods, and consisted of amounts received from the exercise of stock options, partially offset by payments on the Company's capital lease obligation. In addition to cash used for investing activities, the Company has operating leases for office space, furniture and equipment. At June 30, 1999, the Company's commitments under non-cancelable operating leases for office space with terms in excess of one year totaled $2.1 million, $4.2 million, $4.2 million, $4.2 million, $2.1 million, and $1.3 million for 1999, 2000, 2001, 2002, 2003, and thereafter. The Company's total payments under such leases was $2.0 million for the 1999 Six Month Period. The Company's $5.0 million revolving bank credit line terminated on June 30, 1999. At that date the Company had no outstanding borrowings. The Company believes that current cash and cash equivalents will be sufficient to fund the Company's operations for the near term. There can be no assurance that additional capital which may be required to support further revenue growth 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. EFFECT OF "YEAR 2000" ISSUES. The "Year 2000" problem is pervasive and complex, as virtually every computer operation will be affected in some way by the rollover of the two-digit year value to "00." The issue is whether computer systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information (or other date changes) could generate erroneous data or fail. Pegasystems' customers rely on date-sensitive operations to calculate internal data and to service their customers. In addition, the Company also uses other companies' products as part of market offerings and for internal use; these programs may also be affected by the issue. Year 2000 readiness issues may negatively affect the purchasing patterns of existing and potential customers. Many organizations are spending significant amounts and rededicating personnel to correct or patch their current systems to achieve Year 2000 readiness. Thus, fewer funds may be available to purchase the Company's products. Also, the issue may divert customers' and potential customers' time, attention, and resources away from those projects which typically lead to purchases of products or services. The Company does not believe that there is any practical way to ascertain the extent of, and has no plans to address problems associated with, any such reduction in purchasing resources of its customers. Any such reduction could, however, result in a material adverse effect on the Company's business, operating results and financial condition. Pegasystems has designed and tested the most current versions of its products to be Year 2000 compliant. However, some customers are using earlier product versions. In addition the Company's products are generally integrated with the systems and products of its customers developed by other vendors. Year 2000 problems in these systems and products might significantly limit the ability of the Company's customers to realize the intended benefit offered by the Company's products. The Company may in the future be subject to claims based on Year 2000 problems in others' products or issues arising from the integration of multiple products within an overall system. Although the Company has not been involved in 12 any litigation or proceeding to date involving its products or services related to Year 2000 issues, there can be no assurance that the Company will not in the future be required to defend its products or services or to negotiate resolutions of claims based on Year 2000 issues. The costs of defending and resolving Year 2000-related disputes, and any liabilities of the Company for Year 2000-related damages, including consequential damages, could have a material adverse effect on the Company business, operating results and financial condition. The Company also relies on certain computer technology and software that it licenses from third parties, including software that is integrated with the Company's products. These programs may also present Year 2000 problems. Although the Company has not experienced any significant product claims to date, there can be no assurance that unanticipated errors or defects will not result in product liability or other claims in the future. Failure of third-party software comprising any part of the Company's systems to operate properly with regard to Year 2000 and thereafter could require the Company to incur unanticipated expenses to address associated problems, which could have a material adverse effect on the Company's business, operating results and financial condition. The Company has adopted standard industry practices to prepare for the effect of the upcoming date change on internal data and information technology systems (such as communications, development, accounting, billing, and other systems). The Company's Year 2000 internal readiness program primarily covers: taking inventory of hardware, software and embedded systems, assessing business and customer satisfaction risks associated with such systems, creating action plans to address known risks, executing and monitoring action plans, and contingency planning. Pegasystems has completed its preliminary Year 2000 readiness preparations with respect to core business systems. Secondary and tertiary systems are now being evaluated for Y2K readiness. It is expected that this process will be complete by November, 1999. Although the Company does not believe that it will incur any material costs or experience material disruptions in its business associated with preparing its internal systems for the year 2000, there can be no assurances that the Company will not experience serious unanticipated negative consequences and/or material costs caused by undetected errors or defects in the technology used in its internal system. The most reasonably likely worst case scenarios would include: (i) corruption of data contained in internal information systems, (ii) hardware failure, and (iii) the failure of infrastructure services provided by government agencies and other third parties (e.g., electricity, phone service, water transport, Internet services, etc.). The Company is in the process of completing contingency planning for high risk areas (such as accounting, payroll, and invoicing/billing systems) at this time and has commenced contingency planning relating to other areas. The Company expects contingency plans to include, among other things, manual "work-arounds" for software and hardware failures, as well as substitution of systems, if necessary. ADOPTION OF THE EURO A new currency, "EURO", was introduced in certain Economic and Monetary Union ("EMU") countries. It is expected that by 2002 (at the latest) all participating EMU countries will use the EURO as their single currency. As a result, software used by many companies headquartered or maintaining a subsidiary in a participating EMU country is expected to be EURO-enabled. In less than four years, all companies headquartered or maintaining a subsidiary in an EMU country will need to be EURO-enabled. These changes will change budgetary, accounting and fiscal systems in companies and public administration, and require the simultaneous handling of parallel currencies and conversion of legacy data. These requirements (and the fact that the final rules and regulations are not yet available) may curb market demand for the Company's products 13 because the budgets and priorities of our customers and prospective customers may change. The Company is monitoring the rules and regulations as they become known in order to make any changes to its software products that the Company deems necessary to comply with such rules and regulations. Although the Company believes that its most recent products address these requirements, there can be no assurance that, once the final rules and regulations are completed, the Company's software will contain all of the necessary changes or meet all of the EURO requirements. Any inability to comply with the EURO requirements could have an adverse effect on 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, and the Company does not expect it to have a significant impact in the future. 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 may be construed as "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 effect of losses from prior periods, liquidity issues, pending litigation and regulatory proceedings, recent adverse publicity, seasonal variation of the Company's operations and fluctuations in the Company's quarterly results, rapid technological change involving the Company's products and those of competitors, 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 provided below. 14 PEGASYSTEMS INC. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Reference is made to Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," in the Company's Annual Report on Form 10-K/A for the year ended December 31, 1998. PART II - OTHER INFORMATION: Item 1. Legal Proceedings Information concerning legal proceedings is discussed in Note E of the Notes to Consolidated Financial Statements, and is incorporated herein and made a part hereof. Item 2. Changes in Securities and Use of Proceeds None. Item 3. Defaults upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders The annual meeting of the stockholders was held on June 21, 1999. The following matters were voted upon: (1) Edward B. Roberts was re-elected to serve as a Director of the Company to hold office until the 2002 Annual Meeting of the Stockholders and until his successor is duly elected and qualified. The following Directors' respective terms of office continued after the annual meeting: Edward A. Maybury, Leonard A. Schlesinger and Alan Trefler. Mr. Roberts was elected with 28,090,088 votes for and 113,803 votes withheld. (2) The stockholders ratified the appointment by the Board of Directors of Arthur Andersen LLP, independent public accountants, to audit the financial statements of the Company for the fiscal year ending December 31, 1999, with 28,170,356 votes for, 29,630 votes against and 3,905 votes abstained. (3) The stockholders approved the amendment to the Amended and Restated 1994 Long-Term Incentive Plan increasing the number of shares reserved for issuance from 7,500,000 to 9,500,000 with 21,983,959 votes for, 2,227,863 votes against, 42,825 votes abstained and 3,949,244 broker non-votes. Item 5. Other Information On May 19, 1999, the Company and Ira Vishner, the Company's former Vice President of Corporate Services, Treasurer, and Director, signed a Separation Agreement, setting forth terms relative to the conclusion of his employment with the Company. A copy of the Separation Agreement is attached as Exhibit 10.1 to this Report. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10.1 Separation Agreement and Release between Pegasystems Inc. and Ira Vishner dated May 19, 1999 27.1 Financial Data Schedule 15 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 12, 1999 /s/ James P. O'Halloran ------------------------------ James P. O'Halloran Senior Vice President, Chief Financial Officer, Treasurer, Clerk and Director 16 EX-10.1 2 EXHIBIT 10.1 Exhibit 10.1 SEPARATION AGREEMENT AND RELEASE This Separation Agreement and Release entered into this 19 day of May, 1999 is made by and between Pegasystems Inc. ("the Company") and Ira Vishner ("the Executive"), and constitutes the parties' agreement with respect to the termination of the Executive's employment. 1. The Executive voluntarily retires as an employee of the Company effective January 4, 1999 ("the Retirement Date"), and resigns as a Director and Officer (including without limitation: Vice President - Corporate Services and Treasurer) of the Company as of such Date. 2. For a period of 24 months commencing on his Retirement Date ("the Payment Period") the Executive (or his beneficiary in the event of his death prior to the expiration of the 24 month period) shall continue to be paid his base salary as in effect on the Retirement Date (i.e., at a rate of $125,000 per year reduced by any amounts received under any disability insurance program, or other income replacement program available through the Company) in accordance with the Company's normal and customary pay practice for executive employees, subject to all applicable federal and state income, payroll and other applicable tax withholding. The Company, in its sole discretion, shall have the right (but not the obligation) to prepay any or all amounts that it is required to pay under this Paragraph 2. 3. During the Payment Period, and (unless disabled) as a condition to receiving payments pursuant to Paragraph 2 hereof, the Executive shall perform any special assignments and provide any other assistance reasonably requested by the President of the Company relating to any administrative or legal proceedings involving the Company and/or its officers, directors and agents. He shall also perform any other special assignments and provide any other assistance during the Payment Period as so requested for which he shall be paid $200 an hour for each hour after the first 40 hours per month of such assistance. After the Payment Period, and also as a condition to receiving payments pursuant to Paragraph 2 hereof, the Executive shall perform any special assignments and provide any other assistance reasonably requested by the President of the Company for which he shall be paid $200 an hour. 4. During the Payment Period, and subject to the exceptions noted below, the Executive shall be entitled to continue his participation in the Company's current employee health and dental benefit plans to the same extent, and under the same conditions, that he may participate in such plans on the Retirement Date; PROVIDED, HOWEVER, such participation shall cease on the earlier of: (a) the end of the Payment Period, or (b) the last day of the first month in which he may be covered by any plan, program or arrangement, sponsored by another employer offering similar (but not necessarily substantially equivalent) health and dental benefits coverage. 5. Subsequent to the Payment Period (and if he is otherwise eligible), the Executive may elect to continue medical and dental benefits under the provisions of COBRA, and he shall be notified of his COBRA rights at that time. 6. The Executive's contributions to the Company's 40l(k) plan (if any) and to the Company's flexible spending account plan (if any) shall cease on the Retirement Date and any payments to the Executive or on his behalf, from such plans shall be governed by their terms. The Executive's entitlement to further vacation, sick leave and other paid time off shall also cease on the Retirement Date and any payments to which he may be entitled for earned but unused vacation, and paid time off shall be made to him within 90 days of the Retirement Date. 7. EXHIBIT A attached hereto sets forth all stock options to purchase share of the Company's stock held by the Executive (the "Options") as of the date hereof. Notwithstanding anything to the contrary contained in the Company's 1994 Long-Term Incentive Plan, as amended (the "Plan"), the Options may be exercised pursuant to the Plan and the applicable stock option agreements for the lesser of three months from the date hereof or the balance of their respective terms, after which period the Options shall be immediately terminated and canceled. 8. Anything contained in Paragraphs 13 and 14 to the contrary notwithstanding, the Company and the Executive shall continue to be bound by the obligations set forth in the Letter Agreement executed by the Executive on April 23, 1996, which Agreement is incorporated herein by reference. 9. The Company shall provide, upon request, a letter of reference stating the positive contributions made by the Executive during his tenure with the Company. 10. From and after the date of this Agreement, the Company shall indemnify and hold harmless the Executive, without regard to the content of his testimony or the outcome of any proceeding, suit, or action, and to the fullest extent provided by law, against all costs, expenses, liabilities and losses (including, without limitation, attorneys' fees, judgments, fines, penalties and amounts paid in settlement) reasonably incurred by Executive in connection with any action, suit or proceeding, whether civil, criminal, administrative or investigative, in which the Executive is made, or is threatened to be made, a party to, or a witness in, such action, suit or proceeding by reason of the fact that he was an officer, director or employee of the Company, or is or was serving at the request of the Company, as an officer, director, member, trustee, employee or agent of another entity in which the Company directly or indirectly owns shares; PROVIDED, HOWEVER, the foregoing provisions of this Paragraph shall not apply with respect to any matter as to which the Executive shall have been finally adjudicated by a court of competent jurisdiction not to have acted in good faith in the reasonable belief that his action was in the best interest of the Company. Any amounts payable by the Company under this Paragraph 10 which it determines to be reasonable shall be paid to the Executive within 90 days of the Company's receipt of adequate documentation of the nature and amount of such cost, expense, liability or loss. 11. The Executive agrees to return to the Company prior to the Retirement Date, all Company property (other than any personal computers purchased by the Company for his home use), including, but not limited to, vendor, supplier, and any other business or mailing lists, reports, files, memoranda, records and software, credit cards, desk or file keys, computer access codes or disks, and Company manuals. The Executive further agrees that he will not retain any copies, duplicates, reproductions or excerpts of any such property. 12. The Executive and the Company represent and agree that except as may otherwise be required by law, they both will keep completely and strictly confidential the terms of this Agreement, the fact that this Agreement has been reached, and any settlement negotiations that occurred in connection with this Agreement. 13. The Executive for himself and on behalf of his heirs, executors, administrators and assigns, hereby remises, releases and fully discharges the Company and, to the extent applicable, its present, former and future parent companies, subsidiaries and affiliates, and the officers, directors, employees, agents, successors and assigns of each of them ("the Released Parties") of and from any and all claims, rights and causes of action of all nature known, unknown, past, present, now foreseeable or unforeseeable, which he has or may hereafter have, in any way arising out of, connected with or related to the Executive's employment with, and activities on behalf of, any of the Released Parties, the termination thereof or based upon information made known to Executive during employment with any of the Released Parties. This Release shall include but, not be limited to, any claims (including without limitation any claims to employment or reemployment, wages, back wages, fees, expenses, benefits or compensation), damages, rights and causes of action for wrongful discharge, breach of contract, discrimination or retaliation under any federal, state or local laws, rules, orders or regulations, including, but not limited to, Title VII of The Civil Rights Act of 1964, as amended, 42 USC, Section 2000e et seq, The Age Discrimination in Employment Act, as amended (ADEA), 29 USC Section 621 et seq, The Americans With Disabilities Act, 42 USC, Section 12101 et seq, The Massachusetts Fair Employment Practices Act, MGL Ch. 151B, Section 1 et seq, all claims arising out of The Massachusetts Civil Rights Act, MGL Ch. 12 Section 11H and 11I and The Massachusetts Equal Rights Act Ch. 93 Section 102. This Release shall also include, but not be limited to, all claims, rights and causes of action for costs, attorneys' fees, bounties, or percentage of awards or settlements which the Executive may assert against or which may be asserted against the Company by others on the Executive's behalf, or against any of the Released Parties, except as provided by Paragraph 10. The Executive and the Company intend and agree that this Release is to be a broad Release to apply to any relief or cause of action, no matter what it is called, and shall include, but not be limited to, claims, rights or causes of action for wages, benefits, bonuses, fines, back pay, share of awards, compensatory damages, and punitive damages. This Release, however, waives no rights or claims which may arise under ADEA after the date this Release is executed, or which may arise from any breach of the terms of this Agreement. 14. The Company agrees, on its behalf, and to the extent applicable, on behalf of its present, former and future parent companies, subsidiaries and affiliates, and officers, directors, agents, successors and assigns of each of them, to fully release and discharge the Executive of and from all claims, demands, causes of action, damages and expenses, of any and every nature whatsoever, whether or not known to this date to exist by the Company, past or present as a result of actions, omissions or events occurring through the Resignation Date in connection with his employment with the Company, or any actions, omissions, or events occurring in connection with any special assignments or assistance requested by the Company as contemplated by Paragraph 3 above, except any such actions, omissions, or events resulting from the Executive's willful misconduct or any matter as to which Executive shall have been finally adjudicated by a court of competent jurisdiction not to have acted in good faith in the reasonable belief that his action was in the best interest of the Company. Willful misconduct is defined herein as fraud, embezzlement, or other acts in intentional disregard of the Company's interests. 15. At no time will Executive in any way disparage or discuss the Company or its agents, officers, servants or employees in a derogatory manner. Executive will at all times state, if asked, that the Company was and is a reputable company during his employment with the Company and that he was proud to have been associated with it. At no time will the Company in any way disparage or discuss the Executive in a derogatory manner. If any inquiry is made as to the circumstances of Executive's departure from the Company, the Company will state that he retired from the Company. 16. The Executive acknowledges that the Company advised him to consult with an attorney prior to signing this Release; advised him that he had twenty-one (21) days in which to consider whether he should sign this Release; and advised him that upon signing this Release, he will be given seven (7) days following the date of such signing to revoke it and that the Release will not be effective until after this seven-day period has elapsed. 17. The Release shall become effective on the eighth (8th) day following the date on which it is signed by the Executive. It is understood that the Executive may revoke his approval of this Release within the seven-day period following the date on which he signs the Release. 18. The payment by the Company of the consideration referred to herein is not, and shall not be deemed, an admission of responsibility or liability by any of the Released Parties. 19. The Executive acknowledges that: - He has read and understands this Agreement and understands fully its final and binding effect; - None of the Released Parties had made any statements, promises or representations not set forth in this Agreement, and the Executive has not relied on any such statements, promises or representations. - He has voluntarily signed this agreement with the knowledge and understanding and full intention of releasing the Released Parties as set forth above; - He was given the opportunity to permit an attorney to review this Agreement and offer advice, and he was given a chance to refuse to sign this Agreement. 20. This Agreement is binding upon and shall inure to the benefits of the parties hereto and their respective assigns, successors, heirs and personal representatives; PROVIDED, HOWEVER, that neither party may assign any rights or duties it may have hereunder without prior written consent of the other party hereto and further provided that the parties' obligations hereunder shall survive any change in control of the Company whether by merger, acquisition, restructuring, reconstitution of the Board of Directors, or otherwise. 21. If any provision of this Agreement is judicially determined to be invalid or unenforceable as written, then such provision shall, if possible, be modified and reformed to the degree necessary to render it valid and enforceable. Any such invalidity or unenforceability of any provision shall have no effect on the remainder of this Agreement which shall remain in full force and effect. 22. This Agreement is to be governed and will be construed as a sealed instrument under and in accordance with the laws of the Commonwealth of Massachusetts without giving effect to its conflicts of laws provisions. 23. This Agreement, constitutes the entire agreement between the parties hereto and supersedes all prior and contemporaneous negotiations, representations, understanding and agreements, whether written or oral. This agreement may be amended or modified only by a written instrument signed by both the Company and the Executive. IN WITNESS WHEREOF, the Company and the Executive have entered into this agreement on the date first above written. Pegasystems Inc. The Executive By: /s/ Alan Trefler /s/ Ira Vishner - --------------------- --------------- Ira Vishner Attest: /s/ Carol A. Alexander ----------------------- As of May 19, 1999, Pegasystems authorized Ira Vishner to retain the following pursuant to Paragraph 11 of the Separation Agreement and Release, until such authorization is revoked in writing: - - personal computers purchased by Pegasystems and made available for Mr. Vishner's home use - - security card #1767 49499 to Pegasystems' Cambridge office - - garage card #716 to the parking lot garage at 101 Main Street - - file key #XF1016 to a file cabinet in Mr. Vishner's office at 101 Main Street - - employee telephone lists /s/ Alan Trefler /s/ Ira Vishner - ---------------- ---------------- Pegasystems Inc. Ira Vishner - ------------------------------------------------------------------- EXHIBIT A TO IRA VISHNER SEPARATION AGREEMENT AND RELEASE
----------------------------------------------------------------------- NQ OPTION OPTION DATE NO. OF PRICE VESTED OUTSTANDING NUMBER SHARES $ $ EXERCISABLE ----------------------------------------------------------------------- 00002380 10/15/98 20k 7.75 0 20k ----------------------------------------------------------------------- 427 3/31/97 25k 20.5625 5k 25k ----------------------------------------------------------------------- 00001944 4/3/98 35k 17.0625 0 35k -----------------------------------------------------------------------
EX-27 3 EXHIBIT 27
5 1,000 U.S. DOLLARS 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 1 30,425 0 81,452 3,791 0 59,625 19,017 9,832 127,532 29,756 0 0 0 288 96,570 127,532 36,412 36,412 16,560 16,560 27,664 0 0 (5,685) 0 (5,685) 0 0 0 (5,685) (.20) (.20)
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