-----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, PLNylqnF37/192VXkjD1XXHOLMM9tKCiRJQuPOI5vcJ8AByRrUcl7WnRoofq7fHl KTdH5q4eUf/JSdej4mIKFQ== 0001047469-99-031973.txt : 19990816 0001047469-99-031973.hdr.sgml : 19990816 ACCESSION NUMBER: 0001047469-99-031973 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 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/A SEC ACT: SEC FILE NUMBER: 001-11859 FILM NUMBER: 99689340 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 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 MARCH 31, 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 28,714,700 shares of the Registrant's common stock, $.01 par value per share, outstanding on March 31, 1999. PEGASYSTEMS INC. AND SUBSIDIARIES INDEX TO FORM 10-Q/A PART I - FINANCIAL INFORMATION
PAGE ---- Item 1. Financial Statements Consolidated Balance Sheets at March 31, 1999 and December 31, 1998 3 Consolidated Statements of Operations for the three-month periods ended March 31, 1999 and March 31, 1998 4 Consolidated Statements of Cash Flows for the three- month periods ended March 31, 1999 and 1998 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 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
Page 3 of 16 FORM 10-Q/A PEGASYSTEMS INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE-RELATED AMOUNTS)
MARCH 31, December 31, 1999 1998 ------------- ------------ (As Restated) (As Restated) ASSETS Current assets: Cash and cash equivalents .......................... $ 26,016 $ 24,806 Trade and installment accounts receivable, net of allowance for doubtful accounts of $3,257 in 1999 and $2,753 in 1998 ........................ 33,053 43,478 Prepaid expenses and other current assets .......... 1,754 2,427 --------- --------- Total current assets ........................... 60,823 70,711 --------- --------- Long-term license installments, net ................ 52,305 49,000 Equipment and improvements, net .................... 9,944 10,044 Purchased software and other, net .................. 9,127 9,505 --------- --------- Total assets ................................. $ 132,199 $ 139,260 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses .............. $ 14,899 $ 14,842 Deferred revenue ................................... 20,963 21,424 Current portion of capital lease obligations ....... 114 123 --------- --------- Total current liabilities ...................... 35,976 36,389 Commitments and contingencies (Note F) -- -- Deferred income taxes ................................. 750 750 Capital lease obligations, net of current portion ..... 186 202 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; 28,714,700 shares and 28,683,100 shares issued and 287 287 outstanding in 1999 and 1998, respectively Additional paid-in capital ......................... 87,767 87,757 Deferred compensation .............................. (32) (36) Stock warrant ...................................... 2,897 2,897 Retained earnings .................................. 4,779 11,489 Cumulative foreign currency translation adjustment . (411) (475) --------- --------- Total stockholders' equity ..................... 95,287 101,919 --------- --------- Total liabilities and stockholders' equity ... $ 132,199 $ 139,260 --------- --------- --------- ---------
The accompanying notes are an integral part of these consolidated financial statements. Page 4 of 16 PEGASYSTEMS INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended March 31, 1999 1998 ------------- ------------- (As Restated) (As Restated) REVENUE: Software license ................................... $ 6,020 $ 8,209 Services ........................................... 9,046 6,025 -------- -------- Total revenue .................................... 15,066 14,234 -------- -------- COST OF REVENUE: Cost of software license ........................... 586 146 Cost of services ................................... 8,271 4,084 -------- -------- Total cost of revenue ............................ 8,857 4,230 -------- -------- GROSS PROFIT .......................................... 6,209 10,004 OPERATING EXPENSES: Research and development ........................... 4,811 5,211 Selling and marketing .............................. 5,222 5,287 General and administrative ......................... 3,791 1,249 -------- -------- Total operating expenses ......................... 13,824 11,747 -------- -------- LOSS FROM OPERATIONS .................................. (7,615) (1,743) License interest income ............................... 828 549 Other interest income ................................. 171 629 Interest expense ...................................... (6) -- Other (expense) income, net ........................... (88) -- -------- -------- LOSS BEFORE BENEFIT FOR INCOME TAXES (6,710) (565) Benefit for income taxes .............................. -- 215 -------- -------- NET LOSS .............................................. $ (6,710) $ (350) -------- -------- -------- -------- LOSS PER SHARE: Basic ............................................... $ (0.23) $ (0.01) -------- -------- -------- -------- Diluted ............................................. $ (0.23) $ (0.01) -------- -------- -------- -------- WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: Basic ............................................... 28,711 28,547 -------- -------- -------- -------- Diluted ............................................. 28,711 28,547 -------- -------- -------- --------
The accompanying notes are an integral part of these consolidated financial statements. Page 5 of 16 PEGASYSTEMS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 1999 1998 ---------- ---------- (As Restated) (As Restated) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ......................................... $ (6,710) $(350) Adjustments to reconcile net loss to net cash provided by operating activities: Benefit from deferred income taxes ........... -- (215) Depreciation and amortization................. 1,690 1,402 Provision for doubtful accounts............... 913 150 Changes in operating assets and liabilities: Trade and installment accounts receivable .. 6,207 (5,931) Prepaid expenses and other current assets .. 673 (519) Accounts payable and accrued expenses ...... 57 1,558 Deferred revenue ........................... (461) 6,497 -------- -------- Net cash provided by operating activities 2,369 2,592 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment and improvements ........... (1,001) (1,131) Purchased software and other ..................... (207) -- -------- -------- Net cash used in investing activities ... (1,208) (1,131) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments of capital lease obligation ............. (25) -- Exercise of stock options ........................ 10 16 -------- -------- Net cash (used in) provided by financing activities (15) 16 -------- -------- Effect of exchange rate on cash and cash equivalents 64 31 -------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS ............. 1,210 1,508 CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD ..... 24,806 52,005 -------- -------- CASH AND CASH EQUIVALENTS, AT END OF PERIOD ........... $ 26,016 $ 53,513 -------- -------- -------- --------
The accompanying notes are an integral part of these consolidated financial statements. Page 6 of 16 PEGASYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 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/A 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 month period ended March 31, 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 - RESTATEMENT 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-month period 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-month period ended March 31, 1998 is as follows:
UNAUDITED THREE MONTHS ENDED MARCH 31, 1998 (IN THOUSANDS, EXCEPT PER SHARE DATA) As Previously Reported As Restated ---------------- ----------------- Software license revenue ......... $ 11,388 $ 8,209 Services revenue ................. $ 6,579 $ 6,025 Total revenue .................... $ 17,967 $ 14,234 Income (loss) from operations .... $ 2,015 $ (1,743) Net income (loss) ................ $ 1,980 $ (350) Earnings (loss) per share: Basic . $ 0.07 $ (0.01) Earnings (loss) per share: Diluted $ 0.07 $ (0.01) Total assets ..................... $ 135,605 $ 135,062
Page 7 of 16 PEGASYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 1999 NOTE C - 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. As a result of the Company's reporting net losses for both three month periods ended March 31, 1999 and 1998, respectively, there is no difference in basic and diluted loss per share. For the three-month periods ended March 31, 1999 and 1998, 5,272,159 and 2,586,144 options and warrants, respectively, were excluded from the weighted average common shares outstanding, assuming dilution, as their effect would be anti-dilutive. Page 8 of 16 PEGASYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 1999 NOTE D - 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 MARCH 31, (IN THOUSANDS) 1999 1998 - -------------- ------------- ----------- (As Restated) Net loss ..................................... $(6,710) $ (350) Foreign currency translation adjustments, net of income taxes ........................... 64 19 ----------- ----------- Comprehensive loss ........................... $(6,646) $ (331) ----------- ----------- ----------- -----------
NOTE E- 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. NOTE F - 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 defendants have filed a motion to dismiss this litigation which the plaintiffs have opposed. The Company intends to defend this matter vigorously. Page 9 of 16 PEGASYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 1999 NOTE F - COMMITMENTS AND CONTINGENCIES - CONTINUED GELFER CASE: In December 1998, a complaint also purporting to be a class action was filed with the Court alleging that the Company and Alan Trefler violated Section 10(b) of the Exchange Act and Rule 10b-5, and that Mr. Trefler also violated Section 20(a) of the Exchange Act. The litigation was filed recently after the Company's November 24, 1998 announcement that it might be recording revenue adjustments. The litigation was initially filed on behalf of a purported class of persons who purchased the Company's Common Stock between October 29, 1998 and November 24, 1998. The Complaint does not specify the amount of damages sought. In April 1999, Plaintiffs filed their First Amended Class Action Complaint which seeks to extend the class period from April 2, 1998 through November 23, 1998 and also names Mr. Vishner as a defendant. The Amended Complaint does not specify the amount of damages sought. The defendants have not yet filed an answer or other responsive pleading in this action. The Company intends to defend this matter vigorously. NOTE G. SUBSEQUENT EVENT On August 11, 1999, the Company announced the restatement of its financial statements for the year ended December 31, 1998 and the unaudited three-month period ended March 31, 1999. As part of the Company's closing for the three-month period ended June 30, 1999, the Company discovered errors in the previously released results of operations for the three-month periods ended December 31, 1998 and March 31, 1999. The errors, which were caused by incorrectly bookkeeping certain credit memos and cash receipts related to previously reversed or deferred revenue, resulted in an understatement of service revenue and an overstatement of costs for each of the periods. Additionally, the Company noted an error in its allocation of operating expenses for the unaudited three-month period ended March 31, 1999. In the opinion of management, all material adjustments necessary to correct the consolidated financial statements for the unaudited three-month period ended March 31, 1999 have been recorded. A summary of the impact of such restatements on the financial statements for the unaudited three-month period ended March 31, 1999 are as follows:
Unaudited Three Months Ended March 31, 1999 Previously Reported As Restated ------------------- ----------- Total revenue $ 13,880 $ 15,066 Loss from operations (9,144) (7,615) Net loss (8,239) (6,710) Earnings per share: Basic (0.29) (0.23) Earnings per share: Diluted (0.29) (0.23) Total Assets $ 130,114 $ 132,199
Page 10 of 16 PEGASYSTEMS INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On August 11, 1999, the Company announced the restatement of its financial statements for the year ended December 31, 1998 and the unaudited three-month period ended March 31, 1999. As part of the Company's closing for the three-month period ended June 30, 1999, the Company discovered errors in the previously released results of operations for the three-month periods ended December 31, 1998 and March 31, 1999. The errors, which were caused by incorrectly bookkeeping certain credit memos and cash receipts related to previously reversed or deferred revenue, resulted in an understatement of service revenue and an overstatement of costs for each of the periods. Additionally, the Company noted an error in its allocation of operating expenses for the unaudited three-month period ended March 31, 1999. RESULTS OF OPERATIONS The Company refined its method of classifying costs and expenses during the three months ended March 31, 1999 (the "1999 Three Month Period") as compared to the method used during the three months ended March 31, 1998 (the "1998 Three Month Period"). During the 1999 Three Month Period, the Company classified costs and expenses based on their functional department. During the 1998 Three Month Period, the Company classified costs and expenses using an allocation method based on salaries. THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998 REVENUE Total revenue for the 1999 Three Month Period increased 5.9% to $15.1 million from $14.2 million for the 1998 Three Month Period. This increase was 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 26.7% to $6.0 million from $8.2 million for the 1998 Three Month Period. This decrease was primarily attributable to no software license acceptances by new customers and fewer software license agreement renewals and extensions by existing customers during the 1999 Three Month Period. Services revenue for the 1999 Three Month Period increased 50.1% to $9.0 million from $6.0 million for the 1998 Three Month Period. This increase in services revenue was primarily attributable to additional consulting services provided to existing customers, and to a lesser extent, increased maintenance revenue from a larger installed product base. Due to the Company's ability to enter into larger dollar software license transactions, the size of services revenue transactions has increased. COST OF REVENUE Cost of software license revenue for the 1999 Three Month Period increased to $0.6 million from $0.1 million for the 1998 Three Month Period. As a percentage of software license revenue, cost of software license increased to 9.7% for the 1999 Three Month Period from 1.8% for the 1998 Three Month Period. This increase was due to amortization costs of $0.1 million associated with a stock purchase warrant issued by the Company in June, 1997, and amortization costs of $0.5 million associated with the Company's acquisition of First Data Resources Corporation's ("FDR") ESP software product, previously recorded as research and development expense. These costs are being amortized through December 31, 2002. Cost of services for the 1999 Three Month Period increased 102.5% to $8.3 million from $4.1 million for the 1998 Three Month Period. This increase was 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 increased to 91.4% for the 1999 Three Month Period from 67.8% for the 1998 Three Month Period. This gross margin reduction was due to decreased productivity of the Company's Consulting Services and Software Services groups, to the inability to invoice customers for certain services, and to a lower amount of incoming business than previously planned. Page 11 of 16 OPERATING EXPENSES Research and development expenses for the 1999 Three Month Period decreased 7.7% to $4.8 million from $5.2 million for the 1998 Three Month Period. As a percentage of total revenue, research and development expenses decreased to 31.9% for the 1999 Three Month Period from 36.6% for the 1998 Three 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 Three-Month period. During the 1998 Three Month Period, the Company had recorded approximately $0.4 million 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") Statement of Financial Accounting Standards ("SFAS") No. 86, - "Accounting for Computer Software to Be Sold, Leased or Otherwise Marketed" the Company recorded these amortization costs in cost of software license during the 1999 Three Month Period. Selling and marketing expenses for the 1999 Three Month Period decreased 1.2% to $5.2 million from $5.3 million for the 1998 Three Month Period. As a percentage of total revenue, selling and marketing expenses decreased to 34.7% for the 1999 Three Month Period from 37.1% for the 1998 Three Month Period. These decreases were mainly due to a refinement in the Company's method of classifying costs and expenses, a reduction of incoming business and expense management efforts. The Company recorded Client Services and Software Services costs associated with services revenue in cost of services revenue during the 1999 Three Month Period and in sales and marketing expense in the 1998 Three Month Period. General and administrative expenses for the 1999 Three Month Period increased 203.5% to $3.8 million from $1.2 million for the 1998 Three Month Period. General and administrative expenses increased as a percentage of total revenue to 25.2% for the 1999 Three Month Period from 8.8% for the 1998 Three Month Period primarily due to increased bad debt expenses and professional fees. Bad debt expenses were incurred in order to replenish the Company's accounts receivable allowance for doubtful accounts. Increased professional fees were incurred as a result of additional legal and accounting costs associated with ongoing class action litigation. 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 50.8% to $0.8 million for the 1999 Three Month Period from $0.5 million for the 1998 Three Month Period due to the increase in Company's installed customer base. PROVISION FOR INCOME TAXES As of March 31, 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. The tax benefit for federal, state and foreign taxes was $0.2 million for the 1998 Three Month Period and the effective tax rate was 38.0% for the 1998 Three Month Period. LIQUIDITY AND CAPITAL RESOURCES Since its inception, the Company has funded its operations primarily through cash flow from operations, bank borrowings and proceeds from the Company's public stock offerings. Page 12 of 16 At March 31, 1999, the Company had cash and cash equivalents of approximately $26.0 million and working capital of approximately $24.8 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 prior to its initial public offering, limited the availability of working capital. Net cash provided by operating activities for the 1999 Three Month Period was $2.4 million, as compared to $2.6 million for the 1998 Three Month Period. This 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 $1.2 million during the 1999 Three Month Period, as compared to $1.1 million for the 1998 Three Month Period. This increase was 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. Net cash used by financing activities was $15,000 during the 1999 Three Month Period, compared to net cash provided of $16,000 for the 1998 Three Month Period, and consisted of the payment of the Company's capital lease obligation, partially offset by amounts received from the exercise of stock options. In addition to cash used for investing activities, the Company has operating leases for office space, furniture and equipment. At March 31, 1999, the Company's commitments under non-cancelable operating leases for office space with terms in excess of one year totaled $3.1 million, $4.2 million, $4.2 million, $4.2 million, and $5.1 million, for 1999, 2000, 2001, 2002, 2003, and thereafter. The Company's total payments under such leases was $0.9 million for the 1999 Three Month Period. The Company's $5.0 million revolving bank credit line matures on June 30, 1999. At March 31, 1999, the Company had no borrowings under such facility. The Company's credit agreement prohibits the payment of dividends and the disposition of assets outside of the ordinary course, has profitability requirements and requires maintenance of specified levels of tangible net worth and certain financial ratios. At March 31, 1999, the Company was in compliance with all these covenant requirements. The Company intends to renegotiate the term and the covenant requirements under the existing line of credit with the same bank. 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 Page 13 of 16 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 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 expects to substantially complete Year 2000 readiness preparations by the end of the third quarter of 1999 with respect to core business systems. 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. Page 14 of 16 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 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/A 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. Page 15 of 16 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 F 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 During the first quarter of fiscal 1999, there were no matters submitted to a vote of security holders. Item 5. Other Information On May 10, 1999, the Company and Richard B. Goldman, the Company's Vice President, Chief Financial Officer, and Treasurer, 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 10.16 to this Report. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10.16 Separation Agreement 27.1 Financial Data Schedule. (b) Reports on Form 8-K: The Company filed a report on Form 8-K on January 8, 1999, announcing the resignation of Ira Vishner from his position as Vice President of Corporate Services and Treasurer of the Company, and also as a Director of the Company. Page 16 of 16 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 EX-27 2 EX-27
5 1,000 U.S. DOLLARS 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 1 26,016 0 85,358 3,257 0 60,823 18,629 8,685 132,199 35,976 0 0 0 287 95,000 132,199 15,066 15,066 8,857 8,857 13,824 0 6 (6,710) 0 (6,710) 0 0 0 (6,710) (0.23) (0.23)
EX-99 3 EX-99 SEPARATION AGREEMENT BETWEEN RICHARD B. GOLDMAN AND PEGASYSTEMS INC. This Separation Agreement (hereinafter "Agreement") is entered into by and between Richard B. Goldman, an individual residing at 90 Westerly Road, Weston, Massachusetts 02493 ("Goldman"), and Pegasystems Inc., a Massachusetts corporation with its principal place of business at 101 Main Street, Cambridge, Massachusetts 02142 ("Pegasystems"). WHEREAS, Goldman is employed as Vice President and Chief Financial Officer of Pegasystems; WHEREAS, Goldman's employment with Pegasystems will terminate on June 30, 1999, or such earlier date that Pegasystems may, in its sole discretion, specify (the date of such termination being herein referred to as the "Separation Date"); and WHEREAS, Goldman and Pegasystems wish to sever their relationship on terms acceptable to each other and to resolve amicably all issues arising out of Goldman's employment with Pegasystems; NOW, THEREFORE, in recognition of the mutual covenants contained herein, Goldman and Pegasystems hereby agree as follows: 1. PEGASYSTEMS' DUTIES. In consideration of the promises made by Goldman in this Agreement, Pegasystems agrees as follows: a. To continue Goldman's current gross salary of $240,000, paid at a rate of $10,000 semi-monthly, less applicable deductions, for the six month-period commencing on the Separation Date (the "Severance Period"). b. Following the Separation Date, Goldman will have the right to elect to continue group medical and dental insurance (collectively "health benefits") pursuant to the federal law known as COBRA. If Goldman should elect to continue health benefits, Pegasystems shall pay directly the premium costs for the continuation of each of the health benefits, subject to any co-payments that Goldman would have paid if his employment would have continued, if applicable (a) through the end of the Severance Period or (b) until such time as Goldman commences substantially full-time employment offering comparable health benefits or (c) until such time as Goldman becomes ineligible to receive COBRA benefits, whichever of the foregoing alternatives occurs first. Pursuant to applicable benefit plan terms and benefit plan practices, Goldman's eligibility to participate in Pegasystems' other employee benefit plans and programs will cease as of the Separation Date and his right to benefits, if any, will be governed by the terms of those benefit plans and programs. c. To provide Goldman with outplacement services of his choosing, and to advance funds for such purpose upon presentation of invoices, to a maximum amount of $25,000. d. To defend and indemnify Goldman in connection with any and all claims, causes of action, or liabilities of any type arising out of Goldman's employment with Pegasystems, and to advance legal fees and expenses resulting from Goldman's retention of counsel in any investigation, litigation, prosecution, or any other activity arising out of Goldman's employment with Pegasystems, to the fullest extent permitted under the Massachusetts Business Corporation Law section 67 and Pegasystems' By-Laws; provided, however, that in no event shall Pegasystems be obligated to defend and indemnify Goldman with respect to any action, suit, proceeding, or claim brought by Pegasystems against Goldman pursuant to this Agreement. e. To give Goldman at least seven (7) days' advance notice of the Separation Date (if the Separation Date is earlier than June 30, 1999). 2. GOLDMAN'S DUTIES. In consideration of the promises made by Pegasystems in this Agreement, Goldman covenants and agrees as follows: a. To remain in the position of Vice President and Chief Financial Officer of Pegasystems until the Separation Date, and to fulfill all duties consistent with that position; b. To assist Pegasystems on a consulting basis, as may be reasonably required from time to time, during the Severance Period, subject to his availability, at a rate of $200 per hour, plus expenses; c. To refrain from making any false or disparaging comments about Pegasystems or any present or former director, officer or employee of Pegasystems; d. To cooperate fully with Pegasystems with respect to all matters arising during or related to his employment, including without limitation, all matters in connection with the defense or prosecution of any claim or action, governmental investigation, litigation, or regulatory or other proceeding which already has arisen or which may arise in the future. Goldman's full cooperation in connection with such matters shall include, without implication of limitation, being available to meet with counsel to prepare for discovery or trial and to testify truthfully as a witness when requested by Pegasystems. Pegasystems agrees to reimburse Goldman for any reasonable out-of-pocket expenses incurred in connection with such cooperation, subject to reasonable documentation. If Goldman's cooperation is required at any time after the Separation Date, Pegasystems will reimburse him for any time reasonably spent by him in connection with such cooperation at the hourly consulting rate referenced in Section 2(b) above, which approximates in hourly terms Goldman's salary during his employment with Pegasystems. 2 3. PEGASYSTEMS' RELEASE. In consideration of the promises made by Goldman in this Agreement, Pegasystems hereby fully and finally releases and discharges Goldman from any claim or claims, causes of action, or liabilities of any type arising out of Goldman's employment with Pegasystems, or any acts or conduct during such employment, or any other occurrence, whether known or unknown, asserted or unasserted, from the beginning of time to the date of this Agreement, except however, that this shall not release Goldman from performance of his duties under this Agreement or from any and all claims, causes of action or liabilities arising out of any acts or omissions by Goldman in violation of law or Pegasystems' Code of Conduct or not undertaken in good faith and in the reasonable belief that they were in the best interests of Pegasystems. 4. GOLDMAN'S RELEASE. In consideration of the promises made by Pegasystems in this Agreement, Goldman hereby fully and finally releases and forever discharges Pegasystems and all of its past and present directors, shareholders, officers, employees, agents, successors and assigns, and all others connected with any of them, both individually and in their official capacities from any and all claims, causes of action, or liabilities of any type arising out of Goldman's employment with Pegasystems, whether known or unknown, asserted or unasserted, including but not limited to claims that have been or could have been asserted under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Older Worker Benefit Protection Act of 1990, the Civil Rights Act of 1991, the Family and Medical Leave Act of 1993, the Employee Retirement Income Security Act, the Equal Pay Act, the Fair Labor Standards Act, The Civil Rights Act of 1871, the Rehabilitation Act of 1973, the Americans with Disabilities Act of 1990, the Massachusetts Fair Employment Practice Act, the Massachusetts Equal Rights Act, the Massachusetts Civil Rights Act, or any other state, federal, or municipal employment discrimination statute (including but not limited to claims based on age, sex, attainment of benefit plan rights, race, religion, handicap, retaliation, and veteran status), or any other federal state, or local statute, law, ordinance, regulation or pursuant to any other theory whatsoever, including but not limited to claims related to implied or express employment contracts, defamation, public policy, tort law, common law theories, or pursuant to any other theory or claim whatsoever, arising out of or related to his employment with Pegasystems or any other occurrence from the beginning of time to the date of this Agreement, whether presently asserted or otherwise, and it is expressly understood that this Agreement is a general release, except however, that this shall not release Pegasystems from performance of its duties under this Agreement. 5. RELEASE AS TO BOTH PARTIES. It is the intention of the parties in executing this Agreement that it shall be effective as a bar to each and every claim, demand, and cause of action herein above described. The parties expressly agree that this Agreement shall be given full force and effect according to each and all of its terms and provisions, including but not limited to the releases contained in this Agreement. The parties specifically acknowledge that the release is an essential and material term of this Agreement and that no agreement could have been reached by the parties without such release. 3 6. CONFIDENTIALITY. Goldman and Pegasystems agree to keep confidential the terms of this Agreement, and will not disclose them to any persons except their tax advisors, legal counsel, or as otherwise required in by court order, statutory or regulatory requirement, or by other force of law. 7. ADMISSIBILITY. The parties agree and acknowledge that this Agreement does not constitute, is not intended to be, and shall not be construed, interpreted, or treated in any respect as an admission of liability or wrongdoing by either party. Both parties further agree that this Agreement shall not be admissible in any proceeding for any purpose, except in an action to enforce it. 8. INTEGRATION. This Agreement sets forth the entire agreement between the parties concerning the subject matter hereof and supersedes any written or oral understanding, promise or agreement which is not referred to and incorporated herein. Goldman and Pegasystems acknowledge that no promise or inducement or statement of intention other than as stated in this Agreement has been offered for the Agreement and no other promises or agreements shall be binding unless reduced to a writing signed by the parties, that explicitly refers to this Agreement. 9. SEVERABILITY. The provisions of this Agreement are severable, and if any part of it is found to be unenforceable, the other parts shall remain fully valid and enforceable. 10. CHOICE OF LAW AND FORUM. This Agreement shall be interpreted in accordance with the laws of the Commonwealth of Massachusetts and United States of America. Goldman and Pegasystems hereby irrevocably submit in any suit, action, or proceeding arising out of or relating to this Agreement to the jurisdiction of the Commonwealth of Massachusetts Superior Court, Middlesex County, and waive any and all objections to jurisdiction that they may have under the laws of the Commonwealth of Massachusetts. 11. NOTICE. Any notice or process to Goldman or Pegasystems in connection herewith, or in connection with any suit, action or proceeding arising out of or relating to this Agreement, may be by certified mail, postage prepaid, to the address hereinabove set forth, with the same effect as though served on the person. 12. SEPTEMBER 14, 1998 LETTER AGREEMENT. Reference is made to that certain letter agreement dated September 14, 1998 by and between Goldman and Pegasystems the provisions of which shall remain in full force and effect and are incorporated herein. Pegasystems shall be entitled to immediate injunctive relief for any breach or threatened breach of such provisions. 13. CONSTRUCTION. Pegasystems and Goldman acknowledge that each of the parties participated jointly in the negotiation of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. 4 14. AMENDMENT. No amendment of any provision of this Agreement will be valid unless the same shall be in writing and signed by each of the parties. No waiver by any party of any default hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 15. THIRD PARTY INQUIRIES. Goldman and Pegasystems agree to negotiate in good faith a written statement regarding the reason(s) for the termination of Goldman's employment with Pegasystems (the "Statement"). All communications by Goldman and Pegasystems with any party inquiring as to such matter shall be consistent with the Statement. 16. MISCELLANEOUS. Goldman affirms that prior to his execution of this Agreement, he has been advised to consult with a legal advisor of his choosing concerning its terms, and that he has done so. Goldman further affirms that he has been given the right to not less than twenty-one (21) days to review and consider this Agreement prior to his execution hereof, and acknowledges his right to revoke the Agreement for a period of seven (7) days following his execution hereof. This Agreement shall not be effective or enforceable until the 7-day revocation period has passed. Goldman further states and represents that he has carefully read this Agreement, understands its contents and effect, and agrees to all of its terms, including the release of claims referenced in Section 4, freely and voluntarily. This Agreement shall have the effect of an instrument executed under seal and shall be binding upon Goldman's heirs, executors, administrators or other legal representatives and the successors and assigns of Pegasystems. This Agreement may be executed in one or more counterparts, and with counterpart signature pages, each of which shall be an original, but all of which together shall constitute one and the same instrument. 5 IN WITNESS WHEREOF, Goldman and Pegasystems have executed this Agreement in duplicate (each of which duplicate shall be deemed an original), on the dates written below. Richard B. Goldman Pegasystems Inc. /s/ Richard B. Goldman /s/ Alan Trefler - ------------------------------ ----------------------------------- Alan Trefler, President and CEO May 10, 1999 May 10, 1999 6 -----END PRIVACY-ENHANCED MESSAGE-----