8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF

THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of Earliest Event Reported): July 28, 2003

Pegasystems Inc.

(Exact name of registrant as specified in its charter)

Massachusetts

(State of incorporation or organization)

1-11859	04-2787865
(Commission File Number)	(I.R.S. Employer Identification No.)

101 Main Street, Cambridge, MA 02142-1590

(Address of Principal Executive Office) (Zip Code)

Registrant’s telephone number, including area code: (617) 374-9600

Item 7.    Financial Statements, Pro Forma Financial Information and Exhibits.

        (c)        Exhibits

        99.1      Press Release, dated July 28, 2003, issued by Pegasystems Inc.

Item 9.    Regulation FD Disclosure.

The information contained in this Item 9 is being furnished pursuant to “Item 12. Disclosure of Results of Operations and Financial Condition” of Form 8-K in accordance with SEC Release Nos. 33-8216 and 34-47583.

On July 28, 2003, Pegasystems Inc. (the “Registrant”) issued a press release announcing its financial results for the quarter ended June 30, 2003. A copy of such press release of the Registrant is attached as Exhibit 99.1 to this Current Report on Form 8-K and is incorporated herein by reference in its entirety.

The information, including the exhibit attached hereto, in this Current Report on Form 8-K shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, except as otherwise expressly stated in such filing.

SIGNATURE

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 hereunto duly authorized.

	PEGASYSTEMS INC.
Date: July 28, 2003	By:	/s/ ALAN TREFLER
		Alan Trefler Chairman and Chief Executive Officer

EXHIBIT INDEX

Exhibit No.	Description
99.1	Press Release, dated July 28, 2003, issued by Pegasystems Inc.

EX-99.1

Exhibit 99.1

[Pegasystems logo appears here]

PEGASYSTEMS INC.	101 Main Street,
	Cambridge, MA. 02142-1590. USA.

For information, contact:
Chris Sullivan	Beth Lewis
Chief Financial Officer	Investor Relations Manager
Pegasystems Inc.	Pegasystems Inc.
(617) 374-9600, ext. 6020	(617) 374-9600, ext. 6077
chris.sullivan@pega.com	beth.lewis@pega.com

Pegasystems Reports Second Quarter Pre-Tax Profits of $5.9 Million,

22% Increase Over Comparable Quarter Last Year

Success in Financial Services, Continued Strength in Services Revenue

CAMBRIDGE, Mass., July 28, 2003 – Pegasystems Inc. (NASDAQ: PEGA), a leading provider of smart business process management (BPM) software, today announced its second quarter results, reporting revenues of $25.5 million, pre-tax profits of $5.9 million, earnings per diluted share of $0.11 and positive cash flow from operations of $6.8 million.

Second Quarter Financial Performance
(In millions, except per share data and percentages)	Current Qtr. Q2 2003			Prior Qtr. Q1 2003			Prior Yr. Q2 2002
Total Revenue	$	25.5		$	25.6		$	26.7
License Revenue	$	15.9		$	16.2		$	19.1
% of Total Revenue		63	%		63	%		72	%
Services Revenue	$	9.6		$	9.4		$	7.6
% of Total Revenue		37	%		37	%		28	%
Pre-tax Income	$	5.9		$	7.7		$	4.9
Provision for income taxes	$	2.0		$	0.9		$	0.3
Net Income	$	3.9		$	6.8		$	4.6
Basic Earnings Per Share	$	0.11		$	0.20		$	0.14
Diluted Earnings Per Share	$	0.11		$	0.19		$	0.13

Henry Ancona, President and Chief Operating Officer commented, “Building on the first quarter’s success in the healthcare market, we saw continued success in financial services in the second quarter. During the quarter we sold our PegaCHECK Smart Adjust product to a Midwest

banking organization and we extended a relationship with a user of our PegaCARD solution. In both cases the organizations needed a solution to ensure differentiated service to their end users, and in both cases Pegasystems offered the winning solution.

“We have had good success through the first half of the year and continue to focus on Simply Smart BPM. We have signed four new customers through the first half of the year, and renewed and expanded two existing customer relationships. Service revenues were $19 million for the first half of the year, up 22% over the first half of 2002, reflective of the additional projects underway. Service margins through the first half of the year were 32%, a significant improvement over 4% in the comparable period last year, and further validation of our focus on execution. We do not expect to continue this rate of services revenue growth and margin improvement as we move toward our goal of complementing our direct selling and support efforts with those of our alliance partners.

Ancona concluded, “As noted last quarter, customers remain cautious in making purchasing decisions. However, because we continue to receive positive response to our new technologies, we have committed to increase our investment in research and development and marketing.”

Said founder and CEO Alan Trefler, “We were delighted to see record attendance at this year’s user conference. Held mid-way through the quarter, we attracted a broad group of customers, partners and prospects. Based on positive feedback regarding our technology and attendees’ need for agile and flexible business processes, we look forward to continuing to leverage our rules-based BPM platform.”

Chris Sullivan, CFO, commented, “Total revenue of $25.5 million for the second quarter was essentially unchanged from the first quarter’s $25.6 million, and down $1.2 million from the comparable quarter last year as a decrease in license revenue was only partially offset by an increase in services revenue. We reported license revenue of $15.9 million, a decrease of $3.2 million compared to the second quarter of 2002, due primarily to the anticipated decline in FDR license revenue of approximately $2.4 million. Substantially all of our license revenue continued to be from existing customers who continue to confirm their support of Pegasystems with

renewals, add-ons and extensions of existing licenses. We reported services revenue of $9.6 million, an increase of $2 million compared to the second quarter of 2002, primarily due to implementation projects associated with new customer license signings. While we have succeeded in signing more new customer license business in the first half of 2003, the implementation projects are not yet complete and therefore the associated license revenue has not yet been recognized.

“We continue to operate on a positive cash-flow basis and generated operating cash flows of $10.6 million during the first six months. Profits before taxes were $5.9 million for the second quarter, compared to $4.9 million for the comparable period last year. Net income for the second quarter, however, was negatively impacted as our effective tax rate trended higher. This trend is expected to continue, though the quarterly effective tax rate is subject to fluctuations due to a variety of factors including valuation allowance adjustments.

“We are maintaining our full-year 2003 revenue guidance in line with 2002’s $97.4 million, plus or minus 10%, and are maintaining our full-year EPS expectation at $0.45, plus or minus 10%. With the continued strong cash flow performance through the second quarter, we now expect to generate between $12 and $18 million of cash from operations in 2003.”

The Company will be hosting a conference call and live Webcast associated with this announcement at 9:00 a.m. ET on Tuesday, July 29, 2003. Dial-in information is as follows: 800-982-3472 (domestic) or 703-871-3022 (international). A replay of the teleconference will be available at 888-266-2081 (domestic), 703-925-2533 (international), with a passcode of 196826.

If interested in listening to the Webcast, log onto www.pega.com at least 5 minutes prior to the event’s broadcast, and click on the Webcast icon in the Investor Relations section.

About Pegasystems

Pegasystems Inc. (Nasdaq: PEGA) provides rules-based, smart business process management (BPM) software to large organizations, helping to deliver significant ROI and providing them with the flexibility and agility to respond to changing business needs. With annualized revenues of approximately $100 million and a blue-chip customer base, the company offers applications for the financial services, healthcare, insurance and government markets, as well as a cross-industry BPM application. Pegasystems

is headquartered in Cambridge, Mass., and has regional offices in North America, Europe and the Pacific Rim. For more information, visit www.pega.com.

Forward-Looking Statements

Certain statements contained in this press release may be construed as “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995 including without limitation our financial guidance with respect to 2003 revenue, earnings per share and cash from operations. The words “believe,” “expect,” “hope,” “anticipate,” “plan” and similar expressions, among others, identify forward-looking statements, which speak only as of the date the statement was made. The Company does not undertake and specifically disclaims any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. These statements are based on current expectations and assumptions and 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 volatility of our quarterly operating results, difficulty in predicting the completion of product implementations and consequently the timing of our license revenue recognition, our ability to develop new products and evolve existing ones, the impact on our business of the ongoing consolidation in the financial services market, historically our core market, our ability to attract and retain key employees, reliance on certain key third-party relationships, and other risks and uncertainties. Further information regarding these and other factors which could cause the Company’s actual results to differ materially from any forward-looking statements contained in this press release is contained in the Company’s most recent report on form 10-Q or 10-K and other recent filings on file with the Securities and Exchange Commission. The forward-looking statements contained in this press release represent the Company’s views as of July 28, 2003. Investors are cautioned not to place undue reliance on such forward-looking statements and there are no assurances that the matters contained in such statements will be achieved. Although subsequent events may cause the Company’s view to change, the Company does not undertake and specifically disclaims any obligation to publicly update or revise these forward-looking statements whether as the result of new information, future events or otherwise. The statements should therefore not be relied upon as representing the Company’s view as of any date subsequent to July 28, 2003.

###

PEGASYSTEMS INC.

Condensed Consolidated Balance Sheets

(in thousands, except share-related amounts)

	June 30, 2003		December 31, 2002
Assets
Current assets
Cash and cash equivalents	$	70,125	$	57,393
Trade accounts receivable, net of allowance for doubtful accounts of $417 in 2003 and $507 in 2002		6,198		4,897
Short-term license installments		33,838		32,178
Short-term investments		4,874		5,303
Prepaid expenses and other current assets		544		790
Total current assets		115,579		100,561
Long-term license installments, net of unearned interest income		55,017		48,667
Long-term investments		—		750
Equipment and improvements, net of accumulated depreciation and amortization		1,127		1,727
Acquired technology, net of accumulated amortization		904		1,079
Other assets		227		196
Goodwill		2,346		3,246
Total assets	$	175,200	$	156,226
Liabilities and Stockholders’ Equity
Current liabilities
Accrued payroll related expenses	$	6,434	$	7,695
Accounts payable and accrued expenses		8,168		5,220
Deferred revenue		17,367		12,145
Total current liabilities		31,969		25,060
Deferred income taxes		1,100		—
Other long-term liabilities		232		239
Total liabilities		33,301		25,299
Commitments and contingencies
Stockholders’ equity
Preferred stock, $0.01 par value, 1,000,000 shares authorized; no shares issued and outstanding		—		—
Common stock, $0.01 par value, 45,000,000 shares authorized; 34,356,188 shares and 34,291,389 shares issued and outstanding in 2003 and 2002, respectively		344		343
Additional paid-in capital		113,507		113,488
Stock warrants		374		374
Retained earnings		26,776		16,054
Accumulated other comprehensive income:
Net unrealized gain on investments available for sale		5		—
Foreign currency translation adjustments		893		668
Total stockholders’ equity		141,899		130,927
Total liabilities and stockholders’ equity	$	175,200	$	156,226

PEGASYSTEMS INC.

Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

	Three Months Ended June 30,					Six Months Ended June 30,
	2003		2002			2003		2002
Revenue
Software license	$	15,937	$	19,105		$	32,134	$	35,371
Services		9,550		7,562			18,977		15,507
Total revenue		25,487		26,667			51,111		50,878
Cost of revenue
Cost of software license		88		673			175		1,316
Cost of services		6,525		7,601			12,921		14,893
Total cost of revenue		6,613		8,274			13,096		16,209
Gross profit		18,874		18,393			38,015		34,669
Operating expenses
Research and development		5,438		5,604			10,198		11,354
Selling and marketing		6,379		5,979			11,912		11,708
General and administrative		2,879		3,103			5,389		5,512
Total operating expenses		14,696		14,686			27,499		28,574
Income from operations		4,178		3,707			10,516		6,095
Installment receivable interest income		1,350		1,258			2,550		2,516
Other interest income, net		130		180			335		323
Other income (expense), net		260		(292	)		221		(443	)
Income before provision for income taxes		5,918		4,853			13,622		8,491
Provision for income taxes		2,000		250			2,900		450
Net income	$	3,918	$	4,603		$	10,722	$	8,041
Earnings per share
Basic	$	0.11	$	0.14		$	0.31	$	0.24
Diluted	$	0.11	$	0.13		$	0.30	$	0.22
Weighted average number of common and common equivalent shares outstanding
Basic		34,337		33,738			34,345		33,442
Diluted		35,516		36,819			35,261		35,900

PEGASYSTEMS INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

	Six Months Ended June 30,
	2003			2002
Cash flows from operating activities
Net income	$	10,722		$	8,041
Adjustments to reconcile net income to net cash provided by operating activities:
Stock option income tax benefits		252			—
Deferred income tax		1,100			—
Depreciation and amortization		860			2,504
Reduction in provision for doubtful accounts receivable		(90	)		—
Changes in operating assets and liabilities:
Trade and installment accounts receivable		(9,222	)		(1,208	)
Prepaid expenses and other current assets		258			1,650
Accounts payable and accrued expenses		1,537			(946	)
Deferred revenue		5,222			2,798
Net cash provided by operating activities		10,639			12,839
Cash flows from investing activities
Purchase of investments		(3,620	)		—
Maturing investments		4,799			—
Acquisition of 1mind		—			(573	)
Purchase of equipment and improvements		(84	)		(291	)
Other long-term assets and liabilities		(20	)		(3	)
Net cash provided by (used in) investing activities		1,075			(867	)
Cash flows from financing activities
Payments under capital lease obligation		—			(81	)
Proceeds from sale of stock under Employee Stock Purchase Plan		253			177
Exercise of stock options		419			3,631
Net cash provided by financing activities		672			3,727
Effect of exchange rate on cash and cash equivalents		346			304
NET INCREASE IN CASH AND CASH EQUIVALENTS		12,732			16,003
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		57,393			33,017
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	70,125		$	49,020