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): February 17, 2004

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 February 17, 2004, issued by Pegasystems Inc.

Item 12.    Results of Operations and Financial Condition.

On February 17, 2004, Pegasystems Inc. (the “Registrant”) issued a press release announcing its financial results for the quarter ended December 31, 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: February 17, 2004	By:	/s/    ALAN TREFLER
		Alan Trefler Chairman and Chief Executive Officer

EXHIBIT INDEX

Exhibit No.	Description
99.1	Press Release, dated February 17, 2004, issued by Pegasystems Inc.

EX-99.1

Exhibit 99.1

PEGASYSTEMS INC.    101 Main Street,

Cambridge, MA. 02142-1590. USA.

[PEGA LOGO]

FOR IMMEDIATE RELEASE

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

Pegasystems Reports Record Revenue and Profits

$99.3 Million 2003 Revenue, Pre-Tax Profits $21.8 Million

CAMBRIDGE, Mass., February 17, 2004–Pegasystems Inc. (NASDAQ: PEGA), a leader in rules-based business process management (BPM) software, today announced its fourth quarter and full year 2003 results, reporting revenue for 2003 of $99.3 million, pre-tax profits up 27% over 2002 to $21.8 million, diluted earnings per share of $0.49 and positive cash flow from operations of $21 million.

Fourth Quarter and Full Year 2003 Financial Performance

	Quarter						Full Year
(In millions, except per share data and percentages)	Q4 2003			Q4 2002			2003			2002
Total Revenue	$	23.1		$	21.0		$	99.3		$	97.4
License Revenue	$	12.0		$	11.7		$	57.7		$	63.9
% of Total Revenue		52	%		56	%		58	%		66	%
Services Revenue	$	11.1		$	9.3		$	41.6		$	33.5
% of Total Revenue		48	%		44	%		42	%		34	%
Pre-tax Income	$	3.0		$	3.6		$	21.8		$	17.2
(Benefit) Provision for Income Taxes	$	(0.5	)	$	1.1		$	4.2		$	1.9
Net Income	$	3.5		$	2.4		$	17.7		$	15.3
Basic Earnings Per Share	$	0.10		$	0.07		$	0.51		$	0.45
Diluted Earnings Per Share	$	0.10		$	0.07		$	0.49		$	0.43

Henry Ancona, President and Chief Operating Officer commented, “This year’s record revenue and profits are testimony to the strides we made in 2003 toward our goal of being the leader in rules-based BPM software. We overcame an anticipated decline in license revenue from First Data Resources (FDR) to record total revenue of $99.3 million.

Exclusive of that customer, we delivered 17% growth in license revenue. We reported a 24% increase in services revenue as we continue to drive new customer sales and implementations. At the same time, we significantly improved our services margins for 2003 to 35% for the year compared to last year’s 13%.

“We had success penetrating our targeted verticals of Financial Services and Healthcare, winning new customers and earning extensions and renewals from existing customers. We also had success broadening our footprint in the insurance and government markets. We are working with a record number of partners including IBM and BearingPoint, and we released a suite of leading-edge products designed to offer our customers maximum flexibility and functionality, and we significantly strengthened our services operations to best support our customers and partners.

“During the fourth quarter we signed CSC Healthcare as an important new channel partner, and we extended relationships with a number of our world-class customers including Blue Cross & Blue Shield of Rhode Island, Hospitals Contribution Fund of Australia, HSBC and Société Générale S.A.

Ancona concluded, “For 2004 we will continue to build on the progress made in 2003. We have an exciting line-up of new products, an expanded sales team and improved organizational discipline focused on deepening and broadening our customer base. We recently introduced a suite of rules-based BPM products including our next-generation PegaRULES Process Commander BPM platform that delivers extensive new functionality including enhanced user control. We also introduced two cross-industry applications focused on process-oriented customer service and on quality and exception management. We have hired exciting new talent to complement our expert and hard-working sales force, and we are focusing our operations on increasing market share.”

Founder and CEO Alan Trefler commented, “The market is taking note of Pegasystems’ market-leading technology and sophisticated BPM offerings. In 2003 we were delighted to be the only company named to the Gartner Magic Quadrant for both Business Rules

Engines and BPM. In addition, we were nominated as Technology Pioneer by the World Economic Forum, ranked number two for BPM by Software 500 and received an Editors’ Choice Award from Intelligent Enterprise. Customers increasingly understand the importance of scalability and flexibility to get the best value-add from their technology investments. With our vision of rules-based BPM as a base, and a comprehensive set of products built on our 20 years’ experience providing customer process and exceptions management solutions, we look forward to 2004.”

Chris Sullivan, CFO, commented, “This year’s record revenue and profits are testimony to the hard work and efforts of our employees, our partners and our customers. Having established a foundation for solid financial performance, we expect to achieve 2004 revenue of $105 million, plus or minus 10%, based on our expectation of continued new business success tempered by fewer scheduled term license customer renewals and the anticipated further decline in FDR license revenue. We are bullish about the business and are therefore investing in incremental sales and marketing spending. This is likely to result in somewhat lower pre-tax profits in the first few quarters of 2004 compared to 2003. We expect profit before tax in 2004 to be $18 million, plus or minus $6 million, depending primarily on the revenue achieved. As a reminder, our tax rate will be normalizing to between 35 and 40 percent in 2004, thus contributing to an expected EPS decline on a year-over-year basis. Finally, we expect positive cash flow from operating activities for the year of $10 to $18 million. Achievement of our 2004 plan will, to a greater extent than in the recent past, depend on developing new license business. It will also depend significantly on strong customer acceptance of our new PegaRULES technology.”

The Company will be hosting a conference call and live Webcast associated with this announcement at 9:00 a.m. ET on Tuesday, February 17, 2004. Dial-in information is as follows: 800-250-4434 (domestic) or 706-634-0667 (international). A replay of the teleconference will be available at 800-642-1687 (domestic) or 706-645-9291 (international), passcode 4945084.

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 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 2004 revenue, profit before tax, tax rate, earnings per share and cash from operating activities. 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, the timing of term software license renewals, customer acceptance of our new PegaRULES Process Commander technology, 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 February 17, 2004. 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 February 17, 2004.

###

PEGASYSTEMS INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share-related data)

	December 31,
	2003			2002
ASSETS
Current assets:
Cash and cash equivalents	$	67,989		$	57,393
Trade accounts receivable, net of allowance for doubtful accounts of $365 in 2003 and $507 in 2002		9,602			6,027
Short-term license installments		28,565			32,178
Short-term investments		19,946			5,303
Prepaid expenses and other current assets		727			790
Total current assets		126,829			101,691
Long-term license installments, net of unearned interest income		53,666			48,667
Long-term investments		—			750
Equipment and improvements, net of accumulated depreciation and amortization		992			1,727
Acquired technology, net of accumulated amortization		729			1,079
Purchased software and other assets, net of accumulated amortization		166			196
Goodwill		2,346			3,246
Total assets	$	184,728		$	157,356
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accrued payroll related expenses	$	8,886		$	7,695
Accounts payable and accrued expenses		7,784			5,220
Deferred revenue		14,180			13,275
Total current liabilities		30,850			26,190
Deferred income taxes		625			—
Other long-term liabilities		81			239
Total liabilities		31,556			26,429
Commitments and contingencies
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; 35,212,505 shares and 34,291,389 shares issued and outstanding in 2003 and 2002, respectively		352			343
Additional paid-in capital		117,391			113,488
Stock warrant		374			374
Retained earnings		33,735			16,054
Accumulated other comprehensive income (loss):
Net unrealized loss on investments available for sale		(9	)		—
Foreign currency translation adjustments		1,329			668
Total stockholders’ equity		153,172			130,927
Total liabilities and stockholders’ equity	$	184,728		$	157,356

PEGASYSTEMS INC.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

	Years ended December 31,
	2003		2002			2001
Revenue:
Software license	$	57,695	$	63,922		$	44,053
Services		41,618		33,486			51,009
Total revenue		99,313		97,408			95,062
Cost of revenue:
Cost of software license		350		2,661			3,049
Cost of services		27,069		29,207			37,347
Total cost of revenue		27,419		31,868			40,396
Gross profit		71,894		65,540			54,666
Operating expenses:
Research and development		21,592		21,284			20,812
Selling and marketing		24,840		23,308			17,522
General and administrative		10,788		9,742			9,798
Total operating expenses		57,220		54,064			48,132
Income from operations		14,674		11,476			6,534
Installment receivable interest income		5,163		5,774			6,159
Other interest income, net		759		760			826
Other income (expense), net		1,235		(813	)		15
Income before provision for income taxes		21,831		17,197			13,534
Provision for income taxes		4,150		1,900			1,000
Net income	$	17,681	$	15,297		$	12,534
Earnings per share, basic	$	0.51	$	0.45		$	0.38
Earnings per share, diluted	$	0.49	$	0.43		$	0.37
Weighted average number of common shares outstanding, basic		34,518		33,835			32,677
Weighted average number of common shares outstanding, diluted		35,757		35,980			33,434

PEGASYSTEMS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Years ended December 31,
	2003			2002			2001
Cash flows from operating activities:
Net income	$	17,681		$	15,297		$	12,534
Adjustment to reconcile net income to net cash provided by operating activities:
Stock option income tax benefits		1,859			1,559			—
Deferred income taxes		625			(1,000	)		—
Depreciation and amortization		1,496			4,992			6,228
Reduction in provision for doubtful accounts		(146	)		(353	)		—
Issuance of compensatory stock option		—			—			73
Losses on disposal of fixed assets		—			83			153
Change in operating assets and liabilities:
Trade accounts receivable and license installments		(4,871	)		(2,248	)		(4,581	)
Prepaid expenses and other current assets		142			1,525			(714	)
Accounts payable and accrued expenses		3,312			204			1,089
Deferred revenue		905			7,041			1,111
Net cash provided by operating activities		21,003			27,100			15,893
Cash flows from investing activities:
Purchase of investments		(46,226	)		(6,053	)		—
Maturing and called investments		32,324			—			—
Purchase of equipment and improvements		(382	)		(1,006	)		(561	)
Acquisition of 1mind		—			(573	)		—
Other long term assets and liabilities		(34	)		157			475
Net cash used in investing activities		(14,318	)		(7,475	)		(86	)
Cash flows from financing activities:
Payments under capital lease obligations		—			(81	)		(315	)
Exercise of stock options		2,422			4,044			60
Proceeds from sale of stock under Employee Stock Purchase Plan		532			390			301
Net cash provided by financing activities		2,954			4,353			46
Effect of exchange rate on cash and cash equivalents		957			398			(175	)
Net increase in cash and cash equivalents		10,596			24,376			15,678
Cash and cash equivalents, beginning of year		57,393			33,017			17,339
Cash and cash equivalents, end of year	$	67,989		$	57,393		$	33,017
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest	$	102		$	2		$	36
Income taxes	$	1,027		$	724		$	1,191
Non-cash financing activity:
Stock issued in business combination	$	—		$	3,669		$	—
Return of shares held in escrow related to business combination	$	901		$	—		$	—