SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A-4
(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, 1997
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)
<TABLE>
<S> <C>
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)
</TABLE>
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 28,487,600 shares of the Registrant's common stock, $.01 par value
per share, outstanding on June 30, 1997.
<PAGE>
PEGASYSTEMS INC. AND SUBSIDIARY
Index to Form 10-Q/A-4
Part I - Financial Information
Item 1. Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Consolidated Balance Sheets at December 31, 1996 3
and June 30, 1997
Consolidated Statements of Operations for the three 4
and six months ended: June 30, 1996 and June 30, 1997
Consolidated Statements of Cash Flows for the six 5
months ended: June 30, 1996 and June 30, 1997
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Part II - Other Information
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
</TABLE>
<PAGE>
Form 10-Q/A-4 Page 3 of 14
PEGASYSTEMS INC.
Consolidated Balance Sheets
(in thousands, except share-related amounts)
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
---- ----
Assets (As Restated)
<S> <C> <C>
Current assets:
Cash and cash equivalents $24,201 $72,511
Trade and installment accounts receivable, net of
Allowance for doubtful accounts of $939 at
December 31, 1996 and $1,871 at June 30, 1997 14,582 16,267
Prepaid expenses and other current assets 1,235 1,620
------- ------
Total current assets 40,018 90,398
Long-term license installments, net 23,802 25,005
Equipment and improvements, net 3,035 3,832
Purchased software and other, net -- 12,871
------- ------
Total assets $66,855 $132,106
======= ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $2,697 $13,661
Deferred revenue 53 2,077
Deferred income taxes 2,904 1,865
------- ------
Total current liabilities 5,654 17,603
------- ------
Deferred income taxes 8,816 8,729
------- ------
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; 26,392,200 shares and 28,487,600 shares
issued and outstanding at December 31, 1996 and June
30, 1997, respectively 264 285
Additional paid-in capital 30,206 82,586
Deferred compensation (73) (63)
Stock warrant -- 2,897
Retained earnings 22,022 20,184
Cumulative foreign currency translation adjustment (34) (115)
------- ------
Total stockholders' equity 52,385 105,774
------- ------
Total liabilities and stockholders' equity $66,855 $132,106
======= ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
Form 10-Q/A-4 Page 4 of 14
PEGASYSTEMS INC.
Consolidated Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1997 1996 1997
---- ---- ---- ----
(As Restated) (As Previously
Revenue: Restated)
<S> <C> <C> <C> <C>
Software license $3,874 $2,220 $6,394 $7,511
Services 2,575 3,052 4,996 5,719
------ ------ ------ ------
Total revenue 6,449 5,272 11,390 13,230
------ ------ ------ ------
Cost of revenue:
Cost of software license 118 10 236 20
Cost of services 1,584 2,386 2,989 4,536
------ ------ ------ ------
Total cost of revenue 1,702 2,396 3,225 4,556
------ ------ ------ ------
Gross Profit 4,747 2,876 8,165 8,674
Operating expenses:
Research and development 1,918 3,253 3,522 5,839
Selling and marketing 1,282 4,403 2,256 7,096
General and administrative 399 641 788 1,246
------ ------ ------ ------
Total operating expenses 3,599 8,297 6,566 14,181
------ ------ ------ ------
Income (loss) from operations 1,148 (5,421) 1,599 (5,507)
License interest income 378 421 746 795
Other interest income 11 998 23 1,748
Interest expense (30) -- (69) --
------ ------ ------ ------
Income (loss) before provision for
income taxes 1,507 (4,002) 2,299 (2,964)
Provision (benefit) for income taxes 588 (1,520) 899 (1,126)
------ ------ ------ ------
Net income (loss) $919 $(2,482) $1,400 $(1,838)
===== ======= ====== =======
Earnings (loss) per share:
Basic $0.04 $(0.09) $0.06 $(0.07)
===== ======= ===== =======
Diluted $0.04 $(0.09) $0.06 $(0.07)
===== ======= ===== =======
Weighted average number of common
shares outstanding:
Basic 23,491 28,452 23,491 28,134
====== ====== ====== ======
Diluted 25,283 28,452 25,258 28,134
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
Form 10-Q/A-4 Page 5 of 14
PEGASYSTEMS INC.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1997
---- ----
(As Previously
Cash flows from operating activities: Restated)
<S> <C> <C>
Net income (loss) $1,400 $(1,838)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Provision (benefit) for deferred income taxes 686 (1,126)
Depreciation and amortization 756 804
Provision for doubtful accounts -- 815
Changes in operating assets and liabilities:
Trade and installment accounts receivable (2,248) (3,668)
Prepaid expenses and other current assets 2 (385)
Accounts payable and accrued expenses (24) 963
Deferred revenue 409 2,024
------ -------
Net cash provided by (used in) operating activities 981 (2,411)
Cash flows from investing activities:
Purchase of equipment and improvements (529) (1,565)
------ -------
Net cash used in investing activities (529) (1,565)
Cash flows from financing activities:
Repayments of long-term debt (391) --
Issuance of common stock, net -- 51,943
Exercise of stock options 1 424
------ -------
Net cash provided by (used in) financing activities (390) 52,367
------ -------
Effect of exchange rate on cash and cash equivalents (16) (81)
------ -------
Net increase in cash and cash equivalents 46 48,310
------ -------
Cash and cash equivalents, at beginning of period 511 24,201
------ -------
Cash and cash equivalents, at end of period $557 $72,511
==== =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
Form 10-Q/A-4 Page 6 of 14
PEGASYSTEMS INC.
Notes to Consolidated Interim Financial Statements
June 30, 1997
Note A - Basis of Presentation
The accompanying unaudited consolidated financial statements of Pegasystems Inc.
(the "Company") presented herein, as restated, have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six-month periods ended June 30, 1997 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1997. The Company suggests that these interim condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 1996,
included in the Company's Annual Report to Stockholders filed with the
Securities and Exchange Commission.
Note B - Subsequent Events
On April 15, 1998, the Company restated its consolidated financial statements
for the unaudited three-month period ended March 31, 1997 and three and
six-month periods ended June 30, 1997. The restatements reflected changes in the
timing of revenue recognition and expense on certain contracts and increased
reserves for revenue and doubtful accounts.
On October 29, 1998, the Company publicly announced its preliminary, unaudited
results of operations for the three and nine-month periods ended September 30,
1998. Subsequently, based on information that had not previously come to the
attention of the Company or its independent auditors, the Company determined
that it may not have accounted properly for certain revenue transactions. As a
result, the Company, with the assistance of its independent auditors, conducted
a comprehensive review of those transactions and others relating to the three
months ended September 30, 1998 and other periods in 1998 and 1997.
Based on such review, the Company concluded that it was necessary to revise its
previously disclosed preliminary, unaudited results of operations for the three
and nine-month periods ended September 30, 1998 and to restate its consolidated
financial statements for the first and second quarters of each of 1998 and 1997.
The revision and restatements primarily reflect changes in the timing of revenue
recognition. The revenue changes are principally reversals of revenue arising
from the inability to reasonably estimate the fair market value of undelivered
elements in connection with software licenses, issues surrounding the timing of
delivery or acceptance of licensed software, certain project milestones not
being completed and billing errors or delays. The revenue changes also reflect
an increase in revenue reserves. In the opinion of management, all material
adjustments necessary to correct the consolidated financial statements have been
recorded.
A summary of the impact of such restatements on the consolidated financial
statements for the unaudited three-month period ended and six-month period ended
June 30, 1997 is as follows:
<TABLE>
<CAPTION>
Unaudited
Three Months Ended
June 30, 1997
As Previously Restated As Restated
---------------------- -----------
<S> <C> <C>
Software license revenue $1,696 $2,220
Services revenue 3,052 3,052
Total revenue 4,748 5,272
Loss from operations (5,945) (5,421)
Net loss (2,806) (2,482)
Earnings per share: Basic $(0.10) $(0.09)
Earnings per share: Diluted $(0.10) $(0.09)
Total Assets $132,106 $132,106
</TABLE>
<PAGE>
Form 10-Q/A-4 Page 7 of 14
Note B - Subsequent Events
<TABLE>
<CAPTION>
Unaudited
Six Months Ended
June 30, 1997
As Previously Reported As Previously Restated
---------------------- ----------------------
<S> <C> <C>
Software license revenue $10,462 $7,511
Services revenue 6,004 5,719
Total revenue 16,466 13,230
Loss from operations (1,093) (5,507)
Net income (loss) 899 (1,838)
Earnings per share: Basic $0.03 $(0.07)
Earnings per share: Diluted $0.03 $(0.07)
Total Assets $123,311 132,106
</TABLE>
Note C - Net Income Per Share
The Company has adopted Statement of Financial Accounting 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 retroactively to all
periods presented. The net income (loss) amounts for the three and six month
periods ended June 30, 1997 reflect all restatement adjustments discussed in
Note B. Calculations of basic and diluted net income per share and potential
common share are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1997 1996 1997
---- ---- ---- ----
(in thousands, except per share data) (As Restated) (As Previously
Restated)
<S> <C> <C> <C> <C>
Basic
Net income (loss) $919 $(2,482) $1,400 $(1,838)
==== ======== ====== ========
Weighted average common shares outstanding 23,491 28,452 23,491 28,134
====== ====== ====== ======
Basic earnings (loss) per share $0.04 $(0.09) $0.06 $(0.07)
===== ======= ===== =======
Diluted
Net income (loss) $919 $(2,482) $1,400 $(1,838)
==== ======== ====== ========
Weighted average common shares outstanding: 23,491 28,452 23,491 28,134
Effect of: Assumed exercise of stock options 1,792 -- 1,767 --
----- ------- ----- -------
Weighted average common shares outstanding,
assuming dilution 25,283 28,452 25,258 28,134
====== ====== ====== ======
Diluted earnings (loss) per share $0.04 $(0.09) $0.06 $(0.07)
===== ======= ===== =======
</TABLE>
<PAGE>
Form 10-Q/A-4 Page 8 of 14
Note D - Software License and Support and Warrant Agreements
On June 27, 1997, the Company entered into Software License and Support and
Warrant Agreements with First Data Resources, Inc. (FDR).
The provisions of the Software License and Support Agreement give FDR the right
to use the Company's software in connection with new products and also the
exclusive right to market, distribute and sublicense the Company's software and
new products to FDR customers and prospects. In addition to the granting of a
license to use its software, the Company will also provide services to FDR in
connection with the new products. For the right to the license and the services,
FDR is expected to pay the Company a base fee of $49.25 million. FDR will pay
$5.0 million in 1997 and remaining fees are expected to be paid on a monthly
basis over the term of the agreement. The initial term of this agreement
commences on June 27, 1997 and runs through December 31, 2002.
In accordance with the Software License and Support Agreement, the Company was
granted a license for access to and use of the designs, specifications and code
of FDR's ESP Product. As consideration for this right, the Company will pay FDR
$10.0 million. This amount was recorded as purchased software on the
accompanying consolidated balance sheet.
In connection with the Software License and Support Agreement on June 27, 1997,
the Company committed to provide a warrant to FDR. Pursuant to the Warrant
Agreement, the Company gave FDR the right to purchase 284,876 shares of the
Company's Common Stock at a purchase price of $28.25 per share which represented
the fair market value of the common stock on the date of the agreement. The
warrant will become exercisable on June 27, 1998 and will expire on June 27,
2002. The warrant was valued at $2.9 million and the corresponding deferred
asset was capitalized and included in "purchased software and other" on the
accompanying consolidated balance sheet.
The Company will recognize the base fee revenue and also amortize the value of
the purchased software and the warrant on a pro rata basis over the initial
5-1/2 year term of the agreement.
<PAGE>
Form 10-Q/A-4 Page 9 of 14
PEGASYSTEMS INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
Three and Six Months Ended June 30, 1997 Compared to Three and Six Months Ended
June 30, 1996
On April 15, 1998 the Company restated its consolidated financial statements for
the unaudited three-month and six-month periods ended June 30, 1997. The
restatements reflected changes in the timing of revenue recognition and expense
on certain contracts and increased reserves for revenue and doubtful accounts.
On October 29, 1998, the Company publicly announced its preliminary, unaudited
results of operations for the three and nine-month periods ended September 30,
1998. Subsequently, based on information that had not previously come to the
attention of the Company or its independent auditors, the Company determined
that it may not have accounted properly for certain revenue transactions. As a
result, the Company, with the assistance of its independent auditors, conducted
a comprehensive review of those transactions and others relating to the three
months ended September 30, 1998 and other periods in 1998 and 1997.
Based on such review, the Company concluded that it was necessary to revise its
previously disclosed preliminary, unaudited results of operations for the three
and nine-month periods ended September 30, 1998 and to restate its consolidated
financial statements for the first and second quarters of each of 1998 and 1997.
The revision and restatements primarily reflect changes in the timing of revenue
recognition. The revenue changes are principally reversals of revenue arising
from the inability to reasonably estimate the fair market value of undelivered
elements in connection with software licenses, issues surrounding the timing of
delivery or acceptance of licensed software, certain project milestones not
being completed and billing errors or delays. The revenue changes also reflect
an increase in revenue reserves. In the opinion of management, all material
adjustments necessary to correct the consolidated financial statements have been
recorded.
Revenue
Total revenue for the three months ended June 30, 1997 (the "1997 Three Month
Period") decreased 18.3% to $5.3 million from $6.4 million for the three months
ended June 30, 1996 (the "1996 Three Month Period"). This decrease was primarily
due to a decrease in software license revenue. Total revenue for the six months
ended June 30, 1997 (the "1997 Six Month Period") increased 16.2% to $13.2
million from $11.4 million for the six months ended June 30, 1996 (the "1996 Six
Month Period"). This increase was primarily due to an increase in software
license revenue.
Software license revenue for the 1997 Three Month Period decreased 42.7% to $2.2
million from $3.9 million for the 1996 Three Month Period. The decrease in
software license revenue was primarily attributable to fewer software license
acceptances by new customers during the 1997 Three Month Period. Software
license revenue for the 1997 Six Month Period increased 17.5% to $7.5 million
from $6.4 million for the 1996 Six Month Period. The increase in software
license revenue was primarily attributable to software license acceptances by
new customers, software license agreement renewals, and extended software usage
by existing customers.
Services revenue for the 1997 Three Month Period increased 18.5% to $3.1 million
from $2.6 million for the 1996 Three Month Period. Services revenue for the 1997
Six Month Period increased 14.5% to $5.7 million from $5.0 million for the 1996
Six Month Period. The increase in services revenue was primarily attributable to
increased implementation services for new customers, additional consulting
services provided to existing customers, and to a lesser extent, increased
maintenance revenue from a larger installed product base.
Cost of Revenue
Cost of software license for the 1997 Three Month Period decreased 91.5% to
$0.01 million from $0.1 million for the 1996 Three Month Period, and decreased
as a percentage of total revenue from 1.8% for the 1996 Three Month Period to
0.2% for the 1997 Three Month Period. Cost of software license for the 1997 Six
Month Period decreased 91.5% to $0.02 million from $0.24 million for the 1996
Six Month Period, and decreased as a percentage of total revenue from 2.1% for
the 1996 Six Month Period to 0.2% for the 1997 Six Month Period. As a percentage
of software license revenue, cost of software license decreased from 3.0% for
the 1996 Three Month Period to 0.5% for the 1997 Three Month Period. As a
percentage of software license revenue, cost of software license decreased from
3.7% for the 1996 Six Month Period to 0.3% for the 1997 Six Month Period.
Software development costs were fully amortized during 1996 and no software
development costs were capitalized during the 1997 Three or Six Month Period.
<PAGE>
Form 10-Q/A-4 Page 10 of 14
Cost of services for the 1997 Three Month Period increased 50.6% to $2.4 million
from $1.6 million for the 1996 Three Month Period. Cost of services for the 1997
Six Month Period increased 51.8% to $4.5 million from $3.0 million for the 1996
Six Month Period. Cost of services as a percentage of total revenue increased
from 24.6% for the 1996 Three Month Period to 45.3% for the 1997 Three Month
Period. This increase was due to a slowdown in the growth of the Company's total
revenue. Cost of services as a percentage of total revenue increased from 26.2%
for the 1996 Six Month Period to 34.3% for the 1997 Six Month Period. Cost of
services as a percentage of services revenue increased from 61.5% for the 1996
Three Month Period to 78.2% for the 1997 Three Month Period. Cost of services as
a percentage of services revenue increased from 59.8% for the 1996 Six Month
Period to 79.3% for the 1997 Six Month Period. These increases were both
primarily due to the buildup of new staff, primarily in the Company's regional
offices, and use of the Company's service personnel to build templates which can
be reused in other customer applications.
Operating Expenses
Research and development expenses for the 1997 Three Month Period increased
69.6% to $3.3 million from $1.9 million for the 1996 Three Month Period.
Research and development expenses for the 1997 Six Month Period increased 65.8%
to $5.8 million from $3.5 million for the 1996 Six Month Period. As a percentage
of total revenue, research and development expenses increased from 29.7% for the
1996 Three Month Period to 61.7% for the 1997 Three Month Period. As a
percentage of total revenue, research and development expenses increased from
30.9% for the 1996 Six Month Period to 44.1% for the 1997 Six Month Period. Both
of these increases were due to a slowdown in the growth of the Company's total
revenue. In addition, during the 1997 Three Month Period, the Company received
from FDR a license to the requirements, designs, specifications, and code of
FDR's ESP product for which the Company will pay $10.0 million, and which will
be used to support the development of the Company's software products. The
Company capitalized this software in the 1997 Three Month Period. The Company
commenced the amortization of these software amortization costs in the 1997
Three Month Period, and expects to continue to amortize these software
amortization costs until December 31, 2002.
Selling and marketing expenses for the 1997 Three Month Period increased 243.4%
to $4.4 million from $1.3 million for the 1996 Three Month Period. Selling and
marketing expenses for the 1997 Six Month Period increased 214.5% to $7.1
million from $2.3 million for the 1996 Six Month Period. As a percentage of
total revenue, selling and marketing expenses increased from 19.9% for the 1996
Three Month Period to 83.5% for the 1997 Three Month Period. As a percentage of
total revenue, selling and marketing expenses increased from 19.9% for the 1996
Six Month Period to 53.6% for the 1997 Six Month Period. These increases were
primarily attributable to the hiring of additional direct sales and marketing
personnel, commission payments on new sales, increased investment in marketing
support activities and materials, additional trade show activities, preparations
for the Company's User Meetings, and the opening of additional regional offices.
General and administrative expenses for the 1997 Three Month Period increased
60.7% to $0.6 million from $0.4 million for the 1996 Three Month Period. General
and administrative expenses for the 1997 Six Month Period increased 58.1% to
$1.2 million from $0.8 million for the 1996 Six Month Period. These increases
were due to increased investment in the infrastructure needed to support the
Company's accelerated growth. General and administrative expenses increased as a
percentage of total revenue from 6.2% for the 1996 Three Month Period to 12.2%
for the 1997 Three Month Period and from 6.9% for the 1996 Six Month Period to
9.4% for the 1997 Six Month Period due to a slowdown in the growth of the
Company's total revenue.
<PAGE>
Form 10-Q/A-4 Page 11 of 14
License Interest Income
License interest income which is the portion of all license fees due under
software license agreements which was not recognized upon product acceptance or
license renewal increased 11.4% from $0.38 million for the 1996 Three Month
Period to $0.42 million for the 1997 Three Month Period. License interest income
increased 6.6% from $0.75 million for the 1996 Six Month Period to $0.80 million
for the 1997 Six Month Period due to the increase in the Company's installed
customer base.
Provision (Benefit) for Income Taxes
The provision for federal, state and foreign taxes was $0.6 million for the 1996
Three Month Period. The tax benefit for the 1997 Three Month Period was $1.5
million. The provision for federal, state and foreign taxes was $0.9 million for
the 1996 Six Month Period. The tax benefit for the 1997 Six Month Period was
$1.1 million. The effective tax rate decreased from 39.0% and 39.1% for 1996
Three and Six Month Periods, respectively to 38.0% for the 1997 Three and Six
Month Periods, respectively. These decreases were due to the re-instatement by
the Internal Revenue Service of the research and development tax credit in May
1996.
Liquidity and Capital Resources
Since its inception, the Company had funded its operations primarily through
cash flow from operations and bank borrowings. In July 1996, the Company issued
and sold 2.7 million shares of Common Stock in connection with its initial
public offering. Net proceeds to the Company from such offering were
approximately $29.4 million. In January 1997, the Company issued and sold 1.8
million shares of Common Stock in connection with a second public offering. Net
proceeds to the Company from such offering were approximately $51.9 million. At
June 30, 1997, the Company had cash and cash equivalents of approximately $72.5
million and working capital of approximately $72.8 million. The Company's
approach of charging license fees payable in installments over the term of its
licenses has historically deferred the receipt of cash and, prior to its initial
public offering, had limited the availability of working capital.
Net cash used in operating activities for the 1997 Six Month period was $2.4
million, primarily due to an increase in accounts receivable and prepaid
expenses and other current assets.
Net cash used in investing activities was $1.6 million during the 1997 Six Month
Period due to the purchase of property and equipment consisting mainly of
computer hardware and software and furniture and fixtures to support the
Company's growing employee base.
Net cash provided by financing activities was $52.4 million during the 1997 Six
Month Period mainly due to the completion of the Company's second public
offering.
The Company's capital commitments consist primarily of operating leases for
office space and equipment. At June 30, 1997, the Company's commitments under
non-cancelable operating leases for office space with terms in excess of one
year totaled $0.7 million, $1.4 million and $0.6 million for 1997, 1998 and
1999, respectively. The Company's total payments under such leases was $0.7
million for the 1997 Six Month Period.
The Company's $5.0 million revolving credit line, which was set to expire on
June 30, 1997, was renewed with the same bank and currently has a maturity date
of June 30, 1999. At June 30, 1997, the Company had no borrowings under its
revolving credit line. The Company's credit agreement prohibits the payment of
dividends, has profitability requirements and requires maintenance of specified
levels of tangible net worth and certain financial ratios.
<PAGE>
Form 10-Q/A-4 Page 12 of 14
The Company recorded bad debt expense of $0.8 million in the 1997 Six Month
Period as a result of indications that certain receivables relating primarily to
consulting and installation services rendered by the Company may not be
collected in full.
The Company believes that the net proceeds from its two recent public offerings
together with cash generated by operations and availability under its bank
credit facility will be sufficient to fund the Company's operations for at least
the next year. However, there can be no assurance that additional capital beyond
the amounts currently forecasted by the Company will not be required or that any
such required additional capital will be available on reasonable terms, if at
all, at such time as required by the Company.
Inflation
Inflation has not had a significant impact on the Company's operating results to
date, nor does the Company expect it to have a significant impact in the future
due to the fact that the Company's license and maintenance fees are typically
subject to annual increases based on recognized inflation indexes.
Forward-Looking Statements
Certain statements contained in this Form 10-Q/A are "forward-looking
statements" as defined in the Private Securities Litigation Reform Act of 1995.
These statements involve various risks and uncertainties which could cause the
Company's actual results to differ from those expressed in such forward-looking
statements. These risks and uncertainties include the seasonal variation of the
Company's operations and fluctuations in the Company's quarterly results, rapid
technological change involving the Company's products, delays in product
development and implementation, the technological compatibility of the Company's
products with its customers' systems, the Company's dependence on customers in
the financial services market, intense competition in the markets for the
Company's products, risk of non-renewal by current customers, management of the
Company's growth, and other risks and uncertainties. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "estimates," and "should" and
similar words and expressions are intended to identify the forward-looking
statements contained in this Form 10-Q/A. These statements are based on
estimates, projections, beliefs, and assumptions of the Company and its
management and are not guarantees of future performance. Further information
regarding those factors which could cause the Company's actual results to differ
materially from any forward-looking statements contained herein is included in
the Company's filings with the Securities and Exchange Commission.
<PAGE>
Form 10-Q/A-4 Page 13 of 14
PEGASYSTEMS INC.
Part II - Other Information:
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on May 13, 1997. The
following matters were voted upon:
(1) Thomas E. Swithenbank and Alan Trefler were both re-elected to serve
as Directors of the Company to hold office until the 2000 annual meeting
of stockholders and until their successors are duly elected and
qualified. The following Directors' respective terms of office continued
after the Annual Meeting: Edward A. Maybury, Leonard A. Schlesinger,
Edward B. Roberts and Ira Vishner. Both Mr. Swithenbank and Mr. Trefler
were elected with 26,847,332 votes for, 78,510 votes against and 0 broker
non-votes.
(2) The stockholders ratified the appointment by the Board of Directors
of Ernst & Young LLP, independent auditors, to audit the financial
statements of the Company for the fiscal year ending December 31, 1997,
with 26,925,237 votes for, 605 votes against and 0 broker non-votes.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
None
<PAGE>
Form 10-Q/A-4 Page 14 of 14
PEGASYSTEMS INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Pegasystems Inc.
Date: January 20, 1999 /s/ Richard B. Goldman
--------------------------------
Richard B. Goldman
Chief Financial Officer
(principal financial officer and
chief accounting officer)
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