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 June 30, 1998
or
[ ] Transition Report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from to _______ 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 28,607,200 shares of the Registrant's common stock, $.01 par value
per share, outstanding on June 30, 1998.
<PAGE>
PEGASYSTEMS INC. AND SUBSIDIARY
Index to Form 10-Q/A
Part I - Financial Information
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 1998 3
and December 31, 1997
Consolidated Statements of Income for the three 4
and six months ended: June 30, 1998 and June 30, 1997
Consolidated Statements of Cash Flows for the six 5
months ended: June 30, 1998 and June 30, 1997
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
Part II - Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 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
</TABLE>
<PAGE>
Form 10-Q/A Page 3 of 18
PEGASYSTEMS INC.
Consolidated Balance Sheets
(in thousands, except share-related amounts)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------- ------------
(As Restated)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $43,898 $52,005
Trade and installment accounts receivable, net of
allowance for doubtful accounts of $2,390 at
June 30, 1998 and $2,200 at December 31, 1997 30,025 20,319
Prepaid expenses and other current assets 2,121 1,514
-------- --------
Total current assets 76,044 73,838
Long-term license installments, net 48,133 36,403
Equipment and improvements, net 6,883 5,578
Purchased software, net 10,524 11,701
-------- --------
Total assets $141,584 $127,520
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 9,259 $ 5,398
Deferred revenue 11,265 1,754
Deferred income taxes 4,240 3,978
-------- --------
Total current liabilities 24,764 11,130
-------- --------
Deferred income taxes 3,669 3,669
-------- --------
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;
28,607,200 shares and 28,545,100 shares issued and
outstanding in 1998 and 1997, respectively 286 285
Additional paid-in capital 87,133 86,841
Deferred compensation (45) (55)
Stock warrant 2,897 2,897
Retained earnings 23,257 23,107
Cumulative foreign currency translation adjustment (377) (354)
-------- --------
Total stockholders' equity 113,151 112,721
-------- --------
Total liabilities and stockholders' equity $141,584 $127,520
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
Form 10-Q/A Page 4 of 18
PEGASYSTEMS INC.
Consolidated Statements of Income
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------------- ------------- ------------- --------------
(As Restated) (As Restated) (As Restated) (As Previously
Restated)
<S> <C> <C> <C> <C>
Revenue:
Software license $ 9,956 $ 2,220 $ 18,165 $ 7,511
Services 8,201 3,052 14,226 5,719
------- ------- -------- -------
Total revenue 18,157 5,272 32,391 13,230
------- ------- -------- -------
Cost of revenue:
Cost of software license 735 10 881 20
Cost of services 5,445 2,386 9,529 4,536
------- ------- -------- -------
Total cost of revenue 6,180 2,396 10,410 4,556
------- ------- -------- -------
Gross Profit 11,977 2,876 21,981 8,674
Operating expenses:
Research and development 5,310 3,253 10,521 5,839
Selling and marketing 5,825 4,403 11,112 7,096
General and administrative 1,237 641 2,486 1,246
------- ------- -------- -------
Total operating expenses 12,372 8,297 24,119 14,181
------- ------- -------- -------
Loss from operations (395) (5,421) (2,138) (5,507)
License interest income 604 421 1,153 795
Other interest income 598 998 1,227 1,748
------- ------- -------- -------
Income (loss) before provision
(benefit) for income taxes 807 (4,002) 242 (2,964)
Provision (benefit) for income taxes 307 (1,520) 92 (1,126)
------- ------- -------- -------
Net income (loss) $500 $(2,482) $150 $(1,838)
======= ======= ======== =======
Earnings (loss) per share:
Basic $0.02 $(0.09) $0.01 $(0.07)
======= ======= ======== =======
Diluted $0.02 $(0.09) $0.01 $(0.07)
======= ======= ======== =======
Weighted average number of common and
potential common shares outstanding:
Basic 28,573 28,452 28,560 28,134
======= ======= ======== =======
Diluted 30,781 28,452 30,463 28,134
======= ======= ======== =======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
Form 10-Q/A Page 5 of 18
PEGASYSTEMS INC.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
------------- --------------
(As Restated) (As Previously
Restated)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $150 $(1,838)
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Provision (benefit) for deferred income taxes 262 (1,126)
Depreciation and amortization 2,646 804
Provision for doubtful accounts 300 815
Changes in operating assets and liabilities:
Trade and installment accounts receivable (21,736) (3,668)
Prepaid expenses and other current assets (607) (385)
Accounts payable and accrued expenses 3,861 963
Deferred revenue 9,511 2,024
------- -------
Net cash used in operating activities (5,613) (2,411)
------- -------
Cash Flows from Investing Activities:
Purchase of equipment and improvements (2,764) (1,565)
------- -------
Net cash used in investing activities (2,764) (1,565)
------- -------
Cash Flows from Financing Activities:
Issuance of common stock, net -- 51,943
Exercise of stock options 293 424
------- -------
Net cash provided by financing activities 293 52,367
Effect of exchange rate on cash and cash equivalents (23) (81)
------- -------
Net increase (decrease) in cash and cash equivalents (8,107) 48,310
Cash and cash equivalents, at beginning of period 52,005 24,201
------- -------
Cash and cash equivalents, at end of period $43,898 $72,511
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
Form 10-Q/A Page 6 of 18
PEGASYSTEMS INC.
Notes to Consolidated Interim Financial Statements
June 30, 1998
(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 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, 1998 are not necessarily indicative
of the results that may be expected for the year ended December 31, 1998. 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, 1997, included in the Company's 1997
Annual Report to Stockholders filed with the Securities and Exchange Commission.
Note B - Subsequent Event
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 and six-month periods ended June 30, 1998 is
as follows:
<PAGE>
Form 10-Q/A Page 7 of 18
PEGASYSTEMS INC.
Notes to Consolidated Financial Statements - Continued
June 30, 1998
Note B - Subsequent Event - continued
<TABLE>
<CAPTION>
Unaudited
Three Months Ended
June 30, 1998
(in thousands, except per share data) As Previously As Restated
Reported
------------- -----------
<S> <C> <C>
Software license revenue $ 14,534 $ 9,956
Services revenue $ 9,005 $ 8,201
Total revenue $ 23,539 $ 18,157
Income (loss) from operations $ 5,115 $ (395)
Net income $ 3,916 $ 500
Earnings per share: Basic $ 0.14 $ 0.02
Earnings per share: Diluted $ 0.13 $ 0.02
Total assets $142,685 $141,584
</TABLE>
<TABLE>
<CAPTION>
Unaudited
Six Months Ended
June 30, 1998
(in thousands, except per share data) As Previously
Reported As Restated
------------ -----------
<S> <C> <C>
Software license revenue $ 25,922 $ 18,165
Services revenue $ 15,584 $ 14,226
Total revenue 41,506 $ 32,391
Income (loss) from operations 7,130 $ (2,138)
Net income $ 5,896 $ 150
Earnings per share: Basic $ 0.21 $ 0.01
Earnings per share: Diluted $ 0.19 $ 0.01
Total assets $142,685 $141,584
</TABLE>
<PAGE>
Form 10-Q/A Page 8 of 18
PEGASYSTEMS INC.
Notes to Consolidated Financial Statements - Continued
June 30, 1998
Note C - Earnings 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. The Company has applied the provisions
of SFAS No. 128 retroactively to all periods presented. Calculations of basic
and diluted net income (loss) per share and potential common shares are as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands, except per share data) 1998 1997 1998 1997
------------- ------------- ------------- -------------
(As Restated) (As Restated) (As Restated) (As Restated)
<S> <C> <C> <C> <C>
Basic
Net income (loss) $ 500 $ (2,482) $ 150 $ (1,838)
====== ======== ====== ========
Weighted average common shares outstanding 28,573 28,452 28,560 28,134
====== ======== ====== ========
Basic earnings (loss) per share $ 0.02 $ (0.09) $ 0.01 $ (0.07)
====== ======== ====== ========
Diluted
Net income (loss) $ 500 $ (2,482) $ 150 $ (1,838)
====== ======== ====== ========
Weighted average common shares outstanding 28,573 28,452 28,560 28,134
Effect of:
Assumed exercise of stock options 2,208 -- 1,903 --
------ -------- ------ --------
Weighted average common shares outstanding,
Assuming dilution 30,781 28,452 30,463 28,134
====== ======== ====== ========
Diluted earnings (loss) per share $ 0.02 $ (0.09) $ 0.01 $ (0.07)
====== ======== ====== ========
</TABLE>
For the three-month periods ended June 30, 1998 and 1997, 295,970 and 77,368
options, respectively, were excluded from the weighted average common shares
outstanding, assuming dilution, as their effect would be anti-dilutive. For the
six-month periods ended June 30, 1998 and 1997, 577,025 and 77,564 options,
respectively, were excluded from the weighted average common shares outstanding,
assuming dilution, as their effect would be anti-dilutive.
<PAGE>
Form 10-Q/A Page 9 of 18
PEGASYSTEMS INC.
Notes to Consolidated Interim Financial Statements - Continued
June 30, 1998
Note D - New Accounting Standards
The Company adopted SFAS No. 130, "Reporting Comprehensive Income", effective
January 1, 1998. SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in financial statements. The components
of the Company's comprehensive income are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) (in thousands)
1998 1997 1998 1997
------------- ------------- ------------- -------------
(As Restated) (As Restated) (As Restated) (As Restated)
<S> <C> <C> <C> <C>
Net income (loss) $ 500 $ (2,482) $ 150 $(1,838)
Foreign currency translation
adjustments, net of income
taxes 23 23 50 50
----- -------- ----- -------
Comprehensive income (loss) $ 523 $ (2,459) $ 200 $(1,788)
===== ======== ===== =======
</TABLE>
In February 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 132, "Employers' Disclosures about Pensions and other post-Retirement
Benefits." SFAS No. 132 is effective for fiscal years beginning after December
15, 1997. The Company does not expect the adoption of this Statement to have a
significant impact on its financial position or results of operations.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires
computer software costs associated with internal use software to be expensed as
incurred until certain capitalization criteria are met. The Company will adopt
SOP 98-1 prospectively beginning January 1, 1999. The Company does not expect
the adoption of this Statement to have a significant impact on its financial
position or results of operations.
In April 1998, the AICPA issued Statement of Position 98-5 ("SOP 98-5"),
Reporting on the Costs of Start-Up Activities." SOP 98-5 requires all costs
associated with pre-opening, pre-operating and organization activities to be
expensed as incurred. The Company will adopt SOP 98-5 beginning January 1, 1999.
The Company does not expect the adoption of this Statement to have a significant
impact on its financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging instruments. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This statement applies to all entities and is effective for all
fiscal quarters beginning after June 15, 1999. Initial application of this
Statement should be as of an entity's fiscal quarter. As of June 30, 1998 and
during the quarter then ended, the Company did not hold any derivative
instruments or have any hedging activities. The Company does not expect the
adoption of this Statement to have a significant impact on its financial
position or results of operations.
<PAGE>
Form 10-Q/A Page 10 of 18
PEGASYSTEMS INC.
Notes to Consolidated Interim Financial Statements - Continued
June 30, 1998
Note E - 1997 Restatement
On April 15, 1998, the Company restated its consolidated financial statements
for the three-month periods ended March 31, 1997, June 30, 1997 and September
30, 1997. The restatements reflected revenue adjustments, as a result of a
change in the timing of revenue recognition on certain contracts. These
adjustments resulted in revenue reversals or in an increase of deferred revenue.
Also included in the restated consolidated financial statements were operating
expenses, including a provision for bad debts not previously recorded by the
Company and the recording of certain other expenses and reserves.
As discussed above in Note B, as a result of a further review of prior revenue
transactions, the Company determined that one revenue transaction was improperly
recognized in the three-month period ended March 31, 1997, but should have been
recognized in the three-month period ended June 30, 1997. Accordingly, the
Company has again restated its consolidated financial statements for the
unaudited three-month period ended June 30, 1997. In the opinion of management,
all material adjustments necessary to correct the financial statements have been
recorded.
A summary of the impact of such restatement on the financial statements for the
three and six-month periods ended June 30, 1997 is as follows:
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1997
As
Previously As Restated
(in thousands, except per share data) 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)
Loss per share: Basic $ (0.10) $ (0.09)
Loss per share: Diluted $ (0.10) $ (0.09)
Total assets $132,106 $132,106
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1997
As Previously As
Reported Previously
(in thousands, except per share data) 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 (loss) per share: Basic $ 0.03 $ (0.07)
Earnings (loss) per share: Diluted $ 0.03 $ (0.07)
Total assets $123,311 $132,106
</TABLE>
<PAGE>
Form 10-Q/A Page 11 of 18
PEGASYSTEMS INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
Three and Six Months Ended June 30, 1998 Compared to Three and Six
Months Ended June 30, 1997
On April 15, 1998, the Company restated its consolidated financial statements
for the three - month and six - month periods ended June 30, 1997. The
restatements reflected revenue adjustments as a result of a change in the timing
of revenue recognition on certain contracts. Also included in the restated
consolidated financial statements were operating expenses, including a provision
for bad debts not previously recorded by the Company and the recording of
certain other expenses and reserves.
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, 1998 (the "1998 Three Month
Period") increased 244.4% to $18.2 million from $5.3 million for the three
months ended June 30, 1997 (the "1997 Three Month Period"). Total revenue for
the six months ended June 30, 1998 (the "1998 Six Month Period") increased
144.8% to $32.4 million from $13.2 million for the six months ended June 30,
1997 (the "1997 Six Month Period"). These increases were due to increases in
both software license and services revenue.
Software license revenue for the 1998 Three Month Period increased 348.5% to
$10.0 million from $2.2 million for the 1997 Three Month Period. Software
license revenue for the 1998 Six Month Period increased 141.8% to $18.2 million
from $7.5 million for the 1997 Six Month Period. These increases in software
license revenue were primarily attributable to software license acceptances by
new customers, software license agreement renewals, and extended software usage
by existing customers.
<PAGE>
Form 10-Q/A Page 12 of 18
PEGASYSTEMS INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Services revenue for the 1998 Three Month Period increased 168.7% to $8.2
million from $3.1 million for the 1997 Three Month Period. Services revenue for
the 1998 Six Month Period increased 148.7% to $14.2 million from $5.7 million
for the 1997 Six Month Period. These increases in services revenue were
primarily attributable to additional consulting services provided to existing
customers, increased implementation services for new customers, and to a lesser
extent, increased maintenance revenue from a larger installed product base.
Cost of Revenue
Cost of software license for the 1998 Three Month Period increased 7,250.0% to
$0.7 million from $0.01 million for the 1997 Three Month Period. As a percentage
of software license revenue, cost of software license increased to 7.4% for the
1998 Three Month Period from 0.5% for the 1997 Three Month Period. Cost of
software license for the 1998 Six Month Period increased 4,305.0% to $0.9
million from $0.02 million for the 1997 Six Month Period. As a percentage of
software license revenue, cost of software license increased to 4.8% for the
1998 Six Month Period from 0.3% for the 1997 Six Month Period. These increases
were primarily due to licensing third party software and amortization costs
associated with a stock purchase warrant issued by the Company in June 1997.
Cost of services for the 1998 Three Month Period increased 128.2% to $5.4
million from $2.4 million for the 1997 Three Month Period. Cost of services for
the 1998 Six Month Period increased 110.1% to $9.5 million from $4.5 million for
the 1997 Six Month Period. These increases were due to costs associated with
increased staffing in the Company's Client Services group. Cost of services as a
percentage of services revenue decreased to 66.4% for the 1998 Three Month
Period from 78.2% for the 1997 Three Month Period. Cost of services as a
percentage of services revenue decreased to 67.0% for the 1998 Six Month Period
from 79.3% for the 1997 Six Month Period. These improved gross margins, for both
the 1998 Three and Six Month Periods, were due to more effective use of a larger
Consulting Services staff.
Operating Expenses
Research and development expenses for the 1998 Three Month Period increased
63.2% to $5.3 million from $3.3 million for the 1997 Three Month Period.
Research and development expenses for the 1998 Six Month Period increased 80.2%
to $10.5 million from $5.8 million for the 1997 Six Month Period. These
increases were primarily due to costs associated with increased staffing in the
Company's research and development group and amortization costs associated with
the acquisition of FDR's ESP Software. As a percentage of total revenue,
research and development expenses decreased to 29.2% for the 1998 Three Month
Period from 61.7% for the 1997 Three Month Period. As a percentage of total
revenue, research and development expenses decreased to 32.5% for the 1998 Six
Month Period from 44.1% for the 1997 Six Month Period. These decreases were due
to increased growth in the Company's total revenue.
Selling and marketing expenses for the 1998 Three Month Period increased 32.3%
to $5.8 million from $4.4 million for the 1997 Three Month Period. Selling and
marketing expenses for the 1998 Six Month Period increased 56.6% to $11.1
million from $7.1 million for the 1997 Six Month Period. These increases were
primarily due to costs associated with increased staffing in the Company's
selling and marketing group. As a percentage of total revenue, selling and
marketing expenses decreased to 32.1% for the 1998 Three Month Period from 83.5%
for the 1997 Three Month Period. As a percentage of total revenue, selling and
marketing expenses decreased to 34.3% for the 1998 Six Month Period from 53.6%
for the 1997 Six Month Period. These decreases were due to increased growth in
the Company's total revenue.
<PAGE>
Form 10-Q/A Page 13 of 18
PEGASYSTEMS INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
General and administrative expenses for the 1998 Three Month Period increased
93.0% to $1.2 million from $0.6 million for the 1997 Three Month Period. General
and administrative expenses for the 1998 Six Month Period increased 99.5% to
$2.5 million from $1.2 million for the 1997 Six Month Period. These increases
were due to increased investment in the infrastructure needed to support the
Company's growth, and increased professional fees incurred as a result of the
change in the Company's independent public accountants. General and
administrative expenses decreased as a percentage of total revenue to 6.8% for
the 1998 Three Month Period from 12.2% for the 1997 Three Month Period and to
7.7% for the 1998 Six Month Period from 9.4% for the 1997 Six Month Period.
These decreases were due to increased growth in the Company's total revenue.
License Interest Income
License interest income, which is the portion of all license fees due under
software license agreements that was not recognized upon product acceptance or
license renewal, increased 43.5% to $604,000 for the 1998 Three Month Period
from $421,000 for the 1997 Three Month Period. License interest income increased
45.0% to $1.2 million for the 1998 Six Month Period from $795,000 for the 1997
Six Month Period. These increases were due to an increase in the Company's
installed customer base.
Provision for Income Taxes
The tax provision for federal, state and foreign taxes was $.3 million for the
1998 Three Month Period. The tax benefit for the 1997 Three Month Period was
$1.5 million. The tax provision for federal, state and foreign taxes was $.1
million for the 1998 Six Month Period. The tax benefit for the 1997 Six Month
Period was $1.1 million. The effective tax rate has remained constant at 38.0%
for the 1998 and 1997 Three and Six Month Periods.
Liquidity and Capital Resources
Since its inception, the Company has funded its operations primarily through
cash flows 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 this 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 this second offering were approximately $51.9
million. At June 30, 1998, the Company had cash and cash equivalents of
approximately $43.9 million and working capital of approximately $51.3 million.
Net cash used in operating activities for the 1998 Six Month period was $5.6
million, primarily due to an increase in accounts receivable partially offset by
increases in deferred income taxes, accounts payable and accrued expenses,
depreciation and amortization, and deferred revenue.
Net cash used in investing activities was $2.8 million during the 1998 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
expansion of certain facilities and the Company's growing employee base.
Net cash provided by financing activities was $292,000 during the 1998 Six Month
Period due to the exercise of stock options.
The Company's capital commitments consist primarily of operating leases for
office space and equipment. At June 30, 1998, the Company's commitments under
non-cancellable operating leases for office space with terms in
<PAGE>
Form 10-Q/A Page 14 of 18
PEGASYSTEMS INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
excess of one year totaled $2.9 million, $3.8 million and $3.6 million for 1998,
1999 and 2000, respectively. The Company's total payments under such leases was
$1.6 million for the 1998 Six Month Period.
The Company's $5.0 million revolving credit line has a maturity date of June 30,
1999. At June 30, 1998, the Company had no borrowings under such facility. 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.
The Company recorded bad debt expense of $300,000 in the 1998 Six Month Period
as a result of indications that certain receivables relating primarily to
consulting and installation services rendered by the Company would not be
collected in full.
The Company believes that the net proceeds from its two 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 twelve months. 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.
The "Year 2000 Issue" refers to the problems associated with computer programs
having been written using two digits rather than four to define the applicable
year. The Company has performed an assessment of the software it uses internally
and the software it licenses to customers and such assessment has not revealed
any outstanding problems in this regard. There can be no assurance that such
problems will not develop or be revealed in the future which could materially
and adversely affect 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, 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 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. 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 Page 15 of 18
PEGASYSTEMS INC.
Part II - Other Information:
Item 1. Legal Proceedings
Disclosure concerning certain litigation pending against the Company is
contained in the Company's Form 10-K filed April 15, 1998. There have been no
material developments with respect to such litigation since such date.
In April 1998, a complaint purporting to be a class action was filed with the
United States District Court for the District of Massachusetts 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 Securities Exchange Act. The
complaint names the Company itself, Alan Trefler, Ira Vishner, Kenneth W. Olson
and Michael R. Pyle, four officers of the Company, as defendants. The Complaint
alleges that the defendants issued false and misleading financial statements and
press releases concerning the Company's publicly reported earnings. The
Complaint seeks certification of a class of persons who purchased the Company's
Common Stock between April 28, 1997 and April 2, 1998, and does not specify the
amount of damages sought. The defendants have served upon counsel for the
plaintiffs a motion to dismiss the Complaint, and expects the defendants to file
a response to the motion. The defendants have not filed an answer or any other
responsive pleadings in this litigation. The Company intends to defend this
matter vigorously.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
*10.1 Amended and Restated 1994 Long-Term Incentive Plan
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
None
- ------------
*Previously filed.
<PAGE>
Form 10-Q/A Page 16 of 18
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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