<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO ______________
Commission File Number: 1-11859
PEGASYSTEMS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2787865
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION )
101 MAIN STREET
CAMBRIDGE, MA 02142-1590
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(617) 374-9600
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
There were 28,896,883 shares of the Registrant's common stock, $.01 par value
per share, outstanding on November 9, 1999.
<PAGE>
PEGASYSTEMS INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 1999
and December 31, 1998 3
Consolidated Statements of Operations for the three and nine
month periods ended September 30, 1999 and September 30, 1998 4
Consolidated Statements of Cash Flows for the nine
month periods ended September 30, 1999 and September 30, 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
</TABLE>
<PAGE>
FORM 10-Q PAGE 3 OF 20
PEGASYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE-RELATED AMOUNTS)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------------- -------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $28,405 $24,806
Trade and installment accounts receivable, net of
allowance for doubtful accounts of $3,811 in 1999
and $2,753 in 1998 26,971 43,478
Prepaid expenses and other current assets 2,340 2,427
-------------------- -------------------
Total current assets 57,716 70,711
Long-term license installments, net 47,957 49,000
Equipment and improvements, net 8,443 10,044
Purchased software and other assets, net 7,973 9,505
-------------------- -------------------
Total assets $122,089 $139,260
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $13,401 $14,842
Deferred revenue 7,668 21,424
Current portion of capital lease obligations 108 123
-------------------- -------------------
Total current liabilities 21,177 36,389
Commitments and contingencies (Note E)
Deferred income taxes 750 750
Capital lease obligations, net of current portion 140 202
Other long-term liabilities 127 --
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;
28,897,107 shares and 28,683,100 shares issued and
outstanding in 1999 and 1998, respectively 289 287
Additional paid-in capital 88,677 87,757
Deferred compensation (22) (36)
Stock warrant 2,897 2,897
Retained earnings 8,248 11,489
Cumulative foreign currency translation adjustment (194) (475)
-------------------- -------------------
Total stockholders' equity 99,895 101,919
-------------------- -------------------
Total liabilities and stockholders' equity $122,089 $139,260
==================== ===================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
FORM 10-Q PAGE 4 OF 20
PEGASYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------------- ----------------- --------------- -------------------
<S> <C> <C> <C> <C>
REVENUE:
Software license $6,274 $ 9,059 $21,419 $ 27,224
Services 14,235 8,572 35,502 22,799
-------------- ----------------- --------------- -------------------
Total revenue 20,509 17,631 56,921 50,023
-------------- ----------------- --------------- -------------------
COST OF REVENUE:
Cost of software license 586 116 1,757 997
Cost of services 7,129 6,465 23,769 15,995
-------------- ----------------- --------------- -------------------
Total cost of revenue 7,715 6,581 25,526 16,992
-------------- ----------------- --------------- -------------------
GROSS PROFIT 12,794 11,050 31,395 33,031
OPERATING EXPENSES:
Research and development 5,134 6,335 15,364 16,856
Selling and marketing 3,932 6,268 14,851 17,380
General and administrative 2,804 1,829 8,068 4,315
-------------- ----------------- --------------- -------------------
Total operating expenses 11,870 14,432 38,283 38,551
-------------- ----------------- --------------- -------------------
INCOME (LOSS) FROM OPERATIONS 924 (3,382) (6,888) (5,520)
License interest income 900 704 2,565 1,857
Other interest income 274 718 601 1,945
Other income 346 -- 481 --
-------------- ----------------- --------------- -------------------
INCOME (LOSS) BEFORE BENEFIT FOR 2,444 (1,960) (3,241) (1,718)
INCOME TAXES
Benefit for income taxes -- (745) -- (653)
-------------- ----------------- --------------- -------------------
NET INCOME (LOSS) $2,444 ($1,215) ($3,241) ($1,065)
============== ================= =============== ===================
EARNINGS (LOSS) PER SHARE:
Basic $0.08 ($0.04) ($0.11) ($0.04)
============== ================= =============== ===================
Diluted $0.08 ($0.04) ($0.11) ($0.04)
============== ================= =============== ===================
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
Basic 28,861 28,628 28,858 28,576
============== ================= =============== ===================
Diluted 31,043 28,628 28,858 28,576
============== ================= =============== ===================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
FORM 10-Q PAGE 5 OF 20
PEGASYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
-------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ($3,241) ($1,065)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Benefit from deferred income taxes -- (494)
Depreciation and amortization 5,161 4,169
Provision for doubtful accounts 2,060 (373)
Issuance of compensatory stock options 85 --
Changes in operating assets and liabilities:
Trade and installment accounts receivable 15,490 (36,322)
Prepaid expenses and other current assets 87 (674)
Accounts payable and accrued expenses (1,441) 4,862
Deferred Revenue (13,756) 16,767
Other long term liabilities 127 --
-------------- ----------------
Net cash provided by (used in) operating activities 4,572 (13,130)
-------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and improvements (1,792) (5,996)
Purchased software and other assets (222) --
-------------- ----------------
Net cash used in investing activities (2,014) (5,996)
-------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligation (77) --
Exercise of stock options 423 421
Sale of stock under employee stock purchase plan 414 --
-------------- ----------------
Net cash provided by financing activities 760 421
-------------- ----------------
Effect of exchange rate on cash and cash equivalents 281 (69)
-------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 3,599 (18,774)
-------------- ----------------
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD 24,806 52,005
-------------- ----------------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $28,405 $ 33,231
============== ================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
FORM 10-Q PAGE 6 OF 20
PEGASYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Pegasystems Inc.
(the "Company") presented herein have been prepared in accordance with generally
accepted accounting principles and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and nine-month
periods ended September 30, 1999 are not necessarily indicative of the results
that may be expected for the full year ended December 31, 1999. The Company
suggests that these consolidated financial statements be read in conjunction
with the consolidated financial statements and notes thereto for the year ended
December 31, 1998, and the Company's 1998 Annual Report on Form 10-K/A filed
with the Securities and Exchange Commission.
NOTE B - EARNINGS (LOSS) PER SHARE
The Company follows the provisions of Statement of Financial Standards (SFAS)
No. 128, "Earnings Per Share." SFAS No. 128 establishes standards for computing
and presenting earnings per share and applies to entities with publicly held
common stock or potential common stock. In accordance with the Securities and
Exchange Commission's Staff Accounting Bulletin (SAB) No. 98, the Company has
determined that there were no nominal issuances of common stock or potential
common stock in the period prior to the Company's initial public offering (IPO).
The Company has applied the provisions of SFAS No. 128 and SAB No. 98
retroactively to all periods presented.
<TABLE>
<CAPTION>
(in thousands, except per share data) Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Basic :
Net income (loss) $2,444 ($1,215) ($3,241) ($1,065)
=========== =========== ============= ============
Weighted average common shares outstanding 28,861 28,628 28,858 28,576
=========== =========== ============= ============
Basic earnings (loss) per share $0.08 ($0.04) ($0.11) ($0.04)
=========== =========== ============= ============
Diluted :
Net income (loss) $2,444 ($1,215) ($3,241) ($1,065)
=========== =========== ============= ============
Weighted average common shares outstanding 28,861 28,628 28,858 28,576
Effect of :
Assumed exercise of stock options 2,182 -- -- --
----------- ----------- ------------- ------------
Weighted average common shares outstanding,
assuming dilution 31,043 28,628 28,858 28,576
=========== =========== ============= ============
Diluted earnings (loss) per share $0.08 ($0.04) ($0.11) ($0.04)
=========== =========== ============= ============
</TABLE>
<PAGE>
FORM 10-Q PAGE 7 OF 20
For the three-month periods ended September 30, 1999 and 1998, 823,626 and
382,376 options and warrants, respectively, were excluded from the weighted
average common shares outstanding, assuming dilution, as their effect would be
anti-dilutive. For the nine-month periods ended September 30, 1999 and 1998,
3,874,863 and 605,283 options and warrants, respectively, were excluded from the
weighted average common shares outstanding, assuming dilution, as their effect
would be anti-dilutive.
NOTE C - COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," effective
January 1, 1998. SFAS 130 establishes standards for reporting and displaying
comprehensive income and its components in financial statements. The components
of the Company's comprehensive income are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(IN THOUSANDS) 1999 1998 1999 1998
-------------- -------------- ----------- ------------------
<S> <C> <C> <C> <C>
Net income (loss) $2,444 ($1,215) ($3,241) ($1,065)
-------------- -------------- ----------- ------------------
Foreign currency translation adjustments,
net of income taxes 17 29 281 43
-------------- -------------- ----------- ------------------
Comprehensive income (loss) $2,461 $ (1,186) ($2,960) $ (1,022)
============== ============== =========== ==================
</TABLE>
NOTE D- SEGMENT REPORTING
During 1998, the Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 requires certain financial and
supplementary information to be disclosed on an annual and interim basis for
each reportable operating segment of an enterprise, as defined. Based on the
criteria set forth in SFAS No. 131, the Company currently operates in one
operating segment, customer service software.
NOTE E - COMMITMENTS AND CONTINGENCIES
COMPANY LITIGATION
CHALVERUS Case: In November 1997 and January 1998, complaints purporting to
be class actions were filed with the United States District Court for the
District of Massachusetts (the "Court") alleging that the Company and several
of its officers violated Section 10(b) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), Rule 10b-5 promulgated by the
Commission thereunder, and Section 20(a) of the Exchange Act. A third
complaint was filed in April 1998 but has been voluntarily dismissed without
prejudice. In December 1998, the plaintiffs in the remaining class actions
filed their First Amended Consolidated Complaint (the "Amended Complaint")
which names the Company, the Company's former President and a former officer
and director, among the defendants. The Amended Complaint alleges that the
defendants issued false and misleading financial statements and press
releases concerning the Company's publicly reported earnings. The Amended
Complaint seeks certification of a class of persons who purchased the
Company's Common Stock between July 2, 1997 and October 29, 1997, and does
not specify the amount of damages sought. The court has denied the
defendants' motion to dismiss the Amended Complaint. Discovery has recently
commenced.
<PAGE>
FORM 10-Q PAGE 8 OF 20
The matter is in a very preliminary stage of litigation, and the Company gives
no assurance as to its eventual outcome. The Company intends to defend this
matter vigorously.
GELFER CASE:
In December 1998, a complaint also purporting to be a class action was filed
with the Court after the Company's announcement on November 24, 1998 that it
may be recording revenue adjustments to prior periods. In April 1999, the
plaintiffs filed their First Amended Class Action Complaint ("Gelfer
Complaint") in that action. The Gelfer Complaint is filed against the
Company, its former President, and a former officer and director and alleges
violations of Section 10(b) and Section 20(a) of the Exchange Act and Rule
10b-5 promulgated by the Commission thereunder. The Complaint is filed on
behalf of a purported class of persons who purchased the Company's common
stock between April 2, 1998 through November 24, 1998 and does not specify
the amount of damages sought. The defendants have filed a motion to dismiss,
which is pending. The matter is in a very preliminary stage of litigation,
and the Company gives no assurance as to its eventual outcome.
FORMAL ORDER OF PRIVATE INVESTIGATION
In May 1999, the Boston office of the Securities and Exchange Commission
("SEC") issued a Formal Order of Private Investigation of the Company and
unidentified individuals, currently or formerly associated with the Company,
which concerns past accounting matters, financial reports, and other public
disclosures and trading activity in the Company's securities during 1997 and
1998. The Company has been cooperating fully with the Commission. The
investigation is confidential and ongoing.
<PAGE>
FORM 10-Q PAGE 9 OF 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
As of January 1, 1999, the Company refined its method of classifying costs
and expenses by directly charging costs to their appropriate functional
classification. During 1998, all costs were allocated to the classifications
using a method based on the classification's salaries.
During the third quarter of 1999, the company further refined its methodology
of classifying costs and expenses. Results for the first nine months of 1999
have been reclassified to conform with the current methodology.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1998
REVENUE
Total revenue for the three-month period ended September 30, 1999 (the "1999
Three Month Period") increased 16.3% to $20.5 million from $17.6 million for the
three-month period ended September 30, 1998 (the "1998 Three Month Period").
Total revenue for the nine-month period ended September 30, 1999 (the "1999 Nine
Month Period") increased 13.8% to $56.9 million from $50.0 million for the
nine-month period ended September 30, 1998 (the "1998 Nine Month Period"). These
increases were due to an increase in services revenue partially offset by a
decrease in software license revenue.
Software license revenue for the 1999 Three Month Period decreased 30.7% to
$6.3 million from $9.1 million for the 1998 Three Month Period. Software
license revenue for the 1999 Nine Month Period decreased 21.3% to $21.4
million from $27.2 million for the 1998 Nine Month Period. The Company
believes that the decreases in software license revenue for both the Three
Month and Nine Month Periods were due to a combination of factors. These
factors include not attracting new customers due to the uncertainties related
to the securities litigation and the SEC investigation that the Company is
involved in and general uncertainties related to the Year 2000 issue that has
delayed procurement decisions in many segments of the computer and software
industries. Additionally, the allocation of revenues between license and
services as required by Statement of Position 97-2, "Software Revenue
Recognition," as issued by the American Institute of Certified Public
Accounts, ("SOP 97-2") has resulted in less revenues being allocated to
licenses and more revenues being allocated to services because the services
required to complete some customer implementations were greater than
initially expected.
Services revenue for the 1999 Three Month Period increased 66.1% to $14.2
million from $8.6 million for the 1998 Three Month Period. Services revenue
for the 1999 Nine Month Period increased 55.7% to $35.5 million from $22.8
million for the 1998 Nine Month Period. The increases in services revenue
were primarily attributable to additional consulting services provided to
existing customers, the completion of projects on which the revenue had
previously been deferred and the allocation between software license revenue
and services revenue as required by SOP 97-2 as discussed above.
COST OF REVENUE
Cost of software license revenue for the 1999 Three Month Period increased
405.2% to $0.6 million from $0.1 million for the 1998 Three Month Period.
Cost of software license revenue for the 1999 Nine Month Period increased
76.2% to $1.8 million from $1.0 million for the 1998 Nine Month Period. Cost
of software license revenue as a percentage of license revenue for the 1999
Three Month Period increased to 9.3% from 1.3% for the 1998 Three Month
Period. Cost of software license revenue as a percentage of license revenue
for the 1999 Nine Month Period increased to 8.2% from 3.7% for 1998 Nine Month
<PAGE>
FORM 10-Q PAGE 10 OF 20
Period. These increases were due primarily to the amortization of purchased
software costs of $0.6 million and $1.8 million for the 1999 Three and Nine
Month Periods respectively, acquired by the Company in June 1997. Amounts
amortized prior to the sale of products incorporating the related purchased
software were treated as research and development expenses. Product sales
incorporating such technology began in the fourth quarter of 1998. The
software is being amortized through December 31, 2002.
Cost of services for the 1999 Three Month Period increased 10.3 % to $7.1
million from $6.5 million for the 1998 Three Month Period. Cost of services
for the 1999 Nine Month Period increased 48.6% to $23.8 million from $16.0
million for the 1998 Nine Month Period. These increases were due to costs
associated with increased staffing, such as compensation, facilities and
equipment-related costs, which resulted from transferring certain of the
research and development staff to the Company's Client Services Group and
Software Services early in the 1999 Nine Month Period. These increases were
partially offset by a reduction in accrued costs relating to employee
incentive compensation plans during the 1999 Three Month Period. Cost of
services as a percentage of services revenue decreased to 50.1% for the 1999
Three Month Period from 75.4% for the 1998 Three Month Period. Cost of
services as a percentage of services revenue decreased to 67.0% for the 1999
Nine Month Period from 70.2% for the 1998 Nine Month Period. These increases
in gross margin were primarily due to the recognition of previously deferred
services revenue and the allocation of software license revenue to services
revenue as required by SOP 97-2, both with no current period cost.
OPERATING EXPENSES
Research and development expenses for the 1999 Three Month Period decreased
19.0% to $5.1 million from $6.3 million for the 1998 Three Month Period.
Research and development expenses for the 1999 Nine Month Period decreased 8.9%
to $15.4 million from $16.9 million for the 1998 Nine Month Period. As a
percentage of total revenue, research and development expenses decreased to
25.0% for the 1999 Three Month Period from 35.9% for the 1998 Three Month
Period. As a percentage of total revenue, research and development expenses
decreased to 27.0% for the 1999 Nine Month Period from 33.7% for the 1998 Nine
Month Period. These decreases were primarily due to lower travel-related costs
as certain research and development staff were transferred to the Company's
Client Services Group early in the 1999 Nine Month period, and lower software
amortization costs. During the 1998 Three and Nine Month Periods, the Company
had recorded approximately $0.5 and $1.4 million, respectively, of
amortization of purchased software acquired by the Company in June 1997.
Amounts amortized subsequent to the sale of products incorporating the
related purchased software were treated as cost of software license. Product
sales incorporating such technology began in the fourth quarter of 1998.
Selling and marketing expenses for the 1999 Three Month Period decreased 37.3%
to $3.9 million from $6.3 million for the 1998 Three Month Period. Selling and
marketing expenses for the 1999 Nine Month Period decreased 14.6% to $14.9
million from $17.4 million for the 1998 Nine Month Period. As a percentage of
total revenue, selling and marketing expenses decreased to 19.2% for the 1999
Three Month Period from 35.6% for the 1998 Three Month Period. As a percentage
of total revenue, selling and marketing expenses decreased to 26.1% for the 1999
Nine Month Period from 34.7% for the 1998 Nine Month Period. These decreases
were due primarily to a reduction in travel expenses, advertising and trade
shows expenses, facilities-related expenses, and accrued costs relating to
employee incentive compensation plans.
General and administrative expenses for the 1999 Three Month Period increased
53.3% to $2.8 million from $1.8 million for the 1998 Three Month Period. General
and administrative expenses for the 1999 Nine Month Period increased 87.0% to
$8.1 million from $4.3 million for the 1998 Nine Month Period. As a percentage
of total revenue, general and administrative expenses increased to 13.7% for
<PAGE>
FORM 10-Q PAGE 11 OF 20
the 1999 Three Month Period from 10.4% for the 1998 Three Month Period. As a
percentage of total revenue, general and administrative expenses increased to
14.2% for the 1999 Nine Month Period from 8.6% for the 1998 Nine Month
Period. These increases were primarily due to higher professional fees and
bad debt expenses to recognize potentially uncollectible accounts. Increased
professional fees were incurred as a result of additional legal and
accounting costs associated with ongoing class action litigation and prior
period restatements.
LICENSE INTEREST INCOME
License interest income, which is the portion of all license fees due and
received under software license agreements that was not recognized upon
product acceptance or license renewal, increased to $0.9 million for the 1999
Three Month Period from $0.7 million for the 1998 Three Month Period. License
interest income increased to $2.6 million for the 1999 Nine Month Period from
$1.9 million for the 1998 Nine Month Period. These changes were primarily due
to the increase in Company's installed customer base.
BENEFIT FOR INCOME TAXES
As of September 30, 1999, the Company has net operating loss and tax credit
carryforwards available to offset future taxable income, if any. The Company has
provided a full valuation allowance against these deferred tax assets as their
realizability is uncertain. The tax benefit for federal, state and foreign
taxes was $0.8 million for the 1998 Three Month Period and $0.7 million for the
1998 Nine Month Period. The effective tax rate remained constant at 38.0% for
the 1998 Three and Nine Month Periods.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has funded its operations primarily through
cash flow from operations, bank borrowings, and proceeds from the Company's
public stock offerings.
At September 30, 1999, the Company has cash and cash equivalents of
approximately $28.4 million and working capital of approximately $36.5
million. The Company's approach of charging license fees payable in
installments over the term of its license has historically deferred the
receipt of cash and limited the availability of working capital.
Net cash provided by operating activities for the 1999 Nine Month Period was
$4.6 million, as compared to $13.1 million of net cash used for the 1998 Nine
Month Period. This increase in cash was primarily due to a decrease in accounts
receivable, partially offset by the decrease in deferred revenue, the decrease
in accounts payable and accrued expenses, and the operating loss, net of
non-cash items.
Net cash used in investing activities was approximately $2.0 million during the
1999 Nine Month Period, as compared to $6.0 million for the 1998 Nine Month
Period. This decrease in cash used was mainly due to fewer purchases of property
and equipment, consisting mainly of computer hardware and software, and
furniture and fixtures.
<PAGE>
FORM 10-Q PAGE 12 OF 20
Net cash provided by financing activities was $0.8 million during the 1999
Nine Month Period, as compared, to $0.4 million for the 1998 Nine Month
Period. The increase in cash was due to the sale of stock under the employee
stock purchase plan and stock option exercises, partially offset by payments
on the Company's capital lease obligation.
In addition to cash used for investing activities, the Company has operating
leases for office space, furniture and equipment. At September 30, 1999, the
Company's commitments under non-cancelable operating leases for office space
with terms in excess of one year totaled $2.4 million, $4.2 million, $4.2
million, $4.2 million, $2.1 million, and $1.3 million for 1999, 2000, 2001,
2002, 2003, and thereafter. The Company's total payments under such leases
was $3.0 million for the 1999 Nine Month Period.
The Company's $5.0 million revolving bank credit line terminated on June 30,
1999. At that date the Company had no outstanding borrowings.
The Company believes that current cash and cash equivalents will be
sufficient to fund the Company's operations for the near term. There can be
no assurance that additional capital which may be required to support further
revenue growth will be available or that any such additional capital will
be available on reasonable terms, if at all, at such time as required by the
Company.
EFFECT OF "YEAR 2000" ISSUES.
The "Year 2000" problem is pervasive and complex, as virtually every computer
operation will be affected in some way by the rollover of the two-digit year
value to "00." The issue is whether computer systems will properly recognize
date sensitive information when the year changes to 2000. Systems that do not
properly recognize such information (or other date changes) could generate
erroneous data or fail. Pegasystems' customers rely on date-sensitive operations
to calculate internal data and to service their customers. In addition, the
Company also uses other companies' products as part of market offerings and for
internal use; these programs may also be affected by the issue.
Year 2000 readiness issues may negatively affect the purchasing patterns of
existing and potential customers. Many organizations are spending significant
amounts and rededicating personnel to correct or patch their current systems to
achieve Year 2000 readiness. Thus, fewer funds may be available to purchase the
Company's products. Also, the issue may divert customers' and potential
customers' time, attention, and resources away from those projects which
typically lead to purchases of products or services. The Company does not
believe that there is any practical way to ascertain the extent of, and has no
plans to address problems associated with, any such reduction in purchasing
resources of its customers. Any such reduction could, however, result in a
material adverse effect on the Company's business, operating results and
financial condition.
Pegasystems has designed and tested the most current versions of its products
to be Year 2000 compliant. However, some customers are using earlier product
versions, which are not necessarily Year 2000 compliant. To address this
issue, the Company has advised users of earlier product versions of such
noncompliance and solicited customer feedback with respect to their Year 2000
testing results. The Company has responded to known Year 2000 problems
experienced by users of earlier product versions with appropriate upgrades
and patches. The Company has also provided to all of its customers a report
on known Year 2000 problems relating to the Company's products and possible
solutions to those problems. In addition, the Company's products are
generally integrated with the systems and products of its customers developed
by other vendors. Year 2000 problems in these systems and products might
significantly limit the ability of the Company's customers to realize the
intended benefit offered by the Company's products. The Company may in the
future be subject to claims based on Year 2000 problems in others' products
or issues arising from the integration of multiple products within an overall
system. Although the Company has not been involved in any litigation or
proceeding to date involving its products or services related to Year 2000
issues, there can be no assurance that the Company will not in the future be
required to defend its products or services or to negotiate resolutions of
claims based on Year 2000 issues. The costs of defending and resolving Year
2000-related disputes, and any liabilities of the Company for
<PAGE>
FORM 10-Q PAGE 13 OF 20
Year 2000-related damages, including consequential damages, could have a
material adverse effect on the Company business, operating results and
financial condition.
The Company also relies on certain computer technology and software that it
licenses from third parties, including software that is integrated with the
Company's products. These programs may also present Year 2000 problems. Although
the Company has not experienced any significant product claims to date, there
can be no assurance that unanticipated errors or defects will not result in
product liability or other claims in the future. Failure of third-party software
comprising any part of the Company's systems to operate properly with regard to
Year 2000 and thereafter could require the Company to incur unanticipated
expenses to address associated problems, which could have a material adverse
effect on the Company's business, operating results and financial condition.
The Company has adopted standard industry practices to prepare for the effect of
the upcoming date change on internal data and information technology systems
(such as communications, development, accounting, billing, and other systems).
The Company's Year 2000 internal readiness program primarily covers: taking
inventory of hardware, software and embedded systems, assessing business and
customer satisfaction risks associated with such systems, creating action plans
to address known risks, executing and monitoring action plans, and contingency
planning. Pegasystems has completed its Year 2000 readiness preparations with
respect to core business systems and all systems are considered ready.
Although the Company does not believe that it will incur any material costs or
experience material disruptions in its business associated with preparing its
internal systems for the year 2000, there can be no assurances that the Company
will not experience serious unanticipated negative consequences and/or material
costs caused by undetected errors or defects in the technology used in its
internal system. The most reasonably likely worst case scenarios would include:
(i) corruption of data contained in internal information systems, (ii) hardware
failure, and (iii) the failure of infrastructure services provided by government
agencies and other third parties (e.g., electricity, phone service, water
transport, Internet services, etc.). The Company has completed contingency
planning for all its internal systems. These contingency plans have included,
among other things, manual "work-arounds" for software and hardware failure,
as well as the substitution of systems where necessary.
ADOPTION OF THE EURO
A new currency, "EURO", was introduced in certain Economic and Monetary Union
("EMU") countries. It is expected that by 2002 (at the latest) all participating
EMU countries will use the EURO as their single currency. As a result, software
used by many companies headquartered or maintaining a subsidiary in a
participating EMU country is expected to be EURO-enabled. In less than four
years, all companies headquartered or maintaining a subsidiary in an EMU country
will need to be EURO-enabled. These changes will change budgetary, accounting
and fiscal systems in companies and public administration, and require the
simultaneous handling of parallel currencies and conversion of legacy data.
These requirements (and the fact that the final rules and regulations are not
yet available) may curb market demand for the Company's products because the
budgets and priorities of our customers and prospective customers may change.
The Company is monitoring the rules and regulations as they become known in
order to make any changes to its software products that the Company deems
necessary to comply with such rules and regulations. Although the Company
believes that its most recent products address these requirements, there can be
no assurance that, once the final rules and regulations are completed, the
Company's software will contain all of the necessary changes or meet all of
<PAGE>
FORM 10-Q PAGE 14 OF 20
the EURO requirements. Any inability to comply with the EURO requirements
could have an adverse effect on the Company's business, operating results and
financial condition.
INFLATION
Inflation has not had a significant impact on the Company's operating results to
date, and the Company does not expect it to have a significant impact in the
future. The Company's license and maintenance fees are typically subject to
annual increases based on recognized inflation indexes.
CERTAIN STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The Company, desiring to avail itself of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, wishes to caution readers that
the following important factors, among others, in some cases have caused and in
the future could cause the Company's actual results to differ materially from
those expressed in forward-looking statements made by or on behalf of the
Company in filings with the Securities and Exchange Commission, press releases
or oral statements. Words such as "expects," "may," "anticipates," "intends,"
"seeks", "would," "will," "plans," "believes," "estimates," "should," and
similar words and expressions are intended to identify such forward-looking
statements. These statements are based on estimates, projections, beliefs, and
assumptions of the Company and its management, and are not guarantees of future
performance.
The Company believes that its cash balances and anticipated future cash flows
will be sufficient to fund operations for the immediate term. The Company can
make no assurances that measures taken to date or to be taken in the future will
be sufficient to stem losses or that future financing will be available to the
Company on satisfactory terms. A transition from existing term licenses to
prepaid extended term licenses may significantly reduce the predictability of
revenue since historically the Company has recognized revenue from software
license renewals, and the change to a prepaid extended term license model will
obviate such renewals.
The Company faces litigation. Negative publicity resulting from its delayed SEC
filings and its restatement of prior period financial statements has made sales
more difficult to close. The Company is presently a defendant in two private
securities litigation matters. Although the Company intends to defend these
actions vigorously, no assurance can be given as to the outcomes. It is possible
that the Company may be required to pay substantial damages or settlement costs
which could have a material adverse effect on the Company's financial position
or results of operation. In addition, regardless of the outcome of any of these
actions, it is likely that the Company will incur substantial defense costs and
that such actions will cause a diversion of management time and attention. The
Company's delays in SEC filings and adjustments made to previously published
financial statements have resulted in negative publicity for the Company. Such
events and related publicity have adversely affected demand for the Company's
products and services.
The Company's stock price has been volatile. Quarterly results have and are
likely to fluctuate significantly. The market price of Pegasystems' Common Stock
has been and may continue to be highly volatile. Factors that are difficult to
predict, such as quarterly revenues and operating results, statements and
ratings by financial analysts and overall market performance, will have a
significant effect on the price for shares of Pegasystems' Common Stock.
Revenues and operating results have varied considerably in the past from period
to period and are likely to vary considerably in the future. Product development
and other expenses are planned anticipating future revenue. If revenue falls
below expectations, financial performance is likely to be adversely affected
because only a small portion of expenses vary with revenue. As a result,
period-to-period comparisons of operating results are not necessarily meaningful
and should not be relied upon to predict future performance.
The timing of license revenues is related to the completion of implementation
services and product acceptance by the customer, the timing of which has been
difficult to predict accurately. There can be no assurance that Pegasystems will
be profitable on an annual or quarterly basis or that earnings or revenues will
meet analysts' expectations. Fluctuations may be particularly pronounced because
a significant portion of revenues in any quarter is attributable to product
acceptance or license renewal by a relatively small number of customers.
Fluctuations also reflect a policy of recognizing license fee revenue upon
product acceptance or license renewal in an amount equal to the present value of
the total committed license payment due during the term. Customers generally do
<PAGE>
PAGE 15 of 20
not accept products until the end of a lengthy sales cycle and an
implementation period, typically ranging from one to six months but in some
cases significantly longer. Risks over which the Company has little or no
control, including customers' budgets, staffing allocation, and internal
authorization reviews, can significantly affect the sales and acceptance
cycles. Changes dictated by customers may delay product implementation and
revenue recognition. The Company's business and financial and operating
results has experienced and may continue to experience significant
seasonality.
The Company will need to develop new products, evolve existing ones, and adapt
to technological change. Technological developments, customer requirements,
programming languages and industry standards change frequently in the Company's
markets. As a result, success in current markets and new markets will depend
upon the Company's ability to enhance current products, to develop and introduce
new products that meet customer needs, keep pace with technological changes,
respond to competitive products, and achieve market acceptance. Product
development requires substantial investments for research, refinement and
testing. There can be no assurance that the Company will have sufficient
resources to make necessary product development investments. Pegasystems may
experience difficulties that will delay or prevent the successful development,
introduction or implementation of new or enhanced products. Inability to
introduce or implement new or enhanced products in a timely manner would
adversely affect future financial performance. The Company's products are
complex and may contain errors. Errors in products will require the Company to
ship corrected products to customers. Errors in products could cause the loss of
or delay in market acceptance or sales and revenue, the diversion of development
resources, injury to the Company's reputation, or increased service and warranty
costs which would have an adverse effect on financial performance.
The Company has historically sold to the financial services market. This market
is consolidating rapidly, and faces uncertainty due to many other factors. The
Company has historically derived a significant portion of its revenue from
customers in the financial services market, and its future growth depends, in
part, upon increased sales to this market. Competitive pressures, industry
consolidation, decreasing operating margins within this industry, currency
fluctuations, geographic expansion and deregulation affect the financial
condition of the Company's customers and their willingness to pay. In addition,
customers' purchasing patterns are somewhat discretionary. As a result, some or
all of the factors listed above may adversely affect the demand by customers.
The financial services market is undergoing intense domestic and international
consolidation. In recent years, several customers have been merged or
consolidated. Future mergers or consolidations may cause a decline in revenues
and adversely affect the Company's future financial performance.
The Company's growth strategy requires expansion into new vertical markets. The
results of this strategy are uncertain. A critical part of the Company's growth
strategy is to continue selling products to markets other than financial
services, such as insurance, telecommunications, and health care. The Company
will need to hire additional personnel with expertise in these other markets and
otherwise invest in people and technologies to facilitate this expansion.
Deterioration in economic or market conditions generally may also adversely
affect the demand by customers in these other markets. There can be no assurance
that the Company will continue to be successful in selling products to these
other markets or in continuing to attract and retain personnel with the
necessary industry expertise. Inability to effectively penetrate these other
markets could have an adverse effect on future financial performance.
If existing customers do not renew, the Company's financial results may suffer.
A significant portion of total revenue has been attributable to license
renewals. While historically a substantial majority have been renewed, there can
be no assurance that a substantial majority of customers will continue to renew
expiring licenses. A decrease in license renewals absent offsetting revenue from
other sources would have a material adverse effect on future financial
performance. In addition, possible transition to a prepaid extended term license
may have a material adverse impact on the amount of license renewal revenues in
future periods.
The Company depends on certain key personnel, and must be able to attract and
retain qualified personnel in the future. The business is dependent on a
number of key, highly skilled technical, managerial, consulting, sales and
marketing personnel, including Mr. Trefler, the Company's former President
and Chief Executive Officer. The loss of key personnel could adversely affect
financial performance. No employee is party to an employment contract with
Pegasystems, although each is typically subject to a non-disclosure and
non-competition agreement. The Company does not have any significant key-man
life insurance on any officers or
<PAGE>
PAGE 16 OF 20
employees and does not plan to put any in place. The Company's success will
depend in large part on the ability to hire and retain qualified personnel.
The number of potential employees who have the extensive knowledge of
computer hardware and operating systems needed to develop, sell and maintain
our products is limited, and competition for their services is intense.
Competition for qualified and effective sales personnel is intense, and there
can be no assurance that the Company will be able to attract and retain such
personnel. If the Company is unable to do so, the Company's business,
operating results, and financial condition could be materially and adversely
affected.
The market for the Company's offerings is increasingly and intensely
competitive, rapidly changing, and highly fragmented. The market for customer
relationship management software and related consulting and training services
is intensely competitive and highly fragmented. The Company currently
encounters significant competition from internal information systems
departments of potential or existing customers that develop custom software.
It also competes with companies that target the customer interaction and
workflow markets and professional services organizations that develop custom
software in conjunction with rendering consulting services. Competition for
market share and pressure to reduce prices and make sales concessions are
likely to increase. Many competitors have far greater resources and may be
able to respond more quickly and efficiently to new or emerging technologies,
programming languages or standards or to changes in customer requirements or
preferences. Competitors may also be able to devote greater managerial and
financial resources to develop, promote and distribute products and provide
related consulting and training services. There can be no assurance that the
Company will be able to compete successfully against current or future
competitors or that the competitive pressures faced by the Company will not
materially and adversely affect its business, operating results, and
financial condition.
The Company must manage increased business complexity and growth effectively.
The business has grown in size, geographic scope and complexity and product
offerings and the customer base have expanded. This growth and expansion have
placed, and are expected to continue to place, a significant strain on
management, operations and capital needs. Continued growth will require the
Company to hire, train and retrain many employees in the United States and
abroad, particularly additional sales and financial personnel. The Company will
also need to enhance its financial and managerial controls and reporting
systems. There can be no assurance that the Company will attract and retain the
personnel necessary to meet our business challenges. Failure to manage growth
effectively may adversely affect future financial performance.
The Company will have to attract and retain effective sales personnel.
Competition for qualified sales personnel is intense, and there can be no
assurance that the Company will be able to attract and retain such personnel. If
the Company is unable to attract and retain effective sales personnel on a
timely basis, the Company's business, operating results, and financial condition
could be materially and adversely affected.
"Year 2000" issues may affect the Company's operations, demand for its
offerings, and future results. The "Year 2000" problem is pervasive and complex
and is discussed in Management's Discussion and Analysis of Financial Condition
and Results of Operations. Year 2000 issues could have an adverse effect on
Pegasystems in a number of ways. Pegasystems' customers rely on date-sensitive
operations to calculate internal data and to service their customers. There can
be no assurance that the Company's products will not contain errors or defects
affecting Year 2000 problems or that litigation involving Pegasystems will not
arise out of such problems. In addition, the Company also uses other companies'
products as part of market offerings and for internal use; these programs may
also be affected. As a result of efforts to correct or patch their current
systems, customers may have fewer funds available to purchase the Company's
products. Also, the Y2K issue may divert current and potential customers' time,
attention and resources away from those projects which typically lead to
purchases of the Company's products or services.
The Company relies on certain third party relationships. The Company has a
number of relationships with third parties that are significant to sales,
marketing and support activities and product development efforts. The Company
relies on relational database management system applications and development
tool vendors, software and hardware vendors, and consultants to provide
marketing and sales opportunities for the direct sales force and to strengthen
the Company's products through the use of industry-standard tools and utilities.
The Company has also recently begun establishing relationships with third
parties that will distribute its products. In particular, the Company relies on
its relationship with First Data Corporation for the distribution of products to
the credit card and mutual fund markets. There can be no assurance that these
<PAGE>
PAGE 17 OF 20
companies, most of which have significantly greater financial and marketing
resources, will not develop or market products that compete with those of the
Company in the future or will not otherwise end their relationships with or
support of the Company.
The Company may face product liability and warranty claims. The Company's
license agreements typically contain provisions intended to limit the nature and
extent of the Company's risk of product liability and warranty claims. There is
a risk that a court might interpret these terms in a limited way or could hold
part or all of these terms to be unenforceable. Also, there is a risk that these
contract terms might not bind a party other than the direct customer.
Furthermore, some of the Company's licenses with its customers are governed by
non-U.S. law, and there is a risk that foreign law might give the Company less
or different protection. Although the Company has not experienced any material
product liability claims to date, a product liability suit or action claiming a
breach of warranty, whether or not meritorious, could result in substantial
costs and a diversion of management's attention and the Company's resources.
The EURO's adoption imposes product and market risks. A new currency, the
"EURO", was introduced in certain Economic and Monetary Union ("EMU") countries
in early 1999. It is expected that by 2002 (at the latest) all participating EMU
countries will use the EURO as their single currency. As a result, software used
by many companies headquartered or maintaining a subsidiary in a participating
EMU country is expected to be EURO-enabled. In less than four years, all 13
companies headquartered or maintaining a subsidiary in an EMU country will need
to be EURO-enabled. These changes will change budgetary, accounting and fiscal
systems in companies and public administration, and require the simultaneous
handling of parallel currencies and conversion of legacy data. These
requirements (and the fact that the final rules and regulations are not yet
available) may curb market demand for the Company's products because the budgets
and priorities of our customers and prospective customers may change. The
Company is monitoring the rules and regulations as they become known in order to
make any changes to its software products that the Company deems necessary to
comply with such rules and regulations. Although the Company believes that its
most recent products address these requirements, there can be no assurance that,
once the final rules and regulations are completed, the Company's software will
contain all of the necessary changes or meet all of the EURO requirements. Any
inability to comply with the EURO requirements could have an adverse effect on
the Company's business, operating results and financial condition.
The Company faces risks from operations and customers based outside of the U.S.
Sales to customers headquartered outside of the United States represented
approximately 22.6%, 16.5%, and 17.7% of the Company's total revenue in 1998,
1997, and 1996, respectively. The Company, in part through its wholly-owned
subsidiaries based in the United Kingdom and in Australia, markets products and
renders consulting and training services to customers based in Canada, the
United Kingdom, France, Switzerland, Ireland, Luxembourg, Mexico, Sweden,
Australia, Austria, and Singapore. The Company has established offices in
continental Europe and in Australia. The Company believes that its continued
growth will necessitate expanded international operations requiring a diversion
of managerial attention and financial resources. The Company anticipates hiring
additional personnel to accommodate international growth, and the Company may
also enter into agreements with local distributors, representatives, or
resellers. If the Company is unable to do one or more of these things in a
timely manner, the Company's growth, if any, in its foreign operations will be
restricted, and the Company's business, operating results, and financial
condition could be materially and adversely affected.
In addition, there can be no assurance that the Company will be able to maintain
or increase international market demand for its products. Most of the Company's
international sales are denominated in U.S. dollars. Accordingly, any
appreciation of the value of the U.S. dollar relative to the currencies of those
countries in which the Company distributes its products may place the Company at
a competitive disadvantage by effectively making its products more expensive as
compared to those of its competitors.
Additional risks inherent in the Company's international business activities
generally include unexpected changes in regulatory requirements, increased
tariffs and other trade barriers, the costs of localizing products for local
markets and complying with local business customs, longer accounts receivable
patterns and difficulties in collecting foreign accounts receivable,
difficulties in enforcing contractual and intellectual property rights,
heightened risks of political and economic instability, the possibility of
<PAGE>
PAGE 18 OF 20
nationalization or expropriation of industries or properties, difficulties in
managing international operations, potentially adverse tax consequences
(including restrictions on repatriating earnings and the threat of "double
taxation"), enhanced accounting and internal control expenses, and the burden of
complying with a wide variety of foreign laws. There can be no assurance that
one or more of these factors will not have a material adverse effect on the
Company's foreign operations, and, consequentially, the Company's business,
operating results, and financial condition.
The Company faces risks related to intellectual property claims or appropriation
of its intellectual property rights. The Company relies primarily on a
combination of copyright, trademark and trade secrets laws, as well as
confidentiality agreements to protect its proprietary rights. In October 1998,
the Company was granted a patent by the United States Patent and Trademark
Office relating to the architecture of the Company's systems. There can be no
assurance that such patent will not be invalidated or circumvented or that
rights granted thereunder or the description contained therein will provide
competitive advantages to the Company's competitors or others. Moreover, despite
the Company's efforts to protect its proprietary rights, unauthorized parties
may attempt to copy aspects of the Company's products or to obtain the use of
information that the Company regards as proprietary. In addition, the laws of
some foreign countries do not protect the Company's proprietary rights to as
great an extent as do the laws of the United States. There can be no assurance
that the Company's means of protecting its proprietary rights will be adequate
or that the Company's competitors will not independently develop similar
technology.
The Company is not aware that any of its products infringe the proprietary
rights of third parties. There can be no assurance, however, that third
parties will not claim infringement by the Company with respect to current or
future products. The Company expects that software product developers will
increasingly be subject to infringement claims as the number of products and
competitors in the Company's industry segment grows and the functionality of
products in different industry segments overlaps. Any such claims, with or
without merit, could be time-consuming, result in costly litigation, cause
product shipment delays, or require the Company to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may
not be available on terms acceptable to the Company or at all, which could
have a material adverse effect upon the Company's business, operating
results, and financial condition. From time to time, the Company licenses
software from third parties for use with its products. The Company believes
that no such license agreement to which it is presently a party is material
and that if any such license agreement were to terminate for any reason, the
Company would be able to obtain a license or otherwise acquire other
comparable technology or software on terms and on a timetable that would not
be materially adverse to the Company.
<PAGE>
FORM 10-Q PAGE 19 OF 20
PEGASYSTEMS INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Part II, Item 7A, "Quantitative and Qualitative Disclosures
about Market Risk," in the Company's Annual Report on Form 10-K/A for the year
ended December 31, 1998.
PART II - OTHER INFORMATION:
Item 1. Legal Proceedings
Information concerning lawsuits brought against Pegasystems is discussed in Note
E of the Notes to Consolidated Financial Statements, and is incorporated herein
and made a part hereof.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule.
10.1 Letter Agreement dated September 1, 1999 between the Company and
Steven F. Kaplan
<PAGE>
FORM 10-Q PAGE 20 OF 20
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: November 12, 1999 /s/ James P. O'Halloran
---------------------------------------------
James P. O'Halloran
Treasurer and Chief Financial Officer
(principal financial officer and
chief accounting officer)
<PAGE>
Exhibit 10.1 Letter Agreement dated September 1, 1999
between the Company and Steven F. Kaplan
STEVEN F. KAPLAN
92 High Rock Street
Needham, MA 02492
September 1, 1999
Mr. Alan Trefler
President
Pegasystems, Inc.
101 Cambridge Street
Cambridge, MA 02142
Dear Alan:
This letter agreement (the "Agreement") effective as of August 1, 1999 will
confirm and summarize the terms and conditions of the indemnification of
Steven F. Kaplan of Needham, Massachusetts (the "Director") by Pegasystems,
Inc. a Massachusetts corporation (the "Company") that we have agreed upon
with respect to my role as a member of the Board of Directors. Specifically,
we have agreed as follows:
The Company hereby agrees to indemnify, hold harmless, defend and reimburse
Director to the full extent lawful from and against, and the Director shall
have no liability to the Company or any of its owners, creditors, security
holders or any other party, for any and all losses, claims, damages,
liabilities and expenses incurred by the Director, including without
limitation any legal fees and expenses as incurred, relating to or arising
out of his role as a Board member (or any other services rendered to the
Company) or out of any action or inaction by the Company or any person or
entity acting by, through or under it, including any legal proceeding in
which the Director may be required to or agree to participate in but in which
the Director is not a party. Director shall be entitled to retain legal
counsel of his own choosing. This indemnification provision shall survive
termination indefinitely.
Sincerely yours,
/s/ Steven F. Kaplan
Steven F. Kaplan
AGREED TO AND ACCEPTED BY:
PEGASYSTEMS, INC.
By: /s/ Alan Trefler
------------------------
Alan Trefler
President
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