Exhibit 13.1.
STOCK PRICE HISTORY AND RELATED STOCKHOLDER MATTERS (unaudited)
The following table sets forth the range of high and low sales prices on the
National Association of Security Dealers Automatic Quotation ("Nasdaq") National
Market System under the Nasdaq symbol PEGA, for 1996. The Company's common stock
has been traded on the Nasdaq National Market System since its initial public
offering in July 1996. Prior to that date, there was no public market for the
Company's common stock. As of February 20, 1997, the Company had approximately
23 stockholders of record and approximately 2,300 beneficial owners of the
Company's common stock. On February 20, 1997, the closing sale price of the
common stock was $35.63. The Company has never declared or paid any dividends on
its common stock. The Company intends to retain its earnings to finance future
growth, and therefore does not anticipate paying any dividends in the
foreseeable future.
1996 High Low
- --------------------------------------- ------------ ------------
Third Quarter (beginning July 19, 1996) $27.00 $10.00
Fourth Quarter $37.00 $26.13
PEGASYSTEMS INC.
FIVE YEAR COMPARISON OF SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below at December 31, 1992,
1993, 1994, 1995 and 1996 have been derived from the consolidated financial
statements of Pegasystems Inc. ("Pegasystems" or the "Company"). This data may
not be indicative of the Company's future condition or results of operations and
should be read in conjunction with the consolidated financial statements and
related notes included herein.
Years Ended December 31,
----------------------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- ----------
Consolidated Statement of Income Data: (in thousands, except per share data)
Total revenue $8,963 $10,212 $16,263 $22,247 $33,545
Income from operations 1,944 793 2,236 3,257 10,019
License interest income 1,220 1,305 1,457 1,486 1,565
Net income 1,867 1,233 2,193 2,878 7,500
Net income per share and common $0.08 $0.05 $0.09 $0.11 $0.28
equivalent share
Weighted average number of
common and common
equivalent shares outstanding 24,471 24,231 24,102 25,551 26,397
Dividends declared -- -- -- -- --
December 31,
----------------------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- ----------
Consolidated Balance Sheet Data: (in thousands)
Cash and cash equivalents $336 $435 $456 $511 $24,201
Working capital 3,428 4,231 4,441 4,393 34,364
Long-term license installments, net 6,319 6,782 9,135 13,399 23,802
Total assets 14,387 17,057 20,787 25,876 66,855
Long-term debt 118 458 450 816 --
Stockholders' equity 8,444 9,676 11,872 14,674 52,385
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company was founded in April 1983 to develop, market and support customer
management software solutions for financial services organizations. Product
development began immediately and by the end of the year the Company had secured
its first customer. The Company has been profitable in each fiscal quarter since
the first quarter of 1985.
The Company's revenue is derived from two sources: software license fees and
services revenue. License fees, which have historically represented the majority
of the Company's total revenue, are generally payable on a monthly basis under
license agreements which typically have a five-year term and are subject to
renewal at the customer's option for an additional fixed period. Such license
agreements are generally non-cancellable, although some may be terminated by the
licensee for a fee prior to the expiration of the initial term but after a
minimum specified period. The Company's licenses generally provide for annual
license fee increases (the "inflation adjustments") based on recognized
inflation indexes (sometimes subject to maximums). The Company believes that
both it and its customers derive substantial benefits from the recurring fee
model because it encourages the Company to be responsive to customer needs and
provides the Company with additional revenue opportunities through license
renewals.
License revenue is generally recognized upon product acceptance. In the case of
license renewals, revenue is recognized upon execution of the renewal agreement
or if, as is generally the case, renewal is automatic unless the customer gives
notice of termination, at the expiration of the period during which the customer
has the right to terminate. The inflation adjustments are recognized ratably
over the periods to which they apply. In accordance with Statement of Position
No. 91-1 issued by the American Institute of Certified Public Accountants, the
amount of software license revenue recognized upon product acceptance or license
renewal is equal to the present value of the payments due during the minimum
initial or renewal term, as the case may be, plus the present value of any early
termination fee. In 1994, 1995 and the three months ended March 31, 1996, the
discount rate for purposes of the present value calculation was 7%; for the nine
months ended December 31, 1996, such discount rate was 6.75%. Commencing with
the three months ended March 31, 1996, the Company has established and intends
to continue to establish the discount rate quarterly as a function of the
Company's then current marginal borrowing rate. The imputed interest portion of
the license fees, which is reported as license interest income in the Company's
consolidated statements of income, is recognized over the minimum initial or the
renewal term, as the case may be. To date, a substantial majority of the
Company's software licenses have been renewed upon expiration. The fact that a
portion of the Company's revenue is derived from the renewal of license
agreements with fixed expiration dates assists the Company in anticipating
future revenue.
The Company's services revenue is comprised of fees for implementation,
consulting, maintenance and training services. All software license customers
are required to enter into a maintenance contract requiring the customer to pay
a monthly maintenance fee over the term of the related license agreement equal
to approximately 18% of the license fee. Maintenance fees are recognized ratably
over the term of the maintenance agreement. The Company's software license
agreements typically require the Company to provide a specified level of
implementation services for a fixed fee, typically with additional
implementation services available at an hourly rate. Implementation fees are
payable upon the achievement of specified milestones. The Company generally
recognizes implementation as well as consulting and training fees as the
services are provided.
The Company's export revenue has fluctuated considerably in the past due to the
fact that such revenue has been largely attributable to a small number of
product acceptances during a given period. The Company's export revenue
increased from $1.0 million in 1993 to $3.9 million in 1994 due primarily to
product acceptance by a single customer in Ireland in 1994, the year in which
the Company organized its subsidiary in the United Kingdom. Export revenue
declined to $2.3 million in 1995 due to the lack of large product acceptances
during the year. In 1996, export revenue increased to $5.9 million, as a result
of new customers in the European marketplace.
Most of the Company's contracts are denominated in U.S. dollars, although
several are denominated in other currencies, primarily British pounds sterling.
The Company expects that in the future more of its contracts will be denominated
in foreign currencies. The Company has not experienced any significant foreign
exchange gains or losses, and the Company does not expect that foreign currency
fluctuations will have a significant effect on either its revenue or costs in
the near term.
The Company's business has experienced and is expected to continue to experience
significant seasonality. In recent years the Company has recognized a greater
percentage of its revenue in its third and fourth quarters than in its first and
second quarters due to the Company's sales commission structure and the impact
of that structure on the timing of product acceptances and license renewals by
customers. This pattern is reinforced by the Company's maintenance contracts,
which generally entitle customers to, among other things, a fixed number of
hours of service per calendar year. Once the annual allotment of service hours
is exhausted, customers pay for additional services on an hourly basis,
typically resulting in higher services revenue in the Company's second, third,
and fourth quarters.
RESULTS OF OPERATIONS
The following table sets forth for the years indicated the percentage of total
revenue represented by certain items reflected in the Statements of Income of
the Company:
Years Ended December 31,
-------------------------------------------------------------------------
1994 1995 1996
-------- -------- --------
(as a percentage of total revenue)
Revenue:
Software license 59.4% 60.8% 66.4%
Services 40.6 39.2 33.6
-------- ------- --------
Total revenue 100.0 100.0 100.0
-------- ------- --------
Cost of revenue:
Cost of software license 6.6 2.9 1.4
Cost of services 23.3 27.7 20.8
-------- ------- --------
Total cost of revenue 29.9 30.6 22.2
-------- ------- --------
Gross profit 70.1 69.4 77.8
-------- ------- --------
Operating expenses:
Research and development 33.5 31.7 24.5
Sales and marketing 16.2 16.1 17.9
General and administrative 6.7 6.9 5.5
-------- ------- --------
Total operating expenses 56.4 54.7 47.9
-------- ------- --------
Income from operations 13.7 14.7 29.9
License interest income 9.0 6.7 4.7
Other interest income 0.1 0.1 1.8
Interest expense (0.3) (0.5) (0.3)
-------- ------- --------
Income before provision for
income taxes 22.5 21.0 36.1
Provision for income taxes 9.0 7.9 13.7
-------- ------- --------
Net income 13.5% 13.1% 22.4%
======== ======== ========
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenue
Total revenue for 1996 increased 50.8% to $33.5 million from $22.2 million for
1995. The increase was primarily due to an increase in software license revenue.
Software license revenue for 1996 increased 64.5% to $22.3 million from $13.5
million in 1995. The increase in software license revenue was primarily
attributable to software license acceptances by new customers, software license
agreement renewals, expanded software usage by existing customers, the licensing
of standard product templates, and inflation-based increases in monthly license
fees.
Services revenue for 1996 increased 29.5% to $11.3 million from $8.7 million for
1995. The increase in services revenue was primarily attributable to increased
demand for consulting and implementation services, and to a lesser extent,
increased maintenance revenue from a larger installed product base.
Cost of Revenue
Cost of software license consists of amortization expense related to capitalized
software development costs, royalty payments to third party software vendors,
and costs of product media, duplication and packaging. Cost of software license
for 1996 decreased 24.9% to $0.5 million from $0.6 million for 1995, and
decreased as a percentage of total revenue from 2.9% for 1995 to 1.4% for 1996.
As a percentage of software license revenue, cost of software license decreased
from 4.7% for 1995 to 2.1% for 1996. Such decreases were due to decreased
amortization expense related to capitalized software development costs. No
software development costs were capitalized in 1995 or 1996.
Cost of services consists primarily of the costs of providing implementation,
consulting, maintenance, and training services. Cost of services for 1996
increased 13.2% to $7.0 million from $6.2 million for 1995, mainly due to
increased staffing in the Company's Reengineering and Client Services group in
the United Kingdom and in the Company's domestic regional offices to meet
growing client commitments. Cost of services as a percentage of total revenue
declined from 27.7% for 1995 to 20.8% for 1996, and declined as a percentage of
services revenue from 70.7% for 1995 to 61.8% for 1996, in both cases due to the
growth in the Company's total revenue and increased utilization of service
personnel.
Operating Expenses
Research and development expenses consist primarily of the cost of personnel and
equipment needed to conduct the Company's research and development efforts.
Research and development expenses for 1996 increased 16.4% to $8.2 million from
$7.1 million for 1995. The increase in research and development expenses was due
to the hiring of additional development personnel. As a percentage of total
revenue, research and development expenses declined from 31.7% for 1995 to 24.5%
for 1996, reflecting the Company's strategy of leveraging existing product
functionality by balancing its historical focus on research and development with
an increased emphasis on sales and marketing. In addition, research and
development expenses declined as a percentage of total revenue due to the growth
in the Company's total revenue.
Sales and marketing expenses for 1996 increased 67.0% to $6.0 million from $3.6
million for 1995. As a percentage of total revenue, sales and marketing expenses
increased from 16.1% for 1995 to 17.9% for 1996. Such increases were
attributable to the hiring of additional direct sales and marketing personnel,
increased sales commission payments attributable to higher sales, and increased
investment in marketing support activities and materials.
General and administrative expenses consist primarily of the salaries of the
Company's executive, administrative and financial personnel, and associated
expenses. General and administrative expenses for 1996 increased 20.5% to $1.9
million from $1.5 million for 1995 due to increased investment in the
infrastructure needed to support the Company's growth. Such expenses declined as
a percentage of total revenue from 6.9% for 1995 to 5.5% for 1996 due to the
growth in the Company's total revenue.
License Interest Income
License interest income represents the portion of all license fees due under
software license agreements which was not recognized upon product acceptance or
license renewal. License interest income for 1996 increased 5.3% to $1.6 million
from $1.5 million for 1995 reflecting a larger installed product base.
Provision for Income Taxes
The provisions for federal, state and foreign taxes were $1.8 million and $4.6
million for 1995 and 1996, respectively. The effective tax rates were 38.0% for
1995 and 38.1% for 1996. At December 31, 1996, the Company had $0.8 million in
research and development tax credit carryforwards available to offset future
federal taxable income. See Note 7 of Notes to Consolidated Financial
Statements.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenue
Total revenue for 1995 increased 36.8% to $22.2 million from $16.3 million for
1994 due primarily to an increase in software license revenue, and to a lesser
extent, an increase in services revenue.
Software license revenue for 1995 increased 40.0% to $13.5 million from $9.7
million in 1994 due to increased product acceptances and license renewals.
Services revenue for 1995 increased 32.1% to $8.7 million from $6.6 million in
1994 primarily due to an increase in the amount of implementation and consulting
services provided, and to a lesser extent, increases in the billing rates of the
personnel providing these services and an increase in training revenue.
Cost of Revenue
Cost of software license for 1995 decreased 40.9% to $0.6 million from $1.1
million for 1994, and decreased as a percentage of total revenue from 6.6% for
1994 to 2.9% for 1995. As a percentage of software license revenue, cost of
software license decreased from 11.1% for 1994 to 4.7% for 1995. Such decreases
were due to reduced amortization of capitalized software development costs.
Cost of services for 1995 increased 62.5% to $6.2 million from $3.8 million for
1994 and increased as a percentage of total revenue from 23.3% for 1994 to 27.7%
for 1995. Cost of services as a percentage of total services revenue increased
from 57.4% for 1994 to 70.7% for 1995. Such increases were due to the hiring of
additional personnel to provide implementation and consulting services to
support the Company's growing customer base.
Operating Expenses
Research and development expenses for 1995 increased 29.8% to $7.1 million from
$5.4 million for 1994 as a result of increased efforts by the Company to develop
versions of its products capable of running on multiple UNIX platforms in a
client/server environment. As a percentage of total revenue, research and
development expenses declined from 33.5% for 1994 to 31.7% for 1995 due to the
growth in the Company's total revenue.
Sales and marketing expenses for 1995 increased 36.6% to $3.6 million from $2.6
million for 1994 due to the hiring of additional sales and marketing personnel,
increased sales commission payments and increased investment in trade shows and
other sales and marketing efforts. As a percentage of total revenue, sales and
marketing expenses decreased slightly from 16.2% for 1994 to 16.1% for 1995 due
to growth in the Company's total revenue.
General and administrative expenses for 1995 increased 41.2% to $1.5 million
from $1.1 million for 1994 due to increased management recruiting costs, the
establishment of two new regional offices in Chicago and Dallas/Fort Worth and
the relocation of the Company's United Kingdom office. General and
administrative expenses were 6.7% in 1994 and 6.9% of total revenue in 1995.
License Interest Income
License interest income for 1995 and 1994 remained constant at $1.5 million.
Provision for Income Taxes
The provisions for federal, state and foreign taxes were $1.5 million and $1.8
million for 1994 and 1995, respectively. The effective tax rates were 40.0% for
1994 and 38.0% for 1995. The decrease in the effective tax rate was primarily
due to increased availability of research and development tax credits. See Note
7 of Notes to Consolidated Financial Statements.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Revenue
Total revenue for 1994 increased 59.2% to $16.3 million from $10.2 million for
1993. In January 1994, the Company organized Pegasystems Limited, a wholly-owned
subsidiary based in the United Kingdom. In its first year of operation,
Pegasystems Limited introduced the Company's products into Ireland, France and
Luxembourg. Financial results for 1994 and subsequent years reflect the
consolidated earnings of Pegasystems Inc. and Pegasystems Limited.
Software license revenue represented 59.4% and 63.1% of total revenue for 1994
and 1993, respectively. Software license revenue for 1994 increased 49.8% to
$9.7 million from $6.4 million for 1993. The increase in software license
revenue in 1994 was primarily attributable to increased product acceptances by
customers headquartered outside of the United States. The Company's software
license revenue from customers headquartered outside of the United States was
$3.1 million, or 32.5% of software license revenue, and $0.7 million, or 10.8%
of software license revenue, in 1994 and 1993, respectively.
Services revenue for 1994 increased 75.3% to $6.6 million from $3.8 million for
1993 primarily due to the increased amount of implementation and consulting
services provided to a widening customer base. Following a focused internal
reengineering effort which began in 1993 and continued into 1994, the Company
redeveloped its strategy for new customer implementations leading to greater
services revenue from more effective and timely implementations and the creation
of standard training courses.
Cost of Revenue
Cost of software license decreased 13.5% to $1.1 million for 1994 from $1.2
million for 1993 and decreased as a percentage of total revenue from 12.2% for
1993 to 6.6% for 1994. As a percentage of software license revenue, cost of
software license decreased from 19.3% for 1993 to 11.1% for 1994. Such decreases
were due to reduced amortization of capitalized software development costs.
Cost of services for 1994 increased 70.3% to $3.8 million from $2.2 million for
1993 and increased as a percentage of total revenue from 21.8% for 1993 to 23.3%
for 1994. Such increases were due to the costs associated with establishing the
Company's United Kingdom office in January 1994 and with developing new training
facilities in Cambridge, Massachusetts and San Francisco, California. Cost of
services as a percentage of total services revenue decreased from 59.2% for 1993
to 57.4% for 1994 due to increased utilization of service personnel.
Operating Expenses
Research and development expenses for 1994 increased 44.4% to $5.4 million from
$3.8 million for 1993 primarily as a result of efforts by the Company to develop
versions of its products capable of running on multiple UNIX platforms in a
client/server environment. As a percentage of total revenue, research and
development expenses declined to 33.5% for 1994 from 36.9% for 1993 due to
growth in the Company's total revenue.
Sales and marketing expenses for 1994 increased 94.7% to $2.6 million from $1.4
million for 1993, representing 16.2% and 13.2% of total revenue in the
respective years. Such increases reflected the establishment of a sales
operation in the United Kingdom and increased sales commission payments.
General and administrative expenses for 1994 increased 30.8% to $1.1 million
from $0.8 million for 1993 due to overhead associated with the expansion of the
Company's headquarters in Cambridge, Massachusetts, relocation of the regional
office in San Francisco, California, and the establishment of operations in the
United Kingdom. General and administrative expenses as a percentage of total
revenue declined slightly to 6.7% for 1994 from 8.2% for 1993 due to the growth
in the Company's total revenue.
License Interest Income
License interest income for 1994 increased 11.6% to $1.5 million from $1.3
million in 1993 primarily due to the prepayment by one customer in 1994 of
certain monthly software license fees.
Provision for Income Taxes
The provisions for federal, state and foreign taxes were $0.9 million and $1.5
million for 1993 and 1994, respectively. The effective tax rates were 41.1% for
1993 and 40.0% for 1994. The decrease in the effective tax rate was primarily
due to the use of certain tax credits. See Note 7 of Notes to Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has funded its operations primarily through
cash flow from operations and bank borrowings. In July 1996, the Company issued
and sold 2.7 million shares of Common Stock in connection with its initial
public offering. Net proceeds to the Company from such offering were
approximately $29.4 million. At December 31, 1996, the Company had cash and cash
equivalents of approximately $24.2 million and working capital of approximately
$34.4 million. The Company's approach of charging license fees payable in
installments over the term of its licenses has historically deferred the receipt
of cash and, prior to its initial public offering, limited the availability of
working capital.
Net cash provided by operating activities for the years ended December 31, 1994
and 1995 was $1.5 million and $0.8 million, respectively. Net cash used by
operating activities for the year ended December 31, 1996 was $2.9 million. Such
amounts were used to support the Company's working capital requirements.
The Company used $1.1 million, $1.4 million and $2.0 million of net cash during
1994, 1995 and 1996, respectively, to purchase property and equipment, primarily
computer hardware and software, to support the Company's growing employee base
and new regional office and training facilities. The Company's capital
commitments consist primarily of operating leases for office space. At December
31, 1996, the Company's commitments under non-cancellable operating leases for
office space with terms in excess of one year totaled $1.2 million, $1.1 million
and $0.6 million for 1997, 1998 and 1999, respectively. The Company's total
payments under such leases was $0.9 million, $1.1 million and $1.4 million for
1994, 1995 and 1996, respectively. See Note 6 of Notes to Consolidated Financial
Statements.
The Company has a $5.0 million revolving credit line, which is unsecured and
expires on June 30, 1997. At December 31, 1996, the Company had no borrowings
under its revolving credit line. The Company's credit agreement prohibits the
payment of dividends, has profitability requirements and requires maintenance of
specified levels of tangible net worth and certain financial ratios. See Note 4
of Notes to Consolidated Financial Statements.
The Company recorded no bad debt expense in 1994. The Company recorded bad debt
expense in the amounts of $0.8 million and $0.3 million in 1995 and 1996,
respectively, as a result of indications that certain receivables relating
primarily to services rendered by the Company would not be collected in full.
The receivables with respect to which bad debt expense was recorded related
primarily to maintenance and installation services provided by the Company. At
the time such services were rendered (and the resulting revenue was recognized)
there was no significant uncertainty regarding the acceptance thereof and the
collectibility of the related receivables was probable.
The Company believes that the net proceeds from its initial public offering and
its public offering which was completed in January 1997 together with cash
generated by operations and availability under its bank credit facility will be
sufficient to fund the Company's operations for at least the next year. However,
there can be no assurance that additional capital beyond the amounts currently
forecasted by the Company will not be required or that any such required
additional capital will be available on reasonable terms, if at all, at such
time as required by the Company.
INFLATION
Inflation has not had a significant impact on the Company's operating results to
date, nor does the Company expect it to have a significant impact in the future
due to the fact that the Company's license and maintenance fees are typically
subject to annual increases based on recognized inflation indexes.
SIGNIFICANT CUSTOMERS
During 1994 one customer accounted for 16.8% of the Company's consolidated
revenue. This customer also accounted for 12.6% of the Company's 1995
consolidated revenue. In 1995 two other customers accounted for 16.2% and 14.9%,
respectively, of the Company's consolidated revenue. In 1996, the Company had
three customers that accounted for 14.5%, 11.4% and 10.5%, respectively, of the
Company's consolidated revenue.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report 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. Works such as "expects,"
"anticipates," "intends," "plans," "believes," "estimates," and "should" and
similar words and expressions are intended to identify the forward-looking
statements contained in this Annual Report. These statements are based on
estimates, projections, beliefs, and assumptions of the Company and its
management and are not guarantees of future performance. Further information
regarding those factors which could cause the Company's actual results to differ
materially from any forward-looking statements contained herein is included in
the Company's filings with the Securities and Exchange Commission.
PEGASYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share-related data)
Assets December 31,
-------------------------------------
1995 1996
------------------ -----------------
Current assets:
Cash and cash equivalents $511 $24,201
Trade and installment accounts receivable, net of
allowance for doubtful accounts of $434 and
$939 at December 31, 1995 and 1996, respectively 8,896 14,582
Prepaid expenses and other assets 425 1,235
------------------ -----------------
Total current assets 9,832 40,018
Long-term license installments, net 13,399 23,802
Equipment and improvements, net 2,172 3,035
Software development costs, net 473 --
------------------ -----------------
Total assets $25,876 $66,855
================== =================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $1,747 $2,697
Deferred revenue 114 53
Current portion of long-term debt 782 --
Deferred income taxes 2,796 2,904
------------------ -----------------
Total current liabilities 5,439 5,654
Deferred income taxes 4,947 8,816
Long-term debt 816 --
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; 23,490,000 shares and 26,392,200
shares issued and outstanding at December 31, 1995
and December 31, 1996, respectively 235 264
Additional paid-in capital 106 30,206
Deferred compensation (91) (73)
Retained earnings 14,522 22,022
Cumulative foreign currency translation adjustment (98) (34)
------------------ -----------------
14,674 52,385
------------------ -----------------
Total liabilities and stockholders' equity $25,876 $66,855
================== =================
The accompanying Notes are an integral part of these Consolidated
Financial Statements.
PEGASYSTEMS INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Years Ended December 31,
--------------------------------------------------------
1994 1995 1996
------------------ ----------------- -----------------
Revenue
Software license $9,662 $13,528 $22,258
Services 6,601 8,719 11,287
------------------ ----------------- -----------------
Total revenue 16,263 22,247 33,545
------------------ ----------------- -----------------
Cost of revenue
Cost of software license 1,075 635 477
Cost of services 3,791 6,161 6,975
------------------ ----------------- -----------------
Total cost of revenue 4,866 6,796 7,452
------------------ ----------------- -----------------
Gross profit 11,397 15,451 26,093
Operating expenses
Research and development 5,440 7,061 8,218
Sales and marketing 2,629 3,592 5,999
General and administrative 1,092 1,541 1,857
------------------ ----------------- -----------------
Total operating expenses 9,161 12,194 16,074
------------------ ----------------- -----------------
Income from operations 2,236 3,257 10,019
License interest income 1,457 1,486 1,565
Other interest income 21 16 619
Interest expense (56) (118) (85)
------------------ ----------------- -----------------
Income before provision for
income taxes 3,658 4,641 12,118
Provision for income taxes 1,465 1,763 4,618
------------------ ----------------- -----------------
Net income $2,193 $2,878 $7,500
================== ================= =================
Net income per common and
common equivalent share $0.09 $0.11 $0.28
================== ================= =================
Weighted average number of
common and common
equivalent shares outstanding 24,102 25,551 26,397
================== ================= =================
The accompanying Notes are an integral part of these Consolidated
Financial Statements.
PEGASYSTEMS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Common Stock Cumulative
------------------------ Foreign
Number Additional Currency Total
of Paid-in Deferred Retained Translation Stockholders'
Shares Amount Capital Compensation Earnings Adjustment Equity
----------- ----------- ------------ -------------- ----------- -------------- -------------
Balance at December 31,
1993 22,617 $226 -- -- $9,451 -- $9,677
Exercise of stock options 873 9 $15 -- -- -- 24
Foreign currency
translation adjustment -- -- -- -- -- $(22) (22)
Net income -- -- -- -- 2,193 -- 2,193
---------- --------- ----------- --------- ---------- ----------- ----------
Balance at December 31,
1994 23,490 235 15 -- 11,644 (22) 11,872
Foreign currency
translation adjustment -- -- -- -- -- (76) (76)
Issuance of stock options -- -- 91 $(91) -- -- --
Net income -- -- -- -- 2,878 -- 2,878
---------- --------- ----------- --------- ---------- ----------- ----------
Balance at December 31,
1995 23,490 235 106 (91) 14,522 (98) 14,674
Issuance of common
stock 2,700 27 29,339 -- -- -- 29,366
Exercise of stock options 202 2 64 -- -- -- 66
Tax benefit from exercise
of stock options -- -- 697 -- -- -- 697
Foreign currency
translation adjustment -- -- -- -- -- 64 64
Amortization of deferred
compensation -- -- -- 18 -- -- 18
Net income -- -- -- -- 7,500 -- 7,500
---------- --------- ----------- --------- ---------- ----------- ----------
Balance at December 31,
1996 26,392 $264 $30,206 $(73) $22,022 $(34) $52,385
========== ========= =========== ========= ========== =========== ==========
The accompanying Notes are an integral part of these Consolidated
Financial Statements.
PEGASYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31,
--------------------------------------------------------
1994 1995 1996
----------------- ------------------ -----------------
Operating activities
Net income $2,193 $2,878 $7,500
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Provision for deferred income taxes 961 1,836 3,977
Depreciation and amortization 1,511 1,455 1,633
Provision for doubtful accounts -- 793 300
Change in operating assets and liabilities:
Increase in trade and installment
accounts receivable (3,988) (5,638) (16,389)
Increase in prepaid expenses and
other assets (16) (221) (810)
Decrease in inventory 215 -- --
Increase (decrease) in accounts
payable and accrued expenses 971 (244) 950
Decrease in deferred revenue (336) (25) (61)
----------------- ------------------ -----------------
Net cash provided (used) by
operating activities 1,511 834 (2,900)
Investing activities
Purchase of equipment and
improvements (1,131) (1,423) (2,005)
Software development costs (297) -- --
----------------- ------------------ -----------------
Net cash used in investing
activities (1,428) (1,423) (2,005)
Financing activities
Repayment of note payable to shareholder (180) (50) --
Proceeds from issuance of long-term debt 380 1,345 --
Repayments of long-term debt (263) (575) (1,598)
Issuance of common stock, net -- -- 29,366
Exercise of stock options 23 -- 66
Tax benefit from exercise of stock options -- -- 697
----------------- ------------------ -----------------
Net cash provided (used) by
financing activities (40) 720 28,531
Effect of exchange rate on cash (22) (76) 64
----------------- ------------------ -----------------
Net increase in cash 21 55 23,690
Cash and cash equivalents at beginning of year 435 456 511
----------------- ------------------ -----------------
Cash and cash equivalents at end of year $456 $511 $24,201
================= ================== =================
Supplemental Disclosures of Cash Flow Information:
Cash paid during period:
Interest $56 $119 $86
================= ================== =================
Income taxes $135 $315 $90
================= ================== =================
The accompanying Notes are an integral part of these Consolidated
Financial Statements.
PEGASYSTEMS INC.- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - December 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
Business
Pegasystems Inc. (the Company) was incorporated on April 21, 1983, and develops
customer service management software used by large, transaction-intensive
organizations to automate and manage their customer interactions. Customers of
the Company include large banks and credit card processors and mutual fund
companies. The Company also offers consulting, training, and maintenance and
support services to facilitate the installation and use of its solutions.
The environment of rapid technological change and intense competition which is
characteristic of the software development industry results in frequent new
products and evolving industry standards. The Company's continued success
depends upon its ability to enhance current products and develop new products on
a timely basis which keep pace with the changes in technology and competitors'
innovations.
International revenue is subject to various risks including imposition of
government controls, export license requirements, political and economic
conditions and instability, trade restrictions, currency fluctuations, changes
in taxes, difficulties in staffing and managing international operations, and
high local wage scales and other operating costs and expenses.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Pegasystems Limited and Pegasystems Investment
Inc. All intercompany accounts and transactions have been eliminated in
consolidation.
Foreign Currency Translation
The translation of assets and liabilities of the Company's foreign subsidiary is
made at year-end rates of exchange, while revenue and expense accounts are
recorded at the average rates of exchange. The resulting translation adjustments
are excluded from net income and are charged or credited to "Cumulative foreign
currency translation adjustment" included as part of stockholders' equity.
Realized and unrealized exchange gains or losses from transaction adjustments
are reflected in operations and are not material.
Revenue Recognition
The Company recognizes revenue in accordance with Statement of Position 91-1,
"Software Revenue Recognition," issued by the American Institute of Certified
Public Accountants. Specifically, revenue from software licenses is generally
recognized upon product acceptance pursuant to non-cancellable license
agreements, and is based on management's assessment that the collectibility risk
on the long-term license installments is low. Upon acceptance, the Company has
no significant vendor obligations. The Company accrues the estimated cost of
warranty and product returns in the period in which product revenue is
recognized; historically these amounts have not been material. In the case of
license renewals, revenue is recognized upon execution of the renewal license
agreement or if, as is generally the case, renewal is automatic unless the
customer gives notice of termination, at the expiration of the period during
which the customer has the right to terminate. Maintenance fees are recognized
ratably over the term of the maintenance agreement. The Company recognizes
implementation as well as consulting and training fees as the services are
provided.
Software license revenue represents the present value of future payments under
non-cancellable license agreements which provide for payment in installments
typically over a five-year period. A portion of the revenue from each agreement
is recognized as interest income over the term of the agreement.
The discount rate in effect for 1994, 1995 and the three months ended March 31,
1996 was 7%. The discount rate for the nine month period ended December 31, 1996
was 6.75%. The trade and installment accounts receivable recorded on the balance
sheet are net of $3.9 million and $5.1 million as of December 31, 1995 and 1996,
respectively, which represents the imputed interest portion of future payments
due under the Company's license agreements. Deferred revenue represents payments
from customers, primarily for maintenance services, which are recognized as
revenue as the related services are performed.
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximates market, and
consist of short-term, highly liquid investments with original maturities of
less than three months.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of
credit risk consist of substantially all of the trade accounts receivable and
long-term license installments receivable. The Company records long-term license
installments in accordance with its revenue recognition policy which results in
receivables from customers, primarily large financial service organizations with
strong credit ratings.
Equipment and Improvements
Equipment and improvements are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets which are
three years for equipment and five years for furniture and fixtures. Leasehold
improvements are amortized over the life of the lease.
Software Development Costs
In compliance with Statement of Financial Accounting Standards (SFAS) No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed," certain software development costs are capitalized in the
accompanying consolidated balance sheets. Capitalization of software development
costs begins upon the establishment of technological feasibility, defined by the
Company as a working model or an operative version of the computer software
product that is completed in the same language and is capable of running on all
of the platforms as the product to be ultimately marketed. During 1994, the
Company capitalized $0.3 million of software costs. No costs were capitalized
during 1995 or 1996.
Amortization of capitalized software development cost is included in costs of
software license revenue and is provided on a straight-line basis of two years,
which approximates the estimated useful life of the software as it relates to
the Company's sales. The straight-line amortization is not materially different
from the amortization computed using the current period revenues as a percent of
total expected product revenues. Total amortization expense charged to
operations was $1.1 million, $0.6 million and $0.5 million during 1994, 1995 and
1996, respectively.
Net Income Per Share
Net income per common and common equivalent share is computed using the weighted
average number of common and common equivalent shares outstanding during each
period, assuming the exercise of stock options into common stock under the
treasury stock method. Common stock equivalent shares are excluded from the
computation if their effect is anti-dilutive; however, pursuant to the
requirements of the Securities and Exchange Commission, common stock equivalent
shares relating to stock options (using the treasury stock method and the
initial public offering price) issued during the twelve months prior to the
registration statement filed with respect to the initial filing of the initial
public offering are included for all periods presented whether or not they are
anti-dilutive. Fully-diluted earnings per common share are not presented as they
are not materially different from primary earnings per common share. Dilutive
common equivalent shares consist of stock options (using the treasury stock
method and using the assumed initial public offering price). Net income per
share also reflects a fifteen-for-one stock split effective December 9, 1994,
and a three-for-one stock split effective July 10, 1996.
Stock Options
The Company grants stock options for a fixed number of shares to employees with
an exercise price equal to the fair market value of the shares at the date of
the grant. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and intends to
continue to do so. During 1995, the Company granted stock options for a fixed
number of shares to employees with an exercise price less than the then fair
market value of the shares at the date of the grant. For the difference between
the fair market value and the exercise price, the Company recorded deferred
compensation which is being expensed over the vesting period.
The Company has adopted the disclosure provisions only of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS
123") and will continue to account for its stock option plans in accordance with
the provisions of APB 25, "Accounting for Stock Issued to Employees."
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Some of the areas where estimates are
utilized included allowance for bad debts, capitalized software, income taxes,
revenue and various accrued expenses. Actual results could differ from those
estimates.
2. EQUIPMENT AND IMPROVEMENTS
The cost and accumulated depreciation of equipment and improvements consist of
the following:
December 31,
-------------------------------------------
(in thousands)
1995 1996
----------------- ---------------
Equipment $2,186 $3,956
Furniture and fixtures 863 1,005
Leasehold improvements 434 527
---------------- ---------------
3,483 5,488
Less accumulated depreciation (1,311) (2,453)
---------------- ---------------
Equipment and improvements, net $2,172 $3,035
================ ===============
Depreciation expense was approximately $0.4 million, $0.8 million and $1.2
million for the years ended December 31, 1994, 1995 and 1996, respectively.
3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
December 31,
-------------------------------------------
(in thousands)
1995 1996
----------------- ---------------
Trade accounts payable $557 $692
Employee compensation and benefits 568 1,257
Accrued income taxes -- 160
Other 622 588
---------------- ---------------
$1,747 $2,697
================ ===============
4. DEBT AND OTHER FINANCIAL INSTRUMENTS
Long-term debt consists of the following:
December 31,
-------------------------------------------
(in thousands)
1995 1996
----------------- ---------------
Note payable to bank, with originally scheduled monthly payments of
$17 thousand plus interest through December 1, 1996 $207 --
Note payable to bank, with originally scheduled monthly payments of
$11 thousand plus interest through December 1, 1997 243 --
Note payable to bank, with originally scheduled monthly payments of
$33 thousand plus interest through June 28, 1998 983 --
Note payable to bank, with originally scheduled monthly payments of
$5 thousand plus interest through December 28, 1998 165 --
---------------- ---------------
1,598 --
Less current portion (782) --
---------------- ---------------
$816 --
================ ===============
The notes bore interest at the bank's prime rate (8.5% at December 31, 1995)
plus 1/2%. The notes were secured by all computer equipment and furniture and
fixtures of the Company. As of December 31, 1996, the Company had repaid all of
the notes.
As of December 31, 1995, the Company had a line of credit with a bank allowing
for borrowings up to $2.5 million at the prime rate, which line of credit was
scheduled to expire on June 1, 1996. As of December 31, 1996, the Company's bank
line of credit had been increased to $5.0 million and extended until June 30,
1997. The Company had no drawings against the line of credit at December 31,
1995 and 1996. Borrowings are subject to various covenants which call for a
specified level of working capital and net worth, maintenance of certain
financial ratios, and restrictions on the payments of dividends.
Financial instruments outstanding at December 31, 1995 and 1996 are as follows:
December 31, December 31,
------------------------------------ ---------------------------------
(in thousands) (in thousands)
1995 1995 1996 1996
---------------- ---------------- -------------- ---------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------- ---------------- -------------- ---------------
Assets:
Cash and cash equivalents $511 $511 $24,201 $24,201
Liabilities:
Notes payable to a bank (1,598) (1,598) -- --
5. EMPLOYEE BENEFIT PLANS
Stock Option Plan
The Company adopted an incentive stock option plan effective July 29, 1983 (the
"1983 Plan"). Key employees, as selected by the Board of Directors of the
Company, were granted options to purchase the Company's common stock at a price,
which in the Board of Directors' opinion, reflected fair value on the date of
the grant. The 1983 plan expired in 1993. At December 31, 1996, no options
issued under this plan were outstanding.
Long-Term Incentive Plan
During the year ended December 31, 1994, the Company adopted a Long-Term
Incentive Plan (the "1994 Plan") to provide incentives to employees, directors
and consultants through opportunities to purchase stock through incentive stock
options and through options which do not qualify as incentive stock options.
In addition to options, eligible participants under the 1994 Plan may be granted
stock appreciation rights, restricted stock and long-term performance awards. At
December 31, 1995, 2.4 million shares were reserved for issuance under the 1994
Plan. As of December 31, 1996, the Company had approved an increase in the
number of shares issuable under the 1994 Plan from 2.4 million to 5.0 million.
Shares equal to 2% of the outstanding shares at the start of each fiscal year
shall be reserved for granting of replacement options; however, this may not
cause the maximum shareholder dilution caused by the 1994 Plan to exceed the 5.0
million shares of stock reserved for issuance under the 1994 Plan.
The option price per share is to be determined at the date of grant. For
incentive stock options, the option price may not be less than 100% of the fair
market value of the Company's common stock at the grant date. Incentive stock
options granted to a person having greater than 10% of the voting power of all
classes of stock must have an exercise price of at least 110% of fair market
value of the Company's common stock.
1996 Non-Employee Director Stock Option Plan
The 1996 Non-Employee Director Stock Option Plan (the "Director Plan") was
adopted by the Board of Directors on May 13, 1996 and approved by the
stockholders on June 26, 1996. The Director Plan provides for the grant of
options for the purchase of up to 250,000 shares of Common Stock of the Company.
As of December 31, 1996, options to purchase 90,000 shares were outstanding
under the Director Plan.
The Director Plan is administered by the Compensation Committee and provides
that each person who becomes a director of the Company after May 13, 1996, and
who is not also an employee of the Company, will receive upon initial election
to the Board of Directors an option to purchase 30,000 shares of Common Stock
vesting in equal annual installments over five years. The exercise price for all
options granted under the Director Plan is equal to the market price of the
Common Stock as of the date of grant.
1996 Employee Stock Purchase Plan
The 1996 Employee Stock Purchase Plan (the "Stock Purchase Plan") was adopted by
the Board of Directors on May 13, 1996 and approved by the stockholders on June
26, 1996. An aggregate of 500,000 shares of Common Stock are reserved for
issuance pursuant to this plan. To date, there have been no offerings under the
Stock Purchase Plan and no shares of Common Stock have been issued thereunder.
The following table presents the combined activity of the two option plans in
which offerings have occurred for the years ended December 31, 1994, 1995 and
1996:
1994 1995 1996
----------------------- --------------------------- ---------------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Options Price Options Price Options Price
------------- -------- ------------- --------- ------------- ---------
Outstanding options (in thousands) (in thousands) (in thousands)
at beginning of year 1,269 $0.23 1,672 $0.33 1,924 $0.34
Granted 1,636 $0.33 335 $0.39 993 $13.19
Exercised (873) $0.03 -- -- (202) $0.33
Cancelled (360) $0.66 (83) $0.48 (133) $4.94
------------- -------- ------------- --------- ------------- ---------
Outstanding options at
end of year 1,672 $0.33 1,924 $0.34 2,582 $5.04
============= ======== ============= ========= ============= =========
Exercisable options at
end of year 396 $0.36 606 $0.33 679 $0.33
============= ======== ============= ========= ============= =========
Weighted average fair
value of options granted
during the year $0.10 $0.09 $8.84
============= ============= =============
In December 1995, the Company granted options to purchase 335,250 shares of
Common Stock at an exercise price of $.39 per share. The Company recorded an
increase to additional paid-in capital and a corresponding charge to deferred
compensation in the amount of $91,000 to recognize the aggregate difference
between the deemed fair value for accounting purposes of the stock options at
the date of grant and the exercise price. The deferred compensation will be
amortized over the option vesting period of five years.
The following table presents weighted average price and life information about
significant option groups outstanding at December 31, 1996:
Options Outstanding Options Exercisable
---------------------------------------- --------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Range of exercise prices Outstanding Remaining Exercise Exercisable Exercise
(in thousands) Contractual Price (in thousands)
Life (years)
- ------------------------ ------------- ------------ -------- -------------- --------
$0.33 - $0.39 1,620 8.2 $0.34 679 $0.33
$6.00 - $10.00 698 9.4 $9.60 -- --
$12.50 - $26.50 158 9.6 $16.52 -- --
$29.00 - $30.50 106 9.9 $29.86 -- --
------------- --------------
2,582 679
============= ==============
Pursuant to the requirements of FAS 123, the following are the pro forma net
income and net income per share for 1995 and 1996, as if the compensation
expense for the option plans had been determined based on the fair value at
the grant date for grants in 1995 and 1996, consistent with the provisions of
FAS 123:
1995 1996
--------------------------------------- ---------------------------------------
As Reported Pro Forma As Reported Pro Forma
----------------- ------------------ ----------------- ------------------
Net income (in thousands) $2,878 $2,878 $7,500 $7,122
Net income per share $0.11 $0.11 $0.28 $0.27
A range of expected vesting percentages were given to each range of exercise
prices. For the range of exercise prices from $0.33 to $0.39, $6.00 to $10.00,
$12.50 to $26.50 and $29.00 to $30.50, it is expected that 95 percent, 90
percent, 75 percent and 50 percent of those options will vest, respectively.
These ranges were based upon the Company's estimates that a more significant
number of lower priced options as compared to higher priced options will vest.
The fair value of options at the date of grant were estimated using the
Black-Scholes model with the following weighted-average assumptions:
Option
---------------------------------------
1995 1996
----------------- ------------------
Volatility 0.0 0.0 - 9.9
Expected option life (years) 5.0 5.0
Interest rate (risk free) 5.51% 5.38 - 6.69%
Volatility was calculated on a monthly basis. Exclusive of one month's data
where volatility was 9.9, volatility ranged from 0.0 to 1.4. The Company has
never declared nor paid dividends on any of its capital stock and does not
expect to in the foreseeable future.
The effects on 1995 and 1996 pro forma net income and net income per share of
expensing the estimated fair value of stock options and shares are not
necessarily representative of the effects on reporting the results of operations
for future years as the periods presented include only one and two years of
option grants under the Company's plans.
6. LEASES
The Company leases certain equipment and office space under non-cancellable
operating leases. Future minimum rental payments required under the operating
leases with non-cancellable terms in excess of one year at December 31, 1996 are
as follows:
Year ended December 31, (in thousands)
---------------
1997 $1,198
1998 1,125
1999 580
2000 322
---------------
Total $3,225
===============
Total rent expense under operating leases was approximately $0.9 million, $1.1
million and $1.4 million for the years ended December 31, 1994, 1995 and 1996,
respectively.
7. INCOME TAXES
Income before income taxes consists of the following:
(in thousands)
1994 1995 1996
---------------- --------------- ----------------
Domestic $3,512 $4,318 $11,546
Foreign 146 323 572
---------------- --------------- ----------------
Total $3,658 $4,641 $12,118
================ =============== ================
The provision (benefit) for income taxes for the years ended December 31, 1994,
1995 and 1996 consisted of the following:
(in thousands)
1994 1995 1996
---------------- --------------- ----------------
Current:
Federal $297 $(107) $6
State 176 (39) 212
Foreign 31 73 160
---------------- --------------- ----------------
Total current 504 (73) 378
---------------- --------------- ----------------
Deferred:
Federal 691 1,563 3,662
State 270 273 578
--------------- ----------------
----------------
Total deferred 961 1,836 4,240
---------------- --------------- ----------------
$1,465 $1,763 $4,618
================= ================ ================
The effective income tax rate differed from the statutory federal income tax
rate due to:
1994 1995 1996
------------- ------------ ------------
Statutory federal income tax rate 34.0% 34.0% 35.0%
State income taxes, net of federal benefit 7.3 5.8 4.2
Permanent differences 2.0 0.7 0.3
Tax credits (3.3) (2.5) (0.6)
Other -- -- (0.8)
------------- ------------ ------------
Effective income tax rate 40.0% 38.0% 38.1%
============= ============ ============
At December 31, 1994, 1995 and 1996, the Company had alternative minimum tax
(AMT) and research and development (R&D) credit carryforwards of approximately
$0.6 million, $0.6 million and $0.8 million, respectively, available to offset
future federal taxable income. The carryforward period for the AMT credit is
unlimited. The R&D credit carryforwards generally expire from 2004 to 2008.
Deferred income taxes at December 31, 1995 and 1996 reflect the net tax effects
of temporary differences between the carrying amounts of assets and liabilities
for financial statement purposes and the amounts used for tax purposes.
Significant components of the Company's deferred tax liabilities and assets as
of December 31, 1995 and 1996 are as follows:
December 31,
-----------------------------------------------
(in thousands)
1995 1996
------------------- -------------------
Deferred tax liabilities:
Software revenue $(9,303) $(14,103)
Capitalized software (213) --
Depreciation (142) (215)
Other (41) (71)
------------------- -------------------
Total deferred tax liabilities (9,699) (14,389)
------------------- -------------------
Deferred tax assets:
Deferred state taxes 729 836
License fees 119 --
Vacation accrual 109 380
Other 274 655
Tax credits 725 798
------------------- -------------------
Total deferred tax assets 1,956 2,669
------------------- -------------------
Net deferred tax liabilities (7,743) (11,720)
Less current portion (2,796) (2,904)
------------------- -------------------
$(4,947) $(8,816)
=================== ===================
8. SIGNIFICANT CUSTOMERS
During 1994 one customer accounted for 16.8% of the Company's consolidated
revenue. This customer also accounted for 12.6% of the Company's 1995
consolidated revenue. In 1995 two other customers accounted for 16.2% and 14.9%,
respectively, of the Company's consolidated revenue. In 1996, the Company had
three customers that accounted for 14.5%, 11.4% and 10.5%, respectively, of the
Company's consolidated revenue.
9. INTERNATIONAL OPERATIONS
The Company's export sales from the United States for 1994, 1995 and 1996 are as
follows:
(in thousands)
1994 1995 1996
--------------- -------------- --------------
United Kingdom $1,515 $1,343 $3,698
Continental Europe 1,409 877 2,017
Other 1,008 114 232
--------------- -------------- --------------
$3,932 $2,334 $5,947
=============== ============== ==============
10. RECAPITALIZATION AND STOCK SPLIT
On December 9, 1994, the Company's Board of Directors declared a fifteen-for-one
split of shares of $.01 par value common stock effected in the form of a
dividend. This dividend resulted in 7.8 million shares of common stock being
issued and outstanding after the split. The par value of the additional shares
of common stock issued in connection with the stock split was credited to common
stock and a like amount was charged to additional paid-in capital to the extent
available, and the remainder to retained earnings.
On July 10, 1996, the Company increased the number of shares of common stock
authorized from 9.0 million to 45.0 million shares. The Company's Board of
Directors approved a three-for-one stock split in the form of a stock dividend
effective on July 10, 1996. The financial statements give effect to both stock
splits for all periods presented.
The Board of Directors is authorized, subject to certain limitations prescribed
by law, without further stockholder approval, to issue from time to time up to
an aggregate 1.0 million shares of Preferred Stock in one or more series and to
fix or alter the designations, preferences, rights and any qualifying
limitations or restrictions of the shares of each such series thereof, including
the dividend rights, dividend rates, conversion rights, voting rights, terms of
redemptions (including sinking fund provisions), redemption price or prices,
liquidation preferences and the number of shares constituting any shares or
designations of such series.
11. SUBSEQUENT EVENTS
Secondary Public Offering: On January 28, 1997, the Company completed a
secondary public offering of 1.8 million shares of its common stock at $30.125
per share.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Pegasystems Inc.
We have audited the accompanying consolidated balance sheets of Pegasystems Inc.
as of December 31, 1995 and 1996 and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Pegasystems Inc. at December 31, 1995 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Boston, Massachusetts
February 24, 1997