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 March 31, 1997
or
[ ] Transition Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from _______ to _______
Commission File Number: 1-11859
PEGASYSTEMS INC.
(Exact name of Registrant as specified in its charter)
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 28,420,000 shares of the Registrant's common stock, $.01 par value
per share, outstanding on April 30, 1997.
PEGASYSTEMS INC. AND SUBSIDIARY
Index to Form 10-Q
Part I - Financial Information
Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at December 31, 1996 3
and March 31, 1997
Condensed Consolidated Statements of Income for the three 4
months ended: March 31, 1996 and 1997
Condensed Consolidated Statements of Cash Flows for the three 5
months ended: March 31, 1996 and 1997
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
Part II - Other Information
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
Form 10-Q Page 3 of 12
PEGASYSTEMS INC.
Condensed Consolidated Balance Sheets
(in thousands, except share-related amounts)
(Unaudited)
December 31, March 31,
1996 1997
---------------- ---------------
Assets
Current assets:
Cash and cash equivalents $24,201 $ 75,021
Trade and installment accounts receivable, net of
allowance for doubtful accounts of $939 at
December 31, 1996 and March 31, 1997 14,582 18,637
Prepaid expenses and other assets 1,235 1,226
---------------- ---------------
Total current assets 40,018 94,884
Long-term license installments, net 23,802 26,719
Equipment and improvements, net 3,035 3,342
---------------- ---------------
Total assets $66,855 $124,945
================ ===============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 2,697 $ 5,927
Deferred revenue 53 39
Deferred income taxes 2,904 2,801
---------------- ---------------
Total current liabilities 5,654 8,767
---------------- ---------------
Deferred income taxes 8,816 10,000
---------------- ---------------
Stockholders' Equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized; no shares issued and outstanding -- --
Common stock, $.01 par value, 45,000,000 shares
authorized; 26,392,200 shares and 28,420,000 shares
issued and outstanding at December 31, 1996 and
March 31, 1997, respectively 264 286
Additional paid-in capital 30,206 82,253
Deferred compensation (73) (68)
Retained earnings 22,022 23,785
Cumulative foreign currency translation adjustment (34) (78)
---------------- ---------------
Total stockholders' equity 52,385 106,178
---------------- ---------------
Total liabilities and stockholders' equity $66,855 $124,945
================ ===============
The accompanying Notes are an integral part of these Condensed
Consolidated Financial Statements.
Form 10-Q Page 4 of 12
PEGASYSTEMS INC.
Condensed Consolidated Statements of Income
(in thousands, except per share amounts)
(Unaudited)
Three Months Ended
March 31,
1996 1997
--------------- ----------------
Revenue
Software license $2,520 $6,478
Services 2,421 2,754
--------------- ----------------
Total revenue 4,941 9,232
--------------- ----------------
Cost of revenue
Cost of software license 118 10
Cost of services 1,405 2,018
--------------- ----------------
Total cost of revenue 1,523 2,028
--------------- ----------------
Gross profit 3,418 7,204
--------------- ----------------
Operating expenses
Research and development 1,604 2,410
Selling and marketing 974 2,510
General and administrative 389 564
--------------- ----------------
Total operating expenses 2,967 5,484
--------------- ----------------
Income from operations 451 1,720
License interest income 368 374
Other interest income 12 750
Interest expense (39) --
--------------- ----------------
Income before provision for
income taxes 792 2,844
Provision for income taxes 311 1,081
--------------- ----------------
Net income $ 481 $1,763
=============== ================
Net income per common and common
equivalent share $0.02 $ 0.06
=============== ================
Weighted average number of common
and common equivalent shares
outstanding 25,505 29,153
=============== ================
The accompanying Notes are an integral part of these Condensed
Consolidated Financial Statements.
Form 10-Q Page 5 of 12
PEGASYSTEMS INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Three Months Ended
March 31,
1996 1997
-------------------- ----------------
Operating Activities
Net income $ 481 $ 1,763
Adjustments to reconcile net income to cash provided
(used) by operating activities:
Provision for deferred income taxes 501 1,081
Depreciation and amortization 374 362
Changes in operating assets and liabilities:
Decrease (increase) in trade and installment
accounts receivable 1,223 (6,972)
Decrease in prepaid expenses and other assets 83 9
Increase (decrease) in accounts payable and accrued
expenses (777) 3,230
Increase (decrease) in deferred revenue 689 (14)
----------------- ----------------
Net cash provided (used) by operating activities 2,574 (541)
----------------- ----------------
Investing Activities
Purchase of equipment and improvements (221) (663)
----------------- ----------------
Net cash used by investing activities (221) (663)
----------------- ----------------
Financing Activities
Repayments of long-term debt (196) --
Issuance of common stock, net -- 52,067
Exercise of stock options -- 2
----------------- ----------------
Net cash provided (used) by financing activities (196) 52,069
Effect of exchange rate on cash (24) (45)
----------------- ----------------
Net increase in cash and equivalents 2,133 50,820
Cash and cash equivalents at beginning of period 511 24,201
----------------- ----------------
Cash and cash equivalents at end of period $2,644 $75,021
================= ================
Supplemental Disclosures of Cash Flow Information
Cash paid during period:
Interest $39 $--
Income taxes $13 $--
The accompanying Notes are an integral part of these Condensed
Consolidated Financial Statements.
Form 10-Q Page 6 of 12
PEGASYSTEMS INC.
Notes to Condensed Consolidated Interim Financial Statements
March 31, 1997
(Unaudited)
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Pegasystems Inc. (the "Company") presented herein, have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three-month period ended March 31, 1997 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1997. The Company suggests that these interim condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 1996,
included in the Company's Annual Report to Shareholders filed with the
Securities and Exchange Commission.
Note B - Subsequent Events
None
Note C - Net Income Per Share
Net income per common share is based on the weighted average number of common
shares and common share equivalents.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share," which is effective for the Company beginning with its
December 31, 1997 annual report. The Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. There is no change to
either primary or fully diluted net income per share for the quarters ended
March 31, 1996 and 1997 using the new method.
Form 10-Q Page 7 of 12
PEGASYSTEMS INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996
Revenue
Total revenue for the three months ended March 31, 1997 (the "1997 Period")
increased 86.9% to $9.2 million from $4.9 million for the three months ended
March 31, 1996 (the "1996 Period"). The increase was primarily due to an
increase in software license revenue.
Software license revenue for the 1997 Period increased 157.1% to $6.5 million
from $2.5 million for the 1996 Period. The increase in software license revenue
was primarily attributable to software license acceptances by new customers,
software license agreement renewals, and extended software usage by existing
customers.
Services revenue for the 1997 Period increased 13.8% to $2.8 million from $2.4
million for the 1996 Period. The increase in services revenue was primarily
attributable to increased implementation services for new customers, additional
consulting services provided to existing customers, and to a lesser extent,
increased maintenance revenue from a larger installed product base.
Cost of Revenue
Cost of software license for the 1997 Period decreased 91.2% to $0.01 million
from $0.1 million for the 1996 Period, and decreased as a percentage of total
revenue from 2.4% for the 1996 Period to 0.1% for the 1997 Period. As a
percentage of software license revenue, cost of software license decreased from
4.7% for the 1996 Period to 0.2% for the 1997 Period. Software development costs
were fully amortized during 1996 and no software development costs were
capitalized during the 1997 period.
Cost of services for the 1997 Period increased 43.6% to $2.0 million from $1.4
million for the 1996 Period. Cost of services as a percentage of total revenue
decreased from 28.4% for the 1996 Period to 21.9% for the 1997 Period. This
decrease was due to the growth in the Company's total revenue. Cost of services
as a percentage of services revenue increased from 58.0% for the 1996 Period to
73.3% for the 1997 Period. This increase was due to the use of the Company's
service personnel to build templates which can be reused in other customer
applications.
Operating Expenses
Research and development expenses for the 1997 Period increased 50.3% to $2.4
million from $1.6 million for the 1996 Period. The level of increase in research
and development expenses
Form 10-Q Page 8 of 12
reflects the Company's strategy of leveraging existing product functionality by
shifting its historical investment in research and development to a more
sales-oriented focus. As a percentage of total revenue, research and development
expenses declined from 32.5% for the 1996 Period to 26.1% for the 1997 Period
due to the growth in the Company's total revenue.
Selling and marketing expenses for the 1997 Period increased 157.7% to $2.5
million from $1.0 million for the 1996 Period. As a percentage of total revenue,
selling and marketing expenses increased from 19.7% for the 1996 Period to 27.2%
for the 1997 Period. These increases were primarily attributable to the hiring
of additional direct sales and marketing personnel, increased investment in
marketing support activities and materials, additional trade show activities,
preparations for the Company's User Meetings, and the opening of the Company's
Sydney, Australia office.
General and administrative expenses for the 1997 Period increased 44.9% to $0.6
million from $0.4 million for the 1996 Period due to increased investment in the
infrastructure needed to support the Company's accelerated growth. General and
administrative expenses declined as a percentage of total revenue from 7.9% for
the 1996 Period to 6.1% for the 1997 Period due to the growth in the Company's
total revenue.
License Interest Income
License interest income which is the portion of all license fees due under
software license agreements which was not recognized upon product acceptance or
license renewal increased 1.7% from $0.368 million for the 1996 Period to $0.374
million for the 1997 Period due to the increase in the Company's installed
customer base.
Provision for Income Taxes
The provisions for federal, state and foreign taxes were $0.3 million and $1.1
million for the 1996 Period and the 1997 Period, respectively. The effective tax
rate decreased from 39.3% for 1996 Period to 38.0% for the 1997 Period. This
decrease was due to the reinstatement by the Internal Revenue Service of the
research and development tax credit in May 1996.
Liquidity and Capital Resources
Since its inception, the Company had funded its operations primarily through
cash flow from operations and bank borrowings. In July 1996, the Company issued
and sold 2.7 million shares of Common Stock in connection with its initial
public offering. Proceeds to the Company from such offering were approximately
$30.1 million. In January 1997, the Company issued and sold 1.8 million shares
of Common Stock in connection with a second public offering. Proceeds to the
Company from such offering were approximately $52.4 million. At March 31, 1997,
the Company had cash and cash equivalents of approximately $75.0 million and
working capital of approximately $86.1 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.
Form 10-Q Page 9 of 12
Net cash used by operating activities for the 1997 period was $0.5 million,
primarily due to an increase in accounts receivable, mainly offset by an
increase in accounts payable and accrued expenses.
Net cash used by investing activities was $0.7 million during the 1997 Period
due to the purchase of property and equipment consisting mainly of computer
hardware and software and furniture and fixtures to support the Company's
growing employee base.
Net cash provided by financing activities was $52.1 million during the 1997
Period mainly due to the completion of the Company's second public offering.
The Company's capital commitments consist primarily of operating leases for
office space and equipment. At March 31, 1997, the Company's commitments under
non-cancellable operating leases for office space with terms in excess of one
year totaled $0.9 million, $1.1 million and $0.6 million for 1997, 1998 and
1999, respectively. The Company's total payments under such leases was $0.3
million for the 1997 Period.
The Company has a $5.0 million revolving credit line, which is unsecured and
expires on June 30, 1997. At March 31, 1997, the Company had no borrowings under
its revolving credit line. The Company's credit agreement prohibits the payment
of dividends, has profitability requirements and requires maintenance of
specified levels of tangible net worth and certain financial ratios.
The Company recorded no bad debt expense in the 1997 Period.
The Company believes that the net proceeds from its two recent public offerings
together with cash generated by operations and availability under its bank
credit facility will be sufficient to fund the Company's operations for at least
the next year. However, there can be no assurance that additional capital beyond
the amounts currently forecasted by the Company will not be required or that any
such required additional capital will be available on reasonable terms, if at
all, at such time as required by the Company.
Inflation
Inflation has not had a significant impact on the Company's operating results to
date, nor does the Company expect it to have a significant impact in the future
due to the fact that the Company's license and maintenance fees are typically
subject to annual increases based on recognized inflation indexes.
Forward-Looking Statements
Certain statements contained in this Form 10-Q 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
Form 10-Q Page 10 of 12
implementation, the technological compatibility of the Company's products with
its customers' systems, the Company's dependence on customers in the financial
services market, intense competition in the markets for the Company's products,
risk of non-renewal by current customers, management of the Company's growth,
and other risks and uncertainties. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "estimates," and "should" and similar words and
expressions are intended to identify the forward-looking statements contained in
this Form 10-Q. 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.
Form 10-Q Page 11 of 12
PEGASYSTEMS INC.
Part II - Other Information:
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
None
Form 10-Q Page 12 of 12
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: May 14, 1997 /s/ Ira Vishner
-----------------------------------
Ira Vishner
Vice President, Corporate Services,
Treasurer, Chief Financial Officer
and Director
(principal financial officer and
chief accounting officer)