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 June 30, 1997
or
[ ] Transition Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from ___________to_____________
Commission File Number: 1-11859
PEGASYSTEMS INC.
(Exact name of Registrant as specified in its charter)
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 28,487,600 shares of the Registrant's common stock, $.01 par value
per share, outstanding on June 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 June 30, 1997
Condensed Consolidated Statements of Income for the three 4
and six months ended: June 30, 1996 and June 30, 1997
Condensed Consolidated Statements of Cash Flows for the six 5
months ended: June 30, 1996 and June 30, 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, June 30,
1996 1997
-------- ---------
Assets
Current assets:
Cash and cash equivalents $24,201 $ 72,511
Trade and installment accounts receivable, net of
allowance for doubtful accounts of $939 at
December 31, 1996 and $671 at June 30, 1997 14,582 22,744
Prepaid expenses and other assets 1,235 1,620
--------- ----------
Total current assets 40,018 96,875
Long-term license installments, net 23,802 27,604
Equipment and improvements, net 3,035 3,832
--------- ----------
Total assets $66,855 $128,311
========= ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 2,697 $ 3,250
Deferred revenue 53 2,176
Deferred income taxes 2,904 3,765
--------- ----------
Total current liabilities 5,654 9,191
--------- ----------
Deferred income taxes 8,816 10,406
--------- ----------
Stockholders' Equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized; no shares issued and outstanding -- --
Common stock, $.01 par value, 45,000,000 shares
authorized; 26,392,200 shares and 28,487,600 shares
issued and outstanding at December 31, 1996 and
June 30, 1997, respectively 264 287
Additional paid-in capital 30,206 82,584
Deferred compensation (73) (63)
Retained earnings 22,022 26,021
Cumulative foreign currency translation adjustment (34) (115)
--------- ----------
Total stockholders' equity 52,385 108,714
--------- ----------
Total liabilities and stockholders' equity $66,855 $128,311
========= ==========
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 Six Months Ended
June 30, June 30,
1996 1997 1996 1997
-------- -------- -------- --------
Revenue
Software license $3,874 $ 8,983 $ 6,394 $15,462
Services 2,575 3,250 4,996 6,004
-------- -------- -------- --------
Total revenue 6,449 12,233 11,390 21,466
-------- -------- -------- --------
Cost of revenue
Cost of software license 118 10 236 20
Cost of services 1,584 2,346 2,989 4,365
-------- -------- -------- --------
Total cost of revenue 1,702 2,356 3,225 4,385
-------- -------- -------- --------
Gross Profit 4,747 9,877 8,165 17,081
Operating expenses
Research and development 1,918 3,015 3,522 5,426
Selling and marketing 1,282 4,081 2,256 6,590
General and administrative 399 595 788 1,158
-------- -------- -------- --------
Total operating expenses 3,599 7,691 6,566 13,174
-------- -------- -------- --------
Income from operations 1,148 2,186 1,599 3,907
License interest income 378 421 746 796
Other interest income 11 998 23 1,747
Interest expense (30) -- (69) --
-------- -------- -------- --------
Income before provision for
income taxes 1,507 3,605 2,299 6,450
Provision for income taxes 588 1,370 899 2,451
-------- -------- -------- --------
Net income $ 919 $ 2,235 $ 1,400 $ 3,999
======== ======== ======== ========
Net income per common and common
equivalent share $ 0.04 $ 0.08 $ 0.06 $ 0.14
======== ======== ======== ========
Weighted average number of common
and common equivalent shares
outstanding 25,359 29,674 25,432 29,413
======== ======== ======== ========
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)
Six Months Ended
June 30,
1996 1997
--------- --------
Operating Activities
Net income $ 1,400 $ 3,999
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for deferred income taxes 686 2,451
Depreciation and amortization 756 783
Changes in operating assets and liabilities:
Increase in trade and installment accounts receivable (2,248) (11,963)
Decrease (increase) in prepaid expenses and other
assets 2 (385)
Increase (decrease) in accounts payable and accrued
expenses (24) 553
Increase in deferred revenue 409 2,123
-------- ---------
Net cash provided (used) by operating activities 981 (2,439)
-------- ---------
Investing Activities
Purchase of equipment and improvements (529) (1,571)
-------- ---------
Net cash used by investing activities (529) (1,571)
-------- ---------
Financing Activities
Repayments of long-term debt (391) --
Issuance of common stock, net -- 52,067
Exercise of stock options 1 334
-------- ---------
Net cash provided (used) by financing activities (390) 52,401
Effect of exchange rate on cash (16) (81)
-------- ---------
Net increase in cash and equivalents 46 48,310
Cash and cash equivalents at beginning of period 511 24,201
-------- ---------
Cash and cash equivalents at end of period $ 557 $ 72,511
======== =========
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
June 30, 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 and six-month periods ended June 30,
1997 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1997. The Company suggests that these interim condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 1996,
included in the Company's Annual Report to Stockholders filed with the
Securities and Exchange Commission.
Note B - 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 June
30, 1996 and June 30, 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 and Six Months Ended June 30, 1997 Compared to
Three and Six Months Ended June 30, 1996
Revenue
Total revenue for the three months ended June 30, 1997 (the "1997 Three Month
Period") increased 89.7% to $12.2 million from $6.4 million for the three months
ended June 30, 1996 (the "1996 Three Month Period"). Total revenue for the six
months ended June 30, 1997 (the "1997 Six Month Period") increased 88.5% to
$21.5 million from $11.4 million for the six months ended June 30, 1996 (the
"1996 Six Month Period"). These increases were primarily due to an increase in
software license revenue.
Software license revenue for the 1997 Three Month Period increased 131.9% to
$9.0 million from $3.9 million for the 1996 Three Month Period. Software license
revenue for the 1997 Six Month Period increased 141.8% to $15.5 million from
$6.4 million for the 1996 Six Month Period. The increase in software license
revenue was primarily attributable to software license acceptances by new
customers, software license agreement renewals, and extended software usage by
existing customers.
Services revenue for the 1997 Three Month Period increased 26.2% to $3.3 million
from $2.6 million for the 1996 Three Month Period. Services revenue for the 1997
Six Month Period increased 20.2% to $6.0 million from $5.0 million for the 1996
Six Month Period. The increase in services revenue was primarily attributable to
increased implementation services for new customers, additional consulting
services provided to existing customers, and to a lesser extent, increased
maintenance revenue from a larger installed product base.
Cost of Revenue
Cost of software license for the 1997 Three Month Period decreased 91.7% to
$0.01 million from $0.1 million for the 1996 Three Month Period, and decreased
as a percentage of total revenue from 1.8% for the 1996 Three Month Period to
0.1% for the 1997 Three Month Period. As a percentage of software license
revenue, cost of software license decreased from 3.1% for the 1996 Three Month
Period to 0.1% for the 1997 Three Month Period. As a percentage of software
license revenue, cost of software license decreased from 3.7% for the 1996 Six
Month Period to 0.1% for the 1997 Six Month Period. Software development costs
were fully amortized during 1996 and no software development costs were
capitalized during the 1997 Three or Six Month Period.
Cost of services for the 1997 Three Month Period increased 48.2% to $2.3 million
from $1.6 million for the 1996 Three Month Period. Cost of services for the 1997
Six Month Period increased 46.0% to $4.4 million from $3.0 million for the 1996
Six Month Period. Cost of services as a percentage of total revenue decreased
from 24.6% for the 1996 Three Month Period to 19.2% for the 1997 Three Month
Period. This decrease was due to the growth in the Company's total revenue. Cost
of services as a percentage of total revenue decreased from 26.3% for the 1996
Six Month Period to 20.3% for the 1997 Six Month Period. Cost of services as a
percentage of services revenue increased from 61.5% for the 1996 Three Month
Period to 72.2% for the 1997 Three Month Period. Cost of services as a
percentage of services revenue increased from 59.8% for the 1996 Six Month
Period to 72.7% for the 1997 Six Month Period. These increases were both
primarily due to the buildup of new staff, primarily in the Company's regional
offices, and use of the Company's service personnel to build templates which can
be reused in other customer applications.
Form 10-Q Page 8 of 12
Operating Expenses
Research and development expenses for the 1997 Three Month Period increased
57.2% to $3.0 million from $1.9 million for the 1996 Three Month Period.
Research and development expenses for the 1997 Six Month Period increased 54.0%
to $5.4 million from $3.5 million for the 1996 Six Month Period. The level of
increase in research and development expenses 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 29.8% for the
1996 Three Month Period to 24.7% for the 1997 Three Month Period. As a
percentage of total revenue, research and development expenses declined from
30.9% for the 1996 Six Month Period to 25.3% for the 1997 Six Month Period. Both
of these declines were due to the growth in the Company's total revenue.
Selling and marketing expenses for the 1997 Three Month Period increased 218.4%
to $4.1 million from $1.3 million for the 1996 Three Month Period. As a
percentage of total revenue, selling and marketing expenses increased from 19.9%
for the 1996 Three Month Period to 33.4% for the 1997 Three Month Period.
Selling and marketing expenses for the 1997 Six Month Period increased 192.3% to
$6.6 million from $2.3 million for the 1996 Six Month Period. As a percentage of
total revenue, selling and marketing expenses increased from 19.8% for the 1996
Six Month Period to 30.7% for the 1997 Six Month Period. These increases were
primarily attributable to the hiring of additional direct sales and marketing
personnel, commission payments on new sales increased investment in marketing
support activities and materials, additional trade show activities, preparations
for the Company's User Meetings, and the opening of additional regional offices.
General and administrative expenses for the 1997 Three Month Period increased
49.2% to $0.6 million from $0.4 million for the 1996 Three Month Period. General
and administrative expenses for the 1997 Six Month Period increased 47.2% to
$1.2 million from $0.8 million for the 1996 Six Month Period. These increases
were due to increased investment in the infrastructure needed to support the
Company's accelerated growth. General and administrative expenses declined as a
percentage of total revenue from 6.2% for the 1996 Three Month Period to 4.9%
for the 1997 Three Month Period and from 6.9% for the 1996 Six Month Period to
5.4% for the 1997 Six Month 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 11.3% from $0.38 million for the 1996 Three Month
Period to $0.42 million for the 1997 Three Month Period. License interest income
increased 6.6% from $0.75 million for the 1996 Six Month Period to $0.80 million
for the 1997 Six Month Period due to the increase in the Company's installed
customer base.
Provision for Income Taxes
The provisions for federal, state and foreign taxes were $0.6 million and $1.4
million for the 1996 Three Month Period and the 1997 Three Month Period,
respectively. The provisions for federal, state and foreign taxes were $0.9
million and $2.5 million for the 1996 Six Month Period and the 1997 Six Month
Period, respectively. The effective tax rate decreased from 39.0% for 1996 Three
and Six Month Periods to 38.0% for the 1997 Three and Six Month Periods. These
decreases were due to the reinstatement by the Internal Revenue Service of the
research and development tax credit in May 1996 and tax benefits to the Company
following employee stock option exercises.
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
Form 10-Q Page 9 of 12
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 June 30, 1997, the Company had
cash and cash equivalents of approximately $72.5 million and working capital of
approximately $87.7 million. The Company's approach of charging license fees
payable in installments over the term of its licenses has historically deferred
the receipt of cash and, prior to its initial public offering, had limited the
availability of working capital.
Net cash used by operating activities for the 1997 Six Month period was $2.4
million, primarily due to an increase in accounts receivable, partially offset
by an increase in deferred revenue and accounts payable and accrued expenses.
Net cash used by investing activities was $1.6 million during the 1997 Six Month
Period due to the purchase of property and equipment consisting mainly of
computer hardware and software and furniture and fixtures to support the
Company's growing employee base.
Net cash provided by financing activities was $52.4 million during the 1997 Six
Month Period mainly due to the completion of the Company's second public
offering.
The Company's capital commitments consist primarily of operating leases for
office space and equipment. At June 30, 1997, the Company's commitments under
non-cancellable operating leases for office space with terms in excess of one
year totaled $0.7 million, $1.4 million and $0.6 million for 1997, 1998 and
1999, respectively. The Company's total payments under such leases was $0.7
million for the 1997 Six Month Period.
The Company's $5.0 million revolving credit line, which expired on June 30,
1997, was renewed with the same bank and has a maturity date of June 30, 1999.
At June 30, 1997, the Company had no borrowings under its revolving credit line.
The Company's credit agreement prohibits the payment of dividends, has
profitability requirements and requires maintenance of specified levels of
tangible net worth and certain financial ratios.
The Company recorded no bad debt expense in the 1997 Six Month 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 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,
Form 10-Q Page 10 of 12
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
The Annual Meeting of Stockholders was held on May 13, 1997. The following
matters were voted upon:
(1) Thomas E. Swithenbank and Alan Trefler were both re-elected to serve
as Directors of the Company to hold office until the 2000 annual
meeting of stockholders and until their successors are duly elected
and qualified. The following Directors' respective terms of office
continued after the Annual Meeting: Edward A. Maybury, Leonard A.
Schlesinger, Edward B. Roberts and Ira Vishner. Both Mr. Swithenbank
and Mr. Trefler were elected with 26,847,332 votes for, 78,510 votes
against and 0 broker non-votes.
(2) The stockholders ratified the appointment by the Board of Directors of
Ernst & Young LLP, independent auditors, to audit the financial
statements of the Company for the fiscal year ending December 31,
1997, with 26,925,237 votes for, 605 votes against and 0 broker
non-votes.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
None
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: August 14, 1997 /s/ Ira Vishner
----------------------------------
Ira Vishner
Vice President, Corporate Services,
Treasurer, Chief Financial Officer
and Director
(principal financial officer and
chief accounting officer)