SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
---------- ---------
Commission File Number: 1-11859
PEGASYSTEMS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2787865
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
101 MAIN STREET
CAMBRIDGE, MA 02142-1590
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(617) 374-9600
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
There were 28,714,700 shares of the Registrant's common stock, $.01 par value
per share, outstanding on March 31, 1999.
PEGASYSTEMS INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q/A
PART I - FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 1999
and December 31, 1998 3
Consolidated Statements of Operations for the three-month
periods ended March 31, 1999 and March 31, 1998 4
Consolidated Statements of Cash Flows for the three-
month periods ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
Page 3 of 16
FORM 10-Q/A
PEGASYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE-RELATED AMOUNTS)
MARCH 31, December 31,
1999 1998
------------- ------------
(As Restated) (As Restated)
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 26,016 $ 24,806
Trade and installment accounts receivable, net of
allowance for doubtful accounts of $3,257
in 1999 and $2,753 in 1998 ........................ 33,053 43,478
Prepaid expenses and other current assets .......... 1,754 2,427
--------- ---------
Total current assets ........................... 60,823 70,711
--------- ---------
Long-term license installments, net ................ 52,305 49,000
Equipment and improvements, net .................... 9,944 10,044
Purchased software and other, net .................. 9,127 9,505
--------- ---------
Total assets ................................. $ 132,199 $ 139,260
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses .............. $ 14,899 $ 14,842
Deferred revenue ................................... 20,963 21,424
Current portion of capital lease obligations ....... 114 123
--------- ---------
Total current liabilities ...................... 35,976 36,389
Commitments and contingencies (Note F) -- --
Deferred income taxes ................................. 750 750
Capital lease obligations, net of current portion ..... 186 202
Stockholders' Equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized; no shares issued and outstanding ..... -- --
Common stock, $.01 par value, 45,000,000 shares
authorized;
28,714,700 shares and 28,683,100 shares issued and 287 287
outstanding in 1999 and 1998, respectively
Additional paid-in capital ......................... 87,767 87,757
Deferred compensation .............................. (32) (36)
Stock warrant ...................................... 2,897 2,897
Retained earnings .................................. 4,779 11,489
Cumulative foreign currency translation adjustment . (411) (475)
--------- ---------
Total stockholders' equity ..................... 95,287 101,919
--------- ---------
Total liabilities and stockholders' equity ... $ 132,199 $ 139,260
--------- ---------
--------- ---------
The accompanying notes are an integral part of these
consolidated financial statements.
Page 4 of 16
PEGASYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended
March 31,
1999 1998
------------- -------------
(As Restated) (As Restated)
REVENUE:
Software license ................................... $ 6,020 $ 8,209
Services ........................................... 9,046 6,025
-------- --------
Total revenue .................................... 15,066 14,234
-------- --------
COST OF REVENUE:
Cost of software license ........................... 586 146
Cost of services ................................... 8,271 4,084
-------- --------
Total cost of revenue ............................ 8,857 4,230
-------- --------
GROSS PROFIT .......................................... 6,209 10,004
OPERATING EXPENSES:
Research and development ........................... 4,811 5,211
Selling and marketing .............................. 5,222 5,287
General and administrative ......................... 3,791 1,249
-------- --------
Total operating expenses ......................... 13,824 11,747
-------- --------
LOSS FROM OPERATIONS .................................. (7,615) (1,743)
License interest income ............................... 828 549
Other interest income ................................. 171 629
Interest expense ...................................... (6) --
Other (expense) income, net ........................... (88) --
-------- --------
LOSS BEFORE BENEFIT FOR INCOME TAXES (6,710) (565)
Benefit for income taxes .............................. -- 215
-------- --------
NET LOSS .............................................. $ (6,710) $ (350)
-------- --------
-------- --------
LOSS PER SHARE:
Basic ............................................... $ (0.23) $ (0.01)
-------- --------
-------- --------
Diluted ............................................. $ (0.23) $ (0.01)
-------- --------
-------- --------
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
Basic ............................................... 28,711 28,547
-------- --------
-------- --------
Diluted ............................................. 28,711 28,547
-------- --------
-------- --------
The accompanying notes are an integral part of these
consolidated financial statements.
Page 5 of 16
PEGASYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
1999 1998
---------- ----------
(As Restated) (As Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ......................................... $ (6,710) $(350)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Benefit from deferred income taxes ........... -- (215)
Depreciation and amortization................. 1,690 1,402
Provision for doubtful accounts............... 913 150
Changes in operating assets and liabilities:
Trade and installment accounts receivable .. 6,207 (5,931)
Prepaid expenses and other current assets .. 673 (519)
Accounts payable and accrued expenses ...... 57 1,558
Deferred revenue ........................... (461) 6,497
-------- --------
Net cash provided by operating activities 2,369 2,592
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and improvements ........... (1,001) (1,131)
Purchased software and other ..................... (207) --
-------- --------
Net cash used in investing activities ... (1,208) (1,131)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligation ............. (25) --
Exercise of stock options ........................ 10 16
-------- --------
Net cash (used in) provided by financing activities (15) 16
-------- --------
Effect of exchange rate on cash and cash equivalents 64 31
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS ............. 1,210 1,508
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD ..... 24,806 52,005
-------- --------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD ........... $ 26,016 $ 53,513
-------- --------
-------- --------
The accompanying notes are an integral part of these
consolidated financial statements.
Page 6 of 16
PEGASYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Pegasystems Inc.
(the "Company") presented herein have been prepared in accordance with generally
accepted accounting principles and with the instructions to Form 10-Q/A and
Article 10 of Regulation S-X. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three month period
ended March 31, 1999 are not necessarily indicative of the results that may be
expected for the full year ended December 31, 1999. The Company suggests that
these consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto for the year ended December
31, 1998, and the Company's 1998 Annual Report on Form 10-K/A filed with the
Securities and Exchange Commission.
NOTE B - RESTATEMENT
On October 29, 1998, the Company publicly announced its preliminary,
unaudited results of operations for the three and nine-month periods ended
September 30, 1998. Subsequently, based on information that had not
previously come to the attention of the Company or its independent auditors,
the Company determined that it may not have accounted properly for certain
revenue transactions. As a result, the Company, with the assistance of its
independent auditors, conducted a comprehensive review of those transactions
and others relating to the three-month period ended September 30, 1998 and
other periods in 1998 and 1997.
Based on such review, the Company concluded that it was necessary to revise
its previously disclosed preliminary, unaudited results of operations for the
three and nine-month periods ended September 30, 1998 and to restate its
consolidated financial statements for the first and second quarters of each
of 1998 and 1997. The revision and restatements primarily reflect changes in
the timing of revenue recognition. The revenue changes are principally
reversals of revenue arising from the inability to reasonably estimate the
fair market value of undelivered elements in connection with software
licenses, issues surrounding the timing of delivery or acceptance of licensed
software, certain project milestones not being completed and billing errors
or delays. The revenue changes also reflect an increase in revenue reserves.
In the opinion of management, all material adjustments necessary to correct
the consolidated financial statements have been recorded.
A summary of the impact of such restatements on the consolidated financial
statements for the unaudited three-month period ended March 31, 1998 is as
follows:
UNAUDITED
THREE MONTHS ENDED
MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA) As Previously
Reported As Restated
---------------- -----------------
Software license revenue ......... $ 11,388 $ 8,209
Services revenue ................. $ 6,579 $ 6,025
Total revenue .................... $ 17,967 $ 14,234
Income (loss) from operations .... $ 2,015 $ (1,743)
Net income (loss) ................ $ 1,980 $ (350)
Earnings (loss) per share: Basic . $ 0.07 $ (0.01)
Earnings (loss) per share: Diluted $ 0.07 $ (0.01)
Total assets ..................... $ 135,605 $ 135,062
Page 7 of 16
PEGASYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1999
NOTE C - EARNINGS (LOSS) PER SHARE
The Company follows the provisions of Statement of Financial Standards (SFAS)
No. 128, "Earnings Per Share." SFAS No. 128 establishes standards for
computing and presenting earnings per share and applies to entities with
publicly held common stock or potential common stock. In accordance with the
Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No. 98,
the Company has determined that there were no nominal issuances of common
stock or potential common stock in the period prior to the Company's initial
public offering (IPO). The Company has applied the provisions of SFAS No. 128
and SAB No. 98 to all periods presented. As a result of the Company's
reporting net losses for both three month periods ended March 31, 1999 and
1998, respectively, there is no difference in basic and diluted loss per
share.
For the three-month periods ended March 31, 1999 and 1998, 5,272,159 and
2,586,144 options and warrants, respectively, were excluded from the weighted
average common shares outstanding, assuming dilution, as their effect would
be anti-dilutive.
Page 8 of 16
PEGASYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1999
NOTE D - COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," effective
January 1, 1998. SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components in financial statements. The components
of the Company's comprehensive income are as follows:
THREE MONTHS ENDED
MARCH 31,
(IN THOUSANDS) 1999 1998
- -------------- ------------- -----------
(As Restated)
Net loss ..................................... $(6,710) $ (350)
Foreign currency translation adjustments, net
of income taxes ........................... 64 19
----------- -----------
Comprehensive loss ........................... $(6,646) $ (331)
----------- -----------
----------- -----------
NOTE E- SEGMENT REPORTING
During 1998, the Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 requires certain financial and
supplementary information to be disclosed on an annual and interim basis for
each reportable operating segment of an enterprise, as defined. Based on the
criteria set forth in SFAS No. 131, the Company currently operates in one
operating segment, customer service software.
NOTE F - COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
CHELVERUS Case:
In November 1997 and January 1998, complaints purporting to be class actions
were filed with the United States District Court for the District of
Massachusetts (the "Court") alleging that the Company and several of its
officers violated Section 10(b) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), Rule 10b-5 promulgated by the Commission
thereunder, and Section 20(a) of the Exchange Act. A third complaint was filed
in April 1998 but has been voluntarily dismissed without prejudice. In December
1998, the plaintiffs in the remaining class actions filed their First Amended
Consolidated Complaint (the "Amended Complaint") which names the Company, the
Company's President (Alan Trefler) and a former officer and director (Ira
Vishner), as defendants. The Amended Complaint alleges that the defendants
issued false and misleading financial statements and press releases concerning
the Company's publicly reported earnings. The Amended Complaint seeks
certification of a class of persons who purchased the Company's Common Stock
between July 2, 1997 and October 29, 1997, and does not specify the amount of
damages sought. The defendants have filed a motion to dismiss this litigation
which the plaintiffs have opposed. The Company intends to defend this matter
vigorously.
Page 9 of 16
PEGASYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1999
NOTE F - COMMITMENTS AND CONTINGENCIES - CONTINUED
GELFER CASE:
In December 1998, a complaint also purporting to be a class action was filed
with the Court alleging that the Company and Alan Trefler violated Section
10(b) of the Exchange Act and Rule 10b-5, and that Mr. Trefler also violated
Section 20(a) of the Exchange Act. The litigation was filed recently after
the Company's November 24, 1998 announcement that it might be recording
revenue adjustments. The litigation was initially filed on behalf of a
purported class of persons who purchased the Company's Common Stock between
October 29, 1998 and November 24, 1998. The Complaint does not specify the
amount of damages sought. In April 1999, Plaintiffs filed their First Amended
Class Action Complaint which seeks to extend the class period from April 2,
1998 through November 23, 1998 and also names Mr. Vishner as a defendant. The
Amended Complaint does not specify the amount of damages sought. The
defendants have not yet filed an answer or other responsive pleading in this
action. The Company intends to defend this matter vigorously.
NOTE G. SUBSEQUENT EVENT
On August 11, 1999, the Company announced the restatement of its financial
statements for the year ended December 31, 1998 and the unaudited three-month
period ended March 31, 1999. As part of the Company's closing for the
three-month period ended June 30, 1999, the Company discovered errors in the
previously released results of operations for the three-month periods ended
December 31, 1998 and March 31, 1999. The errors, which were caused by
incorrectly bookkeeping certain credit memos and cash receipts related to
previously reversed or deferred revenue, resulted in an understatement of
service revenue and an overstatement of costs for each of the periods.
Additionally, the Company noted an error in its allocation of operating
expenses for the unaudited three-month period ended March 31, 1999.
In the opinion of management, all material adjustments necessary to correct
the consolidated financial statements for the unaudited three-month period
ended March 31, 1999 have been recorded.
A summary of the impact of such restatements on the financial statements for
the unaudited three-month period ended March 31, 1999 are as follows:
Unaudited
Three Months Ended
March 31, 1999
Previously Reported As Restated
------------------- -----------
Total revenue $ 13,880 $ 15,066
Loss from operations (9,144) (7,615)
Net loss (8,239) (6,710)
Earnings per share: Basic (0.29) (0.23)
Earnings per share: Diluted (0.29) (0.23)
Total Assets $ 130,114 $ 132,199
Page 10 of 16
PEGASYSTEMS INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
On August 11, 1999, the Company announced the restatement of its financial
statements for the year ended December 31, 1998 and the unaudited three-month
period ended March 31, 1999. As part of the Company's closing for the
three-month period ended June 30, 1999, the Company discovered errors in the
previously released results of operations for the three-month periods ended
December 31, 1998 and March 31, 1999. The errors, which were caused by
incorrectly bookkeeping certain credit memos and cash receipts related to
previously reversed or deferred revenue, resulted in an understatement of
service revenue and an overstatement of costs for each of the periods.
Additionally, the Company noted an error in its allocation of operating
expenses for the unaudited three-month period ended March 31, 1999.
RESULTS OF OPERATIONS
The Company refined its method of classifying costs and expenses during the
three months ended March 31, 1999 (the "1999 Three Month Period") as compared
to the method used during the three months ended March 31, 1998 (the "1998
Three Month Period"). During the 1999 Three Month Period, the Company
classified costs and expenses based on their functional department. During
the 1998 Three Month Period, the Company classified costs and expenses using
an allocation method based on salaries.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
REVENUE
Total revenue for the 1999 Three Month Period increased 5.9% to $15.1 million
from $14.2 million for the 1998 Three Month Period. This increase was due to
an increase in services revenue partially offset by a decrease in software
license revenue.
Software license revenue for the 1999 Three Month Period decreased 26.7% to
$6.0 million from $8.2 million for the 1998 Three Month Period. This decrease
was primarily attributable to no software license acceptances by new
customers and fewer software license agreement renewals and extensions by
existing customers during the 1999 Three Month Period.
Services revenue for the 1999 Three Month Period increased 50.1% to $9.0
million from $6.0 million for the 1998 Three Month Period. This increase in
services revenue was primarily attributable to additional consulting services
provided to existing customers, and to a lesser extent, increased maintenance
revenue from a larger installed product base. Due to the Company's ability to
enter into larger dollar software license transactions, the size of services
revenue transactions has increased.
COST OF REVENUE
Cost of software license revenue for the 1999 Three Month Period increased to
$0.6 million from $0.1 million for the 1998 Three Month Period. As a
percentage of software license revenue, cost of software license increased to
9.7% for the 1999 Three Month Period from 1.8% for the 1998 Three Month
Period. This increase was due to amortization costs of $0.1 million
associated with a stock purchase warrant issued by the Company in June, 1997,
and amortization costs of $0.5 million associated with the Company's
acquisition of First Data Resources Corporation's ("FDR") ESP software
product, previously recorded as research and development expense. These
costs are being amortized through December 31, 2002.
Cost of services for the 1999 Three Month Period increased 102.5% to $8.3
million from $4.1 million for the 1998 Three Month Period. This increase was due
to costs associated with increased staffing in the Company's Client Services and
Software Services groups worldwide. Cost of services as a percentage of services
revenue increased to 91.4% for the 1999 Three Month Period from 67.8% for the
1998 Three Month Period. This gross margin reduction was due to decreased
productivity of the Company's Consulting Services and Software Services
groups, to the inability to invoice customers for certain services, and to a
lower amount of incoming business than previously planned.
Page 11 of 16
OPERATING EXPENSES
Research and development expenses for the 1999 Three Month Period decreased
7.7% to $4.8 million from $5.2 million for the 1998 Three Month Period. As a
percentage of total revenue, research and development expenses decreased to
31.9% for the 1999 Three Month Period from 36.6% for the 1998 Three Month
Period. These decreases were primarily due to a transfer of certain of the
research and development staff to the Company's Client Services Group early
in the 1999 Three-Month period. During the 1998 Three Month Period, the
Company had recorded approximately $0.4 million of software amortization
costs associated with the Company's acquisition of FDR's ESP software product
in research and development expenses. During the second half of 1998, the
Company had its first sale of software which included components of the ESP
software product. Consistent with Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 86, -
"Accounting for Computer Software to Be Sold, Leased or Otherwise Marketed"
the Company recorded these amortization costs in cost of software license
during the 1999 Three Month Period.
Selling and marketing expenses for the 1999 Three Month Period decreased 1.2%
to $5.2 million from $5.3 million for the 1998 Three Month Period. As a
percentage of total revenue, selling and marketing expenses decreased to 34.7%
for the 1999 Three Month Period from 37.1% for the 1998 Three Month Period.
These decreases were mainly due to a refinement in the Company's method of
classifying costs and expenses, a reduction of incoming business and expense
management efforts. The Company recorded Client Services and Software
Services costs associated with services revenue in cost of services revenue
during the 1999 Three Month Period and in sales and marketing expense in the
1998 Three Month Period.
General and administrative expenses for the 1999 Three Month Period increased
203.5% to $3.8 million from $1.2 million for the 1998 Three Month Period.
General and administrative expenses increased as a percentage of total
revenue to 25.2% for the 1999 Three Month Period from 8.8% for the 1998
Three Month Period primarily due to increased bad debt expenses and
professional fees. Bad debt expenses were incurred in order to replenish the
Company's accounts receivable allowance for doubtful accounts. Increased
professional fees were incurred as a result of additional legal and
accounting costs associated with ongoing class action litigation.
LICENSE INTEREST INCOME
License interest income, which is the portion of all license fees due and
received under software license agreements that was not recognized upon product
acceptance or license renewal, increased 50.8% to $0.8 million for the 1999
Three Month Period from $0.5 million for the 1998 Three Month Period due to the
increase in Company's installed customer base.
PROVISION FOR INCOME TAXES
As of March 31, 1999, the Company has net operating loss and tax credit
carryforwards available to offset future taxable income, if any. The Company
has provided a full valuation allowance against these deferred tax assets as
their realizability is uncertain. The tax benefit for federal, state and
foreign taxes was $0.2 million for the 1998 Three Month Period and the
effective tax rate was 38.0% for the 1998 Three Month Period.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has funded its operations primarily through
cash flow from operations, bank borrowings and proceeds from the Company's
public stock offerings.
Page 12 of 16
At March 31, 1999, the Company had cash and cash equivalents of approximately
$26.0 million and working capital of approximately $24.8 million. The Company's
approach of charging license fees payable in installments over the term of its
license has historically deferred the receipt of cash, and prior to its initial
public offering, limited the availability of working capital.
Net cash provided by operating activities for the 1999 Three Month Period was
$2.4 million, as compared to $2.6 million for the 1998 Three Month Period.
This was primarily due to a decrease in accounts receivable and prepaid
expenses and other current assets, partially offset by the operating loss,
net of non-cash items.
Net cash used in investing activities was approximately $1.2 million during
the 1999 Three Month Period, as compared to $1.1 million for the 1998 Three
Month Period. This increase was due to the purchase of property and
equipment, consisting mainly of computer hardware and software and furniture
and fixtures to support the expansion of certain facilities.
Net cash used by financing activities was $15,000 during the 1999 Three Month
Period, compared to net cash provided of $16,000 for the 1998 Three Month
Period, and consisted of the payment of the Company's capital lease
obligation, partially offset by amounts received from the exercise of stock
options.
In addition to cash used for investing activities, the Company has operating
leases for office space, furniture and equipment. At March 31, 1999, the
Company's commitments under non-cancelable operating leases for office space
with terms in excess of one year totaled $3.1 million, $4.2 million, $4.2
million, $4.2 million, and $5.1 million, for 1999, 2000, 2001, 2002, 2003,
and thereafter. The Company's total payments under such leases was $0.9
million for the 1999 Three Month Period.
The Company's $5.0 million revolving bank credit line matures on June 30,
1999. At March 31, 1999, the Company had no borrowings under such facility.
The Company's credit agreement prohibits the payment of dividends and the
disposition of assets outside of the ordinary course, has profitability
requirements and requires maintenance of specified levels of tangible net
worth and certain financial ratios. At March 31, 1999, the Company was in
compliance with all these covenant requirements. The Company intends to
renegotiate the term and the covenant requirements under the existing line of
credit with the same bank.
The Company believes that current cash and cash equivalents will be sufficient
to fund the Company's operations for the near term. There can be no assurance
that additional capital which may be required to support further revenue growth
will 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.
EFFECT OF "YEAR 2000" ISSUES.
The "Year 2000" problem is pervasive and complex, as virtually every computer
operation will be affected in some way by the rollover of the two-digit year
value to "00." The issue is whether computer systems will properly recognize
date sensitive information when the year changes to 2000. Systems that do not
properly recognize such information (or other date changes) could generate
erroneous data or fail. Pegasystems' customers rely on date-sensitive operations
to calculate internal data and to service their customers. In addition, the
Company also uses other companies' products as part of market offerings and for
internal use; these programs may also be affected by the issue.
Year 2000 readiness issues may negatively affect the purchasing patterns of
existing and potential customers. Many organizations are spending significant
amounts and rededicating personnel to correct or patch their
Page 13 of 16
current systems to achieve Year 2000 readiness. Thus, fewer funds may be
available to purchase the Company's products. Also, the issue may divert
customers' and potential customers' time, attention, and resources away from
those projects which typically lead to purchases of products or services. The
Company does not believe that there is any practical way to ascertain the extent
of, and has no plans to address problems associated with, any such reduction in
purchasing resources of its customers. Any such reduction could, however, result
in a material adverse effect on the Company's business, operating results and
financial condition.
Pegasystems has designed and tested the most current versions of its products to
be Year 2000 compliant. However, some customers are using earlier product
versions. In addition the Company's products are generally integrated with the
systems and products of its customers developed by other vendors. Year 2000
problems in these systems and products might significantly limit the ability of
the Company's customers to realize the intended benefit offered by the Company's
products. The Company may in the future be subject to claims based on Year 2000
problems in others' products or issues arising from the integration of multiple
products within an overall system. Although the Company has not been involved in
any litigation or proceeding to date involving its products or services related
to Year 2000 issues, there can be no assurance that the Company will not in the
future be required to defend its products or services or to negotiate
resolutions of claims based on Year 2000 issues. The costs of defending and
resolving Year 2000-related disputes, and any liabilities of the Company for
Year 2000-related damages, including consequential damages, could have a
material adverse effect on the Company business, operating results and financial
condition.
The Company also relies on certain computer technology and software that it
licenses from third parties, including software that is integrated with the
Company's products. These programs may also present Year 2000 problems. Although
the Company has not experienced any significant product claims to date, there
can be no assurance that unanticipated errors or defects will not result in
product liability or other claims in the future. Failure of third-party software
comprising any part of the Company's systems to operate properly with regard to
Year 2000 and thereafter could require the Company to incur unanticipated
expenses to address associated problems, which could have a material adverse
effect on the Company's business, operating results and financial condition.
The Company has adopted standard industry practices to prepare for the effect of
the upcoming date change on internal data and information technology systems
(such as communications, development, accounting, billing, and other systems).
The Company's Year 2000 internal readiness program primarily covers: taking
inventory of hardware, software and embedded systems, assessing business and
customer satisfaction risks associated with such systems, creating action plans
to address known risks, executing and monitoring action plans, and contingency
planning. Pegasystems expects to substantially complete Year 2000 readiness
preparations by the end of the third quarter of 1999 with respect to core
business systems.
Although the Company does not believe that it will incur any material costs or
experience material disruptions in its business associated with preparing its
internal systems for the year 2000, there can be no assurances that the Company
will not experience serious unanticipated negative consequences and/or material
costs caused by undetected errors or defects in the technology used in its
internal system. The most reasonably likely worst case scenarios would include:
(i) corruption of data contained in internal information systems, (ii) hardware
failure, and (iii) the failure of infrastructure services provided by government
agencies and other third parties (e.g., electricity, phone service, water
transport, Internet services, etc.). The Company is in the process of completing
contingency planning for high risk areas (such as accounting, payroll, and
invoicing/billing systems) at this time and has commenced contingency planning
relating to other areas. The Company expects contingency plans to include, among
other things, manual "work-arounds" for software and hardware failures, as well
as substitution of systems, if necessary.
Page 14 of 16
ADOPTION OF THE EURO
A new currency, "EURO," was introduced in certain Economic and Monetary Union
("EMU") countries. It is expected that by 2002 (at the latest) all participating
EMU countries will use the EURO as their single currency. As a result, software
used by many companies headquartered or maintaining a subsidiary in a
participating EMU country is expected to be EURO-enabled. In less than four
years, all companies headquartered or maintaining a subsidiary in an EMU country
will need to be EURO-enabled. These changes will change budgetary, accounting
and fiscal systems in companies and public administration, and require the
simultaneous handling of parallel currencies and conversion of legacy data.
These requirements (and the fact that the final rules and regulations are not
yet available) may curb market demand for the Company's products because the
budgets and priorities of our customers and prospective customers may change.
The Company is monitoring the rules and regulations as they become known in
order to make any changes to its software products that the Company deems
necessary to comply with such rules and regulations. Although the Company
believes that its most recent products address these requirements, there can be
no assurance that, once the final rules and regulations are completed, the
Company's software will contain all of the necessary changes or meet all of the
EURO requirements. Any inability to comply with the EURO requirements could have
an adverse effect on the Company's business, operating results and financial
condition.
INFLATION
Inflation has not had a significant impact on the Company's operating results to
date, and the Company does not expect it to have a significant impact in the
future. The Company's license and maintenance fees are typically subject to
annual increases based on recognized inflation indexes.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q/A may be construed as
"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
effect of losses from prior periods, liquidity issues, pending litigation and
regulatory proceedings, recent adverse publicity, seasonal variation of the
Company's operations and fluctuations in the Company's quarterly results, rapid
technological change involving the Company's products and those of competitors,
delays in product development and implementation, the technological
compatibility of the Company's products with its customers' systems, the
Company's dependence on customers in the financial services market, intense
competition in the markets for the Company's products, risk of non-renewal by
current customers, management of the Company's growth, and other risks and
uncertainties. Further information regarding those factors which could cause the
Company's actual results to differ materially from any forward-looking
statements contained herein is provided below.
Page 15 of 16
PEGASYSTEMS INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Part II, Item 7A, "Quantitative and Qualitative
Disclosures about Market Risk," in the Company's Annual Report on Form 10-K/A
for the year ended December 31, 1998.
PART II - OTHER INFORMATION:
Item 1. Legal Proceedings
Information concerning legal proceedings is discussed in Note F of the Notes
to Consolidated Financial Statements, and is incorporated herein and made a
part hereof.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
During the first quarter of fiscal 1999, there were no matters submitted to a
vote of security holders.
Item 5. Other Information
On May 10, 1999, the Company and Richard B. Goldman, the Company's Vice
President, Chief Financial Officer, and Treasurer, signed a Separation
Agreement, setting forth terms relative to the conclusion of his employment with
the Company. A copy of the Separation Agreement is attached as Exhibit 10.16 to
this Report.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.16 Separation Agreement
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K on January 8, 1999, announcing the
resignation of Ira Vishner from his position as Vice President of Corporate
Services and Treasurer of the Company, and also as a Director of the Company.
Page 16 of 16
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 12, 1999 /s/ James P. O'Halloran
----------------------------------
James P. O'Halloran
Senior Vice President,
Chief Financial Officer, Treasurer,
Clerk and Director