SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
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[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Pegasystems Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
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Dear Stockholder:
We cordially invite you to attend our 1998 Annual Meeting of
Stockholders on Wednesday, May 6, 1998 at Fleet National Bank, 75 State Street,
Conference Room F, 8th Floor, Boston, Massachusetts. Please join us for a
pre-meeting continental breakfast at 10:00 a.m. The Meeting will commence at
10:30 a.m.
The following Notice of Annual Meeting of Stockholders and Proxy
Statement describes the items to be considered by the stockholders and contains
certain information about the Company and its officers and directors.
Please sign and return the enclosed proxy card as soon as possible in
the envelope provided so that your shares can be voted at the Meeting in
accordance with your instructions. Even if you plan to attend the Meeting, we
urge you to sign and promptly return the proxy card. You can revoke it at any
time before it is exercised at the Meeting, or vote your shares personally if
you attend the Meeting.
We look forward to seeing you on May 6, 1998.
Sincerely,
Alan Trefler
April 29, 1998 President
PEGASYSTEMS INC.
101 Main Street
Cambridge, MA 02142
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be held on May 6, 1998
To The Stockholders of Pegasystems Inc:
Notice is hereby given that the Annual Meeting of Stockholders of
Pegasystems Inc. (the "Company") will be held at Fleet National Bank, 75 State
Street, Conference Room F, 8th Floor, Boston, Massachusetts, on Wednesday, May
6, 1998 at 10:30 a.m., local time, for the following purposes:
1. To re-elect two members of the Board of Directors to hold
office until the 2001 Annual Meeting of Stockholders and until
their successors are duly elected and qualified.
2. To ratify the Board of Directors' selection of Arthur Andersen
LLP as the independent public accountants for the Company for
the year ending December 31, 1998.
3. To approve the amended and restated 1994 Long-Term Incentive
Plan.
4. To transact such other business as may properly come before
the Meeting or any adjournment(s) thereof.
Only stockholders of record at the close of business on the record
date, March 20, 1998, will receive notice of the Meeting and be entitled to vote
at the Meeting or any adjournment(s) thereof. The transfer books will not be
closed.
You are cordially invited to attend the Meeting in person if possible.
Whether you plan to attend the Meeting or not, please fill out, sign and date
the enclosed proxy and return it in the envelope enclosed for this purpose. The
proxy is revocable by the person giving it at any time prior to the exercise
thereof by written notice received by the Company, by delivery of a duly
executed proxy bearing a later date, or by attending the Meeting and voting in
person.
By Order of the Board of Directors
Alan Trefler
April 29, 1998 Clerk
PEGASYSTEMS INC.
101 Main Street
Cambridge, MA 02142
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
To Be Held On May 6, 1998
This Proxy Statement is furnished to the holders of the Common Stock,
$.01 par value (the "Common Stock"), of Pegasystems Inc. (the "Company") in
connection with the solicitation by and on behalf of the Board of Directors of
the Company of proxies for use at the Annual Meeting of Stockholders of the
Company to be held at Fleet National Bank, 75 State Street, Conference Room F,
8th Floor, Boston, Massachusetts, on Wednesday, May 6, 1998 at 10:30 a.m., local
time, and at any adjournment(s) thereof. Each properly signed proxy will be
voted in accordance with the instructions contained therein, and, if no choice
is specified, the proxy will be voted in favor of the proposals set forth in the
Notice of Annual Meeting.
Any proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before its use by delivering to the Company a
written notice of revocation or a duly executed proxy bearing a later date, or
by attending the Meeting and voting in person.
This Proxy Statement, the enclosed proxy and Annual Report to
Stockholders for the year ended December 31, 1997, are being mailed to the
stockholders on or about April 29, 1998. The Annual Report does not constitute
any part of this Proxy Statement.
The entire cost of this solicitation will be paid by the Company. In
addition, the Company may reimburse brokerage firms and other persons
representing beneficial owners of shares for their expenses in forwarding
solicitation material to such beneficial owners.
Only stockholders of record of the Company's 28,545,100 shares of
Common Stock outstanding as of the close of business on the record date, March
20, 1998, will be entitled to vote. Each share of Common Stock is entitled to
one vote at the Meeting or any adjournment(s) thereof. The presence, in person
or by proxy, of the holders of a majority of the outstanding shares of Common
Stock entitled to vote is necessary to constitute a quorum at the Meeting.
Shares voted to abstain or to withhold as to a particular matter as to which a
nominee (such as a broker holding shares in street name for a beneficial owner)
has no voting authority in respect of such matter will be deemed represented for
quorum purposes. Under the Company's By-Laws, such shares will not be deemed to
be voting on such matter, and therefore will not be the equivalent of negative
votes as to such matter. Votes will be tabulated by the Company's transfer agent
subject to supervision of persons designated by the Board of Directors as
inspectors.
The affirmative vote of the holders of a plurality of the shares
represented at the Meeting, at which a quorum is present, is required for the
election of Directors. Approval of other matters before the Meeting will require
the affirmative vote at the Meeting, at which a quorum is present, of the
holders of a majority of votes cast with respect to such matters.
PRINCIPAL AND MANAGEMENT STOCKHOLDERS
The following table sets forth certain information as of February 17,
1998, with respect to the beneficial ownership of Common Stock of the Company by
(i) each person known by the Company to be the beneficial owner of more than 5%
of the outstanding Common Stock of the Company, (ii) each Director of the
Company, (iii) the CEO and the five other most highly compensated executive
officers and (iv) all executive officers and Directors of the Company as a
group. To the knowledge of the Company, based on information provided by such
owners, all persons listed below have sole voting and investment power with
respect to their shares of Common Stock except to the extent authority is shared
by spouses under applicable law.
Name of Number of Shares Percentage of Shares
Beneficial Owner Beneficially Owned (1) Beneficially Owned
- ---------------- ---------------------- ---------------------
Alan Trefler (2) 21,447,100 75.1%
Joseph J. Friscia (3) 187,000 *
Eugene A. Bonte (3) 23,000 *
Michael R. Pyle (3) 112,700 *
Ira Vishner 227,200 *
Kenneth W. Olson 245,000 *
Edward A. Maybury (3) 10,400 *
Edward B. Roberts 11,000 *
Leonard A. Schlesinger (3) 6,000 *
Thomas E. Swithenbank (3) 6,000 *
All executive officers and Directors
as a group (10 persons) (4 ) 22,275,400 77.1%
- -----------------
* Represents beneficial ownership of less than 1% of the outstanding Common
Stock.
(1) The number of shares of Common Stock deemed outstanding includes (i)
28,545,100 shares of Common Stock outstanding as of February 17, 1998 and
(ii) 361,100 shares issuable pursuant to outstanding options held by the
respective person or group which are exercisable within 60 days of February
17, 1998, as set forth below.
(2) Includes 185,000 shares held in trust with respect to which Mr. Trefler has
voting and dispositive power. Mr. Trefler disclaims beneficial interest.
(3) Consists solely of shares of Common Stock subject to stock options
exercisable within 60 days of February 17, 1998.
(4) Includes 361,100 shares of Common Stock subject to stock options
exercisable within 60 days of February 17, 1998.
2
ELECTION OF DIRECTORS
(Item 1 of Notice)
There are currently six members of the Board of Directors, divided into
three classes with terms expiring respectively at the 1998, 1999 and 2000 annual
meetings of stockholders. The Board has nominated Edward A. Maybury and Leonard
A. Schlesinger, whose terms are expiring, for re-election. Messrs. Maybury and
Schlesinger have consented to serve, if elected at the Meeting, for three-year
terms expiring at the time of the 2001 annual meeting of stockholders and when
their respective successors are elected and qualified. The shares represented by
the enclosed proxy will be voted to elect Messrs. Maybury and Schlesinger unless
such authority is withheld by marking the proxy to that effect. Messrs. Maybury
and Schlesinger have agreed to serve, but in the event either shall unexpectedly
become unavailable for election, the proxy, unless authority has been withheld
as to such nominee, may be voted for election of a substitute. Proxies may not
be voted for more than two persons.
THE BOARD OF DIRECTORS RECOMMENDS ELECTION OF THE NOMINEES AS DIRECTORS.
The following information is furnished with respect to the nominees for
election as Directors and each other Director.
NOMINEES FOR ELECTION FOR TERMS OF THREE YEARS EXPIRING IN 2001
Edward A. Maybury, 58, has been a Director of the Company since its
organization in 1983. Since July 1991, he has served as a Director, and from
July 1991 through May 1993 was the President and Chief Executive Officer, of
Creative Systems, Inc., a software and services company. Prior thereto, Mr.
Maybury was the Chief Executive Officer of Data Architect Systems, Inc., a
software and services company.
Leonard A. Schlesinger, 45, has been a Director of the Company since
June 1996. He has been a Professor of Business Administration at the Harvard
Business School since 1988, where he is chairman of the Service Management
Group, an interdisciplinary faculty group that focuses on customer service.
Professor Schlesinger is also a Director of The Limited, Inc., a specialty
retailer, Borders Group, Inc., a book, music and video retailer, and GC
Companies, Inc., a movie exhibition and investments company.
DIRECTORS WHOSE TERMS EXPIRE IN 1999
Edward B. Roberts, 62, has been a Director of the Company since June
1996. Since 1961, he has been the David Sarnoff Professor of Management of
Technology at the Massachusetts Institute of Technology. He was co-founder and
chairman, from 1963 until June 1995, of Pugh-Roberts Associates, Inc., an
international management consulting firm specializing in strategic planning and
technology management. In addition, Dr. Roberts co-founded and is a Director of
Medical Information Technology, Inc., a provider of hospital information
systems. Dr. Roberts is also a Director of Advanced Magnetics, Inc., a medical
imaging company, and Selfcare, Inc., a manufacturer of home medical diagnostic
products, and is a general partner of Zero Stage Capital, a venture capital
firm.
Ira Vishner, 44, a founder of the Company, has served as Vice
President, Corporate Services, Treasurer and Chief Financial Officer of the
Company since 1983 and has been a Director since 1994. Prior to 1983, he worked
in the executive offices of TMI Systems Corporation where he was responsible for
corporate planning, financial analysis and product marketing. Mr. Vishner holds
an S.B. in Mathematics from the Massachusetts Institute of Technology.
3
DIRECTORS WHOSE TERMS EXPIRE IN 2000
Thomas E. Swithenbank, 53, has been a Director of the Company since
June 1996. Since 1990, he has been President and Chief Executive Officer of
Harte-Hanks Data Technologies, a computer software and servicing company
specializing in database marketing systems. Prior thereto, Mr. Swithenbank was
President of International Data Corporation, a world-wide computer marketing
consulting firm. Mr. Swithenbank has an A.B. from Harvard University and an
M.B.A. from the Harvard Business School.
Alan Trefler, 41, a founder of the Company, has served as President and
Clerk and has been a Director since the Company's organization in 1983. Prior
thereto, he managed an electronic funds transfer product for TMI Systems
Corporation, a software and services company. Mr. Trefler holds a degree in
economics and computer science from Dartmouth College.
BOARD OF DIRECTORS AND COMMITTEE MEETINGS
The Company's Board of Directors has established an Audit Committee and
a Compensation Committee. The Audit Committee is responsible for nominating the
Company's independent public accountants for approval by the Board of Directors,
reviewing the scope, results and costs of the audit with the Company's
independent public accountants and reviewing the financial statements of the
Company. Messrs. Maybury and Roberts are currently the members of the Audit
Committee. The Audit Committee met one time during 1997. The Compensation
Committee is responsible for recommending compensation and benefits for the
executive officers of the Company to the Board of Directors and for
administering the Company's stock plans. Messrs. Maybury and Schlesinger are
currently the members of the Compensation Committee. The Compensation Committee
met one time during 1997.
During 1997, the Board of Directors of the Company held six meetings.
Each incumbent Director attended at least 75% of the aggregate number of
meetings of the Board and the meetings of the committees of the Board on which
he served.
DIRECTOR COMPENSATION
Each non-employee Director of the Company receives $1,000 for every
Board or committee meeting attended. The Company also reimburses non-employee
Directors for expenses incurred in attending Board meetings. In addition,
non-employee Directors of the Company are eligible to receive stock options
under the 1996 Non-Employee Director Stock Option Plan. No other compensation is
paid to Directors for attending Board or committee meetings. Messrs. Maybury,
Roberts, Schlesinger and Swithenbank are currently the non-employee Directors of
the Company.
4
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by
or paid for services rendered to the Company in all capacities during the years
ended December 31, 1997, 1996 and 1995 by (i) the Company's Chief Executive
Officer and (ii) the five most highly compensated other executive officers
(collectively, the "Named Executive Officers"):
Summary Compensation Table
Annual Compensation (1)
------------------------------------- All Other
Name and Principal Positions Year Salary ($) Bonus ($) Compensation ($)
- -------------------------------------------------------------------------------------------------------------------------
Alan Trefler 1997 $200,000 - -
President 1996 188,333 (2) $ 38,759 (3) $ 15,000 (4)
1995 171,250 23,545 (5) -
Joseph J. Friscia 1997 143,333 47,250 (6) 10,786 (4)
Vice President of Sales and Marketing 1996 125,000 94,730 (7) -
1995 124,583 24,154 (8) -
Eugene A. Bonte 1997 129,167 21,000 (6) -
Vice President of Market Strategy and Delivery 1996 86,897 31,149 (7) -
1995 - - -
Michael R. Pyle 1997 120,000 15,750 (6) 8,587 (4)
Vice President of Applications Development 1996 111,250 41,285 (9) -
1995 102,083 23,044 (5) -
Ira Vishner 1997 120,000 10,500 (6) 19,441 (4)
Vice President, Corporate Services, Treasurer, 1996 110,667 30,169 (9) -
Chief Financial Officer 1995 100,500 16,892 (5) 8,483 (4)
Kenneth W. Olson 1997 112,000 10,500 (6) 20,123 (4)
Vice President of Technical Development 1996 105,583 27,365 (9) -
1995 98,083 13,118 (5) 30,000 (4)
- -----------------
(1) In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits
has been omitted because the aggregate amount of such perquisites and other
personal benefits constituted less than the lesser of $50,000 or 10% of the
total of annual salary and bonuses for each of the Named Executive Officers
for 1997, 1996 and 1995.
(2) Includes $8,333 earned between August and December 1996 and paid in
February 1997.
(3) Represents bonus earned between July 1995 and June 1996 and paid in
February 1997.
(4) Represents payments in lieu of paid days off.
(5) Represents bonus earned between July 1994 and June 1995 and paid in 1995.
(6) Represents bonus earned between July 1996 and December 1997 and paid in
1998.
(7) Represents bonus earned in 1996 and paid in February 1997.
(8) Represents bonus earned in 1995 and paid in February 1996. Does not include
a bonus of $66,650 earned in 1994 and paid in February 1995.
(9) Represents bonus earned between July 1995 and June 1996 and paid in 1996.
5
Option Grants
The following table provides certain information concerning grants of
options to purchase the Company's Common Stock made during the fiscal year
ending December 31, 1997, to each of the Named Executive Officers:
Option Grants in Fiscal 1997
Individual Grants
--------------------------------------------------------------------- Potential Realizable Value
Number of Percent of at Assumed Annual Rates
Shares Total Options of Stock Price Appreciation
Underlying Granted to Exercise or for Option Term (2)
Options Employees In Base Price Expiration --------------------------------
Name Granted (#) (1) Fiscal Year ($/Share) Date 5% ($) 10% ($)
- ---------------------- ----------------- ---------------- --------------- ------------- -------------- ----------------
Alan Trefler - - - - - -
Joseph J. Friscia 25,000 2.4% $20.56 3/31/07 $323,249 $819,162
Eugene A. Bonte 25,000 2.4 20.56 3/31/07 323,249 819,162
Michael R. Pyle 25,000 2.4 20.56 3/31/07 323,249 819,162
Ira Vishner 25,000 2.4 20.56 3/31/07 323,249 819,162
Kenneth W. Olson 25,000 2.4 20.56 3/31/07 323,249 819,162
- -----------------
(1) These options vest in 5 equal annual installments, commencing on March 31,
1998.
(2) As required by the rules of the Securities and Exchange Commission,
potential values stated are based on the prescribed assumption that the
Company's common stock will appreciate in value from the date of grant to
the end of the option term at rates (compounded annually) of 5% and 10%,
respectively, and therefore are not intended to forecast possible future
appreciation, if any, in the price of the Company's common stock.
6
Aggregated Option Exercises and Year-End Option Table
The following table sets forth certain information concerning options
exercised during 1997 and the number and value of unexercised stock options held
by each of the Named Executive Officers as of December 31, 1997.
Aggregated Option Exercises in Last Fiscal Year
and Year-End Option Values
Number of Shares Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Year-End At Year-End ($)
----------------------------------- -------------------------------
Shares Value
Acquired on Realized
Name Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- --------------------------------------------------------------------------------------------------------------------------
Alan Trefler - - - - - -
Joseph J. Friscia 70,000 $2,085,881 182,000 133,000 $3,615,121 $2,145,236
Eugene A. Bonte 18,000 252,000 - 97,000 - 877,680
Michael R. Pyle 65,100 1,953,732 107,700 111,400 2,139,277 1,716,189
Ira Vishner - - - 25,000 - -
Kenneth W. Olson - - - 25,000 - -
CERTAIN TRANSACTIONS
Since December 31, 1996 there have been no transactions involving more
than $60,000, nor are any proposed, between the Company and any executive
officer, Director, 5% beneficial owner of the Company's Common Stock or
equivalents, or any immediate family member of any of the foregoing, in which
any such persons or entities had or will have a direct or indirect material
interest.
The Company has adopted a policy whereby all future transactions
between the Company and its officers, Directors, principal stockholders and
their affiliates will be on terms no less favorable to the Company than could be
obtained from unrelated third parties and will be approved by a majority of the
disinterested members of the Company's Board of Directors. No such transactions
are currently being considered.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
General
The Compensation Committee of the Board of Directors (the "Committee")
is composed entirely of Directors who are not employees of or consultants to the
Company. The Committee, which as of April 29, 1998 consisted of Edward A.
Maybury and Leonard A. Schlesinger, is responsible for recommending compensation
and benefits for the executive officers of the Company to the Board of Directors
and for administering the Company's stock plans. The Committee determines the
compensation for the President. The Committee and the President together
determine the compensation for the other executive officers of the Company.
7
Compensation Philosophy
The objectives of the Committee are to provide an executive
compensation program that aligns executive compensation with the achievement of
specific company goals. The Committee believes that executive compensation
should also reflect the value that an individual adds to the Company and that
executive compensation should enable the Company to attract and retain key
employees in an increasingly competitive industry environment.
Compensation Components
There are two compensation components for executive officers: cash
compensation in the form of salary and merit pay, and non-cash compensation in
the form of stock options.
Salary. Cash compensation in the form of salary is intended to reflect
an executive's knowledge, skills, and level of responsibility as well as the
economic and business conditions affecting the Company. The salary of each
executive was determined by the Committee in part by analyzing the Culpepper
Surveys on Software Industry Executive and Administrative Pay, an
annually-published compensation survey, and other published surveys (the
"Surveys"), and in addition, as a result of the Committee making an assessment
of an executive's individual personal performance with respect to his attainment
of specific predetermined company goals.
Merit Pay. Merit pay reflects the financial valuation of each
executive's individual contribution to the Company over the review period. An
executive's ability to achieve closure on critical projects, to attain required
results, and to contribute positively to Company tone in the process are
critical to ensuring the strong financial performance of the Company as a whole,
and thus helps define the executive's financial value. Awards of merit payments
are made at the discretion of the Board of Directors, based upon their opinions
of executives' respective contributions to the Company. There is no pre-set
amount allocated and available in a "merit pay pool" for executive officers.
Stock Options. The Committee uses stock options as a long-term,
non-cash incentive and as a means of aligning the long-term interests of
executives and stockholders. Stock options are awarded based upon the market
price of the Common Stock on the date of grant and are linked to future
performance of the Company's stock because they do not become valuable to the
holder unless the price of the Company's stock increases above the price on the
date of grant. The number of stock options granted to an executive as a form of
non-cash compensation is determined by taking into consideration factors such as
number of stock options previously granted to an executive, the executive's
remaining options exercisable and the value of those stock options, as compared
to the anticipated value that an executive will add to the Company in the
future. Stock options are not necessarily granted to executives on an annual
basis. Stock options were granted to executive officers during 1997.
Compensation of the President and All Other Executive Officers
The Committee, in its consideration of the salary, merit pay and stock
option components of compensation for 1997 for the President and all other
executive officers, made reference to the Surveys, which it believes represent
compensation data from companies that are similar in nature to the Company. The
salary, merit pay and stock option components of compensation that was
determined for the President and all other executive officers was comparable
with companies found in the Surveys.
Mr. Trefler's annual salary compensation of $200,000 reflects an
increase effective August 1996. During 1997, there was no change in Mr.
Trefler's annual salary compensation.
Bonuses for the period covering July 1996 through December 1997 for the
executive officers were determined but not yet paid as of December 31, 1997 and
can be found in the Executive Compensation Table contained herein.
8
The Surveys and the Pegasystems Inc. Performance Graph
The companies included in the Surveys differ from the companies
included in the Goldman Sachs Technology Software Index, which is included in
the Performance Graph following this report, in that the Goldman Sachs
Technology Software Index includes only a select number of public companies
which sell software, while the Surveys include public as well as private
companies which sell software and integrated turnkey systems, and is therefore
broader in scope. The Committee made reference to the Surveys in establishing
executive compensation because the Surveys include companies that are in the
software industry, as is the Company, and contain a broader range of companies
that are likely to compete for the services of the Company's executive officers.
For these reasons the Committee believes that Goldman Sachs Technology Software
Index is an appropriate basis for comparing stock performance and the Surveys
are an appropriate basis for determining compensation.
Deductibility of Executive Compensation
Section 162(m) of the Internal Revenue Code, enacted in 1993, generally
disallows a tax deduction to public companies for compensation over $1 million
paid to its chief executive and its four other most highly compensated
executives. Performance-based compensation is excluded from the compensation
taken into account for purposes of the limit if certain requirements are met.
The Company currently intends to structure its stock options granted to
executives in a manner that complies with the performance-based requirements of
the statute. The Committee believes that, given the general range of salaries
and bonuses for executive officers of the Company, the $1 million threshold of
Section 162(m) will not be reached by any executive officer of the Company in
the foreseeable future. Accordingly, the Committee has not considered what its
policy regarding compensation not qualifying for federal tax deduction might be
at such time, if ever, as that threshold is within range of any executive
officer.
Meetings of the Compensation Committee
The Committee met on February 19, 1997 to determine the merit pay
component of compensation for executive officers for 1997.
Compensation Committee
Edward A. Maybury
Leonard A. Schlesinger
Compensation Committee Interlocks and Insider Participation
Prior to May 1996, decisions concerning compensation of executive
officers were made by the Board of Directors which included Mr. Trefler, the
President of the Company, and Mr. Vishner, a Vice President and the Chief
Financial Officer of the Company. In May 1996, the Company established the
Compensation Committee. No executive officer of the Company has served as a
Director or member of the compensation committee (or other committee serving an
equivalent function) of any other entity, whose executive officers served on the
Company's Board of Directors or Compensation Committee.
9
COMPARISON OF CUMULATIVE TOTAL STOCKHOLDER RETURN
The following performance graph represents a comparison of the
cumulative total return (assuming the reinvestment of dividends) for a $100
investment on July 18, 1996 (the date the Common Stock was first registered
under Section 12 of the Securities Exchange Act of 1934) in each of the Common
Stock of Pegasystems Inc., the Nasdaq Stock Market Index (a broad market index)
and the Goldman Sachs Technology Software Index ("GSTITM + Software") (a
published industry index). The Company paid no dividends during the period
shown. The graph lines merely connect measurement dates and do not reflect
fluctuations between those dates.
[GRAPH OMITTED]
Line representation of graph
- --------------------------------------------------------------------------------
7/18/96 12/31/96 12/31/97
- --------------------------------------------------------------------------------
Pegasystems Inc. $100 $251 $168
- --------------------------------------------------------------------------------
Nasdaq Stock Market Index - US companies $100 $116 $143
- --------------------------------------------------------------------------------
GSTI Software $100 $116 $145
- --------------------------------------------------------------------------------
The Report of the Compensation Committee on Executive Compensation and the
Comparison of Cumulative Total Stockholder Return information above shall not be
deemed "soliciting material" or incorporated by reference into any of the
Company's filings with the Securities and Exchange Commission by implication or
by any reference in any such filing to this Proxy Statement.
+ GSTI is a registered trademark of Goldman, Sachs & Co.
10
RATIFICATION OF THE SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
(Item 2 of Notice)
The Board of Directors has selected Arthur Andersen LLP, independent
public accountants, to audit the financial statements of the Company for the
fiscal year ending December 31, 1998. The Board proposes that the stockholders
ratify this selection. Arthur Andersen LLP audited the Company's financial
statements for the fiscal year ended December 31, 1997. The Company expects that
representatives of Arthur Andersen LLP will be present at the Meeting, with the
opportunity to make a statement if they so desire, and will be available to
respond to appropriate questions.
Ernst & Young LLP ("E&Y") served as the Company's independent auditors
from 1984 through October 30, 1997 when E&Y elected to resign. The Board of
Directors of the Company had recommended the termination of E&Y as the
independent auditors of the Company prior to E&Y's resignation on October 30,
1997. The Company engaged Arthur Andersen LLP as its independent public
accountants on December 10, 1997.
The reports of E&Y on the Company's financial statements for 1995 and
1996 did not contain an adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope, or accounting principles.
To the Company's knowledge, during 1995 and 1996, there was no disagreement
between the Company and E&Y on any matter of accounting principles or practices,
financial statement disclosure, or audit scope or procedures, which
disagreement, if not resolved to the satisfaction of E&Y, would have caused it
to make a reference to the subject matter of the disagreement in connection with
its report.
During the interim period subsequent to December 31, 1996 and prior to
E&Y's resignation on October 30, 1997, there was no disagreement of the type
described in the immediately preceding paragraph between the Company and E&Y,
except for a disagreement which arose in late October 1997 concerning the
Company's financial statements for the quarter ended June 30, 1997. The
disagreement involved the appropriate accounting treatment for a series of
transactions (the "FDR Transactions") entered into by the Company with First
Data Resources Inc. ("FDR") in June 1997. Contrary to the expectations of the
Company based on its discussions with E&Y at the time the FDR Transactions were
being negotiated, E&Y advised the Company that $5 million of software license
revenue recognized by the Company in the quarter ended June 30, 1997 from one of
the FDR Transactions should not have been recognized in that quarter.
Accordingly, E&Y advised the Company to restate its financial statements for the
three and six month periods ended June 30, 1997, which the Company did on
November 19, 1997.
The Board of Directors of the Company discussed the subject matter of
the disagreement referenced above with E&Y and has authorized E&Y to respond
fully to the inquiries of Arthur Andersen LLP concerning the subject matter of
such disagreements.
The Company is unaware of the occurrence of any of the kinds of events
described in subparagraphs (A)-(D) of Item 304(a)(1)(v) of Regulation S-K as
promulgated by the Securities and Exchange Commission, except for the
disagreement referenced above and except that E&Y advised the Company that it
disagreed with the accounting approaches preliminarily proposed by the Company
for recognizing revenue from the FDR Transactions in the quarter ended September
30, 1997 (the "reportable event"). The Board of Directors of the Company
discussed with E&Y the reportable event and has authorized E&Y to respond fully
to the inquiries of Arthur Andersen LLP concerning the reportable event.
11
In the event that ratification of the appointment of Arthur Andersen
LLP as the independent public accountants for the Company is not obtained at the
upcoming Annual Meeting of Stockholders, the Board of Directors will reconsider
its selection.
The affirmative vote of a majority of the shares present or represented
and entitled to vote and voting at the Meeting is required to ratify the
selection of the independent public accountants.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE TO APPROVE THE RATIFICATION OF
THE SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS AND PROXIES SOLICITED BY THE
BOARD WILL BE VOTED IN FAVOR THEREOF UNLESS A STOCKHOLDER HAS INDICATED
OTHERWISE ON THE PROXY.
APPROVAL OF AMENDED AND RESTATED 1994 LONG-TERM INCENTIVE PLAN
(Item 3 of Notice)
The Board of Directors has adopted, subject to stockholder approval, an
amendment to the Company's 1994 Long-Term Incentive Plan and directed that such
Plan, as amended and restated to reflect such amendment (the "Plan"), be
submitted to the stockholders for their approval. The following summary of the
Plan does not purport to be complete and is qualified in its entirety by
reference to the full text of the Plan, which is attached as Appendix A to this
Proxy Statement.
Background
The Plan was adopted by the Board of Directors on November 23, 1994 and
approved by the stockholders on April 21, 1995, prior to the Company's initial
public offering. The Plan provides for the issuance of shares of Common Stock
pursuant to the grant of incentive stock options ("ISOs") to employees and
nonqualified stock options ("NSOs"), stock appreciation rights ("SARs"),
restricted stock or long-term performance awards to employees, consultants,
directors and officers of the Company. Long-term performance awards may be made
in cash or in stock, must be awarded in connection with a performance period of
at least two years, and are based on performance objectives determined by the
Compensation Committee. At April 29, 1998, the Company had 455 employees
eligible to participate in the Plan and options to purchase 4,253,850 shares
were outstanding and 514,350 shares issued upon the exercise of options were
outstanding. As of April 29, 1998, no restricted stock, SARs or long-term
performance awards had been granted under the Plan. The amendment to the Plan
approved by the Board of Directors increased the number of shares reserved for
issuance under the Plan from 5,000,000 to 7,500,000.
Administration
The Plan is administered by the Compensation Committee. Subject to the
provisions of the Plan, the Compensation Committee has the authority to select
the optionees or SAR, long-term performance award or restricted stock recipients
and determine the terms of the options, SARs, long-term performance awards or
restricted stock granted, including: (i) the number of shares or SARs; (ii) the
option exercise terms; (iii) the amount of the awards; (iv) the exercise or
purchase price (which in the case of an incentive stock option cannot be less
than the market price of the Common Stock as of the date of grant); (v) the type
and duration of transfer or other restrictions; and (vi) the time and form of
payment for restricted stock and upon exercise of options.
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Shares Available for Issuance
The stock subject to options and awards is authorized but unissued
shares of the Company's common stock or shares of treasury common stock. Any
shares subject to an option which for any reason expires or is terminated
unexercised as to such shares and any restricted stock which is reacquired by
the Company as a result of the exercise of a repurchase option may again be the
subject of an option or award under the Plan.
Transferability of Options
Generally, an option is not transferable by the optionholder except by
will or by the laws of descent and distribution.
Exercise and Termination of Options
No option may be exercised following termination for cause or
voluntary termination, or more than three months following involuntary
termination without cause. Upon termination due to death, an option is
exercisable for a maximum of one year after such termination, and upon
termination due to disability or upon early or normal retirement, an option is
exercisable for a maximum of two years after such termination.
1997 Option Grants
The following table sets forth the number of outstanding options
granted during 1997 under the Plan to the specified individuals and groups.
Name Number of Options
- -------------------------------------------------------------------------------------
Alan Trefler --
Joseph J. Friscia 25,000
Eugene A. Bonte 25,000
Michael R. Pyle 25,000
Ira Vishner 25,000
Kenneth W. Olson 25,000
All current executive officers as a group (6 persons) 125,000
All employees who were not executive officers as a group 901,000
Federal Income Tax Consequences
ISOs -- A participant who receives an ISO will recognize no taxable
income for regular federal income tax purposes upon either the grant or the
exercise of such ISO. However, when a participant exercises an ISO, the
difference between the fair market value of the shares purchased and the option
price of those shares will be includible in determining the participant's
alternative minimum taxable income.
If the shares are retained by the participant for at least one year
from the date of exercise and two years from the date of grant of the option,
gain will be taxable to the participant, upon sale of the shares acquired upon
exercise of the ISO, as a long-term capital gain. In general, the adjusted basis
for the shares acquired upon exercise will be the option price paid with respect
to such exercise. The
13
Company will not be entitled to a tax deduction arising from the exercise of an
ISO, if the employee qualifies for such long-term capital gain treatment.
If the shares are sold within a period of one year from the date of
exercise or two years from the date of grant of the ISO, the participant will be
required to recognize ordinary income equal to the difference between the option
price and the lesser of the fair market value of the shares on the date of
exercise or the amount realized on the sale or exchange of the shares. In this
situation, the Company will be entitled to a tax deduction of an equal amount.
NSOs -- A participant will not recognize taxable income for federal
income tax purposes at the time an NSO is granted. However, the participant will
recognize compensation taxable as ordinary income at the time of exercise for
all shares which are not subject to a substantial risk of forfeiture. The amount
of such compensation will be the difference between the option price and the
fair market value of the shares on the date of exercise of the option. The
Company will be entitled to a deduction for federal income tax purposes at the
same time and in the same amount as the participant is deemed to have recognized
compensation income with respect to shares received upon exercise of the NSO.
The participant's basis in the shares will be adjusted by adding the amount so
recognized as compensation to the purchase price paid by the participant for the
shares.
The participant will recognize gain or loss when he disposes of shares
obtained upon exercise of an NSO in an amount equal to the difference between
the selling price and the participant's tax basis in such shares. Such gain or
loss will be treated as long-term or short-term capital gain or loss, depending
upon the holding period.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE TO APPROVE THE COMPANY'S
AMENDED AND RESTATED 1994 LONG-TERM INCENTIVE PLAN AND PROXIES SOLICITED BY THE
BOARD WILL BE VOTED IN FAVOR THEREOF UNLESS A STOCKHOLDER HAS INDICATED
OTHERWISE ON THE PROXY.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "1934 Act")
requires the Company's Directors and executive officers, and persons who own
more than ten percent of the Company's Common Stock, to file reports with the
Securities and Exchange Commission (the "SEC") disclosing their ownership of
stock in the Company and changes in such ownership. Copies of such reports are
also required to be furnished to the Company.
To the Company's knowledge, based solely on review of the copies of the
above-mentioned reports furnished to the Company and written representations
that no other reports were required, during 1997 all such filing requirements
were complied with in a timely fashion.
STOCKHOLDER PROPOSALS FOR 1999 MEETING
Proposals of stockholders intended to be presented at the 1999 Annual Meeting of
Stockholders must be presented on or before December 30, 1998 for inclusion in
the proxy materials relating to that meeting. Any such proposals should be sent
to the Company at its principal offices addressed to the Clerk. Other
requirements for inclusion are set forth in Rule 14a-8 under the 1934 Act.
14
OTHER MATTERS
The Company does not know of any other matters which will be brought
before the Meeting. If other business is properly presented for consideration at
the Meeting, it is intended that the shares represented by the enclosed proxy
will be voted by the persons voting the proxies in accordance with their
judgment on such matters.
In order that your shares may be represented if you do not plan to
attend the Meeting, and in order to assure the required quorum, please fill out,
sign, date and return your proxy promptly.
A prompt response will greatly facilitate arrangements for the Meeting,
and your cooperation will be appreciated.
By Order of the Board of Directors
Alan Trefler
April 29, 1998 Clerk
15
4840-PS-98
(SKU to be printed on the back of the proxy statement)
16
PEGASYSTEMS INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
1998 Annual Meeting of Stockholders
The undersigned stockholder of Pegasystems Inc., a Massachusetts corporation
("Pegasystems"), hereby acknowledges receipt of the Notice of Annual Meeting of
Stockholders and Proxy Statement dated April 29, 1998, and hereby appoints Ira
Vishner, Robert V. Jahrling, III and James W. Hackett, Jr., or any one or more
of them, proxies and attorneys-in-fact with full power of substitution to each
for and in the name of the undersigned, with all powers the undersigned would
possess if personally present to vote the Common Stock of the undersigned in
Pegasystems at the Annual Meeting of its stockholders to be held May 6, 1998 at
Fleet National Bank, 75 State Street, Conference Room F, 8th Floor, Boston,
Massachusetts at 10:00 a.m., local time, or any adjournment or postponement
thereof. Any of such attorneys or substitutes shall have and may exercise all of
the powers of said attorneys-in-fact hereunder.
1. ELECTION OF FOR all nominees listed below AGAINST all nominees listed below [ ]
DIRECTORS: (except marked to the contrary below) [ ]
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU INSTRUCT THE PROXIES TO
VOTE FOR ALL OF THE NOMINEES LISTED BELOW.
NOMINEES: Edward A. Maybury and Leonard A. Schlesinger
(INSTRUCTION: TO VOTE AGAINST ANY INDIVIDUAL NOMINEE,
WRITE THAT NOMINEE'S NAME IN THE SPACE PROVIDED BELOW.)
- --------------------------------------------------------------------------------
(continued and to be signed on reverse side)
- --------------------------------------------------------------------------------
2. To ratify the selection of Arthur Andersen LLP as independent public
accountants of Pegasystems for the fiscal year ending December 31, 1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. To approve the amended and restated 1994 Long-Term Incentive Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting or any adjournment or
postponement thereof.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU INSTRUCT THE PROXIES TO VOTE FOR
PROPOSAL NO. 2 AND 3.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL
NOS. 1, 2 AND 3 AND AS SAID PROXIES DEEM ADVISABLE ON SUCH OTHER MATTERS AS MAY
COME BEFORE THE MEETING.
PLEASE SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED ENVELOPE.
Please sign exactly as name appears below. When shares are held in more than one
name, including joint tenants, each party should sign. When signing as attorney,
executor, administrator, trustee or guardian, please give full title as such.
Dated ______________________, 1998
[ ] Mark here for address __________________________________
change and note below: Signature
__________________________________
Signature, if held jointly