As filed with the Securities and Exchange Commission on July 12, 1996
Registration No. 333-03807
=============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
-------------
PEGASYSTEMS INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Massachusetts 7389
(State or other jurisdiction of (Primary Standard 04-2787865
incorporation or organization) Industrial (I.R.S. Employer Identification Number)
Classification Code Number)
</TABLE>
101 Main Street, Cambridge, Massachusetts 02142 (617) 374-9600
(Address and Telephone Number of Registrant's Principal Executive Offices)
-------------
ALAN TREFLER
President
PEGASYSTEMS INC.
101 Main Street
Cambridge, Massachusetts 02142
(617) 374-9600
(Name, Address and Telephone Number of Agent for Service)
-------------
Copies to:
<TABLE>
<CAPTION>
<S> <C>
ROBERT V. JAHRLING III, ESQ. MARK G. BORDEN, ESQ.
Choate, Hall & Stewart JEFFREY A. STEIN, ESQ.
Exchange Place Hale and Dorr
53 State Street 60 State Street
Boston, Massachusetts 02109-2891 Boston, Massachusetts 02109-1816
(617) 248-5000 (617) 526-6000
</TABLE>
-------------
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are being offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
-------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Securities and Exchange
Commission, acting pursuant to said Section 8(a), may determine.
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
<PAGE>
PEGASYSTEMS INC.
CROSS-REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K
Showing Location in Prospectus of Information
Required by Part I of Form S-1
<TABLE>
<CAPTION>
Registration Statement Item and Caption Location in Prospectus
---------------------------------------------- ------------------------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and Outside front cover page of Prospectus
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Inside front and outside back cover pages of
Prospectus Prospectus; Additional Information
3. Summary Information, Risk Factors and Ratio of Prospectus Summary; Risk Factors
Earnings to Fixed Charges
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Outside front cover page; Underwriting
6. Dilution Dilution
7. Selling Security Holders Principal and Selling Stockholders
8. Plan of Distribution Outside front cover page; Underwriting
9. Description of Securities to be Registered Description of Capital Stock
10. Interests of Named Experts and Counsel Legal Matters; Experts
11. Information with Respect to the Registrant Prospectus Summary; Risk Factors; Use of
Proceeds; Dividend Policy; Capitalization;
Dilution; Selected Consolidated Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Business; Management; Certain Transactions;
Principal and Selling Stockholders; Description
of Capital Stock; Shares Eligible for Future
Sale; Consolidated Financial Statements
12. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act
Liabilities
</TABLE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
SUBJECT TO COMPLETION, DATED JULY 12, 1996
3,400,000 Shares
[Pegasystems Inc. Logo]
Common Stock
(par value $.01 per share)
-------------
Of the 3,400,000 shares of Common Stock offered hereby, 2,700,000 are
being sold by Pegasystems Inc. ("Pegasystems" or the "Company") and 700,000
shares are being sold by the Selling Stockholders. See "Principal and Selling
Stockholders." The Company will not receive any of the proceeds from the sale
of shares by the Selling Stockholders.
Prior to this offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public
offering price per share will be between $12.00 and $14.00. For factors to be
considered in determining the initial public offering price, see
"Underwriting."
See "Risk Factors" beginning on page 5 for certain considerations relevant
to an investment in the Common Stock.
Application has been made to have the Common Stock approved for quotation on
the Nasdaq National Market under the symbol "PEGA."
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
-------------
<TABLE>
<CAPTION>
Initial Public Underwriting Proceeds to Proceeds to Selling
Offering Price Discount (1) Company (2) Stockholders
<S> <C> <C> <C> <C>
Per Share $ $ $ $
Total (3) $ $
$ $
</TABLE>
- -------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses of the offering payable by the Company,
estimated to be $600,000.
(3) The Company has granted to the Underwriters an option for 30 days to
purchase up to an additional 510,000 shares at the initial offering price
per share, less the underwriting discount, solely to cover
over-allotments, if any. If such option is exercised in full, the total
initial public offering price, underwriting discount and proceeds to
Company will be $ , $ and $ , respectively. See
"Underwriting."
-------------
The shares offered hereby are offered by the several Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
delivery of the shares of Common Stock offered hereby will be made at the
offices of Goldman, Sachs & Co., New York, New York, on or about ,
1996.
Goldman, Sachs & Co.
Cowen & Company
Montgomery Securities
-------------
The date of this Prospectus is , 1996.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ
NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
P. 24--Illustration omitted:
Illustration, set over a map of the world, of the Company's three-tier,
client/server environment. A central server is connected to three satellite
servers, with rules and code replicated on all servers.
Foldout: Illustration omitted:
Illustration of the Pegasystems' "service backbone." A circle, revolving around
customers, is divided into six segments corresponding to the customer service
management functions supported by the Company's products, each segment
containing labeled icons representing examples of such functions. In the
"receiving" segment are icons representing computer inbound faxes, PegaView-ACE
and Internet connections, high speed computer network links and shows computer
screens demonstrating PegaView-ACE and Internet access; in the "reporting"
segment, icons representing productivity, service and quality management,
relational database interfaces and opportunity analysis; in the "resolving"
segment, icons representing advisor checklists, system-driven processing and
multi-currency accounting; in the "responding" icon, outbound faxes, internet
electronic mail and personalized letters and automated followups; in the
"researching" segment, icons representing on-line disks, micrographics and
virtual archive opticals and tapes; and in the "routing" segment, prioritization
and queuing, rule-driven workflow, electronic baskets and clustered work.
Inside cover: Illustration omitted:
Illustration of dispersed departments of an organization interacting with
customers contacting the organization through various means, each such
department connected to the organization's integrated service backbone, which is
represented by a circle divided into six segments corresponding to the customer
management functions supported by the Company's products support (receiving,
reporting, resolving, responding, researching and routing).
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus. Investors should carefully consider
the information set forth under the heading "Risk Factors."
The Company
Pegasystems develops customer service management software to automate
customer interactions across transaction-intensive enterprises. Many of the
world's largest banks, mutual funds and credit card organizations use the
Company's solutions to integrate, automate, standardize and manage a broad
array of mission-critical customer service activities, including account
set-up, record retrieval, correspondence, disputes, investigations and
adjustments. The Company's systems can be used by thousands of concurrent
users to manage customer interactions and to generate billions of dollars a
day in resulting transactions. Work processes initiated by the Company's
systems are driven by a highly adaptable "rule base" defined by the
user-organization for its specific needs. The rule base facilitates a high
level of consistency in customer interactions, yet drives different processes
depending on the customer profile or the nature of the request. The Company's
open, multi-tier, client/server systems operate on a broad variety of
platforms, including UNIX, Windows/NT and IBM/MVS. The Company offers
consulting, training and support services to facilitate the use of its
solutions.
Intensifying competition is forcing businesses to reduce costs while
focusing on customer service management as an important means of
differentiation. Due to the volume and precise nature of their transactions,
it is especially critical for financial services organizations to implement
cost-effective systems to manage customer interactions accurately and
efficiently. The Company's solutions provide a service backbone that drives
intelligent processing and seamlessly integrates an organization's
geographically dispersed and product specific service operations and isolated
computer systems. By bridging these "islands of automation" within large
organizations, the Company's solutions increase the efficiency of service
representatives and enable organizations to address multiple customer needs
during a single contact.
The Company's objective is to become the leading provider of
mission-critical client/server customer service management software to
organizations performing a high volume of complex interactions with demanding
customers. To achieve this objective, the Company is pursuing a number of
strategies, including expanding its marketing to additional business units
within its existing customers; leveraging its relationships and expertise
with large financial services organizations to penetrate the medium-sized
financial services market; targeting markets outside of financial services
which have similar customer service management needs; and developing standard
product templates to facilitate the more rapid implementation of its
solutions.
The Company markets its software and services primarily through a direct
sales force which consisted of six people as of April 30, 1996. The Company
intends to increase substantially the size of its sales force, which will be
necessary if the Company is to achieve significant revenue growth in the
future.
The Company was incorporated in the Commonwealth of Massachusetts in April
1983 and has been profitable in each quarter since the first quarter of 1985.
The Company's principal executive offices are located at 101 Main Street,
Cambridge, Massachusetts 02142, and its telephone number is (617) 374-9600.
Pegasystems, PegaCARD, PegaCLAIMS, PegaSHARES, PegaTRACE, PegaINDEX,
PegaPRISM, PegaREELAY, PegaSEARCH, PegaVIEW-ACE, PegaSTAR, Integrated Service
Backbone, Service Excellence Through Automation, and Virtual Archive are
trademarks of the Company. This Prospectus also includes trademarks of
companies other than the Company.
3
<PAGE>
The Offering
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered by the Company 2,700,000 shares
Common Stock offered by the Selling Stockholders 700,000 shares
Common Stock to be outstanding after the offering 26,290,800 shares (1)
Use of proceeds by the Company For general corporate purposes, including working
capital, product development, capital expenditures
and possible acquisitions. See "Use of Proceeds."
Proposed Nasdaq National Market symbol PEGA
</TABLE>
- -------------
(1) Based on the number of shares of Common Stock outstanding on May 13,
1996, plus 100,800 shares of Common Stock issuable upon exercise of stock
options to be exercised immediately prior to the closing of this
offering. Excludes 2,308,200 shares of Common Stock issuable upon
exercise of stock options outstanding as of May 13, 1996, at a weighted
average exercise price of $2.60 per share, of which options to purchase
487,950 shares were then exercisable. See "Capitalization" and
"Management--Stock Plans."
Summary Consolidated Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
Ended
Year ended December 31, March 31,
-------------------------- ----------------
1993 1994 1995 1995 1996
------ ------ ------ ----- -------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Income
Data:
Total revenue $10,212 $16,263 $22,247 $ 4,005 $ 4,941
Income from operations 793 2,236 3,257 3 456
License interest income 1,305 1,457 1,486 370 368
Net income 1,233 2,193 2,878 224 486
Net income per common and common
equivalent share $ 0.05 $ 0.09 $ 0.11 $ 0.01 $ 0.02
Weighted average number of common and
common equivalent shares
outstanding 24,231 24,102 25,551 25,600 25,505
</TABLE>
<TABLE>
<CAPTION>
March 31, 1996
-----------------------
As Adjusted
Actual (1)
------ --------------
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 2,644 $33,318
Working capital 6,952 38,356
Long-term license installments, net 11,444 11,444
Total assets 26,555 57,228
Long-term debt 672 --
Stockholders' equity 15,136 47,212
</TABLE>
- -------------
(1) Gives effect to (i) the sale of the 2,700,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price
of $13.00 per share, after deducting the estimated underwriting discount
and offering expenses payable by the Company, and gives effect to the
anticipated application of the net proceeds therefrom, and (ii) the
exercise of stock options to purchase 100,800 shares of Common Stock at
an exercise price of approximately $0.33 per share, which exercise will
occur immediately prior to the closing of this offering. See "Use of
Proceeds" and "Capitalization."
Unless otherwise indicated herein, all information in this Prospectus (i) has
been adjusted to give effect to a 15-for-1 split of the outstanding Common
Stock, in the form of a stock dividend, effective December 9, 1994, (ii) has
been adjusted to give effect to an amendment and restatement of the Company's
Articles of Organization (the "Restated Articles"), effective July 10, 1996,
providing for, among other things, the creation of a new undesignated class of
Preferred Stock, (iii) has been adjusted to give effect to a 3-for-1 split of
the outstanding Common Stock, in the form of a stock dividend, effective
July 10, 1996, and (iv) assumes no exercise of the Underwriters' over-allotment
option. See "Description of Capital Stock" and "Underwriting."
4
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be carefully considered in evaluating an
investment in the Common Stock offered by this Prospectus.
Potential Fluctuations in Quarterly Results; Seasonality
The Company's revenue and operating results have varied considerably in
the past, and are likely to vary considerably in the future. Such
fluctuations may be particularly pronounced because a significant portion of
the Company's revenue in any quarter is attributable to product acceptances
or license renewals by a relatively small number of customers, and reflects
the Company's policy of recognizing license fee revenue upon product
acceptance or license renewal in an amount equal to the present value of the
total committed license payments due during the initial license term or
renewal period, as the case may be. Product acceptance is preceded by an
implementation period, typically ranging from three to six months but in some
cases significantly longer, and by a lengthy sales cycle. The Company's sales
cycle is subject to a number of significant risks over which the Company has
little or no control, including customers' budgeting constraints and internal
authorization reviews. Product implementation may be delayed for a variety of
reasons including unforeseen technical problems and changes dictated by the
customer in the scope or schedule of the implementation. Other factors
contributing to fluctuations in the Company's revenue and operating results
include changes in the level of operating expenses, demand for the Company's
products and services, the introduction of new products and product
enhancements by the Company and its competitors, competitive conditions in
the industry and general economic conditions. The Company budgets its product
development and other expenses anticipating future revenue. If revenue falls
below expectations, the Company's business, operating results and financial
condition are likely to be materially and adversely affected because only a
small portion of the Company's expenses vary with its revenue. As a result,
the Company believes that period-to-period comparisons of its operating
results are not necessarily meaningful and should not be relied upon to
predict future performance. There can be no assurance that the Company will
be able to maintain profitability on an annual or quarterly basis.
The Company's business has experienced and may continue to experience
significant seasonality. In recent years the Company has recognized a greater
percentage of its revenue in its third and fourth quarters than in the first
and second quarters due to the Company's sales commission structure and the
impact of that structure on the timing of product acceptances and license
renewals by customers. This pattern is reinforced by the Company's
maintenance contracts, which entitle customers to, among other things, a
fixed number of hours of service per calendar year. Once the annual allotment
of service hours is exhausted, customers pay for additional services on an
hourly basis, typically resulting in higher services revenue in the Company's
second, third and fourth quarters.
Due to the foregoing factors, it is likely that in some future quarters
the Company's operating results will fall below the expectations of the
Company, market analysts and investors. In such event, the price of the
Company's Common Stock would likely be materially and adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Dependence on New Products; Rapid Technological Change; Product Development
and Implementation Risks
The market for customer management software and related consulting and
training services is subject to rapid technological change, changing customer
needs and preferences, frequent new product introductions, and evolving
programming languages and industry standards that may render existing
products and services obsolete. The Company's position in its current market
or other markets that it may enter could be eroded rapidly by product
advances. The life cycles of the Company's products are difficult to
estimate, and the Company's growth and future performance will depend in part
upon its ability to enhance existing products, and to develop and introduce
new products that keep pace with technological advancements, meet changing
customer requirements, respond to competitive products, and achieve market
acceptance. The Company's product development efforts require and are
expected to continue to require substantial investments by the Company for
research, refinement and testing, and there can be no assurance that the
Company will have the resources sufficient to make such investments. The
Company has in the past experienced developmental delays, and there can be no
assurance that the
5
<PAGE>
Company will not experience difficulties which would delay or prevent the
successful development, introduction or implementation of new or enhanced
products. In addition, there can be no assurance that such products will meet
the requirements of the marketplace and achieve market acceptance, or that
the Company's current or future products will conform to changing industry
requirements. If the Company is unable for technological or other reasons to
develop, introduce or implement new or enhanced products in a timely and
effective manner, the Company's business, operating results and financial
condition could be materially and adversely affected.
Products as complex as the Company's may contain errors that may be
detected at any point in the products' life cycles. In the past, the Company
has discovered certain errors in its products and has experienced shipping
delays while such errors were corrected. Such errors have also required the
Company to ship corrected products to existing customers. There can be no
assurance that errors will not be found in the future resulting in the loss
of, or delay in, market acceptance and/or sales and revenue, diversion of
development resources, injury to the Company's reputation, or increased
service and warranty costs, any of which could have a material adverse effect
on the Company's business, operating results and financial condition. See
"Business--Products" and "--Product Development."
Computing Platform Shift; Compatibility with Third Party Relational Databases
The majority of large financial services organizations have traditionally
used IBM MVS or Digital Equipment Corporation VMS systems for transaction
processing. Increasingly, however, such organizations are migrating towards
more open UNIX and Windows/NT server operating systems to meet their
transaction processing requirements. Responding to this trend, and while
continuing to support its core IBM and Digital Equipment Corporation
platforms, the Company commenced efforts in 1992 to evolve versions of its
products to use the C++ programming language and run on a variety of open
platforms. In December 1995, for the first time one of the new C++ versions
of the Company's products was used in production by a customer of the
Company. The Company has since shipped new C++ versions of its products for
use on RS 6000/AIX and Windows/NT platforms and has brought two RS 6000/AIX
C++ systems into initial production use. The Company is actively working with
customers to bring additional installations of these products into
production. There can be no assurance that the new versions of the Company's
products will meet the requirements of the marketplace and achieve market
acceptance, or that organizations will not migrate to other computing
platforms not supported by the Company. Moreover, there can be no assurance
that, notwithstanding the benefits of the new versions of the Company's
products, some of the Company's existing customers may choose not to migrate
to UNIX and Windows/NT systems. In such event, the Company may be required to
support both the old and new versions of its products, which could have a
material adverse effect on its business, operating results and financial
condition.
The Company believes that the compatibility of customer service management
software systems with popular relational databases is an important factor in
the purchase decision of many organizations. Consequently, the Company
recently developed (and will shortly ship) Windows/NT and RS 6000/AIX
versions of its software capable of storing work items in Oracle relational
databases, and is working to develop similar capabilities for other versions
of its software with other third party relational databases, such as
Microsoft's SQL Server. There can be no assurance that the Company will not
experience difficulties which would delay or prevent the successful
development or introduction of these additional capabilities. Any such
difficulty could have a material and adverse effect on the Company's
business, operating results and financial condition. See "Business--Product
Development."
Dependence on the Financial Services Market; Industry Consolidation
The Company has derived all of its revenue to date from customers in the
financial services market, and the Company's future growth depends, in large
part, upon increased sales to this market. The financial condition of the
Company's customers and their willingness to pay for the Company's products
and services are affected by competitive pressures, decreasing operating
margins within the industry, currency fluctuations, active geographic
expansion and deregulation. The Company believes that its customers'
6
<PAGE>
purchasing patterns are somewhat discretionary. As a result, demand for the
Company's products and services could be affected by the condition of the
financial services market or a deterioration in economic or market conditions
generally.
The financial services market is undergoing intense domestic and
international consolidation. In recent years, several customers of the
Company have been merged or consolidated out of independent existence, and
there is no assurance that the Company will not experience declines in
revenue occasioned, in whole or in part, by future mergers or consolidations.
Any decline in the demand for the Company's products would have a material,
adverse effect on the Company's business, operating results and financial
condition. See "Business--Customers."
Uncertainty of Growth into other Markets
As part of its growth strategy the Company is exploring the possibility of
applying its technology to the customer service management requirements of
markets other than financial services, such as insurance, medical, utilities
and retail. The Company believes that in connection with such efforts it will
be necessary for the Company to hire additional personnel with expertise in
these other markets. There can be no assurance that the Company will be
successful in adapting its technology to these other markets or in attracting
and retaining personnel with the necessary industry expertise. The inability
of the Company to penetrate these other markets could have a material adverse
effect on its business, operating results and financial condition. See
"Business--Business Strategy."
Risks of Customer License Non-Renewal
To date, a substantial majority of the Company's licenses have been
renewed upon expiration. Revenue attributable to license renewals accounted
for 32%, 26% and 28% of the Company's total revenue in 1993, 1994 and 1995,
respectively, and in each period was attributable to a relatively small
number of customers. There can be no assurance that a substantial majority of
the Company's customers will continue to renew expiring licenses; any such
non-renewal would require the Company to obtain revenue from other sources in
order to achieve its revenue targets. A decrease in the Company's license
renewal rate without offsetting revenue from other sources would have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business--Customers" and Notes 1 and 8
of Notes to Consolidated Financial Statements.
Control by Existing Stockholders
Upon completion of this offering, Alan Trefler, the Company's President
and a member of its Board of Directors, will own approximately 84% of the
Company's outstanding Common Stock (83% if the over- allotment option granted
to the Underwriters is exercised in full). As of May 13, 1996, there were
outstanding options to purchase 2,409,000 shares of the Company's Common
Stock, of which options to purchase 588,750 shares were then exercisable.
Assuming the exercise of all such outstanding options, Mr. Trefler would own
approximately 77% of the outstanding Common Stock (76% if the over-allotment
option granted to the Underwriters is exercised in full). There can be no
assurance that any such stock options will be exercised. Accordingly, Mr.
Trefler will be able to control the Company through his ability to determine
the outcome of elections of the Company's directors, amend the Company's
Restated Articles of Organization and Restated By-laws and take certain other
actions requiring the vote or consent of stockholders of the Company. This
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company. See "Principal and Selling Stockholders."
Dependence on Key Personnel
The Company's future success depends to a significant extent on Mr.
Trefler, its other executive officers and certain technical, managerial,
consulting, sales and marketing personnel. The loss of the services of any of
these individuals or group of individuals could have a material adverse
effect on the Company's business, operating results and financial condition.
None of the Company's executive officers has entered into an employment
contract with the Company, although each is subject to a non-disclosure and
non-competition agreement with the Company. The Company does not have, and is
not contemplating
7
<PAGE>
securing, any significant amount of key-man life insurance on any of its
executive officers or other key employees. The Company believes that its
future success also will depend significantly upon its ability to attract,
motivate and retain additional highly skilled technical, managerial,
consulting, sales and marketing personnel. In particular, delays in hiring
and training qualified sales personnel would adversely affect the Company's
operating results due to the substantial time period between the
identification of new customers and the successful implementation and
acceptance of the Company's products by those customers. Because developing,
selling and maintaining the Company's products requires extensive knowledge
of computer hardware and operating systems, programming languages and
application software, the number of qualified potential employees is limited.
Moreover, competition for such personnel is intense, and there can be no
assurance that the Company will be successful in attracting and retaining the
personnel it requires to continue to grow and operate profitably.
Intense Competition
The market for customer service management software and related consulting
and training services is relatively new, intensely competitive and highly
fragmented. The Company encounters significant competition from internal
information systems departments of potential or existing customers that
develop custom software. The Company also competes with companies that target
the customer interaction or workflow markets, and professional services
organizations that develop custom software in conjunction with rendering
consulting services. Such competitors vary in size and in the scope and
breadth of products and services offered. The Company anticipates increased
competition for market share and pressure to reduce prices and make sales
concessions, which could materially and adversely affect the Company's
business, operating results and financial condition.
Many of the Company's competitors have greater resources than the Company,
and may be able to respond more quickly and efficiently to new or emerging
technologies, programming languages or standards, or to changes in customer
requirements or preferences. Many of the Company's competitors can devote
greater managerial or financial resources than the Company can to develop,
promote and distribute customer service management software products and
provide related consulting and training services. There can be no assurance
that the Company's current or future competitors will not develop products or
services which may be superior in one or more respects to the Company's or
which may gain greater market acceptance. Some of the Company's competitors
have established or may establish cooperative arrangements or strategic
alliances among themselves or with third parties, thus enhancing their
abilities to compete with the Company. It is likely that new competitors will
emerge and rapidly acquire market share. There can be no assurance that the
Company will be able to compete successfully against current or future
competitors or that the competitive pressures faced by the Company will not
materially and adversely affect its business, operating results and financial
condition. See "Business--Competition."
Management of Growth
The growth in the size, geographic scope and complexity of the Company's
business and the expansion of its product offerings and customer base have
placed and are expected to continue to place a significant strain on the
Company's management, operations and capital needs. The Company's continued
growth, if any, will require it to hire, train and retain many employees both
in the United States and abroad, particularly additional sales and financial
personnel, and will also require the Company to enhance its financial and
managerial controls and reporting systems. There is no assurance that the
Company can manage its growth effectively or that the Company will be able to
attract and retain the necessary personnel to meet its business challenges.
If the Company is unable to manage its growth effectively, the Company's
business, operating results and financial condition could be materially and
adversely affected. See "Business--Business Strategy" and "--Sales and
Marketing."
Risks Associated with International Operations; Currency and Other Risks
Sales to customers headquartered outside of the United States represented
approximately 24% and 10% of the Company's total revenue in 1994 and 1995,
respectively. The Company, in part through its wholly-owned subsidiary based
in the United Kingdom, markets products and renders consulting and training
services to customers based in Canada, the United Kingdom, France,
Switzerland, Ireland and
8
<PAGE>
Luxembourg. The Company is in negotiations with potential customers based in
other foreign countries, and may establish a physical presence in continental
Europe, Australia or elsewhere in the Pacific Rim. The Company believes that
its continued growth will necessitate expanded international operations
requiring a diversion of managerial attention and financial resources. The
Company anticipates hiring additional personnel to accommodate international
growth, and the Company may also enter into agreements with local
distributors, representatives or resellers. If the Company is unable to do
one or more of these things in a timely manner, the Company's growth, if any,
in its foreign operations will be restricted, and the Company's business,
operating results and financial condition could be materially and adversely
affected.
In addition, there can be no assurance that the Company will be able to
maintain or increase international market demand for its products. Most of
the Company's international sales are denominated in U.S. dollars.
Accordingly, any appreciation of the value of the U.S. dollar relative to the
currencies of those countries in which the Company distributes its products
may place the Company at a competitive disadvantage by effectively making its
products more expensive as compared to those of its competitors.
Additional risks inherent in the Company's international business
activities generally include unexpected changes in regulatory requirements,
increased tariffs and other trade barriers, the costs of localizing products
for local markets and complying with local business customs, longer accounts
receivable patterns and difficulties in collecting foreign accounts
receivable, difficulties in enforcing contractual and intellectual property
rights, heightened risks of political and economic instability, the
possibility of nationalization or expropriation of industries or properties,
difficulties in managing international operations, potentially adverse tax
consequences (including restrictions on repatriating earnings and the threat
of "double taxation"), enhanced accounting and internal control expenses, and
the burden of complying with a wide variety of foreign laws. There can be no
assurance that one or more of these factors will not have a material adverse
effect on the Company's foreign operations, and, consequentially, the
Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Sales and Marketing."
Dependence upon Proprietary Rights; Risks of Infringement
The Company's success is heavily dependent upon its ability to protect its
proprietary technology. To protect its proprietary rights, the Company relies
on a combination of copyright, trademark and trade secret laws, as well as
confidentiality agreements. The Company also has one United States patent
application pending. However, existing patent, copyright, trademark and trade
secret laws afford only limited protection. In addition, many countries' laws
do not protect the Company's proprietary rights to the same extent as do the
laws of the United States. Accordingly, there can be no assurance that the
Company will be able to protect its proprietary rights against unauthorized
third party copying, use or exploitation, any of which could have a material
adverse effect on the Company's business, operating results and financial
condition.
Attempts may be made to copy or reverse engineer aspects of the Company's
products, or to obtain, use or exploit information or methods which the
Company deems proprietary. Additionally, there can be no assurance that the
Company's customers and others will not develop products which infringe upon
the Company's rights, or that compete with the Company's products. Policing
the use of the Company's products is difficult and expensive, and there is no
assurance that such efforts would prove effective. Litigation or other action
may be necessary in the future to enforce the Company's proprietary rights,
to seek and confirm patent protection for the Company's technologies, or to
determine the validity and scope of the proprietary rights of others. The
Company expects that its software products may increasingly be subject to
claims as the number of products and competitors in the Company's markets
grows and the functionality of such products overlaps. Such litigation or
proceedings, whether or not meritorious, could result in substantial costs
and diversions of resources and management's attention, and could have a
material adverse impact on the Company's business, operating results and
financial condition. See "Business--Intellectual Property and Licenses."
9
<PAGE>
Reliance on Certain Relationships
The Company has a number of third party relationships that are significant
to its sales, marketing and support activities and product development
efforts. The Company relies upon relational database management systems
applications and development tool vendors, software and hardware vendors, and
consultants to provide marketing and sales opportunities for the Company's
direct sales force, and strengthen its product offerings through the use of
industry-standard tools and utilities. The Company's strategy in entering
into these relationships is to keep pace with the technological and marketing
developments of major software vendors, and to acquire technical assistance
for the Company's product development efforts. There can be no assurance that
these companies, most of which have significantly greater financial and
marketing resources than the Company, will not develop or market software
products which compete with the Company's products in the future or will not
otherwise discontinue their relationships with or support of the Company. The
failure of the Company to maintain its existing relationships, or to
establish new relationships in the future, because of a divergence of
interests, acquisition of one or more of these third parties, or for any
other reason, could have a material adverse effect on the Company's business,
results of operations and financial condition.
Product Liability; Warranty Claims
The Company's license agreements with its customers typically contain
provisions intended to limit the nature and extent of the Company's liability
for product liability claims or claims arising from breaches of warranties.
There is no assurance that such limitations would withstand judicial scrutiny
or that they would bind a party not in direct privity with the Company.
Furthermore, some of the Company's licenses with its customers are governed
by laws other than those of the United States, and there is no assurance that
purported limitations on liability would be enforced were foreign law to
govern. Although the Company has not experienced any material product
liability claims to date, the license and support of products by the Company
and the incorporation of third party products and components may entail the
risk of such claims. A product liability suit or action claiming a breach of
warranty, whether or not meritorious, could result in substantial costs and a
diversion of management's attention and the Company's resources, which costs
and diversion could have a material adverse effect on the Company's business,
operating results and financial condition. Additionally, a suit alleging a
product defect or a breach of an express or implied warranty, if successful,
may also have an adverse precedential effect on other or future actions.
Lack of Prior Dividends; No Plans to Pay Dividends in the Foreseeable Future
The Company has never declared or paid cash dividends and does not
anticipate paying cash dividends in the foreseeable future. The Company's
current bank line prohibits payment of dividends without the bank's consent.
Immediate and Substantial Dilution
Purchasers of shares of Common Stock offered hereby will suffer an
immediate and substantial dilution in the net tangible book value of $11.22
per share of the Common Stock from the initial public offering price. See
"Dilution" and "Capitalization."
Potential Adverse Effects of Anti-Takeover Provisions; Possible Issuance of
Preferred Stock
The Company's Restated Articles of Organization (the "Restated Articles")
and Restated By-Laws contain provisions that may make it more difficult for a
third party to acquire, or discourage acquisition bids for, the Company. The
Restated Articles and Restated By-Laws provide that a stockholder seeking to
have business conducted at a meeting of stockholders must give notice to the
Company not less than 90 days prior to the scheduled meeting. The Restated
By-Laws further provide that a special stockholders meeting may be called by
the president or the Board of Directors or upon the request of stockholders
holding at least 40% of the voting power of the Company. The Restated
Articles and Restated By-Laws provide for a classified Board of Directors,
and for the removal of directors only for cause upon the affirmative vote of
the holders of a majority of the shares entitled to vote. Moreover, upon
completion of this offering, the Company will be subject to an anti-takeover
provision of the Massachusetts General Laws which prohibits, subject to
certain exceptions, a holder of 5% or more of the outstanding voting stock of
a corporation from engaging in certain transactions with the corporation,
including a merger or stock
10
<PAGE>
or asset sale. These provisions could limit the price that certain investors
might be willing to pay in the future for shares of the Company's Common
Stock and may have the effect of preventing changes in the management of the
Company. In addition, shares of the Company's Preferred Stock may be issued
in the future without further stockholder approval and upon such terms and
conditions, and having such rights, privileges and preferences, as the Board
of Directors may determine. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of any holders of
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or discouraging a third party
from acquiring, a majority of the outstanding voting stock of the Company.
The Company has no present plans to issue any shares of Preferred Stock. See
"Description of Capital Stock."
Shares Eligible for Future Sale
Sales of substantial amounts of shares of Common Stock in the public
market following this offering could adversely affect the market price of the
Common Stock. On the date of this Prospectus, in addition to the 3,400,000
shares offered hereby, 12,000 shares of Common Stock will be eligible for
future sale in the public market pursuant to Rule 144(k) under the Securities
Act of 1933, as amended (the "Securities Act"). Beginning 90 days after the
date of this Prospectus, an additional 139,500 shares will become eligible
for sale in the public market, pursuant to Rules 144 and 701 under the
Securities Act. Upon the expiration of lock-up agreements between certain
stockholders of the Company and the representatives of the Underwriters 180
days after the date of this Prospectus, an additional 22,739,300 shares will
become eligible for sale in the public market, subject to the provisions of
Rule 144 under the Securities Act. The representatives of the Underwriters
may waive some or all of the provisions of such lock-up agreements on a
case-by-case or general basis, all without notice to the Company, its
stockholders or any market on which the Common Stock may then be trading. See
"Shares Eligible for Future Sale" and "Underwriting."
Shortly after the date of this Prospectus, the Company intends to file a
Form S-8 registration statement under the Securities Act registering
approximately 5,750,000 shares of Common Stock issuable under the Company's
stock plans. As of May 13, 1996, giving effect to the exercise of options for
the purchase of 100,800 shares immediately prior to the closing of this
offering, options to purchase a total of 2,308,200 shares were outstanding
(of which 487,950 were then exercisable) and 3,341,000 shares were reserved
for future issuance under such stock plans. See "Shares Eligible for Future
Sale."
No Prior Trading Market; Potential Volatility of Stock Price
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active trading market
will develop or be sustained after this offering. The initial public offering
price to be negotiated between the Company, the Selling Stockholders and the
representatives of the Underwriters may not be indicative of prices that will
prevail in the trading market. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price.
The market price of the Company's Common Stock could be subject to wide
fluctuations in response to quarter-to-quarter variations in operating
results, the gain or loss of significant contracts, announcements of
technological developments or new products by the Company and its
competitors, changes in earnings estimates by analysts, market conditions in
the industry and general economic conditions. In addition, the stock market
has experienced volatility that has particularly affected the market prices
for the stock of many technology companies and that often has been unrelated
to the operating performance of such companies. These market fluctuations may
adversely affect the market price of the Company's Common Stock. See
"Underwriting."
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,700,000 shares of
Common Stock offered by the Company pursuant to this offering are estimated
to be $32,043,000 ($38,209,000 if the Underwriters' over-allotment option is
exercised in full), assuming an initial public offering price of $13.00 per
share and after deducting the estimated underwriting discount and offering
expenses payable by the Company. The principal purposes of this offering are
to increase the Company's equity capital, to create a public market for the
Common Stock, to increase the visibility of the Company in the marketplace
and to facilitate future access by the Company to public equity markets.
The Company anticipates using the net proceeds from this offering to repay
the Company's existing bank indebtedness and for general corporate purposes.
At March 31, 1996, the Company's bank indebtedness consisted of four term
promissory notes in the aggregate principal amount of $1,402,000, which are
due December 1996 ($155,000), November 1997 ($211,000), June 1998 ($885,000)
and December 1998 ($151,000). Interest accrues on such loans at the bank's
prime rate (8.25% at March 31, 1996) plus 0.5% per annum. The proceeds of
such loans were used by the Company primarily to acquire capital equipment.
The Company may seek acquisitions of businesses, products and technologies
that are complementary to those of the Company, and a portion of the net
proceeds may be used for such acquisitions. While the Company engages from
time to time in discussions with respect to potential acquisitions, the
Company has no plans, commitments or agreements with respect to any such
acquisitions as of the date of this Prospectus, and there can be no assurance
that any such acquisitions will be made. Pending such uses, the Company
intends to invest the net proceeds from this offering in short-term,
investment-grade, interest-bearing securities.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock and does not anticipate paying any cash dividends in the foreseeable
future. The Company currently intends to retain future earnings to fund the
development and growth of its business. The Company's current loan agreement
with a bank prohibits the payment of dividends without the bank's consent.
12
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1996 and as adjusted to give effect to the sale of 2,700,000 shares
of Common Stock offered by the Company hereby at an assumed initial public
offering price of $13.00 per share and the receipt and application of the
proceeds therefrom, after deducting the estimated underwriting discount and
offering expenses payable by the Company. See "Use of Proceeds." This
information should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
March 31, 1996
---------------------
Adjusted
Actual (1)
------ -----------
(in thousands except
share-related data)
<S> <C> <C>
Long-term debt, less current maturities $ 672 --
Stockholders' equity
Common Stock, $.01 par value, 45,000,000 shares
authorized, 23,490,000 shares issued and
outstanding (actual); and 26,290,800 shares issued
and outstanding (as adjusted) (2) (3) 235 $ 263
Additional paid-in capital 15 32,063
Retained earnings 15,008 15,008
Cumulative foreign currency translation adjustment (122) (122)
------- --------
Total stockholders' equity 15,136 47,212
------- --------
Total capitalization $15,808 $47,212
======= ========
</TABLE>
- -------------
(1) Adjusted to give effect to the sale of 2,700,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price
of $13.00 per share, after deducting the estimated underwriting discount
and offering expenses payable by the Company, and the anticipated
application of the net proceeds therefrom.
(2) Includes 100,800 shares of Common Stock issuable upon exercise of stock
options to be exercised immediately prior to the closing of this
offering.
(3) Excludes 2,308,200 shares of Common Stock issuable pursuant to the
exercise of options outstanding at May 13, 1996, of which options to
purchase 487,950 shares were then exercisable. See "Management--Stock
Plans."
13
<PAGE>
DILUTION
The net tangible book value of the Company at March 31, 1996 was
$14,814,418 or $0.63 per share of Common Stock, after giving effect to the
anticipated exercise of options to purchase 100,800 shares of Common Stock
immediately prior to the closing of this offering. Net tangible book value
per share is equal to the Company's total tangible assets less total
liabilities, divided by the total number of shares of Common Stock
outstanding. Net tangible book value dilution per share represents the
difference between the amount per share paid by purchasers of shares of
Common Stock in the offering made hereby and the net tangible book value per
share of Common Stock immediately after completion of this offering. After
giving effect to the sale by the Company of the 2,700,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $13.00
per share, and after deducting the estimated underwriting discount and
offering expenses, the pro forma net tangible book value of the Company as of
March 31, 1996 would have been $46,857,418 or $1.78 per share of Common
Stock. This represents an immediate increase in such pro forma net tangible
book value of $1.15 per share to existing stockholders and an immediate
dilution of $11.22 per share to new investors purchasing shares in this
offering. If the initial public offering price is higher or lower, the
dilution to the new investors will be, respectively, greater or less. The
following table illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share $13.00
Net tangible book value per share as of March 31, 1996 $0.63
Increase per share attributable to new investors $1.15
-----
Pro forma net tangible book value per share as of March 31, 1996 after
offering 1.78
------
Net tangible book value dilution per share to new investors $11.22
======
</TABLE>
The following table summarizes on a pro forma basis as of March 31, 1996,
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price paid per share by
existing stockholders and by new investors (assuming an initial public
offering price of $13.00 per share):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------- --------------------
Average Price
Number Percent Amount Percent Per Share
-------- ------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1) (2) 23,590,800 90% $ 107,728 0.3% $0.005
New investors (1) 2,700,000 10 35,100,000 99.7 $13.00
---------- --- ----------- ----- ------
Total 26,290,800 100% $35,207,728 100.0%
========== === =========== =====
</TABLE>
- -------------
(1) Sales by Selling Stockholders in this offering will reduce the number of
shares of Common Stock held by existing stockholders to 22,890,800
shares, or 87% of the total number of shares of Common Stock to be
outstanding after this offering (85% if the Underwriters' over-allotment
option is exercised in full), and will increase the number of shares of
Common Stock held by new investors to 3,400,000, or 13% of the total
number of shares to be outstanding (3,910,000 shares or 15% if the
Underwriters' over-allotment option is exercised in full). See "Principal
and Selling Stockholders."
(2) Includes 100,800 shares of Common Stock issuable upon exercise of stock
options to be exercised immediately prior to the closing of this offering
at an exercise price of approximately $0.33 per share.
As of May 13, 1996, there were options outstanding to purchase 2,409,000
shares of Common Stock under the Company's 1994 Long-Term Incentive Plan at a
weighted average exercise price of $2.51 per share, of which options to
purchase 588,750 shares were then exercisable. To the extent any such options
are exercised (other than those referred to in note (2) to the above table),
there will be further dilution to the new investors. In addition, on May 13,
1996, the Company's Board of Directors adopted the 1996 Non- Employee
Director Stock Option Plan (the "Director Plan") and the 1996 Employee Stock
Purchase Plan (the "Stock Purchase Plan"); and 250,000 shares and 500,000
shares have been reserved for issuance under the Director Plan and the Stock
Purchase Plan, respectively. The issuance of shares under these plans is not
reflected in the preceding tables. See "Management--Stock Plans."
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data at December 31, 1994 and 1995 and
for the three years ended December 31, 1995, are derived from consolidated
financial statements of Pegasystems Inc., which have been audited by Ernst &
Young LLP, independent auditors. The selected consolidated financial data at
December 31, 1991 and 1992 and for each of the two years ended December 31,
1992, are derived from consolidated financial statements of the Company
audited by Ernst & Young LLP but not included in this Prospectus. The
selected consolidated financial data presented below at and for the three
months ended March 31, 1995 and 1996 are derived from the Company's unaudited
financial statements also appearing herein and which, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results for the
unaudited interim periods. The results of operations for the three months
ended March 31, 1996 are not necessarily indicative of the results that may
be expected for the full year or for any future period. The data presented
below should be read in conjunction with the consolidated financial
statements, related notes and other financial information included herein.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
<TABLE>
<CAPTION>
Three Months
Ended
Year Ended December 31, March 31,
-------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
----- ----- ------ ------ ------ ----- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of Income
Data:
Total revenue $ 7,784 $ 8,963 $10,212 $16,263 $22,247 $ 4,005 $ 4,941
Income from operations 1,858 1,944 793 2,236 3,257 3 456
License interest income 987 1,220 1,305 1,457 1,486 370 368
Net income 1,791 1,867 1,233 2,193 2,878 224 486
Net income per share $ 0.07 $ 0.08 $ 0.05 $ 0.09 $ 0.11 $ 0.01 $ 0.02
Weighted average common and common
equivalent shares outstanding 24,471 24,471 24,231 24,102 25,551 25,600 25,505
</TABLE>
<TABLE>
<CAPTION>
March
December 31, 31,
----------------------------------------- --------
1991 1992 1993 1994 1995 1996
----- ----- ----- ----- ----- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 80 $ 336 $ 435 $ 456 $ 511 $ 2,644
Working capital 1,904 3,428 4,231 4,441 4,393 6,952
Long-term license installments, net 5,512 6,319 6,782 9,135 13,399 11,444
Total assets 11,992 14,387 17,057 20,787 25,876 26,555
Long-term debt 108 118 458 450 816 672
Stockholders' equity 6,576 8,444 9,676 11,872 14,674 15,136
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operation of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto, and the other financial
information included elsewhere in this Prospectus.
Overview
The Company was founded in April 1983 to develop, market and support
customer management software solutions for financial services organizations.
Product development began immediately and by the end of the year the Company
had secured its first customer. The Company has been profitable in each
fiscal quarter since the first quarter of 1985.
The Company's revenue is derived from two sources: software license fees
and services revenue. License fees, which have historically represented the
majority of the Company's total revenue, are generally payable on a monthly
basis under license agreements which typically have a five-year term and are
subject to renewal at the customer's option for an additional fixed period.
Such license agreements are generally non-cancellable, although some may be
terminated by the licensee for a fee prior to the expiration of the initial
term but after a minimum specified period. The Company's licenses generally
provide for annual license fee increases (the "inflation adjustments") based
on recognized inflation indexes (sometimes subject to maximums). The Company
believes that both it and its customers derive substantial benefits from the
recurring fee model because it encourages the Company to be responsive to
customer needs and provides the Company with additional revenue opportunities
through license renewals.
License revenue is recognized upon product acceptance. In the case of
license renewals, revenue is recognized upon execution of the renewal
agreement or if, as is generally the case, renewal is automatic unless the
customer gives notice of termination, at the expiration of the period during
which the customer has the right to terminate. The inflation adjustments are
recognized ratably over the months to which they apply. In accordance with
Statement of Position No. 91-1 issued by the American Institute of Certified
Public Accountants, the amount of software license revenue recognized upon
product acceptance or license renewal is equal to the present value of the
payments due during the minimum initial or renewal term, as the case may be,
plus the present value of any early termination fee. In 1993, 1994 and 1995
and the three months ended March 31, 1996, the discount rate for purposes of
the present value calculation was 7%. In the future, the Company intends to
establish the discount rate quarterly based on the Company's then current
marginal borrowing rate, reduced, with respect to licenses which provide for
inflation adjustments, by 1.5%, reflecting the Company's estimate of the
benefit of future inflation adjustments during the minimum license term. The
imputed interest portion of the license fees, which is reported as license
interest income in the Company's consolidated statements of income, is
recognized over the minimum initial or the renewal term, as the case may be.
To date, a substantial majority of the Company's software licenses have been
renewed upon expiration. License renewals accounted for 32%, 26%, 28% and 25%
of total revenue in 1993, 1994, 1995 and the three months ended March 31,
1996, respectively. The fact that a significant portion of the Company's
revenue is derived from the renewal of license agreements with fixed
expiration dates assists the Company in anticipating future revenue.
The Company's services revenue is comprised of fees for implementation,
consulting, maintenance and training services. All software license customers
are required to enter into a maintenance contract requiring the customer to
pay a monthly maintenance fee over the term of the related license agreement
equal to approximately 18% of the license fee. Maintenance fees are
recognized ratably over the term of the maintenance agreement. The Company's
software license agreements typically require the Company to provide a
specified level of implementation services for a fixed fee, typically with
additional implementation services available at an hourly rate.
Implementation fees are payable upon the achievement of specified milestones.
The Company generally recognizes implementation as well as consulting and
training fees as the services are provided.
In accordance with generally accepted accounting principles, the Company
has capitalized certain software development costs which it has typically
amortized over two years. No such costs, however, were
16
<PAGE>
capitalized in 1995 or in the three months ended March 31, 1996. At March 31,
1996, the Company carried $354,000 of capitalized software development costs.
These costs will be fully amortized by the end of 1996. As a result, the
Company expects that its cost of software license revenue will be lower in
1997 than in 1996.
The Company's export revenue has fluctuated considerably in the past due
to the fact that such revenue has been largely attributable to a small number
of product acceptances during a given period. The Company's export revenue
increased from $1.0 million in 1993 to $3.9 million in 1994 due primarily to
product acceptance by a single customer in Ireland in 1994, the year in which
the Company organized its subsidiary in the United Kingdom. Export revenue
declined to $2.3 million in 1995 due to the lack of large product acceptances
during the year.
Substantially all of the Company's contracts are denominated in U.S.
dollars, although several are denominated in British pounds sterling. The
Company expects that in the future more of its contracts will be denominated
in foreign currencies. The Company has not experienced any significant
foreign exchange gains or losses, and the Company does not expect that
foreign currency fluctuations will have a significant effect on either its
revenue or costs in the near term.
Results of Operations
The following table sets forth, for the periods indicated, certain items
in the Company's consolidated statement of income reflected as a percentage
of total revenue:
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
--------------------- --------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C>
Revenue:
Software license 63.1% 59.4% 60.8% 55.2% 51.0%
Services 36.9 40.6 39.2 44.8 49.0
----- ----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Cost of revenue:
Cost of software license 12.2 6.6 2.9 4.8 2.4
Cost of services 21.8 23.3 27.7 31.2 28.4
----- ----- ----- ----- -----
Total cost of revenue 34.0 29.9 30.6 36.0 30.8
----- ----- ----- ----- -----
Gross margin 66.0 70.1 69.4 64.0 69.2
----- ----- ----- ----- -----
Operating expenses:
Research and development 36.9 33.5 31.7 35.9 32.4
Sales and marketing 13.2 16.2 16.1 19.9 19.7
General and administrative 8.2 6.7 6.9 8.2 7.8
----- ----- ----- ----- -----
Total operating expenses 58.3 56.4 54.7 64.0 59.9
----- ----- ----- ----- -----
Income from operations 7.7 13.7 14.7 0.0 9.3
License interest income 12.8 9.0 6.7 9.2 7.4
Other interest income 0.3 0.1 0.1 0.2 0.2
Interest expense (0.3) (0.3) (0.5) (0.4) (0.8)
----- ----- ----- ----- -----
Income before provision for
income taxes 20.5 22.5 21.0 9.0 16.1
Provision for income taxes 8.4 9.0 7.9 3.4 6.3
----- ----- ----- ---- -----
Net income 12.1% 13.5% 13.1% 5.6% 9.8%
===== ===== ===== ==== =====
</TABLE>
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31, 1995
Revenue
Total revenue for the three months ended March 31, 1996 (the "1996
Period") increased 23.4% to $4.9 million from $4.0 million for the three
months ended March 31, 1995 (the "1995 Period"). The increase
17
<PAGE>
was primarily due to an increase in services revenue, and to a lesser extent,
an increase in software license revenue.
Software license revenue for the 1996 Period increased 14.1% to $2.5
million from $2.2 million for the 1995 Period. The increase in software
license revenue was primarily attributable to software license agreement
renewals, the licensing of standard product templates, and inflation-based
increases in monthly license fees.
Services revenue for the 1996 Period increased 34.8% to $2.4 million from
$1.8 million for the 1995 Period. The increase in services revenue was
primarily attributable to increased demand for consulting and implementation
services, and to a lesser extent, increased maintenance revenue from a larger
installed product base.
Revenue from customers headquartered outside of the United States for the
1996 Period increased 398% to $1.3 million from $250,000 in the 1995 Period
due largely to the expanded operations of the Company's office in the United
Kingdom.
Cost of Revenue
Cost of software license consists of amortization expense related to
capitalized software development costs, royalty payments to third party
software vendors and costs of product media, duplication and packaging. Cost
of software license for the 1996 Period decreased 38.0% to $118,000 from
$191,000 for the 1995 Period, and decreased as a percentage of total revenue
from 4.8% for the 1995 Period to 2.4% for the 1996 Period. As a percentage of
software license revenue, cost of software license decreased from 8.6% for
the 1995 Period to 4.7% for the 1996 Period. Such decreases were due to
decreased amortization expense related to capitalized software development
costs.
Cost of services consists primarily of the costs of providing
implementation, consulting, maintenance and training services. Cost of
services for the 1996 Period increased 14.4% to $1.4 million from $1.2
million for the 1995 Period mainly due to increased staffing in the Company's
Reengineering and Client Services group in the United Kingdom and in the
Company's domestic regional offices. Cost of services as a percentage of
total revenue declined from 31.2% for the 1995 Period to 28.4% for the 1996
Period, and declined as a percentage of services revenue from 69.5% for the
1995 Period to 58.0% for the 1996 Period, in both cases due to the growth in
the Company's total revenue and increased utilization of service personnel.
Operating Expenses
Research and development expenses consist primarily of the cost of
personnel and equipment needed to conduct the Company's research and
development efforts. Research and development expenses for the 1996 Period
increased 11.4% to $1.6 million from $1.4 million for the 1995 Period. The
modest increase in research and development expenses reflected the
substantial completion in December 1995 of the Company's efforts to develop
versions of its products based on the C++ programming language. As a
percentage of total revenue, research and development expenses declined from
35.9% for the 1995 Period to 32.4% for the 1996 Period due to the growth in
the Company's total revenue.
Sales and marketing expenses for the 1996 Period increased 22.0% to
$972,000 from $797,000 for the 1995 Period. As a percentage of total revenue,
sales and marketing expenses decreased slightly from 19.9% for the 1995
Period to 19.7% for the 1996 Period. Such increases were attributable to the
hiring of additional direct sales personnel, increased sales commission
payments attributable to higher sales, and investments in marketing
materials. The Company's license agreements, by providing for the payment of
license fees in installments over the term of the agreement, have
historically limited the Company's working capital and consequently its
ability to invest in sales and marketing. With the proceeds of this offering,
the Company intends to increase substantially its sales and marketing
spending.
General and administrative expenses consist primarily of the salaries of
the Company's executive, administrative and financial personnel, and
associated expenses. General and administrative expenses for the 1996 Period
increased 18.7% to $388,000 from $327,000 for the 1995 Period due to staff
growth. Such expenses declined slightly as a percentage of total revenue from
8.2% for the 1995 Period to 7.8% for the 1996 Period due to the growth in the
Company's total revenue.
18
<PAGE>
License Interest Income
License interest income represents the portion of all license fees due
under software license agreements which was not recognized upon product
acceptance or license renewal. License interest income for the 1996 Period
and the 1995 Period remained constant at $370,000.
Provision for Income Taxes
The provisions for federal, state and foreign taxes were $137,000 and
$310,000 for the 1995 Period and the 1996 Period, respectively. The effective
tax rates were 38% for the 1995 Period and 39% for the 1996 Period. The
increase in the effective tax rate was primarily due to the reduced
availability of research and development tax credit carryforwards. At March
31, 1996, the Company had $440,000 in research and development tax credit
carryforwards available to offset future federal taxable income.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenue
Total revenue for 1995 increased 36.8% to $22.2 million from $16.3 million
for 1994 due primarily to an increase in software license revenue, and to a
lesser extent, an increase in services revenue.
Software license revenue for 1995 increased 40.0% to $13.5 million from
$9.7 million in 1994 due to increased product acceptances and license
renewals.
Services revenue for 1995 increased 32.1% to $8.7 million from $6.6
million in 1994 primarily due to an increase in the amount of implementation
and consulting services provided, and to a lesser extent, increases in the
billing rates of the personnel providing these services and an increase in
training revenue.
Cost of Revenue
Cost of software license for 1995 decreased 40.9% to $640,000 from $1.1
million for 1994, and decreased as a percentage of total revenue from 6.6%
for 1994 to 2.9% for 1995. As a percentage of software license revenue, cost
of software license decreased from 11.1% for 1994 to 4.7% for 1995. Such
decreases were due to reduced amortization of capitalized software
development costs.
Cost of services for 1995 increased 62.5% to $6.2 million from $3.8
million for 1994 and increased as a percentage of total revenue from 23.3%
for 1994 to 27.7% for 1995. Cost of services as a percentage of total
services revenue increased from 57.4% for 1994 to 70.7% for 1995. Such
increases were due to the hiring of additional personnel to provide
implementation and consulting services to support the Company's growing
customer base.
Operating Expenses
Research and development expenses for 1995 increased 29.8% to $7.1 million
from $5.4 million for 1994 as a result of increased efforts by the Company to
develop versions of its products capable of running on multiple UNIX
platforms in a client/server environment. As a percentage of total revenue,
research and development expenses declined from 33.5% for 1994 to 31.7% for
1995 due to the growth in the Company's total revenue.
Sales and marketing expenses for 1995 increased 36.6% to $3.6 million from
$2.6 million for 1994 due to the hiring of additional sales and marketing
personnel, increased sales commission payments and increased investment in
trade shows and other sales and marketing efforts. As a percentage of total
revenue, sales and marketing expenses decreased slightly from 16.2% for 1994
to 16.1% for 1995 due to growth in the Company's total revenue.
General and administrative expenses for 1995 increased 41.2% to $1.5
million from $1.1 million for 1994 due to increased management recruiting
costs, the establishment of two new regional offices in Chicago and
Dallas/Fort Worth and the relocation of the Company's United Kingdom office.
General and administrative expenses were 6.9% of total revenue in 1995 and
6.7% in 1994.
License Interest Income
License interest income for 1995 and 1994 remained constant at $1.5
million.
19
<PAGE>
Provision for Income Taxes
The provisions for federal, state and foreign taxes were $1.5 million and
$1.8 million for 1994 and 1995, respectively. The effective tax rates were
40% for 1994 and 38% for 1995. The decrease in the effective tax rate was
primarily due to increased availability of research and development tax
credits. See Note 7 of Notes to Consolidated Financial Statements.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Revenue
Total revenue for 1994 increased 59.2% to $16.3 million from $10.2 million
for 1993. In January 1994, the Company organized Pegasystems Limited, a
wholly-owned subsidiary based in the United Kingdom. In its first year of
operation, Pegasystems Limited introduced the Company's products into
Ireland, France and Luxembourg. Financial results for 1994 and subsequent
years reflect the consolidated earnings of Pegasystems Inc. and Pegasystems
Limited.
Software license revenue represented 59.4% and 63.1% of total revenue for
1994 and 1993, respectively. Software license revenue for 1994 increased
49.8% to $9.7 million from $6.4 million for 1993. The increase in software
license revenue in 1994 was primarily attributable to increased product
acceptances by customers headquartered outside of the United States. The
Company's software license revenue from customers headquartered outside of
the United States was $3.1 million, or 32.5% of software license revenue, and
$0.7 million, or 10.8% of software license revenue, in 1994 and 1993,
respectively.
Services revenue for 1994 increased 75.3% to $6.6 million from $3.8
million for 1993 primarily due to the increased amount of implementation and
consulting services provided to a widening customer base. Following a focused
internal reengineering effort which began in 1993 and continued into 1994,
the Company redeveloped its strategy for new customer implementations leading
to greater services revenue from more effective and timely implementations
and the creation of standard training courses.
Cost of Revenue
Cost of software license decreased 13.5% to $1.1 million for 1994 from
$1.2 million for 1993 and decreased as a percentage of total revenue from
12.2% for 1993 to 6.6% for 1994. As a percentage of software license revenue,
cost of software license decreased from 19.3% for 1993 to 11.1% for 1994.
Such decreases were due to reduced amortization of capitalized software
development costs.
Cost of services for 1994 increased 70.3% to $3.8 million from $2.2
million for 1993 and increased as a percentage of total revenue from 21.8%
for 1993 to 23.3% for 1994. Such increases were due to the costs associated
with establishing the Company's United Kingdom office in January 1994 and
with developing new training facilities in Cambridge, Massachusetts and San
Francisco, California. Cost of services as a percentage of total services
revenue decreased from 59.2% for 1993 to 57.4% for 1994 due to increased
utilization of service personnel.
Operating Expenses
Research and development expenses for 1994 increased 44.4% to $5.4 million
from $3.8 million for 1993 primarily as a result of efforts by the Company to
develop versions of its products capable of running on multiple UNIX
platforms in a client/server environment. As a percentage of total revenue,
research and development expenses declined to 33.5% for 1994 from 36.9% for
1993 due to growth in the Company's total revenue.
Sales and marketing expenses for 1994 increased 94.7% to $2.6 million from
$1.4 million for 1993, representing 16.2% and 13.2% of total revenue in the
respective years. Such increases reflected the establishment of a sales
operation in the United Kingdom and increased sales commission payments.
General and administrative expenses for 1994 increased 30.8% to $1.1
million from $830,000 for 1993 due to overhead associated with the expansion
of the Company's headquarters in Cambridge, Massachusetts, relocation of the
regional office in San Francisco, California, and the establishment of
20
<PAGE>
operations in the United Kingdom. General and administrative expenses as a
percentage of total revenue declined slightly to 6.7% for 1994 from 8.2% for
1993 due to the growth in the Company's total revenue.
License Interest Income
License interest income for 1994 increased 11.6% to $1.5 million from $1.3
million in 1993 primarily due to the prepayment by one customer in 1994 of
certain monthly software license fees.
Provision for Income Taxes
The provisions for federal, state and foreign taxes were $860,000 and $1.5
million for 1993 and 1994, respectively. The effective tax rates were 41% for
1993 and 40% for 1994. The decrease in the effective tax rate was primarily
due to the use of certain tax credits. See Note 7 of Notes to Consolidated
Financial Statements.
Quarterly Operating Results
The following tables set forth certain unaudited consolidated financial
information for each of the four quarters in 1995 and for the first quarter
of 1996. In management's opinion, this unaudited quarterly information has
been prepared on the same basis as the audited consolidated financial
statements and includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the information for the
quarters presented, when read in conjunction with the audited consolidated
financial statements and notes thereto included elsewhere in this Prospectus.
The Company believes that quarter-to-quarter comparisons of its financial
results are not necessarily meaningful and should not be relied upon as an
indication of future performance.
21
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------
March June September December
31, 30, 30, 31, March 31,
1995 1995 1995 1995 1996
------- ------ ----------- ---------- ---------
(in thousands except percentage data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Income Data:
Revenue:
Software license $ 2,209 $ 2,581 $ 3,624 $ 5,114 $2,520
Services 1,796 2,113 2,032 2,778 2,421
------- ------- ------- ------- ------
Total revenue 4,005 4,694 5,656 7,892 4,941
------- ------- ------- ------- ------
Cost of revenue:
Cost of software license 191 190 127 127 118
Cost of services 1,249 1,404 1,605 1,903 1,405
------- ------- ------- ------- ------
Total cost of revenue 1,440 1,594 1,732 2,030 1,523
------- ------- ------- ------- ------
Gross profit 2,565 3,100 3,924 5,862 3,418
------- ------- ------- ------- ------
Operating expenses:
Research and development $ 1,438 $1,640 $1,871 $2,112 $1,602
Sales and marketing 797 867 878 1,050 972
General and administrative 327 380 381 453 388
------- ------- ------- ------- ------
Total operating expenses 2,562 2,887 3,130 3,615 2,962
------- ------- ------- ------- ------
Income from operations 3 213 794 2,247 456
------- ------- ------- ------- ------
License interest income 370 368 384 364 368
Other interest income 6 4 6 0 12
Interest expense (18) (17) (33) (50) (39)
------- ------- ------- ------- ------
Income before provision for income
taxes 361 568 1,151 2,561 797
Provision for income taxes 137 216 437 973 311
------- ------- ------- ------- ------
Net income $ 224 $ 352 $ 714 $1,588 $ 486
======= ======= ======= ======= ======
Percent of Total Revenue:
Revenue:
Cost of software license 55.2% 55.0% 64.1% 64.8% 51.0%
Cost of services 44.8 45.0 35.9 35.2 49.0
------- ------- ------- ------- ------
Total revenue 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Software license 4.8 4.1 2.2 1.6 2.4
Services 31.2 29.9 28.4 24.1 28.4
------- ------- ------- ------- ------
Total cost of revenue 36.0 34.0 30.6 25.7 30.8
------- ------- ------- ------- ------
Gross margin 64.0 66.0 69.4 74.3 69.2
------- ------- ------- ------- ------
Operating expenses:
Research and development 35.9 34.9 33.1 26.8 32.4
Sales and marketing 19.9 18.5 15.5 13.3 19.7
General and administrative 8.2 8.1 6.7 5.7 7.8
------- ------- ------- ------- ------
Total operating expenses 64.0 61.5 55.3 45.8 59.9
------- ------- ------- ------- ------
Income from operations 0.0 4.5 14.1 28.5 9.3
License interest income 9.2 7.8 6.8 4.6 7.4
Other interest income 0.2 0.1 0.1 0.0 0.2
Interest expense (0.4) (0.3) (0.6) (0.7) (0.8)
------- ------- ------- ------- ------
Income before provision for income
taxes 9.0 12.1 20.4 32.4 16.1
Provision for income taxes 3.4 4.6 7.8 12.3 6.3
------- ------- ------- ------- ------
Net income 5.6% 7.5% 12.6% 20.1% 9.8%
======= ======= ======= ======= ======
</TABLE>
22
<PAGE>
The Company's business has experienced and is expected to continue to
experience significant seasonality. In recent years the Company has
recognized a greater percentage of its revenue in its third and fourth
quarters than in its first and second quarters due to the Company's sales
commission structure and the impact of that structure on the timing of
product acceptances and license renewals by customers. This pattern is
reinforced by the Company's maintenance contracts, which entitle customers
to, among other things, a fixed number of hours of service per calendar year.
Once the annual allotment of service hours is exhausted, customers pay for
additional services on an hourly basis, typically resulting in higher
services revenue in the Company's second, third and fourth quarters.
Cost of software license declined in each of the quarters shown above due
to decreasing amortization expense relating to capitalized software
development costs. No software development costs were capitalized in 1995 or
the first quarter of 1996.
The increase in total operating expenses in the fourth quarter of 1995
reflected primarily an adjustment for bad debt exposure which developed in such
quarter.
Liquidity and Capital Resources
The Company historically has satisfied its cash requirements through cash
generated from operations and borrowings. 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 limited the availability of
working capital.
Net cash provided by operating activities for the years ended December 31,
1993, 1994, 1995, and the three months ended March 31, 1996 was $1.6 million,
$1.5 million, $830,000 and $2.6 million, respectively. During each of these
periods, these sources of cash were used to support the Company's working
capital requirements.
The Company used $890,000, $1.1 million, $1.4 million and $220,000 of net
cash during 1993, 1994, 1995, and the three months ended March 31, 1996,
respectively, to purchase property and equipment, primarily computer hardware
and software, to support the Company's growing employee base and new regional
office and training facilities. The Company's capital commitments consist
primarily of operating leases for office space and equipment. At December 31,
1995, the Company's commitments under noncancellable operating leases for
office space and equipment with terms in excess of one year totalled $1.0
million, $1.1 million and $1.1 million for 1996, 1997 and 1998, respectively.
The Company's total payments under such leases was $800,000, $860,000 and
$1.1 million for 1993, 1994 and 1995, respectively. See Note 6 of Notes to
Consolidated Financial Statements.
The Company has a $5.0 million revolving credit line, which expires June
30, 1997, and four term loans from the same bank in the aggregate principal
amount of $1.4 million at March 31, 1996, which are due December 1996
($155,000), November 1997 ($211,000), June 1998 ($885,000) and December 1998
($151,000). The term loans are secured by certain fixed assets of the
Company; the revolving credit line is unsecured. At March 31, 1996, the
Company had no borrowings under its revolving credit line. The Company
intends to use a portion of the proceeds from this offering to repay the four
term loans in full. The Company's credit agreement prohibits the payment of
dividends, has profitability requirements and requires maintenance of
specified levels of tangible net worth and certain financial ratios. See Note
4 of Notes to Consolidated Financial Statements.
In 1993, the Company added $330,000 to its allowance for doubtful accounts as
a result of certain specifically identified accounts receivable relating
primarily to services rendered by the Company. In 1994, the Company made no
provision for doubtful accounts. In 1995, the Company added $790,000 to its
allowance for doubtful accounts as a result of indications in the fourth
quarter of the year that certain receivables relating primarily to services
rendered by the Company would not be collected in full.
The Company believes that the net proceeds from this offering 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 one
year following the completion of this offering. However, there can be no
assurance that additional capital beyond the amounts currently forecasted by
the Company will not be required or that
23
<PAGE>
any such required additional capital will be available on reasonable terms,
if at all, at such time as required by the Company.
Inflation
Inflation has not had a significant impact on the Company's operating
results to date, nor does the Company expect it to have a significant impact
in the future due to the fact that the Company's license and maintenance fees
are typically subject to annual increases based on recognized inflation
indexes.
Significant Customers
In 1993, First Interstate Bank and Fidelity Investments accounted for
approximately 12.9% and 12.3%, respectively, of the Company's total revenue.
In 1994, Chemical Bank accounted for approximately 16.8% of the Company's
total revenue. In 1995, Citibank, Household Credit Services and Chemical Bank
accounted for approximately 16.2%, 14.9% and 12.6%, respectively, of the
Company's total revenue. During the three months ended March 31, 1996,
Fidelity Investments, Bank of America and Cedel accounted for approximately
25.3%, 11.7% and 10.5%, respectively, of the Company's total revenue.
24
<PAGE>
BUSINESS
Pegasystems develops customer service management software to automate
customer interactions across transaction-intensive enterprises. Many of the
world's largest banks, mutual funds and credit card organizations use the
Company's solutions to integrate, automate, standardize and manage a broad
array of mission-critical customer service activities, including account
set-up, record retrieval, correspondence, disputes, investigations and
adjustments. The Company's systems can be used by thousands of concurrent
users to manage customer interactions and to generate billions of dollars a
day in resulting transactions. Work processes initiated by the Company's
systems are driven by a highly adaptable "rule base" defined by the
user-organization for its specific needs. The rule base facilitates a high
level of consistency in customer interactions, yet drives different processes
depending on the customer profile or the nature of the request. The Company's
open, multi-tier, client/server systems operate on a broad variety of
platforms, including UNIX, Windows/NT and IBM/MVS. The Company offers
consulting, training and support services to facilitate the use of its
solutions.
Industry Background
Intensifying competition is forcing businesses to reduce costs while
focusing on customer service management as an important means of
differentiation. Many types of businesses are increasingly recognizing
customer interactions as a critical opportunity to solidify and expand
customer relationships. Due to the volume and precise nature of their
transactions, it is especially critical for financial services organizations
to implement cost-effective systems to manage customer interactions
accurately and efficiently.
Providing high quality, cost-effective customer service management is
complex. Organizations with global operations must be able to manage customer
interactions in different languages, time zones, currencies and regulatory
environments. The challenge is magnified as the product offerings of an
organization increase and organizations are combined. Work processes
occasioned by a single customer interaction often involve multiple
departments within an organization, which may have different priorities and
service standards, and may involve a variety of different computer systems.
Customers may contact an organization through various means, including
telephone, facsimile, the Internet or in person. The organization must be
able to respond in a timely, accurate and consistent fashion or risk customer
defection.
Historically, in attempting to meet demand for new customer management
software systems, organizations have faced a choice between building custom
systems or purchasing third party systems. Building custom systems or
modifying third party systems can be slow and costly and has often led to
isolated, departmentalized solutions. Traditional third party systems are
often inflexible, requiring organizations to conform their work processes to
the system, rather than vice-versa. Neither custom nor third party solutions
have generally accommodated an organization's need to evolve or expand
operations without significant programming effort. Moreover, neither has had
the high volume transaction processing or integration capabilities necessary
to support the comprehensive customer interaction requirements of large
organizations. Today, organizations need flexible, scalable customer service
management solutions that can be implemented on an enterprise-wide basis to
facilitate consistent, cost-effective customer service management.
A 1995 report of the Aberdeen Group, Inc., a market research firm,
estimates the size of the customer interaction software market at $1.7
billion in 1996, and projects that it will grow to $2.7 billion by 1998. Of
this market, the share held by independent software vendors is estimated at
$540 million in 1996, growing to $925 million in 1998. The total market, as
defined by the Aberdeen Group, includes software supporting customer service,
internal help desks, field and telesales automation, order entry, sales or
product configuration, service dispatching and quality assurance.
25
<PAGE>
The Pegasystems Solution
The Company's solutions integrate, automate, standardize and manage on an
enterprise-wide basis a broad array of mission-critical customer interactions
for financial services organizations, including account set- up, record
retrieval, correspondence, disputes, investigations and adjustments.
Pegasystems' solutions provide a service backbone that drives intelligent
processing and seamlessly integrates an organization's geographically
dispersed and product specific service operations and isolated computer
systems. By bridging these "islands of automation" within large
organizations, the Company's solutions increase the efficiency of service
representatives and enable organizations to address multiple customer needs
during a single contact.
The Company's customer service management solutions offer the following
advantages:
Flexibility and Consistency. The Company's solutions are based on rules
defined by the user- organization which drive various types of processing
depending on such factors as the content of the customer request, the profile
of the customer, the organization's policies and procedures and the authority
or qualifications of the customer service representative. By modifying its
rule base, an organization can evolve its processing to address the
competitive requirements of its business without costly and time consuming
reprogramming. Significantly, the rule base feature of the Company's systems
permits an organization to establish consistent standards yet interact
differently with different segments of its customer base and thereby "mass
customize" its services.
Scalability and Robust Functionality. The scalability of the Company's
multi-tier client/server architecture allows an organization to add branches
or departments easily to new or existing servers without performance
degradation. Organizations currently entrust the Company's systems with the
storage and management of data relating to hundreds of millions of financial
transactions. The Company's systems can be used by more than 4,000 concurrent
users to manage customer interactions and to process accurately and securely
transactions involving billions of dollars a day that result from those
interactions.
Ease-of-Use. The Company's client software application, PegaVIEW-ACE,
increases the effectiveness and productivity of customer service
representatives by providing them with a flexible graphical user interface
and processing capabilities that leverage the power of client/server desktop
computers. The Company's solutions allow customer service representatives to
focus on delivering superior customer service, rather than on mastering the
protocols and procedures of multiple applications.
Integration Capabilities. The Company's open architecture permits its
solutions to be integrated with a wide variety of other applications and
technologies, including industry standard relational database management
systems, advanced telephony equipment and diverse storage media (including
magnetic, optical, tape and microfilm). The Company's solutions also support
the message formats of major financial transaction networks such as the SWIFT
international funds network, the Federal Reserve's Fedwire system and the
VISA and MasterCard networks.
Multi-Platform Server Support. The Company's solutions feature a common
software code base which, in addition to facilitating maintenance and
enhancement development efforts, simplifies the support of multiple
platforms. The Company's solutions are designed to run on a broad range of
computer operating systems including IBM's MVS/CICS and AIX/UNIX systems,
Digital Equipment Corporation's VMS and UNIX systems, Microsoft's Windows/NT
system and Sun Microsystems' Solaris UNIX system.
Improved Efficiency of Customer Service Representatives. Pegasystems'
solutions actually perform work, rather than simply track a customer service
representative's tasks. Variable data elements (for example, date, amount,
customer, account) automatically route service requests and invoke system
processes, depending on an organization's rule base. This feature allows
customer service representatives to focus on revenue enhancing opportunities,
such as cross-selling, and other matters requiring personal attention. When
service representative involvement is required during a customer interaction,
the Company's solutions provide pertinent, consolidated information to guide
the service representative. Savings are realized through reduced talk time,
fewer manual processes and less rework.
26
<PAGE>
Business Strategy
Pegasystems' objective is to become the leading provider of
mission-critical client/server customer service management software to
organizations performing a high volume of complex interactions with demanding
customers. To achieve this objective, the Company is pursuing the following
strategies:
Leverage Strength in Financial Services Market. Pegasystems provides
customer service management solutions to many of the largest financial
services organizations in the world. The Company is seeking to expand its
business with these organizations through a sales group focused on marketing
the Company's products and services to other business operations of these
organizations. The Company is also leveraging its relationships and expertise
with large financial services organizations to penetrate the medium-sized
financial services market.
Target Other Markets. Pegasystems believes that the insurance, medical,
utilities, retail and other markets have similar customer service management
needs and that the Company's core technology is readily adaptable to these
additional markets. The Company is exploring these additional markets, and if
appropriate, expects to develop the necessary industry specific extensions of
its core technology and hire or otherwise gain access to personnel with
expertise in such markets.
Increase Sales and Support Efforts. Pegasystems intends to establish
additional sales and support offices and to increase significantly its
domestic and international direct sales forces. In addition, the Company
plans to explore relationships with financial transaction processors and
consulting firms through which the Company's products can be distributed and
implemented.
Develop Standard Product Templates. The Company recently commenced
licensing standard product templates that give organizations an advanced
starting point for configuring their work processes. The Company intends to
continue to develop and market standard product templates for financial
services organizations, including templates for outbound telemarketing,
collections and account set-up. The Company believes that these templates
will facilitate more rapid implementation of the Company's solutions and will
be a cost-effective way to address the needs of smaller organizations.
Reduce Implementation Time. The Company is continuing to refine its
PegaSTAR consulting methodology, an approach to the reengineering of an
organization's work processes that facilitates more rapid implementation of
the Company's customer management systems and continued evolution of such
systems by an organization's personnel after initial implementation. This
methodology complements the Company's standard product templates in reducing
the time required to implement the Company's systems.
Maintain Technological Leadership Position. Pegasystems is continuing to
develop and invest in its technology. Current development efforts include
integration of additional databases and support of emerging technical and
workflow standards.
Technology
The Company's technology is designed to optimize the performance of
mission-critical, customer service management processes over a variety of
computer platforms, networks and databases. Pegasystems' solutions have the
following key technological attributes:
"Any-Call, Any-Time, Anywhere" Information Management. Effective customer
response requires up-to-date information about the customer relationship,
regardless of how, why, when or where the customer contacts the organization.
Pegasystems' customer service management systems centralize core customer
information to facilitate global access.
Multi-tier, Dynamic Distributed Processing. Although the Company's systems
are currently used primarily in a two-tier client/server environment, they
are also designed to run in an advanced, highly scalable three-tier
environment. In traditional three-tier client/server environments, the user
interface, the application code, and the data are segregated onto separate
tiers. In the Pegasystems three-tier client/server environment, the
application code, the rule base and selected data are replicated on both the
central and satellite tiers so that processing may occur on either the
central server or the distributed satellite servers to minimize network
traffic and enhance performance. The rule base determines the optimal
location for processing to occur based on the nature of the work required and
the data involved. Rule base changes are replicated across the organization's
central and satellite servers to facilitate consistent processing by all
parts of the organization.
27
<PAGE>
Distributed Processing Environment
[Graphic Representation of Pegasystems Worldwide
Platform Processing Environment]
Satellite Server
Code
Rules
Central Server
Code
Rules
Work Item Data
Satellite Server
Code
Rules
Satellite Server
Code
Rules
Inherited Workflow. Pegasystems solutions maintain organizational
consistency while providing the flexibility needed for mass customization.
The rule base of the Company's systems may be defined so that certain
processes are standardized across an organization while others may be
superseded or supplemented by "local" rules tailored to the specific
requirements of groups within the organization.
Resiliency. Fallback options are provided to deal with hardware or network
failure. For example, in a three-tier environment, the PC client can bypass a
failed satellite server and connect directly to the central server. The
Company is presently working to enhance its systems so that should a failure
occur at the central server, each satellite server's replicated code and rule
base could support continued processing, with "store and forward"
capabilities to automatically re-synchronize the central server when it
resumes operation.
Platform Independence. Recognizing that organizations often use a variety
of computer platforms, Pegasystems provides technology alternatives by
supporting a range of mainframes, minicomputers, PC networks and interface
devices. While the Company offers its advanced Windows-based PegaVIEW-ACE
application for the desktop, the Company's server applications can also drive
"dumb terminals", allowing organizations to preserve their investments in
legacy networks.
28
<PAGE>
Pegasystems Platform Options
[Graphic of Pegasystems Platform Options]
<TABLE>
<CAPTION>
Desktop Local Distributed Global Central
Networks Satellite Servers Networks Servers
<S> <C> <C> <C> <C> <C>
Windows TCP/IP IBM AIX TCP/IP IBM MVS
UNIX CICS
Windows 95 LU6.2 DEC Open LU6.2 IBM AIX
VMS UNIX
Windows NT Pathworks Microsoft Pathworks DEC Open Data
Windows NT VMS
OS/2 Novell SUN Solaris(1) Novell SUN Solaris(1) Data
IPX UNIX IPX UNIX
IBM 3270 IBM DEC UNIX IBM DEC UNIX Data
"Dumb Terminal" VTAM LU2 VTAM LU2
Character-Based Async IBM MVS Async Windows NT
"Dumb Terminal" CICS
Netscape(1) Microsoft HP/UX(2) SNA HP/UX(2)
Motif DDE UNIX UNIX
Netscape(1) Procedure (1) Shipping in Q3, 1996
Windows Call (2) Availability planned in Q4, 1996
</TABLE>
Internet and Intranet Access. Pegasystems' solutions use the
Internet-based HTML (Hypertext Markup Language) to define display attributes
for its PegaVIEW-ACE graphical user interface, leveraging logic and
presentation rules between PegaVIEW-ACE and Internet/Intranet workflows.
Pegasystems' rules dynamically create HTML forms, menus and displays, thereby
facilitating interaction with the Internet. Pegasystems is a Netscape
Development partner and supports the Netscape Commerce Server interface.
Interfacing With Other Systems. Pegasystems' open architecture permits
integration with a wide variety of other applications and networks, including
relational databases, legacy systems accessed through IBM 3270 emulation, and
messaging protocols. The Company offers a Universal Application Programming
Interface (API) that allows an organization's custom software to be
integrated with the Company's applications without the need to modify the
Company's core application code. Pegasystems' solutions also integrate with
other applications, accounting systems and imaging products. The Company's
systems support the message formats of major financial transaction networks,
such as the SWIFT international funds network, the Federal Reserve's Fedwire
system and the VISA and MasterCard networks.
Storage Options. Data storage flexibility is important to the Company's
customers, and the Company's software uses an innovative object-oriented
approach that dynamically maps data according to the type of workflow.
Versions of the Company's systems designed to run on Windows/NT can store
customer service request data in Microsoft's SQL Server relational database,
and the Company has developed similar compatibility in the Windows/NT and RS
6000/AIX environments for databases from Oracle Corporation.
Products
The Company's products employ a consistent architecture and support the
following customer service management functions:
Receiving. Organizations receive service requests by telephone, mail,
facsimile, or personal contact. Customer service representatives enter
details of incoming requests into PegaVIEW-ACE, the
29
<PAGE>
Company's easy-to-use, graphical user interface. Alternatively, electronic
service requests received from various networks and systems, such as the
SWIFT network, Fedwire system, and the VISA and MasterCard networks are
entered directly into the Company's system. The Company's systems also
support direct electronic access by customers through PCs, Internet browsers
and voice response units. In all cases, the service request automatically
initiates appropriate processing.
Routing. As processing steps are completed, the Company's systems
categorize and queue the request either for automatic or manual processing.
Productivity-based load leveling and dynamic prioritization ensure high
performance and responsiveness. As work is processed, each service
representative's "work-list" is automatically updated in real time. The
systems monitor each service request for conformance to the organization's
timeliness standards, automatically increasing priority and generating
warnings based on the service standards of the organization.
Researching. The Company's systems determine when more information is
needed, where to locate it, and how to retrieve it from databases or other
repositories. Pegasystems' rule-driven processing automatically extracts
relevant data, directs it to the customer service representative or customer,
links it to the work, and keeps it readily accessible. The Company's systems
can access information from multiple data sources, whether maintained by the
Company's systems or third party systems.
Responding. The Company's systems facilitate communications by an
organization with its customers by combining user-defined templates and
specific customer information to create personalized correspondence. When
appropriate, service representatives may further refine message content
before forwarding by mail, facsimile or electronic transmission, and may
attach images of statements, checks and other data. Follow-up communications
are automatically composed, customized and sent. Sensitive correspondence can
be queued for online review before release, and the systems create a
permanent audit trail of all customer communications.
Resolving. Concluding a piece of work involves application of the
organization's rules for resolving a request or stepping the customer service
representative through the process when human judgment is required.
Resolution also includes the creation of transactions, transmission to
production systems, management of financial adjustments, posting of service
charges, updating of general ledger accounts and synchronization of multiple
item requests.
Reporting. Data automatically collected by the Company's systems enables
an organization to analyze service representative efficiency and determine
needs for service representative training or changes to work processes. The
Company's systems produce reports, graphical output and feeds to spreadsheets
illustrating the volume and status of customer requests, the productivity of
customer service representatives and service levels with specific customers.
The Company offers a number of different products, each with components
and features designed to address particular business areas, but all sharing
core technology and adaptable rule-driven processing:
PegaCARD manages credit and debit card customer service operations by
supporting a wide variety of interactions with cardholders and merchants,
including simple inquiries (for example, balances or credit limits), customer
requests (address changes, additional cards, credit line increases) and
problem management (disputes, chargebacks, fraud, financial adjustments,
penalties). Automated features include processing of electronic chargeback
messages and images from the MasterCard and VISA networks. PegaCARD allows
service representatives to move seamlessly among multiple back-end accounting
systems without having to be familiar with the different protocols of each
system.
PegaCLAIMS manages corporate and wholesale banking customer service by
supporting a broad spectrum of customer interactions, including inquiries
(product terms, rates), customer requests (account data changes, duplicate
copies), and problem management (research, financial adjustments). PegaCLAIMS
processes customer service interactions relating to money transfers,
securities movement and control, global custody, trade services, foreign
exchange and cash management, and features electronic message routing, SWIFT
processing and interbank financial compensation management.
PegaSHARES manages customer service for transfer agents, brokers, dealers,
shareholder servicers and mutual fund managers by supporting inquiries (share
balances, net asset values, transactions), customer
30
<PAGE>
requests (account changes, copies of statements) and problem resolution
(incorrect purchases, monetary adjustments). Automated features include share
transfer accounting, literature fulfillment and securities processing
compliance.
PegaTRACE facilitates retail banking and check clearing customer service
by processing inquiries (account balances, fees), customer requests (copies
of statements, account transfers) and problem management (research, financial
adjustments). PegaTRACE securely manages the suspense accounts that major
organizations use to control the flow of accounting entries. Additional
features include integration with check clearing systems, suspense ledger
management, multi-debit/credit adjustments, and electronic check presentment
(ECP) interfaces.
PegaSEARCH and PegaINDEX manage high volumes of archived data, such as
check information, contained on multiple types of storage media including
magnetic disk, optical disk and magnetic tape silos. These systems are
designed for organizations that process tens of millions of checks per day
and require seven years of archived check data.
PegaPRISM and PegaREELAY are used by customer service representatives to
retrieve images, view them on a PC and correlate them with specific customer
service requests. PegaREELAY is a specialized image retrieval product that
automates request processing of reel microfilm.
PegaVIEW-ACE (the Advanced Client Environment) is a graphical client
application designed for use with the Company's server applications to
increase the effectiveness and productivity of customer service
representatives. PegaVIEW-ACE organizes customer data to facilitate service
representative effectiveness and supports graphical methods to view and enter
information.
Product Pricing
The Company's systems are licensed to organizations under agreements
requiring the payment of fees, typically in monthly installments, over the
term of the agreement. The amount of the license fee is based on various
factors, including the number of concurrent users, the functionality of the
system, the number of servers on which product is installed, and the scope of
business usage. Typical recent individual system licenses have provided for
the payment of monthly installments of between $5,000 and $50,000. Some
organizations receive discounts for licensing multiple systems. The monthly
license payments generally begin once a system is installed and accepted. The
term of such licenses is typically five years, subject to automatic renewal
at the organization's option.
Services
Pegasystems' Reengineering and Client Services Group, which as of April
30, 1996 was comprised of 50 people located in the Company's six offices,
provides consulting, training and customer support.
Consulting Services. The Company works with its customers during and after
system installation to reengineer customer workflows to leverage the
capabilities of the Company's systems. Using an installation approach based
on its PegaSTAR (the Pegasystems Structured Technique for Analysis and
Reengineering) methodology, the Company's consultants assist customers in six
major areas--analysis, data collection, process definition, configuration,
piloting and measurement. The Company encourages team building and transfer
of knowledge from its consultants to an organization's staff through an
interactive co-production methodology. Pegasystems and its customers work
together to design, document and tailor the system's rule base to the
customer's organization. Pegasystems' goal is to empower its customers'
staffs with the knowledge and confidence to operate, refine and evolve their
systems.
Training. The Company offers training programs for those persons within
the customer organization responsible for evolving the rules that drive the
various processes related to customer interactions. Pegasystems also
organizes periodic user group meetings enabling customers to exchange ideas,
learn about product directions and influence Pegasystems' development
process.
Maintenance and Support. Pegasystems provides comprehensive maintenance
and support services, which may include 24 hours a day, 7 days a week
customer service, periodic preventative maintenance, documentation updates
and new software releases.
31
<PAGE>
Each organization which licenses the Company's systems is required to
enter into a maintenance contract providing for the payment to the Company of
a monthly maintenance fee over the term of the related license agreement
equal to approximately 18% of the license fee. The Company's maintenance
agreements typically obligate Pegasystems to provide up to a specified number
of hours of consulting and support. Organizations seeking additional
consulting and support services are generally charged an incremental fee
ranging between $90 and $170 per hour.
Customers
Pegasystems provides robust and scalable customer service management
solutions that can support thousands of concurrent users based in multiple
countries, speaking different languages, and working with different
currencies. A representative list of the Company's major customers and the
uses to which they apply the Company's products is shown below:
Advanta Services Corporation -- Credit card operations, including
telephony center, correspondence generation, dispute and chargeback
processing.
Banco Popular de Puerto Rico -- Retail service center automation, check
research and consumer loan inquiry and service.
Bank of America -- Retail/check customer service and research, automation
of branch support centers. Institutional funds transfer and foreign exchange
customer service for U.S. and European operations. Credit and debit card
correspondence, dispute and chargeback service processing.
Bank of Ireland -- Retail/check clearings and research, automation of
branch support centers, and exception/credit item review and verification.
Banque Nationale de Paris -- Institutional funds transfer service,
research and archive.
Barclays Bank -- Institutional funds transfer and foreign exchange
customer service for international operations. Credit card (merchant and
individual) service including telephony center, correspondence, dispute and
chargeback processing.
Cedel Bank -- Global custody and securities movement and control customer
service.
Citibank -- Global funds transfer and foreign exchange customer service.
Check-related customer service and research. Domestic MasterCard service
including image integration, correspondence, dispute and chargeback
processing.
Colonial Group -- Mutual fund customer service supporting telephony center
and correspondence.
Federal Reserve Banks of Boston and San Francisco -- Check processing
customer service, suspense ledger management, research, adjustment and
archive.
Fidelity Investments -- Mutual fund customer service supporting telephony
center and correspondence.
First National Bank of Chicago -- Retail/check customer service and
research. Wholesale banking, funds transfer, check, corporate lockbox and
interbank compensation service for global operations.
Franklin/Templeton -- Mutual fund customer service supporting telephony
center, correspondence and research.
Household Credit Services -- Credit card service including telephony
center, correspondence, dispute and chargeback processing. Private label
customer service for major retailers.
Marine Midland -- Institutional funds transfer customer service.
Mellon Bank -- Retail/check customer service, research and archive.
Wholesale, institutional, cash management, and corporate lockbox customer
service.
Prudential Securities -- "All-in-one" account support and service for
brokerage, credit, and clearing transactions.
Trans Union Corporation -- Credit bureau data-management customer service
for institutional customers and real estate property appraisal processing.
32
<PAGE>
Sales and Marketing
The Company markets its software and services primarily through a direct
sales force. As of April 30, 1996, the Company's sales force consisted of
four people located in the Company's Cambridge, Massachusetts headquarters,
and two people based in the Company's United Kingdom office. The Company
intends to increase substantially the size of its sales force, which will be
necessary if the Company is to achieve significant revenue growth in the
future. Competition for qualified sales personnel is intense and there can be
no assurance that the Company will be able to attract such personnel. If the
Company is unable to hire additional qualified sales personnel on a timely
basis, the Company's business, operating results and financial condition
could be materially and adversely affected. See "Risk Factors-- Dependence on
Key Personnel."
In the future, the Company may market and sell its products through value
added resellers (VARs) and systems integrators. There can be no assurance,
however, that the Company will be able to attract and retain VARs and system
integrators that will be able to market and sell the Company's products
effectively.
To support its sales force, the Company conducts marketing programs which
include trade shows, public relations and seminars. Sales leads are also
generated by the Company's consulting staff.
In 1993, 1994 and 1995, international sales represented 10%, 24% and 10%,
respectively, of the Company's total revenue. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Results of
Operations."
Product Development
Since its inception, the Company has made substantial investments in
product development. The Company believes that its future performance depends
on its ability to maintain and enhance its current products and develop new
products. The Company's product development priorities include (1) developing
the capability of the Company's systems to operate with additional third
party relational databases such as Oracle; (2) developing standard
Application Programming Interfaces that allow other client workstation and
server applications to interoperate with the Company's systems; and (3)
enhancing existing interfaces between the Company's systems and popular
applications such as e-mail, spreadsheets and Lotus Notes.
In 1993, 1994, 1995 and the three months ended March 31, 1996, the
Company's research and development expenses were approximately $3.8 million,
$5.4 million, $7.1 million and $1.6 million, respectively.
Competition
The customer service management software market is intensely competitive
and subject to rapid change. Competitors vary in size and in the scope and
breadth of the products and services offered. The Company encounters
competition primarily from internal information systems departments of
potential or current customers that develop custom software. The Company also
competes with: (1) software companies that target the customer interaction or
workflow markets such as Remedy Corporation, Scopus Technology, Inc. and The
Vantive Corporation; (2) companies that target specific service areas such as
DST Systems Inc. and First Data Corp.; and (3) professional services
organizations such as Andersen Consulting that develop custom software in
conjunction with rendering consulting services. In addition, the Company
expects additional competition from other established and emerging companies,
including Oracle Corporation and SAP AG, as the market continues to develop
and expand. Increased competition may result in price reductions, less
beneficial contract terms, reduced gross margins and loss of market share,
any of which could materially and adversely affect the Company's business,
operating results and financial condition.
The Company believes that the principal competitive factors affecting its
market include product features such as adaptability, scalability, ability to
integrate with other products and technologies, functionality and
ease-of-use, the timely development and introduction of new products and
product enhancements, as well as product reputation, quality, performance,
price, customer service and support, and the vendor's reputation. Although
the Company believes that its products currently compete favorably
33
<PAGE>
with regard to such factors, there can be no assurance that the Company can
maintain its competitive position against current and potential competitors.
Many of the Company's competitors have greater resources than the Company,
and may be able to respond more quickly and efficiently to new or emerging
technologies, programming languages or standards, or to changes in customer
requirements or preferences. Many of the Company's competitors can devote
greater managerial or financial resources than the Company can to develop,
promote and distribute customer service management software products and
provide related consulting, training and support services. There can be no
assurance that the Company's current or future competitors will not develop
products or services which may be superior in one or more respects to the
Company's or which may gain greater market acceptance. Some of the Company's
competitors have established or may establish cooperative arrangements or
strategic alliances among themselves or with third parties, thus enhancing
their abilities to compete with the Company. It is likely that new
competitors will emerge and rapidly acquire market share. There can be no
assurance that the Company will be able to compete successfully against
current or future competitors or that the competitive pressures faced by the
Company will not materially and adversely affect its business, operating
results and financial condition. See "Risk Factors--Intense Competition."
Intellectual Property and Licenses
The Company relies primarily on a combination of copyright, trademark and
trade secrets laws, as well as confidentiality agreements to protect its
proprietary rights. The Company also has one patent application pending in
the United States relating to the architecture of the Company's systems.
While the Company believes that its pending patent application relates to a
patentable invention, there can be no assurance that such patent application
or any future patent application will be granted or that any patent relied
upon by the Company in the future will not be challenged, invalidated or
circumvented or that rights granted thereunder will provide competitive
advantages to the Company. Moreover, despite the Company's efforts to protect
its proprietary rights, unauthorized parties may attempt to copy aspects of
the Company's products or to obtain the use of information that the Company
regards as proprietary. In addition, the laws of some foreign countries do
not protect the Company's proprietary rights to as great an extent as do the
laws of the United States. There can be no assurance that the Company's means
of protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar technology.
The Company is not aware that any of its products infringes the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim infringement by the Company with respect to
current or future products. The Company expects that software product
developers will increasingly be subject to infringement claims as the number
of products and competitors in the Company's industry segment grows and the
functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements,
if required, may not be available on terms acceptable to the Company or at
all, which could have a material adverse effect upon the Company's business,
operating results and financial condition.
From time to time, the Company licenses software from third parties for
use with its products. The Company believes that no such license agreement to
which it is presently a party is material and that if any such license
agreement were to terminate for any reason, the Company would be able to
obtain a license or otherwise acquire other comparable technology or software
on terms and on a timetable that would not be materially adverse to the
Company.
Employees
As of April 30, 1996, the Company had a total of 160 employees, of whom
135 were based in the United States and 25 were based in the United Kingdom.
Of the total, 73 were in research and development, 50 were in consulting and
customer support, 15 were in sales and marketing, six were in market strategy
and delivery and 16 were in administration and finance. The Company's future
performance depends in significant part upon the continued service of its key
technical, sales and marketing and senior management personnel and its
continuing ability to attract and retain highly qualified
34
<PAGE>
technical, sales and marketing and managerial personnel. Competition for such
personnel is intense and there can be no assurance that the Company will be
successful in attracting or retaining such personnel in the future. None of
the Company's employees is represented by a labor union or is subject to a
collective bargaining agreement. The Company has not experienced any work
stoppages and considers its relations with its employees to be good. See
"Risk Factors--Dependence on Key Personnel."
Facilities
Pegasystems' principal administrative, sales, marketing, support, and
research and development operations are located in a 35,000 square foot
leased facility in Cambridge, Massachusetts. The lease for this facility
expires in March 1997, subject to the Company's option to extend the term for
up to eight additional years. The Company also leases offices in New York,
New York, Chicago, Illinois, Dallas, Texas, San Francisco, California and
Reading, United Kingdom pursuant to leases expiring between March 1997 and
July 2006. The Company believes that additional or alternative space will be
available in the future on commercially reasonable terms as needed.
Legal Proceedings
The Company is not a party to any material pending litigation or other
legal proceedings.
35
<PAGE>
MANAGEMENT
Executive Officers and Directors
The executive officers and directors of the Company and their ages are as
follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Alan Trefler 40 President, Clerk and Director
Clifford R. Balzer 45 Vice President of Reengineering and Client
Services
Eugene A. Bonte 45 Vice President of Market Strategy and
Delivery
Joseph J. Friscia 41 Vice President of Sales and Marketing
Kenneth W. Olson 46 Vice President of Technical Development
Michael R. Pyle 41 Vice President of Applications Development
Ira Vishner 42 Vice President of Corporate Services,
Treasurer, Chief Financial Officer and
Director
Edward A. Maybury(1)(2) 56 Director
Edward B. Roberts(1) 60 Director
Leonard A. 43 Director
Schlesinger(2)
Thomas E. Swithenbank 51 Director
</TABLE>
- -------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Alan Trefler, 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.
Clifford R. Balzer joined the Company in December 1995 as Vice President
of Reengineering and Client Services. From January through November 1995, he
was a Senior Consultant for Arthur D. Little, a research and consulting firm.
From July 1990 through January 1995, Mr. Balzer was employed as a Director of
U.S. Consulting by DMR Group, Inc., an international consulting firm. Mr.
Balzer holds a B.A. from Kansas Wesleyan University and an M.B.A. from
Fordham University.
Eugene A. Bonte joined the Company in April 1996 as Vice President of
Market Strategy and Development. He was a founder of Object Design, Inc., a
developer of object database management systems and tools, where he served as
Vice President from August 1988 through September 1995 and was responsible,
at different times, for marketing, corporate development and product
management. Mr. Bonte holds a B.A. from The Johns Hopkins University and an
M.B.A. from the Harvard Business School.
Joseph J. Friscia joined the Company in 1984 to establish its New York
office and has served as Vice President of Sales and Marketing since 1987.
Prior to joining the Company, he worked as a money transfer operations
manager with Bankers Trust Company and J. Henry Schroder Bank and Trust
Company. Mr. Friscia holds a B.A. from Long Island University and an M.B.A.
from Adelphi University.
Kenneth W. Olson, a founder of the Company, has served as Vice President
of Technical Development since 1983. Prior thereto, he managed the
development of specialized computer systems for large-volume transaction
processing for TMI Systems Corporation. Mr. Olson holds an S.B. in Humanities
and Sciences from the Massachusetts Institute of Technology.
Michael R. Pyle joined the Company in 1985 as an application development
manager and has been Vice President of Applications Development since 1990.
Mr. Pyle holds a B.C.S. from the CS College in
36
<PAGE>
London. Prior to joining the Company, Mr. Pyle worked in Europe and the
United States developing and deploying large-scale communications systems for
the financial and commercial sectors.
Ira Vishner, a founder of the Company, has served as Vice President of
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.
Edward A. Maybury 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.
Edward B. Roberts has been a director of the Company since June 1996.
Since 1961, he has been a Professor of Management of Technologies 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.
Leonard A. Schlesinger 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 Limited, Inc., a clothing retailer, and
Borders Group, Inc., a book and movie store chain.
Thomas E. Swithenbank 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.
Classes of Directors
Following this offering, the Board of Directors will be divided into three
classes, each of whose members will serve for a staggered three-year term.
Messrs. Swithenbank and Trefler will serve in the class whose term expires in
1997; Messrs. Maybury and Schlesinger will serve in the class whose term
expires in 1998; and Messrs. Roberts and Vishner will serve in the class
whose term expires in 1999. Upon the expiration of the term of a class of
directors, directors within such class will be elected for a three-year term
at the annual meeting of stockholders in the year in which such term expires.
Executive Officers
Executive officers of the Company are elected by the Board of Directors on
an annual basis and serve until the next annual meeting of the Board of
Directors and until their successors have been duly elected and qualified.
There are no family relationships among any of the executive officers or
directors of the Company.
Board Committees
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 accountants for approval by the Board of Directors,
reviewing the scope, results and costs of the audit with the Company's
independent accountants and reviewing the financial statements of the
Company. Messrs. Maybury and Roberts are currently the members of the Audit
Committee. 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.
37
<PAGE>
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 will receive stock options under the
1996 Non-Employee Director Stock Option Plan. See "Management--Stock Plans."
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.
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 year
ended December 31, 1995 by (i) the Company's Chief Executive Officer and (ii)
the four most highly compensated other executive officers who received annual
compensation in excess of $100,000 (collectively, the "Named Executive
Officers"):
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation (1)
-----------------------
All Other
Name and Principal Position Salary Bonus Compensation
- ---------------------------------------------- ------- --------- -------------
<S> <C> <C> <C>
Alan Trefler, President $171,250 $23,545(2) --
Joseph J. Friscia, Vice President of Sales and
Marketing 124,583 24,154(3) --
Michael R. Pyle, Vice President of
Applications Development 102,083 23,044(2) --
Ira Vishner, Vice President of Corporate
Services, Treasurer and Chief Financial
Officer 100,500 16,892(2) $ 8,483(4)
Kenneth W. Olson, Vice President of Technical
Development 98,083 13,118(2) 30,000(4)
</TABLE>
- -------------
(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 1995.
(2) The amounts presented are bonuses earned between July 1994 and June 1995,
and paid in 1995. Bonuses, if any, for the period from July 1995 through
June 1996 have not yet been determined.
(3) The amount presented is bonus earned in 1995 and paid in February 1996.
Mr. Friscia earned a bonus of $66,650 in 1994, which was paid in February
1995.
(4) Represents payments in lieu of paid days off.
Option Grants
No stock options or stock appreciation rights ("SARs") were granted to any
of the Named Executive Officers during 1995.
38
<PAGE>
Year-End Option Table
The following table sets forth certain information concerning the number
and value of unexercised stock options held by each of the Named Executive
Officers as of December 31, 1995. No SARs or stock options were exercised
during 1995.
Year-End Option Values
<TABLE>
<CAPTION>
Number of Shares
Underlying Value of Unexercised
Unexercised Options In-the-Money Options at
at Year-End (1) Year-End (2)
--------------------------- -----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Alan Trefler -- -- -- --
Joseph J. Friscia 180,000 216,000 (3) $2,281,212 $2,737,454
Michael R. Pyle 151,200 172,800 (3) 1,916,218 2,189,963
Ira Vishner -- -- -- --
Kenneth W. Olson -- -- -- --
</TABLE>
- -------------
(1) The exercise price for each of the unexercised options included in the
above table is approximately $0.33 per share.
(2) There was no public trading market for the Common Stock as of December
31, 1995. Accordingly, as permitted by the rules of the Securities and
Exchange Commission, these values have been calculated on the basis of an
assumed market value of $13.00 per share, which is the mid-point of the
estimated initial public offering price range of $12.00 to $14.00 per
share.
(3) These options vest in equal installments on December 29, 1996, 1997, 1998
and 1999.
Merit Payment Program
The Company frequently awards merit payments to its employees as part of a
performance assessment process, under which employees may be awarded cash
payments based upon individual performance. All employees are eligible to
receive merit payments. Historically, the Company's supervisors have been
responsible for recommending the amount of merit payment for each of the
employees under their direct review. These recommendations are then reviewed
by the Board of Directors to promote consistency among departments. Awards of
merit payments are made at the discretion of supervisors and the Board of
Directors, based upon their opinions of employees' respective contributions
to the Company. Awards have generally been made in connection with annual
employee reviews.
Sales Compensation
In addition to base salary, the Company pays commissions to its sales
personnel based on the attainment of annual sales quotas, monthly fees
generated during the period from July 1 through June 30 of each year, and
cash received by the Company from new accounts within one year after the
initial signing of a contract with a customer.
Stock Plans
1994 Long-Term Incentive Plan
The Company's 1994 Long-Term Incentive Plan (the "1994 Plan") was adopted
by the Board of Directors on November 23, 1994, and approved by the
stockholders on April 21, 1995. The 1994 Plan provides for the issuance of a
maximum of 5,000,000 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 30, 1996, the Company had 161 employees eligible to participate in
the 1994 Plan and options to purchase 2,409,000 were outstanding. To date, no
restricted stock, SARs or long-term performance awards have been granted
under the 1994 Plan.
39
<PAGE>
The 1994 Plan is administered by the Compensation Committee of the Board
of Directors (the "Compensation Committee"). Subject to the provisions of the
1994 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 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. Generally,
an option is not transferable by the optionholder except by will or by the
laws of descent and distribution. No option may be exercised following
termination for cause or voluntary termination, or more than three months
following involuntary termination. Upon termination due to death, an option
is exercisable for a maximum of one year after such termination, and upon
termination due to disability, the option is exercisable for a maximum of two
years after such termination.
Federal Income Tax Consequences. The following is a brief description of
the federal income tax consequences related to options awarded under the 1994
Plan.
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
date of exercise and two years from 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 Company will not be entitled to a tax deduction upon the
exercise of an ISO.
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
and the Company will be entitled to a tax deduction of an equal amount. Any
additional gain will be treated as long-term capital gain if the shares are
held for more than one year prior to the sale and as short-term capital gain
if the shares are held for a shorter period. If the participant sells the
stock for less than the option price, the participant will recognize a
capital loss equal to the difference between the sale price and the option
price. The loss will be a long- term capital loss if the shares are held for
more than one year prior to the sale and short-term if the shares are held
for a shorter period.
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 or she 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.
40
<PAGE>
1996 Non-Employee Director Stock Option Plan
The 1996 Non-Employee Director Stock Option Plan (the "Director Plan") was
adopted by the Board of Directors on May 13, 1996 and approved by the
stockholders on June 26, 1996. The Director Plan provides for the grant of
options for the purchase of up to 250,000 shares of Common Stock of the
Company. To date, no options have been granted under the Director Plan.
The Director Plan is administered by the Compensation Committee and
provides that each person who becomes a director of the Company after May 13,
1996, and who is not also an employee of the Company will receive upon
initial election to the Board of Directors an option to purchase 30,000
shares of Common Stock vesting in equal annual installments over five years.
The exercise price for all options granted under the Director Plan will be
equal to the market price of the Common Stock as of the date of grant.
Options may not be assigned or transferred except by will or by the laws of
descent and distribution and are exercisable, only to the extent vested,
within 90 days after the optionee ceases to serve as a director of the
Company (except that if a director dies or becomes disabled while he or she
is serving as a director of the Company, the option is exercisable until the
earlier of the scheduled expiration date of the option or one year from the
date of death or disability).
Federal Income Tax Consequences. All options granted under the Director
Plan are NSOs. See the discussion concerning the 1994 Plan above for a
description of the federal income tax consequences of NSOs.
1996 Employee Stock Purchase Plan
The 1996 Employee Stock Purchase Plan (the "Stock Purchase Plan") was
adopted by the Board of Directors on May 13, 1996 and approved by the
stockholders on June 26, 1996. An aggregate of 500,000 shares of Common Stock
are reserved for issuance pursuant to this plan.
The Stock Purchase Plan is administered by the Compensation Committee. All
employees of the Company whose customary employment is in excess of 20 hours
per week and more than five months per year, other than those employees who
own 5% or more of the stock of the Company, are eligible to participate in
the Stock Purchase Plan. As of April 30, 1996, approximately 135 of the
Company's employees would have been eligible to participate in the Stock
Purchase Plan. The Stock Purchase Plan will be implemented by one or more
offerings of such duration as the Compensation Committee may determine,
provided that no offering period may be longer than 27 months. An eligible
employee participating in an offering will be able to purchase Common Stock
at a price equal to the lesser of: (i) 85% of its fair market value on the
date the right was granted, or (ii) 85% of its fair market value on the date
the right was exercised. Payment for Common Stock purchased under the Stock
Purchase Plan will be through regular payroll deduction or lump sum cash
payment, or both, as determined by the Compensation Committee. The maximum
value of Common Stock an employee may purchase during an offering period is
10% of the employee's base salary during such period, calculated on the basis
of the employee's compensation rate on the date the employee elects to
participate in that offering.
To date, there have been no offerings under the Stock Purchase Plan and no
shares of Common Stock have been issued thereunder.
Federal Income Tax Consequences. The Stock Purchase Plan is intended to
qualify as an "employee stock purchase plan" as defined in Section 423 of the
Internal Revenue Code of 1986, as amended (the "Code") which provides that an
employee will not realize any federal tax consequences when such employee
joins the Stock Purchase Plan, or when an offering ends and such employee
receives shares of the Company's Common Stock. An employee must, however,
recognize income or loss on the difference, if any, between the price at
which he or she sells the shares and the price he or she paid for them. If
any employee has owned shares purchased under the plan for more than one
year, disposes of them at least two years after the date the offering
commenced, and the market price of the shares on the date of sale is equal to
or less than the purchase price under the Stock Purchase Plan, he or she will
recognize a long-term capital loss in the amount equal to the price paid over
the sale price. If an employee has owned shares for more than one year, more
than two years has elapsed from the date the offering commenced, and the
market price of the shares on the date of sale is higher than the purchase
price under the Stock Purchase Plan, the employee must recognize ordinary
income in an amount equal to the lesser of (i) the fair market value of the
shares on the day the offering
41
<PAGE>
commenced over the price paid, or (ii) the excess of the amount actually
received for the shares over the purchase price. Any further gain would be
treated as long-term capital gain.
If an employee sells shares purchased under the Stock Purchase Plan prior
to holding them for more than one year or prior to two years from the date
the offering commenced, he or she must recognize ordinary income in the
amount of the difference between the price he or she paid and the market
price of the shares on the date of purchase and the Company will receive an
expense deduction for the same amount. The employee will recognize a capital
gain or loss on the difference between the sale price and the market price on
the date of purchase. The Company will not be entitled to a tax deduction
upon either the purchase or sale of shares under the Stock Purchase Plan if
the holding period requirements set forth above are met. The Stock Purchase
Plan is not qualified under Section 401(a) of the Code.
401(k) Plan
In December 1989, the Company adopted a tax-qualified employee savings and
retirement plan (the "401(k) Plan") covering all of the Company's domestic
employees upon commencement of employment and attainment of the age of 18.
Participants may elect to contribute to the 401(k) Plan up to the lesser of
the statutorily prescribed annual limit ($9,500 in 1996) or 20% of their
total pre-tax compensation. The 401(k) Plan permits, but does not require,
the Company to make additional matching contributions on behalf of
participants. The 401(k) Plan is intended to qualify under Section 401 of the
Code so that contributions by employees or by the Company to the 401(k) Plan,
and income earned on plan contributions, are not taxable to employees until
withdrawn from the 401(k) Plan, and so that contributions by the Company, if
any, will be deductible by the Company when made. Participants are fully
vested in their deferred salary contributions, and Company contributions, if
any, vest 20% after three years and an additional 20% on each anniversary
thereof. The administrator of the 401(k) Plan, at the direction of each
participant, invests the plan assets of such participant among various
investment options. Participants have the option of obtaining loans from the
401(k) Plan secured by their account balances.
Vacation Policy
The Company generally provides its employees with a flexible vacation and
paid time off policy. This policy provides that employees are given one block
of paid days off for all uses, including vacation, sick days, personal days
and holidays. The number of paid days off given to each employee per year
varies according to each employee's length of service with the Company.
Unused paid days off are carried over from year to year. Employees are
generally entitled to payment in cash for the value of unused paid days off.
The Company retains the right to repurchase paid days off in excess of thirty
at the end of any quarter from employees who have accumulated more than
thirty paid days off.
Compensation Committee Interlocks and Insider Participation
In 1995, 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. The Company recently established a Compensation Committee of its
Board of Directors, which currently consists of Messrs. Maybury and
Schlesinger. 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 as
a director of the Company.
CERTAIN TRANSACTIONS
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.
The Company borrowed $230,000 from its President, Alan Trefler, in order
to increase the Company's working capital and to fund operations. This loan,
which was evidenced by a note renewed in January 1993 and bore interest at a
rate of 8.5% per annum, was repaid in full by the Company in 1995.
42
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of May 13, 1996, and as adjusted
for the sale of the shares of Common Stock offered hereby, by: (i) each
person who is known by the Company to own beneficially more than 5% of the
Common Stock, (ii) each director and Named Executive Officer of the Company,
(iii) all directors and executive officers of the Company as a group, and
(iv) each Selling Stockholder. Unless otherwise indicated below, to the
knowledge of the Company, 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.
<TABLE>
<CAPTION>
Shares to be
Shares Beneficially Beneficially Owned
Owned Prior to After Offering (1)
Offering (1) (2)
------------------- ---------------------
Number
of
Number of Shares Number of
Name Shares Percent Offered Shares Percent
- -------------------------- ---------- ------- ------- ---------- --------
<S> <C> <C> <C> <C> <C>
Alan Trefler 22,488,000 95.7% 385,900 22,102,100 84.1%
Joseph J. Friscia (3) 234,000 * 90,000 144,000 *
Michael R. Pyle (4) 151,200 * 64,800 86,400 *
Ira Vishner 346,500 1.5 69,300 277,200 1.1
Kenneth W. Olson 450,000 1.9 90,000 360,000 1.4
Edward A. Maybury -- -- -- -- --
Edward B. Roberts -- -- -- -- --
Leonard A. Schlesinger -- -- -- -- --
Thomas E. Swithenbank -- -- -- -- --
All directors and
executive officers as a
group (11 persons) (5) 23,669,700 99.4 700,000 22,969,700 86.6
</TABLE>
- -------------
* Less than 1% of the outstanding Common Stock.
(1) The number of shares of Common Stock deemed outstanding prior to the
offering includes (i) 23,490,000 shares of Common Stock outstanding as of
May 13, 1996 and (ii) shares issuable pursuant to outstanding options
held by the respective person or group which are currently exercisable or
which will be exercisable within 60 days of May 13, 1996, as set forth
below. The number of shares of Common Stock deemed outstanding after this
offering includes (i) 2,700,000 shares which are being offered for sale
by the Company in this offering and (ii) 100,800 shares issuable upon
exercise of stock options to be exercised immediately prior to the
closing of this offering.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) Shares beneficially owned prior to offering includes 180,000 shares of
Common Stock subject to stock options exercisable within 60 days of May
13, 1996, 36,000 of which shares will be issued upon the exercise of
options immediately prior to the closing of this offering; shares to be
beneficially owned after offering consists solely of shares of Common
Stock subject to stock options exercisable within 60 days of May 13,
1996.
(4) Consists solely of shares of Common Stock subject to stock options
exercisable within 60 days of May 13, 1996, 64,800 of which shares will
be issued upon the exercise of options immediately prior to the closing
of this offering.
(5) Shares beneficially owned prior to offering includes 331,200 shares of
Common Stock subject to stock options exercisable within 60 days of May
13, 1996, 100,800 of which shares will be issued upon the exercise of
options immediately prior to the closing of this offering; shares to be
beneficially owned after offering includes 230,400 shares of Common Stock
subject to stock options exercisable within 60 days of May 13, 1996.
43
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Effective upon the filing of the Restated Articles of Organization (the
"Restated Articles") prior to this offering, the authorized capital stock of
the Company will consist of 45,000,000 shares of Common Stock, $.01 par value
per share, and 1,000,000 shares of preferred stock, $.01 par value per share
(the "Preferred Stock"), which may be issued in one or more series.
Common Stock
As of May 13, 1996, there were 23,490,000 shares of Common Stock
outstanding and held of record by twelve stockholders. Based upon the number
of shares outstanding as of that date and giving effect to (i) the issuance
of the 2,700,000 shares of Common Stock offered by the Company hereby, and
(ii) the exercise of options to purchase 100,800 shares of Common Stock
anticipated to occur immediately prior to the closing of this offering, there
will be 26,290,800 shares of Common Stock outstanding upon the closing of
this offering.
Holders of Common Stock are entitled to one vote for each share held on
all matters submitted to a vote of stockholders and do not have cumulative
voting rights. Accordingly, holders of a majority of the shares of Common
Stock entitled to vote in any election of directors may elect all of the
directors standing for election. Holders of Common Stock are entitled to
receive ratably such dividends, if any, as may be declared by the Board of
Directors out of funds legally available therefor, subject to any
preferential dividend rights of outstanding Preferred Stock. Upon the
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to receive ratably the net assets of the Company available
after the payment of all debts and other liabilities and subject to the prior
rights of any outstanding Preferred Stock. Holders of the Common Stock have
no preemptive, subscription, redemption or conversion rights. The outstanding
shares of Common Stock are, and the shares offered by the Company in this
offering will be, when issued and paid for, fully paid and nonassessable. The
rights, preferences and privileges of holders of Common Stock are subject to,
and may be adversely affected by, the rights of the holders of shares of any
series of Preferred Stock which the Company may designate and issue in the
future. Upon the closing of this offering, there will be no shares of
Preferred Stock outstanding.
Preferred Stock
Upon filing of the Restated Articles, the Board of Directors will be
authorized, subject to certain limitations prescribed by law, without further
stockholder approval, to issue from time to time up to an aggregate of
1,000,000 shares of Preferred Stock in one or more series and to fix or alter
the designations, preferences, rights and any qualifications, limitations or
restrictions of the shares of each such series thereof, including the
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption (including sinking fund provisions), redemption price or prices,
liquidation preferences and the number of shares constituting any series or
designations of such series. The issuance of Preferred Stock may have the
effect of delaying, deferring or preventing a change of control of the
Company. The Company has no present plans to issue any shares of Preferred
Stock. See "Risk Factors--Potential Adverse Effects of Anti-Takeover
Provisions; Possible Issuance of Preferred Stock."
Massachusetts Law and Certain Provisions of the Company's Restated Articles
of Organization and Restated By-Laws
Following this offering, the Company expects that it will have more than
200 stockholders, thus making it subject to Chapter 110F of the Massachusetts
General Laws, an anti-takeover law. In general, this statute prohibits a
publicly held Massachusetts corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
after the date of the transaction in which the person becomes an interested
stockholder, unless (i) the interested stockholder obtains the approval of
the Board of Directors prior to becoming an interested stockholder, (ii) the
interested stockholder acquires 90% of the outstanding voting stock of the
corporation (excluding shares held by certain affiliates of the corporation)
at the time it becomes an interested stockholder, or (iii) the business
combination is approved by both the Board of Directors and the holders of
two-thirds of the outstanding voting stock of the corporation (excluding
shares held by the interested stockholder). An "interested stockholder" is a
person who, together with affiliates and associates, owns (or at any time
within the prior three years did own)
44
<PAGE>
5% or more of the outstanding voting stock of the corporation. A "business
combination" includes a merger, a stock or asset sale, and certain other
transactions resulting in a financial benefit to the interested stockholder.
The Company's Restated Articles and the Restated By-Laws (the "Restated
By-Laws") provide for a classified board of directors consisting of three
classes as nearly equal in size as possible. See "Management--Executive
Officers and Directors." In addition, the Restated Articles and Restated
By-Laws provide that directors may be removed only for cause by the
affirmative vote of the holders of a majority of the shares issued
outstanding and entitled to vote. Under the Restated Articles and Restated
By-Laws, any vacancy, however occurring, including a vacancy resulting from
an enlargement of the Board, may only be filled by a vote of a majority of
the directors then in office. The classification of the Board of Directors
and the limitations on the removal of directors and filling of vacancies
could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from acquiring, control of the
Company.
The Restated By-Laws include a provision excluding the Company from the
applicability of Massachusetts General Laws Chapter 110D, entitled
"Regulation of Control Share Acquisitions". In general, this statute provides
that any stockholder of a corporation subject to this statute who acquires
20% or more of the outstanding voting stock of a corporation may not vote
such stock unless the stockholders of the corporation so authorize. The Board
of Directors may amend the Company's Restated By-Laws at any time to subject
the Company to this statute prospectively.
The Restated By-Laws also require that a stockholder seeking to have any
business conducted at a meeting of stockholders give notice to the Company
not less than 90 days prior to the scheduled meeting. The notice from the
stockholder must describe the proposed business to be brought before the
meeting and include information about the stockholder making the proposal,
any beneficial owner on whose behalf the proposal is made and any other
stockholder known to be supporting the proposal. The Restated By- Laws
further provide that a special stockholders meeting may be called by the
president or the Board of Directors or upon the request of stockholders
holding at least 40% of the voting power of the Company. These provisions may
discourage another person or entity from making a tender offer for the
Company's Common Stock, because such person or entity, even if it acquired a
majority of the outstanding shares, would be able to take action as a
stockholder (such as electing new directors or approving a merger) only at a
duly called stockholders meeting.
The Restated By-Laws provide that the directors, officers, employees and
certain other agents of the Company shall be indemnified by the Company to
the fullest extent authorized by Massachusetts law, as it now exists or may
in the future be amended, against all expenses and liabilities reasonably
incurred in connection with service for or on behalf of the Company. In
addition, the Restated Articles provide that the directors of the Company
will not be personally liable for monetary damages to the Company for
breaches of their fiduciary duty as directors, unless they violated their
duty of loyalty to the Company or its stockholders, acted in bad faith,
knowingly or intentionally violated the law, authorized illegal dividends or
redemptions or derived an improper personal benefit from their action as
directors.
Transfer Agent and Registrar
The transfer agent and registrar for the Company's Common Stock is Fleet
National Bank.
45
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of this offering, the Company will have an aggregate of
26,290,800 shares of Common Stock outstanding, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options to
purchase Common Stock other than the options to purchase 100,800 shares to be
exercised immediately prior to the closing of this offering by certain
Selling Stockholders. Of these shares, the 3,400,000 shares sold in this
offering are freely tradable without restriction or further registration
under the Securities Act of 1933, as amended (the "Securities Act"), except
that any shares held by "affiliates" of the Company, as that term is defined
in Rule 144 under the Securities Act ("Rule 144"), may generally only be sold
in compliance with the limitations of Rule 144 described below.
The remaining 22,890,800 shares of Common Stock are deemed "Restricted
Securities" as defined under Rule 144. Restricted Securities may be sold in
the public market only if registered or if they qualify for an exemption from
registration under Rules 144, 144(k) or 701 promulgated under the Securities
Act, which rules are summarized below. Subject to the executive officers and
directors of the Company entering into lock-up agreements described below and
the provisions of Rules 144, 144(k) and 701, additional shares will be
available for sale in the public market (subject in the case of shares held
by affiliates to compliance with certain volume restrictions) as follows: (i)
12,000 shares will be available for immediate sale in the public market on
the date of this Prospectus, (ii) 139,500 shares will be eligible for sale 90
days after the date of this Prospectus and (iii) 22,739,300 shares will be
eligible for sale upon the expiration of lock-up agreements 180 days after
the date of this Prospectus.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially
owned shares for at least two years is entitled to sell, within any
three-month period commencing 90 days after the date of this Prospectus, a
number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock (approximately 262,000 shares immediately
after this offering) or (ii) the average weekly trading volume in the Common
Stock during the four calendar weeks preceding the date on which notice of
such sale is filed, subject to certain restrictions. In addition, a person
who is not deemed to have been an affiliate of the Company at any time during
the 90 days preceding a sale and who has beneficially owned the shares
proposed to be sold for at least three years would be entitled to sell such
shares under Rule 144(k) without regard to the requirements described above.
To the extent that shares were acquired from an affiliate of the Company,
such stockholder's holding period for the purpose of effecting a sale under
Rule 144 commences on the date of transfer from the affiliate. The Securities
and Exchange Commission has recently proposed to reduce the two- and
three-year holding periods under Rule 144 to one and two years, respectively.
If enacted, such modifications will have material effect on the timing of
when certain shares of Common Stock become eligible for resale.
Rule 701 promulgated under the Securities Act provides that shares of
Common Stock acquired pursuant to written plans such as the 1994 Plan may be
resold by persons other than affiliates, beginning 90 days after the date of
this Prospectus, subject only to the manner of sale provisions of Rule 144,
and by affiliates, beginning 90 days after the date of this Prospectus,
subject to all provisions of Rule 144 except its two-year minimum holding
period.
Shortly after the date of this Prospectus, the Company intends to file a
Form S-8 registration statement under the Securities Act to register all
shares of Common Stock issuable under the 1994 Plan, the Director Plan and
the Stock Purchase Plan (collectively, the "Stock Plans"). See
"Management--Stock Plans." Such registration statement is expected to become
effective immediately upon filing, and shares covered by that registration
statement will thereupon be eligible for sale in the public markets, subject
to Rule 144 limitations applicable to affiliates.
Prior to this offering, there has not been any public market for the
Common Stock of the Company, and no prediction can be made as to the effect,
if any, that market sales of shares of Common Stock or the availability of
shares for sale will have on the market price of the Common Stock prevailing
from time to time. Nevertheless, sales of substantial amounts of Common Stock
in the public market could adversely affect the market price of the Common
Stock and could impair the Company's future ability to raise capital through
the sale of its equity securities.
46
<PAGE>
Except to the extent they have agreed to sell shares in the offering, all
directors and officers, who hold in the aggregate 23,338,500 shares of Common
Stock and options to purchase 906,000 shares of Common Stock, have agreed,
pursuant to agreements with the representatives of the Underwriters, that
they will not, without the prior written consent of the representatives of
the Underwriters, sell or otherwise dispose of any shares of Common Stock or
options to acquire shares of Common Stock during the 180-day period following
the date of this Prospectus.
The Company has agreed not to sell or otherwise dispose of any shares of
Common Stock during the 180-day period following the date of the Prospectus,
except the Company may issue, and grant options to purchase, shares of Common
Stock under the Stock Plans. In addition, the Company may issue shares of
Common Stock in connection with any acquisition of another company if the
terms of such issuance provide that such Common Stock shall not be resold
prior to the expiration of the 180-day period referenced in the preceding
sentence.
LEGAL MATTERS
The validity of the shares of Common Stock offered by this Prospectus will
be passed upon for the Company and the Selling Stockholders by Choate, Hall &
Stewart, Boston, Massachusetts. Certain legal matters in connection with the
offering will be passed upon for the Underwriters by Hale and Dorr, Boston,
Massachusetts.
EXPERTS
The consolidated financial statements of Pegasystems Inc., at December 31,
1994 and 1995 and for each of the three years in the period ended December
31, 1995, appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein and are included in reliance upon
such report given upon the authority of such firm as experts in accounting
and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act
with respect to the shares of Common Stock offered hereby. As permitted by
the rules and regulations of the Commission, this Prospectus omits certain
information contained in the Registration Statement. For further information
with respect to the Company and the Common Stock offered hereby, reference is
hereby made to the Registration Statement and to the exhibits and schedules
filed therewith. Statements contained in this Prospectus as to the contents
of any agreement or other document filed as an exhibit to the Registration
Statement are not necessarily complete, and in each instance reference is
made to the copy of such agreement filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. The Registration Statement, including the exhibits and schedules
filed therewith, may be inspected without charge at the Commission's Public
Reference Room, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Commission's regional offices located at Seven World Trade
Center, 13th Floor, New York, New York 10048 and at Northwest Atrium Center,
Suite 1400, 500 West Madison Street, Chicago, Illinois 60661. Copies of the
Registration Statement may be obtained from the Commission from its Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, upon
payment of prescribed fees.
The Company intends to distribute to its stockholders annual reports
containing financial statements audited by its independent accountants and
will make available copies of quarterly reports for the first three quarters
of each fiscal year containing unaudited financial statements.
47
<PAGE>
PEGASYSTEMS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and
as of March 31, 1996 (unaudited) F-3
Consolidated Statements of Income for the years ended December 31, 1993, 1994 and
1995 and for the three months ended March 31, 1995 and 1996 (unaudited) F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1993,
1994 and 1995 and for the three months ended March 31, 1996 (unaudited) F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994
and 1995 and for the three months ended March 31, 1995 and 1996 (unaudited) F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Pegasystems Inc.
We have audited the accompanying consolidated balance sheets of
Pegasystems Inc. as of December 31, 1994 and 1995 and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Pegasystems Inc. at December 31, 1994 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts
May 6, 1996, except for Notes 10 and 11,
as to which the date is July 10, 1996.
F-2
<PAGE>
PEGASYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------
March 31,
1994 1995 1996
---- ---- ---------
(unaudited)
(in thousands except
share-related data)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 456 $ 511 $ 2,644
Trade and installment accounts receivable, net of
allowance for doubtful accounts of $0 and $434
at December 31, 1994 and 1995, respectively,
and $434 at March 31, 1996 8,315 8,896 9,628
Prepaid expenses and other assets 204 425 342
------- ------- -------
Total current assets 8,975 9,832 12,614
Long-term license installments, net 9,135 13,399 11,444
Equipment and improvements, net 1,564 2,172 2,143
Software development costs, net 1,113 473 354
------- ------- -------
Total assets $20,787 $25,876 $26,555
======= ======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 1,991 $ 1,747 $ 970
Deferred revenue 139 114 803
Current portion of long-term debt 378 782 730
Deferred income taxes 1,976 2,796 3,159
Note payable to stockholder 50 -- --
------- ------- -------
Total current liabilities 4,534 5,439 5,662
Deferred income taxes 3,931 4,947 5,085
Long-term debt 450 816 672
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized; no shares issued and outstanding -- -- --
Common stock, $.01 par value, 45,000,000 shares
authorized, 23,490,000 shares issued and
outstanding 235 235 235
Additional paid-in-capital 15 15 15
Retained earnings 11,644 14,522 15,008
Cumulative foreign currency translation
adjustment (22) (98) (122)
------- ------- -------
11,872 14,674 15,136
------- ------- -------
Total liabilities and stockholders' equity $20,787 $25,876 $26,555
======= ======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
PEGASYSTEMS INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
----------------------------------- -----------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ----------
(unaudited)
(in thousands except share-related data)
<S> <C> <C> <C> <C> <C>
Revenue
Software license $6,448 $9,662 $13,528 $2,209 $2,520
Services 3,764 6,601 8,719 1,796 2,421
---------- ---------- ---------- --------- -----------
Total Revenue 10,212 16,263 22,247 4,005 4,941
Cost of Revenue
Cost of software license 1,242 1,075 635 191 118
Cost of services 2,227 3,791 6,161 1,249 1,405
---------- ---------- ---------- --------- -----------
Total cost of revenue 3,469 4,866 6,796 1,440 1,523
---------- ---------- ---------- --------- -----------
Gross profit 6,743 11,397 15,451 2,565 3,418
Operating expenses
Research and development 3,766 5,440 7,061 1,438 1,602
Sales and marketing 1,350 2,629 3,592 797 972
General and administrative 834 1,092 1,541 327 388
---------- ---------- ---------- --------- -----------
Total operating expenses 5,950 9,161 12,194 2,562 2,962
---------- ---------- ---------- --------- -----------
Income from operations 793 2,236 3,257 3 456
License interest income 1,305 1,457 1,486 370 368
Other interest income 27 21 16 6 12
Interest expense (32) (56) (118) (18) (39)
---------- ---------- ---------- --------- -----------
Income before provision for
income taxes 2,093 3,658 4,641 361 797
Provision for income taxes 860 1,465 1,763 137 311
---------- ---------- ---------- --------- -----------
Net income $1,233 $2,193 $2,878 $224 $486
========== ========== ========== ========= ===========
Net income per common and
common equivalent share $.05 $.09 $.11 $.01 $.02
========== ========== ========== ========= ===========
Weighted average number of
common and common
equivalent shares
outstanding 24,231,000 24,102,000 25,551,000 25,600,000 25,505,000
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
PEGASYSTEMS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
------------------
Cumulative
Foreign
Number Additional Currency Total
of Paid-in Retained Translation Stockholders'
Shares Amount Capital Earnings Adjustment Equity
--------- ------ -------- -------- ---------- -------------
(in thousands except for share-related data)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 22,500,000 $225 -- $ 8,218 -- $ 8,443
Exercise of stock options 117,000 1 -- -- -- 1
Net income -- -- -- 1,233 -- 1,233
---------- ---- --- ------- ----- -------
Balance at December 31, 1993 22,617,000 226 -- 9,451 -- 9,677
Exercise of stock options 873,000 9 $15 -- -- 24
Foreign currency translation
adjustment -- -- -- -- $ (22) (22)
Net income -- -- -- 2,193 -- 2,193
---------- ---- --- ------- ----- -------
Balance at December 31, 1994 23,490,000 235 15 11,644 (22) 11,872
Foreign currency translation
adjustment -- -- -- -- (76) (76)
Net income -- -- -- 2,878 -- 2,878
---------- ---- --- ------- ----- -------
Balance at December 31, 1995 23,490,000 235 15 14,522 (98) 14,674
Foreign currency translation
adjustment -- -- -- -- (24) (24)
Net income (unaudited) -- -- -- 486 -- 486
---------- ---- --- ------- ----- -------
Balance at March 31, 1996
(unaudited) 23,490,000 $235 $15 $15,008 $(122) $15,136
========== ==== === ======= ===== =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
PEGASYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months
Ended
Year Ended December 31, March 31,
-------------------------- ----------------
1993 1994 1995 1995 1996
------ ------ ------ ----- -------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Operating activities
Net income $ 1,233 $ 2,193 $ 2,878 $ 224 $ 486
Adjustments to reconcile net income to net
cash provided (used) by operating
activities:
Provision for deferred income taxes 629 961 1,836 103 501
Depreciation and amortization 1,536 1,511 1,455 309 369
Increase (decrease) in allowance for
doubtful accounts 322 (340) 434
Change in operating assets and liabilities:
Decrease (increase) in trade and
installment accounts receivable (2,145) (3,648) (5,279) 722 1,223
Decrease (increase) in prepaid expenses
and other assets (121) (16) (221) (41) 83
Decrease (increase) in inventory (215) 215 -- -- --
Increase (decrease) in accounts payable
and accrued expenses 8 971 (244) (623) (777)
Increase (decrease) in deferred revenue 333 (336) (25) 416 689
------- ------- ------- ------ ------
Net cash provided by operating
activities 1,580 1,511 834 1,110 2,574
Investing activities
Purchase of equipment and improvements (888) (1,131) (1,423) (370) (221)
Software development costs (1,060) (297) -- -- --
------- ------- ------- ------ ------
Net cash used in investing activities (1,948) (1,428) (1,423) (370) (221)
Financing activities
Repayment of note payable to shareholder -- (180) (50) -- --
Proceeds from issuance of long-term debt 710 380 1,345 -- --
Repayments of long-term debt (243) (263) (575) (95) (196)
Exercise of stock options -- 23 -- -- --
------- ------- ------- ------ ------
Net cash provided (used) by financing
activities 467 (40) 720 (95) (196)
Effect of exchange rate on cash -- (22) (76) (5) (24)
------- ------- ------- ------ ------
Net increase in cash 99 21 55 640 2,133
Cash and equivalents at beginning of year 336 435 456 456 511
------- ------- ------- ------ ------
Cash and equivalents at end of period $ 435 $ 456 $ 511 $1,096 $2,644
======= ======= ======= ====== ======
Supplemental Disclosure of Cash Flow
Information:
Cash paid during period:
Interest $ 32 $ 56 $ 119 $ 18 $ 39
======= ======= ======= ====== ======
Income taxes $ 553 $ 135 $ 315 $ 92 $ 13
======= ======= ======= ====== ======
</TABLE>
See accompanying notes.
F-6
<PAGE>
PEGASYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
1. SIGNIFICANT ACCOUNTING POLICIES
Business
Pegasystems Inc. (the Company) was incorporated on April 21, 1983, and
develops customer service management software used by large,
transaction-intensive organizations to automate and manage their customer
interactions. Customers of the Company include large banks and credit card
processors and mutual fund companies. The Company also offers consulting,
training and maintenance and support services to facilitate the installation
and use of its solutions.
The environment of rapid technological change and intense competition
which is characteristic of the software development industry results in
frequent new products and evolving industry standards. The Company's
continued success depends upon its ability to enhance current products and
develop new products on a timely basis which keep pace with the changes in
technology and competitors' innovations.
International revenue is subject to various risks including imposition of
government controls, export license requirements, political and economic
conditions and instability, trade restrictions, currency fluctuations,
changes in taxes, difficulties in staffing and managing international
operations, and high local wage scales and other operating costs and
expenses.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Pegasystems Limited. All intercompany
accounts and transactions have been eliminated in consolidation.
Foreign Currency Translation
The translation of assets and liabilities of the Company's foreign
subsidiary is made at year-end rates of exchange, while revenue and expense
accounts are recorded at the average rates of exchange. The resulting
translation adjustments are excluded from net income and are charged or
credited to "Cumulative foreign currency translation adjustment" included as
part of stockholder's equity. Realized and unrealized exchange gains or
losses from transaction adjustments are reflected in operations and are not
material.
Revenue Recognition
The Company recognizes revenue in accordance with Statement of Position
91-1, Software Revenue Recognition, issued by the American Institute of
Certified Public Accountants. Specifically, revenue from software licenses is
recognized upon product acceptance pursuant to noncancelable license
agreements, and is based on management's assessment that the collectibility
risk on the long-term license installments is low. Upon acceptance, the
Company has no significant vendor obligations. The Company accrues the
estimated cost of warranty and product returns in the period in which product
revenue is recognized; historically these amounts have not been material. In
the case of license renewals, revenue is recognized upon execution of the
renewal license agreement or if, as is generally the case, renewal is
automatic unless the customer gives notice of termination, at the expiration
of the period during which the customer has the right to terminate.
Maintenance fees are recognized ratably over the term of the maintenance
agreement. The Company recognizes implementation as well as consulting and
training fees as the services are provided.
Software license revenue represents the present value of future payments
under noncancelable license agreements which provide for payment in
installments typically over a five-year period. A portion of the revenue from
each agreement is recognized as interest income over the term of the
agreement.
F-7
<PAGE>
PEGASYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
The discount rate in effect for 1993, 1994, 1995 and for the three months
ended March 31, 1996 was 7%. The trade and installment accounts receivable
recorded on the balance sheet are net of $3,477,000, $3,937,000 and
$3,887,000 as of December 31, 1994 and 1995, and March 31, 1996,
respectively, which represents the imputed interest portion of future
payments due under the Company's license agreements. Deferred revenue
represents payments from customers, primarily for maintenance services, which
are recognized as revenue as the related services are performed.
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximates market,
and consist of short-term, highly liquid investments with original maturities
of less than three months.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentration of credit risk consist primarily of trade accounts receivable
and long-term license installments. The Company records long-term license
installments in accordance with its revenue recognition policy which results
in receivables from customers, primarily large financial service
organizations with strong credit ratings.
Interim Financial Statements
The consolidated balance sheet at March 31, 1996, the consolidated
statements of income and consolidated statements of cash flows for the three
months ended March 31, 1995 and 1996 and the consolidated statement of
stockholders' equity for the three months ended March 31, 1996 are unaudited,
but, in the opinion of management, include all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation of results
for these interim periods. The results of operations for the three months
ended March 31, 1996 are not necessarily indicative of results to be expected
for the entire year.
Equipment and Improvements
Equipment and improvements are recorded at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets
which are three years for equipment and five years for furniture and
fixtures. Leasehold improvements are amortized over the life of the lease.
Software Development Costs
In compliance with Statement of Financial Accounting Standards (SFAS) No.
86, Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed, certain software development costs are capitalized in the
accompanying consolidated balance sheets. Capitalization of software
development costs begins upon the establishment of technological feasibility,
defined by the Company as a working model or an operative version of the
computer software product that is completed in the same language and is
capable of running on all of the platforms as the product to be ultimately
marketed. During 1994, the Company capitalized $297,000 of software costs. No
costs were capitalized during 1995 or the three months ended March 31, 1996.
Amortization of capitalized software development cost is included in costs
of software license revenue and is provided on a straight-line basis of two
years, which approximates the estimated useful life of the software as it
relates to the Company's sales. The straight line amortization is not
materially different from the amortization computed using the current period
revenues as a percent of total expected product revenues. Total amortization
expense charged to operations was $1,242,000, $1,075,000, $635,000 and
$118,000 during 1993, 1994 and 1995 and the three months ended March 31,
1996, respectively.
F-8
<PAGE>
PEGASYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Net Income Per Share
Net income per common and common equivalent share is computed using the
weighted average number of common and dilutive common equivalent shares
outstanding during each period, assuming the exercise of stock options into
common stock under the treasury stock method. Stock issued after May 14, 1995
and common stock issuable pursuant to stock options granted after May 14,
1995 have been reflected as outstanding for all of 1993, 1994 and 1995, using
the treasury stock method. Fully diluted earnings per common share are not
presented as they are not materially different from primary earnings per
common share. Dilutive common equivalent shares consist of stock options
(using the treasury stock method and using the assumed initial public
offering price). Net income per share also reflects a fifteen- for-one stock
split effective December 9, 1994, and a three-for-one stock split effective
on the effective date of the Form S-1 registration statement.
Stock Options
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the estimated fair market value of the shares
at the date of the grant. The Company accounts for stock option grants in
accordance with APB Opinion No. 25 "Accounting for Stock Issued to
Employees," and intends to continue to do so. Accordingly, the Company
recognizes no compensation expense for stock option grants.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Some of the areas where estimates are
utilized included allowance for bad debts, capitalized software, income
taxes, revenue and various accrued expenses. Actual results could differ from
those estimates.
2. EQUIPMENT AND IMPROVEMENTS
The cost and accumulated depreciation of equipment and improvements
consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
(in thousands)
1994 1995
----- --------
<S> <C> <C>
Equipment $1,435 $ 2,186
Furniture and fixtures 630 863
Leasehold improvements 202 434
------ -------
2,267 3,483
Less accumulated depreciation (703) (1,311)
------ -------
Equipment and improvements, net $1,564 $ 2,172
====== =======
</TABLE>
F-9
<PAGE>
PEGASYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995
3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------
(in thousands)
1994 1995
----- ------
<S> <C> <C>
Trade accounts payable $ 744 $ 557
Employee compensation and
benefits 508 568
Accrued income taxes 253 --
Other 486 622
------ ------
$1,991 $1,747
====== ======
</TABLE>
4. DEBT AND OTHER FINANCIAL INSTRUMENTS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------
(in
thousands)
1994 1995
---- ----
<S> <C> <C>
Note payable to bank, with monthly payments of $3,750
plus interest through December 15, 1995 $ 45 --
Note payable to bank, with monthly payments of $17,222
plus interest through December 1, 1996 413 $ 207
Note payable to bank, with monthly payments of $10,556
plus interest through December 1, 1997 370 243
Note payable to bank, with monthly payments of $32,778
plus interest through June 28, 1998 -- 983
Note payable to bank, with monthly payments of $4,583
plus interest through December 28, 1998 -- 165
---- ------
828 1,598
Less current portion 378 782
---- ------
$450 $ 816
==== ======
</TABLE>
The notes bear interest at the bank's prime rate (6% at December 31, 1993
and 8.5% at December 31, 1994 and 1995) plus 1/2%. The notes are secured by
all computer equipment and furniture and fixtures of the Company. Maturities
of these notes are $782,000 in 1996, $564,000 in 1997 and $252,000 in 1998.
The Company has a line of credit with a bank allowing for borrowings up to
$2,500,000 at the prime rate. The line expires June 1, 1996. The Company had
no drawings against the line of credit at December 31, 1995 and 1994.
Borrowings are subject to various covenants which call for a specified level
of working capital and net worth, maintenance of certain financial ratios and
restrictions on the payments of dividends.
The Company had a note payable of $50,000 to the president at December 31,
1994, which was repaid in full during 1995. The interest rate on the note was
8.5% in 1994 and 1995.
F-10
<PAGE>
PEGASYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995
4. DEBT AND OTHER FINANCIAL INSTRUMENTS (Continued)
Financial instruments outstanding at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
------- --------
(in thousands)
<S> <C> <C>
Assets
Cash and cash equivalents $ 511 $ 511
Liabilities
Notes payable to bank ($1,598) ($1,598)
</TABLE>
The fair value of the long-term debt approximates the carrying amount due
to the variable interest rate of the debt.
5. EMPLOYEE BENEFIT PLANS
Stock Option Plan
The Company adopted an incentive stock option plan effective July 29, 1983
(the 1983 Plan). Key employees, as selected by the Board of Directors of the
Company, were granted options to purchase the Company's common stock at a
price, which in the Board of Directors' opinion, reflected fair value on the
date of the grant. The 1983 plan expired in 1993. At December 31, 1995, no
options issued under this plan were outstanding.
Long-Term Incentive Plan
During the year ended December 31, 1994, the Company adopted a Long-Term
Incentive Plan (the 1994 Plan) to provide incentives to employees, directors
and consultants through opportunities to purchase stock through incentive
stock options and through options which do not qualify as incentive stock
options.
In addition to options, eligible participants under the 1994 Plan may be
granted stock appreciation rights, restricted stock and long-term performance
awards. A maximum of 2,400,000 shares are reserved for issuance under the
plan. Shares equal to 2% of the outstanding shares at the start of each
fiscal year shall be reserved for granting of replacement options; however,
this may not cause the maximum shareholder dilution caused by the Plan to
exceed the 2,400,000 shares of stock reserved for issuance under the plan.
The option price per share is to be determined at the date of grant. For
incentive stock options, the option price may not be less than 100% of the
fair market value of the Company's common stock at the grant date. Incentive
stock options granted to a person having greater than 10% of the voting power
of all classes of stock must have an exercise price of at least 110% of fair
market value of the Company's common stock.
F-11
<PAGE>
PEGASYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995
5. EMPLOYEE BENEFIT PLANS (Continued)
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
March 31,
December 31, 1996
1993 1994 1995 (unaudited)
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Outstanding options at beginning of
period 1,494,000 1,269,000 1,671,750 1,924,500
Granted -- 1,635,750 335,250 24,000
Exercised (117,000) (873,000) -- --
Canceled (108,000) (360,000) (82,500) (25,500)
---------- ---------- ---------- ----------
Outstanding at end of period 1,269,000 1,671,750 1,924,500 1,923,000
========== ========== ========== ==========
Price range of outstanding options $.01-$.69 $.33-$.69 $.33-$.39 $.33-$6.00
========== ========== ========== ==========
Exercisable at end of period 1,216,125 396,000 605,850 600,750
========== ========== ========== ==========
Available for grant at end of period -- 764,250 475,500 477,000
========== ========== ========== ==========
</TABLE>
6. LEASES
The Company leases certain equipment and office space under noncancelable
operating leases. Future minimum rental payments required under the operating
leases with noncancelable terms in excess of one year at December 31, 1995
are as follows:
<TABLE>
<CAPTION>
Year ended December 31, (in thousands)
<S> <C>
1996 $1,016
1997 1,090
1998 1,090
1999 579
------
Total $3,775
======
</TABLE>
Total rent expense under operating leases was approximately $800,000,
$863,000, and $1,100,000 for the years ended December 31, 1993, 1994 and
1995, respectively.
7. INCOME TAXES
Income before income taxes consists of the following:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Domestic $2,093 $3,512 $4,318
Foreign 0 146 323
------ ------ ------
Total $2,093 $3,658 $4,641
====== ====== ======
</TABLE>
F-12
<PAGE>
PEGASYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995
7. INCOME TAXES (Continued)
The provision (benefit) for income taxes for the years ended December 31,
1993, 1994 and 1995 consisted of the following:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Current:
Federal $180 $ 297 $ (107)
State 51 176 (39)
Foreign -- 31 73
---- ------ -----
Total current 231 504 (73)
Deferred:
Federal 449 691 1,563
State 180 270 273
---- ------ ------
Total deferred 629 961 1,836
---- ------ ------
$860 $1,465 $1,763
==== ====== ======
</TABLE>
The effective income tax rate differed from the statutory federal income
tax rate due to:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal benefit 7.3 7.3 5.8
Permanent differences 1.5 2.0 0.7
Tax credits (1.7) (3.3) (2.5)
---- ---- ----
Effective income tax rate 41.1% 40.0% 38.0%
==== ==== ====
</TABLE>
At December 31, 1993, 1994 and 1995, the Company had research and
development credit carryforwards of approximately $495,000, $421,000 and
$440,000, respectively, available to offset future federal taxable income.
These carryforward amounts generally expire from 2004 to 2008. In addition,
as of December 31, 1993, 1994 and 1995, the Company had available alternative
minimum tax (AMT) credit carryforwards of approximately $194,000. The
carryforward period for the AMT credit is unlimited.
Deferred income taxes at December 31, 1994 and 1995 reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial statement purposes and the amounts used for tax
purposes. Significant components of the Company's deferred tax liabilities
and assets as of December 31, 1994 and 1995 are as follows:
F-13
<PAGE>
PEGASYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995
7. INCOME TAXES (Continued)
<TABLE>
<CAPTION>
December 31,
1994 1995
---- ----
(in thousands)
<S> <C> <C>
Deferred tax liabilities:
Software revenue $(6,924) $(9,303)
Capitalized software (501) (213)
Depreciation -- (142)
Other -- (41)
------ -------
Total deferred tax
liabilities (7,425) (9,699)
Deferred tax assets:
Deferred state taxes 590 729
License fees 119 119
Vacation accrual 64 109
Other 133 274
Tax credits 612 725
------- -------
Total deferred tax assets 1,518 1,956
------- -------
Net deferred tax liabilities (5,907) (7,743)
Less current portion (1,976) (2,796)
------- -------
$(3,931) $(4,947)
======= =======
</TABLE>
8. SIGNIFICANT CUSTOMERS
During 1993 the Company had two customers that accounted for 12.9% and
12.3%, respectively, of the Company's consolidated revenue. In 1994 one
customer accounted for 16.8% of the Company's consolidated revenue. This
customer also accounted for 12.6% of the Company's 1995 consolidated revenue.
Additionally, in 1995 two other customers accounted for 16.2% and 14.9%,
respectively, of the Company's consolidated revenue.
9. INTERNATIONAL OPERATIONS
The Company's export sales from the United States are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
United Kingdom $ 488 $1,515 $1,343
Ireland 0 1,288 355
Canada 58 1,008 114
Switzerland 469 49 125
France 0 25 297
Other 0 47 100
------ ------ ------
Total $1,015 $3,932 $2,334
====== ====== ======
</TABLE>
10. RECAPITALIZATION AND STOCK SPLIT
During the year ended December 31, 1994, the Company increased the number
of shares authorized from 600,000 shares of $.01 par value common stock to 9
million shares of $.01 par value common stock.
On December 9, 1994, the Company's Board of Directors declared a
fifteen-for-one split of shares of $.01 par value common stock effected in
the form of a dividend. This dividend resulted in 7,830,000
F-14
<PAGE>
PEGASYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995
10. RECAPITALIZATION AND STOCK SPLIT (Continued)
shares of common stock being issued and outstanding after the split. The par
value of the additional shares of common stock issued in connection with the
stock split was credited to common stock and a like amount was charged to
additional paid-in capital to the extent available, and the remainder to
retained earnings.
The Company's Board of Directors has approved an increase in the number of
shares of common stock authorized from 9 million to 45 million shares and a
three-for-one stock split in the form of a stock dividend effective on July
10, 1996.
The financial statements give effect to both stock splits for all periods
presented.
Upon filing of the Restated Articles, the Board of Directors will be
authorized, subject to certain limitations prescribed by law, without further
stockholder approval, to issue from time to time up to an aggregate 1,000,000
shares of Preferred Stock in one or more series and to fix or alter the
designations, preferences, rights and any qualifying limitations or
restrictions of the shares of each such series thereof, including the
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemptions (including sinking fund provisions), redemption price or prices,
liquidation preferences and the number of shares constituting any shares or
designations of such series.
11. SUBSEQUENT EVENTS
1996 Non-Employee Director Stock Option Plan The 1996 Non-Employee
Director Stock Option Plan (the "Director Plan") was adopted by the Board of
Directors on May 13, 1996. The Director Plan provides for the grant of
options for the purchase of up to 250,000 shares of common stock of the
Company. To date, no options have been granted under the Director Plan.
The Director Plan is administered by the Compensation Committee and
provides that each person who becomes a director of the Company after May 13,
1996 and who is not also an employee of the Company will receive upon his
initial election to the Board of Directors, an option to purchase 30,000
shares of common stock vesting in equal annual installments over five years.
The exercise price per share for all options granted under the Director Plan
will be equal to the market price of the common stock as of the date of
grant. Options may not be assigned or transferred except by will or by the
laws of descent and distribution and are exercisable, only to the extent
vested, within 90 days after the optionee ceases to serve as a director of
the Company (except that if a director dies or becomes disabled while he or
she is serving as a director of the Company, the option is exercisable until
the earlier of the scheduled expiration date of the option or one year from
the date of death or disability).
1996 Employee Stock Purchase Plan The 1996 Employee Stock Purchase Plan
(the "Stock Purchase Plan") was adopted by the Board of Directors on May 13,
1996. An aggregate of 500,000 shares of common stock are reserved for
issuance pursuant to this plan.
The Stock Purchase Plan is administered by the Compensation Committee. All
employees of the Company whose customary employment is in excess of 20 hours
per week and more than five months per year, other than those employees who
own 5% or more of the stock of the Company, are eligible to participate in
the Stock Purchase Plan. The Stock Purchase Plan will be implemented by one
or more offerings of such duration as the Compensation Committee may
determine, provided that no offering period may be longer than 27 months. An
eligible employee participating in an offering will be able to purchase
common stock at a price equal to the lesser of: (i) 85% of its fair market
value on the date the right was granted, or (ii) 85% of its fair market value
on the date the right was exercised. Payment for common stock purchased under
the Stock Purchase Plan will be through regular payroll deduction or lump sum
cash payment, or both, as determined by the Compensation Committee. The
maximum value of common stock an employee may purchase during an offering
period is 10% of the employee's base salary
F-15
<PAGE>
PEGASYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995
11. SUBSEQUENT EVENTS (Continued)
during such period, calculated on the basis of the employee's compensation
rate on the date the employee elects to participate in that offering.
To date, there have been no offerings under the Stock Purchase Plan and no
shares of common stock have been issued thereunder.
Line of Credit The Company's bank line of credit was increased to $5
million and extended until June 30, 1997.
1994 Long Term Incentive Plan On May 13, 1996, the Company approved an
increase in the number of shares issuable under the 1994 Long-Term Incentive
Plan from 2,400,000 to 5,000,000.
F-16
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholders have agreed to sell to each of the
Underwriters named below, and each of such Underwriters, for whom Goldman,
Sachs & Co., Cowen & Company and Montgomery Securities are acting as
representatives, has severally agreed to purchase from the Company and the
Selling Stockholders, the respective number of shares of Common Stock set
forth opposite its name below:
<TABLE>
<CAPTION>
Number of
Shares of
Common
Underwriter Stock
- ----------- ---------
<S> <C>
Goldman, Sachs & Co.
Cowen & Company
Montgomery Securities
---------
Total 3,400,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered
hereby, if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at
such price less a concession of $ per share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $ per share
to certain brokers and dealers. After the shares of Common Stock are released
for sale to the public, the offering price and other selling terms may from
time to time be varied by the representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 510,000
additional shares of Common Stock to cover over- allotments, if any. If the
Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately
the same percentage thereof that the number of shares to be purchased by each
of them, as shown in the foregoing table, bears to the 3,400,000 shares of
Common Stock offered.
The Company and the Selling Stockholders have agreed that, subject to
certain exceptions, during the period beginning from the date of this
Prospectus and continuing to and including the date 180 days after the date
of the Prospectus, they will not offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock or of any other securities of the
Company (other than pursuant to stock plans existing on the date of this
Prospectus) which are substantially similar to the shares of Common Stock or
which are convertible or exchangeable into securities which are substantially
similar to the shares of Common Stock without the prior written consent of
the representatives, except for the shares of Common Stock offered in
connection with the offering.
The representatives of the Underwriters have informed the Company that
they do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares
of Common Stock offered hereby.
U-1
<PAGE>
Prior to the offering, there has been no public market for the shares of
Common Stock. The initial public offering price will be negotiated among the
Company and the representatives. Among the factors to be considered in
determining the initial public offering price of the Common Stock, in
addition to prevailing market conditions, will be the Company's historical
performance, estimates of business potential and earnings prospects for the
Company, an assessment of the Company's management and the consideration of
the above factors in relation to market valuation of companies in related
businesses.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act.
U-2
<PAGE>
Picture of Pegasus, the winged horse of mythology, flying out of a computer
terminal screen, against a background of stars.
Service Excellence
Through Automation
<PAGE>
================================================================================
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, and, if given
or made, such information or representations must not be relied upon as
having been authorized. This Prospectus does not constitute an offer to sell
or the solicitation of an offer to buy any securities other than the
securities to which it relates or an offer to sell or the solicitation of an
offer to buy such securities in any circumstances in which such offer or
solicitation is unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create any implication
that there has been no change in the affairs of the Company since the date
hereof or that the information contained herein is correct as of any time
subsequent to its date.
-------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Prospectus Summary 3
Risk Factors 5
Use of Proceeds 12
Dividend Policy 12
Capitalization 13
Dilution 14
Selected Consolidated Financial Data 15
Management's Discussion and Analysis of Fi-
nancial Condition and Results of Operations 16
Business 25
Management 36
Certain Transactions 42
Principal and Selling Stockholders 43
Description of Capital Stock 44
Shares Eligible for Future Sale 46
Legal Matters 47
Experts 47
Additional Information 47
Index to Consolidated Financial Statements F-1
Underwriting U-1
</TABLE>
Through and including , 1996 (the 25th day after the date of this
Prospectus), all dealers effecting transactions in the Common Stock, whether
or not participating in this distribution, may be required to deliver a
Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus when acting as Underwriters and with respect to their unsold
allotments or subscriptions.
3,400,000 Shares
PEGASYSTEMS INC.
Common Stock
(par value $.01 per share)
-------------
[Pegasystems Inc. Logo]
-------------
Goldman, Sachs & Co.
Cowen & Company
Montgomery Securities
Representatives of the Underwriters
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Estimated expenses (other than underwriting discounts and commissions)
payable in connection with the sale of the Common Stock offer hereby are as
follows:
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee $ 18,876
NASD filing fee 5,974
Nasdaq National Market listing fee 50,000
Printing and engraving expenses 100,000
Legal fees and expenses 200,000
Accounting fees and expenses 150,000
Blue Sky fees and expenses (including legal fees) 18,000
Transfer agent and registrar fees and expenses 10,000
Miscellaneous 47,150
--------
Total $600,000
========
</TABLE>
The Registrant will bear all expenses shown above.
Item 14. Indemnification of Directors and Officers.
Section 67 of Chapter 156B of the Massachusetts General Laws provides that
a corporation may indemnify its directors and officers to the extent
specified in or authorized by (i) the articles of organization, (ii) a by-law
adopted by the stockholders, or (iii) a vote adopted by the
holders of a majority of the shares of stock entitled to vote on the election
of directors. In all instances, the extent to which a corporation provides
indemnification to its directors and officers under Section 67 is optional.
In its Restated Articles of Organization, the Registrant has elected to
commit to provide indemnification to its directors and officers in specified
circumstances. Generally, the Restated Articles of Organization provide that
the Registrant shall indemnify directors and officers of the Registrant
against liabilities and expenses arising out of legal proceedings brought
against them by reason of their status as directors or officers or by reason
of their agreeing to serve, at the request of the Registrant, as a director
or officer with another organization. Under this provision, a director or
officer of the Registrant shall be indemnified by the Registrant for all
costs and expenses (including attorneys' fees), judgments, liabilities and
amounts paid in settlement of such proceedings, even if he is not successful
on the merits, if he acted in good faith in the reasonable belief that his
action was in the best interests of the Registrant. The Board of Directors
may authorize advancing litigation expenses to a director or officer at his
request upon receipt of an undertaking by any such director or officer to
repay such expenses if it is ultimately determined that he is not entitled to
indemnification for such expenses.
Article VI of the Registrant's Restated Articles of Organization
eliminates the personal liability of the Registrant's directors to the
Registrant or its stockholders for monetary damages for breach of a
director's fiduciary duty, except for liability (i) for any breach of a
director's duty of loyalty to the Registrant or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of laws, (iii) for authorization of illegal dividends
or redemptions, or (iv) for any transaction in which a director derived an
improper personal benefit.
Section 8 of the Underwriting Agreement provides that the Underwriters are
obligated, under certain circumstances, to indemnify the Company, directors,
officers and controlling persons of the Company against certain liabilities,
including liabilities under the Securities Act. Reference is made to the form
of Underwriting Agreement filed as Exhibit 1.1 hereto.
The Company maintains directors and officers liability insurance for the
benefit of its directors and certain of its officers.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities.
In the three years preceding the filing of this registration statement,
the Company has issued the below-listed securities that were not registered
under the Securities Act. The numbers below have been adjusted to give effect
to (i) the 15-for-1 split of the Registrant's Common Stock, in the form of a
dividend, which became effective on December 9, 1994 and (ii) the 3-for-1
split of the Registrant's Common Stock, in the form of a dividend, to be
effective immediately prior to this offering.
Between December 1993 and May 13, 1996, the Registrant issued an aggregate
of 990,000 shares of Common Stock upon the exercise of options, at a weighted
average exercise price of approximately $0.03 per share, to certain officers
and employees of the Registrant for total consideration of $24,800.
In addition, the Registrant will issue an aggregate of 100,800 shares of
Common Stock upon the exercise of options at an exercise price of
approximately $0.33 per share, immediately prior to the closing of this
offering, to certain officers of the Registrant for total consideration of
$32,928.
Since December 1994, the Registrant has issued options to certain
officers, directors and employees of the Registrant to purchase an aggregate
of 2,409,000 shares of Common Stock under the Registrant's 1994 Long-Term
Incentive Plan at a weighted average exercise price of approximately $2.60
per share.
No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration
provisions of the Securities Act set forth in Section 4(2) thereof relative
to sales by an issuer not involving any public offering or the rules and
regulations thereunder, or, in the case of options, Rule 701 of the
Securities Act. All of the foregoing securities are deemed restricted
securities for the purposes of the Securities Act.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
No. Description
- ---------- -----------
<S> <C>
1.1. Form of Underwriting Agreement.
3.1.* Articles of Organization of the Registrant, as amended.
3.2.* By-Laws of the Registrant.
3.3. Restated Articles of Organization of the Registrant, effective July 10, 1996.
3.4. Form of Restated By-Laws of the Registrant, to be effective upon the
effectiveness of the offering.
4.1.* Specimen certificate representing the Common Stock.
5.1. Opinion of Choate, Hall & Stewart with respect to the legality of the securities of the
Registrant being registered.
10.1. Amended and Restated 1994 Long-Term Incentive Plan.
10.2. 1996 Non-Employee Director Stock Option Plan.
10.3. 1996 Employee Stock Purchase Plan.
10.4.* Loan Agreement dated as of December 16, 1993 between the Registrant and Fleet Bank of
Massachusetts, N.A.
10.5.* Loan Modification Agreement dated as of May 5, 1995 between the Registrant and Fleet Bank
of Massachusetts, N.A.
10.6.* Second Loan Modification Agreement between the Registrant and Fleet National Bank
(successor by merger to Fleet Bank of Massachusetts, N.A.).
10.7.* Promissory Note in the amount of $620,000.00 dated December 16, 1993 made by the
Registrant to the order of Fleet Bank of Massachusetts, N.A.
10.8.* Promissory Note in the amount of $380,000.00 dated November 17, 1994 made by the
Registrant to the order of Fleet Bank of Massachusetts, N.A.
10.9.* Promissory Note in the amount of $1,180,000.00 dated June 28, 1995 made by the Registrant
to the order of Fleet Bank of Massachusetts, N.A.
II-2
<PAGE>
Exhibit
No. Description
- ---------- -----------
10.10.* Promissory Note in the amount of $165,000.00 dated December 28, 1995 made by the
Registrant to the order of Fleet Bank of Massachusetts, N.A.
10.11.* Promissory Note in the amount of $5,000,000 made by the Registrant to the order of Fleet
National Bank.
10.12.* Security Agreement dated as of December 16, 1993 between the Registrant and Fleet Bank of
Massachusetts, N.A.
10.13.* Lease Agreement dated February 26, 1993 between the Registrant and Riverside Office Park
Joint Venture.
10.14.* Amendment Number 1 to Lease Agreement dated August 7, 1994 between the Registrant and
Riverside Office Park Joint Venture.
21.1.* Subsidiaries of the Registrant.
23.1. Consent of Ernst & Young LLP.
23.2. Consent of Choate, Hall & Stewart (included in Exhibit 5.1).
23.3* Consent of Edward B. Roberts.
23.4* Consent of Leonard A. Schlesinger.
23.5* Consent of Thomas E. Swithenbank.
23.6. Consent of the Aberdeen Group, Inc.
24.1.* Powers of Attorney.
27.1.* Financial Data Schedule.
99.1* Valuation and Qualifying Accounts of the Registrant.
</TABLE>
- -------------
*Previously filed.
(b) Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable, not
required under the instructions, or all of the information required is set
forth in the financial statements or notes thereto.
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to provisions described in Item 14 above, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
The Registrant hereby undertakes (1) to provide to the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser; (2) that for purposes of
determining any liability under the Securities Act, the information omitted
from the form of prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this Registration Statement as of the time
it was declared effective; and (3) that for the purpose of determining any
liability under the Securities Act, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to be signed on its behalf by the
undersigned, thereunto duly authorized, in Cambridge, Massachusetts on July
9, 1996.
PEGASYSTEMS INC.
By /s/ Alan Trefler
-------------------------------
Alan Trefler
President
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Pegasystems Inc., hereby
severally constitute and appoint Alan Trefler, Ira Vishner and Robert V.
Jahrling III, and each of them singly, our true and lawful attorneys, with
full power to them and each of them singly, to sign for us in our names in
the capacities indicated below, all pre-effective and post-effective
amendments to this registration statement and any related subsequent
registration statement pursuant to Rule 462(b) of the Securities Act of 1933,
as amended, and generally to do all things in our names and on our behalf in
such capacities to enable Pegasystems Inc. to comply with the provisions of
the Securities Act of 1933, as amended, and all requirements of the
Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title(s) Date
--------- -------- ----
<S> <C> <C>
/s/ Alan Trefler
- ------------------------- President, Clerk and Director
Alan Trefler (Principal Executive Officer) July 9, 1996
Ira Vishner* Vice President of Corporate Services,
- ------------------------- Treasurer and Director (Principal
Ira Vishner Financial and Accounting Officer) July 9, 1996
Edward A. Maybury*
- -------------------------
Edward A. Maybury Director July 9, 1996
/s/ Edward B. Roberts
- -------------------------
Edward B. Roberts Director July 9, 1996
- -------------------------
Leonard A. Schlesinger Director July 9, 1996
/s/ Thomas E. Swithenbank
- -------------------------
Thomas E. Swithenbank Director July 9, 1996
*/s/ Alan Trefler
- -------------------------
Alan Trefler
Attorney-in-Fact
</TABLE>
II-4
<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
EXHIBITS
TO
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
-------------
PEGASYSTEMS, INC.
(Exact Name of Registrant As Specified In its Charter)
-------------
101 Main Street
Cambridge, Massachusetts 02142
(Address of Principal Executive Offices)
================================================================================
Pegasystems Inc.
Common Stock
---------------
Underwriting Agreement
July __, 1996
Goldman, Sachs & Co.
Cowen & Company
Montgomery Securities
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004
Ladies and Gentlemen:
Pegasystems Inc., a Massachusetts corporation (the "Company"), proposes,
subject to the terms and conditions stated herein, to issue and sell to the
Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of
2,700,000 shares and, at the election of the Underwriters, up to 510,000
additional shares of Common Stock, $.01 par value ("Stock") of the Company and
the stockholders of the Company named in Schedule II hereto (the "Selling
Stockholders") propose, subject to the terms and conditions stated herein, to
sell to the Underwriters an aggregate of 700,000 shares of Stock. The aggregate
of 3,400,000 shares to be sold by the Company and the Selling Stockholders is
herein called the "Firm Shares" and the aggregate of 510,000 additional shares
to be sold by the Company is herein called the "Optional Shares." The Firm
Shares and the Optional Shares that the Underwriters elect to purchase pursuant
to Section 2 hereof are herein collectively called the "Shares."
1. (a) The Company represents and warrants to, and agrees with, each
of the Underwriters that:
(i) A registration statement on Form S-1 (File No. 333-3751) (the
"Initial Registration Statement") in respect of the Shares has been filed
with the Securities and Exchange Commission (the "Commission"); the
Initial Registration Statement and any post-effective amendment thereto,
each in the form heretofore delivered to you, and, excluding exhibits
thereto, to you for each of the other Underwriters, have been declared
effective by the Commission in such form; other than a registration
statement, if any, increasing the size of the offering (the "Rule 462(b)
Registration Statement"), filed pursuant to Rule 462(b) under the
Securities Act of 1933, as amended (the "Act"), which became effective
upon filing, no other document with respect to such registration statement
has heretofore been filed with the
<PAGE>
Commission; and no stop order suspending the effectiveness of the Initial
Registration Statement, any post-effective amendment thereto or the Rule
462(b) Registration Statement, if any, has been issued and no proceeding
for that purpose has been initiated or threatened by the Commission (any
preliminary prospectus included in the Initial Registration Statement and
the Rule 462(b) Registration Statement, if any, or filed with the
Commission pursuant to Rule 424(a) of the rules and regulations of the
Commission under the Act is hereinafter called a "Preliminary Prospectus";
the various parts of the Initial Registration Statement and the Rule
462(b) Registration Statement, if any, including all exhibits thereto and
including the information contained in the form of final prospectus filed
with the Commission pursuant to Rule 424(b) under the Act in accordance
with Section 5(a) hereof and deemed by virtue of Rule 430A under the Act
to be part of the Initial Registration Statement at the time it was
declared effective, each as amended at the time such part of the Initial
Registration Statement became effective or such part of the Rule 462(b)
Registration Statement, if any, became or hereafter becomes effective, are
hereinafter collectively called the "Registration Statement"; and such
final prospectus, in the form first filed pursuant to Rule 424(b) under
the Act, is hereinafter called the "Prospectus");
(ii) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material
respects to the requirements of the Act and the rules and regulations of
the Commission thereunder, and did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter through
Goldman, Sachs & Co. expressly for use therein or by a Selling Stockholder
expressly for use in the preparation of the answers therein to Items 7 and
11(l) of Form S-1;
(iii) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of
the Act and the rules and regulations of the Commission thereunder and do
not and will not, as of the applicable effective date as to the
Registration Statement and any amendment thereto and as of the applicable
filing date as to the Prospectus and any amendment or supplement thereto,
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that this representation and
warranty shall not apply to any statements or omissions made in reliance
upon and in conformity with information furnished in writing to the
Company by an Underwriter through Goldman, Sachs & Co. expressly for use
therein or by a Selling Stockholder expressly for use in the preparation
of the answers therein to Items 7 and 11(l) of Form S-1;
(iv) Neither the Company nor any of its subsidiaries has sustained
since the date of the latest audited financial statements included in the
Prospectus any material loss or interference with its business from fire,
explosion, flood or other calamity, whether
-2-
<PAGE>
or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus; and, since the respective dates as of
which information is given in the Registration Statement and the
Prospectus, there has not been any change in the capital stock or long-
term debt of the Company or any of its subsidiaries or any material
adverse change, or any development involving a prospective material
adverse change, in or affecting the general affairs, management, financial
position, stockholders' equity or results of operations of the Company and
its subsidiaries, otherwise than as set forth or contemplated in the
Prospectus;
(v) The Company and its subsidiaries do not own any real property; the
Company and its subsidiaries have good and marketable title to all
personal property owned by them, in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or
such as do not materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property by
the Company and its subsidiaries; and any real property and buildings held
under lease by the Company and its subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of
such property and buildings by the Company and its subsidiaries;
(vi) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the Commonwealth of
Massachusetts, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus, and
has been duly qualified as a foreign corporation for the transaction of
business and is in good standing under the laws of each other jurisdiction
in which it owns or leases properties or conducts any business so as to
require such qualification, or is subject to no material liability or
disability by reason of the failure to be so qualified in any such
jurisdiction; and each subsidiary of the Company has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation;
(vii) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company
have been duly and validly authorized and issued, are fully paid and non-
assessable and conform to the description of the Stock contained in the
Prospectus; and all of the issued shares of capital stock of each
subsidiary of the Company have been duly and validly authorized and
issued, are fully paid and non-assessable and (except for directors'
qualifying shares) are owned directly or indirectly by the Company, free
and clear of all liens, encumbrances, equities or claims;
(viii) The unissued Shares to be issued and sold by the Company to the
Underwriters hereunder have been duly and validly authorized and, when
issued and delivered against payment therefor as provided herein, will be
duly and validly issued and fully paid and non-assessable and will conform
to the description of the Stock contained in the Prospectus;
(ix) The issue and sale of the Shares to be sold by the Company and
the compliance by the Company with all of the provisions of this Agreement
and the consummation of the transactions herein contemplated will not
conflict with or result
-3-
<PAGE>
in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Company or any of
its subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any of the property or assets of the
Company or any of its subsidiaries is subject, nor will such action result
in any violation of the provisions of the Articles of Organization or By-
laws of the Company or any statute or any order, rule or regulation of any
court or governmental agency or body having jurisdiction over the Company
or any of its subsidiaries or any of their properties; and no consent,
approval, authorization, order, registration or qualification of or with
any such court or governmental agency or body is required for the issue
and sale of the Shares or the consummation by the Company of the
transactions contemplated by this Agreement, except the registration under
the Act of the Shares and such consents, approvals, authorizations,
registrations or qualifications as may be required under state securities
or Blue Sky laws in connection with the purchase and distribution of the
Shares by the Underwriters or under the rules of the National Association
of Securities Dealers, Inc.;
(x) Neither the Company nor any of its subsidiaries is in violation of
its Articles of Organization or By-laws (or other charter documents) or in
default in the performance or observance of any material obligation,
agreement, covenant or condition contained in any indenture, mortgage,
deed of trust, loan agreement, lease or other agreement or instrument to
which it is a party or by which it or any of its properties may be bound;
(xi) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a
summary of the terms of the Stock and under the caption "Underwriting",
insofar as they purport to describe the provisions of the laws and
documents referred to therein, are accurate, complete and fair;
(xii) There are no legal or governmental proceedings pending to which
the Company or any of its subsidiaries is a party or of which any property
of the Company or any of its subsidiaries is the subject which, if
determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a material adverse effect on the
current or future consolidated financial position, stockholders' equity or
results of operations of the Company and its subsidiaries taken as a
whole; and, to the best of the Company's knowledge, no such proceedings
are threatened or contemplated by governmental authorities or threatened
by others;
(xiii) The Company is not and, after giving effect to the offering and
sale of the Shares, will not be an "investment company" or an entity
controlled by an "investment company", as such terms are defined in the
Investment Company Act of 1940, as amended (the "Investment Company Act");
(xiv) Neither the Company nor any of its affiliates does business with
the government of Cuba or with any person or affiliate located in Cuba
within the meaning of Section 517.075, Florida Statutes;
-4-
<PAGE>
(xv) Ernst & Young LLP, who have certified certain financial
statements of the Company and its subsidiaries, are independent public
accountants as required by the Act and the rules and regulations of the
Commission thereunder; and
(xvi) To the best of the Company's knowledge, each of the Company and
its subsidiaries owns, is licensed to use or otherwise possesses adequate
rights to use all material patents, patent rights, inventions, trade
secrets, know-how, trademarks, service marks, trade names and copyrights
described or referred to in the Prospectus as owned or used by it or which
are necessary for the conduct of its businesses as described in the
Prospectus; and the Company has not received any notice of, and has no
knowledge of, any infringement of or conflict with asserted rights of
others with respect to any patent, patent rights, inventions, trade
secrets, know-how, trademarks, service marks, trade names or copyrights.
(b) Each of the Selling Stockholders severally represents and warrants to,
and agrees with, each of the Underwriters and the Company that:
(i) All consents, approvals, authorizations and orders necessary for
the execution and delivery by such Selling Stockholder of this Agreement
and the Power of Attorney and the Custody Agreement hereinafter referred
to, and for the sale and delivery of the Shares to be sold by such Selling
Stockholder hereunder, have been obtained; and such Selling Stockholder
has full right, power and authority to enter into this Agreement, the
Power of Attorney and the Custody Agreement and to sell, assign, transfer
and deliver the Shares to be sold by such Selling Stockholder hereunder;
(ii) The sale of the Shares to be sold by such Selling Stockholder
hereunder and the compliance by such Selling Stockholder with all of the
provisions of this Agreement, the Power of Attorney and the Custody
Agreement and the consummation of the transactions herein and therein
contemplated will not conflict with or result in a breach or violation of
any of the terms or provisions of, or constitute a default under, any
statute, indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which such Selling Stockholder is a party or by
which such Selling Stockholder is bound or to which any of the property or
assets of such Selling Stockholder is subject, nor will such action result
in any violation of any statute or any order, rule or regulation of any
court or governmental agency or body having jurisdiction over such Selling
Stockholder or the property of such Selling Stockholder;
(iii) Such Selling Stockholder has, and immediately prior to each
Time of Delivery (as defined in Section 4 hereof) such Selling Stockholder
will have, good and valid title to the Shares to be sold by such Selling
Stockholder hereunder, free and clear of all liens, encumbrances, equities
or claims; and, upon delivery of such Shares and payment therefor pursuant
hereto, good and valid title to such Shares, free and clear of all liens,
encumbrances, equities or claims, will pass to the several Underwriters;
(iv) During the period beginning from the date hereof and continuing
to and including the date 180 days after the date of the Prospectus, such
Selling Stockholder shall not offer, sell, contract to sell or otherwise
dispose of, except as
-5-
<PAGE>
provided hereunder, any Stock, or any securities of the Company that are
substantially similar to the Shares, including but not limited to any
securities that are convertible into or exchangeable for, or that
represent the right to receive, Stock or any such substantially similar
securities (other than pursuant to employee stock option plans existing on
the date of this Agreement), without your prior written consent;
(v) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action which is designed to or which has
constituted or which might reasonably be expected to cause or result in
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the Shares;
(vi) To the extent that any statements or omissions made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto are made in reliance upon and in
conformity with written information furnished to the Company by such
Selling Stockholder expressly for use therein, such Preliminary Prospectus
and the Registration Statement did, and the Prospectus and any further
amendments or supplements to the Registration Statement and the
Prospectus, when they become effective or are filed with the Commission,
as the case may be, will conform in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder and will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
to make the statements therein not misleading;
(vii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 with respect to the transactions herein
contemplated, such Selling Stockholder will deliver to you prior to or at
the First Time of Delivery (as hereinafter defined) a properly completed
and executed United States Treasury Department Form W-9 (or other
applicable form or statement specified by Treasury Department regulations
in lieu thereof);
(viii) Certificates in negotiable form representing all of the
Shares to be sold by such Selling Stockholder hereunder, or stock option
agreements, accompanied by duly completed notices of exercise for all of
the Shares to be sold by such Selling Stockholder hereunder, and the
exercise price therefor, have been placed in custody under a Custody
Agreement, in the form heretofore furnished to you (the "Custody
Agreement"), duly executed and delivered by such Selling Stockholder to
Choate, Hall & Stewart, as custodian (the "Custodian"), and such Selling
Stockholder has duly executed and delivered a Power of Attorney, in the
form heretofore furnished to you (the "Power of Attorney"), appointing the
persons indicated in Schedule II hereto, and each of them, as such Selling
Stockholder's attorneys-in-fact (the "Attorneys-in-Fact") with authority
to execute and deliver this Agreement on behalf of such Selling
Stockholder, to determine the purchase price to be paid by the
Underwriters to the Selling Stockholders as provided in Section 2 hereof,
to authorize the delivery of the Shares to be sold by such Selling
Stockholder hereunder and otherwise to act on behalf of such Selling
Stockholder in connection with the transactions contemplated by this
Agreement and the Custody Agreement; and
-6-
<PAGE>
(ix) The Shares represented by the certificates and the notices of
exercise of options, accompanied by the exercise price therefor, each as
held in custody for such Selling Stockholder under the Custody Agreement,
are subject to the interests of the Underwriters hereunder; the
arrangements made by such Selling Stockholder for such custody, and the
appointment by such Selling Stockholder of the Attorneys-in-Fact by the
Power of Attorney, are to that extent irrevocable; the obligations of the
Selling Stockholders hereunder shall not be terminated by operation of
law, whether by the death or incapacity of any individual Selling
Stockholder or, in the case of an estate or trust, by the death or
incapacity of any executor or trustee or the termination of such estate or
trust, or in the case of a partnership or corporation, by the dissolution
of such partnership or corporation, or by the occurrence of any other
event; if any individual Selling Stockholder or any such executor or
trustee should die or become incapacitated, or if any such estate or trust
should be terminated, or if any such partnership or corporation should be
dissolved, or if any other such event should occur, before the delivery of
the Shares hereunder, certificates representing the Shares shall be
delivered by or on behalf of the Selling Stockholders in accordance with
the terms and conditions of this Agreement and of the Custody Agreements;
and actions taken by the Attorneys-in-Fact pursuant to the Powers of
Attorney shall be as valid as if such death, incapacity, termination,
dissolution or other event had not occurred, regardless of whether or not
the Custodian, the Attorneys-in-Fact, or any of them, shall have received
notice of such death, incapacity, termination, dissolution or other event.
2. Subject to the terms and conditions herein set forth, (a) the Company and
each of the Selling Stockholders agree, severally and not jointly, to sell to
each of the Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Company and each of the Selling Stockholders, at a
purchase price per share of $.............., the number of Firm Shares (to be
adjusted by you so as to eliminate fractional shares) determined by multiplying
the aggregate number of Shares to be sold by the Company and each of the Selling
Stockholders as set forth opposite their respective names in Schedule II hereto
by a fraction, the numerator of which is the aggregate number of Firm Shares to
be purchased by such Underwriter as set forth opposite the name of such
Underwriter in Schedule I hereto and the denominator of which is the aggregate
number of Firm Shares to be purchased by all of the Underwriters from the
Company and all of the Selling Stockholders hereunder and (b) in the event and
to the extent that the Underwriters shall exercise the election to purchase
Optional Shares as provided below, the Company agrees to sell to each of the
Underwriters, and each of the Underwriters agrees, severally and not jointly, to
purchase from the Company, at the purchase price per share set forth in clause
(a) of this Section 2, that portion of the number of Optional Shares as to which
such election shall have been exercised (to be adjusted by you so as to
eliminate fractional shares) determined by multiplying such number of Optional
Shares by a fraction the numerator of which is the maximum number of Optional
Shares which such Underwriter is entitled to purchase as set forth opposite the
name of such Underwriter in Schedule I hereto and the denominator of which is
the maximum number of Optional Shares that all of the Underwriters are entitled
to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at their
election up to 510,000 Optional Shares, at the purchase price per share set
forth in the paragraph above, for the sole purpose of covering overallotments in
the sale of the Firm Shares. Any such election to purchase Optional Shares may
be exercised only by written notice from you to
-7-
<PAGE>
the Company, given within a period of 30 calendar days after the date of this
Agreement and setting forth the aggregate number of Optional Shares to be
purchased and the date on which such Optional Shares are to be delivered, as
determined by you but in no event earlier than the First Time of Delivery (as
defined in Section 4 hereof) or, unless you and the Company otherwise agree in
writing, earlier than two or later than ten business days after the date of such
notice.
3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior
notice to the Company and the Selling Stockholders shall be delivered by or on
behalf of the Company and the Selling Stockholders to Goldman, Sachs & Co., for
the account of such Underwriter, against payment by or on behalf of such
Underwriter of the purchase price therefor by wire transfer or certified or
official bank check or checks, payable to the order of the Company and the
Custodian in federal (same day) funds. The Company will cause the certificates
representing the Shares to be made available for checking and packaging at least
twenty-four hours prior to the Time of Delivery (as defined below) with respect
thereto at the office of Goldman, Sachs & Co., 85 Broad Street, New York, New
York 10004 (the "Designated Office"). The time and date of such delivery and
payment shall be, with respect to the Firm Shares, 9:30 a.m., New York time, on
July __, 1996 or such other time and date as Goldman, Sachs & Co., the Company
and the Selling Stockholders may agree upon in writing, and, with respect to the
Optional Shares, 9:30 a.m., New York time, on the date specified by Goldman,
Sachs & Co. in the written notice given by Goldman, Sachs & Co. of the
Underwriters' election to purchase such Optional Shares, or such other time and
date as Goldman, Sachs & Co. and the Company may agree upon in writing. Such
time and date for delivery of the Firm Shares is herein called the "First Time
of Delivery", such time and date for delivery of the Optional Shares, if not the
First Time of Delivery, is herein called the "Second Time of Delivery", and each
such time and date for delivery is herein called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or on behalf
of the parties hereto pursuant to Section 7 hereof, including the cross receipt
for the Shares and any additional documents requested by the Underwriters
pursuant to Section 7(j) hereof, and the check or checks specified in subsection
(a) above, if any, will be delivered at the offices of Hale and Dorr, 60 State
Street, Boston, Massachusetts 02109 (the "Closing Location"), and the Shares
will be delivered at the Designated Office, all at such Time of Delivery. A
meeting will be held at the Closing Location at .......p.m., New York City time,
on the New York Business Day next preceding such Time of Delivery, at which
meeting the final drafts of the documents to be delivered pursuant to the
preceding sentence will be available for review by the parties hereto. For the
purposes of this Section 4, "New York Business Day" shall mean each Monday,
Tuesday, Wednesday, Thursday and Friday which is not a day on which banking
institutions in New York are generally authorized or obligated by law or
executive order to close.
-8-
<PAGE>
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file such
Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier
time as may be required by Rule 430A(a)(3) under the Act; to make no further
amendment or any supplement to the Registration Statement or Prospectus
prior to the last Time of Delivery which shall be disapproved by you
promptly after reasonable notice thereof; to advise you, promptly after it
receives notice thereof, of the time when any amendment to the Registration
Statement has been filed or becomes effective or any supplement to the
Prospectus or any amended Prospectus has been filed and to furnish you with
copies thereof; to advise you, promptly after it receives notice thereof, of
the issuance by the Commission of any stop order or of any order preventing
or suspending the use of any Preliminary Prospectus or prospectus, of the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding for any
such purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or Prospectus or for additional
information; and, in the event of the issuance of any stop order or of any
order preventing or suspending the use of any Preliminary Prospectus or
prospectus or suspending any such qualification, promptly to use its best
efforts to obtain the withdrawal of such order;
(b) Promptly from time to time to take such action as you may reasonably
request to qualify the Shares for offering and sale under the securities
laws of such jurisdictions as you may request and to comply with such laws
so as to permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the distribution
of the Shares, provided that in connection therewith the Company shall not
be required to qualify as a foreign corporation or to file a general consent
to service of process in any jurisdiction;
(c) Prior to 12:00 p.m., New York City time, on the New York Business
Day next succeeding the date of this Agreement and from time to time, to
furnish the Underwriters with copies of the Prospectus in New York City in
such quantities as you may reasonably request, and, if the delivery of a
prospectus is required at any time prior to the expiration of nine months
after the time of issue of the Prospectus in connection with the offering or
sale of the Shares and if at such time any events shall have occurred as a
result of which the Prospectus as then amended or supplemented would include
an untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made when such Prospectus is delivered,
not misleading, or, if for any other reason it shall be necessary during
such period to amend or supplement the Prospectus in order to comply with
the Act, to notify you and upon your request to prepare and furnish without
charge to each Underwriter and to any dealer in securities as many copies as
you may from time to time reasonably request of an amended Prospectus or a
supplement to the Prospectus which will correct such statement or omission
or effect such compliance, and in case any Underwriter is required to
deliver a prospectus in connection with sales of any of the Shares at any
time nine months or more after the time of issue of the Prospectus, upon
your request but at the expense of such Underwriter, to prepare and deliver
to such Underwriter as many copies as you
-9-
<PAGE>
may request of an amended or supplemented Prospectus complying with
Section 10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the
effective date of the Registration Statement (as defined in Rule 158(c)
under the Act), an earnings statement of the Company and its subsidiaries
(which need not be audited) complying with Section 11(a) of the Act and the
rules and regulations of the Commission thereunder (including, at the option
of the Company, Rule 158);
(e) During the period beginning from the date hereof and continuing to
and including the date 180 days after the date of the Prospectus, not to
offer, sell, contract to sell or otherwise dispose of, except as provided
hereunder, any securities of the Company that are substantially similar to
the Shares, including but not limited to any securities that are convertible
into or exchangeable for, or that represent the right to receive, Stock or
any such substantially similar securities (other than option issuances and
the issuance of Stock upon the exercise of options pursuant to employee
stock plans existing on the date of this Agreement), without your prior
written consent, except that the Company may issue such securities in
exchange for all of the equity or substantially all of the assets of a
company in connection with a merger or acquisition, provided that prior to
any such issuance the recipients of such securities shall have agreed with
Goldman, Sachs & Co. in writing to be bound by this provision for the
remainder of the 180-day period;
(f) To furnish to its stockholders as soon as practicable after the end
of each fiscal year an annual report (including a balance sheet and
statements of income, stockholders' equity and cash flows of the Company and
its consolidated subsidiaries certified by independent public accountants)
and, as soon as practicable after the end of each of the first three
quarters of each fiscal year (beginning with the fiscal quarter ending after
the effective date of the Registration Statement), consolidated summary
financial information of the Company and its subsidiaries for such quarter
in reasonable detail;
(g) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and to
deliver to you (i) as soon as they are available, copies of any reports and
financial statements furnished to or filed with the Commission or any
national securities exchange on which any class of securities of the Company
is listed; and (ii) such additional information concerning the business and
financial condition of the Company as you may from time to time reasonably
request (such financial statements to be on a consolidated basis to the
extent the accounts of the Company and its subsidiaries are consolidated in
reports furnished to its stockholders generally or to the Commission);
(h) To use the net proceeds received by it from the sale of the Shares
pursuant to this Agreement in the manner specified in the Prospectus under
the caption "Use of Proceeds";
-10-
<PAGE>
(i) To use its best efforts to list for quotation the Shares on the
National Association of Securities Dealers Automated Quotations National
Market System ("NASDAQ"); and
(j) To file with the Commission such reports on Form SR as may be
required by Rule 463 under the Act; and
(k) If the Company elects to rely on Rule 462(b), the Company shall file
a Rule 462(b) Registration Statement with the Commission in compliance with
Rule 462(b) by 10:00 p.m., Washington, D.C. time, on the date of this
Agreement, and the Company shall at the time of filing either pay to the
Commission the filing fee for the Rule 462(b) Registration Statement or give
irrevocable instructions for the payment of such fee pursuant to Rule 111(b)
under the Act.
6. (a) The Company covenants and agrees with each Selling Stockholder and
the several Underwriters that the Company will pay or cause to be paid the
following: (i) the fees, disbursements and expenses of the Company's counsel and
accountants in connection with the registration of the Shares under the Act and
all other expenses in connection with the preparation, printing and filing of
the Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum,
closing documents (including any compilations thereof) and any other documents
in connection with the offering, purchase, sale and delivery of the Shares;
(iii) all expenses in connection with the qualification of the Shares for
offering and sale under state securities laws as provided in Section 5(b)
hereof, including the fees and disbursements of counsel for the Underwriters in
connection with such qualification and in connection with the Blue Sky survey;
(iv) all fees and expenses in connection with listing the Shares on NASDAQ; and
(v) the filing fees incident to any required review by the National Association
of Securities Dealers, Inc. of the terms of the sale of the Shares; (vi) the
cost of preparing stock certificates; (vii) the cost and charges of any transfer
agent or registrar and (viii) all other costs and expenses incident to the
performance of its obligations hereunder which are not otherwise specifically
provided for in this Section.
(b) The Company further covenants and agrees with each of the Selling
Stockholders and the several Underwriters that the Company will pay or cause to
be paid all costs and expenses incident to the performance of such Selling
Stockholder's obligations hereunder which are not otherwise specifically
provided for in this Section, including (i) any fees and expenses of counsel for
such Selling Stockholder, (ii) the fees and expenses of the Attorneys-in-Fact
and the Custodian, and (iii) all expenses and taxes incident to the sale and
delivery of the Shares to be sold by such Selling Stockholder to the
Underwriters hereunder. In connection with clause (iii) of the preceding
sentence, Goldman, Sachs & Co. agrees to pay New York State stock transfer tax,
and the Selling Stockholder agrees to reimburse Goldman, Sachs & Co. for
associated carrying costs if such tax payment is not rebated on the day of
payment and for any portion of such tax payment not rebated. It is understood,
however, that the Company shall bear, and the Selling Stockholders shall not be
required to pay or to reimburse the Company for, the cost of any other matters
not directly relating to the sale and purchase of the Shares pursuant to this
Agreement, and that, except as provided in this Section, and Sections 8 and 11
hereof, the Underwriters will pay all of their own costs and expenses, including
the fees of their counsel, stock transfer taxes on resale of any of the Shares
by them, and any advertising expenses connected with any offers they may make.
-11-
<PAGE>
7. The obligations of the Underwriters hereunder, as to the Shares to be
delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company and of the Selling Stockholders herein are, at and as of such Time
of Delivery, true and correct, the condition that the Company and the Selling
Stockholders shall have performed all of its and their obligations hereunder
theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant to
Rule 424(b) within the applicable time period prescribed for such filing by
the rules and regulations under the Act and in accordance with Section 5(a)
hereof; if the Company has elected to rely upon Rule 462(b), the Rule 462(b)
Registration Statement shall have become effective by 10:00 p.m.,
Washington, D.C. time, on the date of this Agreement, no stop order
suspending the effectiveness of the Registration Statement or any part
thereof shall have been issued and no proceeding for that purpose shall have
been initiated or threatened by the Commission; and all requests for
additional information on the part of the Commission shall have been
complied with to your reasonable satisfaction;
(b) Hale and Dorr, counsel for the Underwriters, shall have furnished to
you such opinion or opinions (a draft of each such written opinion is
attached as Annex II(a) hereto), dated such Time of Delivery, with respect
to the matters covered in paragraphs (i), (ii), (vii), (x) and (xii) of
subsection (c) below as well as such other related matters as you may
reasonably request, and such counsel shall have received such papers and
information as they may reasonably request to enable them to pass upon such
matters;
(c) Choate, Hall & Stewart, counsel for the Company, shall have
furnished to you their written opinion (a draft of such opinion is attached
as Annex II(b) hereto), dated such Time of Delivery, in form and substance
satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly existing
as a corporation in good corporate standing under the laws of The
Commonwealth of Massachusetts, with corporate power and authority to own
its properties and conduct its business as described in the Prospectus;
(ii) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued shares of capital stock of the
Company (including the Shares being delivered at such Time of Delivery)
have been duly and validly authorized and issued and are fully paid and
non-assessable; and the Shares conform to the description of the Stock
contained in the Prospectus;
(iii) The Company has been duly qualified as a foreign corporation
for the transaction of business and is in good standing under the laws
of each of the States of California, Texas, New York and Illinois, which
to such counsel's knowledge are the only jurisdictions in which the
Company owns or leases real property or maintains an office.
(iv) Each subsidiary of the Company has been duly incorporated and
is validly existing as a corporation in good corporate standing under
the laws of its jurisdiction of incorporation; and all of the issued
shares of capital stock of each
-12-
<PAGE>
such subsidiary have been duly and validly authorized and issued, are
fully paid and non-assessable, and (except for directors' qualifying
shares) are owned directly or indirectly by the Company, free and clear
of all liens, encumbrances, equities or claims (such counsel being
entitled to rely in respect of the opinion in this clause upon opinions
of local counsel and in respect of matters of fact upon certificates of
officers of the Company or its subsidiaries, provided that such counsel
shall state that they believe that both you and they are justified in
relying upon such opinions and certificates);
(v) Any real property and buildings held under lease by the
Company and its subsidiaries are held by them under valid, subsisting
and enforceable (except to the extent that the rights and remedies
created thereby may be limited by applicable bankruptcy, insolvency,
reorganization and similar laws affecting rights and remedies of
creditors and that the remedy of specific performance is subject to the
discretion of a court) leases with such exceptions as are not material
and do not interfere with the use made and proposed to be made of such
property and buildings by the Company and its subsidiaries (in giving
the opinion in this clause, such counsel may rely in respect of matters
of fact, upon certificates of officers of the Company or its
subsidiaries, provided that such counsel shall state that they believe
that both you and they are justified in relying upon such certificates);
(vi) To such counsel's knowledge and other than as set forth in
the Prospectus, there are no legal or governmental proceedings pending
to which the Company or any of its subsidiaries is a party or of which
any property of the Company or any of its subsidiaries is the subject
which would individually or in the aggregate reasonably be expected to
have a material adverse effect on the current or future consolidated
financial position, stockholders' equity or results of operations of the
Company and its subsidiaries; and, to such counsel's knowledge, no such
proceedings are threatened or contemplated by governmental authorities
or threatened by others;
(vii) This Agreement has been duly authorized, executed and
delivered by the Company;
(viii) The issue and sale of the Shares being delivered at such
Time of Delivery to be sold by the Company and the compliance by the
Company with all of the provisions of this Agreement and the
consummation of the transactions herein contemplated will not conflict
with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, loan agreement or other material agreement or instrument
known to such counsel to which the Company or any of its subsidiaries is
a party or by which the Company or any of its subsidiaries is bound or
to which any of the property or assets of the Company or any of its
subsidiaries is subject, nor will such action result in any violation of
the provisions of the Articles of Organization or By-laws of the Company
or any statute or any order, rule or regulation known to such counsel of
any court or governmental agency or body having jurisdiction over the
Company or any of its subsidiaries or any of their properties;
(ix) No consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency or body
is required
-13-
<PAGE>
for the issue and sale of the Shares or the consummation by the Company
of the transactions contemplated by this Agreement, except the
registration under the Act of the Shares, and such consents, approvals,
authorizations, registrations or qualifications as may be required under
state securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters or under the rules of the
National Association of Securities Dealers, Inc.;
(x) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a
summary of the terms of the Stock and under the caption "Underwriting",
insofar as they purport to describe the provisions of the laws and
documents referred to therein, are accurate and complete summaries of
such terms and provisions in all material respects;
(xi) The Company is not an "investment company" or an entity
controlled by an "investment company", as such terms are defined in the
Investment Company Act; and
(xii) The Registration Statement and the Prospectus and any
further amendments and supplements thereto made by the Company prior to
such Time of Delivery (other than the financial statements and related
schedules therein, as to which such counsel need express no belief)
comply as to form in all material respects with the requirements of the
Act and the rules and regulations thereunder; although they do not
assume any responsibility for the accuracy, completeness or fairness of
the statements contained in the Registration Statement or the
Prospectus, except for those referred to in the opinion in subsection
(x) of this Section 7(c), no facts have come to their attention that
have caused them to believe that, as of its effective date, the
Registration Statement or any further amendment thereto made by the
Company prior to such Time of Delivery (other than the financial
statements and related schedules therein, as to which such counsel need
express no belief) contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or that, as of
its date, the Prospectus or any further amendment or supplement thereto
made by the Company prior to such Time of Delivery (other than the
financial statements and related schedules therein, as to which such
counsel need express no belief) contained an untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading or that, as of such Time of Delivery, either
the Registration Statement or the Prospectus or any further amendment or
supplement thereto made by the Company prior to such Time of Delivery
(other than the financial statements and related schedules therein, as
to which such counsel need express no belief) contains an untrue
statement of a material fact or omits to state a material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading; and they do not know of any
amendment to the Registration Statement required to be filed or of any
contracts or other documents of a character required to be filed as an
exhibit to the Registration Statement or required to be described in the
Registration Statement or the Prospectus which are not filed or
described as required.
-14-
<PAGE>
(d) Choate, Hall & Stewart, counsel for each of the Selling
Stockholders, shall have furnished to you their written opinion with respect
to each of the Selling Stockholders (such opinion to be incorporated in the
opinion attached as Annex II(b) hereto), dated such Time of Delivery, in
form and substance satisfactory to you, to the effect that:
(i) A Power of Attorney and a Custody Agreement have been duly
executed and delivered by such Selling Stockholder and constitute valid
and binding agreements of such Selling Stockholder in accordance with
their terms (except to the extent that the rights and remedies created
thereby may be limited by applicable bankruptcy, insolvency,
reorganization and similar laws affecting rights and remedies of
creditors and that the remedy of specific performance is subject to the
discretion of a court);
(ii) This Agreement has been duly executed and delivered by or on
behalf of such Selling Stockholder; and the sale of the Shares to be
sold by such Selling Stockholder hereunder and the compliance by such
Selling Stockholder with all of the provisions of this Agreement, the
Power of Attorney and the Custody Agreement and the consummation of the
transactions herein and therein contemplated will not conflict with or
result in a breach or violation of any terms or provisions of, or
constitute a default under, any statute, indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument known to such
counsel to which such Selling Stockholder is a party or by which such
Selling Stockholder is bound or to which any of the property or assets
of such Selling Stockholder is subject, nor will such action result in
any violation of any order, rule or regulation known to such counsel of
any court or governmental agency or body having jurisdiction over such
Selling Stockholder or the property of such Selling Stockholder;
(iii) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the
transactions contemplated by this Agreement in connection with the
Shares to be sold by such Selling Stockholder hereunder, except such as
have been obtained under the Act and such as may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution of such Shares by the Underwriters or under the rules of
the National Association of Securities Dealers, Inc.;
(iv) Immediately prior to such Time of Delivery, such Selling
Stockholder was the sole registered and, to such counsel's knowledge,
beneficial, owner of the Shares to be sold at such Time of Delivery by
such Selling Stockholder under this Agreement, and, to such counsel's
knowledge, had full right, power and authority to sell, assign, transfer
and deliver the Shares to be sold by such Selling Stockholder hereunder;
and
(v) Immediately prior to the Time of Delivery, each Selling
Stockholder was the sole registered owner of the Shares to be sold by
such Selling Stockholder. Upon registration of the Shares in the names
of the Underwriters in the stock records of the Company, the
Underwriters will have acquired the Shares, free and clear of any liens,
encumbrances, equities or claims (assuming that the Underwriters are
without notice of any adverse claim, as defined in the Uniform
-15-
<PAGE>
Commercial Code, and are otherwise bona fide purchasers for the purposes
of the Code and that such Underwriters' rights are not limited by
subsection (4) of Section 8-302 of the Uniform Commercial Code).
(e) On the date of the Prospectus at a time prior to the execution of
this Agreement, at 9:30 a.m., New York City time, on the effective date of
any post-effective amendment to the Registration Statement filed subsequent
to the date of this Agreement and also at each Time of Delivery, Ernst &
Young LLP shall have furnished to you a letter or letters, dated the
respective dates of delivery thereof, in form and substance satisfactory to
you, to the effect set forth in Annex I hereto (the executed copy of the
letter delivered prior to the execution of this Agreement is attached as
Annex I(d) hereto and a draft of the form of letter to be delivered on the
effective date of any post-effective amendment to the Registration Statement
and as of each Time of Delivery is attached as Annex I(e) hereto);
(f)(i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements included
in the Prospectus any loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance, or
from any labor dispute or court or governmental action, order or decree,
otherwise than as set forth or contemplated in the Prospectus, and (ii)
since the respective dates as of which information is given in the
Prospectus there shall not have been any change in the capital stock (other
than as a result of the exercise of stock options) or long-term debt of the
Company or any of its subsidiaries or any change, or any development
involving a prospective change, in or affecting the general affairs,
management, financial position, stockholders' equity or results of
operations of the Company and its subsidiaries, otherwise than as set forth
or contemplated in the Prospectus, the effect of which, in any such case
described in clause (i) or (ii), is in the judgment of the Representatives
so material and adverse as to make it impracticable or inadvisable to
proceed with the public offering or the delivery of the Shares being
delivered at such Time of Delivery on the terms and in the manner
contemplated in the Prospectus;
(g) On or after the date hereof there shall not have occurred any of the
following: (i) a suspension or material limitation in trading in securities
generally on the New York Stock Exchange or on NASDAQ; (ii) a suspension or
material limitation in trading in the Company's securities on NASDAQ; (iii)
a general moratorium on commercial banking activities declared by either
Federal or New York or Massachusetts State authorities; or (iv) the outbreak
or escalation of hostilities involving the United States or the declaration
by the United States of a national emergency or war, if the effect of any
such event specified in this clause (iv) in the judgment of the
Representatives makes it impracticable or inadvisable to proceed with the
public offering or the delivery of the Shares being delivered at such Time
of Delivery on the terms and in the manner contemplated in the Prospectus;
(h) The Shares at the such Time of Delivery shall have been duly
listed for quotation on NASDAQ;
(i) The Company has obtained and delivered to the Underwriters executed
copies of an agreement from each stockholder of the Company substantially to
the
-16-
<PAGE>
effect set forth in Subsection 1(b)(iv) hereof in form and substance
satisfactory to you; and
(j) The Company and the Selling Stockholders shall have furnished or
caused to be furnished to you at such Time of Delivery certificates of
officers of the Company and of the Selling Stockholders, respectively,
satisfactory to you as to the accuracy of the representations and warranties
of the Company and the Selling Stockholders, respectively, herein at and as
of such Time of Delivery, as to the performance by the Company and the
Selling Stockholders of all of their respective obligations hereunder to be
performed at or prior to such Time of Delivery, and as to such other matters
as you may reasonably request, and the Company shall have furnished or
caused to be furnished certificates as to the matters set forth in
subsections (a) and (f) of this Section; and
(k) The Company shall have complied with the provisions of Section 5(c)
hereof with respect to the furnishing of prospectuses on the New York
Business Day next succeeding the date of this Agreement.
8. (a) The Company and each of the Selling Stockholders, jointly and
severally, will indemnify and hold harmless each Underwriter against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and will reimburse each Underwriter for any legal or other expenses reasonably
incurred by such Underwriter in connection with investigating or defending any
such action or claim as such expenses are incurred; provided, however, that the
Company and the Selling Stockholders shall not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in any Preliminary Prospectus, the Registration Statement or the
Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through Goldman, Sachs & Co. expressly for use therein; provided further, that
the liability of a Selling Stockholder pursuant to this subsection (a) shall not
exceed the product of the number of Shares sold by such Selling Stockholder and
the initial public offering price of the Shares as set forth in the Prospectus.
(b) Each Underwriter will indemnify and hold harmless the Company and each
Selling Stockholder against any losses, claims, damages or liabilities to which
the Company or such Selling Stockholder may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in any Preliminary
-17-
<PAGE>
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through Goldman, Sachs & Co.
expressly for use therein; and will reimburse the Company and each Selling
Stockholder for any legal or other expenses reasonably incurred by the Company
or such Selling Stockholder in connection with investigating or defending any
such action or claim as such expenses are incurred.
(c) Promptly (but in any event within 30 days) after receipt by an
indemnified party under subsection (a) or (b) above of notice of the
commencement of any action, such indemnified party shall, if a claim in respect
thereof is to be made against the indemnifying party under such subsection,
notify the indemnifying party in writing of the commencement thereof. No
indemnification under subsection (a) or (b) above shall be available to any
party who shall so fail to give such notice if the party to whom such notice was
not given was unaware of the action to which the notice would have related and
was prejudiced by the failure to give the notice, but the omission so to notify
the indemnifying party shall not relieve it from any liability which it may have
to any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal
expenses of other counsel or any other expenses, in each case subsequently
incurred by such indemnified party, in connection with the defense thereof other
than reasonable costs of investigation. No indemnifying party shall, without the
written consent of the indemnified party, effect the settlement or compromise
of, or consent to the entry of any judgment with respect to, any pending or
threatened action or claim in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified party is an actual or
potential party to such action or claim) unless such settlement, compromise or
judgment (i) includes an unconditional release of the indemnified party from all
liability arising out of such action or claim and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act, by or
on behalf of any indemnified party.
(d) If the indemnification provided for in this Section 8 is unavailable to
or insufficient to hold harmless an indemnified party under subsection (a) or
(b) above in respect of any losses, claims, damages or liabilities (or actions
in respect thereof) referred to therein, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities (or actions in respect thereof)
in such proportion as is appropriate to reflect the relative benefits received
by the Company and the Selling Stockholders on the one hand and the Underwriters
on the other from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law or if the indemnified party failed to give the notice required under
subsection (c) above, then each indemnifying party shall contribute to such
amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company and the Selling Stockholders on the one hand and the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the
-18-
<PAGE>
Company and the Selling Stockholders on the one hand and the Underwriters on the
other shall be deemed to be in the same proportion as the total net proceeds
from the offering (before deducting expenses) received by the Company and the
Selling Stockholders bear to the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Selling Stockholders on
the one hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company, each of the Selling Stockholders and the
Underwriters agree that it would not be just and equitable if contributions
pursuant to this subsection (d) were determined by pro rata allocation (even if
the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable considerations
referred to above in this subsection (d). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or liabilities (or
actions in respect thereof) referred to above in this subsection (d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this subsection (d), no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this subsection
(d) to contribute are several in proportion to their respective underwriting
obligations and not joint. Notwithstanding the foregoing, the liability of a
Selling Stockholder pursuant to this subsection(d) shall not exceed the product
of the number of Shares sold by such Selling Stockholder and the initial public
offering price of the Shares as set forth in the Prospectus.
(e) The obligations of the Company and the Selling Stockholders under this
Section 8 shall be in addition to any liability which the Company and the
respective Selling Stockholders may otherwise have and shall extend, upon the
same terms and conditions, to each person, if any, who controls any Underwriter
within the meaning of the Act; and the obligations of the Underwriters under
this Section 8 shall be in addition to any liability which the respective
Underwriters may otherwise have and shall extend, upon the same terms and
conditions, to each officer and director of the Company (including any person
who, with his or her consent, is named in the Registration Statement as about to
become a director of the Company) and to each person, if any, who controls the
Company or any Selling Stockholder within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to purchase the
Shares which it has agreed to purchase hereunder at a Time of Delivery, you may
in your discretion arrange for you or another party or other parties to purchase
such Shares on the terms contained herein. If within thirty-six hours after such
default by any Underwriter you do not arrange for the purchase of such Shares,
then the Company and the Selling Stockholders shall be entitled to a further
period of thirty-six hours within which to procure another party or other
parties satisfactory to you to purchase such Shares on such terms. In the event
that, within the respective prescribed periods, you notify the Company and the
Selling Stockholders that you
-19-
<PAGE>
have so arranged for the purchase of such Shares, or the Company and the Selling
Stockholders notify you that they have so arranged for the purchase of such
Shares, you or the Company and the Selling Stockholders shall have the right to
postpone such Time of Delivery for a period of not more than seven days, in
order to effect whatever changes may thereby be made necessary in the
Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees to file promptly any amendments to the
Registration Statement or the Prospectus which in your opinion may thereby be
made necessary. The term "Underwriter" as used in this Agreement shall include
any person substituted under this Section with like effect as if such person had
originally been a party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company and
the Selling Stockholders as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased does not exceed one-eleventh of
the aggregate number of all the Shares to be purchased at such Time of Delivery,
then the Company and the Selling Stockholders shall have the right to require
each non- defaulting Underwriter to purchase the number of Shares which such
Underwriter agreed to purchase hereunder at such Time of Delivery and, in
addition, to require each non-defaulting Underwriter to purchase its pro rata
share (based on the number of Shares which such Underwriter agreed to purchase
hereunder) of the Shares of such defaulting Underwriter or Underwriters for
which such arrangements have not been made; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company and
the Selling Stockholders as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased exceeds one-eleventh of the
aggregate number of all of the Shares to be purchased at such Time of Delivery,
or if the Company and the Selling Stockholders shall not exercise the right
described in subsection (b) above to require non-defaulting Underwriters to
purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement
(or, with respect to the Second Time of Delivery, the obligations of the
Underwriters to purchase and of the Company and the Selling Stockholders to sell
the Optional Shares) shall thereupon terminate, without liability on the part of
any non-defaulting Underwriter or the Company or the Selling Stockholders,
except for the expenses to be borne by the Company and the Selling Stockholders
and the Underwriters as provided in Section 6 hereof and the indemnity and
contribution agreements in Section 8 hereof; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations, warranties and
other statements of the Company, the Selling Stockholders and the several
Underwriters, as set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement, shall remain in full force and effect,
regardless of any investigation (or any statement as to the results thereof)
made by or on behalf of any Underwriter or any controlling person of any
Underwriter, or the Company, or any of the Selling Stockholders, or any officer
or director or controlling person of the Company, or any controlling person of
any Selling Stockholder, and shall survive delivery of and payment for the
Shares.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
neither the Company nor the Selling Stockholders shall then be under any
liability to any Underwriter except as provided in Sections 6 and 8 hereof; but,
if for any other reason any Shares are not
-20-
<PAGE>
delivered by or on behalf of the Company and the Selling Stockholders as
provided herein, the Company and each of the defaulting Selling Stockholders, if
any, pro rata (with the Company's portion based on the number of Shares to be
sold by the Company and all non-defaulting Selling Stockholders hereunder and
the defaulting Selling Stockholder's portion based on the number of Shares to be
sold by such defaulting Selling Stockholder, if any, hereunder) will reimburse
the Underwriters through you for all out-of-pocket expenses approved in writing
by you, including fees and disbursements of counsel, reasonably incurred by the
Underwriters in making preparations for the purchase, sale and delivery of the
Shares not so delivered, but the Company and the Selling Stockholders shall then
be under no further liability to any Underwriter in respect of the Shares not so
delivered except as provided in Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives; and in all dealings with any Selling Stockholder hereunder, you
and the Company shall be entitled to act and rely upon any statement, request,
notice or agreement on behalf of such Selling Stockholder made or given by any
or all of the Attorneys- in-Fact for such Selling Stockholder.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 85 Broad Street, New York, New York 10004, Attention: Registration
Department; if to any Selling Stockholder shall be delivered or sent by mail,
telex or facsimile transmission to counsel for such Selling Stockholder at its
address set forth in Schedule II hereto; and if to the Company shall be
delivered or sent by mail, telex or facsimile transmission to the address of the
Company set forth in the Registration Statement, Attention: President; provided,
however, that any notice to an Underwriter pursuant to Section 8(c) hereof shall
be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its Underwriters' Questionnaire or telex
constituting such Questionnaire, which address will be supplied to the Company
or the Selling Stockholders by you on request. Any such statements, requests,
notices or agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters, the Company and the Selling Stockholders and, to the
extent provided in Sections 8 and 10 hereof, the officers and directors of the
Company and each person who controls the Company, any Selling Stockholder or any
Underwriter, and their respective heirs, executors, administrators, successors
and assigns, and no other person shall acquire or have any right under or by
virtue of this Agreement. No purchaser of any of the Shares from any Underwriter
shall be deemed a successor or assign by reason merely of such purchase.
14. Time shall be of the essence of this Agreement. As used herein, the term
"business day" shall mean any day when the Commission's office in Washington,
D.C. is open for business.
15. This Agreement shall be governed by and construed in accordance with the
laws of the State of New York.
-21-
<PAGE>
16. This Agreement may be executed by any one or more of the parties hereto
in any number of counterparts, each of which shall be deemed to be an original,
but all such counterparts shall together constitute one and the same instrument.
If the foregoing is in accordance with your understanding, please sign and
return to us seven counterparts hereof, and upon the acceptance hereof by you,
on behalf of each of the Underwriters, this letter and such acceptance hereof
shall constitute a binding agreement among each of the Underwriters, the Company
and each of the Selling Stockholders. It is understood that your acceptance of
this letter on behalf of each of the Underwriters is pursuant to the authority
set forth in a form of Agreement among Underwriters, the form of which shall be
submitted to the Company and the Selling Stockholders for examination, upon
request, but without warranty on your part as to the authority of the signers
thereof.
Any person executing and delivering this Agreement as Attorney-in-Fact for a
Selling Stockholder represents by so doing that he has been duly appointed as
Attorney-in-Fact by such Selling Stockholder pursuant to a validly existing and
binding Power-of-Attorney which authorizes such Attorney-in-Fact to take such
action.
Very truly yours,
PEGASYSTEMS INC.
By:
--------------------------------
Name:
Title:
THE PERSONS LISTED AS SELLING
STOCKHOLDERS ON SCHEDULE II HERETO
By:
-------------------------------
Name:
Title:
As Attorney-in-Fact acting on behalf of
each of the Selling Stockholders named
in Schedule II to this Agreement.
-22-
<PAGE>
Accepted as of the date hereof at ....,
.................................:
Goldman, Sachs & Co.
Cowen & Company
Montgomery Securities
By:
-------------------------------
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
-23-
<PAGE>
SCHEDULE I
Number of Optional
Total Number of Shares to be Purchased
Firm Shares if Maximum
Underwriter to be Purchased Option Exercised
Total
-24-
<PAGE>
SCHEDULE II
Number of Optional
Total Number of Shares to be Purchased
Firm Shares if Maximum
to be Purchased Option Exercised
The Company ..................... 2,700,000 510,000
The Selling Stockholders(a) .....
Alan Trefler .................... 385,900 --
Joseph J. Friscia ............... 90,000 --
Michael R. Pyle ................. 64,800 --
Ira Vishner ..................... 69,300 --
Kenneth W. Olson 90,000 --
--------- -------
Total 3,400,000 510,000
(a) All Selling Stockholders are represented by Choate, Hall & Stewart and have
appointed Alan Trefler and Ira Vishner, and each of them, as the
Attorneys-in-Fact for such Selling Stockholder.
-25-
<PAGE>
ANNEX I
Pursuant to Section 7(d) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect to
the Company and its subsidiaries within the meaning of the Act and the
applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any supplementary
financial information and schedules (and, if applicable, financial forecasts
and/or pro forma financial information) examined by them and included in the
Prospectus or the Registration Statement comply as to form in all material
respects with the applicable accounting requirements of the Act and the
related published rules and regulations thereunder; and they have made a
review in accordance with standards established by the American Institute of
Certified Public Accountants of the unaudited consolidated interim financial
statements, selected financial data, pro forma financial information,
financial forecasts and/or condensed financial statements derived from
audited financial statements of the Company for the periods specified in
such letter, as indicated in their reports thereon, copies of which have
been separately furnished to the representatives of the Underwriters (the
"Representatives");
(iii) They have made a review in accordance with standards established
by the American Institute of Certified Public Accountants of the unaudited
condensed consolidated statements of income, consolidated balance sheets and
consolidated statements of cash flows included in the Prospectus as
indicated in their reports thereon copies of which have been separately
furnished to the Representatives and on the basis of specified procedures
including inquiries of officials of the Company who have responsibility for
financial and accounting matters regarding whether the unaudited condensed
consolidated financial statements referred to in paragraph (vi)(A)(i) below
comply as to form in all material respects with the applicable accounting
requirements of the Act and the related published rules and regulations,
nothing came to their attention that caused them to believe that the
unaudited condensed consolidated financial statements do not comply as to
form in all material respects with the applicable accounting requirements of
the Act and the related published rules and regulations;
(iv) They have compared the information in the Prospectus under
selected captions with the disclosure requirements of Regulation S-K and on
the basis of limited procedures specified in such letter nothing came to
their attention as a result of the foregoing procedures that caused them to
believe that this information does not conform in all material respects with
the disclosure requirements of Items 301, 302, 402 and 503(d), respectively,
of Regulation S-K;
(v) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available interim
financial statements of the Company and its subsidiaries, inspection of the
minute books of the Company and its subsidiaries since the date of the
latest audited financial statements included in the Prospectus, inquiries of
officials of the
<PAGE>
Company and its subsidiaries responsible for financial and accounting
matters and such other inquiries and procedures as may be specified in
such letter, nothing came to their attention that caused them to believe
that:
(A) (i) the unaudited consolidated statements of income,
consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus do not comply as to form in all material
respects with the applicable accounting requirements of the Act and
the related published rules and regulations, or (ii) any material
modifications should be made to the unaudited condensed consolidated
statements of income, consolidated balance sheets and consolidated
statements of cash flows included in the Prospectus for them to be in
conformity with generally accepted accounting principles;
(B) any other unaudited income statement data and balance sheet
items included in the Prospectus do not agree with the corresponding
items in the unaudited consolidated financial statements from which
such data and items were derived, and any such unaudited data and
items were not determined on a basis substantially consistent with the
basis for the corresponding amounts in the audited consolidated
financial statements included in the Prospectus;
(C) the unaudited financial statements which were not included
in the Prospectus but from which were derived any unaudited condensed
financial statements referred to in Clause (A) and any unaudited
income statement data and balance sheet items included in the
Prospectus and referred to in Clause (B) were not determined on a
basis substantially consistent with the basis for the audited
consolidated financial statements included in the Prospectus;
(D) any unaudited pro forma consolidated condensed financial
statements included in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of the
Act and the published rules and regulations thereunder or the pro
forma adjustments have not been properly applied to the historical
amounts in the compilation of those statements;
(E) as of a specified date not more than five days prior to the
date of such letter, there have been any changes in the consolidated
capital stock (other than issuances of capital stock upon exercise of
options which were outstanding on the date of the latest financial
statements included in the Prospectus) or any increase in the
consolidated long-term debt of the Company and its subsidiaries, or
any decreases in consolidated net current assets or stockholders'
equity or other items specified by the Representatives, or any
increases in any items specified by the Representatives, in each case
as compared with amounts shown in the latest balance sheet included in
the Prospectus, except in each case for changes, increases or
decreases which the Prospectus discloses have occurred or may occur or
which are described in such letter; and
(F) for the period from the date of the latest financial
statements included in the Prospectus to the specified date referred
to in Clause (E) there were any decreases in consolidated net revenues
or operating profit or the total or per share amounts of consolidated
net income or other items specified by the
<PAGE>
Representatives, or any increases in any items specified by the
Representatives, in each case as compared with the comparable period
of the preceding year and with any other period of corresponding
length specified by the Representatives, except in each case for
decreases or increases which the Prospectus discloses have occurred or
may occur or which are described in such letter; and
(vi) In addition to the examination referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of minute
books, inquiries and other procedures referred to in paragraphs (iii) and
(vi) above, they have carried out certain specified procedures, not
constituting an examination in accordance with generally accepted auditing
standards, with respect to certain amounts, percentages and financial
information specified by the Representatives, which are derived from the
general accounting records of the Company and its subsidiaries, which appear
in the Prospectus, or in Part II of, or in exhibits and schedules to, the
Registration Statement specified by the Representatives, and have compared
certain of such amounts, percentages and financial information with the
accounting records of the Company and its subsidiaries and have found them
to be in agreement.
The Commonwealth Of Massachusetts
William Francis Galvin
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108
RESTATED ARTICLES OF ORGANIZATION
(General Laws, Chapter 156B, Section 74)
I, Alan Trefler , President
- -------------------------------------------------------------------
and _______________________________________________________________ , Clerk and
of Pegasystems Inc.
- -------------------------------------------------------------------------------
(Exact name of corporation)
located at 101 Main Street, Cambridge, MA 02142
--------------------------------------------------------------------
(Street address of corporation Massachusetts)
do hereby certify that the following Restatement of the Articles of
Organization was duly adopted at a meeting
held on June 26, 1996 by a vote of the directors/or:
7,791,500 shares of Common Stock of 7,830,000 shares outstanding,
(type, class & series, if any)
_____________ shares of ____________ of ______________ shares outstanding, and
(type, class & series, if any)
_____________ shares of ______________ of ________________ shares outstanding,
(type, class & series, if any)
being at least a majority of each type, class or series outstanding and entitled
to vote thereon:/being at least two-thirds of each type, class or series
outstanding and entitled to vote thereon and of each type, class or series of
stock whose rights are adversely affected thereby:
ARTICLE I
The name of the corporation is:
Pegasystems Inc.
ARTICLE II
The purpose of the corporation is to engage
in the following business activities:
Please see Continuation Sheet 2A, which is attached hereto and
incorporated herein by reference.
<PAGE>
Continuation Sheet 2A
ARTICLE II
To provide consulting services including advice with respect to computers
and computer programs or data; to engage in research, design, development,
systems analysis, manufacturing, purchasing, importing, exporting, licensing,
distribution, repair, maintenance and marketing of computer equipment, computer
software and related products and services; and in general to carry on any and
all businesses and activities permitted to corporations organized under Chapter
156B, as amended from time to time, wherever the same may lawfully be done.
<PAGE>
ARTICLE III
State the Total number of shares and par value, if any, of each class of stock
which the corporation is authorized to issue:
WITHOUT PAR VALUE WITH PAR VALUE
- -------------------------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- -------------------------------------------------------------------------------
Common: Common: 45,000,000 $.01
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Preferred: Preferred: 1,000,000 $.01
- -------------------------------------------------------------------------------
ARTICLE IV
If more than one class of stock is authorized, state a distinguishing
designation for each class. Prior to the issuance of any shares of a class, if
shares of another class are outstanding, the corporation must provide a
description of the preferences, voting powers, qualifications, and special or
relative rights or privileges of that class and of each other class of which
shares are outstanding and of each series then established within any class.
Please see Continuation Sheets 4A and 4B, which are attached hereto and
incorporated herein by reference.
ARTICLE V
The restrictions, if any, posed by the Articles of Organization upon the
transfer of shares of stock of any class are:
None.
ARTICLE VI
Other lawful provisions, if any, for the conduct and regulation of the business
and affairs of the corporation, for its voluntary dissolution, or for limiting,
defining, or regulating the powers of the corporation, or of its directors or
stockholders, or of any class of stockholders:
Please see Continuation Sheets 6A-6E, which are attached hereto and
incorporated herein by reference.
<PAGE>
Continuation Sheet 4A
ARTICLE IV
1. Common Stock. The Corporation shall have authority to issue
45,000,000 shares of Common Stock. The rights, privileges, preferences
and voting powers of the Common Stock are as follows:
a. Dividend Rights. Subject to the prior rights of holders of all
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of the corporation legally
available therefor, such dividends as may be declared from time to time by the
Board of Directors.
b. Liquidation Rights. Subject to the prior rights of holders of all
classes of stock at the time outstanding have prior rights on liquidation, upon
the liquidation, dissolution or winding up of the Corporation, the assets of the
Corporation shall be distributed ratably among the holders of the Common Stock
in proportion to the number of shares of Common Stock held by each such holder.
c. Voting Rights. The holder of each share of Common Stock shall
have the right to one vote, and shall be entitled to notice of any stockholders
meeting in accordance with the By-laws of the Corporation, and shall be entitled
to vote upon such matters and in such manner as may be provided by law.
d. Increase in Authorized Common Stock. The number of authorized
shares of Common Stock may be increased or decreased (but not below the number
of shares of Common Stock then outstanding) by an affirmative vote of the
holders of a majority of the outstanding capital stock of the Corporation
outstanding and entitled to vote thereon, voting as a single class.
2. Preferred Stock. The Corporation shall have the authority to issue
1,000,000 shares of undesignated Preferred Stock. The shares of undesignated
Preferred Stock may be issued from time to time in one or more series as the
Board of Directors may determine. Each series shall be so designated to
distinguish the shares thereof from the shares of all other series and classes.
Except as to the relative preferences, powers, qualifications, rights and
privileges referred to below, in respect of any or all of which there may be
variations between different series, all shares of Preferred Stock shall be
identical. Different series of Preferred Stock shall not be construed to
constitute different classes of shares for the purpose of voting by classes.
The Board of Directors is expressly authorized, subject to the limitations
prescribed by law and the provisions of these Restated Articles of Organization,
to provide by adopting a
<PAGE>
Continuation Sheet 4B
vote or votes, a certificate of which shall be filed in accordance with the
Business Corporation Law of The Commonwealth of Massachusetts, for the issuance
of the Preferred Stock in one or more series, each with such designations,
preferences, voting powers, qualifications, special or relative rights and
privileges as shall be stated in the vote or votes creating such series. The
authority of the Board of Directors with respect to each such series shall
include without limitation of the foregoing the right to determine and fix:
a. the distinctive designation of such series and the number of shares
to constitute such series;
b. the rate at which dividends on the shares of such series shall be
declared and paid, or set aside for payment, whether dividends at the rate so
determined shall be cumulative, and whether the shares of such series shall be
entitled to any participating or other dividends in addition to the dividends at
the rate so determined, and if so, on what terms;
c. the right, if any, of the Corporation to redeem shares of the
particular series and, if redeemable, the price, terms and manner of
such redemption;
d. the special and relative rights and preferences, if any, and the
amount or amounts per share, which the shares of such series shall be
entitled to receive upon any voluntary or involuntary liquidation, dissolution
or winding up of the Corporation;
e. the terms and conditions, if any, upon which shares of such series
shall be convertible into, or exchangeable for, shares of stock of any other
class or classes, including the price or prices or rate or rates of conversion
or exchange and the terms of adjustment, if any;
f. the obligation, if any, of the Corporation to retire or purchase
shares of such series pursuant to a sinking fund or fund of a similar
nature or otherwise, and the terms and conditions of such obligation;
g. voting rights, if any;
h. limitations, if any, on the issuance of additional shares of such
series or any shares of any other series of Preferred Stock; and
i. such other preferences, powers, qualifications, special or relative
rights and privileges thereof as the Board of Directors may deem advisable and
are not inconsistent with law and the provisions of these Restated Articles of
Organization.
<PAGE>
Continuation Sheet 6A
ARTICLE VI
PART A. CLASSIFICATION OF BOARD OF DIRECTORS
This Article VI, Part A shall be effective only from and after the closing
of this Corporation's initial public offering of shares of Common Stock pursuant
to the Securities Act of 1933, as amended (the "Public Offering Date").
The number of directors of the Corporation shall be determined in the
manner provided in the by-laws.
The provisions of Chapter 156B, ss.50A of the Massachusetts General Laws
with respect to staggered terms for directors shall not apply to this
Corporation. The directors of this Corporation shall be divided into three
classes, as nearly equal in number as possible; the term of office of the first
class ("Class I Directors") to continue until the first annual meeting following
the Public Offering Date and until their successors are chosen and qualified;
the term of office of the second class ("Class II Directors") to continue until
the second annual meeting following the Public Offering Date and until their
successors are chosen and qualified; and the term of office of the third class
("Class III Directors") to continue until the third annual meeting following the
Public Offering Date and until their successors are chosen and qualified. At
each annual meeting of this Corporation, the successors to the class of
directors whose term expires at that meeting shall be elected to hold office for
a term continuing until the annual meeting held in the third year following the
year of their election and until their successors are duly elected and
qualified.
Vacancies and newly created directorships, whether resulting from an
increase in the size of the board of directors, from the death, resignation,
disqualification or removal of a director or otherwise, shall be filled solely
by the affirmative vote of a majority of the directors then in office, even
though less than a quorum of the board of directors. Any director so elected
shall hold office for the remainder of the full term of the class of directors
in which the vacancy occurred or the new directorship was created and until such
director's successor shall have been elected and qualified.
At any meeting of the stockholders called for the purpose, any director
may be removed from office only for cause by the affirmative vote of a majority
of the shares issued, outstanding and entitled to vote in the election of
directors.
Notwithstanding any other provision of these Restated Articles of
Organization, or any other provision of law that might otherwise permit a lesser
vote or no vote, the affirmative vote of a majority of the shares issued,
outstanding and entitled to vote in the election of directors shall be required
to alter, amend or repeal this Article VI, Part A.
<PAGE>
Continuation Sheet 6B
PART B. MISCELLANEOUS
By-Laws
The board of directors is authorized to make, amend or repeal the by-laws
of this Corporation in whole or in part, except with respect to any provisions
thereof which by law, by these Restated Articles of Organization or by the
by-laws requires action by the stockholders.
Place of Meetings of The Stockholders
Meetings of the stockholders may be held anywhere in the United States.
Partnership
The Corporation may be a partner in any business enterprise which the
Corporation would have power to conduct by itself.
Indemnification of Directors, Officers and Others
The Corporation shall indemnify each person who is or was a director,
officer, employee or other agent of the Corporation, each person who is or was
serving at the request of the Corporation as a director, trustee, officer,
employee or other agent of another organization in which it directly or
indirectly owns shares or of which it is directly or indirectly a creditor, and
each person who is or was serving at the request of the Corporation in any
capacity with respect to any employee benefit plan against all liabilities,
costs and expenses, including but not limited to amounts paid in satisfaction of
judgments, in settlement or as fines and penalties, and counsel fees and
disbursements, reasonably incurred by him in connection with the defense or
disposition of or otherwise in connection with or resulting from any action,
suit or other proceedings, whether civil, criminal, administrative or
investigative, before any court or administrative or legislative or
investigative body, in which he may be or may have been involved as a party or
otherwise or with which he may be or may have been threatened, while in office
or thereafter, by reason of his being or having been such a director, officer,
employee, agent or trustee, or having served in any capacity with respect to any
employee benefit plan, or by reason of any action taken or not taken in any such
capacity, except with respect to any matter as to which he shall have been
finally adjudicated by a court of competent jurisdiction not to have acted in
good faith in the reasonable belief that his action was in the best interest of
the Corporation or, to the extent that such matter relates to service with
respect to any employee benefit, in the best interests of the participants or
beneficiaries of such employee benefit plan. Expenses, including but not limited
to counsel fees and disbursements, so incurred by any such person in defending
any such action, suit or proceeding may be paid from time to time by the
Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of the person
indemnified to repay the amounts so paid if it shall ultimately be determined
that
<PAGE>
Continuation Sheet 6C
indemnification of such expenses is not authorized hereunder, which undertaking
may be accepted without reference to the financial ability of such person to
make repayment.
As to any matter disposed of by settlement by any such person, pursuant to
a consent decree or otherwise, no such indemnification either for the amount of
such settlement or for any other expenses shall be provided unless such
settlement shall be approved as in the best interests of the Corporation, after
notice that it involves such indemnification, (a) by a vote of a majority of the
disinterested directors then in office (even though the disinterested directors
be less than a quorum), or (b) by any disinterested person or persons to whom
the question may be referred by a vote of a majority of such disinterested
directors, or (c) by vote of the holders of a majority of the outstanding stock
at the time entitled to vote for directors, voting as a single class, exclusive
of any stock owned by any interested persons, or (d) by any disinterested person
or persons to whom the question may be referred by vote of the holders of a
majority of such stock. No such approval shall prevent the recovery from any
such officer, director, employee, agent or trustee or any such person serving in
any capacity with respect to any employee benefit plan of any amounts paid to
him or on his behalf as indemnification in accordance with the preceding
sentence if such person is subsequently adjudicated by a court of competent
jurisdiction not to have acted in good faith in the reasonable belief that his
action was in the best interests of the Corporation or, to the extent that such
matter relates to service with respect to an employee benefit plan, in the best
interests of the participants or beneficiaries of such employee benefit plan.
The right of indemnification hereby provided shall not be exclusive of or
affect any other rights to which any director, officer, employee, agent, or
trustee or any such person serving in any capacity with respect to any employee
benefit plan may be entitled or which may lawfully be granted to him. As used
herein, the terms "director," "officer," "employee," "agent" and "trustee"
include their respective executors, administrators and other legal
representatives, and "interested" person is one against whom the action, suit or
other proceeding in question or another action, suit or other proceeding on the
same or similar grounds is then or had been pending or threatened, and a
"disinterested" person is a person against whom no such action, suit or other
proceeding is then or had been pending or threatened.
By action of the board of directors, notwithstanding any interest of the
directors in such action, the Corporation may purchase and maintain insurance,
in such amounts as the board of directors may from time to time deem
appropriate, on behalf of any person who is or was a director, officer, employee
or other agent of the Corporation, or is or was serving at the request of the
Corporation as a director, trustee, officer, employee or other agent of another
organization or with respect to any employee benefit plan, in which it directly
or indirectly owns shares or of which it is directly or indirectly a creditor,
against any liability incurred by him in any such capacity, or arising out of
his status as such, whether or not the Corporation would have the power to
indemnify him against such liability.
<PAGE>
Continuation Sheet 6D
Intercompany Transactions
No contract or transaction between the Corporation and one or more of its
directors or officers, or between the Corporation and any other organization of
which one or more of its directors or officers are directors, trustees or
officers, or in which any of them has any financial or other interest, shall be
void or voidable, or in any way affected, solely for this reason, or solely
because the director or officer is present at or participates in the meeting of
the board of directors or committee thereof which authorizes, approves or
ratifies the contract or transaction, or solely because his or their votes are
counted for such purposes, if:
(a) The material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the board of
directors or the committee which authorizes, approves or ratifies
the contract or transaction, and the board or committee in good
faith authorizes, approves or ratifies the contract or transaction
by the affirmative vote of a majority of the disinterested
directors, even though the disinterested directors be less than a
quorum; or
(b) The material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the
stockholders entitled to vote thereon, and the contract or
transaction is specifically authorized, approved or ratified in good
faith by vote of the stockholders; or
(c) The contract or transaction is fair as to the Corporation as of the
time it is authorized, approved or ratified by the board of
directors, a committee thereof, or the stockholders.
Interested directors may be counted in determining the presence of a
quorum at a meeting of the board of directors or of a committee thereof which
authorizes, approves or ratifies the contract or transaction. No director or
officer of the Corporation shall be liable or accountable to the Corporation or
to any of its stockholders or creditors or to any other person, either for any
loss to the Corporation or to any other person or for any gains or profits
realized by such director or officer, by reason of any contract or transaction
as to which clauses (a), (b) or (c) above are applicable.
<PAGE>
Continuation Sheet 6E
Limitations on Director Liability
No director of the Corporation shall be liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 61 or 62 of Chapter 156B of the General Laws of The Commonwealth of
Massachusetts, or (iv) for any transaction in which the director derived an
improper personal benefit. No amendment to or repeal of any provision of this
paragraph, directly or by adoption of an inconsistent provision of these
Articles of Organization, shall apply to or have any effect on any liability or
alleged liability of any director of the Corporation for or with respect to any
acts or omissions of such director occurring prior to such amendment or repeal.
<PAGE>
Continuation Sheet 8A
Residential Post Office
Name Address Address
---- ----------- -----------
Edward B. Roberts 300 Boylston Street Same
Boston, MA 02116
Leonard A. Schlesinger 20 Garland Road Same
Lincoln, MA 01773
Thomas E. Swithenbank 42 Old Mystic Street Same
Arlington, MA 02174
<PAGE>
Continuation Sheet 8B
Article III - Increased the authorized shares of Common Stock to 45,000,000, and
authorized 1,000,000 shares of Preferred Stock.
Article IV - Established relative rights of Common Stock and Preferred Stock.
Article VI - Amended and restated Article VI.
ds1/264197
<PAGE>
ARTICLE VII
The effective date of the restated Articles of Organization of the corporation
shall be the date approved and filed by the Secretary of the Commonwealth. If a
later effective date is desired, specify such date which shall not be more than
thirty days after the date of filing.
ARTICLE VIII
The information contained in Article VIII is not a permanent part of the
Articles of Organization.
a. The street address (post office boxes are not acceptable) of the principal
office of the corporation in Massachusetts is: 101 Main Street,
Cambridge, MA 02142
b. The name, residential address and post office address of each director and
officer of the corporation is as follows:
<TABLE>
<CAPTION>
NAME RESIDENTIAL ADDRESS POST OFFICE ADDRESS
<S> <C> <C>
President: Alan Trefler 228 Allandale Road, Unit 3c same
Chestnut Hill, MA 08167
Treasurer: Ira Vishner 88 Tappan Street same
Brookline, MA 02146
Clerk: Alan N. Trefler same as above same
Directors: Alan N. Trefler same as above same
Ira Vishner same as above same
Edward A. Maybury 254 Phillips Road P.O. Box 443
Sagamore Beach, MA Sagamore Beach, MA 02562-0443
02562-0443
See Continuation Sheet 8A.
</TABLE>
c. The fiscal year (i.e., tax year) of the corporation shall end on the last
day of the month of: December
d. The name and business address of the resident agent, if any, of the
corporation is:
We further certify that the foregoing Restated Articles of Organization
affect no amendments to the Articles of Organization of the corporation as
heretofore amended, except amendments to the following articles. Briefly
describe amendments below:
See Continuation Sheet 8B, which is attached hereto and incorporated
herein by reference.
SIGNED UNDER THE PENALTIES OF PERJURY, this 10th day of July , 1996,
--------
/s/ Alan Trefler , President
_____________________________________________________________________ , Clerk
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
RESTATED ARTICLES OF ORGANIZATION
(General Laws, Chapter 156B, Section 74)
I hereby approve the within Restated Articles of Organization and, the filing
fee in the amount of $ ______________ having been paid, said articles are
deemed to have been filed with me this ___________ day of
_______________, 19_____.
Effective date: ___________________________________________
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
Photocopy of document to be sent to:
Ira Vishner
Pegasystems Inc.
----------------------------------------
101 Main Street
----------------------------------------
Cambridge, MA 02142
----------------------------------------
Telephone: (617) 374-9600
----------------------------------------
ds1/264197
AMENDED AND RESTATED BY-LAWS
OF
PEGASYSTEMS INC.
ARTICLE I
Stockholders
Section 1. Annual Meeting. The annual meeting of the stockholders shall be
held within six months after the end of the corporation's fiscal year on such
date, and at such place and time, as may be determined each year by the board of
directors. The purpose for which the annual meeting is to be held, in addition
to those prescribed by law, by the articles of organization of the corporation
or by these by-laws, may be specified by the board of directors or the
president. If in any year the annual meeting is not held within the period
specified above, a special meeting in lieu thereof may be held at a later time
and any elections held or business transacted at such meeting shall have the
same force and effect as if held or transacted at the annual meeting.
Section 2. Special Meetings. Special meetings of the stockholders may be
called at any time by the president or by the board of directors and shall be
called by the clerk, or in case of the death, absence, incapacity or refusal of
the clerk, by any other officer, upon written application of one or more
stockholders who hold at least forty percent (40%) in interest of the capital
stock entitled to vote thereat. Such application shall specify the purposes for
which the meeting is to be called and may designate the date, hour and place of
such meeting, provided, however, that no such application shall designate a date
not a full business day or an hour not within normal business hours as the date
or hour of such meeting without the approval of the president or the board of
directors.
Section 3. Place of Meetings. Meetings of the stockholders may be held
anywhere within, but not without, the United States.
Section 4. Notice. Except as hereinafter provided, a written or printed
notice of every meeting of stockholders stating the place, date, hour and
purposes thereof shall be given by the clerk or an assistant clerk (or by any
other officer in the case of an annual meeting or by the person or persons
calling the meeting in the case of a special meeting) at least seven (7) days
before the meeting to each stockholder entitled to vote thereat and to each
stockholder who, by law, by the articles of organization or by these by-laws, is
entitled to such notice, by leaving such notice with him or at his residence or
usual place of business or by mailing it, postage prepaid, addressed to him at
his address as it appears upon the records of the corporation. No notice of the
place, date, hour or purposes of any annual or special meeting of stockholders
need be given to a stockholder if a written waiver of
<PAGE>
such notice, executed before or after the meeting by such stockholder or his
attorney thereunto authorized, is filed with the records of the meeting.
Section 5. Notice of Stockholder Business. The following
provisions of this Section 5 shall apply to the conduct of business
at any meeting of the stockholders.
(a) At any meeting of the stockholders, only such matters shall be
considered and acted upon as shall have been brought before the meeting (i)
pursuant to the corporation's notice of meeting, (ii) by or at the direction of
the Board of Directors or any committee of the Board of Directors or (iii) by
any stockholder of the corporation who is a stockholder of record at the time of
giving of the notice provided for in paragraph (b) of this Section 5, who shall
be entitled to vote at the meeting and who complies with the notice procedures
set forth in paragraph (b) of this Section 5.
(b) For a matter to be properly brought before any meeting of the
stockholders by a stockholder pursuant to clause (iii) of paragraph (a) of this
Section 5, the stockholder must have given timely notice thereof in writing to
the clerk of the corporation. Unless otherwise required by the Exchange Act, to
be timely a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the corporation not later than 90 days prior
to the meeting. As to each matter proposed to be brought before the meeting, the
stockholder's notice to the clerk shall set forth the following information: (i)
a brief description of the matter to be considered by the stockholders at the
meeting and the reasons for bringing such matter to the stockholders at the
meeting; (ii) as to the stockholder proposing that such matter be considered,
each beneficial owner, if any, on whose behalf the matter is to be considered,
and each other stockholder and beneficial owner known to the proposing
stockholder and such beneficial owner, if any, to support the matter proposed
for consideration: (a) such person's name and address, as they appear on the
corporation's books; (b) the class or series and number of shares of the
corporation which are owned beneficially and of record by such person; and (c)
any material interest, financial or otherwise, of such person in the matter
proposed for consideration by the stockholders.
(c) Nothing in this Section 5 shall require the consideration of any
matter noticed by a stockholder pursuant to this Section 5. The person presiding
at the meeting shall have the discretion to determine whether the matter was
properly brought before the meeting and whether the procedures set forth in
these by-laws were complied with in connection with such matter, and if the
presiding person determines that such matter was not properly brought before the
meeting or that such procedures were not followed, the matter shall not be
considered or acted upon at the meeting. Any
2
<PAGE>
stockholder noticing a matter to be considered at a stockholders' meeting
pursuant to this Section 5 shall in all events comply with all relevant
provisions of the Exchange Act.
Section 6. Quorum. Except as otherwise provided by the articles of
organization, at any meeting of the stockholders a majority of all shares of
stock then issued, outstanding and entitled to vote (including shares as to
which a nominee has no voting authority as to certain matters brought before the
meeting) shall constitute a quorum for the transaction of business. Though less
than a quorum be present, any meeting may without further notice be adjourned to
a subsequent date or until a quorum be had, and at any such adjourned meeting
any business may be transacted which might have been transacted at the original
meeting.
Section 7. Voting and Proxies. Except as otherwise provided by law or by
the articles of organization or by these by-laws, each holder of record of
shares of stock entitled to vote on any matter shall have one vote for each such
share held of record by him and a proportionate vote for any fractional shares
so held by him. Stockholders may vote either in person or by proxy. No proxy
dated more than six months before the meeting named therein shall be valid and
no proxy shall be valid after the final adjournment of such meeting. A proxy
with respect to stock held in the name of two or more persons shall be valid if
executed by any one of them unless at or prior to the exercise of the proxy the
corporation receives a specific written notice to the contrary from any one of
them. A proxy purporting to be executed by or on behalf of a stockholder shall
be deemed valid unless challenged at or prior to its exercise and the burden of
proving its invalidity shall rest on the challenger.
Section 8. Action at a Meeting. When a quorum is present at any meeting,
the affirmative vote of the holders of a majority of the shares voted at the
meeting shall be necessary and sufficient to the determination of such question,
unless a larger vote is required by law, by the articles of organization or by
these by-laws; provided, however, that any election by stockholders shall be
determined by a plurality of the votes cast by the stockholders entitled to vote
in such election. Shares as to which a nominee has no voting authority as to a
particular question or questions brought before the meeting will not be deemed
to be voted or cast with respect to such question or questions. Any election by
stockholders and the determination of any other questions to come before a
meeting of the stockholders shall be by ballot if so requested by any
stockholder entitled to vote thereon but need not be otherwise.
Section 9. Action Without a Meeting. Any action required or permitted to
be taken at any meeting of the stockholders may be taken without a meeting if
all stockholders entitled to vote on the matter consent to the action in writing
and the written consents
3
<PAGE>
are filed with the records of the meetings of stockholders. Such
consents shall be treated for all purposes as a vote at a meeting.
ARTICLE II
Directors
Section 1. Number and Election. There shall be a board of not less than
three directors. The number of directors shall be determined from time to time
by the board of directors and shall be elected at the annual meeting of the
stockholders by such stockholders as have the right to vote thereon. No decrease
in the number of directors constituting the board of directors shall shorten the
term of any incumbent director.
Section 2. Term. The provisions of Chapter 156B, ss.50A of the
Massachusetts General Laws with respect to staggered terms for directors shall
not apply to this corporation. Except as otherwise provided by law, by the
articles of organization or by these by-laws, the directors of this corporation
shall be divided into three classes, as nearly equal in number as possible; the
term of office of the first class ("Class I Directors") to continue until the
first annual meeting following the closing of this Corporation's initial public
offering of shares of Common Stock (the "Public Offering Date") pursuant to the
Securities Act of 1933, as amended, and until their successors are chosen and
qualified; the term of office of the second class ("Class II Directors") to
continue until the second annual meeting following the Public Offering Date and
until their successors are chosen and qualified; and the term of office of the
third class ("Class III Directors") to continue until the third annual meeting
following the Public Offering Date and until their successors are chosen and
qualified. At each annual meeting of this corporation, the successors to the
class of directors whose term expires at that meeting shall be elected to hold
office for a term continuing until the annual meeting held in the third year
following the year of their election and until their successors are duly elected
and qualified.
Section 3. Resignations. Any director may resign by delivering his or her
written resignation to the corporation at its principal office or to the
president or clerk or if there by one, to the secretary. Such resignation shall
become effective at the time or upon the happening of the condition, if any,
specified therein or, if no such time or condition is specified, upon its
receipt.
Section 4. Removal. At any meeting of the stockholders called for the
purpose, any director may be removed from office only for cause by the
affirmative vote of a majority of the shares issued, outstanding and entitled
to vote in the election of directors. At any meeting of the board of directors
4
<PAGE>
any director may be removed from office for cause by vote of a majority of the
directors then in office. A director may be removed for cause only after a
reasonable notice and opportunity to be heard before the body proposing to
remove him.
Section 5. Vacancies. Vacancies and newly created directorships, whether
resulting from an increase in the size of the board of directors, from the
death, resignation, disqualification or removal of a director or otherwise,
shall be filled solely by the affirmative vote of a majority of the directors
then in office, even though less than a quorum of the board of directors. Any
director elected in accordance with this Section 5 shall hold office for the
remainder of the full term of the class of directors in which the vacancy
occurred or the new directorship was created and until such director's successor
shall have been elected and qualified.
Section 6. Regular Meetings. Regular meetings of the board of directors
may be held at such times and places within or without The Commonwealth of
Massachusetts as the board of directors may fix from time to time and, when so
fixed, no notice thereof need be given. The first meeting of the board of
directors following the annual meeting of the stockholders shall be held without
notice immediately after and at the same place as the annual meeting of the
stockholders or the special meeting held in lieu thereof. If in any year a
meeting of the board of directors is not held at such time and place, any
elections to be held or business to be transacted at such meeting may be held or
transacted at any later meeting of the board of directors with the same force
and effect as if held or transacted at such meeting.
Section 7. Special Meetings. Special meetings of the board of directors may
be called at any time by the president or secretary (or, if there be no
secretary, the clerk) or by any director. Such special meetings may be held
anywhere within or without The Commonwealth of Massachusetts. A written,
printed, facsimile or telegraphic notice stating the place, date and hour (but
not necessarily the purposes) of the meeting shall be given by the secretary or
an assistant secretary (or, if there be no secretary or assistant secretary, the
clerk or an assistant clerk) or by the officer or director calling the meeting
at least forty-eight (48) hours before such meeting to each director by leaving
such notice with him or at his residence or usual place of business or by
mailing it, postage prepaid, or sending it by prepaid telegram, addressed to him
at his last known address. No notice of the place, date or hour of any meeting
of the board of directors need be given to any director if a written waiver of
such notice, executed by him before or after the meeting, is filed with the
records of the meeting, or to any director who attends the meeting without
protesting prior thereto or at its commencement the lack of notice to him.
5
<PAGE>
Section 8. Action at a Meeting. At any meeting of the board of directors,
a majority of the directors then in office shall constitute a quorum. Though
less than a quorum be present, any meeting may without further notice be
adjourned to a subsequent date or until a quorum be had. When a quorum is
present at any meeting a majority of the directors present may take any action
on behalf of the board except to the extent that a larger number is required by
law, by the articles of organization or by these by-laws.
Section 9. Action Without a Meeting. Any action required or permitted to
be taken at any meeting of the directors may be taken without a meeting if all
the directors consent to the action in writing and the written consents are
filed with the records of the meetings of the directors. Such consents shall be
treated for all purposes as a vote at a meeting.
Section 10. Powers. The board of directors shall have and may exercise all
the powers of the corporation, except such as by law, by the articles of
organization or by these by-laws are conferred upon or reserved to the
stockholders. In the event of any vacancy in the board of directors, the
remaining directors then in office, except as otherwise provided by law, shall
have and may exercise all of the powers of the board of directors until the
vacancy is filled.
Section 11. Committees. The board of directors may elect from the board an
executive committee or one or more other committees and may delegate to any such
committee or committees any or all of the powers of the board except those which
by law, by the articles of organization or by these by-laws may not be so
delegated. Such committees shall serve at the pleasure of the board of
directors. Except as the board of directors may otherwise determine, each such
committee may make rules for the conduct of its business, but, unless otherwise
determined by the board or in such rules, its business shall be conducted as
nearly as may be as is provided in these by-laws for the conduct of the business
of the board of directors.
Section 12. Meeting by Telecommunications. Members of the board of
directors or any committee elected thereby may participate in a meeting of such
board or committee by means of a conference telephone or similar communications
equipment by means of which all persons participating in a meeting can hear each
other at the same time and participation by such means shall constitute presence
in person at the meeting.
6
<PAGE>
ARTICLE III
Officers
Section 1. Enumeration. The officers of the corporation shall consist of a
president, a treasurer and a clerk and such other officers, including without
limitation a chairman of the board of directors, a secretary and one or more
vice presidents, assistant treasurers, assistant clerks and assistant
secretaries, as the board of directors may from time to time determine.
Section 2. Qualifications. No officer need be a stockholder or a director.
The same person may hold at the same time one or more offices unless otherwise
provided by law. The clerk shall be a resident of Massachusetts unless the
corporation shall have a resident agent. Any officer may be required by the
board of directors to give a bond for the faithful performance of his duties in
such form and with such sureties as the board may determine.
Section 3. Elections. The president, treasurer and clerk shall be elected
annually by the board of directors at its first meeting following the annual
meeting of the stockholders. All other officers shall be chosen or appointed by
the board of directors.
Section 4. Term. Except as otherwise provided by law, by the articles of
organization or by these by-laws, the president, treasurer and clerk shall hold
office until the first meeting of the board of directors following the next
annual meeting of the stockholders and until their respective successors are
chosen and qualified. All other officers shall hold office until the first
meeting of the board of directors following the next annual meeting of the
stockholders, unless a shorter time is specified in the vote choosing or
appointing such officer or officers.
Section 5. Resignations. Any officer may resign by delivering his written
resignation to the corporation at its principal office or to the president or
clerk, or, if there be one, to the secretary. Such resignation shall be
effective at the time or upon the happening of the condition, if any, specified
therein or, if no such time or condition is specified, upon its receipt.
Section 6. Removal. Any officer may be removed from office with or without
cause by vote of a majority of the directors then in office. An officer may be
removed for cause only after a reasonable notice and opportunity to be heard
before the board of directors.
Section 7. Vacancies. Vacancies in any office may be filled by the board
of directors.
7
<PAGE>
Section 8. Certain Duties and Powers. The officers designated below,
subject at all times to these by-laws and to the direction and control of the
board of directors, shall have and may exercise the respective duties and powers
set forth below:
The Chairman of the Board of Directors. The chairman of the board of
directors, if there be one, shall, when present, preside at all meetings
of the board of directors.
The President. The president shall be the chief executive officer of
the corporation and shall have general operating charge of its business.
Unless otherwise prescribed by the board of directors, he shall, when
present, preside at all meetings of the stockholders, and, if a director,
at all meetings of the board of directors unless there be a chairman of
the board of directors who is present at the meeting.
Vice President. In the absence of the president or the chairman or
in case of their inability to act, the senior vice president in length of
service shall preside at all meetings of the stockholders.
The Treasurer. The treasurer shall be the chief financial officer of
the corporation and shall cause to be kept accurate books of account.
The Clerk. The clerk shall keep a record of all proceedings of the
stockholders and, if there be no secretary, shall also keep a record of
all proceedings of the board of directors. In the absence of the clerk
from any meeting of the stockholders or, if there be no secretary, from
any meeting of the board of directors, an assistant clerk, if there be
one, otherwise a clerk pro tempore designated by the person presiding at
the meeting, shall perform the duties of the clerk at such meeting.
The Secretary. The secretary, if there be one, shall keep a record
of all proceedings of the board of directors. In the absence of the
secretary, if there be one, from any meeting of the board of directors, an
assistant secretary, if there be one, otherwise a secretary pro tempore
designated by the person presiding at the meeting, shall perform the
duties of the secretary at such meeting.
Section 9. Other Duties and Powers. Each officer, subject at all times to
these by-laws and to the direction and control of the board of directors, shall
have and may exercise, in addition to the duties and powers specifically set
forth in these by-laws, such duties and powers as are prescribed by law, such
duties and powers as are commonly incident to his office and such duties and
powers as the board of directors may from time to time prescribe.
8
<PAGE>
ARTICLE IV
Capital Stock
Section 1. Amount and Issuance. The total number of shares and the par
value, if any, of each class of stock which the corporation is authorized to
issue shall be stated in the articles of organization. The directors may at any
time issue all or from time to time any part of the unissued capital stock of
the corporation from time to time authorized under the articles of organization,
and may determine, subject to any requirements of law, the consideration for
which stock is to be issued and the manner of allocating such consideration
between capital and surplus. Shares of stock previously issued which have been
reacquired by the corporation may be restored to the status of authorized but
unissued shares by vote of the board of directors, without amendment of the
articles of organization.
Section 2. Certificates. Each stockholder shall be entitled to a
certificate or certificates stating the number and the class and the designation
of the series, if any, of the shares held by him, and otherwise in form approved
by the board of directors. Such certificate or certificates shall be signed by
the president or a vice president and by the treasurer or an assistant
treasurer. Such signatures may be facsimiles if the certificate is signed by a
transfer agent, or by a registrar, other than a director, officer or employee of
the corporation. In case any officer who has signed or whose facsimile signature
has been placed on such certificate shall have ceased to be such officer before
such certificate is issued, it may be issued by the corporation with the same
effect as if he were such officer at the time of its issue.
Every certificate issued for shares of stock at a time when such shares
are subject to any restriction on transfer pursuant to the articles of
organization, these by-laws or any agreement to which the corporation is a party
shall have the restriction noted conspicuously on the certificate and shall also
set forth on the face or back of the certificate either (i) the full text of the
restriction or (ii) a statement of the existence of such restriction and a
statement that the corporation will furnish a copy thereof to the holder of such
certificate upon written request and without charge.
Every certificate issued for shares of stock at a time when the
corporation is authorized to issue more than one class or series of stock shall
set forth on the face or back of the certificate either (i) the full text of the
preferences, voting powers, qualifications and special and relative rights of
the shares of each class and series, if any, authorized to be issued, as set
forth in the articles of organization or (ii) a statement of the existence of
such preferences, powers, qualifications and rights and a statement that the
corporation will furnish a copy
9
<PAGE>
thereof to the holder of such certificate upon written request and
without charge.
Section 3. Transfers. The board of directors may make such rules and
regulations not inconsistent with the law, with the articles of organization or
with these by-laws as it deems expedient relative to the issue, transfer and
registration of stock certificates. The board of directors may appoint a
transfer agent and a registrar of transfers or either and require all stock
certificates to bear their signatures. Except as otherwise provided by law, by
the articles of organization or by these by-laws, the corporation shall be
entitled to treat the record holder of any shares of stock as shown on the books
of the corporation as the holder of such shares for all purposes, including the
right to receive notice of and to vote at any meeting of stockholders and the
right to receive any dividend or other distribution in respect of such shares.
Section 4. Record Date. The board of directors may fix in advance a time,
which shall be not more than sixty (60) days before the date of any meeting of
stockholders or the date for the payment of any dividend or the making of any
distribution to stockholders or the last day on which the consent or dissent of
stockholders may be effectively expressed for any purpose, as the record date
for determining the stockholders having the right to notice of and to vote at
such meeting and any adjournment thereof or the right to receive such dividend
or distribution or the right to give such consent or dissent, and in such case
only stockholders of record on such record date shall have such right,
notwithstanding any transfer of stock on the books of the corporation after the
record date; or without fixing such record date the directors may for any of
such purposes close the transfer books for all or any part of such period.
Section 5. Lost Certificates. The board of directors may, except as
otherwise provided by law, determine the conditions upon which a new certificate
of stock may be issued in place of any certificate alleged to have been lost,
mutilated or destroyed.
ARTICLE V
Miscellaneous Provisions
Section 1. Fiscal Year. The fiscal year of the corporation shall begin on
the first day of January in each year and end on the last day of December next
following.
Section 2. Corporate Seal. The seal of the corporation shall be in such
form as shall be determined from time to time by the board of directors.
10
<PAGE>
Section 3. Corporation Records. The original, or attested copies, of the
articles of organization, by-laws and records of all meetings of the
incorporators and stockholders, and the stock and transfer records, which shall
contain the names of all stockholders and the record address and the amount of
stock held by each, shall be kept in The Commonwealth of Massachusetts at the
principal office of the corporation in said Commonwealth or at an office of the
transfer agent or of its clerk or of its resident agent, if any. Said copies and
records need not all be kept in the same office. They shall be available at all
reasonable times to inspection by any stockholder for any proper purpose but not
if the purpose for which such inspection is sought is to secure a list of
stockholders or other information for the purpose of selling said list or
information or copies thereof or of using the same for a purpose other than the
interest of the applicant, as a stockholder, relative to the affairs of the
corporation.
Section 4. Voting of Securities. Except as the board of directors may
otherwise prescribe, the president or the treasurer shall have full power and
authority in the name and on behalf of the corporation, subject to the
instructions of the board of directors, to waive notice of, to attend, act and
vote at, and to appoint any person or persons to act as proxy or attorney in
fact for this corporation (with or without power of substitution) at any meeting
of stockholders or shareholders of any other corporation or organization, the
securities of which may be held by this corporation.
Section 5. Execution of Instruments. All deeds, leases, transfers,
contracts, bonds, notes and other obligations authorized to be executed by an
officer of the corporation in its behalf shall be signed by the president, any
vice president or the treasurer except as the board of directors may generally
or in particular cases otherwise determined.
Section 6. Control Share Acquisitions. The provisions of Chapter 110D of
the Massachusetts General Laws with respect to the regulation of control share
acquisitions shall not apply to this corporation.
ARTICLE VI
Amendments
These by-laws may be amended or repealed at any annual or special meeting
of the stockholders by the affirmative vote of a majority of the shares of
capital stock then issued, outstanding and entitled to vote, provided notice of
the proposed amendment or repeal is given in the notice of the meeting.
11
<PAGE>
If authorized by the articles of organization, these by-laws may also be
amended or repealed in whole or in part, or new by-laws made, by the board of
directors except with respect to any provision hereof which by law, the articles
of organization or these by-laws requires action by the stockholders. Not later
than the time of giving notice of the meeting of stockholders next following the
making, amendment or repeal by the directors of any by-laws, notice thereof
stating the substance of such change shall be given to all stockholders entitled
to vote on amending the by-laws. Any by-law to be made, amended or repealed by
the directors may be amended or repealed by the stockholders.
1-258036
12
July 11, 1996
Pegasystems Inc.
101 Main Street
Cambridge, MA 02142
Gentlemen:
This opinion is delivered to you in connection with the
registration statement (the "Registration Statement") on Form S-1
of Pegasystems Inc. (the "Company") filed on May 15, 1996 with
the Securities and Exchange Commission by the Company under the
Securities Act of 1933, as amended, for registration under said
Act of 3,910,000 shares of the common stock, $.01 par value (the
"Common Stock"), of the Company.
We are familiar with the Articles of Organization of the
Company, as amended, the corporate minute book and the by-laws of
the Company, as amended, and the Registration Statement. We have
also made such further investigation as we have deemed necessary
for the purposes of this opinion.
Based upon and subject to the foregoing, we are of the
opinion that the shares of Common Stock to be sold by the Company
pursuant to the prospectus contained in the Registration
Statement (the "Prospectus") have been validly authorized for
issuance and, when issued against receipt of the purchase price
described in the Prospectus, will be legally issued, fully paid
and nonassessable.
We understand that this opinion is to be used in connection
with the Registration Statement. We consent to the filing of
this opinion as an exhibit to the Registration Statement and the
reference to our firm in the Prospectus under the caption "Legal
Matters."
Very truly yours,
CHOATE, HALL & STEWART
Pegasystems Inc.
1994 Long-Term Incentive Plan
As Amended and Restated on May 13, 1996
<PAGE>
Pegasystems Inc.
1994 Long-Term Incentive Plan
================================================================================
SECTION CONTENTS PAGE
- ------- -------- -----
1. Purpose; Definitions 1
2. Administration 4
3. Stock Subject to Plan 5
4. Eligibility 7
5. Stock Options 7
6. Stock Appreciation Rights 13
7. Restricted Stock 15
8. Long-Term Performance Awards 17
9. Amendments and Termination 19
10. Unfunded Status of Plan 20
11. General Provisions 20
12. Effective Date of Plan 22
13. Term of Plan 22
- --------------------------------------------------------------------------------
Pegasystems Inc. Page i Confidential
<PAGE>
Pegasystems Inc.
1994 Long-Term Incentive Plan
================================================================================
SECTION 1. Purpose; Definitions.
The name of this Plan is the Pegasystems Inc. 1994 Long-Term Incentive
Plan (the "Plan"). The purpose of the Plan is to provide incentives: (a) to
employees of Pegasystems Inc. (the "Corporation") by providing them with
opportunities to purchase stock in the Corporation pursuant to options granted
hereunder which qualify as Incentive Stock Options under Section 422 of the
Internal Revenue Code of 1986; (b) to directors (whether or not employees),
employees and consultants of the Corporation by providing them with
opportunities to purchase stock in the Corporation pursuant to options granted
hereunder which do not qualify as Incentive Stock Options under Section 422 of
the Internal Revenue Code of 1986, and otherwise to participate in shareholder
value which has been created.
For the purposes of the Plan, the following terms shall be defined as
set forth below:
a. "Award" means any Option, Stock Appreciation Right, Restricted
Stock or Long-Term Award granted under this Plan.
b. "Board" means the Board of Directors of the Corporation.
c. "Cause" means a felony conviction of a Participant or the failure
of a Participant to contest prosecution for a felony, or a
Participant's willful misconduct or dishonesty, any of which is
directly and materially harmful to the business or reputation of
the Corporation.
d. "Code" means the Internal Revenue Code of 1986, as amended from
time to time, and any successor thereto.
e. "Committee" means a Compensation Committee of the Board, if such
Committee has been appointed by the Board and has been authorized
to administer the Plan. Such Committee will consist of two or
more members of the Board. In the event the Corporation registers
any class of any equity security pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
each member of the Committee shall be a "Disinterested Person" as
defined below. All references herein to the Committee shall mean
the Board if there is no Committee so appointed. From time to
time the Board may increase the size of the Committee and appoint
additional members thereof, remove members (with or without
- --------------------------------------------------------------------------------
Pegasystems Inc. Page 1 Confidential
<PAGE>
Pegasystems Inc.
1994 Long-Term Incentive Plan
================================================================================
cause), and appoint new members in substitution thereof, fill
vacancies however caused, or remove all members of the Committee
and thereafter directly administer the Plan.
f. "Corporation" means Pegasystems Inc., a corporation organized
under the laws of the Commonwealth of Massachusetts, or any
successor organization.
g. "Disability" means permanent and total disability as determined
under the Corporation's long-term disability program.
h. "Disinterested Person" shall have the meaning set forth in Rule
16b-3(c)(2)(i) as promulgated by the Securities and Exchange
Commission under the Exchange Act, or any successor definition
adopted by the Securities and Exchange Commission.
i. "Early Retirement" means that a Participant has attained the
consent of the Committee to retire prior to having attained age
60 or qualifies for early retirement pursuant to the early
retirement provisions as set forth in a pension plan of the
Corporation in which the Optionee is a participant.
j. "Fair Market Value" means, as of any given date, the mean of the
highest and lowest quoted selling prices of the Stock on the
exchange on which the Corporation's shares are listed for trading
(consolidated trading) or, if no such sale occurs on the exchange
on such date, the fair market value of the Stock as determined by
the Committee in good faith based on the best available facts and
circumstances at the time.
k. "Incentive Stock Option" means any Stock Option intended to be
and designated as an "Incentive Stock Option" within the meaning
of Section 422 of the Code.
l. "Insider" means a Participant who is subject to the requirements
of the Rules (as defined below).
m. "Long-Term Performance Award" or "Long-Term Award" means an award
made pursuant to Section 8 below that is payable in cash and/or
Stock (including Restricted Stock) in accordance with the terms
of the grant, based
- --------------------------------------------------------------------------------
Pegasystems Inc. Page 2 Confidential
<PAGE>
Pegasystems Inc.
1994 Long-Term Incentive Plan
================================================================================
on Corporation, business unit and/or individual performance over
a period of at least two years.
n. "Non-Qualified Stock Option" means any Stock Option that is not
an Incentive Stock Option.
o. "Normal Retirement" means retirement of a Participant from active
employment with the Corporation and any subsidiary or affiliate
after either having attained age 60 or pursuant to the normal
retirement provisions of an applicable pension plan of the
Corporation.
p. "Option" means any Incentive Stock Option or Non-Qualified Stock
Option to purchase shares of Stock (including Restricted Stock,
if the Committee so determines) granted pursuant to Section 5
below.
q. "Optionee" means a Participant who is the recipient of any
Incentive Stock Option or Non-Qualified Stock Option under this
Plan.
r. "Participant" means anyone to whom an Award is granted pursuant
to the Plan.
s. "Plan" means the Pegasystems Inc. 1994 Long-Term Incentive Plan,
as hereinafter amended from time to time.
t. "Restricted Stock" means an award of shares of Stock that is
subject to restrictions pursuant to Section 7 below.
u. "Retirement" means Normal or Early Retirement.
v. "Rules" means Section 16 of the Securities Exchange Act of 1934,
as amended (the "Exchange Act") and the regulations promulgated
thereunder.
w. "Securities Broker" means the registered securities broker
acceptable to the Corporation who agrees to effect the cashless
exercise of an Option pursuant to Section 5(m) hereof.
- --------------------------------------------------------------------------------
Pegasystems Inc. Page 3 Confidential
<PAGE>
Pegasystems Inc.
1994 Long-Term Incentive Plan
================================================================================
x. "Stock" means the Common Stock, $.01 par value per share, of the
Corporation.
y. "Stock Appreciation Right" means the right, pursuant to an award
granted under Section 6 below, to surrender to the Corporation
all (or a portion) of a Stock Option in exchange for an amount
equal to the difference between (i) the Fair Market Value (or
such lesser ceiling as may be specified in the option grant), as
of the date such Stock Option (or such portion thereof) is
surrendered, of the shares of Stock covered by such Stock Option
(or such portion thereof), and (ii) the aggregate exercise price
of such Stock Option (or such portion thereof).
SECTION 2. Administration
The Plan shall be administered by the Committee.
The Committee shall have the authority to grant to eligible
Participants, pursuant to the terms of the Plan: (i) Stock Options, (ii) Stock
Appreciation Rights, (iii) Restricted Stock and/or (iv) Long-Term Performance
Awards.
In particular, the Committee shall have the authority:
(i) to select the Participants to whom Stock Options, Stock
Appreciation Rights, Restricted Stock and Long-Term Performance
Awards may from time to time be granted hereunder.
(ii) to determine whether and to what extent Incentive Stock Options,
Non-Qualified Stock Options, Stock Appreciation Rights,
Restricted Stock and Long-Term Performance Awards, or any
combination thereof, are to be granted hereunder;
(iii) to determine the number of shares to be covered by each such
award granted hereunder;
(iv) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any award granted hereunder including, but
not limited to, the share price and any restriction or
limitation, or any vesting acceleration or
- --------------------------------------------------------------------------------
Pegasystems Inc. Page 4 Confidential
<PAGE>
Pegasystems Inc.
1994 Long-Term Incentive Plan
================================================================================
forfeiture waiver regarding any Stock Option or other award
and/or the shares of Stock relating thereto, based on such
factors as the Committee shall determine, in its sole discretion;
(v) to determine whether and under what circumstances a Stock Option
may be settled in cash or stock, including Restricted Stock under
Section 5(k);
(vi) to determine whether and under what circumstances a Stock Option
may be exercised without a payment of cash under Section 5(1);
and
(vii) to determine whether, to what extent and under what circumstances
Stock and other amounts payable with respect to an award under
this Plan shall be deferred either automatically or at the
election of the Participant.
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall,
from time to time, deem advisable; to interpret the terms and provisions of the
Plan and any award issued under the Plan (and any agreements relating thereto);
and to otherwise supervise the administration of the Plan.
All decisions made by the Committee pursuant to the provisions of the
Plan shall be final and binding on all persons, including the Corporation and
Plan Participants.
SECTION 3. Stock Subject to the Plan
(a) Stock Subject to Plan. The stock to be subject or related to
awards under the Plan shall be shares of the Corporation's Stock
and may be either authorized and unissued or held in the treasury
of the Corporation. The maximum number of shares of Stock
authorized with respect to the grant of awards under the Plan,
subject to adjustment in accordance with paragraph 3(c) below,
shall be up to 5,000,000 shares of Stock (after giving effect to
a 3-for-1 stock split in the form of a stock dividend to be
effective on July 10, 1996); any or all of such 5,000,000
shares of Stock may be granted for awards of Incentive Stock
Options.
- --------------------------------------------------------------------------------
Pegasystems Inc. Page 5 Confidential
<PAGE>
Pegasystems Inc.
1994 Long-Term Incentive Plan
================================================================================
In addition, shares equal to 2% of Stock outstanding shares at
the start of each Fiscal Year shall each year be reserved
exclusively for the granting of replacement Options under Section
5(e) below to all Participants. Such additional authorization of
Stock for the granting of replacement Options shall not, at any
time, cause the maximum shareholder dilution caused by the Plan
to exceed the 5,000,000 shares of Stock authorized for grant
under the Plan.
Notwithstanding the foregoing, no individual shall receive, over
the term of the Plan, more than an aggregate of 30% of the shares
authorized for grant under the Plan, including shares subject to
replacement Options awarded under the Plan.
(b) Unused, Forfeited and Reacquired Shares. The shares related to
the unexercised or undistributed portion of any terminated,
expired or forfeited Award for which no material benefit was
received by a Participant (i.e. dividends) shall be made
available for distribution in connection with future awards under
the Plan to the extent permitted to receive exemptive relief
pursuant to the Rules. Any shares made available for distribution
in connection with future awards under this Plan pursuant to this
paragraph (b) shall be in addition to the shares available
pursuant to paragraph (a) of this Section 3.
(c) Other Adjustments. In the event of any merger, reorganization,
consolidation, recapitalization, Stock dividend, or other change
in corporate structure affecting the Stock, such substitution or
adjustment shall be made in the aggregate number of shares
reserved for issuance under the Plan, in the number and option
price of shares subject to outstanding Options granted under the
Plan and in the number and price of shares subject to other
Awards made under the Plan, as may be determined to be
appropriate by the Committee in its sole discretion, provided
that the number of shares subject to any award shall always be a
whole number. Such adjusted option price shall also be used to
determine the amount payable by the Corporation upon the exercise
of any Stock Appreciation Right associated with any Stock Option.
- --------------------------------------------------------------------------------
Pegasystems Inc. Page 6 Confidential
<PAGE>
Pegasystems Inc.
1994 Long-Term Incentive Plan
================================================================================
SECTION 4. Eligibility
Directors (whether or not employees of the Corporation), consultants and
employees of the Corporation who are responsible for or who contribute to the
management, growth and/or profitability of the Corporation and/or any Subsidiary
(as defined below) or affiliate of the Corporation are eligible to be granted
Awards under the Plan.
SECTION 5 Stock Options
Stock Options may be granted alone, in addition to or in tandem with
other awards granted under the Plan. Any Stock Option granted under the Plan
shall be in such form as the Committee may from time to time approve.
Stock Options granted under the Plan may be of two types: (i)
Incentive Stock Options and (ii) Non-Qualified Stock Options.
With the exception of Optionees who are either (i) consultants or (ii)
directors who are not also employees of the corporation, who shall not be
eligible to receive Incentive Stock Options, the Committee shall have the
authority to grant any Optionee Incentive Stock Options, Non-Qualified Stock
Options, or both types of Stock Options (in each case with or without Stock
Appreciation Rights). To the extent that any Stock Option does not qualify as an
Incentive Stock Option, it shall constitute a separate Non-Qualified Stock
Option.
Anything in the Plan to the contrary notwithstanding, no term of this
Plan relating to Incentive Stock Options shall be interpreted, amended or
altered, nor shall any discretion or authority granted under the Plan be so
exercised, so as to disqualify the Plan under Section 422 of the Code, or,
without the consent of the Optionee(s) affected, to disqualify any Incentive
Stock Option under such Section 422.
Options granted under the Plan shall be subject to the following terms
and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem
appropriate:
(a) Option Price. The option price per share of Stock purchasable
under a Stock Option shall be determined by the Committee at the
time of grant, but for Non-Qualified Stock Options shall not be
less than 50% of the Fair Market
- --------------------------------------------------------------------------------
Pegasystems Inc. Page 7 Confidential
<PAGE>
Pegasystems Inc.
1994 Long-Term Incentive Plan
================================================================================
Value of the Stock at the time of grant, and for Incentive Stock
Options shall be not less than 100% of the Fair Market Value of
the Stock at the time of grant. However, any Incentive Stock
Option granted to any Optionee who, at the time the Option is
granted, owns more than 10% of the voting power of all classes of
stock of the Corporation or of a Parent or Subsidiary
corporation, shall have an exercise price no less than 110% of
Fair Market Value per share on date of the grant. The term
"Parent" and "Subsidiary" as used herein shall mean "parent
corporation" and "subsidiary corporation" as those terms are
defined in Section 424 of the Code.
(b) Option Term. The term of each Stock Option shall be fixed by the
Committee, but no Incentive Stock Option or Non-Qualified Stock
Option shall be exercisable more than ten years after the date
the Option is granted. However, any Option granted to any
Optionee who at the time the Option is granted owns more than 10%
of the voting power of all classes of Stock of the Corporation or
of a Parent or Subsidiary corporation may not have a term of more
than five years. No Option may be exercised by any person after
expiration of the term of the Option.
(c) Exercisability. Stock Options shall be exercisable at such time
or times and subject to such terms and conditions as shall be
determined by the Committee at or after grant, provided, however,
that, except as provided in Section 5(g), unless otherwise
determined by the Committee at or after grant, no Stock Option
shall be exercisable during the six months following the date of
the granting of the Option. If the Committee provides, in its
discretion, that any Stock Option is exercisable only in
installments, the Committee may waive such installment exercise
provisions at any time at or after grant in whole or in part,
based on such factors as the Committee shall determine, in its
sole discretion.
(d) Method of Exercise. Subject to whatever installment exercise
provisions apply under Section 5(c), Stock Options may be
exercised in whole or in part at any time and from time to time
during the Option period, by giving written notice of exercise to
the Corporation specifying the number of shares to be purchased.
- --------------------------------------------------------------------------------
Pegasystems Inc. Page 8 Confidential
<PAGE>
Pegasystems Inc.
1994 Long-Term Incentive Plan
================================================================================
Such notice shall be accompanied by payment in full of the
purchase price, either by certified or bank check, or such other
instrument as the Committee may accept. As determined by the
Committee, in its sole discretion, at or after grant, payment in
full or in part may also be made in the form of unrestricted
Stock already owned by the Optionee or, in the case of the
exercise of a Non-Qualified Stock Option or Restricted Stock
subject to an award hereunder (based, in each case, on the Fair
Market Value of the Stock on the date the Option is exercised, as
determined by the Committee), provided, however, that, in the
case of an Incentive Stock Option, the right to make a payment in
the form of already owned shares may be authorized only at the
time the Option is granted.
The Committee, in its sole discretion, may at the time of grant
or such later time as it determines, permit payment of the Option
exercise price of a Non-Qualified Stock Option to be made in
whole or in part in the form of Restricted Stock. If such payment
is permitted, then such Restricted Stock (and any replacement
shares relating thereto) shall remain (or be) restricted in
accordance with the original terms of the Restricted Stock award
in question, and any additional Stock received upon the exercise,
shall be subject to the same forfeiture restrictions, unless
otherwise determined by the Committee, in its sole discretion, at
or after grant.
If payment of the Option exercise price of a Non-Qualified Option
is made in whole or in part in the form of unrestricted stock
already owned by the Participant, the Corporation may require
that the stock be owned by the Participant for a period of six
months or longer so that such payment would not result in a
pyramid exercise.
No shares of Stock shall be issued until full payment therefor
has been made. An Optionee shall generally have the rights to
dividends or other rights of a shareholder with respect to shares
subject to the Option when the Optionee has given written notice
of exercise, has paid in full for such shares, and, if requested,
has given the representation described in Section 11(a).
(e) Replacement Options. If an Option granted pursuant to the Plan
may be exercised by an Optionee by means of a stock-for-stock
swap method of exercise as provided in 5(d) above, then the
Committee may, in its sole
- --------------------------------------------------------------------------------
Pegasystems Inc. Page 9 Confidential
<PAGE>
Pegasystems Inc.
1994 Long-Term Incentive Plan
================================================================================
discretion, at the time of the original Option grant or at such
subsequent time during the term of such Option as the Committee,
in its sole discretion, shall deem appropriate, authorize the
Participant to automatically receive a replacement Option
pursuant to this part of the Plan. This replacement Option shall
cover a number of shares determined by the Committee, but in no
event more than the number of shares equal to the difference
between the number of shares covered by the original Option
exercised and the net shares received by the Participant from
such exercise. The exercise price of the replacement Option shall
equal the then current Fair Market Value, and with a term not to
exceed ten years.
The Committee shall have the right, in its sole discretion and at
any time, to discontinue the automatic grant of replacement
Options if it determines the continuance of such grants to no
longer be in the best interest of the Corporation.
(f) Non-transferability of Options. No Stock Option shall be
transferable by the Optionee otherwise than by will or by the
laws of descent and distribution, and all Stock Options shall be
exercisable, during the Optionee's lifetime, only by the
Optionee.
(g) Termination by Reason of Death. Subject to Section 5(j), if an
Optionee's employment by the Corporation and any Subsidiary or
affiliate terminates by reason of death, any Stock Option held by
such Optionee may thereafter be exercised, to the extent then
exercisable or on such accelerated basis as the Committee may
determine at or after grant, by the legal representative of the
estate or by the legatee of the Optionee under the will of the
Optionee, for a period of one year (or such shorter period as the
Committee may specify at grant) from the date of such death or
until the expiration of the stated term of such Stock Option,
whichever period is the shorter.
(h) Termination by Reason of Disability. Subject to Section 5(k), if
an Optionee's employment by the Corporation and any Subsidiary or
affiliate terminates by reason of Disability, any Stock Option
held by such Optionee may thereafter be exercised by the
Optionee, to the extent it was exercisable at the time of
termination, or on such accelerated basis as the Committee may
determine at or after grant, for a period of two years (or such
shorter period as the Committee may specify at grant) from the
date of such termination of employment or until the expiration of
the stated term of such Stock Option, whichever period is the
shorter; provided, however, that if the Optionee dies within such
two-year period (or such shorter period
- --------------------------------------------------------------------------------
Pegasystems Inc. Page 10 Confidential
<PAGE>
Pegasystems Inc.
1994 Long-Term Incentive Plan
================================================================================
as the Committee shall specify at grant), any unexercised Stock
Option held by such Optionee shall, at the sole discretion of the
Committee, thereafter be exercisable to the extent to which it
was exercisable at the time of death for a period of twelve
months from the date of such death or until the expiration of the
stated term of such Stock Option, whichever period is the
shorter. In the event of termination of employment by reason of
Disability, if an Incentive Stock Option is exercised after the
expiration of the exercise periods that apply for purposes of
Section 422 of the Code, such Stock Option will thereafter be
treated as a Non-Qualified Stock Option.
(i) Termination by Reason of Retirement. Subject to Section 5(j), if
an Optionee's employment by the Corporation terminates by reason
of Normal or Early Retirement, any Stock Option held by such
Optionee may thereafter be exercised by the Optionee, to the
extent it was exercisable at the time of such Retirement or on
such accelerated basis as the Committee may determine at or after
grant, for a period of two years (or such shorter period as
Committee may specify at grant) from the date of such termination
of employment or the expiration of the stated term of such Stock
Option, whichever period is the shorter; provided, however, that,
if the Optionee dies within such two-year period, any unexercised
Stock Option held by such Optionee shall, at the sole discretion
of the Committee, thereafter be exercisable, to the extent to
which it was exercisable at the time of death, for a period of
twelve months from the date of such death or until the expiration
of the stated term of such Stock Option, whichever period is the
shorter. In the event of termination of employment by reason of
Retirement, if an Incentive Stock Option is exercised after the
expiration of the exercise periods that apply for purposes of
Section 422 of the Code, such Stock Option will thereafter be
treated as a Non-Qualified Stock Option.
(j) Other Termination. Unless otherwise determined by the Committee
at or after grant, if an Optionee's employment by the Corporation
terminates for any reason other than death, Disability or Normal
or Early Retirement, the Stock Option shall thereupon terminate,
except that such Stock Option may
- --------------------------------------------------------------------------------
Pegasystems Inc. Page 11 Confidential
<PAGE>
Pegasystems Inc.
1994 Long-Term Incentive Plan
================================================================================
be exercised for the lesser of three months or the balance of
such Stock Option's term if the Optionee is involuntarily
terminated by the Corporation without Cause.
(k) Incentive Stock Option Limitations. To the extent required for
"Incentive Stock Option" status under Section 422 of the Code,
the aggregate Fair Market Value (determined as of the time of
grant) of the Stock with respect to which Incentive Stock Options
granted after 1986 are exercisable for the first time by the
Optionee during any calendar year under the Plan and/or any other
Option plan of the Corporation (within the meaning of Section 424
of the Code) after 1986 shall not exceed $100,000.
To the extent (if any) permitted under Section 422 of the Code,
if (i) a Participant's employment with the Corporation is
terminated by reason of death, Disability or Retirement and (ii)
the portion of any Incentive Stock Option that is otherwise
exercisable during the post-termination period specified under
Section 5(g), (h) or (i), applied without regard to this Section
5(k), is greater than the portion of such Option that is
exercisable as an "Incentive Stock Option" during such
post-termination period under Section 422, such post-termination
period shall automatically be extended (but not beyond the
original Option term) to the extent necessary to permit the
Optionee to exercise such Incentive Stock Option.
(l) Cash-out of Option; Settlement of Spread Value in Restricted
Stock. On receipt of written notice to exercise, the Committee
may, in its sole discretion, elect to cash out all or part of the
portion of the Option(s) to be exercised by paying the Optionee
an amount, in cash or stock, equal to the excess of the Fair
Market Value of the Stock over the option price (the "Spread
Value") on the effective date of such cash-out.
In addition, if the Option agreement so provides at grant or is
amended (with the Optionee's consent) after grant and prior to
exercise to so provide, the Committee may require that all or
part of the shares to be issued with respect to the Spread Value
of an exercised Option take the form of Restricted Stock, which
shall be valued on the date of exercise on the basis of the Fair
Market Value of such Restricted Stock determined without regard
to the forfeiture restrictions involved.
- --------------------------------------------------------------------------------
Pegasystems Inc. Page 12 Confidential
<PAGE>
Pegasystems Inc.
1994 Long-Term Incentive Plan
================================================================================
(m) Cashless Exercise. To the extent permitted under the applicable
laws and regulations under Section 16 of the Securities Exchange
Act of 1934, as amended, and the Rules promulgated thereunder,
and with the consent of the Committee, the Corporation agrees to
cooperate in a "cashless exercise" of an Option. The cashless
exercise shall be effected by the Participant delivering to the
Securities Broker instructions to sell a sufficient number of
shares of Common Stock to cover the costs and expenses associated
therewith.
SECTION 6. Stock Appreciation Rights
(a) Grant and Exercise. Stock Appreciation Rights may be granted in
conjunction with all or part of any Stock Option granted under
the Plan. In the case of a Non-Qualified Stock Option, such
rights may be granted either at or after the time of the grant of
such Stock Option. In the case of an Incentive Stock Option, such
rights may be granted only at the time of the grant of such Stock
Option.
A Stock Appreciation Right or applicable portion thereof granted
with respect to a given Stock Option shall terminate and no
longer be exercisable upon the termination or exercise of the
related Stock Option, except that, unless otherwise determined by
the Committee, in its sole discretion, at the time of grant, a
Stock Appreciation Right granted with respect to less than the
full number of shares covered by a related Stock Option shall not
be reduced until the number of shares covered by an exercise or
termination of the related Stock Option exceeds the number of
shares not covered by the Stock Appreciation Right.
A Stock Appreciation Right may be exercised by an Optionee, in
accordance with Section 6(b), by surrendering the applicable
portion of the related Stock Option. Upon such exercise and
surrender, the Optionee shall be entitled to receive an amount
determined in the manner prescribed in Section 6(b). Stock
Options which have been so surrendered, in whole or in part,
shall no longer be exercisable to the extent the related Stock
Appreciation Rights have been exercised.
- --------------------------------------------------------------------------------
Pegasystems Inc. Page 13 Confidential
<PAGE>
Pegasystems Inc.
1994 Long-Term Incentive Plan
================================================================================
b. Terms and Conditions. Stock Appreciation Rights shall be subject to such
terms and conditions, not inconsistent with the provisions of the Plan,
as shall be determined from time to time by the Committee, including the
following:
(i) Stock Appreciation Rights shall be exercisable only at such time
or times and to the extent that the Stock Options to which they
relate, if any, shall be exercisable in accordance with the
provisions of Section 5 and this Section 6 of the Plan; provided,
however, that any Stock Appreciation Right granted subsequent to
the grant of the related Stock Option shall not be exercisable
during the first six months of its term, except that this special
limitation shall not apply in the event of death or Disability of
the Optionee prior to the expiration of the six-month period.
(ii) Upon the exercise of a Stock Appreciation Right, an Optionee
shall be entitled to receive up to, but not more than, an amount
in cash and/or shares of Stock equal in value to the excess of
the Fair Market Value of one share of Stock over the Option price
per share or such lesser amount as specified in the grant
agreement, multiplied by the number of shares in respect of which
the Stock Appreciation Right shall have been exercised, with the
Committee having the right to determine the form of payment.
(iii) Stock Appreciation Rights shall be transferable only when and to
the extent that the underlying Stock Option would be transferable
under Section 5(f) of the Plan.
(iv) Upon the exercise of a Stock Appreciation Right, the Stock Option
or part thereof to which such Stock Appreciation Right is related
shall be deemed to have been exercised for the purpose of the
limitation set forth in Section 3 of the Plan on the number of
shares of Stock to be issued under the Plan, but only to the
extent of the number of shares issued under the Stock
Appreciation Right at the time of exercise based on the value of
the Stock Appreciation Right at such time.
(v) A Stock Appreciation Right granted in connection with an
Incentive Stock Option may be exercised only if and when the
market price of
- --------------------------------------------------------------------------------
Pegasystems Inc. Page 14 Confidential
<PAGE>
Pegasystems Inc.
1994 Long-Term Incentive Plan
================================================================================
the Stock subject to the Incentive Stock Option exceeds the
exercise price of such Stock Option.
SECTION 7. Restricted Stock
(a) Administration. Shares of Restricted Stock may be issued either alone
or in addition to other awards granted under the Plan. The Committee
shall determine the Participants to whom, and the time or times at
which, grants of Restricted Stock will be made, the number of shares to
be awarded, the price (if any) to be paid by the recipient of
Restricted Stock (subject to Section 7(b)), the time or times within
which such awards may be subject to forfeiture, and all other
conditions of the awards.
The Committee may condition the grant of Restricted Stock upon the
attainment of specified performance goals or such other factors as the
Committee may determine, in its sole discretion.
The provisions of Restricted Stock awards need not be the same with
respect to each recipient.
(b) Awards and Certificates. The prospective recipient of a Restricted
Stock award shall not have any rights with respect to such award,
unless and until such recipient has executed an agreement evidencing
the award and has delivered a fully executed copy thereof to the
Corporation, and has otherwise complied with the applicable terms and
conditions of such award.
(i) The purchase price for shares of Restricted Stock shall not be
less than what prevailing law may require.
(ii) Awards of Restricted Stock must be accepted within a period of 60
days (or such shorter period as the Committee may specify at
grant) after the award date, by executing a Restricted Stock
Award Agreement and paying whatever price (if any) is required
under Section 7(b)(i).
(iii) Each Participant receiving a Restricted Stock award shall be
issued a stock certificate in respect of such shares of
Restricted Stock. Such
- --------------------------------------------------------------------------------
Pegasystems Inc. Page 15 Confidential
<PAGE>
Pegasystems Inc.
1994 Long-Term Incentive Plan
================================================================================
certificate shall be registered in the name of such Participant,
and shall bear an appropriate legend referring to the terms,
conditions, and restrictions applicable to such award,
substantially in the following form:
"The transferability of this certificate and the shares of
stock represented hereby are subject to the terms and
conditions (including forfeiture) of the Pegasystems Inc.
1994 Long-Term Incentive Plan and an Agreement entered into
between the registered owner and Pegasystems Inc. Copies of
such Plan and or Agreement are on file in the offices of
Pegasystems Inc. 101 Main Street, Cambridge, MA 02142-1590
Attention: Vice President, Corporate Services.
(iv) The Committee shall require that the stock certificates
evidencing such shares be held in custody by the Corporation
until the restrictions thereon shall have lapsed, and that, as a
condition of any Restricted Stock award, the Participant shall
have delivered a stock power, endorsed in blank, relating to the
Stock covered by such award.
(c) Restrictions and Conditions. The shares of Restricted Stock awarded
pursuant to this Section 7 shall be subject to the following
restrictions and conditions:
(i) Subject to the provisions of this Plan and the award agreement,
during a period set by the Committee commencing with the date of
such award (the "Restriction Period"), the Participant shall not
be permitted to sell, transfer, pledge, assign or otherwise
encumber shares of Restricted Stock awarded under the Plan.
Within these limits, the Committee, in its sole discretion, may
provide for the lapse of such restrictions in installments and
may accelerate or waive such restrictions in whole or in part,
based on service, performance and/or such other factors or
criteria as the Committee may determine, in its sole discretion.
(ii) Except as provided in this paragraph (ii) and Section 7(c)(i),
the Participant shall have, with respect to the shares of
Restricted Stock,
- --------------------------------------------------------------------------------
Pegasystems Inc. Page 16 Confidential
<PAGE>
Pegasystems Inc.
1994 Long-Term Incentive Plan
================================================================================
all of the rights of a shareholder of the Corporation, including
the right to vote the shares, and the right to receive any cash
dividends. The Committee, in its sole discretion, as determined
at the time of award, may permit or require the payment of cash
dividends to be deferred and, if the Committee so determines,
reinvested in additional Restricted Stock to the extent shares
are available under Section 3.
(iii) Subject to the applicable provisions of the award agreement and
this Section 7, upon termination of a Participant's employment
with the Corporation for any reason during the Restriction
Period, all shares still subject to restriction shall be
forfeited by the Participant.
(iv) In the event of hardship or other special circumstances of a
Participant whose employment with the Corporation is
involuntarily terminated (other than for Cause), the Committee
may, in its sole discretion, waive in whole or in part any or all
remaining restrictions with respect to such Participant's shares
of Restricted Stock, based on such factors as the Committee may
deem appropriate.
(v) If and when the Restriction Period expires without a prior
forfeiture of the Restricted Stock subject to such Restriction
Period, the certificates for such shares shall be delivered to
the Participant promptly.
SECTION 8. Long Term Performance Awards
(a) Awards and Administration. Long Term Performance Awards may be awarded
either alone or in addition to other awards granted under the Plan. The
Committee shall determine the nature, length and starting date of the
performance period (the "Performance Period") for each Long Term
Performance Award, which shall be at least two years, and shall
determine the performance objectives to be used in valuing Long Term
Performance Awards and determining the extent to which such Long Term
Performance Awards have been earned. Performance objectives may vary
from Participant to Participant and between groups of Participants and
shall be based upon such Corporation, business unit and/or individual
performance factors and criteria as the Committee may deem appropriate,
including, but not limited to, earnings per share or return on equity.
Performance Periods may overlap and
- --------------------------------------------------------------------------------
Pegasystems Inc. Page 17 Confidential
<PAGE>
Pegasystems Inc.
1994 Long-Term Incentive Plan
================================================================================
Participants may participate simultaneously with respect to Long
Term Performance Awards that are subject to different Performance
Periods and/or different performance factors and criteria.
At the beginning of each Performance Period, the Committee shall
determine for each Long Term Performance Award subject to such
Performance Period the range of dollar values or number of shares
of Stock to be awarded to the Participant at the end of the
Performance Period if and to the extent that the relevant
measure(s) of performance for such Long Term Performance Award is
(are) met. Such dollar values or number of shares of Stock may be
fixed or may vary in accordance with such performance and/or
other criteria as may be specified by the Committee, in its sole
discretion.
(b) Adjustment of Awards. In the event of special or unusual events or
circumstances affecting the application of one or more performance
objectives to a Long Term Performance Award, the Committee may revise
the performance objectives and/or underlying factors and criteria
applicable to the Long Term Performance Awards affected, to the extent
deemed appropriate by the Committee, in its sole discretion, to avoid
unintended windfalls or hardship.
(c) Termination of Employment. Unless otherwise provided in the applicable
award agreement(s), if a Participant terminates employment with the
Corporation during a Performance Period because of death, Disability or
Retirement, such Participant shall be entitled to a payment with
respect to each outstanding Long Term Performance Award at the end of
the applicable Performance Period:
(i) based, to the extent relevant under the terms of the
award, upon the Participant's performance for the portion
of such Performance Period ending on the date of
termination and the performance of the applicable business
unit(s) for the entire Performance Period, and
(ii) prorated where deemed appropriate by the Committee, for
the portion of the Performance Period during which the
Participant was employed by the Corporation, all as
determined by the Committee, in its sole discretion.
- --------------------------------------------------------------------------------
Pegasystems Inc. Page 18 Confidential
<PAGE>
Pegasystems Inc.
1994 Long-Term Incentive Plan
================================================================================
However, the Committee may provide for an earlier payment in
settlement of such award in such amount and under such terms and
conditions as the Committee deems appropriate.
If a Participant terminates employment with the Corporation
during a Performance Period for any other reason, then such
Participant shall not be entitled to any payment with respect to
the Long Term Performance Awards subject to such Performance
Period, unless the Committee shall otherwise determine, in its
sole discretion.
(d) Form of Payment. The earned portion of a Long Term Performance
Award may be paid currently or on a deferred basis with such
interest or earnings equivalent as may be determined by the
Committee, in its sole discretion. Payment shall be made in the
form of cash or whole shares of Stock, including Restricted
Stock, either in a lump sum payment or in annual installments
commencing as soon as practicable after the end of the relevant
Performance Period, all as the Committee shall determine at or
after grant. If and to the extent a Long Term Performance Award
is payable in Stock and the full amount of such value is not paid
in Stock, then the shares of Stock representing the portion of
the value of the Long Term Performance Award not paid in Stock
shall again become available for award under the Plan.
SECTION 9. Amendments and Termination
The Board may amend, alter, or discontinue the Plan at any time and from
time to time, but no amendment, alteration, or discontinuation shall be made
which would impair the rights of an Optionee or Participant with respect to a
Stock Option, Stock Appreciation Right, Restricted Stock or Long Term
Performance Award which has been granted under the Plan, without the Optionee's
or Participant's consent, or which, without the approval of the Corporation's
stockholders obtained within 12 months before or after the Board adopts a
resolution authorizing any of the following amendments, would:
(a) except as expressly provided in this Plan, increase the total
number of shares reserved for the purpose of the Plan;
(b) decrease the Option price of any Stock Option to less than 50% of
the Fair Market Value on the date of grant;
- --------------------------------------------------------------------------------
Pegasystems Inc. Page 19 Confidential
<PAGE>
Pegasystems Inc.
1994 Long-Term Incentive Plan
================================================================================
(c) change the employees or class of employees eligible to
participate in the Plan; or
(d) extend the maximum Option period under Section 5(b) of the Plan.
The Committee may amend the terms of any Stock Option or other award
theretofore granted, prospectively or retroactively, but, subject to Section 3
above, no such amendment shall impair the rights of any holder without the
holder's consent. The Committee may also substitute new Stock Options for
previously granted Stock Options, including previously granted Stock Options
having higher Option prices.
Subject to the above provisions, the Committee shall have broad
authority to amend the Plan to take into account changes in applicable tax laws
and accounting rules, as well as other developments.
SECTION 10. Unfunded Status of Plan
The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
Participant or Optionee by the Corporation, nothing contained herein shall give
any such Participant or Optionee any rights that are greater than those of a
general creditor of the Corporation. In its sole discretion, the Board may
authorize the creation of trusts or other arrangements to meet the obligations
created under the Plan to deliver Stock or payments in lieu of or with respect
to awards hereunder, provided, however, that, unless the Board otherwise
determines with the consent of the affected Participant, the existence of such
trusts or other arrangements is consistent with the "unfunded" status of the
Plan.
SECTION 11. General Provisions
(a) The Committee may require each person purchasing shares pursuant
to a Stock Option under the Plan to represent to and agree with
the Corporation in writing that the Optionee or Participant is
acquiring the shares without a view to distribution thereof. The
certificates for such shares may include any legend which the
Committee deems appropriate to reflect any restrictions on
transfer.
- --------------------------------------------------------------------------------
Pegasystems Inc. Page 20 Confidential
<PAGE>
Pegasystems Inc.
1994 Long-Term Incentive Plan
================================================================================
All certificates for shares of Stock or other securities
delivered under the Plan shall be subject to such stock-transfer
orders and other restrictions as the Committee may deem advisable
under the rules, regulations, and other requirements of the
Exchange Act, any stock exchange upon which the Stock is then
listed, and any applicable federal or state securities law, and
the Committee may cause a legend or legends to be put on any such
certificates to make appropriate reference to such restrictions.
(b) Nothing contained in this Plan shall prevent the Board of
Directors from adopting other or additional compensation
arrangements, subject to stockholder approval if such approval is
required; and such arrangements may be either generally
applicable or applicable only in specific cases.
(c) The adoption of the Plan shall not confer upon any employee of
the Corporation any right to continued employment with the
Corporation, as the case may be, nor shall it interfere in any
way with the right of the Corporation to terminate the employment
of any of its employees at any time.
(d) No later than the date as of which an amount first becomes
includible in the gross income of the Participant for Federal
income tax purposes with respect to any award under the Plan, the
Participant shall pay to the Corporation, or make arrangements
satisfactory to the Committee regarding the payment of, any
Federal, state, or local taxes of any kind required by law to be
withheld with respect to such amount. Unless otherwise determined
by the Committee, the minimum required withholding obligations
may be settled with Stock, including Stock that is part of the
award that gives rise to the withholding requirement. The
obligations of the Corporation under the Plan shall be
conditional on such payment or arrangements and the Corporation
shall, to the extent permitted by law, have the right to deduct
any such taxes from any payment of any kind otherwise due to the
Participant.
(e) At the time of grant, the Committee may provide in connection
with any grant made under this Plan that the shares of Stock
received as a result of such grant shall be subject to a right of
first refusal, pursuant to which the Participant shall be
required to offer to the Corporation any shares that the
Participant wishes to sell, with the price being the then Fair
Market Value of
- --------------------------------------------------------------------------------
Pegasystems Inc. Page 21 Confidential
<PAGE>
Pegasystems Inc.
1994 Long-Term Incentive Plan
================================================================================
the Stock, subject to such other terms and conditions as the
Committee may specify at the time of grant.
(f) Shares may be subject to a repurchase right by the Corporation
which the Corporation shall have the right to exercise from time
to time as may be set forth in a grant agreement for an award
granted under this Plan.
(g) The reinvestment of dividends in additional Restricted Stock (or
in other types of Plan awards) at the time of any dividend
payment shall only be permissible if sufficient shares of Stock
are available under Section 3 for such reinvestment (taking into
account then outstanding Stock Options and other Plan awards).
(h) The Committee shall establish such procedures as it deems
appropriate for a Participant to designate a beneficiary to whom
any amounts payable in the event of the Participant's death are
to be paid.
(i) The Plan and all awards made and actions taken thereunder shall
be governed by and construed in accordance with the laws of the
Commonwealth of Massachusetts.
SECTION 12. Effective Date of Plan
The Plan shall be effective on the date it is approved by a vote of the
holders of a majority of the total outstanding Stock.
SECTION 13. Term of Plan
No Stock Option, Stock Appreciation Right, Restricted Stock or Long Term
Performance Award shall be granted pursuant to the Plan on or after the tenth
anniversary of the date of stockholder approval, but awards granted prior to
such tenth anniversary may extend beyond that date.
- --------------------------------------------------------------------------------
Pegasystems Inc. Page 22 Confidential
[/R]
PEGASYSTEMS INC.
1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
1. Purpose. This 1996 Non-Employee Director Stock Option Plan
(hereinafter, the "Plan") is intended to promote the interests of Pegasystems
Inc., a Massachusetts corporation (the "Company"), by providing an inducement to
obtain and retain the services of qualified persons who are not employees or
officers of the Company to serve as members of its Board of Directors (the
"Board").
2. Available Shares. The total number of shares of Common Stock, $.01
par value per share, of the Company (the "Common Stock") for which options may
be granted under the Plan shall not exceed shares, subject to adjustment in
accordance with paragraph 10 of the Plan. Shares subject to the Plan are
authorized but unissued shares or shares that were once issued and subsequently
reacquired by the Company. If any options granted under the Plan are surrendered
before exercise or lapse without exercise, in whole or in part, the shares
reserved therefor shall continue to be available under the Plan.
3. Administration. The Plan shall be administered by the Board or by a
committee appointed by the Board (the "Committee"). In the event the Board fails
to appoint or refrains from appointing a Committee, the Board shall have all
power and authority to administer the Plan. In such event, the word "Committee"
wherever used herein shall be deemed to mean the Board. The Committee shall,
subject to the provisions of the Plan, have the power to construe the Plan, to
determine all questions hereunder, and to adopt and amend such rules and
regulations for the administration of the Plan as it may deem desirable. No
member of the Board or the Committee shall be liable for any action or
determination made in good faith with respect to the Plan or any option granted
under it.
4. Granting of Options.
During the term of the Plan and subject to the availability of shares
under the Plan, each person who is first elected as a member of the Board (the
"Optionee") after May 13, 1996 and during the term of this Plan, and who is not
on the date of such election a current or former employee or officer of the
Company, shall be granted, contingent on stockholder approval of this Plan, an
option to purchase 30,000 shares of Common Stock (after giving effect to a
3-for-1 stock split in the form of a stock dividend to be effective on July 10,
1996) on the date of such grant, such option to vest pursuant to Section 7
below.
Except for the specific options referred to above, no other options
shall be granted under the Plan.
5. Option Price. The purchase price of the stock covered by an option
granted pursuant to this Plan shall be 100% of the fair market value of such
shares on the day the option is granted. The option price will be subject to
adjustment in accordance with the provisions of Section 10 below. For purposes
of this Plan, if, at the time an option is granted under the Plan, the Company's
Common Stock is publicly traded, "fair market value" shall be determined as of
the last business day for which the prices or quotes discussed in this sentence
<PAGE>
are available prior to the date such option is granted and shall mean (i) the
average (on that date) of the high and low prices of the Common Stock on the
principal national securities exchange on which the Common Stock is traded, if
the Common Stock is then traded on a national securities exchange; (ii) the last
reported sale price (on that date) of the Common Stock on the Nasdaq National
Market, if the Common Stock is not then traded on a national securities
exchange; or (iii) the closing bid price (or average of bid prices) last quoted
(on that date) by an established quotation service for over-the-counter
securities, if the Common Stock is not reported on the Nasdaq National Market or
on a national securities exchange. If, at the time an option is granted under
this Plan, the Company's stock is not publicly traded, "fair market value" shall
be the fair market value on the date the option is granted as determined by the
Board in good faith.
6. Period of Option. Unless sooner terminated in accordance with the
provisions of Section 8 below, an option granted hereunder shall expire on the
date which is ten (10) years after the date of grant of the option.
7. Vesting of Shares and Non-transferability of Options.
(a) Vesting. Options granted under this Plan shall not be
exercisable until they become vested. Options granted under this Plan shall vest
in the Optionee and thus become exercisable by the Optionee in five equal annual
installments commencing on the first anniversary of the date of grant.
(b) Legend on Certificates. The certificates representing such
shares shall carry such appropriate legend and such written instructions shall
be given to the Company's transfer agent as may be deemed necessary or advisable
by counsel to the Company in order to comply with the requirements of the
Securities Act of 1933 or any state securities laws.
(c) Non-transferability. Any option granted pursuant to this Plan
shall not be assignable or transferable other than by will or the laws of
descent and distribution or pursuant to a qualified domestic relations order and
shall be exercisable during the Optionee's lifetime only by him or her.
8. Termination of Option Rights.
(a) In the event an Optionee ceases to be a member of the Board
for any reason other than death or permanent disability, any then unexercised
portion of options granted to such Optionee shall, to the extent not then
vested, immediately terminate and become void; any portion of an option which is
then vested but has not been exercised at the time the Optionee so ceases to be
a member of the Board may be exercised, to the extent it is then vested, by the
Optionee until the earlier of the scheduled expiration date of the option and
90 days after the date the Optionee ceased to be a member of the Board.
2
<PAGE>
(b) In the event that an Optionee ceases to be a member of the
Board by reason of his or her death or permanent disability, any option granted
to such Optionee shall be immediately and automatically accelerated and become
fully vested and all unexercised options shall be exercisable by the Optionee
(or by the optionee's personal representative, heir or legatee, in the event of
death) until the earlier of the scheduled expiration date of the option or one
year after the death or disability of the Optionee.
(c) Notwithstanding the provisions in this Section 8, the
Committee may, in its sole discretion, establish different terms and conditions
pertaining to the effect of a participant's ceasing to be a member of the Board.
9. Exercise of Option. An option granted hereunder shall, to the extent
then exercisable, be exercisable in whole or in part by giving written notice to
the Company at its principal office address, stating the number of shares with
respect to which the option is being exercised, accompanied by payment in full
for such shares. Payment may be (a) in United States dollars in cash or by
check, (b) in whole or in part in shares of Common Stock of the Company already
owned by the person or persons exercising the option or shares subject to the
option being exercised (subject to such restrictions and guidelines as the Board
may adopt from time to time), valued at fair market value determined in
accordance with the provisions of Section 5 or (c) consistent with applicable
law, through the delivery of an assignment to the Company of a sufficient amount
of the proceeds from the sale of the Common Stock acquired upon exercise of the
option and an authorization to the broker or selling agent to pay that amount to
the Company, which sale shall be at the participant's direction at the time of
exercise. There shall be no such exercise at any one time as to fewer than one
hundred (100) shares or all of the remaining shares then purchasable by the
person or persons exercising the option, if fewer than one hundred (100) shares.
The Company's transfer agent shall, on behalf of the Company, prepare a
certificate or certificates representing such shares acquired pursuant to
exercise of the option, shall register the optionee as the owner of such shares
on the books of the Company and shall cause the fully executed certificates(s)
representing such shares to be delivered to the optionee as soon as practicable
after payment of the option price in full. The holder of an option shall not
have any rights of a stockholder with respect to the shares covered by the
option except to the extent that one or more certificates for such shares shall
be delivered to him or her upon the due exercise of the option.
10. Adjustments Upon Changes in Capitalization and Other Matters. Upon
the occurrence of any of the following events, an Optionee's rights with respect
to options granted to him or her hereunder shall be adjusted as hereinafter
provided:
(a) Stock Dividends. In the event the Company shall issue any of
its shares as a stock dividend upon or with respect to the shares of stock of
the class which shall at the time be subject to option hereunder, each Optionee
upon exercising an option shall be entitled to receive (for the purchase price
paid upon such exercise) the shares as to which he is exercising his option and,
in addition thereto (at no additional cost), such number of shares of the class
or classes in which such stock dividend or dividends were declared or paid, and
such
3
<PAGE>
amount of cash in lieu of fractional shares, as he would have received if
he had been the holder of the shares as to which he is exercising his option at
all times between the date of grant of such option and the date of its exercise.
(b) Merger; Consolidation; Liquidation; Sale of Assets. In the
event the Company is merged into or consolidated with another corporation under
circumstances where the Company is not the surviving corporation or if the
Company is liquidated or sells or otherwise disposes of all or substantially all
of its assets to another corporation while unexercised options remain
outstanding under this Plan, (i) subject to the provisions of clauses (iii),
(iv) and (v) below, after the effective date of such merger, consolidation or
sale, as the case may be, each holder of an outstanding option shall be
entitled, upon exercise of such option, to receive in lieu of shares of Common
Stock, shares of such stock or other securities as the holders of shares of
Common Stock received pursuant to the terms of the merger, consolidation or
sale; or (ii) the Board may waive any discretionary limitations imposed with
respect to the exercise of the option so that all options from and after a date
prior to the effective date of such merger, consolidation, liquidation or sale,
as the case may be, specified by the Board, shall be exercisable in full; or
(iii) all outstanding options may be cancelled by the Board as of the effective
date of any such merger, consolidation, liquidation or sale, provided that
notice of such cancellation shall be given to each holder of an option, and each
such holder thereof shall have the right to exercise such option in full
(without regard to any discretionary limitations imposed with respect to the
option) during a 30-day period preceding the effective date of such merger,
consolidation, liquidation or sale; or (iv) all outstanding options may be
cancelled by the Board as of the date of any such merger, consolidation,
liquidation or sale, provided that notice of such cancellation shall be given to
each holder of an option and each such holder thereof shall have the right to
exercise such option but only to the extent exercisable in accordance with any
discretionary limitations imposed with respect to the option prior to the
effective date of such merger, consolidation, liquidation or sale; or (v) the
Board may provide for the cancellation of all outstanding options and for the
payment to the holders thereof of some part or all of the amount by which the
value thereof exceeds the payment, if any, which the holder would have been
required to make to exercise such option.
(c) Issuance of Securities. Except as expressly provided herein,
no issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of shares
subject to options. No adjustments shall be made for dividends paid in cash or
in property other than securities of the Company.
(d) No Fractional Shares. No fractional shares shall actually be
issued under the Plan. Any fractional shares which, but for this subparagraph
(d), would have been issued to an Optionee pursuant to an option, shall be
deemed to have been issued and immediately sold to the Company for their fair
market value, and the Optionee shall receive from the Company cash in lieu of
such fractional shares.
4
<PAGE>
(e) Adjustments. Upon the happening of any of the foregoing
events, the class and aggregate number of shares set forth in Section 2 above
that are subject to options which previously have been or subsequently may be
granted under the Plan shall also be appropriately adjusted to reflect such
events. The Board shall determine the specific adjustments to be made under this
Section 10 and its determination shall be conclusive.
11. Restrictions on Issuance of Shares. Notwithstanding the provisions
of Sections 4 and 9 above, the Company shall have no obligation to deliver any
certificate or certificates upon exercise of an option until one of the
following conditions shall be satisfied:
(i) The shares with respect to which the option has been exercised
are at the time of the issue of such shares effectively registered under
applicable federal and state securities laws as now in force or
hereafter amended; or
(ii) Counsel for the Company shall have given an opinion that such
shares are exempt from registration under federal and state securities
laws as now in force or hereafter amended; and the Company has complied
with all applicable laws and regulations with respect thereto, including
without limitation all regulations required by any stock exchange upon
which the Company's outstanding Common Stock is then listed.
12. Representation of Optionee. If requested by the Company, the
Optionee shall deliver to the Company written representations and warranties
upon exercise of the option that are necessary to show compliance with federal
and state securities laws, including representations and warranties to the
effect that a purchase of shares under the option is made for investment and not
with a view to their distribution (as that term is used in the Securities Act of
1933).
13. Option Agreement. Each option granted under the provisions of this
Plan shall be evidenced by an option agreement, which agreement shall be duly
executed and delivered on behalf of the Company and by the Optionee to whom such
option is granted. The option agreement shall contain such terms, provisions and
conditions not inconsistent with this Plan as may be determined by the officer
executing it.
14. Term and Amendment of Plan. This Plan was adopted by the Board
effective as of May 13, 1996, subject to approval by the stockholders of the
Company. Options may no longer be granted under the Plan after May 13, 2006, and
the Plan shall terminate when all options granted or to be granted hereunder are
no longer outstanding. Subject to the provisions of Section 4 above, options may
be granted under the Plan prior to the date of stockholder approval of the Plan.
If the approval of stockholders is not obtained by May 13, 1997, any grants of
options under the Plan made prior to that date will be rescinded. The Board may
at any time terminate the Plan or make such modification or amendment thereof as
it deems advisable; provided, however, that the Board may not, without approval
by the stockholders, (a) increase the maximum number of shares for which options
may be granted under the Plan
5
<PAGE>
(except by adjustment pursuant to Section 10), (b) materially modify the
requirements as to eligibility to participate in the Plan, (c) materially
increase benefits accruing to option holders under the Plan or (d) amend the
Plan in any manner which would cause Rule 16b-3 to become inapplicable to the
Plan; and provided further that the provisions of this Plan specified in Rule
16b-3(c)(2)(ii)(A) (or any successor or amended provision thereof) under the
Securities Exchange Act of 1934 (including without limitation, provisions as to
eligibility, amount, price and timing of awards) may not be amended more than
once every six months, other than to comport with changes in the Internal
Revenue Code, the Employee Retirement Income Security Act or the rules
thereunder. Termination or any modification or amendment of the Plan shall not,
without consent of a participant, affect his or her rights under an option
previously granted to him or her.
15. Compliance with Regulations. It is the Company's intent that this
Plan comply in all respects with Rule 16b-3 under the Securities Exchange Act of
1934 (or any successor or amended version thereof) and any applicable Securities
and Exchange Commission interpretations thereof. If any provision of the Plan is
deemed not to be in compliance with Rule 16b-3, the provision shall be null and
void.
16. Governing Law. The validity and construction of this Plan and the
instruments evidencing options shall be governed by the laws of The Commonwealth
of Massachusetts, without giving effect to the principles of conflicts of law
thereof.
ds1B256710.1
6
PEGASYSTEMS INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
l. PURPOSE. The purpose of this Employee Stock Purchase Plan (the "Plan")
is to provide employees of Pegasystems Inc., a Massachusetts corporation
(the "Company"), and its subsidiaries, who wish to become stockholders
of the Company an opportunity to purchase shares of the Common Stock,
$.01 par value per share, of the Company (the "Shares"). The Plan is
intended to qualify as an "employee stock purchase plan" within the
meaning of Section 423 of the Internal Revenue Code of 1986, as amended
(the "Code").
2. ELIGIBLE EMPLOYEES. Subject to provisions of Sections 7, 8 and 9 below,
any individual who is in the full-time employment (as defined below) of
the Company, or any of its subsidiaries (as defined in Section 424(f) of
the Code) the employees of which are designated by the Board of
Directors of the Company (the "Board") as eligible to participate in the
Plan, is eligible to participate in any Offering of Shares (as defined
in Section 3 below) made by the Company hereunder. Full-time employment
shall include all employees whose customary employment is:
(a) in excess of 20 hours per week; and
(b) more than five months in the relevant calendar year.
3. OFFERING DATES. From time to time the Company, by action of the Board,
will grant rights to purchase Shares to employees eligible to
participate in the Plan pursuant to one or more offerings (each of which
is an "Offering") on a date or series of dates (each of which is an
"Offering Date") designated for this purpose by the Board.
4. PRICES. The Price per share for each grant of rights hereunder shall be
the lesser of:
(a) eighty-five percent (85%) of the fair market value of a Share on
the Offering Date on which such right was granted; or
(b) eighty-five percent (85%) of the fair market value of a Share on
the date such right is exercised.
At its discretion, the Board of Directors may determine a higher price
for a grant of rights.
For purposes of this Plan, the term "fair market value" on any date
means (i) the average (on that date) of the high and low prices of the
Company's Common Stock on the principal national securities exchange on
which the Common Stock is traded, if the Common Stock is then traded on
a national securities exchange; or (ii) the last reported sale price (on
that date) of the Common Stock on the Nasdaq National Market System, if
the Common Stock is not then traded on a national securities exchange;
or (iii) the average of the closing bid and asked prices last quoted (on
that date) by an established quotation service for over-the-counter
securities, if the Common Sock is not reported on the Nasdaq National
Market
<PAGE>
System or on a national securities exchange. If the Company's
Common Stock is not publicly traded at the time a right is granted under
this Plan, "fair market value" shall mean the fair market value of the
Common Stock as determined by the Board after taking into consideration
all factors which it deems appropriate, including, without limitation,
recent sale and offer prices of the Common Stock in private transactions
negotiated at arm's length.
5. EXERCISE OF RIGHTS AND METHOD OF PAYMENT.
(a) Rights granted under the Plan will be exercisable periodically on
specified dates as determined by the Board.
(b) The method of payment for Shares purchased upon exercise of
rights granted hereunder shall be through regular payroll
deductions or by lump sum cash payment, or both, as determined by
the Board. No interest shall be paid upon payroll deductions
unless specifically provided for by the Board.
(c) Any payments received by the Company from a participating
employee and not utilized for the purchase of Shares upon
exercise of a right granted hereunder shall be promptly returned
to such employee by the Company after termination of the right to
which the payment relates.
6. TERM OF RIGHTS. Rights granted on any Offering Date shall be exercisable
upon the expiration of such period ("Offering Period") as shall be
determined by the Board when it authorizes the Offering, provided that
such Offering Period shall in no event be longer than twenty-seven (27)
months.
7. SHARES SUBJECT TO THE PLAN. No more than 500,000 (after giving effect to
a 3-for-1 stock split in the form of a stock dividend to be effective on
July 10, 1996) Shares may be sold pursuant to rights granted under the
Plan; provided, however, that appropriate adjustment shall be made in
such number, in the number of Shares covered by outstanding rights
granted hereunder, in the exercise price of the rights and in the
maximum number of Shares which an employee may purchase (pursuant to
Section 9 below) to give effect to any mergers, consolidations,
reorganizations, recapitalizations, stock splits, stock dividends or
other relevant changes in the capitalization of the Company occurring
after the effective date of the Plan, provided that no fractional Shares
shall be subject to a right and each right shall be adjusted downward to
the nearest full Share. Any agreement of merger or consolidation will
include provisions for protection of the then existing rights of
participating employees under the Plan. Either authorized and unissued
Shares or issued Shares heretofore or hereafter reacquired by the
Company may be made subject to rights under the Plan. If for any reason
any right under the Plan terminates in whole or in part, Shares subject
to such terminated right may again be subjected to a right under the
Plan.
8. LIMITATIONS ON GRANTS.
2
<PAGE>
(a) No employee shall be granted a right hereunder if such employee,
immediately after the right is granted, would own stock or rights
to purchase stock possessing five percent (5%) or more of the
total combined voting power or value of all classes of stock of
the Company, or of any subsidiary, computed in accordance with
Sections 423(b)(3) and 424(d) of the Code.
(b) No employee shall be granted a right which permits his right to
purchase shares under all employee stock purchase plans of the
Company and its subsidiaries to accrue at a rate which exceeds
twenty-five thousand dollars ($25,000) (or such other maximum as
may be prescribed from time to time by the Code) of the fair
market value of such Shares (determined at the time such right is
granted) for each calendar year in which such right is
outstanding at any time in accordance with the provisions of
Section 423(b)(8) of the Code.
(c) No right granted to any participating employee under a single
Offering shall cover more shares than may be purchased at an
exercise price equal to 10% of the base salary payable to the
employee during the Offering not taking into consideration any
changes in the employee's rate of compensation after the date the
employee elects to participate in the Offering, or such other
percentage as determined by the Board from time to time. This
provision shall be construed to meet the requirements set forth
in Section 423(b)(5) of the Code.
9. LIMIT ON PARTICIPATION. Participation in an Offering shall be limited to
eligible employees who elect to participate in such Offering in the
manner, and within the time limitation, established by the Board when it
authorizes the offering.
10. CANCELLATION OF ELECTION TO PARTICIPATE. An employee who has elected to
participate in an Offering may, unless the employee has waived this
cancellation right at the time of such election in a manner established
by the Board, cancel such election as to all (but not part) of the
rights granted under such Offering by giving written notice of such
cancellation to the Company before the expiration of the Offering
Period. Any amounts paid by the employee for the Shares or withheld for
the purchase of Shares from the employee's compensation through payroll
deductions shall be paid to the employee, without interest, upon such
cancellation.
11. TERMINATION OF EMPLOYMENT. Upon termination of employment for any
reason, including the death of the employee, before the date on which
any rights granted under the Plan are exercisable, all such rights shall
immediately terminate and amounts paid by the employee for the Shares or
withheld for the purchase of Shares from the employee's compensation
through payroll deductions shall be paid to the employee or to the
employee's estate, without interest.
12. EMPLOYEE'S RIGHTS AS STOCKHOLDER. No participating employee shall have
any rights as a stockholder in the Shares covered by a right granted
hereunder until such right
3
<PAGE>
has been exercised, full payment has been made for the corresponding
Shares and a certificate for the Shares is actually issued.
13. RIGHTS NOT TRANSFERABLE. Rights under the Plan are not assignable or
transferable by a participating employee and are exercisable only by the
employee.
14. LIMITS ON SALE OF STOCK PURCHASED UNDER THE PLAN. The Plan is intended
to provide shares of Common Stock for investment and not for resale. The
Company does not, however, intend to restrict or influence any employee
in the conduct of his or her own affairs. An employee may, therefore,
sell stock purchased under the Plan at any time the employee chooses,
subject to compliance with any applicable federal or state securities
laws; provided, however, that because of certain federal tax
requirements, each employee agrees by entering the Plan, promptly to
give the Company notice of any such stock disposed of within two years
after the date of grant or within one year of the date of exercise of
the applicable right, such notice to set forth the number of such shares
disposed of. THE EMPLOYEE ASSUMES THE RISK OF ANY MARKET FLUCTUATIONS IN
THE PRICE OF THE STOCK.
15. AMENDMENTS TO OR DISCONTINUANCE OF THE PLAN. The Board may at any time
terminate or amend the Plan without notice and without further action on
the part of stockholders of the Company, provided:
(a) that no such termination or amendment shall adversely affect the
then existing rights of any participating employee; and
(b) that any such amendment which:
(i) increases the number of Shares subject to the Plan
(subject to the provisions of Section 7);
(ii) changes the class of persons eligible to participate under
the Plan; or
(iii) materially increases the benefits accruing to participants
under the Plan
shall be subject to approval of the stockholders of the Company.
16. EFFECTIVE DATE AND APPROVALS. The Plan was adopted by the Board on May
13, 1996 to become effective as of said date. The Company's obligation
to offer, sell and deliver its Shares under the Plan is subject to the
approval of its stockholders not later than May 13, 1997 and of any
governmental authority required in connection with the authorized
issuance or sale of such Shares and is further subject to the Company
receiving the opinion of its counsel that all applicable securities laws
have been complied with.
17. TERM OF PLAN. No rights shall be granted under the Plan after May 13,
2006.
4
<PAGE>
18. ADMINISTRATION OF THE PLAN. The Board or any committee or persons to
whom it delegates its authority (the "Administrator") shall administer,
interpret and apply all provisions of the Plan. The Administrator may
waive such provisions of the Plan as it deems necessary to meet special
circumstances not anticipated or covered expressly by the Plan. Nothing
contained in this Section shall be deemed to authorize the Administrator
to alter or administer the provisions of the Plan in a manner
inconsistent with the provisions of Section 423 of the Code. No member
of the Administrator shall be liable for any action or determination
made in good faith with respect to the Plan or any right granted under
it.
Date approved by the Board
of Directors of the Company: May 13, 1996
Date approved by the
Stockholders of the Company: June 26, 1996
ds1-256712.1
5
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Consolidated Financial Data" and to the use of our report dated May
6, 1996 (except for Notes 10 and 11, as to which the date is July 10, 1996),
in Amendment No. 2 to the Registration Statement (Form S-1 No. 333-03807) and
the related Prospectus of Pegasystems Inc. for the registration of 3,910,000
shares of its common stock.
Our audits also included the financial statement schedule of Pegasystems
Inc. located at Exhibit 99.1. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
Boston, Massachusetts
July 10, 1996
July 3, 1996
The undersigned hereby consents to the reference to its
name and to the use of its report by Pegasystems Inc. (the
"Company") in the Company's Registration Statement on Form S-1
and hereby agrees to the filing of this consent as an exhibit
thereto.
THE ABERDEEN GROUP, INC.
By:___________________________
Name:
Title:
