SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1998
or
[ ] Transition Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ________
Commission File Number: 1-11859
PEGASYSTEMS INC.
(Exact name of Registrant as specified in its charter)
Massachusetts 04-2787865
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
101 Main Street
Cambridge, MA 02142-1590
(Address of principal executive offices) (zip code)
(617) 374-9600
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
There were 28,607,200 shares of the Registrant's common stock, $.01 par value
per share, outstanding on June 30, 1998.
<PAGE>
PEGASYSTEMS INC. AND SUBSIDIARY
Index to Form 10-Q
Part I - Financial Information
Page
Item 1. Financial Statements ----
Consolidated Balance Sheets at December 31, 1997 3
and June 30, 1998
Consolidated Statements of Income for the three 4
and six months ended: June 30, 1997 and June 30, 1998
Consolidated Statements of Cash Flows for the six 5
months ended: June 30, 1997 and June 30, 1998
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Part II - Other Information
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
<PAGE>
Form 10-Q Page 3 of 14
PEGASYSTEMS INC.
Consolidated Balance Sheets
(in thousands, except share-related amounts)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 52,005 $ 43,898
Trade and installment accounts receivable, net of
allowance for doubtful accounts of $2,200 at
December 31, 1997 and $2,500 at June 30, 1998 20,319 31,126
Prepaid expenses and other current assets 1,514 2,121
--------- --------
Total current assets 73,838 77,145
Long-term license installments, net 36,403 48,133
Equipment and improvements, net 5,578 6,883
Purchased software, net 11,701 10,524
--------- --------
Total assets $127,520 $142,685
========= ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 5,398 $ 8,159
Deferred revenue 1,754 4,198
Deferred income taxes 3,978 7,762
--------- -------
Total current liabilities 11,130 20,119
--------- -------
Deferred income taxes 3,669 3,669
--------- -------
Stockholders' Equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized; no shares issued and outstanding -- --
Common stock, $.01 par value, 45,000,000 shares authorized;
28,545,100 shares and 28,607,200 shares issued and
outstanding in 1997 and 1998, respectively 285 286
Additional paid-in capital 86,841 87,133
Deferred compensation (55) (45)
Stock warrant 2,897 2,897
Retained earnings 23,107 29,003
Cumulative foreign currency translation adjustment (354) (377)
--------- --------
Total stockholders' equity 112,721 118,897
--------- --------
Total liabilities and stockholders' equity $127,520 $142,685
========= ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
Form 10-Q Page 4 of 14
PEGASYSTEMS INC.
Consolidated Statements of Income
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1998 1997 1998
-------------- ------- ------------- -------
<S> <C> <C> <C> <C>
Revenue:
Software license $ 1,696 $14,534 $ 7,511 $25,922
Services 3,052 9,005 5,719 15,584
------- ------- ------- -------
Total revenue 4,748 23,539 13,230 41,506
------- ------- ------- -------
Cost of revenue:
Cost of software license 10 735 20 881
Cost of services 2,386 5,317 4,536 9,376
------- ------- ------- -------
Total cost of revenue 2,396 6,052 4,556 10,257
------- ------- ------- -------
Gross Profit 2,352 17,487 8,674 31,249
Operating expenses:
Research and development 3,253 5,310 5,839 10,521
Selling and marketing 4,403 5,825 7,096 11,112
General and administrative 641 1,237 1,246 2,486
------- ------- ------- -------
Total operating expenses 8,297 12,372 14,181 24,119
------- ------- ------- -------
Income (loss) from operations (5,945) 5,115 (5,507) 7,130
License interest income 421 604 795 1,153
Other interest income 998 598 1,748 1,227
------- ------- ------- -------
Income (loss) before provision (benefit) for
income taxes (4,526) 6,317 (2,964) 9,510
Provision (benefit) for income taxes (1,720) 2,401 (1,126) 3,614
------- ------- ------- -------
Net income (loss) $(2,806) $ 3,916 $(1,838) $ 5,896
======= ======= ======= =======
Earnings (loss) per share:
Basic $ (0.10) $ 0.14 $ (0.07) $ 0.21
======= ======= ======= =======
Diluted $ (0.10) $ 0.13 $ (0.07) $ 0.19
======= ======= ======= =======
Weighted average number of common and potential
common shares outstanding:
Basic 28,452 28,573 28,134 28,560
======= ======= ======= =======
Diluted 28,452 30,781 28,134 30,463
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
Form 10-Q Page 5 of 14
PEGASYSTEMS INC.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1998
-------------- -------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $(1,838) $ 5,896
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Provision for deferred income taxes (1,126) 3,784
Depreciation and amortization 804 2,647
Provision for doubtful accounts 815 300
Changes in operating assets and liabilities:
Trade and installment accounts receivable (3,668) (22,837)
Prepaid expenses and other current assets (385) (607)
Accounts payable and accrued expenses 963 2,761
Deferred revenue 2,024 2,444
------- -------
Net cash used in operating activities (2,411) (5,612)
------- -------
Cash Flows from Investing Activities:
Purchase of equipment and improvements (1,565) (2,764)
------- -------
Net cash used in investing activities (1,565) (2,764)
------- -------
Cash Flows from Financing Activities:
Issuance of common stock, net 51,943 --
Exercise of stock options 424 292
------- -------
Net cash provided by financing activities 52,367 292
Effect of exchange rate on cash and cash equivalents (81) (23)
------- -------
Net increase (decrease) in cash and cash equivalents 48,310 (8,107)
Cash and cash equivalents, at beginning of period 24,201 52,005
------- -------
Cash and cash equivalents, at end of period $72,511 $43,898
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
Form 10-Q Page 6 of 14
PEGASYSTEMS INC.
Notes to Consolidated Interim Financial Statements
June 30, 1998
(Unaudited)
Note A - Basis of Presentation
The accompanying unaudited consolidated financial statements of Pegasystems Inc.
(the "Company") presented herein have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three-and six-month periods ended June 30, 1998 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. The Company suggests that these interim condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 1997,
included in the Company's 1997 Annual Report to Stockholders filed with the
Securities and Exchange Commission.
Note B - Earnings Per Share
The Company follows the provisions of Statement of Financial Standards (SFAS)
No. 128, "Earnings Per Share." SFAS No. 128 establishes standards for computing
and presenting earnings per share and applies to entities with publicly held
common stock or potential common stock. The Company has applied the provisions
of SFAS No. 128 and SAB No. 98 retroactively to all periods presented.
Calculations of basic and diluted net income (loss) per share and potential
common shares are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands, except per share data) 1997 1998 1997 1998
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Basic
Net income (loss) $ (2,806) $ 3,916 $(1,838) $ 5,896
======== ======= ======= =======
Weighted average common shares outstanding 28,452 28,573 28,134 28,560
======== ======= ======= =======
Basic earnings (loss) per share $ (0.10) $ 0.14 $ (0.07) $0.21
======== ======= ======= =======
Diluted
Net income (loss) $ (2,806) $ 3,916 $(1,838) $ 5,896
======== ======= ======= =======
Weighted average common shares outstanding 28,452 28,573 28,134 28,560
Effect of:
Assumed exercise of stock options -- 2,208 -- 1,903
-------- ------- ------- -------
Weighted average common shares outstanding,
assuming dilution 28,452 30,781 28,134 30,463
======== ======= ======= =======
Diluted earnings (loss) per share $ (0.10) $ 0.13 $ (0.07) $ 0.19
======== ======= ======= =======
</TABLE>
For the three-month periods ended June 30, 1997 and 1998, 77,368 and 295,970
options, respectively, were excluded from the weighted average common shares
outstanding, assuming dilution, as their effect would be anti-dilutive. For the
six-month periods ended June 30, 1997 and 1998, 77,564 and 577,025 options,
respectively, were excluded from the weighted average common shares outstanding,
assuming dilution, as their effect would be anti-dilutive.
<PAGE>
Form 10-Q Page 7 of 14
PEGASYSTEMS INC.
Notes to Consolidated Interim Financial Statements - Continued
June 30, 1998
Note C - New Accounting Standards
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," effective
January 1, 1998. SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in financial statements. The components
of the Company's comprehensive income are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) (in thousands)
1997 1998 1997 1998
------- ------ ------- ------
<S> <C> <C> <C> <C>
Net income (loss) $(2,806) $3,916 $(1,838) $5,896
Foreign currency translation adjustments, net
of income taxes 23 33 50 14
======= ====== ======= ======
Comprehensive income (loss) $(2,783) $3,949 $(1,788) $5,910
======= ====== ======= ======
</TABLE>
In February 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 132, "Employers' Disclosures about Pensions and other post-Retirement
Benefits." SFAS No. 132 is effective for fiscal years beginning after December
15, 1997. The Company does not expect the adoption of this Statement to have a
significant impact on its financial position or results of operations.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires
computer software costs associated with internal use software to be expensed as
incurred until certain capitalization criteria are met. The Company will adopt
SOP 98-1 prospectively beginning January 1, 1999. The Company does not expect
the adoption of this Statement to have a significant impact on its financial
position or results of operations.
In April 1998, the AICPA issued Statement of Position 98-5 ("SOP 98-5"),
Reporting on the Costs of Start-Up Activities." SOP 98-5 requires all costs
associated with pre-opening, pre-operating and organization activities to be
expensed as incurred. The Company will adopt SOP 98-5 beginning January 1, 1999.
The Company does not expect the adoption of this Statement to have a significant
impact on its financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging instruments. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This statement applies to all entities and is effective for all
fiscal quarters beginning after June 15, 1999. Initial application of this
Statement should be as of an entity's fiscal quarter. As of June 30, 1998 and
during the quarter then ended, the Company did not hold any derivative
instruments or have any hedging activities. The Company does not expect the
adoption of this Statement to have a significant impact on its financial
position or results of operations.
<PAGE>
Form 10-Q Page 8 of 14
PEGASYSTEMS INC.
Notes to Consolidated Interim Financial Statements - Continued
June 30, 1998
Note D - Restatement
The Company restated its consolidated financial statements for the quarters
ended March 31, 1997, June 30, 1997 and September 30, 1997. In the opinion of
management, all material adjustments necessary to correct the financial
statements have been recorded. The restatements reflect revenue adjustments, as
a result of a change in the timing of revenue recognition on certain contracts.
These adjustments resulted in revenue reversals or in an increase of deferred
revenue. Also included in the restated consolidated financial statements are
operating expenses, including a provision for bad debts not previously recorded
by the Company and the recording of certain other expenses and reserves.
A summary of the impact of such restatements on the financial statements for the
three months ended and six-months ended June 30, 1997 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1997 June 30, 1997
Previously As Previously As
Reported Restated Reported Restated
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Software license revenue $ 3,983 $ 1,696 $ 10,462 $ 7,511
Services revenue 3,250 3,052 6,004 5,719
Total revenue 7,233 4,748 16,466 13,230
(Loss) from operations (2,814) (5,945) (1,093) (5,507)
Net income (loss) (865) (2,806) 899 (1,838)
Earnings (loss) per share: Basic $ (0.03) $ (0.10) $ 0.03 $ (0.07)
Earnings (loss) per share: Diluted $ (0.03) $ (0.10) $ 0.03 $ (0.07)
Total assets $123,311 $132,106 $123,311 $132,106
</TABLE>
<PAGE>
Form 10-Q Page 9 of 14
PEGASYSTEMS INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
Three and Six Months Ended June 30, 1998 Compared to Three and Six Months Ended
June 30, 1997
Revenue
Total revenue for the three months ended June 30, 1998 (the "1998 Three Month
Period") increased 395.8% to $23.5 million from $4.7 million for the three
months ended June 30, 1997 (the "1997 Three Month Period"). Total revenue for
the six months ended June 30, 1998 (the "1998 Six Month Period") increased
213.7% to $41.5 million from $13.2 million for the six months ended June 30,
1997 (the "1997 Six Month Period"). These increases were due to increases in
both software license and services revenue.
Software license revenue for the 1998 Three Month Period increased 757.0% to
$14.5 million from $1.7 million for the 1997 Three Month Period. Software
license revenue for the 1998 Six Month Period increased 245.1% to $25.9 million
from $7.5 million for the 1997 Six Month Period. These increases in software
license revenue were primarily attributable to software license acceptances by
new customers, software license agreement renewals, and extended software usage
by existing customers.
Services revenue for the 1998 Three Month Period increased 195.0% to $9.0
million from $3.1 million for the 1997 Three Month Period. Services revenue for
the 1998 Six Month Period increased 172.5% to $15.6 million from $5.7 million
for the 1997 Six Month Period. These increases in services revenue were
primarily attributable to additional consulting services provided to existing
customers, increased implementation services for new customers, and to a lesser
extent, increased maintenance revenue from a larger installed product base.
Cost of Revenue
Cost of software license for the 1998 Three Month Period increased 7,250.0% to
$0.7 million from $0.01 million for the 1997 Three Month Period. As a percentage
of software license revenue, cost of software license increased from 0.6% for
the 1997 Three Month Period to 5.1% for the 1998 Three Month Period. Cost of
software license for the 1998 Six Month Period increased 4,305.0% to $0.9
million from $0.02 million for the 1997 Six Month Period. As a percentage of
software license revenue, cost of software license increased from 0.3% for the
1997 Six Month Period to 3.4% for the 1998 Six Month Period. These increases
were primarily due to licensing third party software and amortization costs
associated with a stock purchase warrant issued by the Company in June 1997.
Cost of services for the 1998 Three Month Period increased 122.8% to $5.3
million from $2.4 million for the 1997 Three Month Period. Cost of services for
the 1998 Six Month Period increased 106.7% to $9.4 million from $4.5 million for
the 1997 Six Month Period. These increases were due to costs associated with
increased staffing in the Company's Client Services group. Cost of services as a
percentage of services revenue decreased from 78.2% for the 1997 Three Month
Period to 59.0% for the 1998 Three Month Period. Cost of services as a
percentage of services revenue decreased from 79.3% for the 1997 Six Month
Period to 60.2% for the 1998 Six Month Period. These improved gross margins, for
both the 1998 Three and Six Month Periods, were due to more effective use of a
larger Consulting Services staff.
<PAGE>
Form 10-Q Page 10 of 14
Operating Expenses
Research and development expenses for the 1998 Three Month Period increased
63.2% to $5.3 million from $3.3 million for the 1997 Three Month Period.
Research and development expenses for the 1998 Six Month Period increased 80.2%
to $10.5 million from $5.8 million for the 1997 Six Month Period. These
increases were primarily due to costs associated with increased staffing in the
Company's research and development group and amortization costs associated with
the acquisition of FDR's ESP Software. As a percentage of total revenue,
research and development expenses decreased from 68.5% for the 1997 Three Month
Period to 22.6% for the 1998 Three Month Period. As a percentage of total
revenue, research and development expenses decreased from 44.1% for the 1997 Six
Month Period to 25.4% for the 1998 Six Month Period. These decreases were due to
increased growth in the Company's total revenue.
Selling and marketing expenses for the 1998 Three Month Period increased 32.3%
to $5.8 million from $4.4 million for the 1997 Three Month Period. Selling and
marketing expenses for the 1998 Six Month Period increased 56.6% to $11.1
million from $7.1 million for the 1997 Six Month Period. These increases were
primarily due to costs associated with increased staffing in the Company's
selling and marketing group. As a percentage of total revenue, selling and
marketing expenses decreased from 92.7% for the 1997 Three Month Period to 24.8%
for the 1998 Three Month Period. As a percentage of total revenue, selling and
marketing expenses decreased from 53.6% for the 1997 Six Month Period to 26.8%
for the 1998 Six Month Period. These decreases were due to increased growth in
the Company's total revenue.
General and administrative expenses for the 1998 Three Month Period increased
93.0% to $1.2 million from $0.6 million for the 1997 Three Month Period. General
and administrative expenses for the 1998 Six Month Period increased 99.5% to
$2.5 million from $1.2 million for the 1997 Six Month Period. These increases
were due to increased investment in the infrastructure needed to support the
Company's growth, and increased professional fees incurred as a result of the
change in the Company's independent public accountants. General and
administrative expenses decreased as a percentage of total revenue from 13.5%
for the 1997 Three Month Period to 5.3% for the 1998 Three Month Period and from
9.4% for the 1997 Six Month Period to 6.0% for the 1998 Six Month Period. These
decreases were due to increased growth in the Company's total revenue.
License Interest Income
License interest income, which is the portion of all license fees due under
software license agreements that was not recognized upon product acceptance or
license renewal, increased 43.5% from $421,000 for the 1997 Three Month Period
to $604,000 for the 1998 Three Month Period. License interest income increased
45.0% from $795,000 for the 1997 Six Month Period to $1.2 million for the 1998
Six Month Period. These increases were due to an increase in the Company's
installed customer base.
Provision for Income Taxes
The tax benefit for federal, state and foreign taxes was $1.7 million for the
1997 Three Month Period. The tax provision for the 1998 Three Month Period was
$2.4 million. The tax benefit for federal, state and foreign taxes was $1.1
million for the 1997 Six Month Period. The tax provision for the 1998 Six Month
Period was $3.6 million. The effective tax rate has remained constant at 38.0%
for the 1997 and 1998 Three and Six Month Periods.
<PAGE>
Form 10-Q Page 11 of 14
Liquidity and Capital Resources
Since its inception, the Company has funded its operations primarily through
cash flows from operations and bank borrowings. In July 1996, the Company issued
and sold 2.7 million shares of Common Stock in connection with its initial
public offering. Net proceeds to the Company from this offering were
approximately $29.4 million. In January 1997, the Company issued and sold 1.8
million shares of Common Stock in connection with a second public offering. Net
proceeds to the Company from this second offering were approximately $51.9
million. At June 30, 1998, the Company had cash and cash equivalents of
approximately $43.9 million and working capital of approximately $57.0 million.
Net cash used in operating activities for the 1998 Six Month period was $5.6
million, primarily due to an increase in accounts receivable partially offset by
increases in deferred income taxes, accounts payable and accrued expenses,
depreciation and amortization, and deferred revenue.
Net cash used in investing activities was $2.8 million during the 1998 Six Month
Period due to the purchase of property and equipment consisting mainly of
computer hardware and software and furniture and fixtures to support the
expansion of certain facilities and the Company's growing employee base.
Net cash provided by financing activities was $292,000 during the 1998 Six
Month Period due to the exercise of stock options.
The Company's capital commitments consist primarily of operating leases for
office space and equipment. At June 30, 1998, the Company's commitments under
non-cancellable operating leases for office space with terms in excess of one
year totaled $2.9 million, $3.8 million and $3.6 million for 1998, 1999 and
2000, respectively. The Company's total payments under such leases was $1.6
million for the 1998 Six Month Period.
The Company's $5.0 million revolving credit line has a maturity date of June 30,
1999. At June 30, 1998, the Company had no borrowings under such facility. The
Company's credit agreement prohibits the payment of dividends, has profitability
requirements and requires maintenance of specified levels of tangible net worth
and certain financial ratios.
The Company recorded bad debt expense of $300,000 in the 1998 Six Month Period
as a result of indications that certain receivables relating primarily to
consulting and installation services rendered by the Company would not be
collected in full.
The Company believes that the net proceeds from its two public offerings
together with cash generated by operations and availability under its bank
credit facility will be sufficient to fund the Company's operations for at least
the next twelve months. However, there can be no assurance that additional
capital beyond the amounts currently forecasted by the Company will not be
required or that any such required additional capital will be available on
reasonable terms, if at all, at such time as required by the Company.
The "Year 2000 Issue" refers to the problems associated with computer programs
having been written using two digits rather than four to define the applicable
year. The Company has performed an assessment of the software it uses internally
and the software it licenses to customers and such assessment has not revealed
any outstanding problems in this regard. There can be no assurance that such
problems will not develop or be revealed in the future which could materially
and adversely affect the Company's business, operating results, and financial
condition.
<PAGE>
Form 10-Q Page 12 of 14
Inflation
Inflation has not had a significant impact on the Company's operating results to
date, nor does the Company expect it to have a significant impact in the future
due to the fact that the Company's license and maintenance fees are typically
subject to annual increases based on recognized inflation indexes.
Forward-Looking Statements
Certain statements contained in this Form 10-Q are "forward-looking statements"
as defined in the Private Securities Litigation Reform Act of 1995. These
statements involve various risks and uncertainties which could cause the
Company's actual results to differ from those expressed in such forward-looking
statements. These risks and uncertainties include the seasonal variation of the
Company's operations and fluctuations in the Company's quarterly results, rapid
technological change involving the Company's products, delays in product
development and implementation, the technological compatibility of the Company's
products with its customers' systems, the Company's dependence on customers in
the financial services market, intense competition in the markets for the
Company's products, risk of non-renewal by current customers, management of the
Company's growth, and other risks and uncertainties. Further information
regarding those factors which could cause the Company's actual results to differ
materially from any forward-looking statements contained herein is included in
the Company's filings with the Securities and Exchange Commission.
<PAGE>
Form 10-Q Page 13 of 14
PEGASYSTEMS INC.
Part II - Other Information:
Item 1. Legal Proceedings
Disclosure concerning certain litigation pending against the Company is
contained in the Company's Form 10-K filed April 15, 1998. There have been no
material developments with respect to such litigation since such date.
In April 1998, a complaint purporting to be a class action was filed with the
United States District Court for the District of Massachusetts alleging that the
Company and several of its officers violated section 10(b) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), Rule 10b-5 promulgated by
the Commission thereunder, and section 20(a) of the Securities Exchange Act. The
complaint names the Company itself, Alan Trefler, Ira Vishner, Kenneth W. Olson
and Michael R. Pyle, four officers of the Company, as defendants. The Complaint
alleges that the defendants issued false and misleading financial statements and
press releases concerning the Company's publicly reported earnings. The
Complaint seeks certification of a class of persons who purchased the Company's
Common Stock between April 28, 1997 and April 2, 1998, and does not specify the
amount of damages sought. The defendants have served upon counsel for the
plaintiffs a motion to dismiss the Complaint, and expects the defendants to file
a response to the motion. The defendants have not filed an answer or any other
responsive pleadings in this litigation. The Company intends to defend this
matter vigorously.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amended and Restated 1994 Long-Term Incentive Plan
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None
<PAGE>
Form 10-Q Page 14 of 14
PEGASYSTEMS INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Pegasystems Inc.
Date: August 14, 1998 /s/ Ira Vishner
---------------
Ira Vishner
Vice President, Corporate Services,
Treasurer, Chief Financial Officer
and Director
(principal financial officer and
chief accounting officer)
Exhibit 10.1
Pegasystems Inc.
1994 Long-Term Incentive Plan
As Amended and Restated on April 22, 1998
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
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.
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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 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.
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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.
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 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.
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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 7,500,000 shares of Stock; any or all of such
7,500,000 shares of Stock may be granted for awards of Incentive
Stock Options. 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 7,500,000 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.
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
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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 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,
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<PAGE>
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.
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 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
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<PAGE>
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 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
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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 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.
(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,
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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.
(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.
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(v) A Stock Appreciation Right granted in connection with an
Incentive Stock Option may be exercised only if and when the
market price of 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 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.
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(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, 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
Participants may participate simultaneously with respect to Long
Term Performance Awards
11
<PAGE>
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.
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.
12
<PAGE>
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;
(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.
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
13
<PAGE>
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 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.
14
<PAGE>
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.
15
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