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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
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[X] Definitive Proxy Statement by Rule 14a-6(e)(2))
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
Pegasystems Inc.
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(Name of Registrant as Specified In Its Charter)
Pegasystems Inc.
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Notes:
Reg. (S) 240.14a-101.
SEC 1913 (3-99)
[Pegasystems Inc. Logo]
Dear Stockholder:
We cordially invite you to attend our 2001 Annual Meeting of Stockholders on
Tuesday, June 5, 2001 at One Main Street, Cambridge, Massachusetts. The Meeting
will commence at 1:30 p.m.
The following Notice of Annual Meeting of Stockholders and Proxy Statement
describe the items to be considered by the stockholders and contain certain
information about the Company and its officers and directors.
Please sign and return the enclosed proxy card as soon as possible in the
envelope provided so that your shares can be voted at the Meeting in accordance
with your instructions. Even if you plan to attend the Meeting, we urge you to
sign and promptly return the proxy card. You can revoke it at any time before
it is exercised at the Meeting, or vote your shares personally if you attend
the Meeting.
We look forward to seeing you on June 5, 2001.
Sincerely,
/s/ Alan Trefler
Alan Trefler
Chairman and Chief Executive Officer
May 15, 2001
PEGASYSTEMS INC.
101 Main Street
Cambridge, MA 02142
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be held on June 5, 2001
To The Stockholders of Pegasystems Inc.:
Notice is hereby given that the Annual Meeting of Stockholders (the
"Meeting") of Pegasystems Inc. (the "Company") will be held at One Main Street,
Cambridge, Massachusetts, on Tuesday, June 5, 2001 at 1:30 p.m., local time,
for the following purposes:
1. To re-elect three members of the Board of Directors to hold office until
the 2004 Annual Meeting of Stockholders and until their successors are
duly elected and qualified.
2. To ratify the Board of Directors' selection of Deloitte & Touche LLP as
the independent public accountants for the Company for the year ending
December 31, 2001.
3. To transact such other business as may properly come before the Meeting
or any adjournment(s) thereof.
Only stockholders of record at the close of business on the record date, May
3, 2001, will receive notice of the Meeting and be entitled to vote at the
Meeting or any adjournment(s) thereof. The transfer books will not be closed.
You are cordially invited to attend the Meeting in person if possible.
Whether you plan to attend the Meeting or not, please fill out, sign and date
the enclosed proxy and return it in the envelope enclosed for this purpose. The
proxy is revocable by the person giving it at any time prior to the exercise
thereof by written notice received by the Company, by delivery of a duly
executed proxy bearing a later date, or by attending the Meeting and voting in
person.
By Order of the Board of Directors
James P. O'Halloran
Clerk
May 15, 2001
PEGASYSTEMS INC.
101 Main Street
Cambridge, MA 02142
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
To Be Held On June 5, 2001
This Proxy Statement is furnished to the holders of the Common Stock, $.01
par value (the "Common Stock"), of Pegasystems Inc. (the "Company") in
connection with the solicitation by and on behalf of the Board of Directors of
the Company of proxies for use at the Annual Meeting of Stockholders of the
Company to be held at One Main Street, Cambridge, Massachusetts, on Tuesday,
June 5, 2001 at 1:30 p.m. local time, and at any adjournment(s) thereof. Each
properly signed proxy will be voted in accordance with the instructions
contained therein, and, if no choice is specified, the proxy will be voted in
favor of the proposals set forth in the Notice of Annual Meeting.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Company a written
notice of revocation or a duly executed proxy bearing a later date, or by
attending the Meeting and voting in person.
This Proxy Statement, the enclosed proxy and Annual Report to Stockholders
for the year ended December 31, 2000, are being mailed to the stockholders on
or about May 15, 2001. The Annual Report does not constitute any part of this
Proxy Statement.
The entire cost of this solicitation will be paid by the Company. In
addition, the Company may reimburse brokerage firms and other persons
representing beneficial owners of shares for their expenses in forwarding
solicitation material to such beneficial owners.
Only stockholders of record of the Company's 32,613,692 shares of Common
Stock outstanding as of the close of business on the record date, May 3, 2001,
will be entitled to vote. Each share of Common Stock is entitled to one vote at
the Meeting or any adjournment(s) thereof. The presence, in person or by proxy,
of the holders of a majority of the outstanding shares of Common Stock entitled
to vote is necessary to constitute a quorum at the Meeting. Shares voted to
abstain or to withhold as to a particular matter as to which a nominee (such as
a broker holding shares in street name for a beneficial owner) has no voting
authority in respect of such matter will be deemed represented for quorum
purposes. Under the Company's by-laws, such shares will not be deemed to be
voting on such matter, and therefore will not be the equivalent of negative
votes as to such matter. Votes will be tabulated by the Company's transfer
agent subject to supervision of persons designated by the Board of Directors as
inspectors.
The affirmative vote of the holders of a plurality of the shares represented
at the Meeting, at which a quorum is present, is required for the election of
Directors. Approval of other matters before the Meeting will require the
affirmative vote at the Meeting, at which a quorum is present, of the holders
of a majority of votes cast with respect to such matters.
1
PRINCIPAL AND MANAGEMENT STOCKHOLDERS
The following table sets forth certain information as of January 16, 2001,
with respect to the beneficial ownership of the Company's Common Stock by (i)
each person known by the Company to be the beneficial owner of more than 5% of
the outstanding Common Stock of the Company, (ii) each Director and nominee for
Director of the Company, (iii) the CEO and the four other most highly
compensated officers and (iv) all executive officers and Directors of the
Company as a group. To the knowledge of the Company, based on information
provided by such owners, all persons listed below have sole voting and
investment power with respect to their shares of Common Stock, except to the
extent authority is shared by spouses under applicable law.
NUMBER OF SHARES PERCENTAGE OF SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED (1) BENEFICIALLY OWNED
------------------------ ---------------------- --------------------
Alan Trefler (2).................. 22,237,100 68.3%
Richard H. Jones (3).............. 1,186,000 3.6%
Joseph J. Friscia (4)............. 542,000 1.7%
James P. O'Halloran (5)........... 174,500 *
Stephen F. Kaplan (4)............. 40,000 *
Edward A. Maybury (4)............. 56,500 *
Kenneth Olson (6)................. 299,625 *
Michael R. Pyle (4)............... 244,662 *
Edward B. Roberts (7)............. 153,500 *
William H. Keough................. 10,000 *
Alexander V. d'Arbeloff........... 1,000,000 3.1%
William W. Wyman.................. 0 *
All executive officers and
Directors as a group
(12 persons) (8)................. 27,514,387 84.5%
---------------------
* Represents beneficial ownership of less than 1% of the outstanding Common
Stock.
(1) The number of shares of Common Stock deemed outstanding includes (i)
32,570,094 shares of Common Stock outstanding as of January 16, 2001 and
(ii) shares issuable pursuant to outstanding options held by the respective
person or group which are exercisable within 60 days of January 16, 2001,
as set forth below.
(2) Includes 375,000 shares held in trust with respect to which Mr. Trefler has
voting and dispositive power. Mr. Trefler disclaims beneficial interest.
(3) Includes 135,000 shares of Common Stock subject to stock options
exercisable within 60 days of January 16, 2001.
(4) Consists solely of shares of Common Stock subject to stock options
exercisable within 60 days of January 16, 2001.
(5) Includes 140,000 shares of Common Stock subject to stock options
exercisable within 60 days of January 16, 2001.
(6) Includes 59,625 shares of Common Stock subject to stock options exercisable
within 60 days of January 16, 2001.
(7) Includes 48,500 shares of Common Stock subject to stock options exercisable
within 60 days of January 16, 2001.
(8) Includes 1,266,287 shares of Common Stock subject to stock options
exercisable within 60 days of January 16, 2001.
2
ELECTION OF DIRECTORS
(Item 1 of Notice)
There are currently nine members of the Board of Directors, divided into
three classes with terms expiring respectively at the 2001, 2002 and 2003
annual meetings of stockholders. The Board has nominated Alexander V.
d'Arbeloff, William H. Keough and Edward A. Maybury, whose terms are expiring,
for re-election to the class of directors whose term expires in 2004. Messrs.
d'Arbeloff, Keough and Maybury have consented to serve, if elected at the
Meeting, for a three-year term expiring at the time of the 2004 annual meeting
of stockholders and when their respective successors are elected and qualified.
The shares represented by the enclosed proxy will be voted to elect Messrs.
d'Arbeloff, Keough and Maybury unless such authority is withheld by marking the
proxy to that effect. Each of Messrs. d'Arbeloff, Keough and Maybury has agreed
to serve, but in the event any of them shall unexpectedly become unavailable
for election, the proxy, unless authority has been withheld as to such nominee,
may be voted for election of a substitute. Proxies may not be voted for more
than three persons.
THE BOARD OF DIRECTORS RECOMMENDS ELECTION OF THE NOMINEES AS DIRECTORS.
The following information is furnished with respect to the nominees for
election as Directors and each other Director.
NOMINEES FOR ELECTION FOR TERM OF THREE YEARS EXPIRING IN 2004
Edward A. Maybury, 61, has been a Director of the Company since its
organization in 1983. In December 2000, he was also elected a member of the
Company's Compensation Committee. Since July 1992, he has served as a Director,
and from April 1992 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.
William H. Keough, 64, has been a Director of the Company and a member of
the Company's Audit Committee since June 2000. He served as a director of
Thermo Ecoteck Corporation, an environmentally sound power plants and fuels
public company, from November 1999 until September 2000, when the company was
spun back into the parent, ThermoElectron. He also serves as Chairman of the
Board of Trustees of the National Multiple Sclerosis Society's Central New
England chapter. He served as Senior Vice President and Chief Financial Officer
of two public companies from 1968 to 1999, most recently at the Pioneer Group,
a financial services business with $20 billion in assets, from 1986 to his
retirement in 1999. Mr. Keough holds a B.S./B.A. in Finance from Boston College
and an M.B.A. from Northeastern University.
Alexander V. d'Arbeloff, 73, has been a Director of the Company since August
2000. As of December 2000, he was also elected a member of the Company's
Compensation Committee. In 1960 Mr. d'Arbeloff co-founded Teradyne, Inc., a
leading manufacturer of automatic test equipment and interconnection systems
for the electronics and telecommunications industries. Mr. d'Arbeloff served as
President and Chief Executive Officer of Teradyne until May 1997, and remained
Chairman of the Board until June 2000. Since 1989, Mr. d'Arbeloff has been a
member of the MIT Corporation, and was named its Chairman in July 1997. Mr.
d'Arbeloff also serves on the board of PRI Automation Inc. and on the boards of
several private companies.
3
DIRECTORS WHOSE TERM EXPIRES IN 2002
Edward B. Roberts, 65, has been a Director of the Company since June 1996.
In December 2000, he was also elected a member of the Company's Compensation
Committee. Since the early 1960s, he has been the David Sarnoff Professor of
Management of Technology at the Massachusetts Institute of Technology, where he
founded and chairs the MIT Entrepreneurship Center. Dr. Roberts co-founded and
is a Director of Medical Information Technology, Inc., a leading provider of
healthcare information systems. He is also a Director of Advanced Magnetics,
Inc., a specialty pharmaceutical company; NETsilicon, Inc., a semiconductor
producer that links equipment to the Internet, Inverness Medical Technology,
Inc., a manufacturer of medical diagnostics products; SOHU.com, Inc., an
internet portal, and several early-stage high-technology firms. Dr. Roberts co-
founded and served for 20 years as a general partner of the Zero Stage and
First Stage Capital group of venture capital funds.
James P. O'Halloran, 69, joined the Company in April 1999. In June 1999 he
was elected Senior Vice President, Chief Financial Officer, Treasurer, Clerk
and a Director. From 1991 to 1999 he served as President of G & J Associates,
Ltd., a financial consulting firm. From 1956 to 1990, he was with the
international accounting firm of Arthur Andersen LLP serving as an audit
partner from 1967 to his retirement in 1990. Mr. O'Halloran also currently
serves as a director of DynEco Corporation, an industry leader in the
innovation, design and development of state-of-the-art compressor technology;
and ASA International Ltd., a software firm focusing on business applications
for small- and medium-sized companies.
Richard H. Jones, 49, joined the Company in October 1999 and was elected a
Director of the Company in November 2000. Prior to joining the Company, he
served as a chief asset management executive and member of the operating
committee at Barnett Banks, Inc., and as CEO of Fleet Investment Services. His
prior experience also includes serving as Executive Vice President with
Fidelity Investments, and as a principal with the consulting firm of Booz,
Allen & Hamilton. Mr. Jones holds an undergraduate degree from Duke University,
with majors in both economics and management science. He also holds an M.B.A.
degree from the Wharton School of the University of Pennsylvania.
DIRECTORS WHOSE TERM EXPIRES IN 2003
Stephen F. Kaplan, 45, has served as a Director of the Company since August
1999. As of December 2000 he was also elected a member of the Company's Audit
Committee. He currently is a Managing Director of The Audax Group, a private
equity and venture capital firm. From 1998 to 2000, Mr. Kaplan was affiliated
with Texas Pacific Group, a private equity firm, and he served as President,
Chief Operating Officer and Chief Financial Officer of Favorite Brands
International Holding Corp., a confectionery company controlled by Texas
Pacific Group. From 1996 to 1997, Mr. Kaplan was Executive Vice President and
Chief Financial Officer of the Coleman Company, an international manufacturer
of camping, outdoor recreation and hardware equipment. From 1993 to 1996, Mr.
Kaplan was a financial and strategy consultant to venture capital and buy-out
firms. During 1994, Mr. Kaplan served as Chief Financial Officer of Marcam
Corporation, a software developer. Prior to that, Mr. Kaplan served as
Executive Vice President and Chief Financial Officer of AM International,
President of Harris Graphics and Partner of Boston Consulting Group. Mr. Kaplan
holds an MS in Management, a BS in Electrical Engineering and Computer Science
and a BS in Management Science from the Massachusetts Institute of Technology.
Alan Trefler, 45, a founder of the Company, served as President until
October 1999 and Clerk until June 1999 and has been Chief Executive Officer and
a Director since the Company's organization in 1983. Prior to that, 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.
4
William W. Wyman, 63, has been a director of the company since June 2000. In
December 2000 he was also elected a member of the Company's Audit Committee.
From 1984 through 1995, Mr. Wyman was a partner at Oliver, Wyman & Company, a
management consulting company which he co-founded. Mr. Wyman is also currently
a director of US Timberlands, a limited partnership consisting of the growing
of trees and the sale of logs and standing timber; SS&C Technologies, a leading
provider of client/server based financial software solutions; Predictive
Systems, a network consulting company focused on the design, performance,
management and security of complex computing networks; and Prime Response, a
company specializing in business to consumer marketing.
BOARD OF DIRECTORS AND COMMITTEE MEETINGS
The Company's Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee is responsible for nominating the
Company's independent public accountants for approval by the Board of
Directors, reviewing the scope, results and costs of the audit with the
Company's independent public accountants and reviewing the financial statements
of the Company. Messrs. Kaplan, Keough and Wyman are currently the members of
the Audit Committee. The Audit Committee met seven (7) times during 2000. 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. d'Arbeloff, Maybury
and Roberts are currently the members of the Compensation Committee. The
Compensation Committee met twice (2) during 2000.
During 2000, the Board of Directors of the Company held seven (7) meetings.
Each incumbent Director attended at least 75% of the aggregate number of
meetings of the Board and the meetings of the committees of the Board on which
he served.
DIRECTOR COMPENSATION
Each non-employee Director of the Company receives $1,000 for every Board or
committee meeting attended. The Company also reimburses non-employee Directors
for expenses incurred in attending board meetings. In addition, non-employee
Directors of the Company are eligible to receive stock options under the
company's 1996 Non-Employee Director Stock Option Plan and all Directors are
eligible to receive stock options and stock grants under the Company's 1994
Long-Term Incentive Plan. Each non-employee director is granted on an annual
basis a fully vested option to purchase 10,000 shares of Common Stock at a
price equal to the fair market value of the common stock on the date of grant
under the 1996 Non-Employee Director Stock Option Plan. No other compensation
is paid to Directors for attending Board or committee meetings.
Messrs. d'Arbeloff, Maybury, Roberts, Keough, Kaplan and Wyman are currently
the non-employee Directors of the Company.
5
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or
paid for services rendered to the Company in all capacities during the years
ended December 31, 2000, 1999, and 1998 by (i) the Company's Chief Executive
Officer and (ii) the four most highly compensated other executive officers
(collectively, the "Named Executive Officers"):
Summary Compensation Table
LONG TERM
COMPENSATION
ANNUAL COMPENSATION (1) AWARDS
------------------------- ------------
SECURITIES
NAME AND PRINCIPAL UNDERLYING ALL OTHER
POSITIONS YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION ($)
------------------ ---- ---------- --------- ------------ ----------------
Alan Trefler 2000 $200,000 -- -- --
Chairman and Chief 1999 200,000 -- -- --
Executive Officer 1998 200,000 -- -- --
Richard H. Jones 2000 250,000 -- -- $74,475(2)
President and Chief 1999 46,556 -- 410,000 --
Operating Officer
Joseph J. Friscia 2000 200,000 -- 50,000 60,554(3)
Executive Vice
President 1999 200,000 $60,000(4) 100,000 86,869
of Sales and Service 1998 180,000 70,000 190,000 30,786
Michael R. Pyle 2000 155,000 3,079(5) 50,000 1,644(6)
Senior Vice President
of 1999 155,000 60,000(4) 35,000 30,734
Product Development 1998 140,000 15,000 100,000 8,587
James P. O'Halloran 2000 240,000 50,000(7) 10,000 --
Senior Vice President
and 1999 150,728 -- 150,000 4,406
Chief Financial Officer
---------------------
(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 $50,000 or 10% of the
total of annual salary and bonuses for each of the Named Executive Officers
for 2000, 1999, and 1998.
(2) Represents travel allowance.
(3) Represents draws and payments by the Company on the Executive's behalf for
professional services.
(4) Represents bonuses earned in 1999 and paid in 2000.
(5) Represents Bonus payment for Y2K on-call coverage.
(6) Represents payments by the Company on the Executive's behalf for
professional services.
(7) Represents bonuses earned and paid in 2000.
6
Option Grants
The following table provides certain information concerning grants of
options to purchase the Company's Common Stock made during the fiscal year
ending December 31, 2000, to each of the Named Executive Officers:
Option Grants in Fiscal 2000
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF STOCK PRICE
SHARES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM (1)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -----------------
NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
---- ----------- ------------- ----------- ---------- ------- ---------
Alan Trefler............ -- -- -- -- -- --
Richard H. Jones........ -- -- -- -- -- --
Joseph J. Friscia....... 50,000(2) 1.7% $18.5625 2/25/10 583,693 1,479,192
James P. O'Halloran..... 10,000(3) 0.3% $18.5625 2/25/10 116,739 295,840
Michael R. Pyle......... 50,000(2) 1.7% $18.5625 2/25/10 583,693 1,479,192
---------------------
(1) As required by the rules of the Securities and Exchange Commission,
potential values stated are based on the prescribed assumption that the
Company's common stock will appreciate in value from the date of grant to
the end of the option term at rates (compounded annually) of 5% and 10%,
respectively, and therefore are not intended to forecast possible future
appreciation, if any, in the price of the Company's common stock.
(2) These options vest in equal quarterly installments over four-year terms.
(3) These options vest in equal quarterly installments over a one-year term.
Year-End Option Value Table
The following table sets forth certain information concerning the number and
value of unexercised stock options held by each of the Named Executive Officers
as of December 31, 2000. None of the named Executive Officers exercised options
during 2000.
Year-End Options Values
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
AT YEAR-END AT YEAR-END ($)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Alan Trefler................ -- -- -- --
Richard H. Jones............ 110,000 300,000 -- --
Joseph J. Friscia........... 529,375 125,625 $576,027 --
James P. O'Halloran......... 137,500 22,500 -- --
Michael R. Pyle............. 234,600 119,500 $335,883 --
CERTAIN TRANSACTIONS
Except as described below, since December 31, 1997 there have been no
transactions involving more than $60,000, nor are any proposed, between the
Company and any executive officer, Director, beneficial owner of 5% or more of
the Company's Common Stock or equivalents, or any immediate family member of
any of the foregoing, in which any such persons or entities had or will have a
direct or indirect material interest.
7
In December 2000, the following officers and directors of the Company
purchased shares of the Company's common stock from the settlement funds
established for the benefit of the plaintiffs in connection with the settlement
of two securities class action lawsuits (the Gelfer and Chalverus cases):
GELFER CHALVERUS
SETTLEMENT SETTLEMENT
OFFICER/DIRECTOR FUND FUND
---------------- ---------- ----------
(# OF SHARES)
Alan Trefler......................................... 1,000,000(1) --
Chairman and Chief Executive Officer
Richard H. Jones..................................... 115,000(1) 885,000(2)
President, Chief Operating Officer and Director
James P. O'Halloran.................................. 25,000(1) --
Chief Financial Officer and Director
Alexander V. d'Arbeloff.............................. 500,000(1) 500,000(3)
Director
Edward B. Roberts.................................... 100,000(1) --
Director
---------------------
(1) The purchase price was $3.081 per share, which was the value ascribed to
the shares under the Gelfer settlement agreement and equal to the average
closing price of the Company's common stock as reported on Nasdaq for the
ten (10) trading days immediately preceding the date of entry of the final
court order approving the settlement.
(2) The purchase price was $3.00 per share, which was equal to the fair market
value of the Company's common stock at the time Mr. Jones agreed to buy the
shares.
(3) The purchase price was $4.69 per share, which was equal to the average
closing price of the Company's common stock as reported on Nasdaq for the
five (5) business days immediately preceding August 23, 2000, the date Mr.
d'Arbeloff committed to the Company to purchase such shares.
The Company has adopted a policy whereby transactions between the Company
and its officers, Directors, principal stockholders and their affiliates must
be on terms no less favorable to the Company than could be obtained from
unrelated third parties and must be approved by a majority of the disinterested
members of the Company's Board of Directors.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
General
The Compensation Committee of the Board of Directors (the "Committee") is
composed entirely of Directors who are not employees of or consultants to the
Company. The Committee, which as of May 31, 2001 consisted of Alexander V.
d'Arbeloff, Edward A. Maybury and Edward Roberts, is responsible for
recommending compensation and benefits for the executive officers of the
Company to the Board of Directors and for administering the Company's stock
plans. The Committee determines the compensation for the President. The
Committee and the President together determine the compensation for the other
executive officers of the Company.
Compensation Philosophy
The objective of the Committee is to provide an executive compensation
program that aligns executive compensation with the achievement of specific
company goals. The Committee believes that executive compensation should also
reflect the value that an individual adds to the Company and that executive
compensation should enable the Company to attract and retain key employees in
an increasingly competitive industry environment.
8
Compensation Components
There are two compensation components for executive officers: cash
compensation in the form of salary and merit pay, and non-cash compensation in
the form of stock options.
Salary. Cash compensation in the form of salary is intended to reflect an
executive's knowledge, skills, and level of responsibility as well as the
economic and business conditions affecting the Company. The salary of each
executive was determined by the Committee in part by analyzing published
compensation surveys (the "Surveys") such as the annually-published Culpepper
Surveys on Software Industry Executive and Administrative Pay, published
surveys by The Survey Group, and Executive Alliance, and in addition, as a
result of the Committee making an assessment of an executive's individual
personal performance with respect to his or her attainment of specific company
goals.
Merit Pay. Merit pay reflects the financial valuation of each executive's
individual contribution to the Company over the review period. An executive's
ability to achieve closure on critical projects, to attain required results,
and to contribute positively to Company tone in the process are critical to
ensuring the strong financial performance of the Company as a whole, and thus
helps define the executive's financial value. Awards of merit payments are made
at the discretion of the Board of Directors, based upon their opinions of
executives' respective contributions to the Company. There is no pre-set amount
allocated and available in a "merit pay pool" for executive officers.
Stock Options. The Committee uses stock options as a long-term, non-cash
incentive and as a means of aligning the long-term interests of executives and
stockholders. Stock options are awarded based upon the market price of the
Common Stock on the date of grant and are linked to future performance of the
Company's stock because they do not become valuable to the holder unless the
price of the Company's stock increases above the price on the date of grant.
The number of stock options granted to an executive as a form of non-cash
compensation is determined by taking into consideration factors such as number
of stock options previously granted to an executive, the executive's remaining
options exercisable and the value of those stock options, as compared to the
anticipated value that an executive will add to the Company in the future.
Stock options are not necessarily granted to executives on an annual basis.
Stock options were granted to certain executive officers during 2000.
Compensation of the Chief Executive Officer and All Other Executive Officers
The Committee, in its consideration of the salary, merit pay and stock
option components of compensation for 2000 for the Chief Executive Officer and
all other executive officers, made reference to the Surveys, which it believes
represent compensation data from companies that are similar in nature to the
Company. The salary, merit pay and stock option components of compensation that
was determined for the Chief Executive Officer and all other executive officers
was comparable with companies found in the Surveys.
The Surveys and the Pegasystems Inc. Performance Graph
The companies included in the Surveys differ from the companies included in
the Goldman Sachs Technology Software Index, which is included in the
Performance Graph following this report, in that the Goldman Sachs Technology
Software Index includes only a select number of public companies which sell
software, while the Surveys include public as well as private companies which
sell software and integrated turnkey systems, and is therefore broader in
scope. The Committee made reference to the Surveys and to the Executive
Alliance in establishing executive compensation because the Surveys include
companies that are in the software industry, as is the Company, and contain a
broader range of companies that are likely to compete for the services of the
Company's executive officers. For these reasons the Committee believes that the
Goldman Sachs Technology Software Index may be an appropriate basis for
comparing stock performance and the Surveys are an appropriate basis for
determining compensation.
9
Deductibility of Executive Compensation
Section 162(m) of the Internal Revenue Code, enacted in 1993, generally
disallows a tax deduction to public companies for compensation over $1 million
paid to its chief executive and its four other most highly compensated
executives. Performance-based compensation is excluded from the compensation
taken into account for purposes of the limit if certain requirements are met.
The Company currently intends to structure its stock options granted to
executives in a manner that complies with the performance-based requirements of
the statute. The Committee believes that, given the general range of salaries
and bonuses for executive officers of the Company, the $1 million threshold of
Section 162(m) will not be reached by any executive officer of the Company in
the foreseeable future. Accordingly, the Committee has not considered what its
policy regarding compensation not qualifying for federal tax deduction might be
at such time, if ever, as that threshold is within range of any executive
officer.
Compensation Committee
Alexander V. d'Arbeloff
Edward A. Maybury
Edward Roberts
Compensation Committee Interlocks and Insider Participation
No executive officer of the Company has served as a Director or member of
the Company's Compensation Committee (or other committee serving an equivalent
function) of any other entity, whose executive officers served on the Company's
Board of Directors or Compensation Committee.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee (the "Committee") oversees the Company's financial
reporting process on behalf of the Board of Directors. Management has the
primary responsibility for the financial statements and the reporting process
including the systems of internal controls.
The Committee consists of three members, each of whom is independent (as
defined by listing standards that govern companies the shares of which are
listed on Nasdaq). The Committee operates under a written charter, approved by
the Board of Directors, which is attached as Appendix A to the Proxy Statement.
In fulfilling its oversight responsibilities regarding the 2000 financial
statements, the Committee reviewed with management the audited financial
statements in the Annual Report, including a discussion of the quality, not
just the acceptability, of the accounting principles, the reasonableness of
significant judgments, and the clarity of disclosures in the financial
statements. The Committee's review included discussion with the outside
auditors of matters required to be discussed pursuant to Statement of Auditing
Standards No. 61 (Communication with Audit Committees).
The Committee reviewed with the independent auditors, who are responsible
for expressing an opinion on the conformity of those audited financial
statements with generally accepted accounting principles, their judgment as to
the quality, not just the acceptability, of the Company's accounting principles
and such other matters as are required to be discussed with the Committee under
generally accepted auditing standards. In addition, the Committee has discussed
with the independent auditors the auditors' independence from management and
the Company, including the matters in the written disclosures required by the
Independence Standards Board Standard No. 1 (Independence Discussions with
Audit Committees) and received by the Committee.
10
The Committee discussed with the Company's independent auditors the overall
scope and plans for their audits in 2001. The Committee meets with the
independent auditors, with and without management present, to discuss the
results of their examinations, the evaluations of the Company's internal
controls, and the overall quality of the Company's financial reporting. The
Committee held seven (7) meetings during 2000.
In reliance on the reviews and discussions referred to above, the Committee
recommended to the Board of Directors, and the Board has approved, that the
audited financial statements be included in the Annual Report on Form 10-K for
the year ended December 31, 2000, for filing with the Securities and Exchange
Commission. The Committee and the Board have also recommended, subject to
shareholder approval, the selection of the Company's independent auditors for
2001.
The Audit Committee
Steven F. Kaplan
William H. Keough
William W. Wyman
11
COMPARISON OF CUMULATIVE TOTAL STOCKHOLDER RETURN
The following performance graph represents a comparison of the cumulative
total return (assuming the reinvestment of dividends) for a $100 investment on
July 18, 1996 (the date the Common Stock was first registered under Section 12
of the Securities Exchange Act of 1934) in each of the Common Stock of
Pegasystems Inc., the Nasdaq Stock Market Index (a broad market index) and the
Goldman Sachs Technology Software Index ("GSTI(TM)* Software") (a published
industry index). The Company paid no dividends during the period shown. The
graph lines merely connect measurement dates and do not reflect fluctuations
between those dates.
[Performance graph here]
7/18/96 12/31/96 12/31/97 12/31/98 12/31/99 12/31/00
-------------------------------------------------------------------------------------------------------
Pegasystems Inc. $100 $251 $168 $ 35 $ 94 $ 19
-------------------------------------------------------------------------------------------------------
Nasdaq Stock Market Index -- US companies $100 $116 $141 $198 $367 $223
-------------------------------------------------------------------------------------------------------
GSTI Software $100 $115 $145 $233 $525 $287
-------------------------------------------------------------------------------------------------------
The Report of the Compensation Committee on Executive Compensation, the
Report of the Audit Committee and the Comparison of Cumulative Total
Stockholder Return information above shall not be deemed "soliciting
material" or incorporated by reference into any of the Company's filings with
the Securities and Exchange Commission by implication or by any reference in
any such filing to this Proxy Statement.
---------------------
*GSTI is a registered trademark of Goldman, Sachs & Co.
12
RATIFICATION OF THE SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
(Item 2 of Notice)
The Board of Directors has selected Deloitte & Touche LLP, independent
public accountants, to audit the financial statements of the Company for the
fiscal year ending December 31, 2001. The Board proposes that the stockholders
ratify this selection. Deloitte & Touche LLP audited the Company's financial
statements for the fiscal year ended December 31, 2000. Arthur Andersen LLP
audited the Company's financial statements for the fiscal years ended December
31, 1997, 1998 and 1999, but declined to stand for re-election. The Company
expects that representatives of Deloitte & Touche LLP will be present at the
Meeting, with the opportunity to make a statement if they so desire, and will
be available to respond to appropriate questions.
Audit Fee. Fees of Deloitte & Touche LLP for the audit of the Company's
financial statements, 401(k) plan and statutory audits for the fiscal year
ended December 31, 2000 and the reviews of quarterly reports on Form 10-Q were
$443,992, of which an aggregate amount of $359,992 had been billed through
December 31, 2000.
Financial Information Systems Design and Implementations Fees. Deloitte &
Touche assessed the company no fees for any financial information systems
design or implementation during the fiscal year ended December 31, 2000.
Review of Revenue Cycle Internal Controls were $25,000 during the fiscal
year ended December 31, 2000.
All Other Fees. Aggregate fees billed for all other services rendered by
Deloitte & Touche LLP during the fiscal year ended December 31, 2000 were
$217,375. These services included:
. reviews of certain financial and statistical information in connection
with contracts and other agreements;
. assistance with 1933 Securities Act filings and accounting technical
advice;
. income tax consulting;
. employee benefit advisory and administration services; and
. litigation support services.
All audit and non-audit services provided by Deloitte & Touche LLP are
approved by the Audit Committee, which considers whether the provision of non-
audit services is compatible with maintaining the auditor's independence.
In the event that ratification of the appointment of Deloitte & Touche LLP
as the independent public accountants for the Company is not obtained at the
upcoming Annual Meeting of Stockholders, the Board of Directors will reconsider
its selection.
The affirmative vote of a majority of the shares present or represented and
entitled to vote and voting at the Meeting is required to ratify the selection
of the independent public accountants.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE TO APPROVE THE RATIFICATION OF THE
SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS AND PROXIES SOLICITED BY THE BOARD
WILL BE VOTED IN FAVOR THEREOF UNLESS A STOCKHOLDER HAS INDICATED OTHERWISE ON
THE PROXY.
13
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "1934 Act")
requires the Company's Directors and executive officers, and persons who own
more than ten percent of the Company's Common Stock, to file reports with the
Securities and Exchange Commission disclosing their ownership of stock in the
Company and changes in such ownership. Copies of such reports are also required
to be furnished to the Company.
To the Company's knowledge, based solely on review of the copies of the
above-mentioned reports furnished to the Company and written representations
that no other reports were required, during 2000, and all other such filing
requirements were complied with in a timely fashion.
STOCKHOLDER PROPOSALS FOR 2002 MEETING
Proposals of stockholders intended to be presented at the 2002 Annual
Meeting of Stockholders must be presented on or before January 15, 2002 for
inclusion in the proxy materials relating to that meeting and on or before
March 31, 2002 for matters to be considered timely such that, pursuant to Rule
14a-4 under the 1934 Act, the Company may not exercise its discretionary
authority to vote on such matters at that meeting. Any such proposals should be
sent to the Company at its principal offices addressed to the Clerk. Other
requirements for inclusion are set forth in Rule 14a-8 under the 1934 Act.
OTHER MATTERS
The Company does not know of any other matters which will be brought before
the Meeting. If other business is properly presented for consideration at the
Meeting, it is intended that the shares represented by the enclosed proxy will
be voted by the persons voting the proxies in accordance with their judgment on
such matters.
In order that your shares may be represented if you do not plan to attend
the Meeting, and in order to assure the required quorum, please fill out, sign,
date and return your proxy promptly.
A prompt response will greatly facilitate arrangements for the Meeting, and
your cooperation will be appreciated.
By Order of the Board of Directors
James P. O'Halloran
Clerk
May 15, 2001
14
APPENDIX A
PEGASYSTEMS INC.
AUDIT COMMITTEE CHARTER
I. PURPOSE
The primary function of the Audit Committee is to assist the Board of
Directors in fulfilling its oversight responsibilities. Consistent with this
function, the Audit Committee should encourage continuous improvement of, and
should foster adherence to, the Corporation's policies, procedures and
practices at all levels. The Audit Committee's primary duties and
responsibilities are to:
. Serve as an objective party to monitor the Corporation's financial
reporting process and internal control system.
. Review and appraise the audit efforts of the Corporation's independent
accountants.
. Provide an open avenue of communication among the independent
accountants, financial and senior management and the Board of Directors.
The Audit Committee will primarily fulfill these responsibilities by
carrying out the activities enumerated in Section IV of this Charter.
II. COMPOSITION
The Audit Committee shall be comprised of three or more directors as
determined by the Board, each of whom shall be independent directors (as
defined in the Nasdaq rules regarding audit committees), and free from any
relationship that, in the opinion of the Board, would interfere with the
exercise of his or her independent judgment as a member of the Committee. All
members of the Committee shall have a working familiarity with basic finance
and accounting practices, and at least one member of the Committee shall have
accounting or related financial management expertise. All members of the
Committee shall either (i) be able to read and understand fundamental financial
statements, including a balance sheet, cash flow statement and income
statement, or (ii) be able to do so within a reasonable period of time after
appointment to the Committee.
The members of the Committee shall be elected by the Board at the annual
organizational meeting of the Board and shall serve until their successors
shall be duly elected and qualified. A Chair shall be elected by the full
Board.
III. MEETINGS
The Committee shall meet at least four times annually, or more frequently as
circumstances dictate. As part of its job to foster open communication, the
Committee should meet at least annually with management and the independent
accountants in separate executive sessions to discuss any matters that the
Committee or each of these groups believe should be discussed privately. In
addition, the Committee should meet with the independent accountants and
management quarterly to review the Corporation's financials consistent with IV.
below.
A-1
IV. RESPONSIBILITIES AND DUTIES
To fulfill its responsibilities and duties the Audit Committee shall:
Documents/Reports Review
1. Review and update this Charter periodically, at least annually, as
conditions dictate.
2. Review with representatives of management and representatives of the
Corporation's independent accounting firm the Corporation's audited annual
financial statements prior to their filing as part of the Annual Report on Form
10-K. After such review and discussion, the Committee shall recommend to the
Board of Directors whether such audited financial statements should be included
in the Corporation's Annual Report on Form 10-K. The Committee shall also
review the Corporation's quarterly financial statements prior to their
inclusion in the Corporation's quarterly SEC filings on Form 10-Q.
3. Review and discuss with management, including the CFO and the independent
auditor major changes in and other questions regarding accounting and auditing
principles and procedures.
Independent Accountants
4. Recommend to the Board of Directors the selection of the independent
accountants, who are ultimately accountable to the Board of Directors and the
Audit Committee, considering independence and their effectiveness and approve
the fees and other compensation to be paid to the independent accountants.
5. Review the performance of the independent accountants and approve any
proposed discharge of the independent accountants when circumstances warrant.
The Committee shall have the ultimate authority and responsibility to select,
evaluate and, when warranted, replace such independent accounting firm (or to
recommend such replacement for stockholder approval in any proxy statement).
6. On an annual basis, receive from the independent accounting firm a formal
written statement identifying all relationships between the independent
accounting firm and the Corporation consistent with Independence Standards
Board ("ISB") Standard 1. The Committee shall actively engage in a dialogue
with the independent accounting firm as to any disclosed relationships or
services that may impact its independence. The Committee shall take, or
recommend that the Board of Directors take appropriate action to oversee the
independence of the independent accounting firm.
7. On an annual basis, discuss with representatives of the independent
accounting firm the matters required to be discussed by Statement on Auditing
Standards ("SAS") 71, as it may be modified or supplemented.
8. Review and discuss with the independent auditor (outside of the presence
of management) any problems or difficulties that the auditor may have
encountered with management or others and any management letter provided by the
auditor and the Company's response to that letter.
Financial Reporting Processes
9. In consultation with the independent accountants, review the integrity of
the organization's financial reporting processes, both internal and external.
10. Consider the independent accountants' judgments about the quality and
appropriateness of the Corporation's accounting principles as applied in its
financial reporting.
A-2
Process Improvement
11. Establish regular and separate systems of reporting to the Audit
Committee by each of management and the independent accountants regarding any
significant judgments made in management's preparation of the financial
statements and the view of each as to appropriateness of such judgments.
12. Review with the independent accountants and management the extent to
which changes or improvements in financial or accounting practices as approved
by the Audit Committee, have been implemented. (This review should be conducted
at an appropriate time subsequent to implementation of changes or improvements,
as decided by the Committee.)
Legal Compliance
13. Review, with the organization's counsel, legal compliance matters
including corporate securities trading policies.
14. Review, with the organization's counsel, any legal matter that could
have a significant impact on the organization's financial statements.
15. Perform any other activities consistent with this Charter, the
Corporation's By-laws and governing law, as the Committee or the Board deems
necessary or appropriate.
A-3
PGSCM-PS-01
DETACH HERE ZPGSC2
PROXY
PEGASYSTEMS INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
2001 ANNUAL MEETING OF STOCKHOLDERS
The undersigned stockholder of Pegasystems Inc., a Massachusetts corporation
("Pegasystems"), hereby acknowledges receipt of the Notice of Annual Meeting of
Stockholders and Proxy Statement dated May 15, 2001 and hereby appoints Alan
Trefler, June Morris and Robert Jahrling, or any one or more of them, proxies
and attorneys-in-fact with full power of substitution to each other for and in
the name of the undersigned, with all powers the undersigned would possess if
personally present to vote the common stock of the undersigned in Pegasystems at
the Annual Meeting of its Stockholders to be held June 5, 2001 at One Main
Street, Cambridge, Massachusetts at 1:30 p.m., local time, or any adjournment or
postponement thereof. Any of such attorneys or substitutes shall have and may
exercise all of the powers of said attorneys-in-fact hereunder.
SEE REVERSE SEE REVERSE
SIDE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SIDE
DETACH HERE ZPGSC1
PLEASE MARK
[X] VOTES AS IN
THIS EXAMPLE.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL
NOS. 1 AND 2 AND SAID PROXIES DEEM ADVISABLE ON SUCH OTHER MATTERS AS MAY COME
BEFORE THE MEETING. THE BOARD OF DIRECTORS RECOMMENDS THAT YOU INSTRUCT THE
PROXIES TO VOTE FOR THE NOMINEES LISTED BELOW AND FOR PROPOSAL NOS. 1 AND 2.
1. Election of Directors.
Nominees: (01) Edward Maybury, (02) William Keough,
(03) Alexander d'Arbeloff
FOR WITHHELD
[_] [_]
[_]
-------------------------------------------------------------------------
(INSTRUCTION: To withhold authority to vote for any individual (illegible),
write that (illegible).)
FOR AGAINST ABSTAIN
2. To ratify the selection of Deloitte & Touche LLP as [_] [_] [_]
independent public accountants of Pegasystems for
the fiscal year ending December 31, 2001.
3. In their discretion, the proxies are authorized to
vote upon such other business as may properly come
before the meeting or any adjournment or postponement
thereof.
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT [_]
PLEASE SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED ENVELOPE.
Please sign exactly as name appears at left. When shares are held in more than
one name, including joint tenants, each party should sign. When signing as an
attorney, executor, administrator, trustee or guardian, please give full title
as such.
Signature: Date: Signature: Date:
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