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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. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
PEGASYSTEMS INC.
--------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
-------------------------------------------------------------------------
(4) Date Filed:
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Notes:
Reg. (S) 240.14a-101.
SEC 1913 (3-99)
[LOGO] [Logo of Pegasystems]
Dear Stockholder:
We cordially invite you to attend our 2002 Annual Meeting of Stockholders on
Tuesday, June 4, 2002 at One Main Street, Cambridge, Massachusetts. The Meeting
will commence at 3:00 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 4, 2002.
Sincerely,
/s/ Alan Trefler
Alan Trefler
Chairman and Chief Executive Officer
May 1, 2002
PEGASYSTEMS INC.
101 Main Street
Cambridge, MA 02142
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be held on June 4, 2002
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 4, 2002 at 3:00 P.M., local time,
for the following purposes:
1. To re-elect three members of the Board of Directors to hold office until
the 2005 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, 2002.
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,
April 15, 2002, 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
June M. Morris
Clerk
May 1, 2002
PEGASYSTEMS INC.
101 Main Street
Cambridge, MA 02142
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
To Be Held On June 4, 2002
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 4, 2002 at 3:00 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, 2001, are being mailed to the stockholders on
or about May 1, 2002. 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 33,465,521 shares of Common
Stock outstanding as of the close of business on the record date, April 15,
2002, 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 10, 2002,
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 of the Company,
(iii) each of the Named Executive Officers and (iv) all executive officers and
Directors of the Company as a group. To the knowledge of the Company, based on
information provided by such owners, all persons listed below have sole voting
and investment power with respect to their shares of Common Stock, except to
the extent authority is shared by spouses under applicable law. The information
provided below regarding persons beneficially owning more than 5% of the
Company's Common Stock is based solely on public filings made by such persons
with the SEC through February 14, 2002.
NUMBER OF SHARES PERCENTAGE OF SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED (1) BENEFICIALLY OWNED
------------------------ ---------------------- --------------------
Alan Trefler (2)............................... 22,237,100 64.6%
Richard H. Jones (3)........................... 1,298,500 3.8%
Joseph J. Friscia (4).......................... 605,000 1.8%
James P. O'Halloran (5)........................ 204,500 *
Steven F. Kaplan (4)........................... 50,000 *
Edward A. Maybury (4).......................... 68,500 *
Kenneth Olson (6).............................. 338,625 1.0%
Michael R. Pyle (4)............................ 294,912 *
Christopher J. Sullivan (4).................... 9,375 *
Edward B. Roberts (7).......................... 171,500 *
William H. Keough (8).......................... 30,000 *
Alexander V. d'Arbeloff (8).................... 1,020,000 3.0%
William W. Wyman (4)........................... 20,000 *
Wellington Management Company, LLP............. 1,796,900 5.5%
All executive officers and directors as a group
(14 persons) (9)............................. 28,144,912 81.8%
--------
* Represents beneficial ownership of less than 1% of the outstanding Common
Stock.
(1) The number of shares of Common Stock deemed outstanding includes (i)
32,755,336 shares of Common Stock outstanding as of January 10, 2002 and
(ii) shares issuable pursuant to outstanding options held by the respective
person or group which are exercisable within 60 days of January 10, 2002,
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 247,500 shares of Common Stock subject to stock options
exercisable within 60 days of January 10, 2002.
(4) Consists solely of shares of Common Stock subject to stock options
exercisable within 60 days of January 10, 2002.
(5) Includes 170,000 shares of Common Stock subject to stock options
exercisable within 60 days of January 10, 2002.
(6) Includes 98,625 shares of Common Stock subject to stock options exercisable
within 60 days of January 10, 2002.
(7) Includes 66,500 shares of Common Stock subject to stock options exercisable
within 60 days of January 10, 2002.
(8) Includes 20,000 shares of Common Stock subject to stock options exercisable
within 60 days of January 10, 2002.
(9) Includes 1,670,412 shares of Common Stock subject to stock options
exercisable within 60 days of January 10, 2002 and the 375,000 shares of
Common Stock described in footnote (2) above.
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 2002, 2003 and 2004
annual meetings of stockholders. The Board has nominated Edward B. Roberts,
James P. O'Halloran and Richard H. Jones, whose terms are expiring, for
re-election to the class of directors whose term expires in 2005. Messrs.
Roberts, O'Halloran and Jones have consented to serve, if elected at the
Meeting, for a three-year term expiring at the time of the 2005 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.
Roberts, O'Halloran and Jones unless such authority is withheld by marking the
proxy to that effect. Each of Messrs. Roberts, O'Halloran and Jones 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 2005
Edward B. Roberts, 66, has been a Director of Pegasystems since June 1996.
In December 2000, he was also elected a member of our 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 Entreprenuership 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, has been a Director of Pegasystems since 1999. From
April 1999 to August 2001, he was the Senior Vice President, Chief Financial
Officer, Treasurer, and Clerk of Pegasystems Inc. 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 ASA International Ltd., a software firm
focusing on business applications for small and medium sized companies.
Richard H. Jones, 50, joined Pegasystems in October 1999 as President and
C.O.O. and was elected a Director of Pegasystems in November 2000. Prior to
joining Pegasystems, he served as a Chief Asset Management Executive and member
of the Operating Committee at Barnett Banks, Inc., which at the time was among
the nation's 25 largest banks, from 1995 to 1997. He served as CEO of Fleet
Investment Services, a brokerage and wealth management organization from 1991
to 1995. His prior experience also includes serving as Executive Vice President
with Fidelity Investments, an internal provider of financial services and
investment resources 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.
3
DIRECTORS WHOSE TERM EXPIRES IN 2003
Steven F. Kaplan, 46, has served as a Director of Pegasystems since August
1999. As of December 2000 he was also elected a member of our 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 Pegasystems, served as President until
October 1999 and Clerk until June 1999 and has been Chief Executive Officer and
a Director since we organized 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.
William W. Wyman, 64, has been a director of Pegasystems since June 2000. In
December 2000, he was also elected a member of our 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; and Predictive Systems, a network
consulting company focused on the design, performance, management and security
of complex computing networks.
DIRECTORS WHOSE TERM EXPIRES IN 2004
Edward A. Maybury, 62, has been a Director of Pegasystems since our
organization in 1983. In December 2000, he was also elected a member of our
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 Pegasystems and a member of
our 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
its parent, Thermo Electron. 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, 74, has been a Director of Pegasystems since August
2000. As of December 2000, he was also elected a member of our 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.
4
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 five times during 2001. 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 during 2001.
During 2001, the Board of Directors of the Company held six meetings. Each
incumbent Director attended at least 75% of the aggregate number of meetings of
the Board and the meetings of the committees of the Board on which he served.
DIRECTOR COMPENSATION
Each non-employee Director of the Company receives $1,000 for every Board or
committee meeting attended. The Company also reimburses non-employee Directors
for expenses incurred in attending board meetings. In addition, non-employee
Directors of the Company are eligible to receive stock options under the
company's 1996 Non-Employee Director Stock Option Plan and all Directors are
eligible to receive stock options and stock grants under the Company's 1994
Long-Term Incentive Plan. Each non-employee director is granted on an annual
basis a fully vested option to purchase 10,000 shares of Common Stock at a
price equal to the fair market value of the common stock on the date of grant
under the 1996 Non-Employee Director Stock Option Plan. No other compensation
is paid to Directors for attending Board or committee meetings. Messrs.
d'Arbeloff, Maybury, Roberts, Keough, Kaplan, O'Halloran and Wyman are
currently the non-employee Directors of the Company.
5
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or
paid for services rendered to the Company in all capacities during the years
ended December 31, 2001, 2000, and 1999 by (i) the Company's Chief Executive
Officer and (ii) the four most highly compensated other executive officers
(collectively, the "Named Executive Officers"):
Summary Compensation Table
LONG TERM
COMPENSATION
------------
ANNUAL COMPENSATION (1) AWARDS
------------------------ ------------
SECURITIES
NAME AND PRINCIPAL UNDERLYING ALL OTHER
POSITIONS YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION ($)
--------- ---- ---------- --------- ------------ ----------------
Alan Trefler 2001 $200,000 $ 70,000(7) -- --
Chairman and Chief 2000 200,000 -- -- --
Executive Officer 1999 200,000 -- -- --
Richard H. Jones 2001 250,000 125,000(7) 100,000 $75,000
President and Chief 2000 250,000 -- -- 74,475
Operations Officer 1999 46,556 -- 410,000 --
Joseph J. Friscia 2001 255,000 80,000(7) 30,000 --
Executive Vice President of Sales 2000 200,000 -- 50,000 60,554
and Service 1999 200,000 60,000(2) 100,000 86,869
Michael R. Pyle 2001 177,500 70,000(7) 40,000 --
Senior Vice President of Product 2000 155,000 3,079(3) 50,000 1,644
Development 1999 155,000 60,000(2) 35,000 30,734
James P. O'Halloran 2001 160,000 -- 10,000 1,438(4)
Retired Senior Vice President and 2000 240,000 50,000(5) 10,000 --
Chief Financial Officer (6) 1999 150,728 -- 150,000 4,406
Kenneth Olson 2001 155,000 50,000(7) 30,000 --
Senior Vice President of 2000 145,000 3,000(3) 40,000 11,457
Advanced Technology 1999 145,000 40,000(2) 30,000 53,385
--------
(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 $50,000 or 10% of the
total of annual salary and bonuses for each of the Named Executive Officers
for 2001, 2000, and 1999.
(2) Represents bonuses earned in 1999 and paid in 2000.
(3) Represents payment for Y2K on-call coverage.
(4) Represents travel allowance.
(5) Represents bonus earned and paid in 2000.
(6) Mr. O'Halloran retired on August 31, 2001.
(7) Represents bonuses earned in 2001 and paid in 2002.
6
Option Grants
The following table provides certain information concerning grants of
options to purchase the Company's Common Stock made during the fiscal year
ending December 31, 2001, to each of the Named Executive Officers:
Option Grants in Fiscal 2001
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES
OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM (1)
------------------------ ----------------
NUMBER OF PERCENT OF
SHARES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
---- ----------- ------------- ----------- ---------- ------- -------
Alan Trefler....... -- -- -- -- -- --
Richard H. Jones... 50,000(2) 2.2% $3.3450 6/5/11 105,183 266,553
50,000(2) 2.2% $2.3310 10/5/11 73,298 185,751
Joseph J. Friscia.. 30,000(2) 1.3% $4.3830 3/8/11 82,694 209,561
Michael R. Pyle.... 40,000(2) 1.8% $4.3830 3/8/11 110,258 279,415
James P. O'Halloran 10,000(3) 0.4% $3.3450 6/5/11 21,037 53,311
Kenneth Olson...... 30,000(2) 1.3% $4.3830 3/8/11 82,694 209,561
--------
(1) As required by the rules of the Securities and Exchange Commission,
potential values stated are based on the prescribed assumption that the
Company's common stock will appreciate in value from the date of grant to
the end of the option term at rates (compounded annually) of 5% and 10%,
respectively, and therefore are not intended to forecast possible future
appreciation, if any, in the price of the Company's common stock.
(2) These options vest in equal quarterly installments over four-years from the
date of grant, which was June 5, 2001 and October 5, 2001, respectively for
Richard H. Jones, and March 8, 2001 for Joseph J. Friscia, Michael R. Pyle,
and Kenneth Olson.
(3) These options were fully vested at the time of grant.
Year-End Option Table
The following table sets forth certain information concerning the number and
value of unexercised stock options held by each of the Named Executive Officers
as of December 31, 2001. None of the named Executive Officers exercised options
during 2001.
Year-End Options Value
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT YEAR-END AT YEAR-END($)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Alan Trefler....... -- -- -- --
Richard H. Jones... 216,250 293,750 $ 7,581 $144,919
Joseph J. Friscia.. 590,500 94,500 $1,179,757 --
Michael R. Pyle.... 282,350 111,750 $ 683,184 $ 1,706
James P. O'Halloran 170,000 -- $ 20,450 --
Kenneth Olson...... 88,875 86,125 $ 2,438 $ 1,463
7
CERTAIN TRANSACTIONS
Except as described below, during 2001 there were 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.
On May 10, 2001, the Company entered into an employment agreement with
Joseph Friscia setting forth his responsibilities and compensation. The
agreement requires the Company to pay Mr. Friscia an annual base salary of
$250,000 and all legal defense expenses arising out of Mr. Friscia's
employment. In addition, subject to Mr. Friscia executing a general release of
claims against the Company, in the event the Company terminates Mr. Friscia's
employment without cause or Mr. Friscia terminates his employment for any
reason, the agreement provides for one year of base salary continuation, one
year of continued coverage under the Company's group health insurance plan and
up to $10,000 of outplacement support services. Under the agreement, Mr.
Friscia confirmed his earlier agreement not to compete with the Company's
business during the term of his employment and for eighteen months thereafter
and also agreed not to solicit any of the Company's employees for a period of
eighteen months after the termination of his employment.
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 1, 2002 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.
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
8
"Surveys") such as the annually-published Culpepper Surveys on Software
Industry Executive and Administrative Pay, published surveys by The Survey
Group and Executive Alliance. In addition, the Committee considered its
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 its opinions of each
executive's contributions to the Company. No pre-set amount is 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 2001.
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 2001 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.
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
9
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 "Audit 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 primary duties and
responsibilities of the Audit Committee are to: (1) serve as an independent and
objective party to monitor the Company's financial reporting process and
internal control systems; (2) review and appraise the audit efforts of the
Company's independent auditors and internal audit department; (3) evaluate the
Company's quarterly financial performance, as well as its compliance with laws
and regulations; (4) oversee management's establishment and enforcement of
financial policies; and, to (5) provide an open avenue of communication among
the independent auditors, financial and senior management, the internal audit
department, and the Board of Directors.
The Audit 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 Audit Committee operates under a written charter,
approved by the Board of Directors.
In fulfilling its oversight responsibilities regarding the 2001 financial
statements, the Audit 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 Audit 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), including the process
used by management in formulating particularly sensitive accounting estimates
and the basis for the conclusions of the independent auditors regarding the
reasonableness of those estimates.
The Audit 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 Audit Committee under generally accepted auditing standards. In
addition, the Audit 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 Audit Committee discussed with the Company's independent auditors the
overall scope and plans for their audits in 2002. The Audit 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
Audit Committee held five meetings during 2001.
In reliance on the reviews and discussions referred to above, the Audit
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, 2001, for filing with the Securities and
Exchange Commission. The Audit Committee and the Board have also recommended,
subject to shareholder approval, the selection of the Company's independent
auditors for 2002.
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
December 31, 1996 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.
[CHART]
12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01
Pegasystems Inc. $100 $ 67 $ 14 $ 37 $ 8 $ 14
Nasdaq Stock Market $100 $122 $170 $315 $191 $151
Index - US companies
GSTI Software $100 $126 $202 $455 $248 $161
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 irrespective of any general incorporation
language therein.
--------
*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, 2002. 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, 2001. 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, 2001 and the reviews of quarterly reports on Form 10-Q were
$357,692 of which an aggregate amount of $342,692 had been billed through
December 31, 2001.
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, 2001.
All Other Fees. Aggregate fees billed for all other services rendered by
Deloitte & Touche LLP during the fiscal year ended December 31, 2001 were
$254,750. These services included:
. reviews of certain financial information in connection with the 1Mind
Corporation acquisition; and
. income tax consulting relating to transfer pricing.
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 2001, and all other such filing
requirements were complied with in a timely fashion.
STOCKHOLDER PROPOSALS FOR 2003 MEETING
Proposals of stockholders intended to be presented at the 2003 Annual
Meeting of Stockholders must be presented on or before January 1, 2003 for
inclusion in the proxy materials relating to that meeting and on or before
March 17, 2003 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
June M. Morris, Esq.
Clerk
May 1, 2002
14
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DETACH HERE
PROXY
PEGASYSTEMS INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
2002 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 1, 2002 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 4, 2002
at One Main Street, Cambridge, Massachusetts at 3:00 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.
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SEE REVERSE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE
SIDE SIDE
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PEGASYSTEMS INC.
C/O EQUISERVE
P.O. BOX 43068
PROVIDENCE, RI 02940
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DETACH HERE
[X] Please mark
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 2. To ratify the selection of Deloitte & Touche LLP as independent public
Nominees: (1) Edward Roberts, accountants of Pegasystems for the fiscal year ending December 31, 2002.
(2) James O'Halloran FOR AGAINST ABSTAIN
(3) Richard Jones [ ] [ ] [ ]
FOR WITHHELD 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.
[ ] ______________________________________
(INSTRUCTION: To withhold authority to vote
for any individual nominee, write that
nominee's name in the space provided above.)
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 attorney, executor, administrator,
trustee or guardian, please give full title
as such.
Signature: Date: Signature: Date:
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