-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GhmYq4SMwyA75t+UGP1sB2m5nbAxiMRiGbzKUoQuExBycLUXDeOTYpam5QrOpOyw KyZbmLMG2W8tn3ebTD46MQ== 0000950146-96-000782.txt : 19960517 0000950146-96-000782.hdr.sgml : 19960517 ACCESSION NUMBER: 0000950146-96-000782 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 21 FILED AS OF DATE: 19960515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEGASYSTEMS INC CENTRAL INDEX KEY: 0001013857 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-03807 FILM NUMBER: 96567614 BUSINESS ADDRESS: STREET 1: 101 MAIN ST CITY: CAMBRIDGE STATE: MA ZIP: 02142-1590 BUSINESS PHONE: 6173749600 MAIL ADDRESS: STREET 1: 101 MAIN ST CITY: CAMBRIDGE STATE: MA ZIP: 02142-1590 S-1 1 PEGASYSTEMS FORM S-1 As filed with the Securities and Exchange Commission on May 15, 1996 Registration No. 333- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM S-1 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 PEGASYSTEMS INC. (Exact name of Registrant as specified in its charter)
Massachusetts 7389 (State or other jurisdiction of (Primary Standard 04-2787865 incorporation or organization) Industrial (I.R.S. Employer Identification Number) Classification Code Number)
101 Main Street, Cambridge, Massachusetts 02142 (617) 374-9600 (Address and Telephone Number of Registrant's Principal Executive Offices) ALAN TREFLER President PEGASYSTEMS INC. 101 Main Street Cambridge, Massachusetts 02142 (617) 374-9600 (Name, Address and Telephone Number of Agent for Service) Copies to: ROBERT V. JAHRLING III, ESQ. MARK G. BORDEN, ESQ. Choate, Hall & Stewart JEFFREY A. STEIN, ESQ. Exchange Place Hale and Dorr 53 State Street 60 State Street Boston, Massachusetts 02109-2891 Boston, Massachusetts 02109-1816 (617) 248-5000 (617) 526-6000 Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ] CALCULATION OF REGISTRATION FEE
Proposed Proposed Maximum Maximum Amount to be Offering Price Aggregate Amount of Title of Each Class of Registered Per Offering Registration Securities to be Registered (1) Share (2) Price (2) Fee - --------------------------- ------------ -------------- -------------- --------------- Common Stock, $.01 par 3,910,000 value shares $14.00 $54,740,000 $18,876
(1) Includes 510,000 shares subject to the Underwriters' over-allotment option. (2) Estimated solely for the purpose of calculating the registration fee, in accordance with Rule 457(a) under the Securities Act of 1933. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. PEGASYSTEMS INC. CROSS-REFERENCE SHEET Pursuant to Item 501(b) of Regulation S-K Showing Location in Prospectus of Information Required by Part I of Form S-1
Registration Statement Item and Caption Location in Prospectus ---------------------------------------------- ------------------------------------------------ 1. Forepart of the Registration Statement and Outside front cover page of Prospectus Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Inside front and outside back cover pages of Prospectus Prospectus; Additional Information 3. Summary Information, Risk Factors and Ratio of Prospectus Summary; Risk Factors Earnings to Fixed Charges 4. Use of Proceeds Use of Proceeds 5. Determination of Offering Price Outside front cover page; Underwriting 6. Dilution Dilution 7. Selling Security Holders Principal and Selling Stockholders 8. Plan of Distribution Outside front cover page; Underwriting 9. Description of Securities to be Registered Description of Capital Stock 10. Interests of Named Experts and Counsel Legal Matters; Experts 11. Information with Respect to the Registrant Prospectus Summary; Risk Factors; Use of Proceeds; Dividend Policy; Capitalization; Dilution; Selected Consolidated Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Certain Transactions; Principal and Selling Stockholders; Description of Capital Stock; Shares Eligible for Future Sale; Consolidated Financial Statements 12. Disclosure of Commission Position on Not Applicable Indemnification for Securities Act Liabilities
Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. SUBJECT TO COMPLETION, DATED MAY 15, 1996 3,400,000 Shares [Logo-Pegasystems] Common Stock (par value $.01 per share) Of the 3,400,000 shares of Common Stock offered hereby, 2,700,000 are being sold by Pegasystems Inc. ("Pegasystems" or the "Company") and 700,000 shares are being sold by the Selling Stockholders. See "Principal and Selling Stockholders." The Company will not receive any of the proceeds from the sale of shares by the Selling Stockholders. Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price per share will be between $12.00 and $14.00. For factors to be considered in determining the initial public offering price, see "Underwriting." See "Risk Factors" beginning on page 5 for certain considerations relevant to an investment in the Common Stock. Application has been made to have the Common Stock approved for quotation on the Nasdaq National Market under the symbol "PEGA." THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Initial Public Underwriting Proceeds to Proceeds to Selling Offering Price Discount (1) Company (2) Stockholders Per Share $ $ $ $ Total (3) $ $ $ $ (1) The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. See "Underwriting." (2) Before deducting expenses of the offering payable by the Company, estimated to be $600,000. (3) The Company has granted to the Underwriters an option for 30 days to purchase up to an additional 510,000 shares at the initial offering price per share, less the underwriting discount, solely to cover over-allotments, if any. If such option is exercised in full, the total initial public offering price, underwriting discount and proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." The shares offered hereby are offered by the several Underwriters, as specified herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of the shares of Common Stock offered hereby will be made at the offices of Goldman, Sachs & Co., New York, New York, on or about , 1996. Goldman, Sachs & Co. Cowen & Company Montgomery Securities The date of this Prospectus is , 1996. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 Foldout: Illustration omitted: Illustration of the Pegasystems' "service backbone." A circle, revolving around customers, is divided into six segments corresponding to the customer service management functions supported by the Company's products, each segment containing labeled icons representing examples of such functions. In the "receiving" segment are icons representing computer inbound faxes, PegaView-ACE and Internet connections, high speed computer network links and shows computer screens demonstrating PegaView-ACE and Internet access; in the "reporting" segment, icons representing productivity, service and quality management, relational database interfaces and opportunity analysis; in the "resolving" segment, icons representing advisor checklists, system-driven processing and multi-currency accounting; in the "responding" icon, outbound faxes, internet electronic mail and personalized letters and automated followups; in the "researching" segment, icons representing on-line disks, micrographics and virtual archive opticals and tapes; and in the "routing" segment, prioritization and queuing, rule-driven workflow, electronic baskets and clustered work. Inside cover: Illustration omitted: Illustration of dispersed departments of an organization interacting with customers contacting the organization through various means, each such department connected to the organization's integrated service backbone, which is represented by a circle divided into six segments corresponding to the customer management functions supported by the Company's products support (receiving, reporting, resolving, responding, researching and routing). PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Investors should carefully consider the information set forth under the heading "Risk Factors." The Company Pegasystems develops customer service management software to automate customer interactions across transaction-intensive enterprises. Many of the world's largest banks, mutual funds and credit card organizations use the Company's solutions to integrate, automate, standardize and manage a broad array of mission-critical customer service activities, including account set-up, record retrieval, correspondence, disputes, investigations and adjustments. The Company's systems can be used by thousands of concurrent users to manage customer interactions and to generate billions of dollars a day in resulting transactions. Work processes initiated by the Company's systems are driven by a highly adaptable "rule base" defined by the user-organization for its specific needs. The rule base facilitates a high level of consistency in customer interactions, yet drives different processes depending on the customer profile or the nature of the request. The Company's open, multi-tier, client/server systems operate on a broad variety of platforms, including UNIX, Windows/NT and IBM/MVS. The Company offers consulting, training and support services to facilitate the use of its solutions. Intensifying competition is forcing businesses to reduce costs while focusing on customer service management as an important means of differentiation. Due to the volume and precise nature of their transactions, it is especially critical for financial services organizations to implement cost-effective systems to manage customer interactions accurately and efficiently. The Company's solutions provide a service backbone that drives intelligent processing and seamlessly integrates an organization's geographically dispersed and product specific service operations and isolated computer systems. By bridging these "islands of automation" within large organizations, the Company's solutions increase the efficiency of service representatives and enable organizations to address multiple customer needs during a single contact. The Company's objective is to become the leading provider of mission-critical client/server customer service management software to organizations performing a high volume of complex interactions with demanding customers. To achieve this objective, the Company is pursuing a number of strategies, including expanding its marketing to additional business units within its existing customers; leveraging its relationships and expertise with large financial services organizations to penetrate the medium-sized financial services market; targeting markets outside of financial services which have similar customer service management needs; and developing standard product templates to facilitate the more rapid implementation of its solutions. The Company markets its software and services primarily through a direct sales force which consisted of six people as of April 30, 1996. The Company intends to increase substantially the size of its sales force, which will be necessary if the Company is to achieve significant revenue growth in the future. The Company was incorporated in the Commonwealth of Massachusetts in April 1983 and has been profitable in each quarter since the first quarter of 1985. The Company's principal executive offices are located at 101 Main Street, Cambridge, Massachusetts 02142, and its telephone number is (617) 374-9600. Pegasystems, PegaCARD, PegaCLAIMS, PegaSHARES, PegaTRACE, PegaINDEX, PegaPRISM, PegaREELAY, PegaSEARCH, PegaVIEW-ACE, PegaSTAR, Integrated Service Backbone, Service Excellence Through Automation, and Virtual Archive are trademarks of the Company. This Prospectus also includes trademarks of companies other than the Company. 3 The Offering
Common Stock offered by the Company 2,700,000 shares Common Stock offered by the Selling Stockholders 700,000 shares Common Stock to be outstanding after the offering 26,290,800 shares (1) Use of proceeds by the Company For general corporate purposes, including working capital, product development, capital expenditures and possible acquisitions. See "Use of Proceeds." Proposed Nasdaq National Market symbol PEGA
(1) Based on the number of shares of Common Stock outstanding on May 13, 1996, plus 100,800 shares of Common Stock issuable upon exercise of stock options to be exercised immediately prior to the closing of this offering. Excludes 2,308,200 shares of Common Stock issuable upon exercise of stock options outstanding as of May 13, 1996, at a weighted average exercise price of $2.60 per share, of which options to purchase 487,950 shares were then exercisable. See "Capitalization" and "Management--Stock Plans." Summary Consolidated Financial Data (in thousands, except per share data)
Three Months Ended Year ended December 31, March 31, -------------------------- ---------------- 1993 1994 1995 1995 1996 ---- ---- ---- ---- ---- Consolidated Statement of Income Data: Total revenue $10,212 $16,263 $22,247 $4,005 $ 4,941 Income from operations 793 2,236 3,257 66 456 License interest income 1,305 1,457 1,486 370 368 Net income 1,233 2,193 2,878 263 486 Net income per common and common equivalent share $ 0.05 $ 0.09 $ 0.11 $ 0.01 $ 0.02 Weighted average number of common and common equivalent shares outstanding 24,231 24,102 25,551 25,600 25,505
March 31, 1996 ---------------------- As Adjusted Actual (1) ----- ------------- Consolidated Balance Sheet Data: Cash and cash equivalents $ 2,644 $33,318 Working capital 6,952 38,356 Long-term license installments, net 11,444 11,444 Total assets 26,555 57,228 Long-term debt 672 -- Stockholders' equity 15,136 47,212
(1) Gives effect to (i) the sale of the 2,700,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $13.00 per share, after deducting the estimated underwriting discount and offering expenses payable by the Company, and gives effect to the anticipated application of the net proceeds therefrom, and (ii) the exercise of stock options to purchase 100,800 shares of Common Stock at an aggregate exercise price of $32,928, which exercise will occur immediately prior to the closing of this offering. See "Use of Proceeds" and "Capitalization." Unless otherwise indicated herein, all information in this Prospectus (i) has been adjusted to give effect to a 15-for-1 split of the outstanding Common Stock, in the form of a stock dividend, effective December 9, 1994, (ii) has been adjusted to give effect to an amendment and restatement of the Company's Articles of Organization (the "Restated Articles") to become effective immediately prior to this offering, providing for, among other things, the creation of a new undesignated class of Preferred Stock, (iii) has been adjusted to give effect to a 3-for-1 split of the outstanding Common Stock, in the form of a stock dividend, to be effective immediately prior to this offering, and (iv) assumes no exercise of the Underwriters' over-allotment option. See "Description of Capital Stock" and "Underwriting." 4 RISK FACTORS In addition to the other information contained in this Prospectus, the following risk factors should be carefully considered in evaluating an investment in the Common Stock offered by this Prospectus. Potential Fluctuations in Quarterly Results; Seasonality The Company's revenue and operating results have varied considerably in the past, and are likely to vary considerably in the future. Such fluctuations may be particularly pronounced because a significant portion of the Company's revenue in any quarter is attributable to product acceptances or license renewals by a relatively small number of customers, and reflects the Company's policy of recognizing license fee revenue upon product acceptance or license renewal in an amount equal to the present value of the total committed license payments due during the initial license term or renewal period, as the case may be. Product acceptance is preceded by an implementation period, typically ranging from three to six months but in some cases significantly longer, and by a lengthy sales cycle. The Company's sales cycle is subject to a number of significant risks over which the Company has little or no control, including customers' budgeting constraints and internal authorization reviews. Product implementation may be delayed for a variety of reasons including unforeseen technical problems and changes dictated by the customer in the scope or schedule of the implementation. Other factors contributing to fluctuations in the Company's revenue and operating results include changes in the level of operating expenses, demand for the Company's products and services, the introduction of new products and product enhancements by the Company and its competitors, competitive conditions in the industry and general economic conditions. The Company budgets its product development and other expenses anticipating future revenue. If revenue falls below expectations, the Company's business, operating results and financial condition are likely to be materially and adversely affected because only a small portion of the Company's expenses vary with its revenue. As a result, the Company believes that period-to-period comparisons of its operating results are not necessarily meaningful and should not be relied upon to predict future performance. There can be no assurance that the Company will be able to maintain profitability on an annual or quarterly basis. The Company's business has experienced and may continue to experience significant seasonality. In recent years the Company has recognized a greater percentage of its revenue in its third and fourth quarters than in the first and second quarters due to the Company's sales commission structure and the impact of that structure on the timing of product acceptances and license renewals by customers. This pattern is reinforced by the Company's practice of offering customers without charge a fixed number of hours of service per calendar year. Once the annual allotment of service hours is exhausted, customers pay for additional services on an hourly basis, typically resulting in higher services revenue in the Company's second, third and fourth quarters. Due to the foregoing factors, it is likely that in some future quarters the Company's operating results will fall below the expectations of the Company, market analysts and investors. In such event, the price of the Company's Common Stock would likely be materially and adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Dependence on New Products; Rapid Technological Change; Product Development and Implementation Risks The market for customer management software and related consulting and training services is subject to rapid technological change, changing customer needs and preferences, frequent new product introductions, and evolving programming languages and industry standards that may render existing products and services obsolete. The Company's position in its current market or other markets that it may enter could be eroded rapidly by product advances. The life cycles of the Company's products are difficult to estimate, and the Company's growth and future performance will depend in part upon its ability to enhance existing products, and to develop and introduce new products that keep pace with technological advancements, meet changing customer requirements, respond to competitive products, and achieve market acceptance. The Company's product development efforts require and are expected to continue to require substantial investments by the Company for research, refinement and testing, and there can be no assurance that the Company will have the resources sufficient to make such investments. The Company has in the past experienced developmental delays, and there can be no assurance that the 5 Company will not experience difficulties which would delay or prevent the successful development, introduction or implementation of new or enhanced products. In addition, there can be no assurance that such products will meet the requirements of the marketplace and achieve market acceptance, or that the Company's current or future products will conform to changing industry requirements. If the Company is unable for technological or other reasons to develop, introduce or implement new or enhanced products in a timely and effective manner, the Company's business, operating results and financial condition could be materially and adversely affected. Products as complex as the Company's may contain errors that may be detected at any point in the products' life cycles. In the past, the Company has discovered certain errors in its products and has experienced shipping delays while such errors were corrected. Such errors have also required the Company to ship corrected products to existing customers. There can be no assurance that errors will not be found in the future resulting in the loss of, or delay in, market acceptance and/or sales and revenue, diversion of development resources, injury to the Company's reputation, or increased service and warranty costs, any of which could have a material adverse effect on the Company's business, operating results and financial condition. See "Business--Products" and "--Product Development." Computing Platform Shift; Compatibility with Third Party Relational Databases The majority of large financial services organizations have traditionally used IBM MVS or Digital Equipment Corporation VMS systems for transaction processing. Increasingly, however, such organizations are migrating towards more open UNIX and Windows/NT server operating systems to meet their transaction processing requirements. Responding to this trend, and while continuing to support its core IBM and Digital Equipment Corporation platforms, the Company commenced efforts in 1992 to evolve versions of its products to use the C++ programming language and run on a variety of open platforms. In December 1995, for the first time one of the new C++ versions of the Company's products was used in production by a customer of the Company. The Company has since shipped new C++ versions of its products to other customers for use on RS 6000/AIX and Windows/NT platforms and the Company is actively working with these customers to bring such products into production. There can be no assurance that the new versions of the Company's products will meet the requirements of the marketplace and achieve market acceptance, or that organizations will not migrate to other computing platforms not supported by the Company. Moreover, there can be no assurance that, notwithstanding the benefits of the new versions of the Company's products, some of the Company's existing customers may choose not to migrate to UNIX and Windows/NT systems. In such event, the Company may be required to support both the old and new versions of its products, which could have a material adverse effect on its business, operating results and financial condition. The Company believes that the compatibility of customer service management software systems with popular relational databases is an important factor in the purchase decision of many organizations. Consequently, the Company recently developed the capability for the Windows/NT versions of its software to store work items in Microsoft's SQL Server relational database, and is working to develop similar capabilities for versions of its software with the relational databases of other third party vendors, including Oracle. There can be no assurance that the Company will not experience difficulties which would delay or prevent the successful development or introduction of these additional capabilities. Any such difficulty could have a material and adverse effect on the Company's business, operating results and financial condition. See "Business--Product Development." Dependence on the Financial Services Market; Industry Consolidation The Company has derived all of its revenue to date from customers in the financial services market, and the Company's future growth depends, in large part, upon increased sales to this market. The financial condition of the Company's customers and their willingness to pay for the Company's products and services are affected by competitive pressures, decreasing operating margins within the industry, currency fluctuations, active geographic expansion and deregulation. The Company believes that its customers' 6 purchasing patterns are somewhat discretionary. As a result, demand for the Company's products and services could be affected by the condition of the financial services market or a deterioration in economic or market conditions generally. The financial services market is undergoing intense domestic and international consolidation. In recent years, several customers of the Company have been merged or consolidated out of independent existence, and there is no assurance that the Company will not experience declines in revenue occasioned, in whole or in part, by future mergers or consolidations. Any decline in the demand for the Company's products would have a material, adverse effect on the Company's business, operating results and financial condition. See "Business--Customers." Uncertainty of Growth into other Markets As part of its growth strategy the Company is exploring the possibility of applying its technology to the customer service management requirements of markets other than financial services, such as insurance, medical, utilities and retail. The Company believes that in connection with such efforts it will be necessary for the Company to hire additional personnel with expertise in these other markets. There can be no assurance that the Company will be successful in adapting its technology to these other markets or in attracting and retaining personnel with the necessary industry expertise. The inability of the Company to penetrate these other markets could have a material adverse effect on its business, operating results and financial condition. See "Business--Business Strategy." Risks of Customer License Non-Renewal To date, a substantial majority of the Company's licenses have been renewed upon expiration. Revenue attributable to license renewals accounted for 32%, 26% and 28% of the Company's total revenue in 1993, 1994 and 1995, respectively, and in each period was attributable to a relatively small number of customers. There can be no assurance that a substantial majority of the Company's customers will continue to renew expiring licenses; any such non-renewal would require the Company to obtain revenue from other sources in order to achieve its revenue targets. A decrease in the Company's license renewal rate without offsetting revenue from other sources would have a material adverse effect on the Company's business, results of operations and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business--Customers" and Notes 1 and 8 of Notes to Consolidated Financial Statements. Control by Existing Stockholders Upon completion of this offering, Alan Trefler, the Company's President and a member of its Board of Directors, will own approximately 84% of the Company's outstanding Common Stock (83% if the over- allotment option granted to the Underwriters is exercised in full). As of May 13, 1996, there were outstanding options to purchase 2,409,000 shares of the Company's Common Stock, of which options to purchase 588,750 shares were then exercisable. Assuming the exercise of all such outstanding options, Mr. Trefler would own approximately 77% of the outstanding Common Stock (76% if the over-allotment option granted to the Underwriters is exercised in full). There can be no assurance that any such stock options will be exercised. Accordingly, Mr. Trefler will be able to control the Company through his ability to determine the outcome of elections of the Company's directors, amend the Company's Restated Articles of Organization and Restated By-laws and take certain other actions requiring the vote or consent of stockholders of the Company. This concentration of ownership may have the effect of delaying or preventing a change in control of the Company. See "Principal and Selling Stockholders." Dependence on Key Personnel The Company's future success depends to a significant extent on Mr. Trefler, its other executive officers and certain technical, managerial, consulting, sales and marketing personnel. The loss of the services of any of these individuals or group of individuals could have a material adverse effect on the Company's business, operating results and financial condition. None of the Company's executive officers has entered into an employment contract with the Company, although each is subject to a non-disclosure and non-competition agreement with the Company. The Company does not have, and is not contemplating 7 securing, any significant amount of key-man life insurance on any of its executive officers or other key employees. The Company believes that its future success also will depend significantly upon its ability to attract, motivate and retain additional highly skilled technical, managerial, consulting, sales and marketing personnel. In particular, delays in hiring qualified sales personnel would adversely affect the Company's operating results due to the substantial time period between the identification of new customers and the successful implementation and acceptance of the Company's products by those customers. Because developing, selling and maintaining the Company's products requires extensive knowledge of computer hardware and operating systems, programming languages and application software, the number of qualified potential employees is limited. Moreover, competition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting and retaining the personnel it requires to continue to grow and operate profitably. Intense Competition The market for customer service management software and related consulting and training services is relatively new, intensely competitive and highly fragmented. The Company encounters significant competition from internal information systems departments of potential or existing customers that develop custom software. The Company also competes with companies that target the customer interaction or workflow markets, and professional services organizations that develop custom software in conjunction with rendering consulting services. Such competitors vary in size and in the scope and breadth of products and services offered. The Company anticipates increased competition for market share and pressure to reduce prices and make sales concessions, which could materially and adversely affect the Company's business, operating results and financial condition. Many of the Company's competitors have greater resources than the Company, and may be able to respond more quickly and efficiently to new or emerging technologies, programming languages or standards, or to changes in customer requirements or preferences. Many of the Company's competitors can devote greater managerial or financial resources than the Company can to develop, promote and distribute customer service management software products and provide related consulting and training services. There can be no assurance that the Company's current or future competitors will not develop products or services which may be superior in one or more respects to the Company's or which may gain greater market acceptance. Some of the Company's competitors have established or may establish cooperative arrangements or strategic alliances among themselves or with third parties, thus enhancing their abilities to compete with the Company. It is likely that new competitors will emerge and rapidly acquire market share. There can be no assurance that the Company will be able to compete successfully against current or future competitors or that the competitive pressures faced by the Company will not materially and adversely affect its business, operating results and financial condition. See "Business--Competition." Management of Growth The growth in the size, geographic scope and complexity of the Company's business and the expansion of its product offerings and customer base have placed and are expected to continue to place a significant strain on the Company's management, operations and capital needs. The Company's continued growth, if any, will require it to hire, train and retain many employees both in the United States and abroad, particularly additional sales and financial personnel, and will also require the Company to enhance its financial and managerial controls and reporting systems. There is no assurance that the Company can manage its growth effectively or that the Company will be able to attract and retain the necessary personnel to meet its business challenges. If the Company is unable to manage its growth effectively, the Company's business, operating results and financial condition could be materially and adversely affected. See "Business--Business Strategy" and "--Sales and Marketing." Risks Associated with International Operations; Currency and Other Risks Sales to customers headquartered outside of the United States represented approximately 24% and 10% of the Company's total revenue in 1994 and 1995, respectively. The Company, in part through its wholly-owned subsidiary based in the United Kingdom, markets products and renders consulting and training services to customers based in Canada, the United Kingdom, France, Switzerland, Ireland and 8 Luxembourg. The Company is in negotiations with potential customers based in other foreign countries, and may establish a physical presence in continental Europe, Australia or elsewhere in the Pacific Rim. The Company believes that its continued growth will necessitate expanded international operations requiring a diversion of managerial attention and financial resources. The Company anticipates hiring additional personnel to accommodate international growth, and the Company may also enter into agreements with local distributors, representatives or resellers. If the Company is unable to do one or more of these things in a timely manner, the Company's growth, if any, in its foreign operations will be restricted, and the Company's business, operating results and financial condition could be materially and adversely affected. In addition, there can be no assurance that the Company will be able to maintain or increase international market demand for its products. Most of the Company's international sales are denominated in U.S. dollars. Accordingly, any appreciation of the value of the U.S. dollar relative to the currencies of those countries in which the Company distributes its products may place the Company at a competitive disadvantage by effectively making its products more expensive as compared to those of its competitors. Additional risks inherent in the Company's international business activities generally include unexpected changes in regulatory requirements, increased tariffs and other trade barriers, the costs of localizing products for local markets and complying with local business customs, longer accounts receivable patterns and difficulties in collecting foreign accounts receivable, difficulties in enforcing contractual and intellectual property rights, heightened risks of political and economic instability, the possibility of nationalization or expropriation of industries or properties, difficulties in managing international operations, potentially adverse tax consequences (including restrictions on repatriating earnings and the threat of "double taxation"), enhanced accounting and internal control expenses, and the burden of complying with a wide variety of foreign laws. There can be no assurance that one or more of these factors will not have a material adverse effect on the Company's foreign operations, and, consequentially, the Company's business, operating results and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Sales and Marketing." Dependence upon Proprietary Rights; Risks of Infringement The Company's success is heavily dependent upon its ability to protect its proprietary technology. To protect its proprietary rights, the Company relies on a combination of copyright, trademark and trade secret laws, as well as confidentiality agreements. The Company also has one United States patent application pending. However, existing patent, copyright, trademark and trade secret laws afford only limited protection. In addition, many countries' laws do not protect the Company's proprietary rights to the same extent as do the laws of the United States. Accordingly, there can be no assurance that the Company will be able to protect its proprietary rights against unauthorized third party copying, use or exploitation, any of which could have a material adverse effect on the Company's business, operating results and financial condition. Attempts may be made to copy or reverse engineer aspects of the Company's products, or to obtain, use or exploit information or methods which the Company deems proprietary. Additionally, there can be no assurance that the Company's customers and others will not develop products which infringe upon the Company's rights, or that compete with the Company's products. Policing the use of the Company's products is difficult and expensive, and there is no assurance that such efforts would prove effective. Litigation or other action may be necessary in the future to enforce the Company's proprietary rights, to seek and confirm patent protection for the Company's technologies, or to determine the validity and scope of the proprietary rights of others. The Company expects that its software products may increasingly be subject to claims as the number of products and competitors in the Company's markets grows and the functionality of such products overlaps. Such litigation or proceedings, whether or not meritorious, could result in substantial costs and diversions of resources and management's attention, and could have a material adverse impact on the Company's business, operating results and financial condition. See "Business--Intellectual Property and Licenses." 9 Reliance on Certain Relationships The Company has a number of third party relationships that are significant to its sales, marketing and support activities and product development efforts. The Company relies upon relational database management systems applications and development tool vendors, software and hardware vendors, and consultants to provide marketing and sales opportunities for the Company's direct sales force, and strengthen its product offerings through the use of industry-standard tools and utilities. The Company's strategy in entering into these relationships is to keep pace with the technological and marketing developments of major software vendors, and to acquire technical assistance for the Company's product development efforts. There can be no assurance that these companies, most of which have significantly greater financial and marketing resources than the Company, will not develop or market software products which compete with the Company's products in the future or will not otherwise discontinue their relationships with or support of the Company. The failure of the Company to maintain its existing relationships, or to establish new relationships in the future, because of a divergence of interests, acquisition of one or more of these third parties, or for any other reason, could have a material adverse effect on the Company's business, results of operations and financial condition. Product Liability; Warranty Claims The Company's license agreements with its customers typically contain provisions intended to limit the nature and extent of the Company's liability for product liability claims or claims arising from breaches of warranties. There is no assurance that such limitations would withstand judicial scrutiny or that they would bind a party not in direct privity with the Company. Furthermore, some of the Company's licenses with its customers are governed by laws other than those of the United States, and there is no assurance that purported limitations on liability would be enforced were foreign law to govern. Although the Company has not experienced any material product liability claims to date, the license and support of products by the Company and the incorporation of third party products and components may entail the risk of such claims. A product liability suit or action claiming a breach of warranty, whether or not meritorious, could result in substantial costs and a diversion of management's attention and the Company's resources, which costs and diversion could have a material adverse effect on the Company's business, operating results and financial condition. Additionally, a suit alleging a product defect or a breach of an express or implied warranty, if successful, may also have an adverse precedential effect on other or future actions. Lack of Prior Dividends; No Plans to Pay Dividends in the Foreseeable Future The Company has never declared or paid cash dividends and does not anticipate paying cash dividends in the foreseeable future. The Company's current bank line prohibits payment of dividends without the bank's consent. Immediate and Substantial Dilution Purchasers of shares of Common Stock offered hereby will suffer an immediate and substantial dilution in the net tangible book value of $11.22 per share of the Common Stock from the initial public offering price. See "Dilution" and "Capitalization." Potential Adverse Effects of Anti-Takeover Provisions; Possible Issuance of Preferred Stock The Company's Restated Articles of Organization (the "Restated Articles") and Restated By-Laws contain provisions that may make it more difficult for a third party to acquire, or discourage acquisition bids for, the Company. The Restated Articles and Restated By-Laws provide that a stockholder seeking to have business conducted at a meeting of stockholders must give notice to the Company not less than 90 days prior to the scheduled meeting. The Restated By-Laws further provide that a special stockholders meeting may be called by the president or the Board of Directors or upon the request of stockholders holding at least 40% of the voting power of the Company. The Restated Articles and Restated By-Laws provide for a classified Board of Directors, and for the removal of directors only for cause upon the affirmative vote of the holders of at least 80% of the shares entitled to vote. Moreover, upon completion of this offering, the Company will be subject to an anti-takeover provision of the Massachusetts General Laws which prohibits, subject to certain exceptions, a holder of 5% or more of the outstanding voting stock of a corporation from engaging in certain transactions with the corporation, including a merger or stock 10 or asset sale. These provisions could limit the price that certain investors might be willing to pay in the future for shares of the Company's Common Stock and may have the effect of preventing changes in the management of the Company. In addition, shares of the Company's Preferred Stock may be issued in the future without further stockholder approval and upon such terms and conditions, and having such rights, privileges and preferences, as the Board of Directors may determine. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of any holders of Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or discouraging a third party from acquiring, a majority of the outstanding voting stock of the Company. The Company has no present plans to issue any shares of Preferred Stock. See "Description of Capital Stock." Shares Eligible for Future Sale Sales of substantial amounts of shares of Common Stock in the public market following this offering could adversely affect the market price of the Common Stock. On the date of this Prospectus, in addition to the 3,400,000 shares offered hereby, 12,000 shares of Common Stock will be eligible for future sale in the public market pursuant to Rule 144(k) under the Securities Act of 1933, as amended (the "Securities Act"). Beginning 90 days after the date of this Prospectus, an additional 139,500 shares will become eligible for sale in the public market, pursuant to Rules 144 and 701 under the Securities Act. Upon the expiration of lock-up agreements between certain stockholders of the Company and the representatives of the Underwriters 180 days after the date of this Prospectus, an additional 22,739,300 shares will become eligible for sale in the public market, subject to the provisions of Rule 144 under the Securities Act. The representatives of the Underwriters may waive some or all of the provisions of such lock-up agreements on a case-by-case or general basis, all without notice to the Company, its stockholders or any market on which the Common Stock may then be trading. See "Shares Eligible for Future Sale" and "Underwriting." Shortly after the date of this Prospectus, the Company intends to file a Form S-8 registration statement under the Securities Act registering approximately 5,750,000 shares of Common Stock issuable under the Company's stock plans. As of May 13, 1996, giving effect to the exercise of options for the purchase of 100,800 shares immediately prior to the closing of this offering, options to purchase a total of 2,308,200 shares were outstanding (of which 487,950 were then exercisable) and 3,341,000 shares were reserved for future issuance under such stock plans. See "Shares Eligible for Future Sale." No Prior Trading Market; Potential Volatility of Stock Price Prior to this offering, there has been no public market for the Company's Common Stock, and there can be no assurance that an active trading market will develop or be sustained after this offering. The initial public offering price to be negotiated between the Company, the Selling Stockholders and the representatives of the Underwriters may not be indicative of prices that will prevail in the trading market. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The market price of the Company's Common Stock could be subject to wide fluctuations in response to quarter-to-quarter variations in operating results, the gain or loss of significant contracts, announcements of technological developments or new products by the Company and its competitors, changes in earnings estimates by analysts, market conditions in the industry and general economic conditions. In addition, the stock market has experienced volatility that has particularly affected the market prices for the stock of many technology companies and that often has been unrelated to the operating performance of such companies. These market fluctuations may adversely affect the market price of the Company's Common Stock. See "Underwriting." 11 USE OF PROCEEDS The net proceeds to the Company from the sale of the 2,700,000 shares of Common Stock offered by the Company pursuant to this offering are estimated to be $32,043,000 ($38,209,000 if the Underwriters' over-allotment option is exercised in full), assuming an initial public offering price of $13.00 per share and after deducting the estimated underwriting discount and offering expenses payable by the Company. The principal purposes of this offering are to increase the Company's equity capital, to create a public market for the Common Stock, to increase the visibility of the Company in the marketplace and to facilitate future access by the Company to public equity markets. The Company anticipates using the net proceeds from this offering to repay the Company's existing bank indebtedness and for general corporate purposes. At March 31, 1996, the Company's bank indebtedness consisted of four term promissory notes in the aggregate principal amount of $1,402,000, which are due December 1996 ($155,000), November 1997 ($211,000), June 1998 ($885,000) and December 1998 ($151,000). Interest accrues on such loans at the bank's prime rate (8.25% at March 31, 1996) plus 0.5% per annum. The proceeds of such loans were used by the Company primarily to acquire capital equipment. The Company may seek acquisitions of businesses, products and technologies that are complementary to those of the Company, and a portion of the net proceeds may be used for such acquisitions. While the Company engages from time to time in discussions with respect to potential acquisitions, the Company has no plans, commitments or agreements with respect to any such acquisitions as of the date of this Prospectus, and there can be no assurance that any such acquisitions will be made. Pending such uses, the Company intends to invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities. DIVIDEND POLICY The Company has never declared or paid any cash dividends on its Common Stock and does not anticipate paying any cash dividends in the foreseeable future. The Company currently intends to retain future earnings to fund the development and growth of its business. The Company's current loan agreement with a bank prohibits the payment of dividends without the bank's consent. 12 CAPITALIZATION The following table sets forth the capitalization of the Company as of March 31, 1996 and as adjusted to give effect to the sale of 2,700,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $13.00 per share and the receipt and application of the proceeds therefrom, after deducting the estimated underwriting discount and offering expenses payable by the Company. See "Use of Proceeds." This information should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto appearing elsewhere in this Prospectus.
March 31, 1996 --------------------- Adjusted Actual (1) ------ ----------- (in thousands except share-related data) Long-term debt, less current maturities $ 672 -- Stockholders' equity Common Stock, $.01 par value, 45,000,000 shares authorized, 23,490,000 shares issued and outstanding (actual); and 26,290,800 shares issued and outstanding (as adjusted) (2) (3) 235 $ 263 Additional paid-in capital 15 32,063 Retained earnings 15,008 15,008 Cumulative foreign currency translation adjustment (122) (122) ------ ------ Total stockholders' equity 15,136 47,212 ------ ------ Total capitalization $15,808 $47,212 ====== ======
(1) Adjusted to give effect to the sale of 2,700,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $13.00 per share, after deducting the estimated underwriting discount and offering expenses payable by the Company, and the anticipated application of the net proceeds therefrom. (2) Includes 100,800 shares of Common Stock issuable upon exercise of stock options to be exercised immediately prior to the closing of this offering. (3) Excludes 2,308,200 shares of Common Stock issuable pursuant to the exercise of options outstanding at May 13, 1996, of which options to purchase 487,950 shares were then exercisable. See "Management--Stock Plans." 13 DILUTION The net tangible book value of the Company at March 31, 1996 was $14,814,418 or $0.63 per share of Common Stock, after giving effect to the anticipated exercise of options to purchase 100,800 shares of Common Stock immediately prior to the closing of this offering. Net tangible book value per share is equal to the Company's total tangible assets less total liabilities, divided by the total number of shares of Common Stock outstanding. Net tangible book value dilution per share represents the difference between the amount per share paid by purchasers of shares of Common Stock in the offering made hereby and the net tangible book value per share of Common Stock immediately after completion of this offering. After giving effect to the sale by the Company of the 2,700,000 shares of Common Stock offered hereby at an assumed initial public offering price of $13.00 per share, and after deducting the estimated underwriting discount and offering expenses, the pro forma net tangible book value of the Company as of March 31, 1996 would have been $46,857,418 or $1.78 per share of Common Stock. This represents an immediate increase in such pro forma net tangible book value of $1.15 per share to existing stockholders and an immediate dilution of $11.22 per share to new investors purchasing shares in this offering. If the initial public offering price is higher or lower, the dilution to the new investors will be, respectively, greater or less. The following table illustrates this per share dilution:
Assumed initial public offering price per share $13.00 Net tangible book value per share as of March 31, 1996 $0.63 Increase per share attributable to new investors $1.15 ----- Pro forma net tangible book value per share as of March 31, 1996 after offering 1.78 ----- Net tangible book value dilution per share to new investors $11.22 =====
The following table summarizes on a pro forma basis as of March 31, 1996, the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price paid per share by existing stockholders and by new investors (assuming an initial public offering price of $13.00 per share):
Shares Purchased Total Consideration ------------------- -------------------- Average Price Number Percent Amount Percent Per Share --------- ------ ---------- ------ ------------- Existing stockholders (1) (2) 23,590,800 90% $ 107,728 0.3 % $ 0.005 New investors (1) 2,700,000 10 35,100,000 99.7 $ 13.00 --------- ---- ---------- ----- ------- Total 26,290,800 100% $35,207,728 100.0 % ========= ==== ========= ====
- ------------- (1) Sales by Selling Stockholders in this offering will reduce the number of shares of Common Stock held by existing stockholders to 22,890,800 shares, or 87% of the total number of shares of Common Stock to be outstanding after this offering (85% if the Underwriters' over-allotment option is exercised in full), and will increase the number of shares of Common Stock held by new investors to 3,400,000, or 13% of the total number of shares to be outstanding (3,910,000 shares or 15% if the Underwriters' over-allotment option is exercised in full). See "Principal and Selling Stockholders." (2) Includes 100,800 shares of Common Stock issuable upon exercise of stock options to be exercised immediately prior to the closing of this offering at a weighted average exercise price of approximately $.33 per share. As of May 13, 1996, there were options outstanding to purchase 2,409,000 shares of Common Stock under the Company's 1994 Long-Term Incentive Plan at a weighted average exercise price of $2.51 per share, of which options to purchase 588,750 shares were then exercisable. To the extent any such options are exercised (other than those referred to in note (2) to the above table), there will be further dilution to the new investors. In addition, on May 13, 1996, the Company's Board of Directors adopted the 1996 Non- Employee Director Stock Option Plan (the "Director Plan") and the 1996 Employee Stock Purchase Plan (the "Stock Purchase Plan"); and 250,000 shares and 500,000 shares have been reserved for issuance under the Director Plan and the Stock Purchase Plan, respectively. The issuance of shares under these plans is not reflected in the preceding tables. See "Management--Stock Plans." 14 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data at December 31, 1994 and 1995 and for the three years ended December 31, 1995, are derived from consolidated financial statements of Pegasystems Inc., which have been audited by Ernst & Young LLP, independent auditors. The selected consolidated financial data at December 31, 1991 and 1992 and for each of the two years ended December 31, 1992, are derived from consolidated financial statements of the Company audited by Ernst & Young LLP but not included in this Prospectus. The selected consolidated financial data presented below at and for the three months ended March 31, 1995 and 1996 are derived from the Company's unaudited financial statements also appearing herein and which, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the unaudited interim periods. The results of operations for the three months ended March 31, 1996 are not necessarily indicative of the results that may be expected for the full year or for any future period. The data presented below should be read in conjunction with the consolidated financial statements, related notes and other financial information included herein. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Three Months Ended Year Ended December 31, March 31, -------------------------------------------- ---------------- 1991 1992 1993 1994 1995 1995 1996 ----- ----- ------ ------ ------ ----- ------- (in thousands, except per share data) Consolidated Statement of Income Data: Total revenue $7,784 $8,963 $10,212 $16,263 $22,247 $4,005 $ 4,941 Income from operations 1,858 1,944 793 2,236 3,257 66 456 License interest income 987 1,220 1,305 1,457 1,486 370 368 Net income 1,791 1,867 1,233 2,193 2,878 263 486 Net income per share $ 0.07 $ 0.08 $ 0.05 $ 0.09 $ 0.11 $ 0.01 $ 0.02 Weighted average common and common equivalent shares outstanding 24,471 24,471 24,231 24,102 25,551 25,600 25,505
March December 31, 31, ----------------------------------------- -------- 1991 1992 1993 1994 1995 1996 ----- ----- ----- ----- ----- -------- (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents $ 80 $ 336 $ 435 $ 456 $ 511 $ 2,644 Working capital 1,904 3,428 4,231 4,441 4,393 6,952 Long-term license installments, net 5,512 6,319 6,782 9,135 13,399 11,444 Total assets 11,992 14,387 17,057 20,787 25,876 26,555 Long-term debt 108 118 458 450 816 672 Stockholders' equity 6,576 8,444 9,676 11,872 14,674 15,136
15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operation of the Company should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto, and the other financial information included elsewhere in this Prospectus. Overview The Company was founded in April 1983 to develop, market and support customer management software solutions for financial services organizations. Product development began immediately and by the end of the year the Company had secured its first customer. The Company has been profitable in each fiscal quarter since the first quarter of 1985. The Company's revenue is derived from two sources: software license fees and services revenue. License fees, which have historically represented the majority of the Company's total revenue, are generally payable on a monthly basis under license agreements which typically have a five-year term and are subject to renewal at the customer's option for an additional fixed period. Such license agreements are generally non-cancellable, although some may be terminated by the licensee for a fee prior to the expiration of the initial term but after a minimum specified period. The Company's licenses generally provide for annual license fee increases (the "inflation adjustments") based on recognized inflation indexes (sometimes subject to maximums). The Company believes that both it and its customers derive substantial benefits from the recurring fee model because it encourages the Company to be responsive to customer needs and provides the Company with additional revenue opportunities through license renewals. License revenue is recognized upon product acceptance. In the case of license renewals, revenue is recognized upon execution of the renewal agreement or if, as is generally the case, renewal is automatic unless the customer gives notice of termination, at the expiration of the period during which the customer has the right to terminate. The inflation adjustments are recognized ratably over the months to which they apply. In accordance with Statement of Position No. 91-1 issued by the American Institute of Certified Public Accountants, the amount of software license revenue recognized upon product acceptance or license renewal is equal to the present value of the payments due during the minimum initial or renewal term, as the case may be, plus the present value of any early termination fee. In 1993, 1994 and 1995 and the three months ended March 31, 1996, the discount rate for purposes of the present value calculation was 7%. In the future, the Company intends to establish the discount rate quarterly based on the Company's then current marginal borrowing rate, reduced, with respect to licenses which provide for inflation adjustments, by 1.5%, reflecting the Company's estimate of the benefit of future inflation adjustments during the minimum license term. The imputed interest portion of the license fees, which is reported as license interest income in the Company's consolidated statements of income, is recognized over the minimum initial or the renewal term, as the case may be. To date, a substantial majority of the Company's software licenses have been renewed upon expiration. License renewals accounted for 32%, 26%, 28% and 25% of total revenue in 1993, 1994, 1995 and the three months ended March 31, 1996, respectively. The fact that a significant portion of the Company's revenue is derived from the renewal of license agreements with fixed expiration dates assists the Company in anticipating future revenue. The Company's services revenue is comprised of fees for implementation, consulting, maintenance and training services. All software license customers are required to enter into a maintenance contract requiring the customer to pay a monthly maintenance fee over the term of the related license agreement equal to approximately 18% of the license fee. Maintenance fees are recognized ratably over the term of the maintenance agreement. The Company's software license agreements typically require the Company to provide a specified level of implementation services for a fixed fee, typically with additional implementation services available at an hourly rate. Implementation fees are payable upon the achievement of specified milestones. The Company generally recognizes implementation as well as consulting and training fees as the services are provided. In accordance with generally accepted accounting principles, the Company has capitalized certain software development costs which it has typically amortized over two years. No such costs, however, were 16 capitalized in 1995 or in the three months ended March 31, 1996. At March 31, 1996, the Company carried $350,000 of capitalized software development costs. These costs will be fully amortized by the end of 1996. As a result, the Company expects that its cost of software license revenue will be lower in 1997 than in 1996. Substantially all of the Company's contracts are denominated in U.S. dollars, although several are denominated in British pounds sterling. The Company expects that in the future more of its contracts will be denominated in foreign currencies. The Company has not experienced any significant foreign exchange gains or losses, and the Company does not expect that foreign currency fluctuations will have a significant effect on either its revenue or costs in the near term. Results of Operations The following table sets forth, for the periods indicated, certain items in the Company's consolidated statement of income reflected as a percentage of total revenue:
Three Months Year Ended Ended December 31, March 31, -------------------- -------------- 1993 1994 1995 1995 1996 ---- ---- ---- ---- ------ Revenue: Software license 63.1 % 59.4 % 60.8 % 55.2 % 51.0 % Services 36.9 40.6 39.2 44.8 49.0 -- -- -- -- ---- Total revenue 100.0 100.0 100.0 100.0 100.0 -- -- -- -- ---- Cost of revenue: Cost of software license 12.2 6.6 2.9 4.8 2.4 Cost of services 21.8 23.3 27.7 30.6 28.4 -- -- -- -- ---- Total cost of revenue 34.0 29.9 30.6 35.4 30.8 -- -- -- -- ---- Gross margin 66.0 70.1 69.4 64.6 69.2 -- -- -- -- ---- Operating expenses: Research and development 36.9 33.5 31.7 35.3 32.4 Sales and marketing 13.2 16.2 16.1 19.6 19.7 General and administrative 8.2 6.7 6.9 8.0 7.8 -- -- -- -- ---- Total operating expenses 58.3 56.4 54.7 62.9 59.9 -- -- -- -- ---- Income from operations 7.7 13.7 14.7 1.7 9.3 License interest income 12.8 9.0 6.7 9.2 7.4 Other interest income 0.3 0.1 0.1 0.1 0.2 Interest expense (0.3) (0.3) (0.5) (0.5) (0.8) -- -- -- -- ---- Income before provision for income taxes 20.5 22.5 21.0 10.5 16.1 Provision for income taxes 8.4 9.0 7.9 4.0 6.3 -- -- -- -- ---- Net income 12.1 % 13.5 % 13.1 % 6.5 % 9.8 % == == == == ====
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31, 1995 Revenue Total revenue for the three months ended March 31, 1996 (the "1996 Period") increased 23.4% to $4.9 million from $4.0 million for the three months ended March 31, 1995 (the "1995 Period"). The increase was primarily due to an increase in services revenue, and to a lesser extent, an increase in software license revenue. Software license revenue for the 1996 Period increased 14.1% to $2.5 million from $2.2 million for the 1995 Period. The increase in software license revenue was primarily attributable to software license agreement renewals, the licensing of standard product templates, and inflation-based increases in monthly license fees. 17 Services revenue for the 1996 Period increased 34.8% to $2.4 million from $1.8 million for the 1995 Period. The increase in services revenue was primarily attributable to increased demand for consulting and implementation services, and to a lesser extent, increased maintenance revenue from a larger installed product base. Revenue from customers headquartered outside of the United States for the 1996 Period increased 398% to $1.3 million from $250,000 in the 1995 Period due largely to the expanded operations of the Company's office in the United Kingdom. Cost of Revenue Cost of software license consists of amortization expense related to capitalized software development costs, royalty payments to third party software vendors and costs of product media, duplication and packaging. Cost of software license for the 1996 Period decreased 38.0% to $118,000 from $191,000 for the 1995 Period, and decreased as a percentage of total revenue from 4.8% for the 1995 Period to 2.4% for the 1996 Period. As a percentage of software license revenue, cost of software license decreased from 8.6% for the 1995 Period to 4.7% for the 1996 Period. Such decreases were due to decreased amortization expense related to capitalized software development costs. Cost of services consists primarily of the costs of providing implementation, consulting, maintenance and training services. Cost of services for the 1996 Period increased 14.4% to $1.4 million from $1.2 million for the 1995 Period mainly due to increased staffing in the Company's Reengineering and Client Services group in the United Kingdom and in the Company's domestic regional offices. Cost of services as a percentage of total revenue declined from 30.6% for the 1995 Period to 28.4% for the 1996 Period, and declined as a percentage of services revenue from 68.4% for the 1995 Period to 58.0% for the 1996 Period, in both cases due to the growth in the Company's total revenue and increased utilization of service personnel. Operating Expenses Research and development expenses consist primarily of the cost of personnel and equipment needed to conduct the Company's research and development efforts. Research and development expenses for the 1996 Period increased 13.4% to $1.6 million from $1.4 million for the 1995 Period. The modest increase in research and development expenses reflected the substantial completion in December 1995 of the Company's efforts to develop versions of its products based on the C++ programming language. As a percentage of total revenue, research and development expenses declined from 35.3% for the 1995 Period to 32.4% for the 1996 Period due to the growth in the Company's total revenue. Sales and marketing expenses for the 1996 Period increased 23.8% to $972,000 from $785,000 for the 1995 Period. As a percentage of total revenue, sales and marketing expenses increased slightly from 19.6% for the 1995 Period to 19.7% for the 1996 Period. Such increases were attributable to the hiring of additional direct sales personnel, increased sales commission payments attributable to higher sales, and investments in marketing materials. The Company's license agreements, by providing for the payment of license fees in installments over the term of the agreement, have historically limited the Company's working capital and consequently its ability to invest in sales and marketing. With the proceeds of this offering, the Company intends to increase substantially its sales and marketing spending. General and administrative expenses consist primarily of the salaries of the Company's executive, administrative and financial personnel, and associated expenses. General and administrative expenses for the 1996 Period increased 20.4% to $388,000 from $322,000 for the 1995 Period due to staff growth. Such expenses declined slightly as a percentage of total revenue from 8.0% for the 1995 Period to 7.8% for the 1996 Period due to the growth in the Company's total revenue. License Interest Income License interest income represents the portion of all license fees due under software license agreements which was not recognized upon product acceptance or license renewal. License interest income for the 1996 Period and the 1995 Period remained constant at $370,000. 18 Provision for Income Taxes The provisions for federal, state and foreign taxes were $160,000 and $310,000 for the 1995 Period and the 1996 Period, respectively. The effective tax rates were 38% for the 1995 Period and 39% for the 1996 Period. The increase in the effective tax rate was primarily due to the reduced availability of research and development tax credit carryforwards. At March 31, 1996, the Company had $440,000 in research and development tax credit carryforwards available to offset future federal taxable income. Year Ended December 31, 1995 Compared to Year Ended December 31, 1994 Revenue Total revenue for 1995 increased 36.8% to $22.2 million from $16.3 million for 1994 due primarily to an increase in software license revenue, and to a lesser extent, an increase in services revenue. Software license revenue for 1995 increased 40.0% to $13.5 million from $9.7 million in 1994 due to increased product acceptances and license renewals. Services revenue for 1995 increased 32.1% to $8.7 million from $6.6 million in 1994 primarily due to an increase in the amount of implementation and consulting services provided, and to a lesser extent, increases in the billing rates of the personnel providing these services and an increase in training revenue. Cost of Revenue Cost of software license for 1995 decreased 42.9% to $640,000 from $1.1 million for 1994, and decreased as a percentage of total revenue from 6.6% for 1994 to 2.9% for 1995. As a percentage of software license revenue, cost of software license decreased from 11.1% for 1994 to 4.7% for 1995. Such decreases were due to reduced amortization of capitalized software development costs. Cost of services for 1995 increased 62.5% to $6.2 million from $3.8 million for 1994 and increased as a percentage of total revenue from 23.3% for 1994 to 27.7% for 1995. Cost of services as a percentage of total services revenue increased from 57.4% for 1994 to 70.7% for 1995. Such increases were due to the hiring of additional personnel to provide implementation and consulting services to support the Company's growing customer base. Operating Expenses Research and development expenses for 1995 increased 29.8% to $7.1 million from $5.4 million for 1994 as a result of increased efforts by the Company to develop versions of its products capable of running on multiple UNIX platforms in a client/server environment. As a percentage of total revenue, research and development expenses declined from 33.5% for 1994 to 31.7% for 1995 due to the growth in the Company's total revenue. Sales and marketing expenses for 1995 increased 36.6% to $3.6 million from $2.6 million for 1994 due to the hiring of additional sales and marketing personnel, increased sales commission payments and increased investment in trade shows and other sales and marketing efforts. As a percentage of total revenue, sales and marketing expenses decreased slightly from 16.2% for 1994 to 16.1% for 1995 due to growth in the Company's total revenue. General and administrative expenses for 1995 increased 41.2% to $1.5 million from $1.1 million for 1994 due to increased management recruiting costs, the establishment of two new regional offices in Chicago and Dallas/Fort Worth and the relocation of the Company's United Kingdom office. General and administrative expenses were 6.9% of total revenue in 1995 and 6.7% in 1994. License Interest Income License interest income for 1995 and 1994 remained constant at $1.5 million. 19 Provision for Income Taxes The provisions for federal, state and foreign taxes were $1.5 million and $1.8 million for 1994 and 1995, respectively. The effective tax rates were 40% for 1994 and 38% for 1995. The decrease in the effective tax rate was primarily due to increased availability of research and development tax credits. Year Ended December 31, 1994 Compared to Year Ended December 31, 1993 Revenue Total revenue for 1994 increased 59.2% to $16.3 million from $10.2 million for 1993. In January 1994, the Company organized Pegasystems Limited, a wholly-owned subsidiary based in the United Kingdom. In its first year of operation, Pegasystems Limited introduced the Company's products into Ireland, France and Luxembourg. Financial results for 1994 and subsequent years reflect the consolidated earnings of Pegasystems Inc. and Pegasystems Limited. Software license revenue represented 59.4% and 63.1% of total revenue for 1994 and 1993, respectively. Software license revenue for 1994 increased 49.8% to $9.7 million from $6.4 million for 1993. The increase in software license revenue in 1994 was primarily attributable to increased product acceptances by customers headquartered outside of the United States. The Company's software license revenue from customers headquartered outside of the United States was $3.1 million, or 32.5% of software license revenue, and $0.7 million, or 10.8% of software license revenue, in 1994 and 1993, respectively. Services revenue for 1994 increased 75.3% to $6.6 million from $3.8 million for 1993 primarily due to the increased amount of implementation and consulting services provided to a widening customer base. Following a focused internal reengineering effort which began in 1993 and continued into 1994, the Company redeveloped its strategy for new customer implementations leading to greater services revenue from more effective and timely implementations and the creation of standard training courses. Cost of Revenue Cost of software license decreased 13.5% to $1.1 million for 1994 from $1.2 million for 1993 and decreased as a percentage of total revenue from 12.2% for 1993 to 6.6% for 1994. As a percentage of software license revenue, cost of software license decreased from 19.3% for 1993 to 11.1% for 1994. Such decreases were due to reduced amortization of capitalized software development costs. Cost of services for 1994 increased 70.3% to $3.8 million from $2.2 million for 1993 and increased as a percentage of total revenue from 21.8% for 1993 to 23.3% for 1994. Such increases were due to the costs associated with establishing the Company's United Kingdom office in January 1994 and with developing new training facilities in Cambridge, Massachusetts and San Francisco, California. Cost of services as a percentage of total services revenue decreased from 59.2% for 1993 to 57.4% for 1994 due to increased utilization of service personnel. Operating Expenses Research and development expenses for 1994 increased 44.4% to $5.4 million from $3.8 million for 1993 primarily as a result of efforts by the Company to develop versions of its products capable of running on multiple UNIX platforms in a client/server environment. As a percentage of total revenue, research and development expenses declined to 33.5% for 1994 from 36.9% for 1993 due to growth in the Company's total revenue. Sales and marketing expenses for 1994 increased 94.7% to $2.6 million from $1.4 million for 1993, representing 16.2% and 13.2% of total revenue in the respective years. Such increases reflected the establishment of a sales operation in the United Kingdom and increased sales commission payments. General and administrative expenses for 1994 increased 30.8% to $1.1 million from $830,000 for 1993 due to overhead associated with the expansion of the Company's headquarters in Cambridge, Massachusetts, relocation of the regional office in San Francisco, California, and the establishment of operations in the United Kingdom. General and administrative expenses as a percentage of total revenue declined slightly to 6.7% for 1994 from 8.2% for 1993 due to the growth in the Company's total revenue. 20 License Interest Income License interest income for 1994 increased 10.9% to $1.5 million from $1.3 million in 1993 primarily due to the prepayment by one customer in 1994 of certain monthly software license fees. Provision for Income Taxes The provisions for federal, state and foreign taxes were $860,000 and $1.5 million for 1993 and 1994, respectively. The effective tax rates were 41% for 1993 and 40% for 1994. The decrease in the effective tax rate was primarily due to the use of certain tax credits. Quarterly Operating Results The following tables set forth certain unaudited consolidated financial information for each of the four quarters in 1995 and for the first quarter of 1996. In management's opinion, this unaudited quarterly information has been prepared on the same basis as the audited consolidated financial statements and includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the quarters presented, when read in conjunction with the audited consolidated financial statements and notes thereto included elsewhere in this Prospectus. The Company believes that quarter-to-quarter comparisons of its financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. 21
Three Months Ended --------------------------------------------------------------------- March 31, June 30, September 30, December 31, March 31, 1995 1995 1995 1995 1996 ---------- ---------- ------------- ------------ --------- (in thousands except percentage data) Consolidated Statement of Income Data: Revenue: Software license $ 2,209 $2,581 $3,624 $ 5,115 $ 2,520 Services 1,796 2,113 2,032 2,777 2,421 -------- -------- ----------- ---------- ------- Total revenue 4,005 4,694 5,656 7,892 4,941 -------- -------- ----------- ---------- ------- Cost of revenue: Cost of software license 191 191 127 127 118 Cost of services 1,228 1,383 1,584 1,966 1,405 -------- -------- ----------- ---------- ------- Total cost of revenue 1,419 1,574 1,711 2,093 1,523 Gross profit 2,586 3,120 3,945 5,799 3,418 -------- -------- ----------- ---------- ------- Operating expenses: Research and development $ 1,413 $1,615 $1,846 $ 2,187 $ 1,602 Sales and marketing 785 854 865 1,088 972 General and administrative 322 375 376 468 388 -------- -------- ----------- ---------- ------- Total operating expenses 2,520 2,844 3,087 3,743 2,962 -------- -------- ----------- ---------- ------- Income from operations 66 276 858 2,056 456 License interest income 370 368 383 364 368 Other interest income 6 4 7 0 12 Interest expense (18) (17) (33) (50) (39) -------- -------- ----------- ---------- ------- Income before provision for income taxes 424 631 1,215 2,370 797 Provision for income taxes 161 240 462 901 311 -------- -------- ----------- ---------- ------- Net income $ 263 391 753 1,469 486 ======== ======== =========== ========== ======= Percent of Total Revenue: Revenue: Cost of software license 55.2% 55.0% 64.1% 64.8% 51.0% Cost of services 44.8 45.0 35.9 35.2 49.0 -------- -------- ----------- ---------- ------- Total revenue 100.0 100.0 100.0 100.0 100.0 Cost of revenue: Software license 4.8 4.1 2.2 1.6 2.4 Services 30.6 29.5 28.0 24.9 28.4 -------- -------- ----------- ---------- ------- Total cost of revenue 35.4 33.6 30.2 26.5 30.8 Gross margin 64.6 66.4 69.8 73.5 69.2 -------- -------- ----------- ---------- ------- Operating expenses: Research and development 35.3 34.4 32.6 27.7 32.4 Sales and marketing 19.6 18.2 15.3 13.8 19.7 General and administrative 8.0 8.0 6.7 5.9 7.8 -------- -------- ----------- ---------- ------- Total operating expenses 62.9 60.6 54.6 47.4 59.9 Income from operations 1.7 5.8 15.2 26.1 9.3 License interest income 9.2 7.8 6.8 4.6 7.4 Other interest income 0.1 0.1 0.1 0.0 0.2 Interest expense (0.5) (0.4) (0.6) (0.6) (0.8) -------- -------- ----------- ---------- ------- Income before provision for income taxes 10.5 13.3 21.5 30.1 16.1 Provision for income taxes 4.0 5.1 8.2 11.4 6.3 -------- -------- ----------- ---------- ------- Net income 6.5% 8.2% 13.3% 18.7% 9.8% ======== ======== =========== ========== =======
22 The Company's business has experienced and is expected to continue to experience significant seasonality. In recent years the Company has recognized a greater percentage of its revenue in its third and fourth quarters than in its first and second quarters due to the Company's sales commission structure and the impact of that structure on the timing of product acceptances and license renewals by customers. This pattern is reinforced by the Company's practice of offering customers a fixed number of hours of service per calendar year without charge. Once the annual allotment of service hours is exhausted, customers pay for additional services on an hourly basis, typically resulting in higher services revenue in the Company's second, third and fourth quarters. Cost of software license declined in each of the quarters shown above due to decreasing amortization expense relating to capitalized software development costs. No software development costs were capitalized in 1995 or the first quarter of 1996. The increase in total operating expenses in the fourth quarter of 1995 reflected annual accruals for certain expenses including bad debts and earned vacation. The Company has implemented revised accounting policies to accrue such expenses on a quarterly basis in the future. Liquidity and Capital Resources The Company historically has satisfied its cash requirements through cash generated from operations and borrowings. The Company's approach of charging license fees payable in installments over the term of its licenses has historically deferred the receipt of cash and limited the availability of working capital. Net cash provided by operating activities for the years ended December 31, 1993, 1994, 1995, and the three months ended March 31, 1996 was $1.6 million, $1.5 million, $830,000 and $2.6 million, respectively. During each of these periods, these sources of cash were used to support the Company's working capital requirements. The Company used $890,000, $1.1 million, $1.4 million and $220,000 of net cash during 1993, 1994, 1995, and the three months ended March 31, 1996, respectively, to purchase property and equipment, primarily computer hardware and software, to support the Company's growing employee base and new regional office and training facilities. The Company's commitments consist primarily of leases on its office facilities. See Note 6 of Notes to Consolidated Financial Statements. The Company has a $5.0 million revolving credit line, which expires June 30, 1997, and four term loans from the same bank in the aggregate principal amount of $1.4 million at March 31, 1996, which are due December 1996 ($155,000), November 1997 ($211,000), June 1998 ($885,000) and December 1998 ($151,000). The term loans are secured by certain fixed assets of the Company; the revolving credit line is unsecured. At March 31, 1996, the Company had no borrowings under its revolving credit line. The Company's credit agreement prohibits the payment of dividends, has profitability requirements and requires maintenance of specified levels of tangible net worth and certain financial ratios. See Note 4 of Notes to the Consolidated Financial Statements. The Company believes that the net proceeds from this offering together with cash generated by operations and availability under its bank credit facility will be sufficient to fund the Company's operations for at least one year following the completion of this offering. However, there can be no assurance that additional capital beyond the amounts currently forecasted by the Company will not be required or that any such required additional capital will be available on reasonable terms, if at all, at such time as required by the Company. Inflation Inflation has not had a significant impact on the Company's operating results to date, nor does the Company expect it to have a significant impact in the future due to the fact that the Company's license and maintenance fees are typically subject to annual increases based on recognized inflation indexes. Significant Customers In 1993, First Interstate Bank and Fidelity Investments accounted for approximately 12.9% and 12.3%, respectively, of the Company's total revenue. In 1994, Chemical Bank accounted for approximately 16.8% of the Company's total revenue. In 1995, Citibank, Household Credit Services and Chemical Bank accounted for approximately 16.2%, 14.9% and 12.6%, respectively, of the Company's total revenue. During the three months ended March 31, 1996, Fidelity Investments, Bank of America and Cedel accounted for approximately 25.3%, 11.7% and 10.5%, respectively, of the Company's total revenue. 23 BUSINESS Pegasystems develops customer service management software to automate customer interactions across transaction-intensive enterprises. Many of the world's largest banks, mutual funds and credit card organizations use the Company's solutions to integrate, automate, standardize and manage a broad array of mission-critical customer service activities, including account set-up, record retrieval, correspondence, disputes, investigations and adjustments. The Company's systems can be used by thousands of concurrent users to manage customer interactions and to generate billions of dollars a day in resulting transactions. Work processes initiated by the Company's systems are driven by a highly adaptable "rule base" defined by the user-organization for its specific needs. The rule base facilitates a high level of consistency in customer interactions, yet drives different processes depending on the customer profile or the nature of the request. The Company's open, multi-tier, client/server systems operate on a broad variety of platforms, including UNIX, Windows/NT and IBM/MVS. The Company offers consulting, training and support services to facilitate the use of its solutions. Industry Background Intensifying competition is forcing businesses to reduce costs while focusing on customer service management as an important means of differentiation. Many types of businesses are increasingly recognizing customer interactions as a critical opportunity to solidify and expand customer relationships. Due to the volume and precise nature of their transactions, it is especially critical for financial services organizations to implement cost-effective systems to manage customer interactions accurately and efficiently. Providing high quality, cost-effective customer service management is complex. Organizations with global operations must be able to manage customer interactions in different languages, time zones, currencies and regulatory environments. The challenge is magnified as the product offerings of an organization increase and organizations are combined. Work processes occasioned by a single customer interaction often involve multiple departments within an organization, which may have different priorities and service standards, and may involve a variety of different computer systems. Customers may contact an organization through various means, including telephone, facsimile, the Internet or in person. The organization must be able to respond in a timely, accurate and consistent fashion or risk customer defection. Historically, in attempting to meet demand for new customer management software systems, organizations have faced a choice between building custom systems or purchasing third party systems. Building custom systems or modifying third party systems can be slow and costly and has often led to isolated, departmentalized solutions. Traditional third party systems are often inflexible, requiring organizations to conform their work processes to the system, rather than vice-versa. Neither custom nor third party solutions have generally accommodated an organization's need to evolve or expand operations without significant programming effort. Moreover, neither has had the high volume transaction processing or integration capabilities necessary to support the comprehensive customer interaction requirements of large organizations. Today, organizations need flexible, scalable customer service management solutions that can be implemented on an enterprise-wide basis to facilitate consistent, cost-effective customer service management. A 1995 report of the Aberdeen Group, Inc., a market research firm, estimates the size of the customer interaction software market at $1.7 billion in 1996, and projects that it will grow to $2.7 billion by 1998. Of this market, the share held by independent software vendors is estimated at $540 million in 1996, growing to $925 million in 1998. The total market, as defined by the Aberdeen Group, includes software supporting customer service, internal help desks, field and telesales automation, order entry, sales or product configuration, service dispatching and quality assurance. 24 The Pegasystems Solution The Company's solutions integrate, automate, standardize and manage on an enterprise-wide basis a broad array of mission-critical customer interactions for financial services organizations, including account set- up, record retrieval, correspondence, disputes, investigations and adjustments. Pegasystems' solutions provide a service backbone that drives intelligent processing and seamlessly integrates an organization's geographically dispersed and product specific service operations and isolated computer systems. By bridging these "islands of automation" within large organizations, the Company's solutions increase the efficiency of service representatives and enable organizations to address multiple customer needs during a single contact. The Company's customer service management solutions offer the following advantages: Flexibility and Consistency. The Company's solutions are based on rules defined by the user- organization which drive various types of processing depending on such factors as the content of the customer request, the profile of the customer, the organization's policies and procedures and the authority or qualifications of the customer service representative. By modifying its rule base, an organization can evolve its processing to address the competitive requirements of its business without costly and time consuming reprogramming. Significantly, the rule base feature of the Company's systems permits an organization to establish consistent standards yet interact differently with different segments of its customer base and thereby "mass customize" its services. Scalability and Robust Functionality. The scalability of the Company's multi-tier client/server architecture allows an organization to add branches or departments easily to new or existing servers without performance degradation. Organizations currently entrust the Company's systems with the storage and management of data relating to hundreds of millions of financial transactions. The Company's systems can be used by more than 4,000 concurrent users to manage customer interactions and to process accurately and securely transactions involving billions of dollars a day that result from those interactions. Ease-of-Use. The Company's client software application, PegaVIEW-ACE, increases the effectiveness and productivity of customer service representatives by providing them with a flexible graphical user interface and processing capabilities that leverage the power of client/server desktop computers. The Company's solutions allow customer service representatives to focus on delivering superior customer service, rather than on mastering the protocols and procedures of multiple applications. Integration Capabilities. The Company's open architecture permits its solutions to be integrated with a wide variety of other applications and technologies, including industry standard relational database management systems, advanced telephony equipment and diverse storage media (including magnetic, optical, tape and microfilm). The Company's solutions also support the message formats of major financial transaction networks such as the SWIFT international funds network, the Federal Reserve's Fedwire system and the VISA and MasterCard networks. Multi-Platform Server Support. The Company's solutions feature a common software code base which, in addition to facilitating maintenance and enhancement development efforts, simplifies the support of multiple platforms. The Company's solutions are designed to run on a broad range of computer operating systems including IBM's MVS/CICS and AIX/UNIX systems, Digital Equipment Corporation's VMS and UNIX systems, Microsoft's Windows/NT system and Sun Microsystems' Solaris UNIX system. Improved Efficiency of Customer Service Representatives. Pegasystems' solutions actually perform work, rather than simply track a customer service representative's tasks. Variable data elements (for example, date, amount, customer, account) automatically route service requests and invoke system processes, depending on an organization's rule base. This feature allows customer service representatives to focus on revenue enhancing opportunities, such as cross-selling, and other matters requiring personal attention. When service representative involvement is required during a customer interaction, the Company's solutions provide pertinent, consolidated information to guide the service representative. Savings are realized through reduced talk time, fewer manual processes and less rework. 25 Business Strategy Pegasystems' objective is to become the leading provider of mission-critical client/server customer service management software to organizations performing a high volume of complex interactions with demanding customers. To achieve this objective, the Company is pursuing the following strategies: Leverage Strength in Financial Services Market. Pegasystems provides customer service management solutions to many of the largest financial services organizations in the world. The Company is seeking to expand its business with these organizations through a sales group focused on marketing the Company's products and services to other business operations of these organizations. The Company is also leveraging its relationships and expertise with large financial services organizations to penetrate the medium-sized financial services market. Target Other Markets. Pegasystems believes that the insurance, medical, utilities, retail and other markets have similar customer service management needs and that the Company's core technology is readily adaptable to these additional markets. The Company is exploring these additional markets, and if appropriate, expects to develop the necessary industry specific extensions of its core technology and hire or otherwise gain access to personnel with expertise in such markets. Increase Sales and Support Efforts. Pegasystems intends to establish additional sales and support offices and to increase significantly its domestic and international direct sales forces. In addition, the Company plans to explore relationships with financial transaction processors and consulting firms through which the Company's products can be distributed and implemented. Develop Standard Product Templates. The Company recently commenced licensing standard product templates that give organizations an advanced starting point for configuring their work processes. The Company intends to continue to develop and market standard product templates for financial services organizations, including templates for outbound telemarketing, collections and account set-up. The Company believes that these templates will facilitate more rapid implementation of the Company's solutions and will be a cost-effective way to address the needs of smaller organizations. Reduce Implementation Time. The Company is continuing to refine its PegaSTAR consulting methodology, an approach to the reengineering of an organization's work processes that facilitates more rapid implementation of the Company's customer management systems and continued evolution of such systems by an organization's personnel after initial implementation. This methodology complements the Company's standard product templates in reducing the time required to implement the Company's systems. Maintain Technological Leadership Position. Pegasystems is continuing to develop and invest in its technology. Current development efforts include integration of additional databases and support of emerging technical and workflow standards. Technology The Company's technology is designed to optimize the performance of mission-critical, customer service management processes over a variety of computer platforms, networks and databases. Pegasystems' solutions have the following key technological attributes: "Any-Call, Any-Time, Anywhere" Information Management. Effective customer response requires up-to-date information about the customer relationship, regardless of how, why, when or where the customer contacts the organization. Pegasystems' customer service management systems centralize core customer information to facilitate global access. Multi-tier, Dynamic Distributed Processing. Although the Company's systems are currently used primarily in a two-tier client/server environment, they are also designed to run in an advanced, highly scalable three-tier environment. In traditional three-tier client/server environments, the user interface, the application code, and the data are segregated onto separate tiers. In the Pegasystems three-tier client/server environment, the application code, the rule base and selected data are replicated on both the central and satellite tiers so that processing may occur on either the central server or the distributed 26 satellite servers to minimize network traffic and enhance performance. The rule base determines the optimal location for processing to occur based on the nature of the work required and the data involved. Rule base changes are replicated across the organization's central and satellite servers to facilitate consistent processing by all parts of the organization. Distributed Processing Environment [Graphic Representation of Pegasystems Worldwide Platform Processing Environment] Satellite Server Rules Central Server Rules Work Items Satellite Server Rules Satellite Server Rules Inherited Workflow. Pegasystems solutions maintain organizational consistency while providing the flexibility needed for mass customization. The rule base of the Company's systems may be defined so that certain processes are standardized across an organization while others may be superseded or supplemented by "local" rules tailored to the specific requirements of groups within the organization. Resiliency. Fallback options are provided to deal with hardware or network failure. For example, in a three-tier environment, the PC client can bypass a failed satellite server and connect directly to the central server. The Company is presently working to enhance its systems so that should a failure occur at the central server, each satellite server's replicated code and rule base could support continued processing, with "store and forward" capabilities to automatically re-synchronize the central server when it resumes operation. Platform Independence. Recognizing that organizations often use a variety of computer platforms, Pegasystems provides technology alternatives by supporting a range of mainframes, minicomputers, PC networks and interface devices. While the Company offers its advanced Windows-based PegaVIEW-ACE application for the desktop, the Company's server applications can also drive "dumb terminals", allowing organizations to preserve their investments in legacy networks. 27 ******* P. 24--Illustration omitted: Illustration, set over a map of the world, of the Company's three-tier, client/server environment. A central server is connected to three satellite servers, with rules and code replicated on all servers. Pegasystems Platform Options [Graphic of Pegasystems Platform Options]
Desktop Local Distributed Global Central Networks Satellite Servers Networks Servers Windows TCP/IP IBM AIX TCP/IP IBM MVS UNIX C/CS Windows 95 LU6.2 DEC Open LU6.2 IBM AIX VMS UNIX Windows NT Pathworks Microsoft Pathworks DEC Open Data Windows NT VMS OS/2 Novell SUN Solaris(1) Novell SUN Solaris(1) Data IPX UNIX IPX UNIX IBM 3270 IBM DEC UNIX IBM DEC UNIX Data "Dumb Terminal" VTAM LU2 VTAM LU2 Character-Based Async IBM MVS Async Windows NT "Dumb Terminal" CICS Netscape(1) Microsoft HP/UX(2) SNA HP/UX(2) Motif DDE UNIX UNIX Netscape(1) Procedure (1) Shipping in Q3, 1996 Windows Call (2) Availability planned in Q4, 1996
Internet and Intranet Access. Pegasystems' solutions use the Internet-based HTML (Hypertext Markup Language) to define display attributes for its PegaVIEW-ACE graphical user interface, leveraging logic and presentation rules between PegaVIEW-ACE and Internet/Intranet workflows. Pegasystems' rules dynamically create HTML forms, menus and displays, thereby facilitating interaction with the Internet. Pegasystems is a Netscape Development partner and supports the Netscape Commerce Server interface. Interfacing With Other Systems. Pegasystems' open architecture permits integration with a wide variety of other applications and networks, including relational databases, legacy systems accessed through IBM 3270 emulation, and messaging protocols. The Company offers a Universal Application Programming Interface (API) that allows an organization's custom software to be integrated with the Company's applications without the need to modify the Company's core application code. Pegasystems' solutions also integrate with other applications, accounting systems and imaging products. The Company's systems support the message formats of major financial transaction networks, such as the SWIFT international funds network, the Federal Reserve's Fedwire system and the VISA and MasterCard networks. Storage Options. Data storage flexibility is important to the Company's customers, and the Company's software uses an innovative object-oriented approach that dynamically maps data according to the type of workflow. Versions of the Company's systems designed to run on Windows/NT can store customer service request data in Microsoft's SQL Server relational database, and the Company is currently working to develop similar compatibility for databases from Oracle Corporation and other vendors. Products The Company's products employ a consistent architecture and support the following customer service management functions: Receiving. Organizations receive service requests by telephone, mail, facsimile, or personal contact. Customer service representatives enter details of incoming requests into PegaVIEW-ACE, the 28 Company's easy-to-use, graphical user interface. Alternatively, electronic service requests received from various networks and systems, such as the SWIFT network, Fedwire system, and the VISA and MasterCard networks are entered directly into the Company's system. The Company's systems also support direct electronic access by customers through PCs, Internet browsers and voice response units. In all cases, the service request automatically initiates appropriate processing. Routing. As processing steps are completed, the Company's systems categorize and queue the request either for automatic or manual processing. Productivity-based load leveling and dynamic prioritization ensure high performance and responsiveness. As work is processed, each service representative's "work-list" is automatically updated in real time. The systems monitor each service request for conformance to the organization's timeliness standards, automatically increasing priority and generating warnings based on the service standards of the organization. Researching. The Company's systems determine when more information is needed, where to locate it, and how to retrieve it from databases or other repositories. Pegasystems' rule-driven processing automatically extracts relevant data, directs it to the customer service representative or customer, links it to the work, and keeps it readily accessible. The Company's systems can access information from multiple data sources, whether maintained by the Company's systems or third party systems. Responding. The Company's systems facilitate communications by an organization with its customers by combining user-defined templates and specific customer information to create personalized correspondence. When appropriate, service representatives may further refine message content before forwarding by mail, facsimile or electronic transmission, and may attach images of statements, checks and other data. Follow-up communications are automatically composed, customized and sent. Sensitive correspondence can be queued for online review before release, and the systems create a permanent audit trail of all customer communications. Resolving. Concluding a piece of work involves application of the organization's rules for resolving a request or stepping the customer service representative through the process when human judgment is required. Resolution also includes the creation of transactions, transmission to production systems, management of financial adjustments, posting of service charges, updating of general ledger accounts and synchronization of multiple item requests. Reporting. Data automatically collected by the Company's systems enables an organization to analyze service representative efficiency and determine needs for service representative training or changes to work processes. The Company's systems produce reports, graphical output and feeds to spreadsheets illustrating the volume and status of customer requests, the productivity of customer service representatives and service levels with specific customers. The Company offers a number of different products, each with components and features designed to address particular business areas, but all sharing core technology and adaptable rule-driven processing: PegaCARD manages credit and debit card customer service operations by supporting a wide variety of interactions with cardholders and merchants, including simple inquiries (for example, balances or credit limits), customer requests (address changes, additional cards, credit line increases) and problem management (disputes, chargebacks, fraud, financial adjustments, penalties). Automated features include processing of electronic chargeback messages and images from the MasterCard and VISA networks. PegaCARD allows service representatives to move seamlessly among multiple back-end accounting systems without having to be familiar with the different protocols of each system. PegaCLAIMS manages corporate and wholesale banking customer service by supporting a broad spectrum of customer interactions, including inquiries (product terms, rates), customer requests (account data changes, duplicate copies), and problem management (research, financial adjustments). PegaCLAIMS processes customer service interactions relating to money transfers, securities movement and control, global custody, trade services, foreign exchange and cash management, and features electronic message routing, SWIFT processing and interbank financial compensation management. PegaSHARES manages customer service for transfer agents, brokers, dealers, shareholder servicers and mutual fund managers by supporting inquiries (share balances, net asset values, transactions), customer 29 requests (account changes, copies of statements) and problem resolution (incorrect purchases, monetary adjustments). Automated features include share transfer accounting, literature fulfillment and securities processing compliance. PegaTRACE facilitates retail banking and check clearing customer service by processing inquiries (account balances, fees), customer requests (copies of statements, account transfers) and problem management (research, financial adjustments). PegaTRACE securely manages the suspense accounts that major organizations use to control the flow of accounting entries. Additional features include integration with check clearing systems, suspense ledger management, multi-debit/credit adjustments, and electronic check presentment (ECP) interfaces. PegaSEARCH and PegaINDEX manage high volumes of archived data, such as check information, contained on multiple types of storage media including magnetic disk, optical disk and magnetic tape silos. These systems are designed for organizations that process tens of millions of checks per day and require seven years of archived check data. PegaPRISM and PegaREELAY are used by customer service representatives to retrieve images, view them on a PC and correlate them with specific customer service requests. PegaREELAY is a specialized image retrieval product that automates request processing of reel microfilm. PegaVIEW-ACE (the Advanced Client Environment) is a graphical client application designed for use with the Company's server applications to increase the effectiveness and productivity of customer service representatives. PegaVIEW-ACE organizes customer data to facilitate service representative effectiveness and supports graphical methods to view and enter information. Product Pricing The Company's systems are licensed to organizations under agreements requiring the payment of fees, typically in monthly installments, over the term of the agreement. The amount of the license fee is based on various factors, including the number of concurrent users, the functionality of the system, the number of servers on which product is installed, and the scope of business usage. Typical recent individual system licenses have provided for the payment of monthly installments of between $5,000 and $50,000. Some organizations receive discounts for licensing multiple systems. The monthly license payments generally begin once a system is installed and accepted. The term of such licenses is typically five years, subject to automatic renewal at the organization's option. Services Pegasystems' Reengineering and Client Services Group, which as of April 30, 1996 was comprised of 50 people located in the Company's six offices, provides consulting, training and customer support. Consulting Services. The Company works with its customers during and after system installation to reengineer customer workflows to leverage the capabilities of the Company's systems. Using an installation approach based on its PegaSTAR (the Pegasystems Structured Technique for Analysis and Reengineering) methodology, the Company's consultants assist customers in six major areas--analysis, data collection, process definition, configuration, piloting and measurement. The Company encourages team building and transfer of knowledge from its consultants to an organization's staff through an interactive co-production methodology. Pegasystems and its customers work together to design, document and tailor the system's rule base to the customer's organization. Pegasystems' goal is to empower its customers' staffs with the knowledge and confidence to operate, refine and evolve their systems. Training. The Company offers training programs for those persons within the customer organization responsible for evolving the rules that drive the various processes related to customer interactions. Pegasystems also organizes periodic user group meetings enabling customers to exchange ideas, learn about product directions and influence Pegasystems' development process. Maintenance and Support. Pegasystems provides comprehensive maintenance and support services, which may include 24 hours a day, 7 days a week customer service, periodic preventative maintenance, documentation updates and new software releases. 30 Each organization which licenses the Company's systems is required to enter into a maintenance contract providing for the payment to the Company of a monthly maintenance fee over the term of the related license agreement equal to approximately 18% of the license fee. The Company's maintenance agreements typically obligate Pegasystems to provide up to a specified number of hours of consulting and support. Organizations seeking additional consulting and support services are generally charged an incremental fee ranging between $90 and $170 per hour. Customers Pegasystems provides robust and scalable customer service management solutions that can support thousands of concurrent users based in multiple countries, speaking different languages, and working with different currencies. A representative list of the Company's major customers and the uses to which they apply the Company's products is shown below: Advanta Services Corporation -- Credit card operations, including telephony center, correspondence generation, dispute and chargeback processing. Banco Popular de Puerto Rico -- Retail service center automation, check research and consumer loan inquiry and service. Bank of America -- Retail/check customer service and research, automation of branch support centers. Institutional funds transfer and foreign exchange customer service for U.S. and European operations. Credit and debit card correspondence, dispute and chargeback service processing. Bank of Ireland -- Retail/check clearings and research, automation of branch support centers, and exception/credit item review and verification. Banque Nationale de Paris -- Institutional funds transfer service, research and archive. Barclays Bank -- Institutional funds transfer and foreign exchange customer service for international operations. Credit card (merchant and individual) service including telephony center, correspondence, dispute and chargeback processing. Cedel Bank -- Global custody and securities movement and control customer service. Citibank -- Global funds transfer and foreign exchange customer service. Check-related customer service and research. Domestic MasterCard service including image integration, correspondence, dispute and chargeback processing. Colonial Group -- Mutual fund customer service supporting telephony center and correspondence. Federal Reserve Banks of Boston and San Francisco -- Check processing customer service, suspense ledger management, research, adjustment and archive. Fidelity Investments -- Mutual fund customer service supporting telephony center and correspondence. First National Bank of Chicago -- Retail/check customer service and research. Wholesale banking, funds transfer, check, corporate lockbox and interbank compensation service for global operations. Franklin/Templeton -- Mutual fund customer service supporting telephony center, correspondence and research. Household Credit Services -- Credit card service including telephony center, correspondence, dispute and chargeback processing. Private label customer service for major retailers. Marine Midland -- Institutional funds transfer customer service. Mellon Bank -- Retail/check customer service, research and archive. Wholesale, institutional, cash management, and corporate lockbox customer service. Prudential Securities -- "All-in-one" account support and service for brokerage, credit, and clearing transactions. Trans Union Corporation -- Credit bureau data-management customer service for institutional customers and real estate property appraisal processing. 31 Sales and Marketing The Company markets its software and services primarily through a direct sales force. As of April 30, 1996, the Company's sales force consisted of four people located in the Company's Cambridge, Massachusetts headquarters, and two people based in the Company's United Kingdom office. The Company intends to increase substantially the size of its sales force, which will be necessary if the Company is to achieve significant revenue growth in the future. Competition for qualified sales personnel is intense and there can be no assurance that the Company will be able to attract such personnel. If the Company is unable to hire additional qualified sales personnel on a timely basis, the Company's business, operating results and financial condition could be materially and adversely affected. See "Risk Factors-- Dependence on Key Personnel." In the future, the Company may market and sell its products through value added resellers (VARs) and systems integrators. There can be no assurance, however, that the Company will be able to attract and retain VARs and system integrators that will be able to market and sell the Company's products effectively. To support its sales force, the Company conducts marketing programs which include trade shows, public relations and seminars. Sales leads are also generated by the Company's consulting staff. In 1993, 1994 and 1995, international sales represented 10%, 24% and 10%, respectively, of the Company's total revenue. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations." Product Development Since its inception, the Company has made substantial investments in product development. The Company believes that its future performance depends on its ability to maintain and enhance its current products and develop new products. The Company's product development priorities include (1) developing the capability of the Company's systems to operate with additional third party relational databases such as Oracle; (2) developing standard Application Programming Interfaces that allow other client workstation and server applications to interoperate with the Company's systems; and (3) enhancing existing interfaces between the Company's systems and popular applications such as e-mail, spreadsheets and Lotus Notes. In 1993, 1994, 1995 and the three months ended March 31, 1996, the Company's research and development expenses were approximately $3.8 million, $5.4 million, $7.1 million and $1.6 million, respectively. Competition The customer service management software market is intensely competitive and subject to rapid change. Competitors vary in size and in the scope and breadth of the products and services offered. The Company encounters competition primarily from internal information systems departments of potential or current customers that develop custom software. The Company also competes with: (1) software companies that target the customer interaction or workflow markets such as Remedy Corporation, Scopus Technology, Inc. and The Vantive Corporation; (2) companies that target specific service areas such as DST Systems Inc. and First Data Corp.; and (3) professional services organizations such as Andersen Consulting that develop custom software in conjunction with rendering consulting services. In addition, the Company expects additional competition from other established and emerging companies, including Oracle Corporation and SAP AG, as the market continues to develop and expand. Increased competition may result in price reductions, less beneficial contract terms, reduced gross margins and loss of market share, any of which could materially and adversely affect the Company's business, operating results and financial condition. The Company believes that the principal competitive factors affecting its market include product features such as adaptability, scalability, ability to integrate with other products and technologies, functionality and ease-of-use, the timely development and introduction of new products and product enhancements, as well as product reputation, quality, performance, price, customer service and support, and the vendor's reputation. Although the Company believes that its products currently compete favorably 32 with regard to such factors, there can be no assurance that the Company can maintain its competitive position against current and potential competitors. Many of the Company's competitors have greater resources than the Company, and may be able to respond more quickly and efficiently to new or emerging technologies, programming languages or standards, or to changes in customer requirements or preferences. Many of the Company's competitors can devote greater managerial or financial resources than the Company can to develop, promote and distribute customer service management software products and provide related consulting, training and support services. There can be no assurance that the Company's current or future competitors will not develop products or services which may be superior in one or more respects to the Company's or which may gain greater market acceptance. Some of the Company's competitors have established or may establish cooperative arrangements or strategic alliances among themselves or with third parties, thus enhancing their abilities to compete with the Company. It is likely that new competitors will emerge and rapidly acquire market share. There can be no assurance that the Company will be able to compete successfully against current or future competitors or that the competitive pressures faced by the Company will not materially and adversely affect its business, operating results and financial condition. See "Risk Factors--Intense Competition." Intellectual Property and Licenses The Company relies primarily on a combination of copyright, trademark and trade secrets laws, as well as confidentiality agreements to protect its proprietary rights. The Company also has one patent application pending in the United States relating to the architecture of the Company's systems. While the Company believes that its pending patent application relates to a patentable invention, there can be no assurance that such patent application or any future patent application will be granted or that any patent relied upon by the Company in the future will not be challenged, invalidated or circumvented or that rights granted thereunder will provide competitive advantages to the Company. Moreover, despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain the use of information that the Company regards as proprietary. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to as great an extent as do the laws of the United States. There can be no assurance that the Company's means of protecting its proprietary rights will be adequate or that the Company's competitors will not independently develop similar technology. The Company is not aware that any of its products infringes the proprietary rights of third parties. There can be no assurance, however, that third parties will not claim infringement by the Company with respect to current or future products. The Company expects that software product developers will increasingly be subject to infringement claims as the number of products and competitors in the Company's industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all, which could have a material adverse effect upon the Company's business, operating results and financial condition. From time to time, the Company licenses software from third parties for use with its products. The Company believes that no such license agreement to which it is presently a party is material and that if any such license agreement were to terminate for any reason, the Company would be able to obtain a license or otherwise acquire other comparable technology or software on terms and on a timetable that would not be materially adverse to the Company. Employees As of April 30, 1996, the Company had a total of 160 employees, of whom 135 were based in the United States and 25 were based in the United Kingdom. Of the total, 73 were in research and development, 50 were in consulting and customer support, 15 were in sales and marketing, six were in market strategy and delivery and 16 were in administration and finance. The Company's future performance depends in significant part upon the continued service of its key technical, sales and marketing and senior management personnel and its continuing ability to attract and retain highly qualified 33 technical, sales and marketing and managerial personnel. Competition for such personnel is intense and there can be no assurance that the Company will be successful in attracting or retaining such personnel in the future. None of the Company's employees is represented by a labor union or is subject to a collective bargaining agreement. The Company has not experienced any work stoppages and considers its relations with its employees to be good. See "Risk Factors--Dependence on Key Personnel." Facilities Pegasystems' principal administrative, sales, marketing, support, and research and development facility is located in approximately 35,000 square feet of space in Cambridge, Massachusetts. The Company also maintains offices in New York, New York, Chicago, Illinois, Dallas, Texas, San Francisco, California and Reading, United Kingdom. The Company believes that additional or alternative space will be available in the future on commercially reasonable terms as needed. Legal Proceedings The Company is not a party to any material legal proceedings. 34 MANAGEMENT Executive Officers and Directors The executive officers and directors of the Company and their ages are as follows:
Name Age Position - ---------------------- -- ---------------------------------------------- Alan Trefler 40 President, Clerk and Director Clifford R. Balzer Vice President of Reengineering and Client 45 Services Eugene A. Bonte Vice President of Market Strategy and 45 Delivery Joseph J. Friscia 41 Vice President of Sales and Marketing Kenneth W. Olson 46 Vice President of Technical Development Michael R. Pyle 41 Vice President of Applications Development Ira Vishner Vice President of Corporate Services, Treasurer, Chief Financial Officer and 42 Director Edward A. Maybury (1) (2) 56 Director
(1) Member of Audit Committee (2) Member of Compensation Committee Alan Trefler, a founder of the Company, has served as President and Clerk and has been a director since the Company's organization in 1983. Prior thereto, he managed an electronic funds transfer product for TMI Systems Corporation, a software and services company. Mr. Trefler holds a degree in economics and computer science from Dartmouth College. Clifford R. Balzer joined the Company in December 1995 as Vice President of Reengineering and Client Services. From January through November 1995, he was a Senior Consultant for Arthur D. Little, a research and consulting firm. From July 1990 through January 1995, Mr. Balzer was employed as a Director of U.S. Consulting by DMR Group, Inc., an international consulting firm. Mr. Balzer holds a B.A. from Kansas Wesleyan University and an M.B.A. from Fordham University. Eugene A. Bonte joined the Company in April 1996 as Vice President of Market Strategy and Development. He was a founder of Object Design, Inc., a developer of object database management systems and tools, where he served as Vice President from August 1988 through September 1995 and was responsible, at different times, for marketing, corporate development and product management. Mr. Bonte holds a B.A. from The Johns Hopkins University and an M.B.A. from the Harvard Graduate School of Business. Joseph J. Friscia joined the Company in 1984 to establish its New York office and has served as Vice President of Sales and Marketing since 1987. Prior to joining the Company, he worked as a money transfer operations manager with Bankers Trust Company and J. Henry Schroder Bank and Trust Company. Mr. Friscia holds a B.A. from Long Island University and an M.B.A. from Adelphi University. Kenneth W. Olson, a founder of the Company, has served as Vice President of Technical Development since 1983. Prior thereto, he managed the development of specialized computer systems for large-volume transaction processing for TMI Systems Corporation. Mr. Olson holds an S.B. in Humanities and Sciences from the Massachusetts Institute of Technology. Michael R. Pyle joined the Company in 1985 as an application development manager and has been Vice President of Applications Development since 1990. Mr. Pyle holds a B.C.S. from the CS College in London. Prior to joining the Company, Mr. Pyle worked in Europe and the United States developing and deploying large-scale communications systems for the financial and commercial sectors. Ira Vishner, a founder of the Company, has served as Vice President of Corporate Services, Treasurer and Chief Financial Officer of the Company since 1983 and has been a director since 1994. Prior to 1983, 35 he worked in the executive offices of TMI Systems Corporation where he was responsible for corporate planning, financial analysis and product marketing. Mr. Vishner holds an S.B. in Mathematics from the Massachusetts Institute of Technology. Edward A. Maybury has been a director of the Company since its organization in 1983. Since July 1991, he has served as a director, and from July 1991 through May 1993 was the President and Chief Executive Officer, of Creative Systems, Inc., a software and services company. Prior thereto, Mr. Maybury was the Chief Executive Officer of Data Architect Systems, Inc., a software and services company. Classes of Directors Following this offering, the Board of Directors will be divided into three classes, each of whose members will serve for a staggered three-year term. Mr. Trefler will serve in the class whose term expires in 1997; Mr. Maybury will serve in the class whose term expires in 1998; and Mr. Vishner will serve in the class whose term expires in 1999. Upon the expiration of the term of a class of directors, directors within such class will be elected for a three-year term at the annual meeting of stockholders in the year in which such term expires. Executive Officers Executive officers of the Company are elected by the Board of Directors on an annual basis and serve until the next annual meeting of the Board of Directors and until their successors have been duly elected and qualified. There are no family relationships among any of the executive officers or directors of the Company. Board Committees The Company's Board of Directors has established an Audit Committee and a Compensation Committee. The Audit Committee is responsible for nominating the Company's independent accountants for approval by the Board of Directors, reviewing the scope, results and costs of the audit with the Company's independent accountants and reviewing the financial statements of the Company. Mr. Maybury is currently the sole member of the Audit Committee. The Compensation Committee is responsible for recommending compensation and benefits for the executive officers of the Company to the Board of Directors and for administering the Company's stock plans. Mr. Maybury is currently the sole member of the Compensation Committee. Director Compensation Each non-employee director of the Company receives $1,000 for every Board or committee meeting attended. The Company also reimburses non-employee directors for expenses incurred in attending Board meetings. In addition, non-employee directors of the Company will receive stock options under the 1996 Non-Employee Director Stock Option Plan. See "Management--Stock Plans." No other compensation is paid to directors for attending Board or committee meetings. Mr. Maybury is currently the sole non-employee director of the Company. 36 Executive Compensation The following table sets forth all compensation awarded to, earned by or paid for services rendered to the Company in all capacities during the year ended December 31, 1995 by (i) the Company's Chief Executive Officer and (ii) the four most highly compensated other executive officers who received annual compensation in excess of $100,000 (collectively, the "Named Executive Officers"): Summary Compensation Table
Annual Compensation (1) -------------------------- All Other Name and Principal Position Salary Bonus Compensation - ---------------------------------------------- ------- --------------- ------------- Alan Trefler, President $171,250 $23,545 (2) -- Joseph J. Friscia, Vice President of Sales and Marketing 124,583 24,154 (3) -- Michael R. Pyle, Vice President of Applications Development 102,083 23,044 (2) -- Ira Vishner, Vice President of Corporate Services, Treasurer and Chief Financial Officer 100,500 16,892 (2) $ 8,483 (4) Kenneth W. Olson, Vice President of Technical Development 98,083 13,118 (2) 30,000 (4)
(1) In accordance with the rules of the Securities and Exchange Commission, other compensation in the form of perquisites and other personal benefits has been omitted because the aggregate amount of such perquisites and other personal benefits constituted less than the lesser of $50,000 or 10% of the total of annual salary and bonuses for each of the Named Executive Officers for 1995. (2) The amounts presented are bonuses earned between July 1994 and June 1995, and paid in 1995. Bonuses, if any, for the period from July 1995 through June 1996 have not yet been determined. (3) The amount presented is bonus earned in 1995 and paid in February 1996. Mr. Friscia earned a bonus of $66,650 in 1994, which was paid in February 1995. (4) Represents payments in lieu of paid days off. Option Grants No stock options or stock appreciation rights ("SARs") were granted to any of the Named Executive Officers during 1995. 37 Year-End Option Table The following table sets forth certain information concerning the number and value of unexercised stock options held by each of the Named Executive Officers as of December 31, 1995. No SARs or stock options were exercised during 1995. Year-End Option Values
Number of Shares Underlying Value of Unexercised Unexercised Options In-the-Money Options at at Year-End Year-End (1) -------------------------- ---------------------------- Name Exercisable Unexercisable Exercisable Unexercisable - ---------------- ---------- ------------ ---------- -------------- Alan Trefler -- -- -- -- Joseph J. Friscia 180,000 216,000 (2) $2,281,212 $2,737,454 Michael R. Pyle 151,200 172,800 (2) 1,916,218 2,189,963 Ira Vishner -- -- -- -- Kenneth W. Olson -- -- -- --
(1) There was no public trading market for the Common Stock as of December 31, 1995. Accordingly, as permitted by the rules of the Securities and Exchange Commission, these values have been calculated on the basis of an assumed market value of $13.00 per share, which is the mid-point of the estimated initial public offering price range of $12.00 to $14.00 per share. (2) These options vest in equal installments on December 29, 1996, 1997, 1998 and 1999. Merit Payment Program The Company frequently awards merit payments to its employees as part of a performance assessment process, under which employees may be awarded cash payments based upon individual performance. Historically, the Company's supervisors have been responsible for recommending the amount of merit payment for each of the employees under their direct review. These recommendations are then reviewed by the Board of Directors to promote consistency among departments. Sales Compensation In addition to base salary, the Company pays commissions to its sales personnel based on the attainment of annual sales quotas, monthly fees generated during the period from July 1 through June 30 of each year, and cash received by the Company from new accounts within one year after the initial signing of a contract with a customer. Stock Plans 1994 Long-Term Incentive Plan The Company's 1994 Long-Term Incentive Plan (the "1994 Plan") was adopted by the Board of Directors on November 23, 1994, and approved by the stockholders on April 21, 1995. The 1994 Plan provides for the issuance of a maximum of 5,000,000 shares of Common Stock pursuant to the grant of incentive stock options ("ISOs") to employees and nonqualified stock options ("NSOs"), stock appreciation rights ("SARs"), restricted stock or long-term performance awards to employees, consultants, directors and officers of the Company. At April 30, 1996, the Company had 161 employees eligible to participate in the 1994 Plan and options to purchase 2,409,000 were outstanding. To date, no restricted stock, SARs or long-term performance awards have been granted under the 1994 Plan. The 1994 Plan is administered by the Compensation Committee of the Board of Directors (the "Compensation Committee"). Subject to the provisions of the 1994 Plan, the Compensation Committee has the authority to select the optionees or SAR, long-term performance award or restricted stock recipients and determine the terms of the options, SARs, long-term performance awards or restricted stock granted, 38 including: (i) the number of shares or SARs; (ii) the option exercise terms; (iii) the amount of awards; (iv) the exercise or purchase price (which in the case of an incentive stock option cannot be less than the market price of the Common Stock as of the date of grant); (v) the type and duration of transfer or other restrictions; and (vi) the time and form of payment for restricted stock and upon exercise of options. Generally, an option is not transferable by the optionholder except by will or by the laws of descent and distribution. No option may be exercised following termination for cause or voluntary termination, or more than three months following involuntary termination. Upon termination due to death, an option is exercisable for a maximum of one year after such termination, and upon termination due to disability, the option is exercisable for a maximum of two years after such termination. Federal Income Tax Consequences. The following is a brief description of the federal income tax consequences related to options awarded under the 1994 Plan. ISOs. A participant who receives an ISO will recognize no taxable income for regular federal income tax purposes upon either the grant or the exercise of such ISO. However, when a participant exercises an ISO, the difference between the fair market value of the shares purchased and the option price of those shares will be includible in determining the participant's alternative minimum taxable income. If the shares are retained by the participant for at least one year from date of exercise and two years from date of grant of the option, gain will be taxable to the participant, upon sale of the shares acquired upon exercise of the ISO, as a long-term capital gain. In general, the adjusted basis for the shares acquired upon exercise will be the option price paid with respect to such exercise. The Company will not be entitled to a tax deduction upon the exercise of an ISO. If the shares are sold within a period of one year from the date of exercise or two years from the date of grant of the ISO, the participant will be required to recognize ordinary income equal to the difference between the option price and the lesser of the fair market value of the shares on the date of exercise or the amount realized on the sale or exchange of the shares and the Company will be entitled to a tax deduction of an equal amount. Any additional gain will be treated as long-term capital gain if the shares are held for more than one year prior to the sale and as short-term capital gain if the shares are held for a shorter period. If the participant sells the stock for less than the option price, the participant will recognize a capital loss equal to the difference between the sale price and the option price. The loss will be a long- term capital loss if the shares are held for more than one year prior to the sale and short-term if the shares are held for a shorter period. NSOs. A participant will not recognize taxable income for federal income tax purposes at the time an NSO is granted. However, the participant will recognize compensation taxable as ordinary income at the time of exercise for all shares which are not subject to a substantial risk of forfeiture. The amount of such compensation will be the difference between the option price and the fair market value of the shares on the date of exercise of the option. The Company will be entitled to a deduction for federal income tax purposes at the same time and in the same amount as the participant is deemed to have recognized compensation income with respect to shares received upon exercise of the NSO. The participant's basis in the shares will be adjusted by adding the amount so recognized as compensation to the purchase price paid by the participant for the shares. The participant will recognize gain or loss when he or she disposes of shares obtained upon exercise of an NSO in an amount equal to the difference between the selling price and the participant's tax basis in such shares. Such gain or loss will be treated as long-term or short-term capital gain or loss, depending upon the holding period. 1996 Non-Employee Director Stock Option Plan The 1996 Non-Employee Director Stock Option Plan (the "Director Plan") was adopted by the Board of Directors on May 13, 1996. The Director Plan provides for the grant of options for the purchase of up to 250,000 shares of Common Stock of the Company. To date, no options have been granted under the Director Plan. The Director Plan is administered by the Compensation Committee and provides that each person who becomes a director of the Company after May 13, 1996, and who is not also an employee of the 39 Company will receive upon initial election to the Board of Directors an option to purchase 30,000 shares of Common Stock vesting in equal annual installments over five years. The exercise price for all options granted under the Director Plan will be equal to the market price of the Common Stock as of the date of grant. Options may not be assigned or transferred except by will or by the laws of descent and distribution and are exercisable, only to the extent vested, within 90 days after the optionee ceases to serve as a director of the Company (except that if a director dies or becomes disabled while he or she is serving as a director of the Company, the option is exercisable until the earlier of the scheduled expiration date of the option or one year from the date of death or disability). Federal Income Tax Consequences. All options granted under the Director Plan are NSOs. See the discussion concerning the 1994 Plan above for a description of the federal income tax consequences of NSOs. 1996 Employee Stock Purchase Plan The 1996 Employee Stock Purchase Plan (the "Stock Purchase Plan") was adopted by the Board of Directors on May 13, 1996. An aggregate of 500,000 shares of Common Stock are reserved for issuance pursuant to this plan. The Stock Purchase Plan is administered by the Compensation Committee. All employees of the Company whose customary employment is in excess of 20 hours per week and more than five months per year, other than those employees who own 5% or more of the stock of the Company, are eligible to participate in the Stock Purchase Plan. As of April 30, 1996, approximately 135 of the Company's employees would have been eligible to participate in the Stock Purchase Plan. The Stock Purchase Plan will be implemented by one or more offerings of such duration as the Compensation Committee may determine, provided that no offering period may be longer than 27 months. An eligible employee participating in an offering will be able to purchase Common Stock at a price equal to the lesser of: (i) 85% of its fair market value on the date the right was granted, or (ii) 85% of its fair market value on the date the right was exercised. Payment for Common Stock purchased under the Stock Purchase Plan will be through regular payroll deduction or lump sum cash payment, or both, as determined by the Compensation Committee. The maximum value of Common Stock an employee may purchase during an offering period is 10% of the employee's base salary during such period, calculated on the basis of the employee's compensation rate on the date the employee elects to participate in that offering. To date, there have been no offerings under the Stock Purchase Plan and no shares of Common Stock have been issued thereunder. Federal Income Tax Consequences. The Stock Purchase Plan is intended to qualify as an "employee stock purchase plan" as defined in Section 423 of the Internal Revenue Code of 1986, as amended (the "Code") which provides that an employee will not realize any federal tax consequences when such employee joins the Stock Purchase Plan, or when an offering ends and such employee receives shares of the Company's Common Stock. An employee must, however, recognize income or loss on the difference, if any, between the price at which he or she sells the shares and the price he or she paid for them. If any employee has owned shares purchased under the plan for more than one year, disposes of them at least two years after the date the offering commenced, and the market price of the shares on the date of sale is equal to or less than the purchase price under the Stock Purchase Plan, he or she will recognize a long-term capital loss in the amount equal to the price paid over the sale price. If an employee has owned shares for more than one year, more than two years has elapsed from the date the offering commenced, and the market price of the shares on the date of sale is higher than the purchase price under the Stock Purchase Plan, the employee must recognize ordinary income in an amount equal to the lesser of (i) the fair market value of the shares on the day the offering commenced over the price paid, or (ii) the excess of the amount actually received for the shares over the purchase price. Any further gain would be treated as long-term capital gain. If an employee sells shares purchased under the Stock Purchase Plan prior to holding them for more than one year or prior to two years from the date the offering commenced, he or she must recognize ordinary income in the amount of the difference between the price he or she paid and the market price of the shares on the date of purchase and the Company will receive an expense deduction for the same amount. The employee will recognize a capital gain or loss on the difference between the sale price and the market price on the date of purchase. The Company will not be entitled to a tax deduction upon either 40 the purchase or sale of shares under the Stock Purchase Plan if the holding period requirements set forth above are met. The Stock Purchase Plan is not qualified under Section 401(a) of the Code. 401(k) Plan In December 1989, the Company adopted a tax-qualified employee savings and retirement plan (the "401(k) Plan") covering all of the Company's domestic employees upon commencement of employment and attainment of the age of 18. Participants may elect to contribute to the 401(k) Plan up to the lesser of the statutorily prescribed annual limit ($9,500 in 1996) or 20% of their total pre-tax compensation. The 401(k) Plan permits, but does not require, the Company to make additional matching contributions on behalf of participants. The 401(k) Plan is intended to qualify under Section 401 of the Code so that contributions by employees or by the Company to the 401(k) Plan, and income earned on plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan, and so that contributions by the Company, if any, will be deductible by the Company when made. Participants are fully vested in their deferred salary contributions, and Company contributions, if any, vest 20% after three years and an additional 20% on each anniversary thereof. The administrator of the 401(k) Plan, at the direction of each participant, invests the plan assets of such participant among various investment options. Participants have the option of obtaining loans from the 401(k) Plan secured by their account balances. Vacation Policy The Company generally provides its employees with a flexible vacation and paid time off policy. This policy provides that employees are given one block of paid days off for all uses, including vacation, sick days, personal days and holidays. The number of paid days off given to each employee per year varies according to each employee's length of service with the Company. Unused paid days off are carried over from year to year. Employees are generally entitled to payment in cash for the value of unused paid days off. The Company retains the right to repurchase paid days off in excess of thirty at the end of any quarter from employees who have accumulated more than thirty paid days off. Compensation Committee Interlocks and Insider Participation In 1995, decisions concerning compensation of executive officers were made by the Board of Directors which included Mr. Trefler, the President of the Company, and Mr. Vishner, a Vice President and the Chief Financial Officer of the Company. The Company recently established a Compensation Committee of its Board of Directors, which currently consists of Mr. Maybury. No executive officer of the Company has served as a director or member of the compensation committee (or other committee serving an equivalent function) of any other entity, whose executive officers served as a director of the Company. CERTAIN TRANSACTIONS The Company has adopted a policy whereby all future transactions between the Company and its officers, directors, principal stockholders and their affiliates will be on terms no less favorable to the Company than could be obtained from unrelated third parties and will be approved by a majority of the disinterested members of the Company's Board of Directors. No such transactions are currently being considered. The Company borrowed $230,000 from its President, Alan Trefler, in order to increase the Company's working capital and to fund operations. This loan, which was evidenced by a note renewed in January 1993 and bore interest at a rate of 8.5% per annum, was repaid in full by the Company in 1995. 41 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of May 13, 1996, and as adjusted for the sale of the shares of Common Stock offered hereby, by: (i) each person who is known by the Company to own beneficially more than 5% of the Common Stock, (ii) each director and Named Executive Officer of the Company, (iii) all directors and executive officers of the Company as a group, and (iv) each Selling Stockholder. Unless otherwise indicated below, to the knowledge of the Company, all persons listed below have sole voting and investment power with respect to their shares of Common Stock, except to the extent authority is shared by spouses under applicable law.
Shares to be Shares Beneficially Beneficially Owned Owned Prior to After Offering (1) Offering (1) (2) ------------------- --------------------- Number of Number of Shares Number of Name Shares Percent Offered Shares Percent - -------------------------- --------- ------ ------- --------- -------- Alan Trefler 22,488,000 95.7 % 385,900 22,102,100 84.1 % Joseph J. Friscia (3) 234,000 * 90,000 144,000 * Michael R. Pyle (4) 151,200 * 64,800 86,400 * Ira Vishner 346,500 1.5 69,300 277,200 1.1 Kenneth W. Olson 450,000 1.9 90,000 360,000 1.4 Edward A. Maybury -- -- -- -- -- All directors and executive officers as a group (8 persons) (5) 23,669,700 99.4 700,000 22,969,700 86.6
* Less than 1% of the outstanding Common Stock. (1) The number of shares of Common Stock deemed outstanding prior to the offering includes (i) 23,490,000 shares of Common Stock outstanding as of May 13, 1996 and (ii) shares issuable pursuant to outstanding options held by the respective person or group which are currently exercisable or which will be exercisable within 60 days of May 13, 1996, as set forth below. The number of shares of Common Stock deemed outstanding after the offering includes (i) 2,700,000 shares which are being offered for sale by the Company in the offering and (ii) 100,800 shares issuable upon exercise of stock options to be exercised immediately prior to the closing of this offering. (2) Assumes no exercise of the Underwriters' over-allotment option. (3) Shares beneficially owned prior to offering includes 180,000 shares of Common Stock subject to stock options exercisable within 60 days of May 13, 1996; shares to be beneficially owned after offering consists solely of shares of Common Stock subject to stock options exercisable within 60 days of May 13, 1996. (4) Consists solely of shares of Common Stock subject to stock options exercisable within 60 days of May 13, 1996. (5) Shares beneficially owned prior to offering includes 331,200 shares of Common Stock subject to stock options exercisable within 60 days of May 13, 1996; shares to be beneficially owned after offering includes 230,400 shares of Common Stock subject to stock options exercisable within 60 days of May 13, 1996. 42 DESCRIPTION OF CAPITAL STOCK Effective upon the filing of the Restated Articles of Organization (the "Restated Articles") prior to this offering, the authorized capital stock of the Company will consist of 45,000,000 shares of Common Stock, $.01 par value per share, and 1,000,000 shares of preferred stock, $.01 par value per share (the "Preferred Stock"), which may be issued in one or more series. Common Stock As of May 13, 1996, there were 23,490,000 shares of Common Stock outstanding and held of record by twelve stockholders. Based upon the number of shares outstanding as of that date and giving effect to (i) the issuance of the 2,700,000 shares of Common Stock offered by the Company hereby, and (ii) the exercise of options to purchase 100,800 shares of Common Stock anticipated to occur immediately prior to the closing of this offering, there will be 26,290,800 shares of Common Stock outstanding upon the closing of this offering. Holders of Common Stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Accordingly, holders of a majority of the shares of Common Stock entitled to vote in any election of directors may elect all of the directors standing for election. Holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefor, subject to any preferential dividend rights of outstanding Preferred Stock. Upon the liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to receive ratably the net assets of the Company available after the payment of all debts and other liabilities and subject to the prior rights of any outstanding Preferred Stock. Holders of the Common Stock have no preemptive, subscription, redemption or conversion rights. The outstanding shares of Common Stock are, and the shares offered by the Company in this offering will be, when issued and paid for, fully paid and nonassessable. The rights, preferences and privileges of holders of Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of Preferred Stock which the Company may designate and issue in the future. Upon the closing of this offering, there will be no shares of Preferred Stock outstanding. Preferred Stock Upon filing of the Restated Articles, the Board of Directors will be authorized, subject to certain limitations prescribed by law, without further stockholder approval, to issue from time to time up to an aggregate of 1,000,000 shares of Preferred Stock in one or more series and to fix or alter the designations, preferences, rights and any qualifications, limitations or restrictions of the shares of each such series thereof, including the dividend rights, dividend rates, conversion rights, voting rights, terms of redemption (including sinking fund provisions), redemption price or prices, liquidation preferences and the number of shares constituting any series or designations of such series. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change of control of the Company. The Company has no present plans to issue any shares of Preferred Stock. See "Risk Factors--Potential Adverse Effects of Anti-Takeover Provisions; Possible Issuance of Preferred Stock." Massachusetts Law and Certain Provisions of the Company's Restated Articles of Organization and Restated By-Laws Following this offering, the Company expects that it will have more than 200 stockholders, thus making it subject to Chapter 110F of the Massachusetts General Laws, an anti-takeover law. In general, this statute prohibits a publicly held Massachusetts corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person becomes an interested stockholder, unless (i) the interested stockholder obtains the approval of the Board of Directors prior to becoming an interested stockholder, (ii) the interested stockholder acquires 90% of the outstanding voting stock of the corporation (excluding shares held by certain affiliates of the corporation) at the time it becomes an interested stockholder, or (iii) the business combination is approved by both the Board of Directors and the holders of two-thirds of the outstanding voting stock of the corporation (excluding shares held by the interested stockholder). An "interested stockholder" is a person who, together with affiliates and associates, owns (or at any time within the prior three years did own) 43 5% or more of the outstanding voting stock of the corporation. A "business combination" includes a merger, a stock or asset sale, and certain other transactions resulting in a financial benefit to the interested stockholder. The Company's Restated Articles and the Restated By-Laws (the "Restated By-Laws") provide for a classified board of directors consisting of three classes as nearly equal in size as possible. See "Management--Executive Officers and Directors." In addition, the Restated Articles and Restated By-Laws provide that directors may be removed only for cause by the affirmative vote of the holders of at least 80% of the shares issued outstanding and entitled to vote. Under the Restated Articles and Restated By-Laws, any vacancy, however occurring, including a vacancy resulting from an enlargement of the Board, may only be filled by a vote of a majority of the directors then in office. The classification of the Board of Directors and the limitations on the removal of directors and filling of vacancies could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, control of the Company. The Restated By-Laws include a provision excluding the Company from the applicability of Massachusetts General Laws Chapter 110D, entitled "Regulation of Control Share Acquisitions". In general, this statute provides that any stockholder of a corporation subject to this statute who acquires 20% or more of the outstanding voting stock of a corporation may not vote such stock unless the stockholders of the corporation so authorize. The Board of Directors may amend the Company's Restated By-Laws at any time to subject the Company to this statute prospectively. The Restated By-Laws also require that a stockholder seeking to have any business conducted at a meeting of stockholders give notice to the Company not less than 90 days prior to the scheduled meeting. The notice from the stockholder must describe the proposed business to be brought before the meeting and include information about the stockholder making the proposal, any beneficial owner on whose behalf the proposal is made and any other stockholder known to be supporting the proposal. The Restated By- Laws further provide that a special stockholders meeting may be called by the president or the Board of Directors or upon the request of stockholders holding at least 40% of the voting power of the Company. These provisions may discourage another person or entity from making a tender offer for the Company's Common Stock, because such person or entity, even if it acquired a majority of the outstanding shares, would be able to take action as a stockholder (such as electing new directors or approving a merger) only at a duly called stockholders meeting. The Massachusetts General Laws provide generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation's articles of organization or by- laws, unless a corporation's articles of organization or by-laws, as the case may be, require a greater percentage. The Restated Articles and Restated By-Laws require the affirmative vote of the holders of at least 80% of the shares issued, outstanding and entitled to vote to amend or repeal any of the provisions described in the previous three paragraphs. The Restated By-Laws provide that the directors, officers, employees and certain other agents of the Company shall be indemnified by the Company to the fullest extent authorized by Massachusetts law, as it now exists or may in the future be amended, against all expenses and liabilities reasonably incurred in connection with service for or on behalf of the Company. In addition, the Restated Articles provide that the directors of the Company will not be personally liable for monetary damages to the Company for breaches of their fiduciary duty as directors, unless they violated their duty of loyalty to the Company or its stockholders, acted in bad faith, knowingly or intentionally violated the law, authorized illegal dividends or redemptions or derived an improper personal benefit from their action as directors. Transfer Agent and Registrar The transfer agent and registrar for the Company's Common Stock is Fleet National Bank. 44 SHARES ELIGIBLE FOR FUTURE SALE Upon the closing of this offering, the Company will have an aggregate of 26,290,800 shares of Common Stock outstanding, assuming no exercise of the Underwriters' over-allotment option and no exercise of outstanding options to purchase Common Stock other than the options to purchase 100,800 shares to be exercised immediately prior to the closing of this offering by certain Selling Stockholders. Of these shares, the 3,400,000 shares sold in this offering are freely tradable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"), except that any shares held by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act ("Rule 144"), may generally only be sold in compliance with the limitations of Rule 144 described below. The remaining 22,890,800 shares of Common Stock are deemed "Restricted Securities" as defined under Rule 144. Restricted Securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 promulgated under the Securities Act, which rules are summarized below. Subject to the executive officers and directors of the Company entering into lock-up agreements described below and the provisions of Rules 144, 144(k) and 701, additional shares will be available for sale in the public market (subject in the case of shares held by affiliates to compliance with certain volume restrictions) as follows: (i) 12,000 shares will be available for immediate sale in the public market on the date of this Prospectus, (ii) 139,500 shares will be eligible for sale 90 days after the date of this Prospectus and (iii) 22,739,300 shares will be eligible for sale upon the expiration of lock-up agreements 180 days after the date of this Prospectus. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated), including an affiliate, who has beneficially owned shares for at least two years is entitled to sell, within any three-month period commencing 90 days after the date of this Prospectus, a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock (approximately 262,000 shares immediately after this offering) or (ii) the average weekly trading volume in the Common Stock during the four calendar weeks preceding the date on which notice of such sale is filed, subject to certain restrictions. In addition, a person who is not deemed to have been an affiliate of the Company at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least three years would be entitled to sell such shares under Rule 144(k) without regard to the requirements described above. To the extent that shares were acquired from an affiliate of the Company, such stockholder's holding period for the purpose of effecting a sale under Rule 144 commences on the date of transfer from the affiliate. The Securities and Exchange Commission has recently proposed to reduce the two- and three-year holding periods under Rule 144 to one and two years, respectively. If enacted, such modifications will have material effect on the timing of when certain shares of Common Stock become eligible for resale. Rule 701 promulgated under the Securities Act provides that shares of Common Stock acquired pursuant to written plans such as the 1994 Plan may be resold by persons other than affiliates, beginning 90 days after the date of this Prospectus, subject only to the manner of sale provisions of Rule 144, and by affiliates, beginning 90 days after the date of this Prospectus, subject to all provisions of Rule 144 except its two-year minimum holding period. Shortly after the date of this Prospectus, the Company intends to file a Form S-8 registration statement under the Securities Act to register all shares of Common Stock issuable under the 1994 Plan, the Director Plan and the Stock Purchase Plan (collectively, the "Stock Plans"). See "Management--Stock Plans." Such registration statement is expected to become effective immediately upon filing, and shares covered by that registration statement will thereupon be eligible for sale in the public markets, subject to Rule 144 limitations applicable to affiliates. Prior to this offering, there has not been any public market for the Common Stock of the Company, and no prediction can be made as to the effect, if any, that market sales of shares of Common Stock or the availability of shares for sale will have on the market price of the Common Stock prevailing from time to time. Nevertheless, sales of substantial amounts of Common Stock in the public market could adversely affect the market price of the Common Stock and could impair the Company's future ability to raise capital through the sale of its equity securities. 45 Except to the extent they have agreed to sell shares in the offering, all directors and officers, who hold in the aggregate 23,338,500 shares of Common Stock and options to purchase 906,000 shares of Common Stock, have agreed, pursuant to agreements with the representatives of the Underwriters, that they will not, without the prior written consent of the representatives of the Underwriters, sell or otherwise dispose of any shares of Common Stock or options to acquire shares of Common Stock during the 180-day period following the date of this Prospectus. The Company has agreed not to sell or otherwise dispose of any shares of Common Stock during the 180-day period following the date of the Prospectus, except the Company may issue, and grant options to purchase, shares of Common Stock under the Stock Plans. LEGAL MATTERS The validity of the shares of Common Stock offered by this Prospectus will be passed upon for the Company and the Selling Stockholders by Choate, Hall & Stewart, Boston, Massachusetts. Certain legal matters in connection with the offering will be passed upon for the Underwriters by Hale and Dorr, Boston, Massachusetts. EXPERTS The consolidated financial statements of Pegasystems Inc., at December 31, 1994 and 1995 and for each of the three years in the period ended December 31, 1995, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 under the Securities Act with respect to the shares of Common Stock offered hereby. As permitted by the rules and regulations of the Commission, this Prospectus omits certain information contained in the Registration Statement. For further information with respect to the Company and the Common Stock offered hereby, reference is hereby made to the Registration Statement and to the exhibits and schedules filed therewith. Statements contained in this Prospectus as to the contents of any agreement or other document filed as an exhibit to the Registration Statement are not necessarily complete, and in each instance reference is made to the copy of such agreement filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. The Registration Statement, including the exhibits and schedules filed therewith, may be inspected without charge at the Commission's Public Reference Room, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at Seven World Trade Center, 13th Floor, New York, New York 10048 and at Northwest Atrium Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661. Copies of the Registration Statement may be obtained from the Commission from its Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed fees. The Company intends to distribute to its stockholders annual reports containing financial statements audited by its independent accountants and will make available copies of quarterly reports for the first three quarters of each fiscal year containing unaudited financial statements. 46 PEGASYSTEMS INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ------- Report of Independent Auditors F-2 Consolidated Balance Sheets as of December 31, 1994 and 1995 and as of March 31, 1996 (unaudited) F-3 Consolidated Statements of Income for the years ended December 31, 1993, 1994 and 1995 and for the three months ended March 31, 1995 and 1996 (unaudited) F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1993, 1994 and 1995 and for the three months ended March 31, 1996 (unaudited) F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and for the three months ended March 31, 1995 and 1996 (unaudited) F-6 Notes to Consolidated Financial Statements F-7
F-1 REPORT OF INDEPENDENT AUDITORS The Board of Directors Pegasystems Inc. We have audited the accompanying consolidated balance sheets of Pegasystems Inc. as of December 31, 1994 and 1995 and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pegasystems Inc. at December 31, 1994 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Boston, Massachusetts May 6, 1996, except for Notes 10 and 11 as to which the date is , 1996. The foregoing report is in the form that will be signed upon completion of the restatement of the capital accounts described in Note 10 to the consolidated financial statements. ERNST & YOUNG LLP Boston, Massachusetts May 14, 1996 F-2 PEGASYSTEMS INC. CONSOLIDATED BALANCE SHEETS
December 31, March 31, 1994 1995 1996 ------ ----- -------- (unaudited) (in thousands except share-related data) Assets Current assets: Cash and cash equivalents $ 456 $ 511 $ 2,644 Trade and installment accounts receivable, net of allowance for doubtful accounts of $0 and $434 at December 31, 1994 and 1995, respectively, and $434 at March 31, 1996 8,315 8,896 9,628 Prepaid expenses and other assets 204 425 342 ---- ---- -------- Total current assets 8,975 9,832 12,614 Long-term license installments, net 9,135 13,399 11,444 Equipment and improvements, net 1,564 2,172 2,143 Software development costs, net 1,113 473 354 ---- ---- -------- Total assets $20,787 $25,876 $26,555 ==== ==== ======== Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accrued expenses $ 1,991 $ 1,747 $ 970 Deferred revenue 139 114 803 Current portion of long-term debt 378 782 730 Deferred income taxes 1,976 2,796 3,159 Note payable to stockholder 50 -- -- ---- ---- -------- Total current liabilities 4,534 5,439 5,662 Deferred income taxes 3,931 4,947 5,085 Long-term debt 450 816 672 Stockholders' equity: Preferred stock, $.01 par value, 1,000,000 shares authorized; no shares issued and outstanding -- -- -- Common stock, $.01 par value, 45,000,000 shares authorized, 23,490,000 shares issued and outstanding 235 235 235 Additional paid-in-capital 15 15 15 Retained earnings 11,644 14,522 15,008 Cumulative foreign currency translation adjustment (22) (98) (122) ---- ---- -------- 11,872 14,674 15,136 ---- ---- -------- Total liabilities and stockholders' equity $20,787 $25,876 $26,555 ==== ==== ========
See accompanying notes. F-3 PEGASYSTEMS INC. CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Year Ended December 31, March 31, 1993 1994 1995 1995 1996 --------- --------- --------- --------- ---------- (unaudited) (in thousands except share-related data) Revenue Software license $ 6,448 $ 9,662 $ 13,528 $ 2,209 $ 2,520 Services 3,764 6,601 8,719 1,796 2,421 ------- ------- ------- ------- -------- Total Revenue 10,212 16,263 22,247 4,005 4,941 Cost of Revenue Cost of software license 1,242 1,075 635 191 118 Cost of services 2,227 3,791 6,161 1,228 1,405 Total cost of revenue 3,469 4,866 6,796 1,419 1,523 ------- ------- ------- ------- -------- Gross profit 6,743 11,397 15,451 2,586 3,418 Operating expenses Research and development 3,766 5,440 7,061 1,413 1,602 Sales and marketing 1,350 2,629 3,592 785 972 General and administrative 834 1,092 1,541 322 388 ------- ------- ------- ------- -------- Total operating expenses 5,950 9,161 12,194 2,520 2,962 ------- ------- ------- ------- -------- Income from operations 793 2,236 3,257 66 456 License interest income 1,305 1,457 1,486 370 368 Other interest income 27 21 16 6 12 Interest expense (32) (56) (118) (18) (39) ------- ------- ------- ------- -------- Income before provision for income taxes 2,093 3,658 4,641 424 797 Provision for income taxes 860 1,465 1,763 161 311 ------- ------- ------- ------- -------- Net income $ 1,233 $ 2,193 $ 2,878 $ 263 $ 486 ======= ======= ======= ======= ======== Net income per common and common equivalent share $ .05 $ .09 $ .11 $ .01 $ .02 ======= ======= ======= ======= ======== Weighted average number of common and common equivalent shares outstanding 24,231,000 24,102,000 25,551,000 25,600,000 25,505,000 ======= ======= ======= ======= ========
See accompanying notes. F-4 PEGASYSTEMS INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock ------------------ Cumulative Foreign Number Additional Currency Total of Paid-in Retained Translation Stockholders' Shares Amount Capital Earnings Adjustment Equity --------- ----- -------- ------- --------- ------------- (in thousands except for share-related data) Balance at December 31, 1992 22,500,000 $225 -- $ 8,218 -- $ 8,443 Exercise of stock options 117,000 1 -- -- -- 1 Net income -- -- -- 1,233 -- 1,233 ------- --- ------ ----- ------- ----------- Balance at December 31, 1993 22,617,000 226 -- 9,451 -- 9,677 Exercise of stock options 873,000 9 $15 -- -- 24 Foreign currency translation adjustment -- -- -- -- $ (22) (22) Net income -- -- -- 2,193 -- 2,193 ------- --- ------ ----- ------- ----------- Balance at December 31, 1994 23,490,000 235 15 11,644 (22) 11,872 Foreign currency translation adjustment -- -- -- -- (76) (76) Net income -- -- -- 2,878 -- 2,878 ------- --- ------ ----- ------- ----------- Balance at December 31, 1995 23,490,000 235 15 14,522 (98) 14,674 Foreign currency translation adjustment -- -- -- -- (24) (24) Net income (unaudited) -- -- -- 486 -- 486 ------- --- ------ ----- ------- ----------- Balance at March 31, 1996 (unaudited) 23,490,000 $235 $15 $15,008 $(122) $15,136 ========== === ====== ===== ======= ===========
See accompanying notes. F-5 PEGASYSTEMS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended Year Ended December 31, March 31, 1993 1994 1995 1995 1996 ------ ------ ------ ----- ------- (unaudited) (in thousands) Operating activities Net income $1,233 $2,193 $2,878 $ 263 $ 486 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for deferred income taxes 629 961 1,836 127 501 Depreciation and amortization 1,536 1,511 1,455 309 369 Change in operating assets and liabilities: Decrease (increase) in trade and installment accounts receivable (1,823) (3,988) (4,845) 722 1,223 Decrease (increase) in prepaid expenses and other assets (121) (16) (221) (41) 83 Decrease (increase) in inventory (215) 215 -- -- -- Increase (decrease) in accounts payable and accrued expenses 8 971 (244) (686) (777) Increase (decrease) in deferred revenue 333 (336) (25) 416 689 ---- ---- ---- --- ----- Net cash provided by operating activities 1,580 1,511 834 1,110 2,574 Investing activities Purchase of equipment and improvements (888) (1,131) (1,423) (370) (221) Software development costs (1,060) (297) -- -- -- ---- ---- ---- ---- ----- Net cash used in investing activities (1,948) (1,428) (1,423) (370) (221) Financing activities Repayment of note payable to shareholder -- (180) (50) -- -- Proceeds from issuance of long-term debt 710 380 1,345 -- -- Repayments of long-term debt (243) (263) (575) (95) (196) Exercise of stock options -- 23 -- -- -- ---- ---- ---- --- ----- Net cash provided (used) by financing activities 467 (40) 720 (95) (196) Effect of exchange rate on cash -- (22) (76) (5) (24) ---- ---- ---- --- ----- Net increase in cash 99 21 55 640 2,133 Cash and equivalents at beginning of year 336 435 456 456 511 ---- ---- ---- --- ----- Cash and equivalents at end of period $ 435 $ 456 $ 511 $1,096 $2,644 ==== ==== ==== ===== ===== Supplemental Disclosure of Cash Flow Information: Cash paid during period: Interest $ 32 $ 56 $ 119 $ 18 $ 39 Income taxes $ 553 $ 135 $ 315 $ 92 $ 13
See accompanying notes. F-6 PEGASYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1995 1. SIGNIFICANT ACCOUNTING POLICIES Business Pegasystems Inc. (the Company) was incorporated on April 21, 1983, and develops customer service management software used by large, transaction-intensive organizations to automate and manage their customer interactions. Customers of the Company include large banks and credit card processors and mutual fund companies. The Company also offers consulting, training and maintenance and support services to facilitate the installation and use of its solutions. The environment of rapid technological change and intense competition which is characteristic of the software development industry results in frequent new products and evolving industry standards. The Company's continued success depends upon its ability to enhance current products and develop new products on a timely basis which keep pace with the changes in technology and competitors' innovations. International revenue is subject to various risks including imposition of government controls, export license requirements, political and economic conditions and instability, trade restrictions, currency fluctuations, changes in taxes, difficulties in staffing and managing international operations, and high local wage scales and other operating costs and expenses. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Pegasystems Limited. All intercompany accounts and transactions have been eliminated in consolidation. Foreign Currency Translation The translation of assets and liabilities of the Company's foreign subsidiary is made at year-end rates of exchange, while revenue and expense accounts are recorded at the average rates of exchange. The resulting translation adjustments are excluded from net income and are charged or credited to "Cumulative foreign currency translation adjustment" included as part of stockholder's equity. Realized and unrealized exchange gains or losses from transaction adjustments are reflected in operations and are not material. Revenue Recognition The Company recognizes revenue in accordance with Statement of Position 91-1, Software Revenue Recognition, issued by the American Institute of Certified Public Accountants. Specifically, revenue from software licenses is recognized upon product acceptance pursuant to noncancelable license agreements, and is based on management's assessment that the collectibility risk on the long-term license installments is low. Upon acceptance, the Company has no significant vendor obligations. In the case of license renewals, revenue is recognized upon execution of the renewal license agreement or if, as is generally the case, renewal is automatic unless the customer gives notice of termination, at the expiration of the period during which the customer has the right to terminate. Maintenance fees are recognized ratably over the term of the maintenance agreement. The Company recognizes implementation as well as consulting and training fees as the services are provided. Software license revenue represents the present value of future payments under noncancelable license agreements which provide for payment in installments typically over a five-year period. A portion of the revenue from each agreement is recognized as interest income over the term of the agreement. F-7 PEGASYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1995 1. SIGNIFICANT ACCOUNTING POLICIES (Continued) The discount rate in effect for 1993, 1994, 1995 and for the three months ended March 31, 1996 was 7%. The trade and installment accounts receivable recorded on the balance sheet are net of $3,477,000, $3,937,000 and $3,887,000 as of December 31, 1994 and 1995, and March 31, 1996, respectively, which represents the imputed interest portion of future payments due under the Company's license agreements. Deferred revenue represents payments from customers, primarily for maintenance services, which are recognized as revenue as the related services are performed. Cash and Cash Equivalents Cash and cash equivalents are stated at cost, which approximates market, and consist of short-term, highly liquid investments with original maturities of less than three months. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of trade accounts receivable and long-term license installments. The Company records long-term license installments in accordance with its revenue recognition policy which results in receivables from customers, primarily large financial service organizations with strong credit ratings. Interim Financial Statements The consolidated balance sheet at March 31, 1996, the consolidated statements of income and consolidated statements of cash flows for the three months ended March 31, 1995 and 1996 and the consolidated statement of stockholders' equity for the three months ended March 31, 1996 are unaudited, but, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of results for these interim periods. The results of operations for the three months ended March 31, 1996 are not necessarily indicative of results to be expected for the entire year. Equipment and Improvements Equipment and improvements are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets which are three years for equipment and five years for furniture and fixtures. Leasehold improvements are amortized over the life of the lease. Software Development Costs In compliance with Statement of Financial Accounting Standards (SFAS) No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed, certain software development costs are capitalized in the accompanying consolidated balance sheets. Capitalization of software development costs begins upon the establishment of technological feasibility. During 1994, the Company capitalized $297,000 of software costs. No costs were capitalized during 1995 or the three months ended March 31, 1996. Amortization of capitalized software development cost is included in costs of software license revenue and is provided on a straight-line basis over a period of two years. Total amortization expense charged to operations was $1,242,000, $1,075,000, $635,000 and $118,000 during 1993, 1994 and 1995 and the three months ended March 31, 1996, respectively. F-8 PEGASYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1995 1. SIGNIFICANT ACCOUNTING POLICIES (Continued) Net Income Per Share Net income per common and common equivalent share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during each period, assuming the exercise of stock options into common stock under the treasury stock method. Stock issued after May 14, 1995 and common stock issuable pursuant to stock options granted after May 14, 1995 have been reflected as outstanding for all of 1993, 1994 and 1995, using the treasury stock method. Fully diluted earnings per common share are not presented as they are not materially different from primary earnings per common share. Dilutive common equivalent shares consist of stock options (using the treasury stock method and using the assumed initial public offering price). Net income per share also reflects a fifteen- for-one stock split effective December 9, 1994, and a three-for-one stock split effective on the effective date of the Form S-1 registration statement. Stock Options The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the estimated fair market value of the shares at the date of the grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25 "Accounting for Stock Issued to Employees," and intends to continue to do so. Accordingly, the Company recognizes no compensation expense for stock option grants. Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Some of the areas where estimates are utilized included allowance for bad debts, capitalized software, income taxes, revenue and various accrued expenses. Actual results could differ from those estimates. 2. EQUIPMENT AND IMPROVEMENTS The cost and accumulated depreciation of equipment and improvements consist of the following:
December 31, (in thousands) 1994 1995 ----- -------- Equipment $1,435 $2,186 Furniture and fixtures 630 863 Leasehold improvements 202 434 --- ------ 2,267 3,483 Less accumulated depreciation (703) (1,311) --- ------ Equipment and improvements, net $1,564 $2,172 === ======
F-9 PEGASYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1995 3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following:
December 31, (in thousands) 1994 1995 ----- ------ Trade accounts payable $ 744 $ 557 Employee compensation and benefits 508 568 Accrued income taxes 253 -- Other 486 622 --- ---- $1,991 $1,747 === ====
4. DEBT AND OTHER FINANCIAL INSTRUMENTS Long-term debt consists of the following:
December 31, (in thousands) 1994 1995 --- ------ Note payable to bank, with monthly payments of $3,750 plus interest through December 15, 1995 $ 45 -- Note payable to bank, with monthly payments of $17,222 plus interest through December 1, 1996 413 $ 207 Note payable to bank, with monthly payments of $10,556 plus interest through December 1, 1997 370 243 Note payable to bank, with monthly payments of $32,778 plus interest through June 28, 1998 -- 983 Note payable to bank, with monthly payments of $4,583 plus interest through December 28, 1998 -- 165 ---- ----- 828 1,598 Less current portion 378 782 ---- ------ $450 $ 816 ==== =====
The notes bear interest at the bank's prime rate (6% at December 31, 1993 and 8.5% at December 31, 1994 and 1995) plus 1/2%. The notes are secured by all computer equipment and furniture and fixtures of the Company. Maturities of these notes are $782,000 in 1996, $564,000 in 1997 and $252,000 in 1998. The Company has a line of credit with a bank allowing for borrowings up to $2,500,000 at the prime rate. The line expires June 1, 1996. The Company had no drawings against the line of credit at December 31, 1995 and 1994. Borrowings are subject to various covenants which call for a specified level of working capital and net worth, and maintenance of certain financial ratios. The Company had a note payable of $50,000 to the president at December 31, 1994, which was repaid in full during 1995. The interest rate on the note was 8.5% in 1994 and 1995. F-10 PEGASYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1995 4. DEBT AND OTHER FINANCIAL INSTRUMENTS (Continued) Financial instruments outstanding at December 31, 1995 are as follows:
Carrying Fair Amount Value ------- -------- (in thousands) Assets Cash and cash equivalents $ 511 $ 511 Liabilities Notes payable to bank ($1,598) ($1,598)
The fair value of the long-term debt approximates the carrying amount due to the variable interest rate of the debt. 5. EMPLOYEE BENEFIT PLANS Stock Option Plan The Company adopted an incentive stock option plan effective July 29, 1983 (the 1983 Plan). Key employees, as selected by the Board of Directors of the Company, were granted options to purchase the Company's common stock at a price, which in the Board of Directors' opinion, reflected fair value on the date of the grant. The 1983 plan expired in 1993. At December 31, 1995, no options issued under this plan were outstanding. Long-Term Incentive Plan During the year ended December 31, 1994, the Company adopted a Long-Term Incentive Plan (the 1994 Plan) to provide incentives to employees, directors and consultants through opportunities to purchase stock through incentive stock options and through options which do not qualify as incentive stock options. In addition to options, eligible participants under the 1994 Plan may be granted stock appreciation rights, restricted stock and long-term performance awards. A maximum of 2,400,000 shares are reserved for issuance under the plan. Shares equal to 2% of the outstanding shares at the start of each fiscal year shall be reserved for granting of replacement options; however, this may not cause the maximum shareholder dilution caused by the Plan to exceed the 2,400,000 shares of stock reserved for issuance under the plan. The option price per share is to be determined at the date of grant. For incentive stock options, the option price may not be less than 100% of the fair market value of the Company's common stock at the grant date. Incentive stock options granted to a person having greater than 10% of the voting power of all classes of stock must have an exercise price of at least 110% of fair market value of the Company's common stock. F-11 PEGASYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1995 5. EMPLOYEE BENEFIT PLANS (Continued) Stock option activity is summarized as follows:
March 31, December 31, 1996 1993 1994 1995 (unaudited) ---------- ---------- ---------- ------------- Outstanding options at beginning of period 1,494,000 1,269,000 1,671,750 1,924,500 Granted -- 1,635,750 335,250 24,000 Exercised (117,000 ) (873,000 ) -- -- Canceled (108,000 ) (360,000 ) (82,500 ) (25,500) -------- -------- -------- ----------- Outstanding at end of period 1,269,000 1,671,750 1,924,500 1,923,000 ======== ======== ======== =========== Price range of outstanding options $.01 -$.69 $.33 -$.69 $.33 -$.69 $.33 - $.69 ======== ======== ======== =========== Exercisable at end of period 1,216,125 396,000 605,850 600,750 ======== ======== ======== =========== Available for grant at end of period -- 764,250 475,500 477,000 ======== ======== ======== ===========
6. LEASES The Company leases certain equipment and office space under noncancelable operating leases. Future minimum rental payments required under the operating leases with noncancelable terms in excess of one year at December 31, 1995 are as follows:
Year ended December 31, (in thousands) 1996 $1,016 1997 1,090 1998 1,090 1999 579 ------ Total $3,775 ======
Total rent expense under operating leases was approximately $800,000, $863,000, and $1,100,000 for the years ended December 31, 1993, 1994 and 1995, respectively. 7. INCOME TAXES The provision (benefit) for income taxes for the years ended December 31, 1993, 1994 and 1995 consisted of the following:
1993 1994 1995 --- ----- ------- (in thousands) Current: Federal $180 $ 297 $ (107) State 51 176 (39) Foreign -- 31 73 ----- ------ ------ Total current 231 504 (73) Deferred: Federal 449 691 1,563 State 180 270 273 ---- ------ ------ Total deferred 629 961 1,836 ---- ------ ------ $860 $1,465 $1,763 ==== ====== ======
F-12 PEGASYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1995 7. INCOME TAXES (Continued) The effective income tax rate differed from the statutory federal income tax rate due to:
1993 1994 1995 ---- ---- ------ Statutory federal income tax rate 34.0% 34.0% 34.0% State income taxes, net of federal benefit 7.3 7.3 5.8 Permanent differences 1.5 2.0 0.7 Tax credits (1.7) (3.3) (2.5) --- --- ---- Effective income tax rate 41.1% 40.0% 38.0% === === ====
At December 31, 1993, 1994 and 1995, the Company had research and development credit carryforwards of approximately $495,000, $421,000 and $440,000, respectively, available to offset future federal taxable income. These carryforward amounts generally expire from 2004 to 2008. In addition, as of December 31, 1993, 1994 and 1995, the Company had available alternative minimum tax (AMT) credit carryforwards of approximately $194,000. The carryforward period for the AMT credit is unlimited. Deferred income taxes at December 31, 1994 and 1995 reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for tax purposes. Significant components of the Company's deferred tax liabilities and assets as of December 31, 1994 and 1995 are as follows:
December 31, 1994 1995 ------- --------- (in thousands) Deferred tax liabilities: Software revenue $(6,924) $(9,303) Capitalized software (501) (213) Depreciation -- (142) Other -- (41) ----- ------- Total deferred tax liabilities (7,425) (9,699) Deferred tax assets: Deferred state taxes 590 729 License fees 119 119 Vacation accrual 64 109 Other 133 274 Tax credits 612 725 ----- ------- Total deferred tax assets 1,518 1,956 ----- ------- Net deferred tax liabilities (5,907) (7,743) Less current portion (1,976) (2,796) ----- ------- $(3,931) $(4,947) ===== =======
8. SIGNIFICANT CUSTOMERS During 1993 the Company had two customers that accounted for 12.9% and 12.3%, respectively, of the Company's consolidated revenue. In 1994 one customer accounted for 16.8% of the Company's consolidated revenue. This customer also accounted for 12.6% of the Company's 1995 consolidated revenue. Additionally, in 1995 two other customers accounted for 16.2% and 14.9%, respectively, of the Company's consolidated revenue. F-13 PEGASYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1995 9. INTERNATIONAL OPERATIONS The Company has sales in the United States, Canada and Europe. The European countries include England, Ireland, France, Switzerland and Luxembourg. Export sales were $1,015,000, $3,932,000 and $2,334,000 in 1993, 1994 and 1995, respectively. 10. RECAPITALIZATION AND STOCK SPLIT During the year ended December 31, 1994, the Company increased the number of shares authorized from 600,000 shares of $.01 par value common stock to 9 million shares of $.01 par value common stock. On December 9, 1994, the Company's Board of Directors declared a fifteen-for-one split of shares of $.01 par value common stock effected in the form of a dividend. This dividend resulted in 7,830,000 shares of common stock being issued and outstanding after the split. The par value of the additional shares of common stock issued in connection with the stock split was credited to common stock and a like amount was charged to additional paid-in capital to the extent available, and the remainder to retained earnings. The Company's Board of Directors has approved an increase in the number of shares of common stock authorized from 9 million to 45 million shares and a three-for-one stock split in the form of a stock dividend on the effective date of the Form S-1 registration statement. The financial statements give effect to both stock splits for all periods presented. Upon filing of the Restated Articles, the Board of Directors will be authorized, subject to certain limitations prescribed by law, without further stockholder approval, to issue from time to time up to an aggregate 1,000,000 shares of Preferred Stock in one or more series and to fix or alter the designations, preferences, rights and any qualifying limitations or restrictions of the shares of each such series thereof, including the dividend rights, dividend rates, conversion rights, voting rights, terms of redemptions (including sinking fund provisions), redemption price or prices, liquidation preferences and the number of shares constituting any shares or designations of such series. 11. SUBSEQUENT EVENTS 1996 Non-Employee Director Stock Option Plan The 1996 Non-Employee Director Stock Option Plan (the "Director Plan") was adopted by the Board of Directors on May 13, 1996. The Director Plan provides for the grant of options for the purchase of up to 250,000 shares of common stock of the Company. To date, no options have been granted under the Director Plan. The Director Plan is administered by the Compensation Committee and provides that each person who becomes a director of the Company after May 13, 1996 and who is not also an employee of the Company will receive upon his initial election to the Board of Directors, an option to purchase 30,000 shares of common stock vesting in equal annual installments over five years. The exercise price per share for all options granted under the Director Plan will be equal to the market price of the common stock as of the date of grant. Options may not be assigned or transferred except by will or by the laws of descent and distribution and are exercisable, only to the extent vested, within 90 days after the optionee ceases to serve as a director of the Company (except that if a director dies or becomes disabled while he or she is serving as a director of the Company, the option is exercisable until the earlier of the scheduled expiration date of the option or one year from the date of death or disability). 1996 Employee Stock Purchase Plan The 1996 Employee Stock Purchase Plan (the "Stock Purchase Plan") was adopted by the Board of Directors on May 13, 1996. An aggregate of 500,000 shares of common stock are reserved for issuance pursuant to this plan. The Stock Purchase Plan is administered by the Compensation Committee. All employees of the Company whose customary employment is in excess of 20 hours per week and more than five months F-14 PEGASYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1995 11. SUBSEQUENT EVENTS (Continued) per year, other than those employees who own 5% or more of the stock of the Company, are eligible to participate in the Stock Purchase Plan. The Stock Purchase Plan will be implemented by one or more offerings of such duration as the Compensation Committee may determine, provided that no offering period may be longer than 27 months. An eligible employee participating in an offering will be able to purchase common stock at a price equal to the lesser of: (i) 85% of its fair market value on the date the right was granted, or (ii) 85% of its fair market value on the date the right was exercised. Payment for common stock purchased under the Stock Purchase Plan will be through regular payroll deduction or lump sum cash payment, or both, as determined by the Compensation Committee. The maximum value of common stock an employee may purchase during an offering period is 10% of the employee's base salary during such period, calculated on the basis of the employee's compensation rate on the date the employee elects to participate in that offering. To date, there have been no offerings under the Stock Purchase Plan and no shares of common stock have been issued thereunder. Line of Credit The Company's bank line of credit was increased to $5 million and extended until June 30, 1997. 1994 Long Term Incentive Plan On May 13, 1996, the Company approved an increase in the number of shares issuable under the 1994 Long-Term Incentive Plan from 2,400,000 to 5,000,000. F-15 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Company and the Selling Stockholders have agreed to sell to each of the Underwriters named below, and each of such Underwriters, for whom Goldman, Sachs & Co., Cowen & Company and Montgomery Securities are acting as representatives, has severally agreed to purchase from the Company and the Selling Stockholders, the respective number of shares of Common Stock set forth opposite its name below:
Number of Shares of Common Underwriter Stock - --------------------- --------- Goldman, Sachs & Co. Cowen & Company Montgomery Securities ------- Total 3,400,000
Under the terms and conditions of the Underwriting Agreement, the Underwriters are committed to take and pay for all of the shares offered hereby, if any are taken. The Underwriters propose to offer the shares of Common Stock in part directly to the public at the initial public offering price set forth on the cover page of this Prospectus and in part to certain securities dealers at such price less a concession of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain brokers and dealers. After the shares of Common Stock are released for sale to the public, the offering price and other selling terms may from time to time be varied by the representatives. The Company has granted the Underwriters an option exercisable for 30 days after the date of this Prospectus to purchase up to an aggregate of 510,000 additional shares of Common Stock to cover over- allotments, if any. If the Underwriters exercise their over-allotment option, the Underwriters have severally agreed, subject to certain conditions, to purchase approximately the same percentage thereof that the number of shares to be purchased by each of them, as shown in the foregoing table, bears to the 3,400,000 shares of Common Stock offered. The Company and the Selling Stockholders have agreed that, subject to certain exceptions, during the period beginning from the date of this Prospectus and continuing to and including the date 180 days after the date of the Prospectus, they will not offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or of any other securities of the Company (other than pursuant to stock plans existing on the date of this Prospectus) which are substantially similar to the shares of Common Stock or which are convertible or exchangeable into securities which are substantially similar to the shares of Common Stock without the prior written consent of the representatives, except for the shares of Common Stock offered in connection with the offering. The representatives of the Underwriters have informed the Company that they do not expect sales to accounts over which the Underwriters exercise discretionary authority to exceed five percent of the total number of shares of Common Stock offered hereby. U-1 Prior to the offering, there has been no public market for the shares of Common Stock. The initial public offering price will be negotiated among the Company and the representatives. Among the factors to be considered in determining the initial public offering price of the Common Stock, in addition to prevailing market conditions, will be the Company's historical performance, estimates of business potential and earnings prospects for the Company, an assessment of the Company's management and the consideration of the above factors in relation to market valuation of companies in related businesses. The Company and the Selling Stockholders have agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act. U-2 ========================================================= No person has been authorized to give any information or to make any representations other than those contained in this Prospectus, and, if given or made, such information or representations must not be relied upon as having been authorized. This Prospectus does not constitute an offer to sell or the solicitation of an offer to buy any securities other than the securities to which it relates or an offer to sell or the solicitation of an offer to buy such securities in any circumstances in which such offer or solicitation is unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof or that the information contained herein is correct as of any time subsequent to its date. TABLE OF CONTENTS
Page ------- Prospectus Summary 3 Risk Factors 5 Use of Proceeds 12 Dividend Policy 12 Capitalization 13 Dilution 14 Selected Consolidated Financial Data 15 Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Business 24 Management 35 Certain Transactions 41 Principal and Selling Stockholders 42 Description of Capital Stock 43 Shares Eligible for Future Sale 45 Legal Matters 46 Experts 46 Additional Information 46 Index to Consolidated Financial Statements F-1 Underwriting U-1
Through and including , 1996 (the 25th day after the date of this Prospectus), all dealers effecting transactions in the Common Stock, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a Prospectus when acting as Underwriters and with respect to their unsold allotments or subscriptions. 3,400,000 Shares PEGASYSTEMS INC. Common Stock (par value $.01 per share) Goldman, Sachs & Co. Cowen & Company Montgomery Securities Representatives of the Underwriters ========================================================= PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. Estimated expenses (other than underwriting discounts and commissions) payable in connection with the sale of the Common Stock offer hereby are as follows:
SEC registration fee $ 18,876 NASD filing fee 5,974 Nasdaq National Market listing fee 50,000 Printing and engraving expenses 100,000 Legal fees and expenses 200,000 Accounting fees and expenses 150,000 Blue Sky fees and expenses (including legal fees) 18,000 Transfer agent and registrar fees and expenses 10,000 Miscellaneous 47,150 -------- Total $600,000 ========
The Registrant will bear all expenses shown above. Item 14. Indemnification of Directors and Officers. Section 67 of Chapter 156B of the Massachusetts General Laws provides that a corporation may indemnify its directors and officers to the extent specified in or authorized by (i) the articles of organization, (ii) a by-law adopted by the stockholders, or (iii) a vote adopted by the holders of a majority of the shares of stock entitled to vote on the election of directors. In all instances, the extent to which a corporation provides indemnification to its directors and officers under Section 67 is optional. In its Restated Articles of Organization, the Registrant has elected to commit to provide indemnification to its directors and officers in specified circumstances. Generally, the Restated Articles of Organization provide that the Registrant shall indemnify directors and officers of the Registrant against liabilities and expenses arising out of legal proceedings brought against them by reason of their status as directors or officers or by reason of their agreeing to serve, at the request of the Registrant, as a director or officer with another organization. Under this provision, a director or officer of the Registrant shall be indemnified by the Registrant for all costs and expenses (including attorneys' fees), judgments, liabilities and amounts paid in settlement of such proceedings, even if he is not successful on the merits, if he acted in good faith in the reasonable belief that his action was in the best interests of the Registrant. The Board of Directors may authorize advancing litigation expenses to a director or officer at his request upon receipt of an undertaking by any such director or officer to repay such expenses if it is ultimately determined that he is not entitled to indemnification for such expenses. Article VI of the Registrant's Restated Articles of Organization eliminates the personal liability of the Registrant's directors to the Registrant or its stockholders for monetary damages for breach of a director's fiduciary duty, except to the extent Chapter 156B of the Massachusetts General Laws prohibits the elimination or limitation of such liability. Section of the Underwriting Agreement provides that the Underwriters are obligated, under certain circumstances, to indemnify the Company, directors, officers and controlling persons of the Company against certain liabilities, including liabilities under the Securities Act. Reference is made to the form of Underwriting Agreement filed as Exhibit 1.1 hereto. The Company maintains directors and officers liability insurance for the benefit of its directors and certain of its officers. Item 15. Recent Sales of Unregistered Securities. In the three years preceding the filing of this registration statement, the Company has issued the below-listed securities that were not registered under the Securities Act. The numbers below have been II-1 adjusted to give effect to (i) the 15-for-1 split of the Registrant's Common Stock, in the form of a dividend, which became effective on December 9, 1994 and (ii) the 3-for-1 split of the Registrant's Common Stock, in the form of a dividend, to be effective immediately prior to this offering. Between December 1993 and May 13, 1996, the Registrant issued an aggregate of 990,000 shares of Common Stock upon the exercise of options, at a weighted average exercise price of approximately $0.03 per share, to certain officers and employees of the Registrant for total consideration of $24,800. In addition, the Registrant will issue an aggregate of 100,800 shares of Common Stock upon the exercise of options at an exercise price of approximately $.33 per share, immediately prior to the closing of this offering, to certain officers of the Registrant for total consideration of $32,928. Since December 1994, the Registrant has issued options to certain officers, directors and employees of the Registrant to purchase an aggregate of 2,409,000 shares of Common Stock under the Registrant's 1994 Long-Term Incentive Plan at a weighted average exercise price of approximately $2.60 per share. No underwriters were involved in the foregoing sales of securities. Such sales were made in reliance upon an exemption from the registration provisions of the Securities Act set forth in Section 4(2) thereof relative to sales by an issuer not involving any public offering or the rules and regulations thereunder, or, in the case of options, Rule 701 of the Securities Act. All of the foregoing securities are deemed restricted securities for the purposes of the Securities Act. Item 16. Exhibits and Financial Statement Schedules. (a) Exhibits:
Exhibit No. Description - ---------- ---------------------------------------------------------------------------------------- 1.1.* Form of Underwriting Agreement. 3.1. Articles of Organization of the Registrant, as amended. 3.2. By-Laws of the Registrant. 3.3. Form of Restated Articles of Organization of the Registrant, to be effective immediately prior to the effectiveness of the offering. 3.4. Form of Restated By-Laws of the Registrant, to be effective immediately prior to the effectiveness of the offering. 4.1.* Specimen certificate representing the Common Stock. 5.1.* Opinion of Choate, Hall & Stewart with respect to the legality of the securities of the Registrant being registered. 10.1. Amended and Restated 1994 Long-Term Incentive Plan. 10.2. 1996 Non-Employee Director Stock Option Plan. 10.3. 1996 Employee Stock Purchase Plan. 10.4. Loan Agreement dated as of December 16, 1993 between the Registrant and Fleet Bank of Massachusetts, N.A. 10.5. Loan Modification Agreement dated as of May 5, 1995 between the Registrant and Fleet Bank of Massachusetts, N.A. 10.6.* Second Loan Modification Agreement between the Registrant and Fleet National Bank (successor by merger to Fleet Bank of Massachusetts, N.A.). 10.7. Promissory Note in the amount of $620,000.00 dated December 16, 1993 made by the Registrant to the order of Fleet Bank of Massachusetts, N.A. 10.8. Promissory Note in the amount of $380,000.00 dated November 17, 1994 made by the Registrant to the order of Fleet Bank of Massachusetts, N.A. 10.9. Promissory Note in the amount of $1,180,000.00 dated June 28, 1995 made by the Registrant to the order of Fleet Bank of Massachusetts, N.A. II-2 10.10. Promissory Note in the amount of $165,000.00 dated December 28, 1995 made by the Registrant to the order of Fleet Bank of Massachusetts, N.A. 10.11.* Promissory Note in the amount of $5,000,000 made by the Registrant to the order of Fleet National Bank. 10.12. Security Agreement dated as of December 16, 1993 between the Registrant and Fleet Bank of Massachusetts, N.A. 10.13. Lease Agreement dated February 26, 1993 between the Registrant and Riverside Office Park Joint Venture. 10.14. Amendment Number 1 to Lease Agreement dated August 7, 1994 between the Registrant and Riverside Office Park Joint Venture. 21.1. Subsidiaries of the Registrant. 23.1. Consent of Ernst & Young LLP. 23.2. Consent of Choate, Hall & Stewart (included in Exhibit 5.1). 24.1. Powers of Attorney (included on page II-4). 27.1. Financial Data Schedule. 99.1 Valuation and Qualifying Accounts of the Registrant.
*To be filed by amendment. (b) Financial Statement Schedules: Schedule II--Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable, not required under the instructions, or all of the information required is set forth in the financial statements or notes thereto. Item 17. Undertakings. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to provisions described in Item 14 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The Registrant hereby undertakes (1) to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser; (2) that for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective; and (3) that for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Cambridge, Massachusetts on May 15, 1996. PEGASYSTEMS INC. By /s/ Alan Trefler Alan Trefler President POWER OF ATTORNEY AND SIGNATURES We, the undersigned officers and directors of Pegasystems Inc., hereby severally constitute and appoint Alan Trefler, Ira Vishner and Robert V. Jahrling III, and each of them singly, our true and lawful attorneys, with full power to them and each of them singly, to sign for us in our names in the capacities indicated below, all pre-effective and post-effective amendments to this registration statement and any related subsequent registration statement pursuant to Rule 462(b) of the Securities Act of 1933, as amended, and generally to do all things in our names and on our behalf in such capacities to enable Pegasystems Inc. to comply with the provisions of the Securities Act of 1933, as amended, and all requirements of the Securities and Exchange Commission. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. Signature Title(s) Date - ----------------------- ------------------------------- ------------ /s/ Alan Trefler President, Clerk and Director - ----------------------- (Principal Executive Officer) May 15, 1996 Alan Trefler /s/ Ira Vishner Vice President of Corporate - ----------------------- Services, Treasurer and Ira Vishner Director (Principal Financial and Accounting Officer) May 15, 1996 /s/ Edward A. Maybury Director May 15, 1996 - ---------------------- Edward A. Maybury II-4
EXHIBIT INDEX Exhibit Description Page - ---------- ------------- ----- 1.1.* Form of Underwriting Agreement. 3.1. Articles of Organization of the Registrant, as amended. 3.2. By-Laws of the Registrant. 3.3. Form of Restated Articles of Organization of the Registrant, to be effective immediately prior to the effectiveness of the offering. 3.4. Form of Restated By-Laws of the Registrant, to be effective immediately prior to the effectiveness of the offering. 4.1.* Specimen certificate representing the Common Stock. 5.1.* Opinion of Choate, Hall & Stewart with respect to the legality of the securities of the Registrant being registered. 10.1. Amended and Restated 1994 Long-Term Incentive Plan. 10.2. 1996 Non-Employee Director Stock Option Plan. 10.3. 1996 Employee Stock Purchase Plan. 10.4. Loan Agreement dated as of December 16, 1993 between the Registrant and Fleet Bank of Massachusetts, N.A. 10.5. Loan Modification Agreement dated as of May 5, 1995 between the Registrant and Fleet Bank of Massachusetts, N.A. 10.6.* Second Loan Modification Agreement between the Registrant and Fleet National Bank (successor by merger to Fleet Bank of Massachusetts, N.A.). 10.7. Promissory Note in the amount of $620,000.00 dated December 16, 1993 made by the Registrant to the order of Fleet Bank of Massachusetts, N.A. 10.8. Promissory Note in the amount of $380,000.00 dated November 17, 1994 made by the Registrant to the order of Fleet Bank of Massachusetts, N.A. 10.9. Promissory Note in the amount of $1,180,000.00 dated June 28, 1995 made by the Registrant to the order of Fleet Bank of Massachusetts, N.A. 10.10. Promissory Note in the amount of $165,000.00 dated December 28, 1995 made by the Registrant to the order of Fleet Bank of Massachusetts, N.A. 10.11.* Promissory Note in the amount of $5,000,000 made by the Registrant to the order of Fleet National Bank. 10.12. Security Agreement dated as of December 16, 1993 between the Registrant and Fleet Bank of Massachusetts, N.A. 10.13. Lease Agreement dated February 26, 1993 between the Registrant and Riverside Office Park Joint Venture. 10.14. Amendment Number 1 to Lease Agreement dated August 7, 1994 between the Registrant and Riverside Office Park Joint Venture. 21.1. Subsidiaries of the Registrant. 23.1. Consent of Ernst & Young LLP. 23.2. Consent of Choate, Hall & Stewart (included in Exhibit 5.1). 24.1. Powers of Attorney (included on page II-4). 27.1. Financial Data Schedule. 99.1 Valuation and Qualifying Accounts of the Registrant.
*To be filed by amendment. EX-3.1 2 ARTICLES OF INCORPORATION The Commonwealth of Massachusetts OFFICE OF THE MASSACHUSETTS SECRETARY OF STATE MICHAEL JOSEPH CONNOLLY, Secretary ONE ASHBURTON PLACE, BOSTON, MASS. 02108 ARTICLE OF ORGANIZATION (Under G.L. Ch. 156B) Incorporators Name POST OFFICE ADDRESS ---- Include given name in full in case of natural persons; in case of a corporation, give state of incorporation. Jane G. Hall Room 1500 Gaston Snow & Ely Bartlett One Federal Street Boston, MA 02110 The above-named incorporator(s) do hereby associate (themselves) with the intention of forming a corporation under the provisions of General Laws, Chapter 156B and hereby state(s): 1. The name by which the corporation shall be known is: Pegasystems Inc. 2. The purpose for which the corporation is formed is as follows: To provide consulting services including advice with respect to computers and computer programs or data; to engage in research, design, development, systems analysis, manufacture, purchase, import, export, license, distribution, repair maintenance and marketing of computer equipment, computer software, and related products and services; and in general to carry on any and all businesses and activities permitted to corporations organized under said Chapter 156B, as amended from time to time, wherever the same may lawfully be done. Note: If the space provided under any article or item on this form is insufficient, additions shall be set forth on separate 8-1/2 x 11 sheets of paper leaving a left hand margin of at least 1 inch for binding. Additions to more than one article may be continued on a single sheet so long as each article requiring each such addition is clearly indicated. 3. The total number of shares and the par value, if any, of each class of stock within the corporation is authorized as follows:
================================================================================================================================ WITHOUT PAR VALUE WITH PAR VALUE CLASS OF STOCK -------------------------------------------------------------------------------------------------------- NUMBER OF SHARES NUMBER OF SHARES PAR VALUE AMOUNT - -------------------------------------------------------------------------------------------------------------------------------- Preferred $ ................................................................................................................................ ................................................................................................................................ Common 300,000 $.01 $3,000 ================================================================================================================================
*4. If more than one class is authorized, a description of each of the different classes of stock with, if any, the preferences, voting powers, qualifications, special or relative rights or privileges as to each class thereof and any series now established: N/A *5. The restrictions, if any imposed by the Articles of Organization upon the transfer of shares of stock of any class are as follows: N/A *6. Other lawful provisions, if any, for the conduct and regulation of business and affairs of the corporation, for its voluntary dissolution, or for limiting, defining, or regulating the powers of the corporation, or of its directors or stockholders, or of any class of stockholders: See Attached Pages 6A, 6B, 6C *If there are no provisions state "None". 6A The following provisions are hereby established for the conduct and regulation of the business and affairs of the corporation, for its voluntary dissolution, or for limiting, defining or regulating the powers of the corporation, or of its directors or stockholders: The corporation may be partner in any business enterprise which the corporation has power to conduct by itself. Meetings of stockholders may be held anywhere in the United States as shall be determined from time to time by the directors or as shall be stated in the call of the meeting. The by-laws may provide that the directors may make, amend or repeal the by-laws, in whole or in part, except with respect to any provision thereof which by law, by the articles of organization or by the by-laws requires action by the stockholders. Except as specifically authorized by statute, no stockholder shall have any right to examine any property or any books, accounts or other writings of the corporation if there is reasonable ground for belief that such examination will for any reason be adverse to the interests of the corporation, and a vote of the directors refusing permission to make such examination and setting forth that in the opinion of the directors such examination would be adverse to the interests of the corporation shall be prima facie evidence that such examination would be adverse to the interests of the corporation. Every such examination shall be subject to such reasonable regulations as the directors may establish in regard thereto. The corporation may enter into contracts and otherwise transact business as vendor, purchaser or otherwise with its directors, officers and stockholders and with corporations, joint stock companies, trusts, firms and associations in which they are or may be or become interested as directors, officers, shareholders, members, trustees, beneficiaries or otherwise as freely as though such adverse interest did not exist even though the vote, action or presence of such director, officer or stockholder may be necessary to obligate the corporation upon such contract or transaction; and no such contract or transaction shall be avoided and not such director, officer or stockholder shall be held liable to account to the corporation or to any creditor or stockholder of the corporation for any profit or benefit realized by him through any such contract or transaction by reason of such adverse interest not by reason of any fiduciary relationship of such director, officer or stockholder to the corporation arising out of such office or stock ownership; provided (in the case of directors and officers but not in the case of any stockholder who is not a director or officer of the corporation) the nature of the interest of such director or officer, though not necessarily 6B the details or extent thereof, be known by or disclosed to the directors. Ownership of or beneficial interest in a minority of the stock or securities of another corporation, joint stock company, trust, firm or association shall not be deemed to constitute an interest adverse to this corporation in such other corporation, joint stock company, trust, firm or association and need not be disclosed. A general notice that a director or officer of the corporation is interested in any corporation, joint stock company, trust firm or association shall be sufficient disclosure as to such director or officer with respect to all contracts and transactions with that corporation, joint stock company, trust, firm or association. In any event the authorization or ratifying vote of a majority of the capital stock of the corporation outstanding and entitled to vote passed at a meeting duly called and held for the purpose shall validate any such contract or transaction as against all stockholders of the corporation, whether of record or not at the time of such vote, and as against all creditors and other claimants, under the corporation, and no contract or transaction shall be avoided by reason of any provision of this paragraph which would be valid but for these provisions. The corporation shall, to the extent legally permissible, indemnify each of its directors and officers and persons who serve at its request as directors or officers of another organization in which it directly or indirectly owns shares or of which it is a creditor, against all liabilities (including expenses) imposed upon or reasonably incurred by him in connection with any action, suit or other proceeding in which he may be involved or with which he may be threatened, while in office or thereafter, by reason of his acts or omissions as such director or officer, unless in any proceeding he shall be finally adjudged not to have acted in good faith in the reasonable belief that his action was in the best interest of the corporation; provided, however, that such indemnification shall not cover liabilities in connection with any matter which shall be disposed of through a compromise payment by such director or officer, pursuant to a consent decree or otherwise, unless such compromise shall be approved as in the best interests of the corporation, after notice that it involves such indemnification, (a) by a vote of the directors in which no interested director participates, or (b) by a vote or the written approval of the holders of a majority of the outstanding stock at the time having the right to vote for directors, not counting as outstanding any stock owned by any interested director or officer. Such indemnification may include payment by the corporation of expenses incurred in defending a civil or criminal action or proceeding in advance of the final disposition of such action or proceeding, upon receipt of an undertaking by the person indemnified to repay such payment if he shall be adjudicated to be not entitled to indemnification hereby provided shall not be exclusive of or 6C affect other rights to which any director or officer may be entitled. As used in this paragraph, the terms "director" and "officer" include their respective heirs, executors and administrators, and an "interested" director or officer is one against whom as such the proceeding in question or another proceeding on the same or similar grounds is then pending. Indemnification of employees and other agents of the corporation (including persons who serve at its request as employees or other agents of another organization in which it owns shares or of which it is a creditor) may be provided by the corporation to whatever extent shall be authorized by the directors before or after the occurrence of any event as to or in consequence of which indemnification may be sought. An indemnification to which a person is entitled under these provisions may be provided although the person to be indemnified is no longer a director, officer, employee or agent of the corporation or of such other organization. The terms and conditions upon which a sale or exchange of all the property and assets, including the good will of the corporation, or any part hereof, is voted may include the payment therefor in whole or in part in shares, notes, bonds or other certificates of interest or indebtedness of any voluntary association, trust, joint stock company or corporation. Such vote or a subsequent vote may in the event of or in contemplation of proceedings for the dissolution of the corporation also provide, subject to the rights of creditors and preferred stockholders, for the distribution pro rata among the stockholders of the corporation, of the proceeds of any such sale or exchange whether such proceeds be in cash or in securities as aforesaid (at values to be determined by the directors). 7. By-laws of the corporation have been duly adopted and the initial directors, president, treasurer and clerk, whose names are set out below, have been duly elected. 8. The effective date of organization of the corporation shall be the date of filing with the Secretary of the Commonwealth or if later date is desired, specify date (not more than 30 days after the date of filing). 9. The following information shall not for any purpose be treated as a permanent part of the Articles of Organization of the corporation. a. The post office address of the initial principal office of the corporation of Massachusetts is: 16 Winter Street #47A, Waltham, MA 02154 b. The name, residence, and post office address of each of the initial directors and following officers of the corporation are as follows:
========================================================================================================================== NAME RESIDENCE POST OFFICE ADDRESS - -------------------------------------------------------------------------------------------------------------------------- President: Alan N. Trefler 16 Winter Street #47A 16 Winter Street #47A Waltham, MA 02154 Waltham, MA 02154 - -------------------------------------------------------------------------------------------------------------------------- Treasurer: Alan N. Trefler same as above same as above - -------------------------------------------------------------------------------------------------------------------------- Clerk: Alan N. Trefler same as above same as above - -------------------------------------------------------------------------------------------------------------------------- Assistant Clerk: Donna M. Sherry 105 Thornberry Road One Federal Street Winchester, MA 01890 Boston, MA 02110 - -------------------------------------------------------------------------------------------------------------------------- Director: Alan N. Trefler same as above same as above ==========================================================================================================================
c. The date initially adopted on which the corporation's fiscal year ends is: December 31 d. The date initially fixed in the by-laws for the annual meeting of stockholders of the corporation is: Third Tuesday in April e. The name and business address of the resident agent, if any, of the corporation is: N/A IN WITNESS WHEREOF and under the penalties of perjury the INCORPORATOR(S) sign(s) these Articles of Organization this 20th day of April, 1983. [Signature of Jane G. Hall] --------------------------------------------------------------------------- --------------------------------------------------------------------------- --------------------------------------------------------------------------- The signature of each incorporator which is not a natural person must be an individual who shall show the capacity in which he acts and by signing shall represent under the penalties of perjury that he is duly authorized on its behalf to sign these Article of Organization. THE COMMONWEALTH OF MASSACHUSETTS ARTICLES OF ORGANIZATION GENERAL LAWS, CHAPTER 156B, SECTION 12 ======================================= I hereby certify that, upon an examination of the within written articles of organization, duly submitted to me, it appears that the provisions of the General Laws relative to the organization of corporations have been complied with, and I hereby approve said articles; and the filing fee in the amount of $150.00 having been paid, said articles are deemed to have been filed with me this 21st day of April, 1983. Effective date /s/ Michael Joseph Connolly MICHAEL JOSEPH CONNOLLY Secretary of State PHOTO COPY OF ARTICLES OF ORGANIZATION TO BE SENT TO BE FILLED IN BY CORPORATION TO: Donna M. Sherry, Esq. Gaston Snow & Ely Bartlett One Federal Street Boston, MA 02110 Telephone: 426-4600 FILING FEE: 1/20 of 1% of the total amount of the authorized capital stock with par value, and one cent a share for all authorized shares without par value, but not less than $125. General Laws, Chapter 156B. Shares of stock with a par value less than one dollar shall be deemed to have par value of one dollar per share. Copy Mailed The Commonwealth of Massachusetts JCM - --------- Examiner OFFICE OF THE MASSACHUSETTS SECRETARY OF STATE MICHAEL J. CONNOLLY, Secretary ONE ASHBURTON PLACE, BOSTON, MASSACHUSETTS 02108 ARTICLES OF AMENDMENT FEDERAL IDENTIFICATION General Laws, Chapter 156B, Section 72 NO. 04-2787865 I, Alan N. Trefler , President and Clerk of PEGASYSTEMS INC. - ------------------------------------------------------------------------------- (EXACT Name of Corporation) located at: 101 Main Street, Cambridge, MA 02142 ------------------------------------------------------------------- (MASSACHUSETTS Address of Corporation) do hereby certify that these ARTICLES OF AMENDMENT affecting Articles NUMBERED: 3 -- - ------------------------------------------------------------------------------ (Number those articles 1, 2, 3, 4, 5 and/or 6 being amended hereby) - ------- Name Approved of the Articles of Organization were duly adopted by unanimous written consent dated December 9, 1994, by vote of: 522,000 shares of Common out of 522,000 shares outstanding, - ------------ -------------- ----------- type, class & series, (if any) shares of out of shares outstanding, and - ------------ -------------- ----------- type, class & series, (if any) shares of out of shares outstanding, - ------------ -------------- ----------- type, class & series, (if any) CROSS OUT INAPPLI- CABLE CAUSE being at least a majority of each type, class or series outstanding and entitled to vote thereon:-1 being at least two-thirds of each type, class or series outstanding and entitled to vote thereon and of each type, class or series of stock whose rights are adversely affected thereby:-2 Third: The total number of shares of stock which the Corporation shall have the authority to issue is 9,000,000 shares of common stock, $.01 par value. C [ ] P [ ] M [ ] R.A [ ] 1 For amendments adopted pursuant to Chapter 156B, Section 70. 2 For amendments adopted pursuant to Chapter 156B, Section 71. Note: If the space provided under any Amendment or item on this form is insufficient, additions shall be set forth on separate 8-1/2 x 11 sheets of paper leaving a left-hand margin of at least 1 inch for binding. Additions to more than one Amendment may be continued on a single sheet so long as each Amendment requiring each such addition is clearly indicated. To CHANGE the number of shares and the par value (if any) of any type, class or series of stock which the corporation is authorized to issue, fill in the following: The total presently authorized is:
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS - ---------------------------------------------------- ----------------------------------------------------------------------- - ---------------------------------------------------- ----------------------------------------------------------------------- TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE - ---------------------------------------------------- ----------------------------------------------------------------------- COMMON: COMMON: 600,000 $.01 .................................................... ....................................................................... .................................................... ....................................................................... - ---------------------------------------------------- ----------------------------------------------------------------------- PREFERRED: PREFERRED: .................................................... ....................................................................... .................................................... ....................................................................... - ---------------------------------------------------- ----------------------------------------------------------------------- CHANGE the total authorized to: WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS - ---------------------------------------------------- ----------------------------------------------------------------------- - ---------------------------------------------------- ----------------------------------------------------------------------- TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE - ---------------------------------------------------- ----------------------------------------------------------------------- COMMON: COMMON: 9,000,000 $.01 .................................................... ....................................................................... .................................................... ....................................................................... - ---------------------------------------------------- ----------------------------------------------------------------------- PREFERRED: PREFERRED: .................................................... ....................................................................... .................................................... ....................................................................... - ---------------------------------------------------- -----------------------------------------------------------------------
The foregoing amendment will become effective when these articles of amendment are filed in accordance with Chapter 156B, Section 6 of The General Laws unless these articles specify, in accordance with the vote adopting the amendment, a later effective date not more than thirty days after such filing, in which event the amendment will become effective on such later date. LATER EFFECTIVE DATE: - ------------------------------------------------------------------------------ IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereunto signed our names this 24th day of December, in the year 1994. President - --------------------------------------------------------------------- Alan N. Trefler Clerk - ---------------------------------------------------------------------- Alan N. Trefler THE COMMONWEALTH OF MASSACHUSETTS ARTICLES OF AMENDMENT GENERAL LAWS, CHAPTER 156B, SECTION 72 ============================================ I hereby approve the within articles of amendment and, the filing fee in the amount of $8,400 having been paid, said articles are deemed to have been filed with me this 29th day of December, 1994. [Signature of Michael Joseph Connolly] MICHAEL J. CONNOLLY Secretary of State TO BE FILLED IN BY CORPORATION PHOTOCOPY OF ARTICLES OF AMENDMENT TO BE SENT TO: Ira Vishner PEGASYSTEMS INC. 101 Main Street, Cambridge, MA 02142 Telephone: (617) 374-9600 The Commonwealth of Massachusetts - ----------- Examiner OFFICE OF THE MASSACHUSETTS SECRETARY OF STATE MICHAEL J. CONNOLLY, Secretary ONE ASHBURTON PLACE, BOSTON, MASS. 02108 ARTICLES OF AMENDMENT FEDERAL IDENTIFICATION General Laws, Chapter 156B, Section 72 NO. 04-2787865 This certificate must be submitted to the Secretary of the Commonwealth within sixty days after the date of the vote of stockholders adopting the amendment. The fee for filing this certificate is prescribed by General Laws, Chapter 156B, Section 114. Make check payable to the Commonwealth of Massachusetts. ---------------- I, Alan N. Trefler , President and Alan N. Trefler , Clerk of Pegasystems Inc. - ------------------------------------------------------------------------------- (Name of Corporation) located at 875 Main Street, Cambridge, MA 02139 -------------------------------------------------------------------- - --------------- Name Approved do hereby certify that the following amendment to the articles of organization of the corporation was duly adopted at a meeting held on June 25, 1984, by vote of 50,000 shares of common stock out of 50,000 shares outstanding, - ------------- -------------- --------- (Class of Stock) shares of out of shares outstanding, and - ------------- -------------- --------- (Class of Stock) shares of out of shares outstanding, - ------------- -------------- --------- (Class of Stock) CROSS OUT INAPPLICABLE CLAUSE being at least a majority of each class outstanding and entitled to vote thereon:-1 two-thirds of each class outstanding and entitled to vote thereon and of each class or series of stock whose rights are adversely affected thereby:-2 Third: The total number of shares of stock which the Corporation shall have the authority to issue is 600,000 shares of common stock, $.01 par value. 1 For amendments adopted pursuant to Chapter 156B, Section 70. 2 For amendments adopted pursuant to Chapter 156B, Section 71. C [ ] F [ ] M [ ] - --------- P.C. Note: If the space provided under any Amendment or item on this form is insufficient, additions shall be set forth on separate 8-1/2 x 11 sheets of paper leaving a left hand margin of at least 1 inch for binding. Additions to more than one Amendment may be continued on a single sheet so long as each Amendment requiring each such addition is clearly indicated. To CHANGE the number of shares and the par value, if any, of each class of stock within the corporation fill in the following: The total presently authorized is:
- ------------------------------------------------------------------------------------------------------------ NO PAR VALUE WITH PAR VALUE PAR KIND OF STOCK NUMBER OF SHARES NUMBER OF SHARES VALUE - ------------------------------------------------------------------------------------------------------------ COMMON 300,000 $.01 ............................................................................................................ ............................................................................................................ - ------------------------------------------------------------------------------------------------------------ PREFERRED ............................................................................................................ ............................................................................................................ - ------------------------------------------------------------------------------------------------------------ CHANGE the total to: - ------------------------------------------------------------------------------------------------------------ NO PAR VALUE WITH PAR VALUE PAR KIND OF STOCK NUMBER OF SHARES NUMBER OF SHARES VALUE - ------------------------------------------------------------------------------------------------------------ COMMON 600,000 $.01 ............................................................................................................ ............................................................................................................ - ------------------------------------------------------------------------------------------------------------ PREFERRED ............................................................................................................ ............................................................................................................ - ------------------------------------------------------------------------------------------------------------
The foregoing amendment will become effective when these articles of amendment are filed in accordance with Chapter 156B, Section 6 of The General Laws unless these articles specify, in accordance with the vote adopting the amendment, a later effective date not more than thirty days after such filing, in which event the amendment will become effective on such later date. IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereto signed our names this 20th day of July, in the year 1984. [Signature of Alan Trefler] President [Signature of Alan Trefler] Clerk THE COMMONWEALTH OF MASSACHUSETTS ARTICLES OF AMENDMENT (General Laws, Chapter 156B, Section 72) I hereby approve the within articles of amendment and, the filing fee in the amount of $150.00 having been paid, said articles are deemed to have been filed with me this 26th day of July, 1984. [Signature of Michael Joseph Connolly] MICHAEL JOSEPH CONNOLLY Secretary of State TO BE FILLED IN BY CORPORATION PHOTO COPY OF AMENDMENT TO BE SENT TO: J. Thomas Franklin Gaston Snow & Ely Bartlett One Federal Street, Boston, MA 02110 Telephone Copy Mailed Aug. 15, 1984 EX-3.2 3 ARTICLES OF INCORPORATION BY-LAWS OF Pegasystems,Inc. ARTICLE I. ---------- Articles of Organization ------------------------ All provisions of these by-laws for the regulation and management of the affairs of the corporation shall be subject to such provisions in regard thereto, if any, as are set forth in the articles of organization as from time to time amended. All references in these by-laws to the articles of organization shall be deemed to refer to the articles of organization of the corporation, as amended and in effect from time to time. ARTICLE II. ----------- Place of Stockholders' Meetings ------------------------------- Meetings of the stockholders shall be held in Massachusetts or, to the extent permitted by the articles or organization, elsewhere in the United States as shall be determined from time to time by the president or the directors and stated in the notice of the meeting. ARTICLE III. ------------ Annual Meeting -------------- There shall be an annual meeting of stockholders at the principal office of the corporation on the third Tuesday in April in each year, if it be not a legal holiday and if it be a legal holiday, then at the same hour on the next succeeding day not a legal holiday unless a different hour or place or both shall have been determined by the directors and stated in the notice of the meeting. Purposes for which an annual meeting is to be held additional to those prescribed by law, by the articles of organization and by these by-laws may be specified by the directors or by the president and shall be included in the notice of the meeting by the clerk, or, in case of the death, absence, incapacity or refusal of the clerk, by another officer upon written application by one or more stockholders who hold at least one-tenth part in interest of the capital stock entitled to vote thereon. In the event an annual meeting has not been held on the date fixed in this article, a special meeting in lieu of the annual meeting may be held with all the force and effect of an annual meeting. ARTICLE IV. ----------- Special Meetings of Stockholders -------------------------------- Special meetings of stockholders may be called by the president or by the directors, and shall be called by the clerk, or, in case of the death, absence, incapacity or refusal of the clerk, by any other officer, upon written application of one or more stockholders who hold at least one-tenth part in interest of the capital stock entitled to vote thereat. Such call may be oral or written and shall state the time, place and purposes of the meeting. ARTICLE V. ---------- Notice of Stockholders' Meeting -------------------------------- A written notice of the place, date and hour of all meetings of stockholders, stating the purposes of the meeting, shall be given by the clerk (or other person empowered to call special meetings of stockholders) at least seven days before the meeting to each stockholder entitled to vote thereat and to each stockholder who, by law, the articles of organization or these by-laws, is entitled to such notice, by leaving such notice with him or at his residence or usual place of business, or by mailing it, postage prepaid, and addressed to such stockholder at his address as it appears in the records of the corporation. In case of the death, absence, incapacity or refusal of the clerk or such other person, such notice may be given by any other officer or by a person designated either by the clerk or by the person or persons calling the meeting or by the board of directors. Whenever notice of a meeting is required to be given to a stockholder under any provisions of law, of the articles of organization or of these by-laws, a written waiver thereof, executed before or after the meeting by such stockholder or his attorney thereunto authorized and filed with the records of the meeting, shall be deemed equivalent to such notice. ARTICLE VI. ----------- Quorum of Stockholders ----------------------- The holders of a majority in interest of all stock issued, outstanding and entitled to vote on any matter shall constitute a quorum with respect to such matter, but, if a quorum is not present, holders of a lesser interest may adjourn any meeting from time to time, and the meeting may be held as adjourned without further notice; except that, if two or more classes of stock are outstanding and entitled to vote as separate classes, then in the case of each such class, a quorum shall consist of the holders of a majority in interest of the stock of that class issued, 2 outstanding and entitled to vote. Stock owned directly or indirectly by the corporation, if any, shall not be deemed outstanding for the purpose of determining a quorum. ARTICLE VII. ------------ Proxies and Voting ------------------ Stockholders entitled to vote shall have the number of votes specified in the articles of organization for each share of stock owned by them and a proportionate vote for a fractional share. Stockholders may vote in person or by written proxy dated not more than six months before the meeting named therein. Proxies shall be filed with the clerk of the meeting, or of any adjournment thereof, before being voted. Except as otherwise limited therein, proxies shall entitle the person named therein to vote at any meeting or adjournment of such meeting but shall not be valid after final adjournment of such meeting. A proxy with respect to stock held in the name of two or more persons shall be valid if executed by any one of them unless at or prior to its exercise the corporation receives a specific written notice to the contrary from any one of them. A proxy purporting to be executed by or on behalf of a stockholder shall be deemed valid unless challenged at or prior to its exercise, and the burden of proving invalidity shall rest on the challenger. When a quorum is present at any meeting, the holders of a majority of the stock represented thereat and entitled to vote on any question (or if there are two or more classes of stock entitled to vote as separate classes, then in the case of each such class, the holders of a majority of the stock of that class represented thereat and entitled to vote on any question) other than an election by stockholders shall, except where a larger vote is required by law, by the articles of organization or by these by-laws, decide any question brought before such meeting. Any election by stockholders shall be determined by a plurality of the votes cast. Any action to be taken by stockholders may be taken without a meeting if all stockholders entitled to vote on the matter consent to the action in writing and the written consents are filed with the records of the meetings of stockholders. ARTICLE VIII. ------------- Fixing Record Date; Closing Transfer Books ------------------------------------------ The directors may fix in advance a time which, unless a shorter period is provided in the articles of organization, shall not be more than sixty days before the date of any meeting of stockholders or the date for the payment of any dividend or the making of any distribution to stockholders or the last day on which 3 the consent or dissent of stockholders may be effectively expressed for any purpose, as the record date for determining the stockholders having the right to notice of and to vote at such meeting and any adjournment thereof or the right to receive such dividend or distribution or the right to give such consent or dissent, and in such case only stockholders of record on such date shall have such right, notwithstanding any transfer of stock on the books of the corporation after the record date. Without fixing such record date the directors may for any of such purposes close the transfer books for any part or all of such period. If no record date is fixed and the transfer books are not closed, the record date for determining stockholders having the right to notice of and to vote at any meeting of stockholders shall be the close of business on the day next preceding the day on which notice of such meeting is given and the record date for determining stockholders for any other purpose shall be the close of business on the day on which the board of directors acts with respect to such purposes. ARTICLE IX. ----------- Board of Directors ------------------ Except as conferred upon or reserved to the stockholders by law, the articles of organization or these by-laws, the business of the corporation shall be managed by a board of not less than three (except that whenever there shall be only two stockholders, the number of directors shall be not less than two and whenever there shall be only one stockholder or prior to the issuance of any stock, there shall be at least one director) nor more than three directors as shall be fixed and elected at the annual meeting of stockholders by such stockholders as have the right to vote thereon. Any such election shall be by ballot if so requested by any stockholder entitled to vote thereon. During any year, the board of directors may be enlarged and additional directors elected to complete the enlarged number, to not more than the maximum number above specified, by the stockholders at any meeting or by a vote of a majority of the directors then in office. The stockholders may, at any meeting held for the purpose during such year, decrease to not fewer than the minimum number above specified, the number of directors as thus fixed or enlarged and remove directors to the decreased number. Subject to the provisions of the articles of organization and to other provisions of these by-laws, each director shall hold office until the next annual meeting and until his successor is chosen and qualified. Any director may resign by delivering his written resignation to the corporation at its principal office or to the president, clerk, or secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. 4 ARTICLE X. ---------- Powers of Directors ------------------- The board of directors may exercise all the powers of the corporation except such as by law, by the articles of organization or by other provisions of these by-laws are conferred upon or reserved to the stockholders. In the event of a vacancy in the board of directors, the remaining directors, except as otherwise provided by law, may exercise all powers of the board until the vacancy is filled. ARTICLE XI. ----------- Committees ---------- The directors may provide for an executive committee or other committees to be elected from and by the directors and, except as otherwise provided by law, may delegate to any such committee or committees such of the powers of the directors as the directors shall designate, may determine the tenure and composition of such committees, the manner of conducting committee business, the number of members required to constitute a quorum or required to take specified types of action and any or all of their other characteristics and authority. Except as the board of directors may otherwise determine, any such committee may make rules for the conduct of its business, but unless otherwise provided by the board of directors or in such rules, its business shall be conducted so far as possible in the same manner as is provided by these by-laws for the board of directors. All members of such committees shall hold such offices at the pleasure of the board of directors. The board of directors may abolish any such committee at any time. The board of directors shall have power to rescind any action of any committee, but no such rescission shall have retroactive effect. ARTICLE XII. ------------ Meeting of the Board of Directors and of Committees --------------------------------- Meetings of the directors may be held within or without Massachusetts. Regular meetings of the directors may be held without notice if the time and place of such meetings are fixed by the board, provided that any director who is absent when the vote fixing such time and place is taken shall be given notice of such vote. A regular meeting of the directors may be held without call or formal notice immediately after, and at the same place as, the annual meeting of stockholders, or the special meeting of stockholders held in place of such annual meeting. 5 Special meetings of the directors may be held at any time and at any place when called, orally or in writing, by the president, treasurer, or two or more directors, reasonable notice thereof being given to each director by the secretary (or, if there be no secretary, by the clerk), or, in case of the death, absence, incapacity or refusal of the secretary (or the clerk, as the case may be), by the officer or directors calling the meeting. In any case, the sending of notice by mail, at least forty-eight hours, or by telegram, at least twenty-four hours, before the meeting, addressed to the directors at their usual or last known business or residence addresses, shall be deemed reasonable notice. Notice of a meeting need not be given to any director, if a written waiver of notice, executed by him before or after the meeting, is filed with the records of the meeting, or to any director who attends the meeting without protesting prior thereto or at its commencement the lack of notice to him. A notice or waiver of notice need not specify the purpose of any meeting of the directors. Except as the articles or organization or other provisions of these by-laws otherwise provide, (a) any action required or permitted to be taken at any meeting of the directors or of any committee thereof may be taken without a meeting, if all members of the board or of such committee consent to the action in writing and the written consents are filed with the records of the meetings of the directors or committee, and such consents shall be treated for all purposes as a vote at a meeting; and (b) members of the board of directors or of any committee designated thereby may participate in a meeting of such board or committee by means of a conference telephone or similar communications equipment whereby all persons participating in the meeting can hear each other at the same time, and participation by such means shall constitute presence in person at the meeting. ARTICLE XIII. ------------- Quorum of the Board of Directors -------------------------------- A majority of the board of directors then in office shall constitute a quorum for the transaction of business. A number less than a quorum may adjourn any meeting from time to time, and the meeting may be held as adjourned without further notice. When a quorum is present at any meeting, a majority of the directors present may take any action on behalf of the board except to the extent that a larger number is required by law, by the articles of organization or by other provisions of these by-laws. 6 ARTICLE XIV. ------------ Officers and Agents ------------------- The officers of the corporation shall consist of a president, a treasurer and a clerk, and such other officers, including but not limited to one or more vice presidents and a secretary, as the directors may appoint. The president, who shall be a director, the treasurer and the clerk shall be elected by the directors at their first meeting following the annual meeting of the stockholders. The clerk shall be a resident of Massachusetts unless a resident agent of the corporation shall be appointed as permitted by law. So far as is permitted by law, any two or more offices may be filled by the same person. Subject to law, to the articles of organization and to other provisions of these by-laws, each officer elected by the directors shall hold office until the first meeting of the board of directors following the next annual meeting of the stockholders and until his successor is chosen and qualified. Any officer may resign by delivering his written resignation to the president, clerk, or secretary, and such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. Any officer or agent of the corporation may be required by the directors to give bond in such amount and with such sureties as the directors may determine for the faithful performance of his duties. The premiums for such bonds may be paid by the corporation. The directors may define the respective tenure, authority and duties of all officers and agents appointed by them except as other provisions of these by-laws may fix the tenure, authority or duties of any such officer. ARTICLE XV. ----------- The President ------------- The president shall be the chief executive officer of the corporation and shall have the powers generally pertaining to that office, subject to the supervision and direction of the directors. Except as otherwise voted by the directors, he shall preside at al meetings of the stockholders and of the directors at which he is present. In addition, the present shall have such other powers and perform such other duties as the directors may from time to time prescribe. ARTICLE XVI. ------------ Vice President -------------- In the absence of the president or in case of his inability to act, the senior vice president in length of service as vice president shall preside at all meetings of the stockholders and 7 directors at which the president, if present, would have presided. Any vice president shall have such other powers and perform such other duties as the directors may from time to time prescribe. ARTICLE XVII. ------------- Treasurer and Assistant Treasurer --------------------------------- Subject to the supervision and direction of the directors, the treasurer shall have general charge of the financial concerns of the corporation and the care and custody of the funds and valuable papers of the corporation, except as the directors may otherwise provide. He shall keep, or cause to be kept, accurate books of account, which shall be the property of the corporation, and shall have such other powers and perform such other duties as the directors may from time to time prescribe. Any assistant treasurer shall have such powers and perform such duties as the directors may from time to time prescribe. ARTICLE XVIII. -------------- Clerk and Assistant Clerk ------------------------- The clerk shall record all proceedings of the stockholders, and, if no secretary is appointed, of the directors, in a book or books to be kept therefor. The clerk shall also keep, or cause to be kept, in Massachusetts, the original, or attested copies, of the articles of organization, by-laws, and records of all meetings of incorporators and stockholders for inspection by stockholders at the principal office of the corporation or at the office of the clerk or of a transfer agent or the resident agent if any be appointed. Unless a transfer agent is appointed, the clerk shall also keep or cause to be kept at any such office the stock and transfer records, which shall contain the names of all stockholders and the record address and the amount of stock held by each, for inspection by stockholders. Any such inspection by a stockholder of the articles of organization, by-laws, records of meetings of the incorporators or stockholders, or the stock and transfer records must be at a reasonable time and for a proper purpose, but not to secure a list of stockholders for the purpose of selling said list of copies thereof or of using the same for a purpose other than in the interest of the applicant, as a stockholder, relative to the affairs of the corporation. Said copies and records need not all be kept in the same office. Any assistant clerk shall have the powers and perform the duties of the clerk in his absence or in case of his inability to 8 act and shall have such other powers and duties as the directors may from time to time prescribe. If neither the clerk nor any assistant clerk is present at any meeting of the stockholders, a temporary clerk to be designated by the person presiding at the meeting shall perform the duties of the clerk. ARTICLE XIX. ------------ Secretary and Assistant Secretary --------------------------------- If a secretary is appointed, he shall record all proceedings of the directors in a book to be kept therefor. In the absence of the secretary at any such meeting, an assistant secretary, or, if none, a temporary secretary designated by the person presiding at the meeting shall record the proceedings of such meeting in the record book. Any assistant secretary shall have the powers and perform the duties of the secretary in his absence or in case of his inability to act and shall have such other powers and duties as the directors may from time to time prescribe. ARTICLE XX. ----------- Removals -------- Except as the articles of organization provide otherwise, directors, including persons elected by directors to fill vacancies on the board, may be removed from their respective offices with or without cause by the vote of the holders of a majority of the shares entitled to vote in the election of such directors and such stockholders may likewise elect successors; provided, that the directors of a class elected by a particular class of stockholders may be removed, and their successors may be elected, only by the vote of the holders of a majority of the shares of such class. Officers may be removed from their respective offices with or without cause by vote of a majority of the directors then in office; provided, that an officer may be removed for cause only after reasonable notice and opportunity to be heard by the board of directors. Directors may be removed from office for cause by vote of a majority of the directors then in office after reasonable notice and opportunity to be heard; vacancies so created may be filled by the directors pending the filling of such vacancies by such stockholders. ARTICLE XXI. ------------ Vacancies --------- Except as the articles of organization provide otherwise, any vacancy in the board of directors, however occurring, including a vacancy resulting from resignation of a director or enlargement of 9 the board, and any vacancy in any other office, however occurring, may be filled by the directors or the remaining directors, though less than a quorum, unless such vacancy, if in the office of director, shall have been filled by the stockholders. Successors so elected shall hold office for the unexpired term, subject to the provisions of Article XX of these by-laws. In lieu of filling any vacancy in the board of directors, the stockholders, in accordance with Article IX of these by-laws, may reduce the number of directors, but not to a number less than three or less than the number of stockholders, if less than three. ARTICLE XXII. ------------- Certificates of Stock --------------------- Each stockholder shall be entitled to a certificate stating the number and the class and the designation of the series, if any, of the shares held by him in the corporation, and setting forth any other information required by law, in such form as shall, in conformity with law, be prescribed from time to time by the board of directors. Such certificate shall be signed by the president or a vice president and by the treasurer or an assistant treasurer. Such signatures may be facsimiles if the certificate is signed by a transfer agent or by a registrar, other than a director, officer, or employee of the corporation. In case any officer who has signed or whose facsimile signature has been placed on such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer at the time of its issue. Every certificate for shares of stock which are subject to any restriction on transfer pursuant to the articles of organization, these by-laws or any agreement to which the corporation is a party, shall have the restriction noted conspicuously on the certificate and shall also set forth on the face or back either the full text of the restriction or a statement of the existence of such restriction and a statement that the corporation will furnish a copy thereof to the holder of such certificate upon written request and without charge. Every certificate issued when the corporation is authorized to issue more than one class or series of stock shall set forth on its face or back either the full text of the preferences, voting powers, qualifications and special and relative rights of the shares of each class and series authorized to be issued or a statement of the existence of such preferences, powers, qualifications and rights, and a statement that the corporation will furnish a copy thereof to the holder of such certificate upon written request and without charge. 10 ARTICLE XXIII. -------------- Transfer of Shares of Stock --------------------------- Subject to the restrictions on transfer, if any, imposed by the articles of organization or these by-laws, noted conspicuously on the certificate and set forth or referred to on the certificate in the manner required by law and these by-laws, and to notice of adverse claims afforded in the manner required by law, title to a certificate of stock and to the shares represented thereby may be transferred (with the effects provided by law) by delivery of the certificate, but such transfer shall be effective as to third persons only when an appropriate person shall have signed on it or on a separate document an assignment or transfer of such certificate and of the shares or any of them represented thereby or a power to assign or transfer them or when the signature of such person is written without more upon the back of such certificate. Such indorsement may be in blank or may specify the person to whom such certificate and shares are to be transferred or who has power to transfer it. When any certificate of stock is presented to the corporation with a request to register transfer of the same and of the shares represented thereby or any of them, the corporation shall register the transfer as requested if there are on or with such certificate the necessary indorsements aforesaid and if reasonable assurance is given to the corporation that such indorsements or assignments or power, one or more, are genuine and effective and if the corporation has no duty to inquire into adverse claims or has discharged such duty and if any and all applicable laws relating to the collection of taxes have been complied with and if such transfer is in fact rightful or is to a bona fide purchaser. Prior to due presentment for registration of such a transfer, the corporation may treat the registered owner appearing on its books as the person exclusively entitled to vote, to receive notifications and otherwise to exercise all the rights and powers of an owner. Nothing herein contained shall be construed to affect the liability of the owner of shares registered on the books of the corporation for calls, assessments or the like. It shall be the duty of each stockholder to notify the corporation of his post office address. ARTICLE XXIV. ------------- Restrictions on Transfer ------------------------ The following restrictions are imposed upon the transfer of shares of the capital stock of the corporation: The corporation shall have the right to purchase, or to direct the transfer of, the shares of its capital stock in the events and subject to the conditions and at a price fixed as provided below; each holder of shares of such capital stock holds his shares 11 subject to this right and by accepting the same upon original issue or subsequent transfer thereof, the stockholder agrees for himself, his legal representatives and assigns as follows: In the event of any change in the ownership of any share or shares of such capital stock (made or proposed) or in the right to vote thereon (whether by the holder's act or by death, legal disability, operation of law, legal processes, order of court, or otherwise, except by ordinary proxies or powers of attorney) the corporation has the right to purchase such share or all or any part of such shares or to require the same to be sold to a purchaser or purchasers designated by the corporation or to follow each such method in part at a price per share equal to the fair value thereof at the close of business on the last business day next preceding such event as determined by mutual agreement or, failing such agreement, by arbitration as provided below. In any such event the owner of the share or shares concerned therein (being for the purposes of these provisions, all persons having any property interest therein) shall give notice thereof in detail satisfactory to the corporation. Within ten days after receipt of said owner's notice, the corporation shall elect whether or not to exercise its said rights in respect of said shares and, if it elects to exercise them, shall give notice of its election. Failing agreement between the owner and the corporation as to the price per share to be paid, such price shall be the fair value of such shares as determined by three arbitrators, one designated within five days after the termination of said ten-day period by the registered holder of said share or shares or his legal representatives, one within said period of five days by the corporation and the third within five days after said appointment last occurring by the two so chosen. Successor arbitrators, if any shall be required, shall be appointed, within reasonable time, as nearly as may be in the manner provided as to the related original appointment. No appointment shall be deemed as having been accomplished unless such arbitrator shall have accepted in writing his appointment as such within the time limited for his appointment. Notice of each appointment of an arbitrator shall be given promptly to the other parties in interest. Said arbitrators shall proceed promptly to determine said fair value. The determination of the fair value of said share or shares by agreement of any two of the arbitrators shall be conclusive upon all parties interested in such shares. Forthwith upon such determination the arbitrators shall mail or deliver notice of such determination to the owner (as above defined) and to the corporation. Within ten days after agreement upon said price or mailing of notice of determination of said price by arbitrators as provided below (whichever shall last occur), the shares specified therein for purchase shall be transferred to the corporation or to the 12 purchaser or purchasers designated therein or in part to each as indicated in such notice of election against payment of said price at the principal office of the corporation. If in any of the said events, notice therefor having been given as provided above, the corporation elects in respect of any such shares or any part thereof not to exercise its said rights, or fails to exercise them or to give notice or make payment all as provided above, or waives said rights by vote or in authorized writing, then such contemplated transfer or such change may become effective as to those shares with respect to which the corporation elects not to exercise its rights or fails to exercise them or to give notice or to make payment, if consummated within thirty days after such election, failure or waiver by the corporation, or within such longer period as the corporation may authorize. If the owner's notice in respect of any of such shares of capital stock is not received by the corporation as provided above, or if the owner fails to comply with these provisions in respect of any such shares in any other regard, the corporation, at its option and in addition to its other remedies, may suspend the rights to vote or to receive dividends on said shares, or may refuse to register on its books any transfer of said shares or otherwise to recognize any transfer or change in the ownership thereof or in the right to vote thereon, one or more, until these provisions are complied with to the satisfaction of the corporation; and if the required owner's notice is not received by the corporation after written demand by the corporation it may also or independently proceed as though a proper owner's notice has been received at the expiration of ten days after mailing such demand, and, if it exercises its rights with respect to said shares or any of them, the shares specified shall be transferred accordingly. In respect of these provisions with respect to the transfer of shares of capital stock, the corporation may act by its board of directors. Any notice or demand under said provisions shall be deemed to have been sufficiently given if in writing delivered by hand or addressed by mail postpaid, to the corporation at its principal office or to the owner (as above defined) or to the holder registered on the books of the corporation (or his legal representative) of the share or shares in question at the address stated in his notice or at his address appearing on the books of the corporation. Nothing herein contained shall prevent the pledging of shares, if there is neither a transfer of the legal title thereto nor a transfer on the books of the corporation into the name of the pledgee, but no pledgee or person claiming thereunder shall be entitled to make or cause to be made any transfer of pledged shares by sale thereof or otherwise (including in this prohibition transfer on the books of the corporation into the name of the 13 pledgee) except upon compliance herewith and any such pledge shall be subject to those conditions and restrictions. The provisions contained in this Article XXIV (a) shall not apply to any transfer to or in trust for the benefit of any stockholder of the corporation, any partner of any stockholder of the corporation, or any member of the immediate family of any such stockholder or partner, and (b) shall terminate upon the occurrence of the initial public offering of the corporation's capital stock (registered pursuant to the Securities Act of 1933 or successor statute, or exempt from registration by reason of Regulation A, or successor regulation, thereunder). ARTICLE XXV. ------------ Loss of Certificate ------------------- The directors may, subject to law, determine the conditions upon which a new certificate of stock may be issued in place of any certificate alleged to have been lost, mutilated or destroyed. They may, in their discretion, require the owner of a lost, mutilated or destroyed certificate, or his legal representative, to give a bond, sufficient in their opinion, with or without surety, to indemnify the corporation against any loss or claim which may arise by reason of the issue of a certificate in place of such lost, mutilated or destroyed stock certificate. ARTICLE XXVI. ------------- Issuance of Capital Stock ------------------------- The board of directors shall have the authority, without offering the same or any part thereof to the stockholders for subscription, to issue or reserve for issue from time to time the whole or any part of the capital stock of the corporation which may be authorized from time to time, to such persons or organizations, whether or not stockholders of this corporation, for such consideration, whether cash, property, services or expenses, or as such stock dividends, and on such terms as the board of directors may determine, including without limitation the granting of options, warrants, or conversion or other rights to subscribe to said capital stock. ARTICLE XXVII. -------------- Seal ---- The board of directors shall have power to adopt and alter the form of seal of the corporation. 14 ARTICLE XXVIII. --------------- Execution of Papers ------------------- Except as the directors may generally or in particular cases authorize the execution thereof in some other manner, all deeds, leases, transfers, contracts, bonds, notes, checks, drafts and other obligations made, accepted or endorsed by the corporation shall be signed by the president or by the treasurer. ARTICLE XXIX. ------------- Fiscal Year ----------- Except as from time to time otherwise provided by the board of directors, the fiscal year of the corporation shall end on the last day of December of each year. ARTICLE XXX. ------------ Voting of Securities of Other Corporation Held by This Corporation Unless otherwise provided by the board of directors, the president or treasurer may waive notice of and act on behalf of this corporation, or appoint another person or persons to act as proxy or attorney in fact for this corporation with or without discretionary power or power of substitution, at any meeting of stockholders or shareholders of any other corporation or organization, any of whose securities are held by this corporation. ARTICLE XXXI. ------------- Indemnification --------------- The corporation shall, to the extent legally permissible, indemnify each of its directors and officers and persons who serve at its request as directors or officers of another organization in which it directly or indirectly owns shares or of which it is a creditor, against all liabilities (including expenses) imposed upon or reasonably incurred by him in connection with any action, suit or other proceeding in which he may be involved or with which he may be threatened, while in office or thereafter, by reason of his acts or omissions as such director or officer, unless in any proceeding he shall be finally adjudged not to have acted in good faith in the reasonable belief that his action was in the best interest of the corporation; provided, however, that such indemnification shall not cover liabilities in connection with any matter which shall be disposed of through a compromise payment by such director or officer, pursuant to a consent decree or otherwise, unless such compromise shall be approved as in the best interests of the corporation, after notice that it involves such 15 indemnification, (a) by a vote of the directors in which no interested director participates, or (b) by a vote or the written approval of the holders of a majority of the outstanding stock at the time having the right to vote for directors, not counting as outstanding any stock owned by any interested director or officer. Such indemnification may include payment by the corporation of expenses incurred in defending a civil or criminal action or proceeding in advance of the final disposition of such action or proceeding, upon receipt of an undertaking by the person indemnified to repay such payment if he shall be adjudicated to be not entitled to indemnification. The right of indemnification hereby provided shall not be exclusive of or affect other rights to which any director or officer may be entitled. As used in this paragraph, the terms "director" and "officer" include their respective heirs, executors and administrators, and an "interested" director or officer is one against whom as such the proceeding in question or another proceeding on the same or similar grounds is then pending. Indemnification of employees and other agents of the corporation (including persons who serve at its request as employees or other agents of another organization in which it owns shares or of which it is a creditor) may be provided by the corporation to whatever extent shall be authorized by the directors before or after the occurrence of any event as to or in consequence of which indemnification may be sought. An indemnification to which a person is entitled under these provisions may be provided although the person to be indemnified is no longer a director, officer, employee or agent of the corporation or of such other organization. ARTICLE XXXII. -------------- Amendments ---------- These by-laws may be amended or repealed and new by-laws may be made at any annual or special meeting of the stockholders called for the purpose, of which the notice shall specify the subject matter of the proposed alteration, amendment or repeal, or the articles to be affected thereby, except that no change in the date fixed for the annual meeting shall be made within sixty days before the date stated in Article III. Notice of any change in such date shall be given to all stockholders at least twenty days before the new date fixed for such meeting. If the articles of organization so provide, these by-laws may also be amended or repealed and new by-laws may be made at any time by vote of a majority of the directors then [in?] office, except that no change may be made by the directors in the date fixed for the annual meeting of stockholders except in conformity with the foregoing provisions respecting such change made by the stockholders and except that no by-law may be made, amended or repealed by the directors which alters the provisions of these by-laws with respect to the number, 16 election or removal of directors or the amendment of these by-laws. Not later than the time of giving notice of the meeting, annual or special, of stockholders next following the making, amending or repealing by the directors of any by-laws, notice thereof stating the substance of such change shall be given to all stockholders entitled to vote on amending the by-laws. Any by-laws whether adopted by the stockholders or by the directors may be amended or repealed by the stockholders. 17 EX-3.3 4 ARTICLES OF INCORPORATION The Commonwealth Of Massachusetts William Francis Galvin Secretary of the Commonwealth One Ashburton Place, Boston, Massachusetts 02108 RESTATED ARTICLES OF ORGANIZATION (General Laws, Chapter 156B, Section 74) I, Alan Trefler , President - ------------------------------------------------------------------- and _______________________________________________________________ , Clerk and of Pegasystems Inc. - ------------------------------------------------------------------------------- (Exact name of corporation) located at 101 Main Street, Cambridge, MA 02142 -------------------------------------------------------------------- (Street address of corporation Massachusetts) do hereby certify that the following Restatement of the Articles of Organization was duly adopted at a meeting held on _________________, 1996 by a vote of the directors/or: _____________ shares of Common Stock of ________________ shares outstanding, (type, class & series, if any) _____________ shares of ____________ of ______________ shares outstanding, and (type, class & series, if any) _____________ shares of ______________ of ________________ shares outstanding, (type, class & series, if any) being at least a majority of each type, class or series outstanding and entitled to vote thereon:/being at least two-thirds of each type, class or series outstanding and entitled to vote thereon and of each type, class or series of stock whose rights are adversely affected thereby: ARTICLE I The name of the corporation is: Pegasystems Inc. ARTICLE II The purpose of the corporation is to engage in the following business activities: Please see Continuation Sheet 2A, which is attached hereto and incorporated herein by reference. Continuation Sheet 2A ARTICLE II To provide consulting services including advice with respect to computers and computer programs or data; to engage in research, design, development, systems analysis, manufacturing, purchasing, importing, exporting, licensing, distribution, repair, maintenance and marketing of computer equipment, computer software and related products and services; and in general to carry on any and all businesses and activities permitted to corporations organized under Chapter 156B, as amended from time to time, wherever the same may lawfully be done. ARTICLE III State the Total number of shares and par value, if any, of each class of stock which the corporation is authorized to issue: WITHOUT PAR VALUE WITH PAR VALUE - ------------------------------------------------------------------------------- TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE - ------------------------------------------------------------------------------- Common: Common: 45,000,000 $.01 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Preferred: Preferred: 1,000,000 $.01 - ------------------------------------------------------------------------------- ARTICLE IV If more than one class of stock is authorized, state a distinguishing designation for each class. Prior to the issuance of any shares of a class, if shares of another class are outstanding, the corporation must provide a description of the preferences, voting powers, qualifications, and special or relative rights or privileges of that class and of each other class of which shares are outstanding and of each series then established within any class. Please see Continuation Sheets 4A and 4B, which are attached hereto and incorporated herein by reference. ARTICLE V The restrictions, if any, posed by the Articles of Organization upon the transfer of shares of stock of any class are: None. ARTICLE VI Other lawful provisions, if any, for the conduct and regulation of the business and affairs of the corporation, for its voluntary dissolution, or for limiting, defining, or regulating the powers of the corporation, or of its directors or stockholders, or of any class of stockholders: Please see Continuation Sheets 6A-6E, which are attached hereto and incorporated herein by reference. Continuation Sheet 4A ARTICLE IV 1. Common Stock. The Corporation shall have authority to issue 45,000,000 shares of Common Stock. The rights, privileges, preferences and voting powers of the Common Stock are as follows: a. Dividend Rights. Subject to the prior rights of holders of all classes of stock at the time outstanding having prior rights as to dividends, the holders of the Common Stock shall be entitled to receive, when and as declared by the Board of Directors, out of any assets of the corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors. b. Liquidation Rights. Subject to the prior rights of holders of all classes of stock at the time outstanding have prior rights on liquidation, upon the liquidation, dissolution or winding up of the Corporation, the assets of the Corporation shall be distributed ratably among the holders of the Common Stock in proportion to the number of shares of Common Stock held by each such holder. c. Voting Rights. The holder of each share of Common Stock shall have the right to one vote, and shall be entitled to notice of any stockholders meeting in accordance with the By-laws of the Corporation, and shall be entitled to vote upon such matters and in such manner as may be provided by law. d. Increase in Authorized Common Stock. The number of authorized shares of Common Stock may be increased or decreased (but not below the number of shares of Common Stock then outstanding) by an affirmative vote of the holders of a majority of the outstanding capital stock of the Corporation outstanding and entitled to vote thereon, voting as a single class. 2. Preferred Stock. The Corporation shall have the authority to issue 1,000,000 shares of undesignated Preferred Stock. The shares of undesignated Preferred Stock may be issued from time to time in one or more series as the Board of Directors may determine. Each series shall be so designated to distinguish the shares thereof from the shares of all other series and classes. Except as to the relative preferences, powers, qualifications, rights and privileges referred to below, in respect of any or all of which there may be variations between different series, all shares of Preferred Stock shall be identical. Different series of Preferred Stock shall not be construed to constitute different classes of shares for the purpose of voting by classes. The Board of Directors is expressly authorized, subject to the limitations prescribed by law and the provisions of these Restated Articles of Organization, to provide by adopting a Continuation Sheet 4B vote or votes, a certificate of which shall be filed in accordance with the Business Corporation Law of The Commonwealth of Massachusetts, for the issuance of the Preferred Stock in one or more series, each with such designations, preferences, voting powers, qualifications, special or relative rights and privileges as shall be stated in the vote or votes creating such series. The authority of the Board of Directors with respect to each such series shall include without limitation of the foregoing the right to determine and fix: a. the distinctive designation of such series and the number of shares to constitute such series; b. the rate at which dividends on the shares of such series shall be declared and paid, or set aside for payment, whether dividends at the rate so determined shall be cumulative, and whether the shares of such series shall be entitled to any participating or other dividends in addition to the dividends at the rate so determined, and if so, on what terms; c. the right, if any, of the Corporation to redeem shares of the particular series and, if redeemable, the price, terms and manner of such redemption; d. the special and relative rights and preferences, if any, and the amount or amounts per share, which the shares of such series shall be entitled to receive upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; e. the terms and conditions, if any, upon which shares of such series shall be convertible into, or exchangeable for, shares of stock of any other class or classes, including the price or prices or rate or rates of conversion or exchange and the terms of adjustment, if any; f. the obligation, if any, of the Corporation to retire or purchase shares of such series pursuant to a sinking fund or fund of a similar nature or otherwise, and the terms and conditions of such obligation; g. voting rights, if any; h. limitations, if any, on the issuance of additional shares of such series or any shares of any other series of Preferred Stock; and i. such other preferences, powers, qualifications, special or relative rights and privileges thereof as the Board of Directors may deem advisable and are not inconsistent with law and the provisions of these Restated Articles of Organization. Continuation Sheet 6A ARTICLE VI PART A. CLASSIFICATION OF BOARD OF DIRECTORS This Article VI, Part A shall be effective only from and after the closing of this Corporation's initial public offering of shares of Common Stock pursuant to the Securities Act of 1933, as amended (the "Public Offering Date"). The number of directors of the Corporation shall be determined in the manner provided in the by-laws. The provisions of Chapter 156B, ss.50A of the Massachusetts General Laws with respect to staggered terms for directors shall not apply to this Corporation. The directors of this Corporation shall be divided into three classes, as nearly equal in number as possible; the term of office of the first class ("Class I Directors") to continue until the first annual meeting following the Public Offering Date and until their successors are chosen and qualified; the term of office of the second class ("Class II Directors") to continue until the second annual meeting following the Public Offering Date and until their successors are chosen and qualified; and the term of office of the third class ("Class III Directors") to continue until the third annual meeting following the Public Offering Date and until their successors are chosen and qualified. At each annual meeting of this Corporation, the successors to the class of directors whose term expires at that meeting shall be elected to hold office for a term continuing until the annual meeting held in the third year following the year of their election and until their successors are duly elected and qualified. Vacancies and newly created directorships, whether resulting from an increase in the size of the board of directors, from the death, resignation, disqualification or removal of a director or otherwise, shall be filled solely by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the board of directors. Any director so elected shall hold office for the remainder of the full term of the class of directors in which the vacancy occurred or the new directorship was created and until such director's successor shall have been elected and qualified. At any meeting of the stockholders called for the purpose, any director may be removed from office only for cause by the affirmative vote of at least eighty percent (80%) of the shares issued, outstanding and entitled to vote in the election of directors. Notwithstanding any other provision of these Restated Articles of Organization, or any other provision of law that might otherwise permit a lesser vote or no vote, the affirmative vote of at least eighty percent (80%) of the shares issued, outstanding and entitled to vote in the election of directors shall be required to alter, amend or repeal this Article VI, Part A. Continuation Sheet 6B PART B. MISCELLANEOUS By-Laws The board of directors is authorized to make, amend or repeal the by-laws of this Corporation in whole or in part, except with respect to any provisions thereof which by law, by these Restated Articles of Organization or by the by-laws requires action by the stockholders. Place of Meetings of The Stockholders Meetings of the stockholders may be held anywhere in the United States. Partnership The Corporation may be a partner in any business enterprise which the Corporation would have power to conduct by itself. Indemnification of Directors, Officers and Others The Corporation shall indemnify each person who is or was a director, officer, employee or other agent of the Corporation, each person who is or was serving at the request of the Corporation as a director, trustee, officer, employee or other agent of another organization in which it directly or indirectly owns shares or of which it is directly or indirectly a creditor, and each person who is or was serving at the request of the Corporation in any capacity with respect to any employee benefit plan against all liabilities, costs and expenses, including but not limited to amounts paid in satisfaction of judgments, in settlement or as fines and penalties, and counsel fees and disbursements, reasonably incurred by him in connection with the defense or disposition of or otherwise in connection with or resulting from any action, suit or other proceedings, whether civil, criminal, administrative or investigative, before any court or administrative or legislative or investigative body, in which he may be or may have been involved as a party or otherwise or with which he may be or may have been threatened, while in office or thereafter, by reason of his being or having been such a director, officer, employee, agent or trustee, or having served in any capacity with respect to any employee benefit plan, or by reason of any action taken or not taken in any such capacity, except with respect to any matter as to which he shall have been finally adjudicated by a court of competent jurisdiction not to have acted in good faith in the reasonable belief that his action was in the best interest of the Corporation or, to the extent that such matter relates to service with respect to any employee benefit, in the best interests of the participants or beneficiaries of such employee benefit plan. Expenses, including but not limited to counsel fees and disbursements, so incurred by any such person in defending any such action, suit or proceeding may be paid from time to time by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the person indemnified to repay the amounts so paid if it shall ultimately be determined that Continuation Sheet 6C indemnification of such expenses is not authorized hereunder, which undertaking may be accepted without reference to the financial ability of such person to make repayment. As to any matter disposed of by settlement by any such person, pursuant to a consent decree or otherwise, no such indemnification either for the amount of such settlement or for any other expenses shall be provided unless such settlement shall be approved as in the best interests of the Corporation, after notice that it involves such indemnification, (a) by a vote of a majority of the disinterested directors then in office (even though the disinterested directors be less than a quorum), or (b) by any disinterested person or persons to whom the question may be referred by a vote of a majority of such disinterested directors, or (c) by vote of the holders of a majority of the outstanding stock at the time entitled to vote for directors, voting as a single class, exclusive of any stock owned by any interested persons, or (d) by any disinterested person or persons to whom the question may be referred by vote of the holders of a majority of such stock. No such approval shall prevent the recovery from any such officer, director, employee, agent or trustee or any such person serving in any capacity with respect to any employee benefit plan of any amounts paid to him or on his behalf as indemnification in accordance with the preceding sentence if such person is subsequently adjudicated by a court of competent jurisdiction not to have acted in good faith in the reasonable belief that his action was in the best interests of the Corporation or, to the extent that such matter relates to service with respect to an employee benefit plan, in the best interests of the participants or beneficiaries of such employee benefit plan. The right of indemnification hereby provided shall not be exclusive of or affect any other rights to which any director, officer, employee, agent, or trustee or any such person serving in any capacity with respect to any employee benefit plan may be entitled or which may lawfully be granted to him. As used herein, the terms "director," "officer," "employee," "agent" and "trustee" include their respective executors, administrators and other legal representatives, and "interested" person is one against whom the action, suit or other proceeding in question or another action, suit or other proceeding on the same or similar grounds is then or had been pending or threatened, and a "disinterested" person is a person against whom no such action, suit or other proceeding is then or had been pending or threatened. By action of the board of directors, notwithstanding any interest of the directors in such action, the Corporation may purchase and maintain insurance, in such amounts as the board of directors may from time to time deem appropriate, on behalf of any person who is or was a director, officer, employee or other agent of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, employee or other agent of another organization or with respect to any employee benefit plan, in which it directly or indirectly owns shares or of which it is directly or indirectly a creditor, against any liability incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability. Continuation Sheet 6D Intercompany Transactions No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other organization of which one or more of its directors or officers are directors, trustees or officers, or in which any of them has any financial or other interest, shall be void or voidable, or in any way affected, solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board of directors or committee thereof which authorizes, approves or ratifies the contract or transaction, or solely because his or their votes are counted for such purposes, if: (a) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors or the committee which authorizes, approves or ratifies the contract or transaction, and the board or committee in good faith authorizes, approves or ratifies the contract or transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (b) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically authorized, approved or ratified in good faith by vote of the stockholders; or (c) The contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified by the board of directors, a committee thereof, or the stockholders. Interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee thereof which authorizes, approves or ratifies the contract or transaction. No director or officer of the Corporation shall be liable or accountable to the Corporation or to any of its stockholders or creditors or to any other person, either for any loss to the Corporation or to any other person or for any gains or profits realized by such director or officer, by reason of any contract or transaction as to which clauses (a), (b) or (c) above are applicable. Continuation Sheet 6E Limitations on Director Liability No director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 61 or 62 of Chapter 156B of the General Laws of The Commonwealth of Massachusetts, or (iv) for any transaction in which the director derived an improper personal benefit. No amendment to or repeal of any provision of this paragraph, directly or by adoption of an inconsistent provision of these Articles of Organization, shall apply to or have any effect on any liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. Continuation Sheet 8A Article III - Increased the authorized shares of Common Stock to 45,000,000, and authorized 1,000,000 shares of Preferred Stock. Article IV - Established relative rights of Common Stock and Preferred Stock. Article VI - Amended and restated Article VI. ds1/264197 ARTICLE VII The effective date of the restated Articles of Organization of the corporation shall be the date approved and filed by the Secretary of the Commonwealth. If a later effective date is desired, specify such date which shall not be more than thirty days after the date of filing. ARTICLE VIII The information contained in Article VIII is not a permanent part of the Articles of Organization. a. The street address (post office boxes are not acceptable) of the principal office of the corporation in Massachusetts is: 101 Main Street, Cambridge, MA 02142 b. The name, residential address and post office address of each director and officer of the corporation is as follows:
NAME RESIDENTIAL ADDRESS POST OFFICE ADDRESS President: Alan Trefler 228 Allandale Road, Unit 3c same Chestnut Hill, MA 08167 Treasurer: Ira Vishner 88 Tappan Street same Brookline, MA 02146 Clerk: Alan N. Trefler same as above same Directors: Alan N. Trefler same as above same Ira Vishner same as above same Edward A. Maybury 254 Phillips Road P.O. Box 443 Sagamore Beach, MA Sagamore Beach, MA 02562-0443 02562-0443
c. The fiscal year (i.e., tax year) of the corporation shall end on the last day of the month of: December d. The name and business address of the resident agent, if any, of the corporation is: We further certify that the foregoing Restated Articles of Organization affect no amendments to the Articles of Organization of the corporation as heretofore amended, except amendments to the following articles. Briefly describe amendments below: See Continuation Sheet 8A, which is attached hereto and incorporated herein by reference. SIGNED UNDER THE PENALTIES OF PERJURY, this____________ day of May , 1996, -------- _________________________________________________________________ , President _____________________________________________________________________ , Clerk THE COMMONWEALTH OF MASSACHUSETTS RESTATED ARTICLES OF ORGANIZATION (General Laws, Chapter 156B, Section 74) I hereby approve the within Restated Articles of Organization and, the filing fee in the amount of $ ______________ having been paid, said articles are deemed to have been filed with me this ___________ day of _______________, 19_____. Effective date: ___________________________________________ WILLIAM FRANCIS GALVIN Secretary of the Commonwealth TO BE FILLED IN BY CORPORATION Photocopy of document to be sent to: Ira Vishner Pegasystems Inc. ---------------------------------------- 101 Main Street ---------------------------------------- Cambridge, MA 02142 ---------------------------------------- Telephone: (617) 374-9600 ---------------------------------------- ds1/264197 EX-3.4 5 ARTICLES OF INCORPORATION AMENDED AND RESTATED BY-LAWS OF PEGASYSTEMS INC. ARTICLE I Stockholders Section 1. Annual Meeting. The annual meeting of the stockholders shall be held within six months after the end of the corporation's fiscal year on such date, and at such place and time, as may be determined each year by the board of directors. The purpose for which the annual meeting is to be held, in addition to those prescribed by law, by the articles of organization of the corporation or by these by-laws, may be specified by the board of directors or the president. If in any year the annual meeting is not held within the period specified above, a special meeting in lieu thereof may be held at a later time and any elections held or business transacted at such meeting shall have the same force and effect as if held or transacted at the annual meeting. Section 2. Special Meetings. Special meetings of the stockholders may be called at any time by the president or by the board of directors and shall be called by the clerk, or in case of the death, absence, incapacity or refusal of the clerk, by any other officer, upon written application of one or more stockholders who hold at least forty percent (40%) in interest of the capital stock entitled to vote thereat. Such application shall specify the purposes for which the meeting is to be called and may designate the date, hour and place of such meeting, provided, however, that no such application shall designate a date not a full business day or an hour not within normal business hours as the date or hour of such meeting without the approval of the president or the board of directors. Section 3. Place of Meetings. Meetings of the stockholders may be held anywhere within, but not without, the United States. Section 4. Notice. Except as hereinafter provided, a written or printed notice of every meeting of stockholders stating the place, date, hour and purposes thereof shall be given by the clerk or an assistant clerk (or by any other officer in the case of an annual meeting or by the person or persons calling the meeting in the case of a special meeting) at least seven (7) days before the meeting to each stockholder entitled to vote thereat and to each stockholder who, by law, by the articles of organization or by these by-laws, is entitled to such notice, by leaving such notice with him or at his residence or usual place of business or by mailing it, postage prepaid, addressed to him at his address as it appears upon the records of the corporation. No notice of the place, date, hour or purposes of any annual or special meeting of stockholders need be given to a stockholder if a written waiver of such notice, executed before or after the meeting by such stockholder or his attorney thereunto authorized, is filed with the records of the meeting. Section 5. Notice of Stockholder Business. The following provisions of this Section 5 shall apply to the conduct of business at any meeting of the stockholders. (a) At any meeting of the stockholders, only such matters shall be considered and acted upon as shall have been brought before the meeting (i) pursuant to the corporation's notice of meeting, (ii) by or at the direction of the Board of Directors or any committee of the Board of Directors or (iii) by any stockholder of the corporation who is a stockholder of record at the time of giving of the notice provided for in paragraph (b) of this Section 5, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in paragraph (b) of this Section 5. (b) For a matter to be properly brought before any meeting of the stockholders by a stockholder pursuant to clause (iii) of paragraph (a) of this Section 5, the stockholder must have given timely notice thereof in writing to the clerk of the corporation. Unless otherwise required by the Exchange Act, to be timely a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not later than 90 days prior to the meeting. As to each matter proposed to be brought before the meeting, the stockholder's notice to the clerk shall set forth the following information: (i) a brief description of the matter to be considered by the stockholders at the meeting and the reasons for bringing such matter to the stockholders at the meeting; (ii) as to the stockholder proposing that such matter be considered, each beneficial owner, if any, on whose behalf the matter is to be considered, and each other stockholder and beneficial owner known to the proposing stockholder and such beneficial owner, if any, to support the matter proposed for consideration: (a) such person's name and address, as they appear on the corporation's books; (b) the class or series and number of shares of the corporation which are owned beneficially and of record by such person; and (c) any material interest, financial or otherwise, of such person in the matter proposed for consideration by the stockholders. (c) Nothing in this Section 5 shall require the consideration of any matter noticed by a stockholder pursuant to this Section 5. The person presiding at the meeting shall have the discretion to determine whether the matter was properly brought before the meeting and whether the procedures set forth in these by-laws were complied with in connection with such matter, and if the presiding person determines that such matter was not properly brought before the meeting or that such procedures were not followed, the matter shall not be considered or acted upon at the meeting. Any 2 stockholder noticing a matter to be considered at a stockholders' meeting pursuant to this Section 5 shall in all events comply with all relevant provisions of the Exchange Act. Section 6. Quorum. Except as otherwise provided by the articles of organization, at any meeting of the stockholders a majority of all shares of stock then issued, outstanding and entitled to vote (including shares as to which a nominee has no voting authority as to certain matters brought before the meeting) shall constitute a quorum for the transaction of business. Though less than a quorum be present, any meeting may without further notice be adjourned to a subsequent date or until a quorum be had, and at any such adjourned meeting any business may be transacted which might have been transacted at the original meeting. Section 7. Voting and Proxies. Except as otherwise provided by law or by the articles of organization or by these by-laws, each holder of record of shares of stock entitled to vote on any matter shall have one vote for each such share held of record by him and a proportionate vote for any fractional shares so held by him. Stockholders may vote either in person or by proxy. No proxy dated more than six months before the meeting named therein shall be valid and no proxy shall be valid after the final adjournment of such meeting. A proxy with respect to stock held in the name of two or more persons shall be valid if executed by any one of them unless at or prior to the exercise of the proxy the corporation receives a specific written notice to the contrary from any one of them. A proxy purporting to be executed by or on behalf of a stockholder shall be deemed valid unless challenged at or prior to its exercise and the burden of proving its invalidity shall rest on the challenger. Section 8. Action at a Meeting. When a quorum is present at any meeting, the affirmative vote of the holders of a majority of the shares voted at the meeting shall be necessary and sufficient to the determination of such question, unless a larger vote is required by law, by the articles of organization or by these by-laws; provided, however, that any election by stockholders shall be determined by a plurality of the votes cast by the stockholders entitled to vote in such election. Shares as to which a nominee has no voting authority as to a particular question or questions brought before the meeting will not be deemed to be voted or cast with respect to such question or questions. Any election by stockholders and the determination of any other questions to come before a meeting of the stockholders shall be by ballot if so requested by any stockholder entitled to vote thereon but need not be otherwise. Section 9. Action Without a Meeting. Any action required or permitted to be taken at any meeting of the stockholders may be taken without a meeting if all stockholders entitled to vote on the matter consent to the action in writing and the written consents 3 are filed with the records of the meetings of stockholders. Such consents shall be treated for all purposes as a vote at a meeting. ARTICLE II Directors Section 1. Number and Election. There shall be a board of not less than three directors. The number of directors shall be determined from time to time by the board of directors and shall be elected at the annual meeting of the stockholders by such stockholders as have the right to vote thereon. No decrease in the number of directors constituting the board of directors shall shorten the term of any incumbent director. Section 2. Term. The provisions of Chapter 156B, ss.50A of the Massachusetts General Laws with respect to staggered terms for directors shall not apply to this corporation. Except as otherwise provided by law, by the articles of organization or by these by-laws, the directors of this corporation shall be divided into three classes, as nearly equal in number as possible; the term of office of the first class ("Class I Directors") to continue until the first annual meeting following the closing of this Corporation's initial public offering of shares of Common Stock (the "Public Offering Date") pursuant to the Securities Act of 1933, as amended, and until their successors are chosen and qualified; the term of office of the second class ("Class II Directors") to continue until the second annual meeting following the Public Offering Date and until their successors are chosen and qualified; and the term of office of the third class ("Class III Directors") to continue until the third annual meeting following the Public Offering Date and until their successors are chosen and qualified. At each annual meeting of this corporation, the successors to the class of directors whose term expires at that meeting shall be elected to hold office for a term continuing until the annual meeting held in the third year following the year of their election and until their successors are duly elected and qualified. Section 3. Resignations. Any director may resign by delivering his or her written resignation to the corporation at its principal office or to the president or clerk or if there by one, to the secretary. Such resignation shall become effective at the time or upon the happening of the condition, if any, specified therein or, if no such time or condition is specified, upon its receipt. Section 4. Removal. At any meeting of the stockholders called for the purpose, any director may be removed from office only for cause by the affirmative vote of at least eighty percent (80%) of the shares issued, outstanding and entitled to vote in the election of directors. At any meeting of the board of directors 4 any director may be removed from office for cause by vote of a majority of the directors then in office. A director may be removed for cause only after a reasonable notice and opportunity to be heard before the body proposing to remove him. Section 5. Vacancies. Vacancies and newly created directorships, whether resulting from an increase in the size of the board of directors, from the death, resignation, disqualification or removal of a director or otherwise, shall be filled solely by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the board of directors. Any director elected in accordance with this Section 5 shall hold office for the remainder of the full term of the class of directors in which the vacancy occurred or the new directorship was created and until such director's successor shall have been elected and qualified. Section 6. Regular Meetings. Regular meetings of the board of directors may be held at such times and places within or without The Commonwealth of Massachusetts as the board of directors may fix from time to time and, when so fixed, no notice thereof need be given. The first meeting of the board of directors following the annual meeting of the stockholders shall be held without notice immediately after and at the same place as the annual meeting of the stockholders or the special meeting held in lieu thereof. If in any year a meeting of the board of directors is not held at such time and place, any elections to be held or business to be transacted at such meeting may be held or transacted at any later meeting of the board of directors with the same force and effect as if held or transacted at such meeting. Section 7. Special Meetings. Special meetings of the board of directors may be called at any time by the president or secretary (or, if there be no secretary, the clerk) or by any director. Such special meetings may be held anywhere within or without The Commonwealth of Massachusetts. A written, printed or telegraphic notice stating the place, date and hour (but not necessarily the purposes) of the meeting shall be given by the secretary or an assistant secretary (or, if there be no secretary or assistant secretary, the clerk or an assistant clerk) or by the officer or director calling the meeting at least forty-eight (48) hours before such meeting to each director by leaving such notice with him or at his residence or usual place of business or by mailing it, postage prepaid, or sending it by prepaid telegram, addressed to him at his last known address. No notice of the place, date or hour of any meeting of the board of directors need be given to any director if a written waiver of such notice, executed by him before or after the meeting, is filed with the records of the meeting, or to any director who attends the meeting without protesting prior thereto or at its commencement the lack of notice to him. 5 Section 8. Action at a Meeting. At any meeting of the board of directors, a majority of the directors then in office shall constitute a quorum. Though less than a quorum be present, any meeting may without further notice be adjourned to a subsequent date or until a quorum be had. When a quorum is present at any meeting a majority of the directors present may take any action on behalf of the board except to the extent that a larger number is required by law, by the articles of organization or by these by-laws. Section 9. Action Without a Meeting. Any action required or permitted to be taken at any meeting of the directors may be taken without a meeting if all the directors consent to the action in writing and the written consents are filed with the records of the meetings of the directors. Such consents shall be treated for all purposes as a vote at a meeting. Section 10. Powers. The board of directors shall have and may exercise all the powers of the corporation, except such as by law, by the articles of organization or by these by-laws are conferred upon or reserved to the stockholders. In the event of any vacancy in the board of directors, the remaining directors then in office, except as otherwise provided by law, shall have and may exercise all of the powers of the board of directors until the vacancy is filled. Section 11. Committees. The board of directors may elect from the board an executive committee or one or more other committees and may delegate to any such committee or committees any or all of the powers of the board except those which by law, by the articles of organization or by these by-laws may not be so delegated. Such committees shall serve at the pleasure of the board of directors. Except as the board of directors may otherwise determine, each such committee may make rules for the conduct of its business, but, unless otherwise determined by the board or in such rules, its business shall be conducted as nearly as may be as is provided in these by-laws for the conduct of the business of the board of directors. Section 12. Meeting by Telecommunications. Members of the board of directors or any committee elected thereby may participate in a meeting of such board or committee by means of a conference telephone or similar communications equipment by means of which all persons participating in a meeting can hear each other at the same time and participation by such means shall constitute presence in person at the meeting. 6 ARTICLE III Officers Section 1. Enumeration. The officers of the corporation shall consist of a president, a treasurer and a clerk and such other officers, including without limitation a chairman of the board of directors, a secretary and one or more vice presidents, assistant treasurers, assistant clerks and assistant secretaries, as the board of directors may from time to time determine. Section 2. Qualifications. No officer need be a stockholder or a director. The same person may hold at the same time one or more offices unless otherwise provided by law. The clerk shall be a resident of Massachusetts unless the corporation shall have a resident agent. Any officer may be required by the board of directors to give a bond for the faithful performance of his duties in such form and with such sureties as the board may determine. Section 3. Elections. The president, treasurer and clerk shall be elected annually by the board of directors at its first meeting following the annual meeting of the stockholders. All other officers shall be chosen or appointed by the board of directors. Section 4. Term. Except as otherwise provided by law, by the articles of organization or by these by-laws, the president, treasurer and clerk shall hold office until the first meeting of the board of directors following the next annual meeting of the stockholders and until their respective successors are chosen and qualified. All other officers shall hold office until the first meeting of the board of directors following the next annual meeting of the stockholders, unless a shorter time is specified in the vote choosing or appointing such officer or officers. Section 5. Resignations. Any officer may resign by delivering his written resignation to the corporation at its principal office or to the president or clerk, or, if there be one, to the secretary. Such resignation shall be effective at the time or upon the happening of the condition, if any, specified therein or, if no such time or condition is specified, upon its receipt. Section 6. Removal. Any officer may be removed from office with or without cause by vote of a majority of the directors then in office. An officer may be removed for cause only after a reasonable notice and opportunity to be heard before the board of directors. Section 7. Vacancies. Vacancies in any office may be filled by the board of directors. 7 Section 8. Certain Duties and Powers. The officers designated below, subject at all times to these by-laws and to the direction and control of the board of directors, shall have and may exercise the respective duties and powers set forth below: The Chairman of the Board of Directors. The chairman of the board of directors, if there be one, shall, when present, preside at all meetings of the board of directors. The President. The president shall be the chief executive officer of the corporation and shall have general operating charge of its business. Unless otherwise prescribed by the board of directors, he shall, when present, preside at all meetings of the stockholders, and, if a director, at all meetings of the board of directors unless there be a chairman of the board of directors who is present at the meeting. The Treasurer. The treasurer shall be the chief financial officer of the corporation and shall cause to be kept accurate books of account. The Clerk. The clerk shall keep a record of all proceedings of the stockholders and, if there be no secretary, shall also keep a record of all proceedings of the board of directors. In the absence of the clerk from any meeting of the stockholders or, if there be no secretary, from any meeting of the board of directors, an assistant clerk, if there be one, otherwise a clerk pro tempore designated by the person presiding at the meeting, shall perform the duties of the clerk at such meeting. The Secretary. The secretary, if there be one, shall keep a record of all proceedings of the board of directors. In the absence of the secretary, if there be one, from any meeting of the board of directors, an assistant secretary, if there be one, otherwise a secretary pro tempore designated by the person presiding at the meeting, shall perform the duties of the secretary at such meeting. Section 9. Other Duties and Powers. Each officer, subject at all times to these by-laws and to the direction and control of the board of directors, shall have and may exercise, in addition to the duties and powers specifically set forth in these by-laws, such duties and powers as are prescribed by law, such duties and powers as are commonly incident to his office and such duties and powers as the board of directors may from time to time prescribe. 8 ARTICLE IV Capital Stock Section 1. Amount and Issuance. The total number of shares and the par value, if any, of each class of stock which the corporation is authorized to issue shall be stated in the articles of organization. The directors may at any time issue all or from time to time any part of the unissued capital stock of the corporation from time to time authorized under the articles of organization, and may determine, subject to any requirements of law, the consideration for which stock is to be issued and the manner of allocating such consideration between capital and surplus. Shares of stock previously issued which have been reacquired by the corporation may be restored to the status of authorized but unissued shares by vote of the board of directors, without amendment of the articles of organization. Section 2. Certificates. Each stockholder shall be entitled to a certificate or certificates stating the number and the class and the designation of the series, if any, of the shares held by him, and otherwise in form approved by the board of directors. Such certificate or certificates shall be signed by the president or a vice president and by the treasurer or an assistant treasurer. Such signatures may be facsimiles if the certificate is signed by a transfer agent, or by a registrar, other than a director, officer or employee of the corporation. In case any officer who has signed or whose facsimile signature has been placed on such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer at the time of its issue. Every certificate issued for shares of stock at a time when such shares are subject to any restriction on transfer pursuant to the articles of organization, these by-laws or any agreement to which the corporation is a party shall have the restriction noted conspicuously on the certificate and shall also set forth on the face or back of the certificate either (i) the full text of the restriction or (ii) a statement of the existence of such restriction and a statement that the corporation will furnish a copy thereof to the holder of such certificate upon written request and without charge. Every certificate issued for shares of stock at a time when the corporation is authorized to issue more than one class or series of stock shall set forth on the face or back of the certificate either (i) the full text of the preferences, voting powers, qualifications and special and relative rights of the shares of each class and series, if any, authorized to be issued, as set forth in the articles of organization or (ii) a statement of the existence of such preferences, powers, qualifications and rights and a statement that the corporation will furnish a copy 9 thereof to the holder of such certificate upon written request and without charge. Section 3. Transfers. The board of directors may make such rules and regulations not inconsistent with the law, with the articles of organization or with these by-laws as it deems expedient relative to the issue, transfer and registration of stock certificates. The board of directors may appoint a transfer agent and a registrar of transfers or either and require all stock certificates to bear their signatures. Except as otherwise provided by law, by the articles of organization or by these by-laws, the corporation shall be entitled to treat the record holder of any shares of stock as shown on the books of the corporation as the holder of such shares for all purposes, including the right to receive notice of and to vote at any meeting of stockholders and the right to receive any dividend or other distribution in respect of such shares. Section 4. Record Date. The board of directors may fix in advance a time, which shall be not more than sixty (60) days before the date of any meeting of stockholders or the date for the payment of any dividend or the making of any distribution to stockholders or the last day on which the consent or dissent of stockholders may be effectively expressed for any purpose, as the record date for determining the stockholders having the right to notice of and to vote at such meeting and any adjournment thereof or the right to receive such dividend or distribution or the right to give such consent or dissent, and in such case only stockholders of record on such record date shall have such right, notwithstanding any transfer of stock on the books of the corporation after the record date; or without fixing such record date the directors may for any of such purposes close the transfer books for all or any part of such period. Section 5. Lost Certificates. The board of directors may, except as otherwise provided by law, determine the conditions upon which a new certificate of stock may be issued in place of any certificate alleged to have been lost, mutilated or destroyed. ARTICLE V Miscellaneous Provisions Section 1. Fiscal Year. The fiscal year of the corporation shall begin on the first day of January in each year and end on the last day of December next following. Section 2. Corporate Seal. The seal of the corporation shall be in such form as shall be determined from time to time by the board of directors. 10 Section 3. Corporation Records. The original, or attested copies, of the articles of organization, by-laws and records of all meetings of the incorporators and stockholders, and the stock and transfer records, which shall contain the names of all stockholders and the record address and the amount of stock held by each, shall be kept in The Commonwealth of Massachusetts at the principal office of the corporation in said Commonwealth or at an office of the transfer agent or of its clerk or of its resident agent, if any. Said copies and records need not all be kept in the same office. They shall be available at all reasonable times to inspection by any stockholder for any proper purpose but not if the purpose for which such inspection is sought is to secure a list of stockholders or other information for the purpose of selling said list or information or copies thereof or of using the same for a purpose other than the interest of the applicant, as a stockholder, relative to the affairs of the corporation. Section 4. Voting of Securities. Except as the board of directors may otherwise prescribe, the president or the treasurer shall have full power and authority in the name and on behalf of the corporation, subject to the instructions of the board of directors, to waive notice of, to attend, act and vote at, and to appoint any person or persons to act as proxy or attorney in fact for this corporation (with or without power of substitution) at any meeting of stockholders or shareholders of any other corporation or organization, the securities of which may be held by this corporation. Section 5. Execution of Instruments. All deeds, leases, transfers, contracts, bonds, notes and other obligations authorized to be executed by an officer of the corporation in its behalf shall be signed by the president, any vice president or the treasurer except as the board of directors may generally or in particular cases otherwise determined. Section 6. Control Share Acquisitions. The provisions of Chapter 110D of the Massachusetts General Laws with respect to the regulation of control share acquisitions shall not apply to this corporation. ARTICLE VI Amendments These by-laws may be amended or repealed at any annual or special meeting of the stockholders by the affirmative vote of at least eighty percent (80%) of the shares of capital stock then issued, outstanding and entitled to vote, provided notice of the proposed amendment or repeal is given in the notice of the meeting. 11 If authorized by the articles of organization, these by-laws may also be amended or repealed in whole or in part, or new by-laws made, by the board of directors except with respect to any provision hereof which by law, the articles of organization or these by-laws requires action by the stockholders. Not later than the time of giving notice of the meeting of stockholders next following the making, amendment or repeal by the directors of any by-laws, notice thereof stating the substance of such change shall be given to all stockholders entitled to vote on amending the by-laws. Any by-law to be made, amended or repealed by the directors may be amended or repealed by the stockholders. 1-258036 12 EX-10.1 6 MATERIAL CONTRACTS Pegasystems Inc. 1994 Long-Term Incentive Plan As Amended and Restated on May __, 1996 ========================================= Pegasystems Inc. 1994 Long-Term Incentive Plan ================================================================================
SECTION CONTENTS PAGE - ------- -------- ----- 1. Purpose; Definitions 1 2. Administration 4 3. Stock Subject to Plan 5 4. Eligibilitiy 7 5. Stock Options 7 6. Stock Appreciation Rights 13 7. Restricted Stock 15 8. Long-Term Performance Awards 17 9. Amendments and Termination 19 10. Unfunded Status of Plan 20 11. General Provisions 21 12. Effective Date of Plan 22 13. Term of Plan 22
- -------------------------------------------------------------------------------- Pegasystems Inc. Page i Confidential Pegasystems Inc. 1994 Long-Term Incentive Plan ================================================================================ SECTION 1. Purpose; Definitions. The name of this Plan is the Pegasystems Inc. 1994 Long-Term Incentive Plan (the "Plan"). The purpose of the Plan is to provide incentives: (a) to employees of Pegasystems Inc. (the "Corporation") by providing them with opportunities to purchase stock in the Corporation pursuant to options granted hereunder which qualify as Incentive Stock Options under Section 422 of the Internal Revenue Code of 1986; (b) to directors (whether or not employees), employees and consultants of the Corporation by providing them with opportunities to purchase stock in the Corporation pursuant to options granted hereunder which do not qualify as Incentive Stock Options under Section 422 of the Internal Revenue Code of 1986, and otherwise to participate in shareholder value which has been created. For the purposes of the Plan, the following terms shall be defined as set forth below: a. "Award" means any Option, Stock Apreciation Right, Restricted Stock or Long-Term Award granted under this Plan. b. "Board" means the Board of Directors of the Corporation. c. "Cause" means a felony conviction of a Participant or the failure of a Participant to contest prosecution for a felony, or a Participant's willful misconduct or dishonesty, any of which is directly and materially harmful to the business or reputation of the Corporation. d. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. e. "Committee" means a Compensation Committee of the Board, if such Committee has been appointed by the Board and has been authorized to administer the Plan. Such Committee will consist of two or more members of the Board. In the event the Corporation registers any class of any equity security pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), each member of the Committee shall be a "Disinterested Person" as defined below. All references herein to the Committee shall mean the Board if there is no Committee so appointed. - -------------------------------------------------------------------------------- Pegasystems Inc. Page 1 Confidential Pegasystems Inc. 1994 Long-Term Incentive Plan ================================================================================ From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause), and appoint new members in substitution thereof, fill vacancies however caused, or remove all members of the Committee and thereafter directly administer the Plan. f. "Corporation" means Pegasystems Inc., a corporation organized under the laws of the Commonwealth of Massachusetts, or any successor organization. g. "Disability" means permanent and total disability as determined under the Corporation's long-term disability program. h. "Disinterested Person" shall have the meaning set forth in Rule 16b-3(c)(2)(i) as promulgated by the Securities and Exchange Commission under the Exchange Act, or any successor definition adopted by the Securities and Exchange Commission. i. "Early Retirement" means that a Participant has attained the consent of the Committee to retire prior to having attained age 60 or qualifies for early retirement pursuant to the early retirement provisions as set forth in a pension plan of the Corporation in which the Optionee is a participant. j. "Fair Market Value" means, as of any given date, the mean of the highest and lowest quoted selling prices of the Stock on the exchange on which the Corporation's shares are listed for trading (consolidated trading) or, if no such sale occurs on the exchange on such date, the fair market value of the Stock as determined by the Committee in good faith based on the best available facts and circumstances at the time. k. "Incentive Stock Option" means any Stock Option intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422 of the Code. l. "Insider" means a Participant who is subject to the requirements of the Rules (as defined below). - -------------------------------------------------------------------------------- Pegasystems Inc. Page 2 Confidential Pegasystems Inc. 1994 Long-Term Incentive Plan ================================================================================ m. "Long-Term Performance Award" or "Long-Term Award" means an award made pursuant to Section 8 below that is payable in cash and/or Stock (including Restricted Stock) in accordance with the terms of the grant, based on Corporation, business unit and/or individual performance over a period of at least two years. n. "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option. o. "Normal Retirement" means retirement of a Participant from active employment with the Corporation and any subsidiary or affiliate after either having attained age 60 or pursuant to the normal retirement provisions of an applicable pension plan of the Corporation. p. "Option" means any Incentive Stock Option or Non-Qualified Stock Option to purchase shares of Stock (including Restricted Stock, if the Committee so determines) granted pursuant to Section 5 below. q. "Optionee" means a Participant who is the recipient of any Incentive Stock Option or Non-Qualified Stock Option under this Plan. r. "Participant" means anyone to whom an Award is granted pursuant to the Plan. s. "Plan" means the Pegasystems Inc. 1994 Long-Term Incentive Plan, as hereinafter amended form time to time. t. "Restricted Stock" means an award of shares of Stock that is subject to restrictions pursuant to Section 7 below. u. "Retirement" means Normal or Early Retirement. v. "Rules" means Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the regulations promulgated thereunder. - -------------------------------------------------------------------------------- Pegasystems Inc. Page 3 Confidential Pegasystems Inc. 1994 Long-Term Incentive Plan ================================================================================ w. "Securities Broker" means the registered securities broker acceptable to the Corporation who agrees to effect the cashless exercise of an Option pursuant to Section 5(m) hereof. x. "Stock" means the Common Stock, $.01 par value per share, of the Corporation. y. "Stock Appreciation Right" means the right, pursuant to an award granted under Section 6 below, to surrender to the Corporation all (or a portion) of a Stock Option in exchange for an amount equal to the difference between (i) the Fair Market Value (or such lesser ceiling as may be specified in the option grant), as of the date such Stock Option (or such portion thereof) is surrendered, of the shares of Stock covered by such Stock Option (or such portion thereof), and (ii) the aggregate exercise price of such Stock Option (or such portion thereof). SECTION 2. Administration The Plan shall be administered by the Committee. The Committee shall have the authority to grant to eligible Participants, pursuant to the terms of the Plan: (i) Stock Options, (ii) Stock Appreciation Rights, (iii) Restricted Stock and/or (iv) Long-Term Performance Awards. In particular, the Committee shall have the authority: (i) to select the Participants to whom Stock Options, Stock Appreciation Rights, Restricted Stock and Long-Term Performance Awards may from time to time be granted hereunder. (ii) to determine whether and to what extent Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock and Long-Term Performance Awards, or any combination thereof, are to be granted hereunder; - -------------------------------------------------------------------------------- Pegasystems Inc. Page 4 Confidential Pegasystems Inc. 1994 Long-Term Incentive Plan ================================================================================ (iii) to determine the number of shares to be covered by each such award granted hereunder; (iv) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder including, but not limited to, the share price and any restriction or limitation, or any vesting acceleration or forfeiture waiver regarding any Stock Option or other award and/or the shares of Stock relating thereto, based on such factors as the Committee shall determine, in its sole discretion; (v) to determine whether and under what circumstances a Stock Option may be settled in cash or stock, including Restricted Stock under Section 5(k); (vi) to determine whether and under what circumstances a Stock Option may be exercised without a payment of cash under Section 5(1); and (vii) to determine whether, to what extent and under what circumstances Stock and other amounts payable with respect to an award under this Plan shall be deferred either automatically or at the election of the Participant. The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any award issued under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Corporation and Plan Participants. SECTION 3. Stock Subject to the Plan (a) Stock Subject to Plan. The stock to be subject or related to awards under the Plan shall be shares of the Corporation's Stock and may be either authorized and unissued or held in the treasury of the Corporation. The maximum number of shares of Stock authorized with respect to the grant of awards under the Plan, subject to adjustment in accordance with paragraph 3(c) below, shall be up to 5,000,000 shares of Stock; any or all of such - -------------------------------------------------------------------------------- Pegasystems Inc. Page 5 Confidential Pegasystems Inc. 1994 Long-Term Incentive Plan ================================================================================ 5,000,000 shares of Stock may be granted for awards of Incentive Stock Options. In addition, shares equal to 2% of Stock outstanding shares at the start of each Fiscal Year shall each year be reserved exclusively for the granting of replacement Options under Section 5(e) below to all Participants. Such additional authorization of Stock for the granting of replacement Options shall not, at any time, cause the maximum shareholder dilution caused by the Plan to exceed the 5,000,000 shares of Stock authorized for grant under the Plan. Notwithstanding the foregoing, no individual shall receive, over the term of the Plan, more than an aggregate of 30% of the shares authorized for grant under the Plan, including shares subject to replacement Options awarded under the Plan. (b) Unused, Forfeited and Reacquired Shares. The shares related to the unexercised or undistributed portion of any terminated, expired or forfeited Award for which no material benefit was received by a Participant (i.e. dividends) shall be made available for distribution in connection with future awards under the plan to the extent permitted to receive exemptive relief pursuant to the Rules. Any shares made available for distribution in connection with future awards under this Plan pursuant to this paragraph (b) shall be in addition to the shares available pursuant to paragraph (a) of this Section 3. (c) Other Adjustments. In the event of any merger, reorganization, consolidation, recapitalization, Stock dividend, or other change in corporate structure affecting the Stock, such substitution or adjustment shall be made in the aggregate number of shares reserved for issuance under the Plan, in the number and option price of shares subject to outstanding Options granted under the Plan and in the number and price of shares subject to other Awards made under the Plan, as may be determined to be appropriate by the Committee in its sole discretion, provided that the number of shares subject to any award shall always be a whole number. Such adjusted option price shall also be used to determine the amount payable by the Corporation upon - -------------------------------------------------------------------------------- Pegasystems Inc. Page 6 Confidential Pegasystems Inc. 1994 Long-Term Incentive Plan ================================================================================ the exercise of any Stock Appreciation Right associated with any Stock Option. SECTION 4. Eligibility Directors (whether or not employees of the Corporation), consultants and employees of the Corporation who are responsible for or who contribute to the management, growth and/or profitability of the Corporation and/or any Subsidiary (as defined below) or affiliate of the Corporation are eligible to be granted Awards under the Plan. SECTION 5 Stock Options Stock Options may be granted alone, in addition to or in tandem with other awards granted under the Plan. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. Stock Options granted under the Plan may be of two types: (i) Incentive Stock Options and (ii) Non-Qualified Stock Options. With the exception of Optionees who are either (i) consultants or (ii) directors who are not also employees of the corporation, who shall not be eligible to receive Incentive Stock Options, the Committee shall have the authority to grant any Optionee Incentive Stock Options, Non-Qualified Stock Options, or both types of Stock Options (in each case with or without Stock Appreciation Rights). To the extent that any Stock Option does not qualify as an Incentive Stock Option, it shall constitute a separate Non-Qualified Stock Option. Anything in the Plan to the contrary notwithstanding, no term of this Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify the Plan under Section 422 of the Code, or, without the consent of the Optionee(s) affected, to disqualify any Incentive Stock Option under such Section 422. Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem appropriate: - -------------------------------------------------------------------------------- Pegasystems Inc. Page 7 Confidential Pegasystems Inc. 1994 Long-Term Incentive Plan ================================================================================ (a) Option Price. The option price per share of Stock purchasable under a Stock Option shall be determined by the Committee at the time of grant, but for Non-Qualified Stock Options shall not be less than 50% of the Fair Market Value of the Stock at the time of grant, and for Incentive Stock Options shall be not less than 100% of the Fair Market Value of the Stock at the time of grant. However, any Incentive Stock Option granted to any Optionee who, at the time the Option is granted, owns more than 10% of the voting power of all classes of stock of the Corporation or of a Parent or Subsidiary corporation, shall have an exercise price no less than 110% of Fair Market Value per share on date of the grant. The term "Parent" and "Subsidiary" as used herein shall mean "parent corporation" and "subsidiary corporation" as those terms are defined in Section 424 of the Code. (b) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Incentive Stock Option or Non-Qualified Stock Option shall be exercisable more than ten years after the date the Option is granted. However, any Option granted to any Optionee who at the time the Option is granted owns more than 10% of the voting power of all classes of Stock of the Corporation or of a Parent or Subsidiary corporation may not have a term of more than five years. No Option may be exercised by any person after expiration of the term of the Option. (c) Exercisability. Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee at or after grant, provided, however, that, except as provided in Section 5(g), unless otherwise determined by the Committee at or after grant, no Stock Option shall be exercisable during the six months following the date of the granting of the Option. If the Committee provides, in its discretion, that any Stock Option is exercisable only in installments, the Committee may waive such installment exercise provisions at any time at or after grant in whole or in part, based on such factors as the Committee shall determine, in its sole discretion. (d) Method of Exercise. Subject to whatever installment exercise provisions apply under Section 5(c), Stock Options may be exercised in whole or in part at any time and from time to time during the Option period, by giving - -------------------------------------------------------------------------------- Pegasystems Inc. Page 8 Confidential Pegasystems Inc. 1994 Long-Term Incentive Plan ================================================================================ written notice of exercise to the Corporation specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price, either by certified or bank check, or such other instrument as the Committee may accept. As determined by the Committee, in its sole discretion, at or after grant, payment in full or in part may also be made in the form of unrestricted Stock already owned by the Optionee or, in the case of the exercise of a Non-Qualified Stock Option or Restricted Stock subject to an award hereunder (based, in each case, on the Fair Market Value of the Stock on the date the Option is exercised, as determined by the Committee), provided, however, that, in the case of an Incentive Stock Option, the right to make a payment in the form of already owned shares may be authorized only at the time the Option is granted. The Committee, in its sole discretion, may at the time of grant or such later time as it determines, permit payment of the Option exercise price of a Non-Qualified Stock Option to be made in whole or in part in the form of Restricted Stock. If such payment is permitted, then such Restricted Stock (and any replacement shares relating thereto) shall remain (or be) restricted in accordance with the original terms of the Restricted Stock award in question, and any additional Stock received upon the exercise, shall be subject to the same forfeiture restrictions, unless otherwise determined by the Committee, in its sole discretion, at or after grant. If payment of the Option exercise price of a Non-Qualified Option is made in whole or in part in the form of unrestricted stock already owned by the Participant, the Corporation may require that the stock be owned by the Participant for a period of six months or longer so that such payment would not result in a pyramid exercise. No shares of Stock shall be issued until full payment therefor has been made. An Optionee shall generally have the rights to dividends or other rights of a shareholder with respect to shares subject to the Option when the Optionee has given written notice of exercise, has paid in full for such shares, and, if requested, has given the representation described in Section 11(a). - -------------------------------------------------------------------------------- Pegasystems Inc. Page 9 Confidential Pegasystems Inc. 1994 Long-Term Incentive Plan ================================================================================ (e) Replacement Options. If an Option granted pursuant to the Plan may be exercised by an Optionee by means of a stock-for-stock swap method of exercise as provided in 5(d) above, then the Committee may, in its sole discretion , at the time of the original Option grant or at such subsequent time during the term of such Option as the Committee, in its sole discretion, shall deem appropriate, authorize the Participant to automatically receive a replacement Option pursuant to this part of the Plan. This replacement Option shall cover a number of shares determined by the Committee, but in no event more than the number of shares equal to the difference between the number of shares covered by the original Option exercised and the net shares received by the Participant from such exercise. The exercise price of the replacement Option shall equal the then current Fair Market Value, and with a term not to exceed ten years. The Committee shall have the right, in its sole discretion and at any time, to discontinue the automatic grant of replacement Options if it determines the continuance of such grants to no longer be in the best interest of the Corporation. (f) Non-transferability of Options. No Stock Option shall be transferable by the Optionee otherwise than by will or by the laws of descent and distribution, and all Stock Options shall be exercisable, during the Optionee's lifetime, only by the Optionee. (g) Termination by Reason of Death. Subject to Section 5(j), if an Optionee's employment by the Corporation and any Subsidiary or affiliate terminates by reason of death, any Stock Option held by such Optionee may thereafter be exercised, to the extent then exercisable or on such accelerated basis as the Committee may determine at or after grant, by the legal representative of the estate or by the legatee of the Optionee under the will of the Optionee, for a period of one year (or such shorter period as the Committee may specify at grant) from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. - -------------------------------------------------------------------------------- Pegasystems Inc. Page 10 Confidential Pegasystems Inc. 1994 Long-Term Incentive Plan ================================================================================ (h) Termination by Reason of Disability. Subject to Section 5(k), if an Optionee's employment by the Corporation and any Subsidiary or affiliate terminates by reason of Disability, any Stock Option held by such Optionee may thereafter be exercised by the Optionee, to the extent it was exercisable at the time of termination, or on such accelerated basis as the Committee may determine at or after grant, for a period of two years (or such shorter period as the Committee may specify at grant) from the date of such termination of employment or until the expiration of the stated term of such Stock Option, whichever period is the shorter; provided, however, that if the Optionee dies within such two-year period (or such shorter period as the Committee shall specify at grant), any unexercised Stock Option held by such Optionee shall, at the sole discretion of the Committee, thereafter be exercisable to the extent to which it was exercisable at the time of death for a period of twelve months from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. In the event of termination of employment by reason of Disability, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. (i) Termination by Reason of Retirement. Subject to Section 5(j), if an Optionee's employment by the Corporation terminates by reason of Normal or Early Retirement, any Stock Option held by such Optionee may thereafter be exercised by the Optionee, to the extent it was exercisable at the time of such Retirement or on such accelerated basis as the Committee may determine at or after grant, for a period of two years (or such shorter period as Committee may specify at grant) from the date of such termination of employment or the expiration of the stated term of such Stock Option, whichever period is the shorter; provided, however, that, if the Optionee dies within such two-year period, any unexercised Stock Option held by such Optionee shall, at the sole discretion of the Committee, thereafter be exercisable, to the extent to which it was exercisable at the time of death, for a period of twelve months from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. In the event of termination of employment by reason of Retirement, if an Incentive Stock Option is exercised after the expiration of the exercise - -------------------------------------------------------------------------------- Pegasystems Inc. Page 11 Confidential Pegasystems Inc. 1994 Long-Term Incentive Plan ================================================================================ periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. (j) Other Termination. Unless otherwise determined by the Committee at or after grant, if an Optionee's employment by the Corporation terminates for any reason other than death, Disability or Normal or Early Retirement, the Stock Option shall thereupon terminate, except that such Stock Option may be exercised for the lesser of three months or the balance of such Stock Option's term if the Optionee is involuntarily terminated by the Corporation without Cause. (k) Incentive Stock Option Limitations. To the extent required for "Incentive Stock Option" status under Section 422 of the Code, the aggregate Fair Market Value (determined as of the time of grant) of the Stock with respect to which Incentive Stock Options granted after 1986 are exercisable for the first time by the Optionee during any calendar year under the Plan and/or any other Option plan of the Corporation (within the meaning of Section 424 of the Code) after 1986 shall not exceed $100,000. To the extent (if any) permitted under Section 422 of the Code, if (i) a Participant's employment with the Corporation is terminated by reason of death, Disability or Retirement and (ii) the portion of any Incentive Stock Option that is otherwise exercisable during the post-termination period specified under Section 5(g), (h) or (i), applied without regard to this Section 5(k), is greater than the portion of such Option that is exercisable as an "Incentive Stock Option" during such post-termination period under Section 422, such post-termination period shall automatically be extended (but not beyond the original Option term) to the extent necessary to permit the Optionee to exercise such Incentive Stock Option. (l) Cash-out of Option; Settlement of Spread Value in Restricted Stock. On receipt of written notice to exercise, the Committee may, in its sole discretion, elect to cash out all or part of the portion of the Option(s) to be exercised by paying the Optionee an amount, in cash or stock, equal to the excess of the Fair Market Value of the Stock over the option price (the "Spread Value") on the effective date of such cash-out. - -------------------------------------------------------------------------------- Pegasystems Inc. Page 12 Confidential Pegasystems Inc. 1994 Long-Term Incentive Plan ================================================================================ In addition, if the Option agreement so provides at grant or is amended (with the Optionee's consent) after grant and prior to exercise to so provide, the Committee may require that all or part of the shares to be issued with respect to the Spread Value of an exercised Option take the form of Restricted Stock, which shall be valued on the date of exercise on the basis of the Fair Market Value of such Restricted Stock determined without regard to the forfeiture restrictions involved. (m) Cashless Exercise. To the extent permitted under the applicable laws and regulations under Section 16 of the Securities Exchange act of 1934, as amended, and the Rules promulgated thereunder, and with the consent of the Committee, the Corporation agrees to cooperate in a "cashless exercise" of an Option. The cashless exercise shall be effected by the Participant delivering to the Securities Broker instructions to sell a sufficient number of shares of Common Stock to cover the costs and expenses associated therewith. SECTION 6. Stock Appreciation Rights (a) Grant and Exercise. Stock Appreciation Rights may be granted in conjunction with all or part of any Stock Option granted under the Plan. In the case of a Non-Qualified Stock Option, such rights may be granted either at or after the time of the grant of such Stock Option. In the case of an Incentive Stock Option, such rights may be granted only at the time of the grant of such Stock Option. A Stock Appreciation Right or applicable portion thereof granted with respect to a given Stock Option shall terminate and no longer be exercisable upon the termination or exercise of the related Stock Option, except that, unless otherwise determined by the Committee, in its sole discretion, at the time of grant, a Stock Appreciation Right granted with respect to less than the full number of shares covered by a related Stock Option shall not be reduced until the number of shares covered by an exercise or termination of the related Stock Option exceeds the number of shares not covered by the Stock Appreciation Right. A Stock Appreciation Right may be exercised by an Optionee, in accordance with Section 6(b), by surrendering the applicable portion of the - -------------------------------------------------------------------------------- Pegasystems Inc. Page 13 Confidential Pegasystems Inc. 1994 Long-Term Incentive Plan ================================================================================ related Stock Option. Upon such exercise and surrender, the Optionee shall be entitled to receive an amount determined in the manner prescribed in Section 6(b). Stock Options which have been so surrendered, in whole or in part, shall no longer be exercisable to the extent the related Stock Appreciation Rights have been exercised. b. Term and Conditions. Stock Appreciation Rights shall be subject to such terms and conditions, not inconsistent with the provisions of the Plan, as shall be determined from time to time by the Committee, including the following: (i) Stock Appreciation Rights shall be exercisable only at such time or times and to the extent that the Stock Options to which they relate, if any, shall be exercisable in accordance with the provisions of Section 5 and this Section 6 of the Plan; provided, however, that any Stock Appreciation Right granted subsequent to the grant of the related Stock Option shall not be exercisable during the first six months of its term, except that this special limitation shall not apply in the event of death or Disability of the Optionee prior to the expiration of the six-month period. (ii) Upon the exercise of a Stock Appreciation Right, an Optionee shall be entitled to receive up to, but not more than, an amount in cash and/or shares of Stock equal in value to the excess of the Fair Market Value of one share of Stock over the Option price per share or such lesser amount as specified in the grant agreement, multiplied by the number of shares in respect of which the Stock Appreciation Right shall have been exercised, with the Committee having the right to determine the form of payment. (iii) Stock Appreciation Rights shall be transferable only when and to the extent that the underlying Stock Option would be transferable under Section 5(f) of the Plan. (iv) Upon the exercise of a Stock Appreciation Right, the Stock Option or part thereof to which such Stock Appreciation Right is related shall be deemed to have been exercised for the purpose of the limitation set forth in Section 3 of the Plan on the number of shares of Stock to be - -------------------------------------------------------------------------------- Pegasystems Inc. Page 14 Confidential Pegasystems Inc. 1994 Long-Term Incentive Plan ================================================================================ issued under the Plan, but only to the extent of the number of shares issued under the Stock Appreciation Right at the time of exercise based on the value of the Stock Appreciation Right at such time. (v) A Stock Appreciation Right granted in connection with an Incentive Stock Option may be exercised only if and when the market price of the Stock subject to the Incentive Stock Option exceeds the exercise price of such Stock Option. SECTION 7. Restricted Stock (a) Administration. Shares of Restricted Stock may be issued either alone or in addition to other awards granted under the Plan. The Committee shall determine the Participants to whom, and the time or times at which, grants of Restricted Stock will be made, the number of shares to be awarded, the price (if any) to be paid by the recipient of Restricted Stock (subject to Section 7(b)), the time or times within which such awards may be subject to forfeiture, and all other conditions of the awards. The Committee may condition the grant of Restricted Stock upon the attainment of specified performance goals or such other factors as the Committee may determine, in its sole discretion. The provisions of Restricted Stock awards need not be the same with respect to each recipient. (b) Awards and Certificates. The prospective recipient of a Restricted Stock award shall not have any rights with respect to such award, unless and until such recipient has executed an agreement evidencing the award and has delivered a fully executed copy thereof to the Corporation, and has otherwise complied with the applicable terms and conditions of such award. (i) The purchase price for shares of Restricted Stock shall not be less than what prevailing law may require. (ii) Awards of Restricted Stock must be accepted within a period of 60 days (or such shorter period as the Committee may specify at grant) - -------------------------------------------------------------------------------- Pegasystems Inc. Page 15 Confidential Pegasystems Inc. 1994 Long-Term Incentive Plan ================================================================================ after the award date, by executing a Restricted Stock Award Agreement and paying whatever price (if any) is required under Section 7(b)(i). (iii) Each Participant receiving a Restricted Stock award shall be issued a stock certificate in respect of such shares of Restricted Stock. Such certificate shall be registered in the name of such Participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such award, substantially in the following form: "The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the Pegasystems Inc. 1994 Long-Term Incentive Plan and an Agreement entered into between the registered owner and Pegasystems Inc. Copies of such Plan and or Agreement are on file in the offices of Pegasystems Inc. 101 Main Street, Cambridge, MA 02142-1590 Attention: Vice President, Corporate Services. (iv) The Committee shall require that the stock certificates evidencing such shares be held in custody by the Corporation until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Stock award, the Participant shall have delivered a stock power, endorsed in blank, relating to the Stock covered by such award. (c) Restrictions and Conditions. The shares of Restricted Stock awarded pursuant to this Section 7 shall be subject to the following restrictions and conditions: (i) Subject to the provisions of this Plan and the award agreement, during a period set by the Committee commencing with the date of such award (the "Restriction Period"), the Participant shall not be permitted to sell, transfer, pledge, assign or otherwise encumber shares of Restricted Stock awarded under the Plan. Within these limits, the Committee, in its sole discretion, may provide for the lapse of such restrictions in installments and may accelerate or waive such - -------------------------------------------------------------------------------- Pegasystems Inc. Page 16 Confidential Pegasystems Inc. 1994 Long-Term Incentive Plan ================================================================================ restrictions in whole or in part, based on service, performance and/or such other factors or criteria as the Committee may determine, in its sole discretion. (ii) Except as provided in this paragraph (ii) and Section 7(c)(i), the Participant shall have, with respect to the shares of Restricted Stock, all of the rights of a shareholder of the Corporation, including the right to vote the shares, and the right to receive any cash dividends. The Committee, in its sole discretion, as determined at the time of award, may permit or require the payment of cash dividends to be deferred and, if the Committee so determines, reinvested in additional Restricted Stock to the extent shares are available under Section 3. (iii) Subject to the applicable provisions of the award agreement and this Section 7, upon termination of a Participant's employment with the Corporation for any reason during the Restriction Period, all shares still subject to restriction shall be forfeited by the Participant. (iv) In the event of hardship or other special circumstances of a Participant whose employment with the Corporation is involuntarily terminated (other than for Cause), the Committee may, in its sole discretion, waive in whole or in part any or all remaining restrictions with respect to such Participant's shares of Restricted Stock, based on such factors as the Committee may deem appropriate. (v) If and when the Restriction Period expires without a prior forfeiture of the Restricted Stock subject to such Restriction Period, the certificates for such shares shall be delivered to the Participant promptly. SECTION 8. Long Term Performance Awards (a) Awards and Administration. Long Term Performance Awards may be awarded either alone or in addition to other awards granted under the Plan. The Committee shall determine the nature, length and starting date of the performance period (the "Performance Period") for each Long Term Performance Award, which shall be at least two years, and shall determine the performance objectives to be used in valuing Long Term Performance Awards - -------------------------------------------------------------------------------- Pegasystems Inc. Page 17 Confidential Pegasystems Inc. 1994 Long-Term Incentive Plan ================================================================================ and determining the extent to which such Long Term Performance Awards have been earned. Performance objectives may vary from Participant to Participant and between groups of Participants and shall be based upon such Corporation, business unit and/or individual performance factors and criteria as the Committee may deem appropriate, including, but not limited to, earnings per share or return on equity. Performance Periods may overlap and Participants may participate simultaneously with respect to Long Term Performance Awards that are subject to different Performance Periods and/or different performance factors and criteria. At the beginning of each Performance Period, the Committee shall determine for each Long Term Performance Award subject to such Performance Period the range of dollar values or number of shares of Stock to be awarded to the Participant at the end of the Performance Period if and to the extent that the relevant measure(s) of performance for such Long Term Performance Award is (are) met. Such dollar values or number of shares of Stock may be fixed or may vary in accordance with such performance and/or other criteria as may be specified by the Committee, in its sole discretion. (b) Adjustment of Awards. In the event of special or unusual events or circumstances affecting the application of one or more performance objectives to a Long Term Performance Award, the Committee may revise the performance objectives and/or underlying factors and criteria applicable to the Long Term Performance Awards affected, to the extent deemed appropriate by the Committee, in its sole discretion, to avoid unintended windfalls or hardship. (c) Termination of Employment. Unless otherwise provided in the applicable award agreement(s), if a Participant terminates employment with the Corporation during a Performance Period because of death, Disability or Retirement, such Participant shall be entitled to a payment with respect to each outstanding Long Term Performance Award at the end of the applicable Performance Period: (i) based, to the extent relevant under the terms of the award, upon the Participant's performance - -------------------------------------------------------------------------------- Pegasystems Inc. Page 18 Confidential Pegasystems Inc. 1994 Long-Term Incentive Plan ================================================================================ for the portion of such Performance Period ending on the date of termination and the performance of the applicable business unit(s) for the entire Performance Period, and (ii) prorated where deemed appropriate by the Committee, for the portion of the Performance Period during which the Participant was employed by the Corporation, all as determined by the Committee, in its sole discretion. However, the Committee may provide for an earlier payment in settlement of such award in such amount and under such terms and conditions as the Committee deems appropriate. If a Participant terminates employment with the Corporation during a Performance Period for any other reason, then such Participant shall not be entitled to any payment with respect to the Long Term Performance Awards subject to such Performance Period, unless the Committee shall otherwise determine, in its sole discretion. (d) Form of Payment. The earned portion of a Long Term Performance Award may be paid currently or on a deferred basis with such interest or earnings equivalent as may be determined by the Committee, in its sole discretion. Payment shall be made in the form of cash or whole shares of Stock, including Restricted Stock, either in a lump sum payment or in annual installments commencing as soon as practicable after the end of the relevant Performance Period, all as the Committee shall determine at or after grant. If and to the extent a Long Term Performance Award is payable in Stock and the full amount of such value is not paid in Stock, then the shares of Stock representing the portion of the value of the Long Term Performance Award not paid in Stock shall again become available for award under the Plan. SECTION 9. Amendments and Termination The Board may amend, alter, or discontinue the Plan at any time and from time to time, but no amendment, alteration, or discontinuation shall be made which would impair the rights of an Optionee or Participant with respect to a Stock Option, Stock Appreciation Right, Restricted Stock or Long Term Performance Award which has been granted under the Plan, without the Optionee's or Participant's consent, or which, - -------------------------------------------------------------------------------- Pegasystems Inc. Page 19 Confidential Pegasystems Inc. 1994 Long-Term Incentive Plan ================================================================================ without the approval of the Corporation's stockholders obtained within 12 months before or after the Board adopts a resolution authorizing any of the following amendments, would: (a) except as expressly provided in this Plan, increase the total number of shares reserved for the purpose of the Plan; (b) decrease the Option price of any Stock Option to less than 50% of the Fair Market Value on the date of grant; (c) change the employees or class of employees eligible to participate in the Plan; or (d) extend the maximum Option period under Section 5(b) of the Plan. The Committee may amend the terms of any Stock Option or other award theretofore granted, prospectively or retroactively, but, subject to Section 3 above, no such amendment shall impair the rights of any holder without the holder's consent. The Committee may also substitute new Stock Options for previously granted Stock Options, including previously granted Stock Options having higher Option prices. Subject to the above provisions, the Committee shall have broad authority to amend the Plan to take into account changes in applicable tax laws and accounting rules, as well as other developments. SECTION 10. Unfunded Status of Plan The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant or Optionee by the Corporation, nothing contained herein shall give any such Participant or Optionee any rights that are greater than those of a general creditor of the Corporation. In its sole discretion, the Board may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Stock or payments in lieu of or with respect to awards hereunder, provided, however, that, unless the Board otherwise determines with the consent of the affected Participant, the existence of such trusts or other arrangements is consistent with the "unfunded" status of the Plan. - -------------------------------------------------------------------------------- Pegasystems Inc. Page 20 Confidential Pegasystems Inc. 1994 Long-Term Incentive Plan ================================================================================ SECTION 11. General Provisions (a) The Committee may require each person purchasing shares pursuant to a Stock Option under the Plan to represent to and agree with the Corporation in writing that the Optionee or Participant is acquiring the shares without a view to distribution thereof. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. All certificates for shares of Stock or other securities delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Exchange Act, any stock exchange upon which the Stock is then listed, and any applicable federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (b) Nothing contained in this Plan shall prevent the Board of Directors from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. (c) The adoption of the Plan shall not confer upon any employee of the Corporation any right to continued employment with the Corporation, as the case may be, nor shall it interfere in any way with the right of the Corporation to terminate the employment of any of its employees at any time. (d) No later than the date as of which an amount first becomes includible in the gross income of the Participant for Federal income tax purposes with respect to any award under the Plan, the Participant shall pay to the Corporation, or make arrangements satisfactory to the Committee regarding the payment of, any Federal, state, or local taxes of any kind required by law to be withheld with respect to such amount. Unless otherwise determined by the Committee, the minimum required withholding obligations may be settled with Stock, including Stock that is part of the award that gives rise to the withholding requirement. The obligations of the Corporation under the Plan shall be conditional on such payment or arrangements and the Corporation shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the Participant. - -------------------------------------------------------------------------------- Pegasystems Inc. Page 21 Confidential Pegasystems Inc. 1994 Long-Term Incentive Plan ================================================================================ (e) At the time of grant, the Committee may provide in connection with any grant made under this Plan that the shares of Stock received as a result of such grant shall be subject to a right of first refusal, pursuant to which the Participant shall be required to offer to the Corporation any shares that the Participant wishes to sell, with the price being the then Fair Market Value of the Stock, subject to such other terms and conditions as the Committee may specify at the time of grant. (f) Shares may be subject to a repurchase right by the Corporation which the Corporation shall have the right to exercise from time to time as may be set forth in a grant agreement for an award granted under this Plan. (g) The reinvestment of dividends in additional Restricted Stock (or in other types of Plan awards) at the time of any dividend payment shall only be permissible if sufficient shares of Stock are available under Section 3 for such reinvestment (taking into account then outstanding Stock Options and other Plan awards). (h) The Committee shall establish such procedures as it deems appropriate for a Participant to designate a beneficiary to whom any amounts payable in the event of the Participant's death are to be paid. (i) The Plan and all awards made and actions taken thereunder shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. SECTION 12. Effective Date of Plan The Plan shall be effective on the date it is approved by a vote of the holders of a majority of the total outstanding Stock. SECTION 13. Term of Plan No Stock Option, Stock Appreciation Right, Restricted Stock or Long Term Performance Award shall be granted pursuant to the Plan on or after the tenth anniversary of the date of stockholder approval, but awards granted prior to such tenth anniversary may extend beyond that date. ds1-263101 - -------------------------------------------------------------------------------- Pegasystems Inc. Page 23 Confidential EX-10.2 7 MATERIAL CONTRACTS PEGASYSTEMS INC. 1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN 1. Purpose. This 1996 Non-Employee Director Stock Option Plan (hereinafter, the "Plan") is intended to promote the interests of Pegasystems Inc., a Massachusetts corporation (the "Company"), by providing an inducement to obtain and retain the services of qualified persons who are not employees or officers of the Company to serve as members of its Board of Directors (the "Board"). 2. Available Shares. The total number of shares of Common Stock, $.01 par value per share, of the Company (the "Common Stock") for which options may be granted under the Plan shall not exceed shares, subject to adjustment in accordance with paragraph 10 of the Plan. Shares subject to the Plan are authorized but unissued shares or shares that were once issued and subsequently reacquired by the Company. If any options granted under the Plan are surrendered before exercise or lapse without exercise, in whole or in part, the shares reserved therefor shall continue to be available under the Plan. 3. Administration. The Plan shall be administered by the Board or by a committee appointed by the Board (the "Committee"). In the event the Board fails to appoint or refrains from appointing a Committee, the Board shall have all power and authority to administer the Plan. In such event, the word "Committee" wherever used herein shall be deemed to mean the Board. The Committee shall, subject to the provisions of the Plan, have the power to construe the Plan, to determine all questions hereunder, and to adopt and amend such rules and regulations for the administration of the Plan as it may deem desirable. No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any option granted under it. 4. Granting of Options. During the term of the Plan and subject to the availability of shares under the Plan, each person who is first elected as a member of the Board (the "Optionee") after May 13, 1996 and during the term of this Plan, and who is not on the date of such election a current or former employee or officer of the Company, shall be granted, contingent on stockholder approval of this Plan, an option to purchase 30,000 shares of Common Stock on the date of such grant, such option to vest pursuant to Section 7 below. Except for the specific options referred to above, no other options shall be granted under the Plan. 5. Option Price. The purchase price of the stock covered by an option granted pursuant to this Plan shall be 100% of the fair market value of such shares on the day the option is granted. The option price will be subject to adjustment in accordance with the provisions of Section 10 below. For purposes of this Plan, if, at the time an option is granted under the Plan, the Company's Common Stock is publicly traded, "fair market value" shall be determined as of the last business day for which the prices or quotes discussed in this sentence are available prior to the date such option is granted and shall mean (i) the average (on that date) of the high and low prices of the Common Stock on the principal national securities exchange on which the Common Stock is traded, if the Common Stock is then traded on a national securities exchange; (ii) the last reported sale price (on that date) of the Common Stock on the Nasdaq National Market, if the Common Stock is not then traded on a national securities exchange; or (iii) the closing bid price (or average of bid prices) last quoted (on that date) by an established quotation service for over-the-counter securities, if the Common Stock is not reported on the Nasdaq National Market or on a national securities exchange. If, at the time an option is granted under this Plan, the Company's stock is not publicly traded, "fair market value" shall be the fair market value on the date the option is granted as determined by the Board in good faith. 6. Period of Option. Unless sooner terminated in accordance with the provisions of Section 8 below, an option granted hereunder shall expire on the date which is ten (10) years after the date of grant of the option. 7. Vesting of Shares and Non-transferability of Options. (a) Vesting. Options granted under this Plan shall not be exercisable until they become vested. Options granted under this Plan shall vest in the Optionee and thus become exercisable by the Optionee in five equal annual installments commencing on the first anniversary of the date of grant. (b) Legend on Certificates. The certificates representing such shares shall carry such appropriate legend and such written instructions shall be given to the Company's transfer agent as may be deemed necessary or advisable by counsel to the Company in order to comply with the requirements of the Securities Act of 1933 or any state securities laws. (c) Non-transferability. Any option granted pursuant to this Plan shall not be assignable or transferable other than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order and shall be exercisable during the Optionee's lifetime only by him or her. 8. Termination of Option Rights. (a) In the event an Optionee ceases to be a member of the Board for any reason other than death or permanent disability, any then unexercised portion of options granted to such Optionee shall, to the extent not then vested, immediately terminate and become void; any portion of an option which is then vested but has not been exercised at the time the Optionee so ceases to be a member of the Board may be exercised, to the extent it is then vested, by the Optionee until the earlier of the scheduled expiration date of the option and 90 days after the date the Optionee ceased to be a member of the Board. 2 (b) In the event that an Optionee ceases to be a member of the Board by reason of his or her death or permanent disability, any option granted to such Optionee shall be immediately and automatically accelerated and become fully vested and all unexercised options shall be exercisable by the Optionee (or by the optionee's personal representative, heir or legatee, in the event of death) until the earlier of the scheduled expiration date of the option or one year after the death or disability of the Optionee. (c) Notwithstanding the provisions in this Section 8, the Committee may, in its sole discretion, establish different terms and conditions pertaining to the effect of a participant's ceasing to be a member of the Board. 9. Exercise of Option. An option granted hereunder shall, to the extent then exercisable, be exercisable in whole or in part by giving written notice to the Company at its principal office address, stating the number of shares with respect to which the option is being exercised, accompanied by payment in full for such shares. Payment may be (a) in United States dollars in cash or by check, (b) in whole or in part in shares of Common Stock of the Company already owned by the person or persons exercising the option or shares subject to the option being exercised (subject to such restrictions and guidelines as the Board may adopt from time to time), valued at fair market value determined in accordance with the provisions of Section 5 or (c) consistent with applicable law, through the delivery of an assignment to the Company of a sufficient amount of the proceeds from the sale of the Common Stock acquired upon exercise of the option and an authorization to the broker or selling agent to pay that amount to the Company, which sale shall be at the participant's direction at the time of exercise. There shall be no such exercise at any one time as to fewer than one hundred (100) shares or all of the remaining shares then purchasable by the person or persons exercising the option, if fewer than one hundred (100) shares. The Company's transfer agent shall, on behalf of the Company, prepare a certificate or certificates representing such shares acquired pursuant to exercise of the option, shall register the optionee as the owner of such shares on the books of the Company and shall cause the fully executed certificates(s) representing such shares to be delivered to the optionee as soon as practicable after payment of the option price in full. The holder of an option shall not have any rights of a stockholder with respect to the shares covered by the option except to the extent that one or more certificates for such shares shall be delivered to him or her upon the due exercise of the option. 10. Adjustments Upon Changes in Capitalization and Other Matters. Upon the occurrence of any of the following events, an Optionee's rights with respect to options granted to him or her hereunder shall be adjusted as hereinafter provided: (a) Stock Dividends. In the event the Company shall issue any of its shares as a stock dividend upon or with respect to the shares of stock of the class which shall at the time be subject to option hereunder, each Optionee upon exercising an option shall be entitled to receive (for the purchase price paid upon such exercise) the shares as to which he is exercising his option and, in addition thereto (at no additional cost), such number of shares of the class or classes in which such stock dividend or dividends were declared or paid, and such 3 amount of cash in lieu of fractional shares, as he would have received if he had been the holder of the shares as to which he is exercising his option at all times between the date of grant of such option and the date of its exercise. (b) Merger; Consolidation; Liquidation; Sale of Assets. In the event the Company is merged into or consolidated with another corporation under circumstances where the Company is not the surviving corporation or if the Company is liquidated or sells or otherwise disposes of all or substantially all of its assets to another corporation while unexercised options remain outstanding under this Plan, (i) subject to the provisions of clauses (iii), (iv) and (v) below, after the effective date of such merger, consolidation or sale, as the case may be, each holder of an outstanding option shall be entitled, upon exercise of such option, to receive in lieu of shares of Common Stock, shares of such stock or other securities as the holders of shares of Common Stock received pursuant to the terms of the merger, consolidation or sale; or (ii) the Board may waive any discretionary limitations imposed with respect to the exercise of the option so that all options from and after a date prior to the effective date of such merger, consolidation, liquidation or sale, as the case may be, specified by the Board, shall be exercisable in full; or (iii) all outstanding options may be cancelled by the Board as of the effective date of any such merger, consolidation, liquidation or sale, provided that notice of such cancellation shall be given to each holder of an option, and each such holder thereof shall have the right to exercise such option in full (without regard to any discretionary limitations imposed with respect to the option) during a 30-day period preceding the effective date of such merger, consolidation, liquidation or sale; or (iv) all outstanding options may be cancelled by the Board as of the date of any such merger, consolidation, liquidation or sale, provided that notice of such cancellation shall be given to each holder of an option and each such holder thereof shall have the right to exercise such option but only to the extent exercisable in accordance with any discretionary limitations imposed with respect to the option prior to the effective date of such merger, consolidation, liquidation or sale; or (v) the Board may provide for the cancellation of all outstanding options and for the payment to the holders thereof of some part or all of the amount by which the value thereof exceeds the payment, if any, which the holder would have been required to make to exercise such option. (c) Issuance of Securities. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares subject to options. No adjustments shall be made for dividends paid in cash or in property other than securities of the Company. (d) No Fractional Shares. No fractional shares shall actually be issued under the Plan. Any fractional shares which, but for this subparagraph (d), would have been issued to an Optionee pursuant to an option, shall be deemed to have been issued and immediately sold to the Company for their fair market value, and the Optionee shall receive from the Company cash in lieu of such fractional shares. 4 (e) Adjustments. Upon the happening of any of the foregoing events, the class and aggregate number of shares set forth in Section 2 above that are subject to options which previously have been or subsequently may be granted under the Plan shall also be appropriately adjusted to reflect such events. The Board shall determine the specific adjustments to be made under this Section 10 and its determination shall be conclusive. 11. Restrictions on Issuance of Shares. Notwithstanding the provisions of Sections 4 and 9 above, the Company shall have no obligation to deliver any certificate or certificates upon exercise of an option until one of the following conditions shall be satisfied: (i) The shares with respect to which the option has been exercised are at the time of the issue of such shares effectively registered under applicable federal and state securities laws as now in force or hereafter amended; or (ii) Counsel for the Company shall have given an opinion that such shares are exempt from registration under federal and state securities laws as now in force or hereafter amended; and the Company has complied with all applicable laws and regulations with respect thereto, including without limitation all regulations required by any stock exchange upon which the Company's outstanding Common Stock is then listed. 12. Representation of Optionee. If requested by the Company, the Optionee shall deliver to the Company written representations and warranties upon exercise of the option that are necessary to show compliance with federal and state securities laws, including representations and warranties to the effect that a purchase of shares under the option is made for investment and not with a view to their distribution (as that term is used in the Securities Act of 1933). 13. Option Agreement. Each option granted under the provisions of this Plan shall be evidenced by an option agreement, which agreement shall be duly executed and delivered on behalf of the Company and by the Optionee to whom such option is granted. The option agreement shall contain such terms, provisions and conditions not inconsistent with this Plan as may be determined by the officer executing it. 14. Term and Amendment of Plan. This Plan was adopted by the Board effective as of May 13, 1996, subject to approval by the stockholders of the Company. Options may no longer be granted under the Plan after May 13, 2006, and the Plan shall terminate when all options granted or to be granted hereunder are no longer outstanding. Subject to the provisions of Section 4 above, options may be granted under the Plan prior to the date of stockholder approval of the Plan. If the approval of stockholders is not obtained by May 13, 1997, any grants of options under the Plan made prior to that date will be rescinded. The Board may at any time terminate the Plan or make such modification or amendment thereof as it deems advisable; provided, however, that the Board may not, without approval by the stockholders, (a) increase the maximum number of shares for which options may be granted under the Plan 5 (except by adjustment pursuant to Section 10), (b) materially modify the requirements as to eligibility to participate in the Plan, (c) materially increase benefits accruing to option holders under the Plan or (d) amend the Plan in any manner which would cause Rule 16b-3 to become inapplicable to the Plan; and provided further that the provisions of this Plan specified in Rule 16b-3(c)(2)(ii)(A) (or any successor or amended provision thereof) under the Securities Exchange Act of 1934 (including without limitation, provisions as to eligibility, amount, price and timing of awards) may not be amended more than once every six months, other than to comport with changes in the Internal Revenue Code, the Employee Retirement Income Security Act or the rules thereunder. Termination or any modification or amendment of the Plan shall not, without consent of a participant, affect his or her rights under an option previously granted to him or her. 15. Compliance with Regulations. It is the Company's intent that this Plan comply in all respects with Rule 16b-3 under the Securities Exchange Act of 1934 (or any successor or amended version thereof) and any applicable Securities and Exchange Commission interpretations thereof. If any provision of the Plan is deemed not to be in compliance with Rule 16b-3, the provision shall be null and void. 16. Governing Law. The validity and construction of this Plan and the instruments evidencing options shall be governed by the laws of The Commonwealth of Massachusetts, without giving effect to the principles of conflicts of law thereof. ds1B256710.1 6 EX-10.3 8 MATERIAL CONTRACTS PEGASYSTEMS INC. 1996 EMPLOYEE STOCK PURCHASE PLAN l. PURPOSE. The purpose of this Employee Stock Purchase Plan (the "Plan") is to provide employees of Pegasystems Inc., a Massachusetts corporation (the "Company"), and its subsidiaries, who wish to become stockholders of the Company an opportunity to purchase shares of the Common Stock, $.01 par value per share, of the Company (the "Shares"). The Plan is intended to qualify as an "employee stock purchase plan" within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). 2. ELIGIBLE EMPLOYEES. Subject to provisions of Sections 7, 8 and 9 below, any individual who is in the full-time employment (as defined below) of the Company, or any of its subsidiaries (as defined in Section 424(f) of the Code) the employees of which are designated by the Board of Directors of the Company (the "Board") as eligible to participate in the Plan, is eligible to participate in any Offering of Shares (as defined in Section 3 below) made by the Company hereunder. Full-time employment shall include all employees whose customary employment is: (a) in excess of 20 hours per week; and (b) more than five months in the relevant calendar year. 3. OFFERING DATES. From time to time the Company, by action of the Board, will grant rights to purchase Shares to employees eligible to participate in the Plan pursuant to one or more offerings (each of which is an "Offering") on a date or series of dates (each of which is an "Offering Date") designated for this purpose by the Board. 4. PRICES. The Price per share for each grant of rights hereunder shall be the lesser of: (a) eighty-five percent (85%) of the fair market value of a Share on the Offering Date on which such right was granted; or (b) eighty-five percent (85%) of the fair market value of a Share on the date such right is exercised. At its discretion, the Board of Directors may determine a higher price for a grant of rights. For purposes of this Plan, the term "fair market value" on any date means (i) the average (on that date) of the high and low prices of the Company's Common Stock on the principal national securities exchange on which the Common Stock is traded, if the Common Stock is then traded on a national securities exchange; or (ii) the last reported sale price (on that date) of the Common Stock on the Nasdaq National Market System, if the Common Stock is not then traded on a national securities exchange; or (iii) the average of the closing bid and asked prices last quoted (on that date) by an established quotation service for over-the-counter securities, if the Common Sock is not reported on the Nasdaq National Market System or on a national securities exchange. If the Company's Common Stock is not publicly traded at the time a right is granted under this Plan, "fair market value" shall mean the fair market value of the Common Stock as determined by the Board after taking into consideration all factors which it deems appropriate, including, without limitation, recent sale and offer prices of the Common Stock in private transactions negotiated at arm's length. 5. EXERCISE OF RIGHTS AND METHOD OF PAYMENT. (a) Rights granted under the Plan will be exercisable periodically on specified dates as determined by the Board. (b) The method of payment for Shares purchased upon exercise of rights granted hereunder shall be through regular payroll deductions or by lump sum cash payment, or both, as determined by the Board. No interest shall be paid upon payroll deductions unless specifically provided for by the Board. (c) Any payments received by the Company from a participating employee and not utilized for the purchase of Shares upon exercise of a right granted hereunder shall be promptly returned to such employee by the Company after termination of the right to which the payment relates. 6. TERM OF RIGHTS. Rights granted on any Offering Date shall be exercisable upon the expiration of such period ("Offering Period") as shall be determined by the Board when it authorizes the Offering, provided that such Offering Period shall in no event be longer than twenty-seven (27) months. 7. SHARES SUBJECT TO THE PLAN. No more than 500,000 Shares may be sold pursuant to rights granted under the Plan; provided, however, that appropriate adjustment shall be made in such number, in the number of Shares covered by outstanding rights granted hereunder, in the exercise price of the rights and in the maximum number of Shares which an employee may purchase (pursuant to Section 9 below) to give effect to any mergers, consolidations, reorganizations, recapitalizations, stock splits, stock dividends or other relevant changes in the capitalization of the Company occurring after the effective date of the Plan, provided that no fractional Shares shall be subject to a right and each right shall be adjusted downward to the nearest full Share. Any agreement of merger or consolidation will include provisions for protection of the then existing rights of participating employees under the Plan. Either authorized and unissued Shares or issued Shares heretofore or hereafter reacquired by the Company may be made subject to rights under the Plan. If for any reason any right under the Plan terminates in whole or in part, Shares subject to such terminated right may again be subjected to a right under the Plan. 8. LIMITATIONS ON GRANTS. 2 (a) No employee shall be granted a right hereunder if such employee, immediately after the right is granted, would own stock or rights to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company, or of any subsidiary, computed in accordance with Sections 423(b)(3) and 424(d) of the Code. (b) No employee shall be granted a right which permits his right to purchase shares under all employee stock purchase plans of the Company and its subsidiaries to accrue at a rate which exceeds twenty-five thousand dollars ($25,000) (or such other maximum as may be prescribed from time to time by the Code) of the fair market value of such Shares (determined at the time such right is granted) for each calendar year in which such right is outstanding at any time in accordance with the provisions of Section 423(b)(8) of the Code. (c) No right granted to any participating employee under a single Offering shall cover more shares than may be purchased at an exercise price equal to 10% of the base salary payable to the employee during the Offering not taking into consideration any changes in the employee's rate of compensation after the date the employee elects to participate in the Offering, or such other percentage as determined by the Board from time to time. This provision shall be construed to meet the requirements set forth in Section 423(b)(5) of the Code. 9. LIMIT ON PARTICIPATION. Participation in an Offering shall be limited to eligible employees who elect to participate in such Offering in the manner, and within the time limitation, established by the Board when it authorizes the offering. 10. CANCELLATION OF ELECTION TO PARTICIPATE. An employee who has elected to participate in an Offering may, unless the employee has waived this cancellation right at the time of such election in a manner established by the Board, cancel such election as to all (but not part) of the rights granted under such Offering by giving written notice of such cancellation to the Company before the expiration of the Offering Period. Any amounts paid by the employee for the Shares or withheld for the purchase of Shares from the employee's compensation through payroll deductions shall be paid to the employee, without interest, upon such cancellation. 11. TERMINATION OF EMPLOYMENT. Upon termination of employment for any reason, including the death of the employee, before the date on which any rights granted under the Plan are exercisable, all such rights shall immediately terminate and amounts paid by the employee for the Shares or withheld for the purchase of Shares from the employee's compensation through payroll deductions shall be paid to the employee or to the employee's estate, without interest. 12. EMPLOYEE'S RIGHTS AS STOCKHOLDER. No participating employee shall have any rights as a stockholder in the Shares covered by a right granted hereunder until such right 3 has been exercised, full payment has been made for the corresponding Shares and a certificate for the Shares is actually issued. 13. RIGHTS NOT TRANSFERABLE. Rights under the Plan are not assignable or transferable by a participating employee and are exercisable only by the employee. 14. LIMITS ON SALE OF STOCK PURCHASED UNDER THE PLAN. The Plan is intended to provide shares of Common Stock for investment and not for resale. The Company does not, however, intend to restrict or influence any employee in the conduct of his or her own affairs. An employee may, therefore, sell stock purchased under the Plan at any time the employee chooses, subject to compliance with any applicable federal or state securities laws; provided, however, that because of certain federal tax requirements, each employee agrees by entering the Plan, promptly to give the Company notice of any such stock disposed of within two years after the date of grant or within one year of the date of exercise of the applicable right, such notice to set forth the number of such shares disposed of. THE EMPLOYEE ASSUMES THE RISK OF ANY MARKET FLUCTUATIONS IN THE PRICE OF THE STOCK. 15. AMENDMENTS TO OR DISCONTINUANCE OF THE PLAN. The Board may at any time terminate or amend the Plan without notice and without further action on the part of stockholders of the Company, provided: (a) that no such termination or amendment shall adversely affect the then existing rights of any participating employee; and (b) that any such amendment which: (i) increases the number of Shares subject to the Plan (subject to the provisions of Section 7); (ii) changes the class of persons eligible to participate under the Plan; or (iii) materially increases the benefits accruing to participants under the Plan shall be subject to approval of the stockholders of the Company. 16. EFFECTIVE DATE AND APPROVALS. The Plan was adopted by the Board on May 13, 1996 to become effective as of said date. The Company's obligation to offer, sell and deliver its Shares under the Plan is subject to the approval of its stockholders not later than May 13, 1997 and of any governmental authority required in connection with the authorized issuance or sale of such Shares and is further subject to the Company receiving the opinion of its counsel that all applicable securities laws have been complied with. 17. TERM OF PLAN. No rights shall be granted under the Plan after May 13, 2006. 4 18. ADMINISTRATION OF THE PLAN. The Board or any committee or persons to whom it delegates its authority (the "Administrator") shall administer, interpret and apply all provisions of the Plan. The Administrator may waive such provisions of the Plan as it deems necessary to meet special circumstances not anticipated or covered expressly by the Plan. Nothing contained in this Section shall be deemed to authorize the Administrator to alter or administer the provisions of the Plan in a manner inconsistent with the provisions of Section 423 of the Code. No member of the Administrator shall be liable for any action or determination made in good faith with respect to the Plan or any right granted under it. Date approved by the Board of Directors of the Company: May 13, 1996 Date approved by the Stockholders of the Company: [__________], 1996 ds1-256712.1 5 EX-10.4 9 MATERIAL CONTRACTS PEGASYSTEMS INC. 101 Main Street Cambridge, MA 02142 December 16, 1993 Fleet Bank of Massachusetts, N.A. 75 State Street Boston, MA 02109 Gentlemen: This letter agreement will set forth certain understandings between Pegasystems Inc., a Massachusetts corporation (the "Borrower") and Fleet Bank of Massachusetts, N.A. (the "Bank") with respect to Revolving Loans and Term Loans (each as hereinafter defined) which may be made by the Bank to the Borrower and with respect to letters of credit which may hereafter be issued by the Bank for the account of the Borrower. In consideration of the mutual promises contained herein and in the other documents referred to below, and for other good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, the Borrower and the Bank agree as follows: I. AMOUNTS AND TERMS ----------------- 1.1. Reference to Documents. Reference is made to (i) that certain $2,500,000 principal amount promissory note (the "Revolving Note") of even date herewith made by the Borrower and payable to the order of the Bank, (ii) certain term notes (the "Term Notes") in an aggregate principal amount up to $1,000,000 which are to be made by the Borrower and payable to the order of the Bank, and (iii) that certain Security Agreement of even date herewith from the Borrower to the Bank (the "Security Agreement"). 1.2. The Borrowing; Revolving Note. Subject to the terms and conditions hereinafter set forth, the Bank will make loans ("Revolving Loans") to the Borrower, in such amounts as the Borrower may request, at the Principal Office of the Bank on any Business Day prior to the first to occur of (i) the Expiration Date, or (ii) the earlier termination of the within-described revolving financing arrangements pursuant to ss.5.2 or ss.6.7; provided, however, that (1) the aggregate principal amount of Revolving Loans outstanding shall at no time exceed the Maximum Revolving Amount (hereinafter defined) and (2) the Aggregate Bank Liabilities (hereinafter defined) shall at no time exceed the Borrowing Base (hereinafter defined). Within such amount, and subject to the terms and conditions hereof, the Borrower may obtain Revolving Loans, repay Revolving Loans and obtain Revolving Loans again on one or more occasions. The Revolving Loans shall be evidenced by the Revolving Note and interest thereon shall be payable at the times and at the rate provided in the Revolving Note. Overdue principal of the Revolving Loans and, to the extent permitted by law, overdue interest shall bear interest at a fluctuating rate per annum which at all times shall be equal to the sum of (i) two (2%) percent plus (ii) the per annum rate otherwise payable under the Revolving Note (but in no event in excess of the maximum rate from time to time permitted by then applicable law), compounded monthly and payable on demand. The Borrower hereby irrevocably authorizes the Bank to make or cause to be made, on a schedule attached to the Revolving Note or on the books of the Bank, at or following the time of making each Revolving Loan and of receiving any payment of principal, an appropriate notation reflecting such transaction and the then aggregate unpaid principal balance of the Revolving Loans. The amount so noted shall constitute prima facie evidence as to the amount owed by the Borrower with respect to principal of the Revolving Loans. Failure of the Bank to make any such notation shall not, however, affect any obligation of the Borrower or any right of the Bank hereunder or under the Revolving Note. 1.3. Repayment; Renewal of Revolving Loan Facility. The Borrower shall repay in full all Revolving Loans and all interest thereon upon the first to occur of: (i) the Expiration Date, or (ii) an acceleration under ss.5.2(a) following an Event of Default. The Borrower may repay, at any time, without penalty or premium, the whole or any portion of any Revolving Loan. In addition, if at any time the Borrowing Base is in an amount which is less than the then outstanding Aggregate Bank Liabilities will not exceed the Borrowing Base. The Bank may, at its sole discretion, renew the revolving financing arrangements described in this letter agreement by extending the Expiration Date in a writing signed by the Bank and accepted by the Borrower. Neither the inclusion in this letter agreement or elsewhere of covenants relating to periods of time after the Expiration Date, nor any other provision hereof, nor any action (except a written extension pursuant to the immediately preceding sentence), non-action or course of dealing on the part of the Bank will be deemed an extension of, or agreement on the part of the Bank to extend, the Expiration Date. 1.4. Term Loans; Term Notes. In addition to the foregoing, the Bank may make one or more loans (the "Term Loans") to the Borrower in an aggregate principal amount up to $1,000,000. A Term Loan shall be made, no more than once per calendar quarter (except that a Term Loan may be made more frequently in order to finance not less than $100,000 in Qualifying Equipment acquired by the Borrower within the 90 days preceding the request for such Term Loan), in such amount as may be requested by the Borrower; 2 provided that (i) no Term Loan will be made after June 30, 1994; (ii) the aggregate original principal amounts of all Term Loans will not exceed $1,000,000; and (iii) no Term Loan will be in an amount more than 80% of the total of (x) invoiced actual costs of the tangible property constituting the items of Qualifying Equipment with respect to which such Term Loan is made (excluding taxes, shipping, installation charges and other "soft costs") plus (y) the actual costs of software relating to such items of Qualifying Equipment, provided that such software costs will not exceed 35% of the total amount of each such Term Loan. Notwithstanding the requirement of clause (iii) of the immediately preceding sentence, the Term Loan or Term Loans made as at the date hereof may include the amount (not in excess of $117,500.15) necessary to repay loans heretofore made by Shawmut Bank, N.A. to the Borrower, which loans were to become due in December 1993, September 1994 and December 1995. Prior to the making of each Term Loan, and as a precondition thereto, the Borrower will provide the Bank with: (i) invoices supporting the costs of the relevant Qualifying Equipment; (ii) such evidence as the Bank may require showing that the Qualifying Equipment has been installed at the Premises, has become fully operational, has been paid for by the Borrower and is owned by the Borrower free of all liens and interests of any other Person (other than the security interest of the Bank pursuant to the Security Agreement); (iii) evidence satisfactory to the Bank that the Qualifying Equipment is fully insured against casualty loss, with insurance naming the Bank as secured party and first loss payee and (iv) a duly executed Term Note in the amount of the relevant Term Loan. Each Term Loan will be evidenced by a Term Note, substantially in the form of item 1.4 of the attached Disclosure Schedule; except that the Term Note representing that Term Loan (in the principal amount of $90,000) which is to be made for the purpose of refunding the loan by Shawmut Bank, N.A. due December 1995 will be amortized in 24 principal installments of $3,750 each. Interest on each Term Loan shall be payable at the times and at the rate provided for in the Term Note evidencing same. Overdue principal of any Term Loan and, to the extent permitted by law, overdue interest shall bear interest at a fluctuating rate per annum which at all times shall be equal to the sum of (i) two (2%) percent plus (ii) the per annum rate otherwise payable under the related Term Note (but in no event in excess of the maximum rate from time to time permitted by then applicable law), compounded monthly and payable on demand. The Borrower hereby irrevocably authorizes the Bank to make or cause to be made, on a schedule attached to the relevant Term Note or on the books of the Bank, at or following the time of making each Term Loan and of receiving any payment of principal, an appropriate notation reflecting such transaction and the then aggregate unpaid principal balance of such Term Loan. The amount so noted shall constitute prima facie evidence as to the amount owed by the Borrower with respect to principal of such Term Loan. Failure of the Bank to make any such notation shall not, however, 3 affect any obligation of the Borrower or any right of the Bank hereunder or under any Term Note. 1.5. Principal Repayment of Term Loans. The Borrower shall repay principal of each Term Loan in 36 equal consecutive monthly installments, commencing on the first day of the month next following the month in which such Term Loan is made and continuing on the first day of each month thereafter. Each such monthly installment of principal shall be in an amount equal to 1/36th of the outstanding principal balance of such Term Loan. In any event, the then outstanding principal balance of each Term Loan and all interest then accrued but unpaid thereon shall be due and payable in full on the first day of the 36th month next following the month in which such Term Loan is made. (Notwithstanding the foregoing, the Term Loan made as at the date hereof in order to refund the aforesaid loan from Shawmut Bank, N.A. due December 1995 will be amortized in 24 equal monthly installments commencing January 15, 1994 and ending December 15, 1995.) The Borrower may prepay, at any time or from time to time, without premium or penalty, the whole or any portion of any Term Loan; provided that each such principal prepayment shall be accompanied by payment of all interest under the related Term Note accrued but unpaid to the date of payment. Any partial prepayment of principal of a Term Loan will be applied to installments of principal of such Term Loan thereafter coming due in inverse order of normal maturity. 1.6. Advances and Payments. The proceeds of all Loans shall be credited by the Bank to a general deposit account maintained by the Borrower with the Bank. The proceeds of each Revolving Loan will be used by the Borrower solely for working capital purposes. The proceeds of each Term Loan will be used by the Borrower solely to pay or reimburse acquisition costs of Qualifying Equipment. The Bank may charge any general deposit account of the Borrower at the Bank with the amount of all payments of interest, principal and other sums when same are due, from time to time, under this letter agreement and/or any Note and/or with respect to any letter of credit; and will thereafter notify the Borrower of the amount so charged. The failure of the Bank so to charge any account or to give any such notice shall not affect the obligation of the Borrower to pay interest, principal or other sums ad provided herein or in any Note or with respect to any letter of credit. Whenever any payment to be made to the Bank hereunder or under any Note or with respect to any letter of credit shall be stated to be due on a day which is not a Business Day, such payment may be made on the next succeeding Business Day, and interest payable on each such date shall include the amount thereof which shall accrue during the period of such extension of 4 time. All payments by the Borrower hereunder and/or in respect of any Note and/or with respect to any letter of credit shall be made net of any impositions or taxes and without deduction, set-off or counterclaim, notwithstanding any claim which the Borrower may now or at any time hereafter have against the Bank. All payments of interest, principal and any other sum payable hereunder and/or under any Note and/or with respect to any letter of credit shall be made to the Bank at its Principal Office, in immediately available funds. All payments received by the Bank after 2:00 p.m. on any day shall be deemed received as of the next succeeding Business Day. All monies received by the Bank shall be applied as specified by the Borrower at the time of payment if no Event of Default has occurred and is then continuing. If no such specification is made or if an Event of Default has occurred and is then continuing, all monies received hereunder will be applied first to fees, charges, costs and expenses payable to the Bank under this letter agreement, any Note and/or any of the other Loan Documents and/or with respect to any letter of credit, next to interest then accrued on account of any Loans or letter of credit reimbursement obligations and only thereafter to principal of the Loans and letter of credit reimbursement obligations (being applied first against the letter of credit reimbursement obligations, next against the Revolving Loans and thereafter against installments of the Term Loans in inverse order of normal maturity). All interest and fees payable hereunder and/or under any Note shall be calculated on the basis of a 360-day year for the actual number of days elapsed. 1.7. Letters of Credit. The Bank may, from time to time, in its sole discretion issue one or more letters of credit for the account of the Borrower; provided that at the time of such issuance and after given effect thereto the Aggregate Bank Liabilities will in no event exceed the lesser of (i) $2,500,000 or (ii) the then effective Borrowing Base. Any such letter of credit will be issued for such fee and upon such terms and conditions as may be agreed to by the Bank and the Borrower at the time of issuance. The Borrower hereby authorizes the Bank, without further request from the Borrower, to cause the Borrower's liability to the Bank for reimbursement of funds drawn under any such letter of credit to be repaid from the proceeds of a Revolving Loan to be made hereunder. The Borrower hereby irrevocably requests that such Revolving Loans be made. 1.8. Conditions to Advance. Prior to the making of the initial Loan hereunder or the issuance of any letter of credit hereunder, the Borrower shall deliver to the Bank duly executed copies of this letter agreement, the Security Agreement, the Revolving Note, the initial Term Note or Term Notes (if such initial Loan is to be a Term Loan) and the documents and other items listed on the Closing Agenda delivered herewith by the Bank to the Borrower, all of which, as well as all legal matters 5 incident to the transactions contemplated hereby, shall be satisfactory in form and substance to the Bank and its counsel. Without limiting the foregoing, any Loan or letter of credit issuance (including the initial Loan or letter of credit issuance) is subject to the further conditions precedent that on the date on which such Loan is made or such letter of credit is issued (and after giving effect thereto): (a) All statements, representations and warranties of the Borrower made in this letter agreement and/or the Security Agreement shall continue to be correct in all material respects as of the date of such Loan or issuance of such letter of credit, as the case may be. (b) All covenants and agreements of the Borrower contained herein and/or in any of the other Loan Documents shall have been complied with in all material respects on and as of the date of such Loan or issuance of such letter of credit, as the case may be. (c) No event which constitutes, or which with notice or lapse of time or both would constitute, an Event of Default shall have occurred and be continuing. (d) No material adverse change shall have occurred in the financial condition of the Borrower from that disclosed in the financial statements then most recently furnished to the Bank. Each request by the Borrower for any Loan or for the issuance of a letter of credit, and each acceptance by the Borrower of the proceeds of any Loan or delivery of a letter of credit, will be deemed a representation and warranty by the Borrower that at the date of such Loan or letter of credit issuance, as the case may be, and after giving effect thereto all of the conditions set forth in the foregoing clauses (a)-(d) of this ss.1.8 will be satisfied. Each request for a Revolving Loan or letter of credit issuance will be accompanied by a borrowing base certificate on a form satisfactory to the Bank, executed by the chief financial officer of the Borrower, unless such a certificate shall have been previously furnished setting forth the Borrowing Base as at a date not more than 15 days prior to the date of the requested borrowing. II. REPRESENTATIONS AND WARRANTIES ------------------------------ 2.1. Representations and Warranties. In order to induce the Bank to enter into this letter agreement and to make Loans hereunder and/or issue letters of credit hereunder, the Borrower warrants and represents to the Bank as follows: 6 (a) The Borrower is a corporation duly organized, validly existing and in good standing under the laws of The Commonwealth of Massachusetts. The Borrower has full corporate power to own its property and conduct its business as now conducted and as contemplated to be conducted, to grant the security interests contemplated by the Security Agreement and to enter into and perform this letter agreement and the other Loan Documents. The Borrower is duly qualified to do business and in good standing in each jurisdiction in which the Borrower maintains any facility, sales office or warehouse and in each other jurisdiction where the failure so to qualify could (singly or in the aggregate with all other such failures) have a material adverse effect on the financial condition, business or prospects of the Borrower, all such jurisdictions being listed on item 2.1(a) of the attached Disclosure Schedule. At the date hereof, the Borrower has no Subsidiaries. The Borrower is in the process of forming an English Subsidiary, which will be wholly-owned by the Borrower. The Borrower is not a member of any partnership or joint venture. (b) At the date of this letter agreement, all of the outstanding capital stock of the Borrower is owned, of record and beneficially, as set forth on item 2.1(b) of the attached Disclosure Schedule. (c) The execution, delivery and performance by the Borrower of this letter agreement and each of the other Loan Documents have been duly authorized by all necessary corporate and other action and do not and will not: (i) violate any provision of, or require any filings, registration, consent or approval under, any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to the Borrower; (ii) violate any provision of the charter or By-laws of the Borrower, or result in a breach of or constitute a default or require any waiver or consent under any material indenture or loan or credit agreement or any other agreement, lease or instrument to which the Borrower is a party or by which the Borrower or any of its properties may be bound or affected or require any other consent of any Person; or (iii) result in, or require, the creation or imposition of any lien, security interest or other encumbrance (other than in favor of the Bank), upon or with respect to any of the properties now owned or hereafter acquired by the Borrower. (d) This letter agreement and each of the other Loan Documents has been duly executed and delivered by the Borrower 7 and is a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with their respective terms. (e) Except as described in item 2.1(e) of the attached Disclosure Schedule, there are no actions, suits, proceedings or investigations pending or, to the knowledge of the Borrower, threatened by or against the Borrower before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which could prevent the consummation of the transactions contemplated hereby or call into question the validity of this letter agreement or any of the other Loan Documents or any other instrument provided for or contemplated by this letter agreement or any of the other Loan Documents or any action taken or to be taken in connection with the transactions contemplated hereby or thereby or which in any single case or in the aggregate might result in any material adverse change in the business, prospects, condition, affairs or operations of the Borrower. (f) The Borrower is not in violation of any term of its charter or By-laws as now in effect. The Borrower is not in material violation of any term of any mortgage, indenture or judgment, decree or order, or any other instrument, contract or agreement to which it is a party or by which any of its property is bound. (g) The Borrower has filed all federal, state and local tax returns, reports and estimates required to be filed by the Borrower. All such filed returns, reports and estimates are proper and accurate and the Borrower has paid all taxes, assessments, impositions, fees and other governmental charges required to be paid in respect of the periods covered by such returns, reports or estimates. No deficiencies for any tax, assessment or governmental charge have been asserted or assessed, and the Borrower knows of no material tax liability or basis therefor. (h) The Borrower is in compliance with all requirements of law, federal, state and local, and all requirements of all governmental bodies or agencies having jurisdiction over it, the conduct of its business, the use of its properties and assets, and all premises occupied by it, failure to comply with which could (singly or in the aggregate with all other such failures) have a material adverse effect upon the assets, business, financial condition or prospects of the Borrower. Without limiting the foregoing, the Borrower has all the franchises, licenses, leases, permits, certificates and authorizations needed for the conduct of its business and the use of its properties and all premises occupied by it, as now conducted, owned and used and as proposed to be conducted, owned and used. 8 (i) The audited financial statements of the Borrower as at December 31, 1992 and the management-generated financial statements of the Borrower as at September 30, 1993, each heretofore delivered to the Bank, are (and all financial statements of the Borrower hereafter delivered pursuant to this letter agreement will be) complete and accurate and fairly present the financial condition of the Borrower as at the date thereof and for the periods covered thereby, except that interim management-generated statements do not and will not have footnotes. The Borrower has no liability, contingent or otherwise, not disclosed in the aforesaid December 31, 1992 financial statements or in any notes thereto that could materially affect the financial condition of the Borrower. Since December 31, 1992, there has been no material adverse development in the business or condition of the Borrower and the Borrower has not entered into any transaction other than in the ordinary course. (j) The principal place of business and chief executive offices of the Borrower are located at 101 Main Street, Cambridge, MA 02142 (the "Premises"). Except as described in item 2.1(j) of the attached Disclosure Schedule, no assets of the Borrower are located at any other address. Said item 2.1(j) of the attached Disclosure Schedule sets forth the names and addresses of all record owners of the Premises. (k) To the best of the Borrower's knowledge, the Borrower owns or has a valid right to use the patents, licenses, copyrights, trademarks, trademark applications, trademark rights and trade names or trade name rights or franchises now being used or necessary to conduct its business. To the best of the Borrower's knowledge, the conduct of the Borrower's business as now operated does not conflict with valid patents, licenses, copyrights, trademarks, trademark rights and trade names and trade name rights or franchises of others in any manner that could materially adversely affect in any manner the business or assets or condition, financial or otherwise, of the Borrower. (l) None of the executive officers or key employees of the Borrower is subject to any agreement in favor of anyone other than the Borrower which limits or restricts that person's right to engage in the type of business activity conducted or proposed to be conducted by the Borrower or which grants to anyone other than the Borrower any rights in any inventions or other ideas susceptible to legal protection developed or conceived by any such officer or key employee. III. AFFIRMATIVE COVENANTS AND REPORTING REQUIREMENTS ------------------------------------------------ Without limitation of any covenants and agreements contained in the Security Agreement or elsewhere, the Borrower agrees that so long as the financing arrangements contemplated hereby are in 9 effect or any Revolving Loan or any Term Loan or any of the other obligations shall be outstanding or any letter of credit issued hereunder shall be outstanding; 3.1. Legal Existence; Qualification; Compliance. The Borrower will maintain (and will cause each Subsidiary of the Borrower to maintain) its corporate existence and good standing in the jurisdiction of its incorporation. The Borrower will qualify to do business and remain qualified and in good standing (and will cause each Subsidiary of the Borrower to qualify and remain qualified and in good standing) in each jurisdiction where it maintains any facility, sales office or warehouse and in each other jurisdiction in which the failure so to qualify could (singly or in the aggregate with all other such failures) have a material adverse effect on the financial condition, business or prospects of the Borrower or any such Subsidiary. The Borrower will comply (and will cause each Subsidiary of the Borrower to comply) with its charter documents and by-laws and, in all material respects, with all contractual requirements by which it or any of its properties may be bound. The Borrower will comply with (and will cause each Subsidiary of the Borrower to comply with) all applicable laws, rules and regulations (including, without limitation, ERISA and those relating to environmental protection) other than (i) laws, rules or regulations the validity or applicability of which the Borrower or such Subsidiary shall be contesting in good faith by proceedings which serve as a matter of law to stay the enforcement thereof and (ii) those laws, rules and regulations the failure to comply with any of which could not (singly or in the aggregate) reasonably be expected to materially adversely affect the financial condition, business or prospects of the Borrower or any such Subsidiary. 3.2. Maintenance of Property; Insurance. The Borrower will maintain and preserve (and cause each Subsidiary of the Borrower to maintain and preserve) all of its properties in good working order and condition, ordinary year and tear excepted, making all necessary repairs thereto and replacements thereof. The Borrower will maintain all such insurance as may be required under the Security Agreement and will also maintain, with financially sound and reputable insurers, insurance with respect to its property and business against such liabilities, casualties and contingencies and of such types and in such amountsas shall be satisfactory to the Bank from time to time and in any event all such insurance as may from time to time be customary for companies conducting a business similar to that of the Borrower in similar locales. 3.3. Payment of Taxes and Charges. The Borrower will pay and discharge (and will cause each Subsidiary of the Borrower to pay and discharge) all taxes, assessments and governmental charges or levies imposed upon it or upon its income or property, including, without limitation, taxes, assessments, charges or 10 levies relating to real and personal property, the Collateral, franchises, income, unemployment, old age benefits, withholding, or sales or use, prior to the date on which penalties would attach thereto, and all lawful claims (whether for any of the foregoing or otherwise) which, if unpaid, might give rise to a lien upon any property of the Borrower or any such Subsidiary, except any of the foregoing which is being contested in good faith and by appropriate proceedings which serve as a matter of law to stay the enforcement thereof and for which the Borrower has established and is maintaining adequate reserves. The Borrower will pay, and will cause each of its Subsidiaries to pay, in a timely manner, all lease obligations, all trade debt, purchase money obligations, equipment lease obligations and all of its other Indebtedness. The Borrower will perform and fulfill all covenants and agreements under any leases of real estate, agreements relating to purchase money debt, equipment leases and other material contracts. The Borrower will maintain in full force and effect, and comply with the terms and conditions of, all permits, permissions and licenses necessary or desirable for its business. 3.4. Accounts. The Borrower will maintain its principal depository and operating accounts with the Bank. 3.5. Conduct of Business. The Borrower will conduct, in the ordinary course, the business in which it is presently engaged. The Borrower will not, without the prior written consent of the Bank, directly or indirectly enter into any other lines of business, businesses or ventures. 3.6. Reporting Requirements. The Borrower will furnish to the Bank: (i) Within 120 days after the end of each fiscal year of the Borrower, a copy of the annual audit report for such fiscal year for the Borrower, including therein consolidated and consolidating balance sheets of the Borrower and Subsidiaries as at the end of such fiscal year and related consolidated and consolidating statements of income, stockholders' equity and cash flow for the fiscal year then ended. The annual consolidated financial statements shall be certified by Ernst & Young or by other independent public accountants selected by the Borrower and reasonably acceptable to the Bank, such certification to be in such form as is generally recognized as "unqualified". (ii) Within 45 days after the end of each fiscal quarter of the Borrower, consolidated and consolidating balance sheets of the Borrower and its Subsidiaries and related consolidated and consolidating statements of income and stockholders, equity and cash flow, unaudited but complete and accurate and prepared in accordance with 11 generally accepted accounting principles fairly presenting the financial condition of the Borrower as at the date thereof and for the periods covered thereby (except that such quarterly statements need not contain footnotes) and certified as accurate (subject to normal year-end audit adjustments, which shall not be material) by the chief financial officer of the Borrower, such balance sheets to be as at the end of such fiscal quarter and such statements of income and stockholders, equity and cash flow ta be for such fiscal quarter and for the year to date, in each case together with a comparison to budget. (iii) At the time of delivery of each annual or quarterly statement of the Borrower, a certificate executed by the chief financial officer of the Borrower stating that he or she has reviewed this letter agreement and the other Loan Documents and has no knowledge of any default by the Borrower in the performance or observance of any of the provisions of this letter agreement or of any of the other Loan Documents or, if he or she has such knowledge, specifying each such default and the nature thereof. Each such certificate shall also set forth the calculations necessary to evidence compliance with ss.ss.3.7-3.10. (iv) Monthly, within 15 days after the end of each month, (A) an aging report in form satisfactory to the Bank covering all Receivables of the Borrower outstanding as at the end of such month and setting forth the schedule of all installment payments scheduled to be paid within the next 12 months under long-term contracts, and (B) a certificate of the chief financial officer of the Borrower setting forth the Borrowing Base as at the end of such month, all in form reasonably satisfactory to the Bank. Notwithstanding the foregoing, the Borrower may omit to furnish the aging report and Borrowing Base certificate otherwise due with respect to any month-end if at such month-end there are outstanding no Revolving Loans nor any letters of credit issued hereunder; provided that prior to any subsequent borrowing of a Revolving Loan or issuance of a letter of credit hereunder the Borrower will furnish such report and Borrowing Base certificate. (v) Promptly after receipt, a copy of all audits or reports submitted to the Borrower by independent public accountants in connection with any annual, special or interim audits of the books of the Borrower and any letter of comments directed by such accountants to the management of the Borrower. (vi) As soon as possible and in any event within five days after the Borrower knows or reasonably should know of the occurrence of any Event of Default or any event which, 12 with the giving of notice or passage of time or both, would constitute an Event of Default, the statement of the Borrower setting forth details of such Event of Default or event and the action which the Borrower proposes to take with respect thereto. (vii) Promptly after the commencement thereof, notice of all actions, suits and proceedings before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, to which the Borrower or any Subsidiary of the Borrower is a party. (viii) Promptly after the Borrower has knowledge thereof, written notice of any development or circumstance which may have a material adverse effect on the Borrower or its business, properties, assets, Subsidiaries or condition, financial or otherwise. (ix) Promptly upon request, such other information respecting the financial condition, operations, Receivables, inventory, machinery or equipment of the Borrower or any Subsidiary as the Bank may from time to time reasonably request. 3.7. Debt to Worth. The Borrower will maintain as at the end of each fiscal quarter of the Borrower on a consolidated basis a Leverage Ratio of not more than 1.25 to 1. As used herein, "Leverage Ratio" means the ratio of (x) total Indebtedness of the Borrower and Subsidiaries to (y) Tangible Net Worth of the Borrower. 3.8. Net Worth. The Borrower will maintain as at the end of each fiscal quarter of the Borrower a consolidated Tangible Net Worth which shall not be less than the then-effective TNW Requirement. As used herein, the "TNW Requirement" will be deemed to have been $5,500,000 as at December 31, 1992; and as at the last day of each fiscal quarter thereafter (beginning with March 31, 1993) the TNW Requirement will be deemed to become an amount equal to the sum of: (i) the TNW Requirement in effect on the last day of the immediately preceding fiscal quarter, plus (ii) 90% of the net proceeds of any equity securities sold by the Borrower during the fiscal quarter then ended, plus (iii) 90% of the consolidated Adjusted Net Income of the Borrower and Subsidiaries during said fiscal quarter then ended (but without giving effect to any Adjusted Net Income which is less than zero for any fiscal quarter). 3.9. Quick Ratio. The Borrower will maintain as at the end of each fiscal quarter of the Borrower a ratio of Net Quick Assets to Current Liabilities, which ratio shall be not less than 1.5 to 1. 13 3.10. Profitability. The BorroWer will not incur a quarterly Net Loss in excess of $250,000 for any fiscal quarter (commencing with the results for the fiscal quarter ended September 30, 1993). The Borrower will not incur a quarterly Net Loss in any two consecutive fiscal quarters. The Borrower will achieve Net Income of at least $750,000 for each fiscal year, beginning with its fiscal year ending December 31, 1993. 3.11. Books and Records. The Borrower will maintain (and cause each of its Subsidiaries to maintain) complete and accurate books, records and accounts which will at all times accurately and fairly reflect all of its transactions in accordance with generally accepted accounting principles consistently applied. The Borrower will, at any reasonable time and from time to time upon reasonable notice and during normal business hours (and at any time and without any necessity for notice following the occurrence and during the continuance of an Event of Default), permit the Bank, and any agents or representatives thereof, to examine and make copies of and take abstracts from the records and books of account of, and visit the properties of the Borrower and any of its Subsidiaries, and to discuss its affairs, finances and accounts with its managers, officers or directors and independent accountants, all of whom are hereby authorized and directed to cooperate with the Bank in carrying out the intent of this ss.3.11. Except as otherwise provided below, the Bank will not at any time use (for any purpose other than in connection with monitoring the within-described loan facilities and/or enforcing its rights hereunder and/or under the Security Agreement) any information of any kind to which the Bank is given access or which is provided to the Bank by the Borrower pursuant to this ss.3.11 or pursuant to the Security Agreement (such information being hereinafter referred to, subject to the last sentence of this ss.3.11, as the "Confidential Information"). The Bank agrees that it will use reasonable efforts to ensure that Confidential Information will not be disclosed to any other Person without the Borrower's consent; provided, however, that nothing contained herein will be deemed to preclude any such disclosure: (1) to employees, officers, directors and/or agents of the Bank in connection with the approval of Loans, letters of credit or other facilities or in connection with the administration of this letter agreement, any such Loans, letters of credit and/or other facilities; (2) to internal or independent auditors; (3) to any examiners or other officials, employees or agents of any federal or state governmental regulatory agency, board, commission, public corporation or similar entity; (4) if ordered by any court or governmental agency having or claiming jurisdiction; (5) to any actual or proposed assignee of or participant in any Loan; and/or (6) in connection with any suit, action or other proceeding to collect any Loans or enforce any other right under this letter agreement, the Security Agreement and/or any of the 14 Notes. Notwithstanding the foregoing, it is agreed that "Confidential Information" expressly excludes: (1) any information filed with a public agency or otherwise within the public domain, (2) any information supplied to the Bank by a third party under circumstances in which the recipient of such information does not know of (and should not reasonably have known of) any confidential relationship between such third party and the Borrower which would restrict dissemination of such information, and (3) any information supplied by or on behalf of the Borrower which is not labelled "confidential" or as to which the Borrower has not otherwise indicated that disclosure is prohibited. IV. NEGATIVE COVENANTS. ------------------- Without limitation of any covenants and agreements contained in the Security Agreement or elsewhere, the Borrower agrees that so long as the financing arrangements contemplated hereby are in effect or any Revolving Loan or any Term Loan or any of the other Obligations shall be outstanding or any letter of credit issued hereunder shall be outstanding: 4.1. Indebtedness. The Borrower will not create, incur, assume or suffer to exist any Indebtedness (nor allow any of its Subsidiaries to create, incur, assume or suffer to exist any Indebtedness), except for: (i) Indebtedness owed to the Bank, including, without limitation, the Indebtedness represented by the Notes and any Indebtedness in respect of letters of credit issued by the Bank; (ii) Indebtedness of the Borrower or any Subsidiary for taxes, assessments and governmental charges or levies not yet due and payable; (iii) unsecured current liabilities of the Borrower or any Subsidiary (other than for money borrowed or the deferred purchase price of property) incurred upon customary terms in the ordinary course of business; (iv) purchase money Indebtedness (including, without limitation, Indebtedness in respect of capitalized equipment leases) owed to equipment vendors and/or lessors for equipment purchased or leased by the Borrower for use in the Borrower's business, provided that the total of Indebtedness permitted under this clause (iv) plus presently-existing equipment financing permitted under clause (v) of this ss.4.1 will not exceed $1,000,000 in the aggregate outstanding at any one time; and 15 (v) other Indebtedness existing at the date hereof, but only to the extent set forth on item 4.1 of the attached Disclosure Schedule. Real estate leases will not be deemed included in "Indebtedness" for the purposes of this ss.4.1. 4.2. Liens. The Borrower will not create, incur, assume or suffer to exist (nor allow any of its Subsidiaries to create, incur, assume or suffer to exist) any mortgage, deed of trust, pledge, lien, security interest, or other charge or encumbrance (including the lien or retained security title of a conditional vendor) of any nature (collectively, "Liens") upon or with respect to any of its property or assets, now owned or hereafter acquired, except: (i) Liens for taxes, assessments or governmental charges or levies on property of the Borrower or any of its Subsidiaries if the same shall not at the time be delinquent or thereafter can be paid without interest or penalty; (ii) Liens imposed by law, such as carriers', warehousemen's and mechanics' liens and other similar Liens arising in the ordinary course of business for sums not yet due or which are being contested in good faith and by appropriate proceedings which serve as a matter of law to stay the enforcement thereof and as to which adequate reserves have been made; (iii) pledges or deposits under workmen's compensation laws, unemployment insurance, social security, retirement benefits or similar legislation; (iv) Liens in favor of the Bank; (v) Liens in favor of equipment vendors and/or lessors securing purchase money Indebtedness to the extent permitted by clause (iv) of ss.4.1; provided that no such Lien will extend to any property of the Borrower other than the specific items of equipment financed; or (vi) other Liens existing at the date hereof, but only to the extent and with the relative priorities set forth on item 4.2 of the attached Disclosure Schedule. The Bank agrees that it will execute and deliver such subordinations as may from time to time be reasonably necessary to permit the purchase money financing described in clause (v) above. 4.3. Guaranties. The Borrower will not, without the prior written consent of the Bank, assume, guarantee, endorse or 16 otherwise become directly or contingently liable (including, without limitation, liable by way of agreement, contingent or otherwise, to purchase, to provide funds for payment, to supply funds to or otherwise invest in any debtor or otherwise to assure any creditor against loss) in connection with any indebtedness of any other Person, except (i) guaranties by endorsement for deposit or collection in the ordinary course of business, (ii) currently existing guaranties described on item 4.3 of the attached Disclosure Schedule, and (iii) guaranties of Indebtedness of Subsidiaries (or of employees of Subsidiaries) in an aggregate amount not to exceed $100,000 outstanding at any one time. 4.4. Dividends. The Borrower will not, without the prior written consent of the Bank, make any distributions to its shareholders, pay any dividends (other than dividends payable solely in capital stock of the Borrower) or redeem, purchase or otherwise acquire, directly or indirectly any of its capital stock. 4.5. Loans and Advances. The Borrower will not make any loans or advances to any Person, including, without limitation, the Borrower's directors, officers and employees, except that the Borrower may make (A) advances to directors, officers or employees with respect to expenses incurred by them in the ordinary course of their duties and advances against salary, all of which will not exceed, in the aggregate, $250,000 outstanding at any one time, and (B) loans or advances to any Person for any purpose in an aggregate amount not to exceed $100,000 outstanding at any one time. 4.6. Investments. The Borrower will not, without the Bank's prior written consent (such consent not be unreasonably withheld), invest in, hold or purchase any stock or securities of any Person (nor will the Borrower permit any of its Subsidiaries to invest in, purchase or hold any such stock or securities) except (i) readily marketable direct obligations of, or obligations guarantied by, the United States of America or any agency thereof, (ii) other investment grade debt securities, (iii) mutual funds, the assets of which are primarily invested in items of the kind described in the foregoing clauses (i) and (ii) of this ss.4.6, (iv) time deposits with or certificates of deposit issued by the Bank and any other obligations of the Bank or the Bank's parent, (v) time deposits with or certificates of deposit issued by any United States commercial bank having more than $100,000,000 in capital, (vi) investments in any Subsidiaries created by the Borrower pursuant to ss.4.7 below; provided that in any event the Tangible Net Worth of the Borrower alone (exclusive of its investment in Subsidiaries and any debt owned by any Subsidiary to the Borrower) will not be less than 90% of the consolidated Tangible Net Worth of the Borrower and Subsidiaries, and (vii) any other investments approved by the Borrower's Board 17 of Directors, provided that the aggregate amount of all such other investments does not exceed $100,000. 4.7. Subsidiaries; Acquisitions. The Borrower will not, without the prior written consent of the Bank (such consent not to be unreasonably withheld), form or acquire any new Subsidiary. The Bank hereby consents to the formation by the Borrower of a Subsidiary under the laws of England. Except with respect to Subsidiaries formed pursuant to the first two sentences of this ss.4.7, the Borrower will not, without the prior written consent of the Bank, make any other acquisition of the stock of any other Person or of all or substantially all or the assets to any other Person. The Borrower will not become a partner in any partnership. 4.8. Merger. The Borrower will not, without the prior written consent of the Bank, merge or consolidate with any Person, or sell, lease, transfer or otherwise dispose of any material portion of its assets (whether in one or more transactions). 4.9. Affiliate Transactions. The Borrower will not, without the prior written consent of the Bank, enter into any transaction, including, without limitation, the purchase, sale or exchange of any property or the rendering of any service, with any affiliate of the Borrower, except in the ordinary course of and pursuant to the reasonable requirements of the Borrower's business and upon fair and reasonable terms no less favorable to the Borrower than would be obtained in a comparable arms'-length transaction with any Person not an affiliate; provided that nothing in this ss.4.9 shall be deemed to prohibit the payment of salary or other similar payments to any officer or director of the Borrower at a level consistent with the salary and other payments being paid at the date of this letter agreement and heretofore disclosed in writing to the Bank, nor to prevent the hiring of additional officers at a salary level consistent with industry practice, nor to prevent reasonable periodic increases in salary. For the purposes hereof, affiliate" means any Person which, directly or indirectly, controls or is controlled by or is under common control with the Borrower; any officer or director or former officer or director of the Borrower; any Person owning of record or beneficially, directly or indirectly, 5% or more of any class of capital stock of the Borrower or 5% or more of any class of capital stock or other equity interest having voting power (under ordinary circumstances) of any of the other Persons described above; and any member of the immediate family of any of the foregoing. "Control" means possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of any Person, whether through ownership of voting equity, by contract or otherwise. 18 4.10. Change of Address, etc. The Borrower will not change its name or legal structure, nor will the Borrower move its chief executive office or principal place of business from the address described in the first sentence of ss.2.1(j) above, nor will the Borrower keep any Collateral at any location other than the Premises without, in each instance, giving the Bank at least 30 days' prior written notice and providing all such financing statements, certificates and other documentation as the Bank may request in order to maintain the perfection and priority of the security interests granted or intended to be granted pursuant to the Security Agreement. The Borrower will not change its fiscal year or methods of financial reporting unless, in each instance, prior written notice of such change is given to the Bank and prior to such change the Borrower enters into amendments to this letter agreement in form and substance satisfactory to the Bank in order to preserve unimpaired the rights of the Bank and the obligations of the Borrower hereunder. 4.11. Hazardous Waste. Except as provided below, the Borrower will not dispose of or suffer or permit to exist any hazardous material or oil on any site or vessel owned, occupied or operated by the Borrower or any Subsidiary of the Borrower, nor shall the Borrower store (or permit any Subsidiary to store) on any site or vessel owned, occupied or operated by the Borrower or any such Subsidiary, or transport or arrange the transport of, any hazardous material or oil (the terms "hazardous material" "oil", "site" and "vessel", respectively, being used herein with the meanings given those terms in Mass. Gen. Laws, Ch. 21E or any comparable terms in any comparable statute in effect in any other relevant jurisdiction). The Borrower shall provide the Bank with written notice of (i) the intended storage or transport of any hazardous material or oil by the Borrower or any Subsidiary of the Borrower, (ii) any potential or known release or threat of release of any hazardous material or oil at or from any site or vessel owned, occupied or operated by the Borrower or any Subsidiary of the Borrower, and (iii) any incurrence of any expense or loss by any government or governmental authority in connection with the assessment, containment or removal of any hazardous material or oil for which expense or loss the Borrower or any Subsidiary of the Borrower may be liable. Notwithstanding the foregoing, the Borrower and its Subsidiaries may use, store and transport, and need not notify the Bank of the use, storage or transportation of, (x) oil in reasonable quantities, as fuel for heating of their respective facilities or for vehicles or machinery used in the ordinary course of their respective businesses and (y) hazardous materials that are solvents, cleaning agents or other materials used in the ordinary course of the respective business operations of the Borrower and its Subsidiaries, in reasonable quantities, as long as in any case the Borrower or the Subsidiary concerned (as the case may be) has obtained and maintains in effect any necessary governmental permits, licenses and approvals, complies with all requirements 19 of applicable federal, state and local law relating to such use, storage or transportation, follows the protective and safety procedures that a prudent businessperson conducting a business the same as or similar to that of the Borrower or such Subsidiary (as the case may be) would follow, and disposes of such materials (not consumed in the ordinary course) only through licensed providers of hazardous waste removal services. 4.12. No Margin Stock. No proceeds of any Loan shall be used directly or indirectly to purchase or carry any margin security. V. DEFAULT AND REMEDIES -------------------- 5.1. Events of Default. The occurrence of any one of the following events shall constitute an Event of Default hereunder: (a) The Borrower shall fail to make any payment of principal of or interest on the Revolving Note or any Term Note on or before the date when due; or the Borrower shall fail to pay when due any amount owed to the Bank with respect to any letter of credit now or hereafter issued by the Bank; or (b) Any representation or warranty of the Borrower contained herein shall at any time prove to have been incorrect in any material respect when made or any representation or warranty made by the Borrower in connection with the execution and delivery of this letter agreement or any other instrument, document, certificate or statement executed and delivered in connection with any Loan or letter of credit shall at any time prove to have been incorrect in any material respect when made; or (c) The Borrower shall default in the performance or observance of any agreement or obligation under any of ss.ss.3.6, 3.7, 3.8, 3.9 or 3.10 or Article IV; or (d) The Borrower shall default in the performance or observance of any agreement or obligation contained in ss.3.1 and/or ss.3.3 and such default shall continue unremedied for 15 days after the commencement thereof; or (e) The Borrower shall default in the performance of any other term, covenant or agreement Contained in this letter agreement and such default shall continue unremedied for 30 days after notice thereof shall have been given to the Borrower; or (f) Any default on the part of the Borrower or any Subsidiary of the Borrower shall exist, and shall remain unwaived or uncured beyond the expiration of any applicable notice and/or grace period, under any other contract, agreement or 20 understanding now existing or hereafter entered into with or for the benefit of the Bank (or any affiliate of the Bank); or (g) Any default shall exist and remain unwaived or uncured with respect to any Indebtedness of the Borrower or any Subsidiary of the Borrower in excess of $250,000 in aggregate principal amount or with respect to any instrument evidencing, guaranteeing, securing or otherwise relating to any such Indebtedness, or any such Indebtedness in excess of $250,000 in aggregate principal amount shall not have been paid when due, whether by acceleration or otherwise, or shall have been declared to be due and payable prior to its stated maturity, or any event or circumstance shall occur which permits, or with the lapse of time or giving of notice or both would permit, the acceleration of the maturity of any such Indebtedness by the holder or holders thereof; or (h) The Borrower shall be dissolved, or the Borrower or any Subsidiary of the Borrower shall become insolvent or bankrupt or shall cease paying its debts as they mature or shall make an assignment for the benefit of creditors, or a trustee, receiver or liquidator shall be appointed for the Borrower or any Subsidiary of the Borrower or for a substantial part of the property of the Borrower or any such Subsidiary, or bankruptcy, reorganization, arrangement, insolvency or similar proceedings shall be instituted by or against the Borrower or any such Subsidiary under the laws of any jurisdiction (except for an involuntary proceeding filed against the Borrower or any Subsidiary of the Borrower which is dismissed within sixty (60) days following the institution thereof); or (i) Any attachment, execution or similar process shall be issued or levied against any of the property of the Borrower or any Subsidiary and such attachment, execution or similar process shall not be paid, stayed, released, vacated or fully bonded within 10 days after its issue or levy; or (j) Any final uninsured judgment in excess of $250,000 shall be entered against the Borrower or any Subsidiary of the Borrower by any court of competent jurisdiction; or (k) The Borrower or any Subsidiary of the Borrower shall fail to meet its minimum funding requirements under ERISA with respect to any employee benefit plan (or other class of benefit which the PBGC has elected to insure) or any such plan shall be the subject of termination proceedings (whether voluntary or involuntary) and there shall result from such termination proceedings a liability of the Borrower or any Subsidiary of the Borrower to the PBGC which in the reasonable opinion of the Bank may have a material adverse effect upon the financial condition of the Borrower or any such Subsidiary; or 21 (1) The Security Agreement or any other Loan Document shall for any reason (other than due to payment in full of all amounts secured or evidenced thereby or due to discharge in writing by the Bank) not remain in full force and effect; or (m) The security interests and liens of the Bank in and on any of the Collateral covered or intended to be covered by the Security Agreement shall for any reason (other than written release by the Bank) not be fully perfected first priority liens and security interests; or (n) The sole stockholder of the Borrower at the date hereof shall for any reason not hold, of record and beneficially, at least 51% of each class of voting stock of the Borrower. 5.2. Rights and Remedies on Default. Upon the occurrence of any Event of Default, in addition to any other rights and remedies available to the Bank hereunder or otherwise, the Bank may exercise any one or more of the following rights and remedies (all of which shall be cumulative): (a) Declare the entire unpaid principal amounts of the Revolving Note and each Term Note then outstanding, all interest accrued and unpaid thereon and all other amounts payable under this letter agreement, and all other Indebtedness of the Borrower to the Bank, to be forthwith due and payable, whereupon the same shall become forthwith due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived by the Borrower. (b) Terminate the revolving financing arrangements and Term Loan facility provided for by this letter agreement. (c) Exercise all rights and remedies hereunder, under the Revolving Note, under each Term Note, under the Security Agreement and under each and any other agreement with the Bank; and exercise all other rights and remedies which the Bank may have under applicable law. 5.3. Set-off. in addition to any rights now or hereafter granted under applicable law and not by way of limitation of any such rights, upon the occurrence and during the continuance of any Event of Default, the Bank is hereby authorized at any time or from time to time, without presentment, demand, protest or other notice of any kind to the Borrower or to any other Person, all of which are hereby expressly waived, to set off and to appropriate and apply any and all deposits and any other Indebtedness at any time held or owing by the Bank or any affiliate thereof to or for the credit or the account of the Borrower against and on account of the obligations and liabilities of the Borrower to the Bank under this letter agreement or otherwise, irrespective of whether or not the Bank 22 shall have made any demand hereunder and although said obligations, liabilities or claims, or any of them, may then be contingent or unmatured and without regard for the availability or adequacy of other collateral. As further security for the Obligations, the Borrower also grants to the Bank a security interest with respect to all its deposits and all securities or other property in the possession of the Bank or any affiliate of the Bank from time to time, and, upon the occurrence and during the continuance of any Event of Default, the Bank may exercise all rights and remedies of a secured party under the Uniform Commercial Code. 5.4. Letters of Credit. Without limitation of any other right or remedy of the Bank, (i) if an Event of Default shall have occurred and the Bank shall have accelerated the Revolving Loans or (ii) if this letter agreement and/or the revolving financing arrangements described herein shall have expired or shall have been earlier terminated by either the Bank or the Borrower for any reason, the Borrower will forthwith deposit with the Bank in cash a sum equal to the total of all then undrawn amounts of all outstanding letters of credit issued by the Bank for the account of the Borrower. VI. MISCELLANEOUS ------------- 6.1. Costs and Expenses. The Borrower agrees to pay on demand all costs and expenses (including, without limitation, reasonable legal fees) of the Bank in connection with the preparation, execution and delivery of this letter agreement, the Security Agreement, the Revolving Note, any Term Note and all other instruments and documents to be delivered in connection with any Loan or letter of credit issued hereunder and any amendments or modifications of any of the foregoing, as well as the costs and expenses (including, without limitation, the reasonable fees and expenses of legal counsel) incurred by the Bank in connection with preserving, enforcing or exercising, upon default, any rights or remedies under this letter agreement, the Security Agreement, the Revolving Note, any Term Note and all other instruments and documents delivered or to be delivered hereunder or in connection herewith, all whether or not legal action is instituted. In addition, the Borrower shall be obligated to pay any and all stamp and other taxes payable or determined to be payable in connection with the execution and delivery of this letter agreement, the Security Agreement, the Revolving Note, any Term Note and all other instruments and documents to be delivered in connection with any obligation. Any fees, expenses or other charges which the Bank is entitled to receive from the Borrower under this Section shall bear interest from that date which is 30 days after the date of any demand therefor until the date when paid at a rate per annum equal to the sum of (i) two (2%) percent plus (ii) the per annum rate 23 otherwise payable under the Revolving Note (but in no event in excess of the maximum rate permitted by then applicable law). 6.2. Capital Adequacy. If the Bank shall have determined that the adoption or phase-in after the date hereof of any applicable law, rule or regulation regarding capital requirements for banks or bank holding companies, or any change therein after the date hereof, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Bank with any request or directive of such entity regarding capital adequacy (whether or not having the force of law) has or would have the effect of reducing the return on the Bank's capital with respect to the Revolving Loans, the Term Loans and/or the within-described revolving and term loan facilities and/or letters of credit issued for the account of the Borrower to a level below that which the Bank could have achieved (taking into consideration the Bank's policies with respect to capital adequacy immediately before such adoption, phase-in, change or compliance and assuming that the Bank's capital was then fully utilized) but for such adoption, phase-in, change or compliance by any amount deemed by the Bank to be material: (i) the Bank shall promptly after its determination of such occurrence give notice thereof to the Borrower; and (ii) the Borrower shall within 30 days following such notice either (A) pay to the Bank as an additional fee such amount as the Bank certifies to be the amount that will compensate it for such reduction with respect to the Revolving Loans, the Term Loans, the within-described revolving and term loan facilities and/or such letters of credit, or (B) terminate this letter agreement and repay all Loans and pay all other sums due hereunder. A certificate of the Bank claiming compensation under this Section shall be conclusive in the absence of manifest error. Such certificate shall set forth the nature of the occurrence giving rise to such compensation, the additional amount or amounts to be paid to it hereunder and the method by which such amounts were determined. In determining such amounts, the Bank may use any reasonable averaging and attribution methods. No failure on the part of the Bank to demand compensation on any one occasion shall constitute a waiver of its right to demand such compensation on any other occasion and no failure on the part of the Bank to deliver any certificate in a timely manner shall in any way reduce any obligation of the Borrower to the Bank under this Section. 6.3. Facility Fees. With respect to the Term Loan, the Borrower will pay to the Bank a facility fee in the amount of $10,000, payable in four non-refundable installments of $2,500 each, the first such installment being payable on the date of execution of this letter agreement and subsequent installments of 24 $2,500 each being due on each of December 31, 1993, March 31, 1994 and June 30, 1994. The Borrower will also pay to the Bank, on the date of execution of this letter agreement and on the first day of each calendar quarter thereafter as long as the within-described revolving loan arrangements are in effect, a non-refundable quarterly facility fee payable in advance in the amount of $2,343.75 per quarter (appropriately pro-rated for any partial calendar quarter). In addition, if the financing arrangements established by this letter agreement are terminated by the Borrower at any time or by the Bank as the result of the Borrower's default, the Borrower shall forthwith upon such termination pay to the Bank a sum equal to all of the fees which would have become due pursuant to the immediately preceding two sentences from the date of such termination through the Expiration Date. Fees described in this Section are in addition to any balances and fees required by the Bank or any of its affiliates in connection with any other services made available to the Borrower. 6.4. Other Agreements. The provisions of this letter agreement are not in derogation or limitation of any obligations, liabilities or duties of the Borrower under any of the other Loan Documents or any other agreement with or for the benefit of the Bank. No inconsistency in default provisions between this letter agreement and any of the other Loan Documents or any such other agreement will be deemed to create any additional grace period or otherwise derogate from the express terms of each such default provision. No covenant, agreement or obligation of the Borrower contained herein, nor any right or remedy of the Bank contained herein, shall in any respect be limited by or be deemed in limitation of any inconsistent or additional provisions contained in any of the other Loan Documents or any such other agreement. 6.5 Governing Law. This letter agreement and the Notes shall be governed by, and construed and enforced in accordance with, the laws of The Commonwealth of Massachusetts. 6.6. Addresses for Notices, etc. All notices, requests, demands and other communications provided for hereunder shall be in writing and shall be mailed or delivered to the applicable party at the address indicated below: If to the Borrower: Pegasystems Inc. 101 Main Street Cambridge, MA 02142 Attention: Ira Vishner, Vice President, Corporate Services 25 If to the Bank: Fleet Bank of Massachusetts, N.A. High Technology Group 75 State Street Boston, MA 02109 Attention: Thomas W. Davies, Vice President or, as to each of the foregoing, at such other address as shall be designated by such Person in a written notice to the other party complying as to delivery with the terms of this Section. All such notices, requests, demands and other communications shall be effective two (2) days after deposit in the United States mails, if sent postage prepaid, certified or registered mail, return receipt requested, addressed as aforesaid. If any such notice, request, demand or other communication is hand delivered, same shall be effective upon receipted delivery. 6.7. Binding Effect; Assignment; Termination. This letter agreement shall be binding upon the Borrower, its successors and assigns and shall inure to the benefit of the Borrower and the Bank and their respective permitted successors and assigns. The Borrower may not assign this letter agreement or any rights hereunder without the express written consent of the Bank. The Bank may, in accordance with applicable law, from time to time assign or grant participations in this letter agreement, the Loans, the Notes and/or any letters of credit issued hereunder; provided that the Bank will not assign this letter agreement, the Loans, the Notes or its rights with respect to any such letters of credit nor grant any participations in any of the foregoing without at least 30 days, prior written notice to the Borrower, except that no such notice will be required in the case of an assignment or participation to an affiliate of the Bank or an assignment to a Federal Reserve Bank as security. The Borrower may terminate this Letter Agreement and the financing arrangements made herein by giving written notice of such termination to the Bank, together with payment of the sum described in the third sentence of ss.6-3; provided that no such termination will release or waive any of the Bank's rights or remedies or any of the Borrower's obligations under this letter agreement or any of the other Loan Documents unless and until the Borrower has paid in full all Loans and all interest thereon and all fees and charges payable in connection therewith and all letters of credit issued hereunder have been terminated. 6.8. Consent to Jurisdiction. The Borrower irrevocably submits to the non-exclusive jurisdiction of any Massachusetts court or any federal court sitting within The Commonwealth of Massachusetts over any suit, action or proceeding arising out of or relating to this letter agreement and/or any Note. The Borrower irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of venue of any such suit, action or proceeding brought in 26 such a court and any claim that any such suit, action or proceeding has been brought in an inconvenient forum. The Borrower agrees that final judgment in any such suit, action or proceeding brought in such a court shall be enforced in any court of proper jurisdiction by a suit upon such judgment, provided that service of process in such action, suit or proceeding shall have been effected upon the Borrower in one of the manners specified in the following paragraph of this ss.6.8 or as otherwise permitted by law. The Borrower hereby consents to process being served in any suit, action or proceeding of the nature referred to in the preceding paragraph of this ss.6.8 either (i) by mailing a copy thereof by registered or certified mail, postage prepaid, return receipt requested, to it at its address set forth in ss.6.6 or (ii) by serving a copy thereof upon it at its address set forth in ss.6.6. 6.9. Severability. In the event that any provision of this letter agreement or the application thereof to any Person, property or circumstances shall be held to any extent to be invalid or unenforceable, the remainder of this letter agreement, and the application of such provision to Persons, properties or circumstances other than those as to which it has been held invalid and unenforceable, shall not be affected thereby, and each provision of this letter agreement shall be valid and enforced to the fullest extent permitted by law. VII. DEFINED TERMS ------------- 7.1. Definitions. In addition to terms defined elsewhere in this letter agreement, as used in this letter agreement, the following terms have the following respective meanings: "Adjusted Net Income" - For any period, that amount (but not less than zero in any event) which represents the Net Income of the Borrower for such period minus the increase (or plus the decrease, as the case may be) in the Borrower's Net Capitalized Software Costs during such period. As used herein, "Net Capitalized Software Costs" means the number properly shown for the item entitled "Software development costs, net" on financial statements of the Borrower prepared consistently with the Borrower's December 31, 1992 financial statements heretofore furnished to the Bank. "Aggregate Bank Liabilities" - At any time, the sum of (i) the principal amount of all Revolving Loans then outstanding, plus (ii) all then undrawn amounts of letters of credit issued by the Bank for the account of the Borrower, plus (iii) all amounts then drawn on any such 27 letter of credit which at said date shall not have been reimbursed to the Bank by the Borrower. "Borrowing Base" - At any time, 80% of the aggregate principal amount of the Qualified Receivables of the Borrower then outstanding. "Business Day" - Any day which is not a Saturday, nor a Sunday nor a public holiday under the laws of the United States of America or The Commonwealth of Massachusetts applicable to a national bank. "Collateral" - All property now or hereafter owned by the Borrower or in which the Borrower now or hereafter has any interest which is described as "Collateral" in the Security Agreement. "Current Assets" - All assets of any corporation or other entity which would, in accordance with generally accepted accounting principles, be classified as current assets of an entity conducting a business the same as or similar to that of such entity; excluding, however, (i) assets which have been pledged, assigned, mortgaged, hypothecated or otherwise encumbered to secure any Indebtedness which is not included in Current Liabilities and (ii) any and all amounts due from affiliated entities. "Current Liabilities" - All liabilities of any corporation or other entity which would, in accordance with generally accepted accounting principles, be classified as current liabilities of an entity conducting a business the same as or similar to that of such entity, including, without limitation, all capitalized lease payments and other payments under capitalized leases and fixed prepayments of, and sinking fund payments with respect to, Indebtedness required to be made within one year from the date of determination. "Current Liabilities" shall also and in any event be deemed to include the Revolving Loans. "ERISA" - The Employee Retirement Income Security Act of 1974, as amended. "Expiration Date" - June 1, 1995, unless extended by the Bank, which extension may be given or withheld by the Bank in its sole discretion. "Indebtedness" - The total of all obligations of a Person, whether current or long-term, senior or subordinated, which in accordance with generally accepted accounting principles would be included as liabilities upon such Person's balance sheet at the date as of which Indebtedness is to be determined, and shall also include 28 guaranties, endorsements (other than for collection in the ordinary course of business) or other arrangements whereby responsibility is assumed for the obligations of others, whether by agreement to purchase or otherwise acquire the obligations of others, including any agreement, contingent or otherwise, to furnish funds through the purchase of goods, supplies or services for the purpose of payment of the obligations of others. "Loan" - Any Revolving Loan or any Term Loan. "Loan Documents" - Each of this letter agreement, the Revolving Note, the Term Notes, the Security Agreement and each other instrument, document or agreement evidencing, securing, guaranteeing or relating in any way to any of the Loans or to any of the letters of credit issued hereunder, all whether now existing or hereafter arising or entered into. "Maximum Revolving Amount" - At any date as of which same is to be determined, the amount by which (x) $2,500,000 exceeds (y) the sum of (i) all then undrawn amounts of letters of credit issued by the Bank for the account of the Borrower plus (ii) all amounts then drawn on any such letter of credit which at said date shall not have been reimbursed to the Bank by the Borrower. "Net Income" (or "Net Loss") - The book net income (or net loss, as the case may be) of a Person for any period, after all taxes actually paid or accrued and all expenses and other charges determined in accordance with generally accepted accounting principles consistently applied. "Net Quick Assets" - Such Current Assets of the Borrower as consist of cash, cash-equivalents and Receivables (less an allowance for bad debt consistent with the Borrower's prior experience). "Notes" - Collectively, the Revolving Note and each of the Term Notes. "Obligation" - All Indebtedness, covenants, agreements, liabilities and obligations, now existing or hereafter arising, made by the Borrower with or for the benefit of the Bank or owed by the Borrower to the Bank in any capacity. "PBGC" - The Pension Benefit Guaranty Corporation or any successor thereto. 29 "Person" - An individual, corporation, partnership, joint venture, trust, or unincorporated organization, or a government or any agency or political subdivision thereof. "Premises" - As defined in ss.2.1(j) above. "Principal Offices" - The principal place of business of the Bank, now located at 75 State Street, Boston, MA 02109. "Qualified Receivables" - Only those Receivables of the Borrower which arise out of bona fide sales made to customers of the Borrower (which customers are unrelated to the Borrower) in the ordinary course of the Borrower's business and which remain unpaid no more than 90 days past the due date of such Receivable, the payment of which is not in dispute; provided, however, that in the case of long-term contracts between the Borrower and customers unrelated to the Borrower, "Qualified Receivables" will also include all installment payments scheduled to be paid under such contracts within the 12 months following the date as of which Qualified Receivables are being measured, so long as all of the other conditions of this definition are met. Unless the Bank in its sole discretion otherwise determines with respect to any Receivable, a Receivable which would otherwise be a Qualified Receivable shall be deemed not to be a Qualified Receivable (i) if such Receivable is not free and clear of all adverse interests in favor of any other Person; (ii) if such Receivable is subject to any deduction, off-set, contra account, counterclaim or condition; (iii) if a field examination made by the Bank fails to confirm that such Receivable exists and satisfies all of the criteria set forth herein to be a Qualified Receivable; (iv) if such Receivable (other than an installment payment described above which is not yet due and payable) is not invoiced within such period of time as is consistent with the Borrower's normal practices at the date hereof or if the relevant invoice contains dating terms which are materially longer than the dating terms customarily given by the Borrower at the date hereof; (v) if the customer or account debtor has disputed liability or made any claim with respect to the Receivable or the merchandise covered thereby or with respect to any other Receivable due from said customer to the Borrower; (vi) if the customer or account debtor has filed a petition for bankruptcy or any other application for relief under the Bankruptcy Code or effected an assignment for the benefit of creditors, or if any petition or any other application for relief under the Bankruptcy Code has been filed against said customer or account debtor, or if the customer or account debtor has suspended business, become insolvent, ceased to pay its debts as they become due, or had or suffered a receiver or trustee to be 30 appointed for any of its assets or affairs; or (vii) if the customer or account debtor has failed to pay other Receivables so that an aggregate of 25% of the total Receivables owing to the Borrower by such customer or account debtor has been outstanding for more than 90 days. Without limitation of the foregoing, if any payment on an installment contract is more than 90 days past due, such payment will not be deemed a Qualified Receivable; and if such payment is more than 120 days past due, none of the remaining installment payments on that contract will be deemed Qualified Receivables. "Qualifying Equipment" - Equipment purchased by the Borrower after the date of this letter agreement (or, in the case of the initial Term Loan, equipment purchased by the Borrower not earlier than January 1, 1993) for use in the Borrower's business which meets all of the following criteria: (i) such equipment consists of one of the items shown on the Equipment List heretofore delivered by the Borrower to the Bank or has otherwise been approved by the Bank for use in supporting a Term Loan, (ii) each item of such equipment has been delivered to and installed at the Premises and has become fully operational, and (iii) the Borrower has paid in full for each item of such equipment and holds title to same, free of all interests and claims of any other Person (other than the security interest of the Bank). "Receivables" - All of the Borrower's present and future accounts, accounts receivable and notes, drafts, acceptances and other instruments representing or evidencing a right to payment for goods sold or for services rendered. "Subsidiary" - Any corporation or other entity of which the Borrower and/or any of its Subsidiaries, directly or indirectly, owns, or has the right to control or direct the voting of, fifty (50%) percent or more of the outstanding capital stock or other ownership interest having general voting power (under ordinary circumstances). "Tangible Net Worth" - An amount equal to the total assets of any Person (excluding (i) the total intangible assets of such Person and (ii) any assets representing amounts due from any affiliate) minus the total liabilities of such Person. Total intangible assets shall be deemed to include, but shall not be limited to, the excess of cost over book value of acquired businesses accounted for by the purchase method, formulae, trademarks, trade names, patents, patent rights and deferred expenses (including, but not limited to, unamortized debt discount and expense, organizational expense, capitalized software costs and experimental and development expenses). 31 Any defined term used in the plural preceded by the definite article shall be taken to encompass all members of the relevant class. Any defined term used in the singular preceded by "any" shall be taken to indicate any number of the members of the relevant class. This letter agreement is executed, as an instrument under seal, as of the day and year first above written. Very truly yours, PEGASYSTEMS INC. By [Signature of Ira Vishner] ---------------------------- Its Treasurer Accepted and agreed: FLEET BANK OF MASSACHUSETTS, N.A. By [Signature of Thomas M. Davies] ------------------------------------- Its VP By [Signature of William E. Reaves Jr.] ------------------------------------ Its First Vice President 32 DISCLOSURE SCHEDULE Item 1.4 Form of Term Note Item 2.1(a) Jurisdictions in which Borrower is qualified Item 2.1(b) Stock ownership Item 2.1(e) Litigation Item 2.1(j) Location of Assets Item 4.1 Existing Indebtedness Item 4.2 Existing Liens Item 4.3 Existing Guaranties Item 1.4 -------- PROMISSORY NOTE --------------- $ - ----------- Boston, Massachusetts , 1993 ----------- FOR VALUE RECEIVED, the undersigned Pegasytems Inc., a Massachusetts corporation (the "Borrower") hereby promises to pay to the order of FLEET BANK OF MASSACHUSETTS, N.A. (the "Bank") the principal amount of [ ] ($__________) Dollars ("Principal"), with interest, at the rate hereinafter set forth, on the daily balance of all unpaid Principal, from the date hereof until payment in full of all Principal and interest hereunder. As used herein, "Letter Agreement" means that certain letter agreement dated December 16, 1993 between the Borrower and the Bank. Interest on all unpaid Principal shall be due and payable monthly in arrears, on the first day of each month commencing on the first such date after the advance of any Principal and continuing on the first day of each month thereafter and on the date of payment of this note in full, at a fluctuating rate per annum (computed on the basis of a year of three hundred sixty [360] days for the actual number of days elapsed) which shall at all times be equal to the sum of (i) one-half of one (0.5%) percent per annum plus (ii) the Prime Rate, as in effect from time to time (but in no event in excess of the maximum rate permitted by then applicable law). A change in the aforesaid rate of interest will become effective on the same day on which any change in the Prime Rate is effective. Overdue Principal and, to the extent permitted by law, overdue interest shall bear interest at a fluctuating rate per annum which at all times shall be equal to the sum of (i) two (2%) percent plus (ii) the per annum rate otherwise payable under this note (but in no event in excess of the maximum rate permitted by then applicable law), compounded monthly and payable on demand. As used herein, "Prime Rate" means that the rate of interest per annum announced by the Bank from time to time as its prime rate, it being understood that such rate is merely a reference rate, not necessarily the lowest, which serves as the basis upon which effective rates of interest are calculated for obligations making reference thereto. Principal shall be repaid in thirty-five (35) equal consecutive monthly installments (each in an amount equal to $____________ [1/36th of Principal]) commencing on [first day of month following date of note] and continuing on the first day of each month thereafter through and including [first day of 35th month following month in which note is executed] plus a thirty- sixty (36th) and final payment due on [first day of 36th month following month in which note is executed] in an amount equal to all then remaining Principal and all interest accrued but unpaid thereon. The Borrower may at any time and from time to time, without premium or penalty, prepay all or any portion of said Principal, each such prepayment to be applied against Principal installments in inverse order of normal maturity. Payments of both Principal and interest shall be made, in immediately available funds, at the principal office of the Bank (now located at 75 State Street, Boston, Massachusetts 02109), or at such other address as the Bank may from time to time designate. The undersigned Borrower irrevocably authorizes the Bank to make or cause to be made, on a schedule attached to this note or on the books of the Bank, at or following the time of making the Term Loan (as defined in the Letter Agreement) evidenced by this note and of receiving any payment of Principal, an appropriate notation reflecting such transaction and the then aggregate unpaid balance of Principal. Failure of the Bank to make any such notation shall not, however, affect any obligation of the Borrower hereunder or under the Letter Agreement. The aggregate unpaid principal amount of the Term Loan evidenced by this note, as recorded by the Bank from time to time on such schedule or on such books, shall constitute prima facie evidence of such amount. The Borrower hereby (a) waives notice of and consents to any and all advances, settlements, compromises, favors and indulgences (including, without limitation, any extension or postponement of the time for payment), any and all receipts, substitutions, additions, exchanges and releases of collateral, and any and all additions, substitutions and releases of any person primarily or secondarily liable, (b) waives presentment, demand, notice, protest and all other demands and notices generally in connection with the delivery, acceptance, performance, default or enforcement of or under this note, and (c) agrees to pay, to the extent permitted by law, all costs and expenses, including, without limitation, reasonable attorneys' fees, incurred or paid by the Bank in enforcing this note and any collateral or security therefor, all whether or not litigation is commenced. This note is one of the Term Notes referred to in, and is secured by and entitled to the benefits of, the Letter Agreement and the Security Agreement (as defined in the Letter Agreement). This note is subject to prepayment as set forth in the Letter Agreement. The maturity of this note may be accelerated upon the occurrence of an Event of Default, as provided in the Letter Agreement. 2 Executed, as an instrument under seal, as of the day and year first above written. CORPORATE SEAL ATTEST: PEGASYSTEMS INC. - ------------------------ By: Clerk --------------------------- Its 3 DISCLOSURE SCHEDULE Item 2.1(a): Jurisdictions in which Borrower is qualified - ---------------------------------------------------------- Massachusetts New York California Item 2.1(b): Stock ownership - ----------------------------- At the date of this letter agreement, all of the outstanding capital stock of the Borrower is owned by Alan Trefler. Item 2.1(e): Litigation - ------------------------ None Item 2.1(j): Location of Assets - -------------------------------- With the exception of small amounts of computer equipment located in the homes of several employees of Borrower, all assets are located in Borrower's offices in Massachusetts, New York, and California. Addresses and landlords follow: 101 Main Street, Cambridge, MA 02142 Landlord: Riverfront Office Park Joint Venture c/o Codman Management Company, Inc. One Main Street Cambridge, MA 02142 3 New York Plaza, New York, NY 10004 Landlord: Pamela Equities Corp. 475 Park Avenue South New York, NY 10016 One Montgomery Street, San Francisco, CA 94104 Landlord: Goldfarb & Lipman One Montgomery Street Telesis Tower, 23rd Floor San Francisco, CA 94104 Item 4.1: Existing Indebtedness - -------------------------------- Loan in the amount of $230,000 payable to Alan Trefler Furniture and equipment leases with Eaton Financial Corporation, First & Main Corporation, IBM Credit Corporation, PacifiCorp Capital Inc., Phoenix Leasing Inc., and Phoenix Leasing Cash Distribution Fund V., L.P. Aggregate amount outstanding is less than $250,000. Item 4.2: Existing Liens - ------------------------- Liens in favor of the equipment vendors identified above. Item 4.3: Existing Guaranties - ------------------------------ None EX-10.5 10 MATERIAL CONTRACTS LOAN MODIFICATION AGREEMENT This Loan Modification Agreement ("this Agreement") is made as of May 5, 1995 between Pegasystems Inc., a Massachusetts corporation (the "Borrower") and Fleet Bank of Massachusetts, N.A. (the "Bank"). For good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, the Borrower and the Bank act and agree as follows: 1. Reference is made to (i) that certain letter agreement dated December 16, 1993 between the Borrower and the Bank, as amended (as so amended, the "Letter Agreement"), (ii) that certain $2,500,000 face amount promissory note dated December 16, 1993 (the "1993 Revolving Note") made by the Borrower and payable to the order of the Bank, (iii) three promissory notes in aggregate original principal amount of $1,090,000 (collectively, the "Facility One Term Notes") made by the Borrower, payable to the order of the Bank and dated as follows: $90,000 note dated December 16, 1993, $620,000 note dated December 16, 1993 and $380,000 note dated November 17, 1994, (iv) that certain Security Agreement dated December 16, 1993 (the "Security Agreement") given by the Borrower to the Bank, (v) certain promissory notes of the Borrower (the "Facility Two Term Notes") which may now or hereafter be issued by the Borrower to the Bank in an aggregate principal amount of up to $2,000,000 and (vi) that certain $2,500,000 face amount promissory note of even date herewith (the "1995 Revolving Note"). The Letter Agreement, the 1995 Revolving Note, the Facility One Term Notes, the Security Agreement and the Facility Two Term Notes (when executed and delivered) are hereinafter collectively referred to as the "Financing Documents". 2. The Letter Agreement is hereby amended, effective as of the date hereof: a. By deleting in its entirety Section 1.1 of the Letter Agreement and by substituting in its stead the following: "1.1 Reference to Documents. Reference is made to (i) that certain $2,500,000 face principal amount promissory note (the 'Revolving Note') dated May 5, 1995 made by the Borrower and payable to the order of the Bank, (ii) certain term notes (collectively, the 'Facility One Term Notes') made by the Borrower, payable to the order of the Bank and dated as follows: $90,000 note dated December 16, 1993, $620,000 note dated December 16, 1993 and $380,000 note dated November 17, 1994, (iii) additional term notes (the 'Facility Two Term Notes') in an aggregate principal amount of up to $2,000,000 which may now or hereafter be made by the Borrower and payable to the order of the Bank pursuant to ss.1.6 below, and (iv) that certain Security Agreement dated December 16, 1993, as amended (as so amended, the 'Security Agreement') from the Borrower to the Bank." b. By deleting from the caption of Section 1.4 of the Letter Agreement the words "Term Loans; Term Notes" and by substituting in their stead the following: "Facility One Term Loans; Facility One Term Notes" c. By deleting from the first sentence of Section 1.4 of the Letter Agreement the parenthetical expression "(the 'Term Loans')" and by substituting in its stead the following: "(the 'Facility One Term Loans')" d. By acknowledging and agreeing that the amount of "$1,000,000" contained in each of the first and second sentences of Section 1.4 of the Letter Agreement has been replaced by the amount "$1,090,000". e. By acknowledging and agreeing that the date "June 30, 1994" contained in the second sentence of Section 1.4 of the Letter Agreement has been replaced by the date "December 31, 1994". f. By deleting from the caption of Section 1.5 of the Letter Agreement the words "Term Loans" and by substituting in their stead the following: "Facility One Term Loans" g. By deleting from the second sentence of Section 1.5 of the Letter Agreement the words "the outstanding principal balance of such Term Loan" and by substituting in their stead the following: "the original principal amount of the relevant Facility One Term Loan" h. By providing generally that all references in Section 1.4 and Section 1.5 of the Letter Agreement to any "Term Loan" or to the "Term Loans" will be deemed to refer to any Facility One Term Loan or to the Facility One Term Loans, respectively. i. By providing generally that all references in Section 1.4 and Section 1.5 of the Letter Agreement to any "Term Note" or to the "Term Notes" will be deemed to refer to any 2 Facility One Term Note or to the Facility One Term Notes, respectively. j. By renumbering Section 1.6 of the Letter Agreement so that same will be known as "Section 1.8". k. By renumbering Section 1.7 of the Letter Agreement so that same will be known as "Section 1.9". l. By renumbering Section 1.8 of the Letter Agreement so that same will be known as "Section 1.10". m. By inserting into the Letter Agreement, immediately after Section 1.5 thereof, the following: "1.6. Facility Two Term Loans; Facility Two Term Notes. In addition to the foregoing, the Bank is hereby establishing a facility for one or more additional term loans (the "Facility Two Term Loans") to the Borrower in an aggregate original principal amount up to $2,000,000. Subject to the conditions contained in this letter agreement, a Facility Two Term Loan shall be made, no more than once per calendar quarter (except that a Facility Two term Loan may be made more frequently in order to finance not less than $100,000 in Qualifying Equipment acquired by the Borrower within the 90 days preceding the request for such Facility Two Term Loan), in such amount as may be requested by the Borrower; subject, however, to the following limitations: (i) no Facility Two Term Loan will be made after June 1, 1996; (ii) the aggregate original principal amounts of all Facility Two Term Loans will not exceed $2,000,000; and (iii) no Facility Two Term Loan will be in an amount more than 100% of the total of (x) the invoiced actual costs of the tangible property constituting the items of Qualifying Equipment with respect to which such Facility Two Term Loan is made (excluding taxes, installation charges, software, shipping and other 'soft' costs) plus (y) the actual costs of software then purchased or licensed by the Borrower relating to such items of Qualifying Equipment, provided that such software costs will not exceed 35% of the total amount of any such Facility Two Term Loan. Prior to the making of each Facility Two Term Loan, and as a precondition thereto, the Borrower 3 will provide the Bank with: (i) invoices supporting the costs of the relevant Qualifying Equipment and software; (ii) such evidence as the Bank may require showing that the Qualifying Equipment has been installed at the Premises, has become fully operational, has been paid for by the Borrower and is owned by the Borrower free of all liens and interests of any other Person (other than the security interest of the Bank pursuant to the Security Agreement); (iii) evidence satisfactory to the Bank that the Qualifying Equipment is fully insured against casualty loss, with insurance naming the Bank as secured party and first loss payee; (iv) all such Uniform Commercial Code financing statements and other documentation as may be necessary or desirable in order to perfect and/or confirm the Bank's security interests in the Qualifying Equipment; and (v) a duly executed Facility Two Term Note in the amount of the relevant Facility Two Term Loan. Each Facility Two Term Loan will be evidenced by a Facility Two Term Note substantially in the form of item 1.6 of the attached Disclosure Schedule. Interest on each Facility Two Term Loan shall be payable at the times and at the rate provided for in the Facility Two Term Note evidencing same. Overdue principal of any Facility Two Term Loan and, to the extent permitted by law, overdue interest on any Facility Two Term Loan shall bear interest at a fluctuating rate per annum which at all times shall equal to the sum of (i) two (2%) percent per annum plus (ii) the per annum rate otherwise payable under the related Facility Two Term Note (but in no event in excess of the maximum rate from time to time permitted by then applicable law), compounded monthly and payable on demand. The Borrower hereby irrevocably authorizes the Bank to make or cause to be made, on a schedule attached to the relevant Facility Two Term Note or on the books of the Bank, at or following the time of making each Facility Two Term Loan and of receiving any payment of principal, an appropriate notation reflecting such transaction and the then aggregate unpaid principal balance of such Facility Two Term Loan. The amount so noted shall constitute prima facie evidence as to the amount owed by the Borrower with respect to 4 principal of such Facility Two Term Loan. Failure of the Bank to make any such notation shall not, however, affect any obligation of the Borrower or any right of the Bank hereunder or under such Facility Two Term Note. 1.7. Principal Repayment of Facility Two Term Loans. The Borrower shall repay principal of each Facility Two Term Loan in 36 equal consecutive monthly installments, commencing on the first day of the month next following the month in which such Facility Two Term Loan is made and continuing on the first day of each month thereafter. Each such monthly installment of principal payable with respect to a Facility Two Term Loan shall be in an amount equal to 1/36th of the original principal amount of such Facility Two Term Loan. In any event the then outstanding principal balance of each Facility Two Term Loan and all interest then accrued but unpaid thereon will be due and payable in full on the first day of the 36th month next following the month in which such Facility Two Term Loan is made. The Borrower may prepay, at any time or from time to time, without premium or penalty, the whole or any portion of any Facility Two Term Loan; provided that each such principal prepayment shall be accompanied by payment of all interest under the related Facility Two Term Note accrued but unpaid to the date of payment. Any partial prepayment of principal of a Facility Two Term Loan will be applied to installments of principal of such Facility Two Term Loan thereafter coming due in inverse order or normal maturity. Amounts paid or repaid with respect to Term Loans will not be available for reborrowing." n. By deleting from the first sentence of the last paragraph of renumbered Section 1.10 of the Letter Agreement the words "this ss.1.8" and by substituting in their stead the following: "this ss.1.10" o. By deleting in their entireties the fourth and fifth sentences of Subsection 2.1(a) of the Letter Agreement and by inserting in their stead the following: 5 "The Borrower has no Subsidiaries, other than an English Subsidiary which is wholly-owned by the Borrower." p. By deleting from clause (iii) of Section 3.6 of the Letter Agreement the words "compliance with ss.ss.3.7-3.10" and by substituting in their stead the following: "compliance with ss.ss.3.7-3.11" q. By deleting in its entirety the last sentence of Section 3.10 of the Letter Agreement and by substituting in its stead the following: "The Borrower will achieve Net Income of at least $1,000,000 for each fiscal year, commencing with its results for the fiscal year ended December 31, 1994." r. By renumbering Section 3.11 of the Letter Agreement so that it will be known as "Section 3.12". s. By inserting into the Letter Agreement, immediately following Section 3.10 thereof, the following: "3.11 Debt Service Coverage Ratio. The Borrower will maintain, for the rolling 12- month period ending on each Determination Date, a Debt Service Coverage Ratio of not less than 1.75 to 1. As used herein, the following terms have the following respective meanings: 'Determination Date' means the last day of each fiscal quarter of the Borrower, commencing with March 31, 1995. 'Debt Service Coverage Ratio' means the ratio of (x) Adjusted EBITDA of the Borrower for the 12-month period ending on any Determination Date to (y) the sum or (i) all interest on Indebtedness paid or accrued by the Borrower during or in respect of such 12- month period ending on such Determination Date, plus (ii) all taxes paid or payable by the Borrower during or in respect of such 12- month period (not including for this purpose any deferred taxes accrued but not actually currently paid or payable), plus (iii) all current maturities of long-term debt of the Borrower outstanding as at such Determination Date. 'Adjusted EBITDA' for any period means the Borrower's EBITDA for such period minus the amount representing software capitalized by the Borrower during such period. As used 6 herein, the Borrower's 'EBITDA' for any period shall be equal to the sum of: (i) the Net Income (or Net Loss, as the case may be, with any such Net Loss being expressed as a negative number) of the Borrower for such period, plus (ii) the amount of the provision for depreciation and/or amortization actually deducted on the books of the Borrower for the purpose of computing such Net Income (or Net Loss, as the case may be) for the period involved, plus (iii) all federal and state income taxes (but not ad valorem property taxes, sales taxes or taxes in the nature of an excise) expensed by the Borrower on its income statement with respect to such period, plus (iv) all interest on any Indebtedness paid or accrued during such period and actually deducted on the books of the Borrower for the purposes of computing such Net Income (or Net Loss, as the case may be) for the period involved." t. By deleting from renumbered Section 3.12 of the Letter Agreement, in each of the three places where same appear, the words "this ss.3.11" and by substituting in their stead, in each such place, the following: "this ss.3.12" u. By inserting into clause (c) of Section 5.1 of the Letter Agreement, immediately after the words "3.9 or 3.10" the following: "or 3.11" v. By deleting from clause (b) of Section 5.2 of the Letter Agreement the word "facility" and by substituting in its stead the following: "facilities" w. By deleting from Section 6.2 of the Letter Agreement, in each place where same appear, the words "the Term Loans" and by substituting in their stead, in each such place, the following: "any Term Loan" x. By deleting in its entirety Section 6.3 of the Letter Agreement and by substituting in its stead the following: 7 "6.3. Facility Fees. With respect to the Facility One Term Loans the Borrower has paid to the Bank non-refundable facility fees in an aggregate amount of $10,000. With respect to the Facility Two Term Loans, the Borrower will pay to the Bank a facility fee in the amount of $20,000, payable in four non-refundable installments of $5,000 each, the first such installment being payable on May 5, 1995 and the three subsequent installments of $5,000 each being due on each of June 30, 1995, September 30, 1995 and December 31, 1995. If the within-described facility for Facility Two Term Loans is terminated prior to December 31, 1995 for any reason (whether a termination by the Bank under ss.5.2 due to the Borrower's default or a voluntary termination by the Borrower under ss.6.7), the Borrower will forthwith upon such termination pay to the Bank an amount equal to the sum of each of the aforesaid $5,000 installments which has not been paid as at the date of such termination. The Borrower will also pay to the Bank, in respect of the revolving loan facility established by this letter agreement, a non-refundable quarterly facility fee equal to $2,343.75 per calendar quarter, such fee being payable in advance on the first day of each calendar quarter and being appropriately prorated for any partial calendar quarter. If the within-described revolving loan facility is terminated prior to the Expiration Date for any reason (whether a termination by the Bank under ss.5.2 due to the Borrower's default or a voluntary termination by the Borrower under ss.6.7), the Borrower will forthwith upon such termination pay to the Bank all facility fees which would have become payable pursuant to the immediately preceding sentence through and including the Expiration Date had no such termination occurred. The fees described in this Section are in addition to any balances and fees required by the Bank or any of its affiliates in connection with any other services made available to the Borrower." y. By deleting from the last sentence of ss.6.7 of the Letter Agreement the words "the sum described in the third sentence of ss.6.3" and by substituting in their stead the following: 8 "each of the amounts described in the third sentence and the fifth sentence of ss.6.3" z. By deleting in its entirety the definition of "Expiration Date" appearing in Section 7.1 of the Letter Agreement and by substituting in its stead the following: "'Expiration Date' - June 1, 1996, unless extended by the Bank, which extension may be given or withheld by the Bank in its sole discretion." aa. By adding to the definition of "Qualifying Equipment" appearing in Section 7.1 of the Letter Agreement, at the end of such definition, the following: "In addition, for the purposes of the Facility Two Term Loans, no item of equipment will be deemed 'Qualifying Equipment' unless purchased by the Borrower within the 90 days preceding the making of the Facility Two Term Loan which funds such item of equipment, except that any Facility Two Term Loan made prior to June 30, 1995 may include equipment purchased at any time after September 30, 1994." bb. By inserting into Section 7.1 of the Letter Agreement, immediately after the definition of "Tangible Net Worth", the following: "'Term Loans' - Collectively, each of the Facility One Term Loans and Facility Two Term Loans. 'Term Notes' - Collectively, each of the Facility One Term Notes and the Facility Two Term Notes." cc. By adding to the Letter Agreement, as an exhibit thereto, Item 1.6 of the Disclosure Schedule attached to the Letter Agreement in the form attached hereto as Item 1.6. 3. Each of the Facility One Term Notes is hereby amended: a. By deleting from the fifth grammatical paragraph of each Facility One Term Note, in both places where same appear, the words "the Term Loan" and by substituting in their stead, in both such places, the following: "the Facility One Term Loan" 9 b. By deleting from the seventh grammatical paragraph of each Facility One Term Note the words "the Term Notes" and by substituting in their stead the following: "the Facility One Term Notes" 4. The Security Agreement is hereby amended, effective as of the date hereof: a. By providing that the terms "Term Note" and "Term Notes", as used in the Security Agreement, will be deemed to refer, collectively, to the Facility One Term Notes and the Facility Two Term Notes (each as defined in the Letter Agreement, as amended by this Agreement). b. By providing that the terms "Term Loan" and "Term Loans", as used in the Security Agreement, will be deemed to refer, collectively, to the Facility One Term Loans and the Facility Two Term Loans (each as defined in the Letter Agreement, as amended by this Agreement). As a result, the "Obligations" secured by the Security Agreement include both the Facility One Term Loans and the Facility Two Term Loans. 5. Wherever in any Financing Document, or in any certificate or opinion to be delivered in connection therewith, reference is made to a "letter agreement" or to the "Letter Agreement", from and after the date hereof same will be deemed to refer to the Letter Agreement, as hereby amended. 6. Simultaneously with the execution and delivery of this Agreement, the Borrower is executing and delivering to the Bank the 1995 Revolving Note, in substitution for the 1993 Revolving Note. The 1995 Revolving Note is a $2,500,000 promissory note of the Borrower, substantially in the form attached hereto as Exhibit 1. Wherever in any Financing Document, or in any certificate or opinion to be delivered in connection therewith, reference is made to the "Revolving Note", from and after the date hereof same will be deemed to refer to the 1995 Revolving Note. 7. In order to induce the Bank to enter into this Agreement, the Borrower further represents and warrants to the Bank as follows: a. The Execution, delivery and performance of this Agreement and the 1995 Revolving Note have been duly authorized by the Borrower by all necessary corporate and other action, will not require the consent of any third party and will not conflict with, violate the provisions of, or cause a default or constitute an event which, with the passage of time or giving of notice or both, could cause a default on the part of the Borrower under its charter documents or by-laws or under any contract, agreement, 10 law, rule, order, ordinance, franchise, instrument or other document, or result in the imposition of any lien or encumbrance on any property or assets of the Borrower (except liens in favor of the Bank). Further, the Facility Two Term Notes to be delivered hereafter under Section 1.6 of the Letter Agreement (as amended hereby) have been duly authorized by the Borrower by all necessary corporate and other action, will not require the consent of any third party and (when issued) will not conflict with, violate the provisions of, or cause a default or constitute an event which, with the passage of time or giving of notice or both, could cause a default on the part of the Borrower under its charter documents or by-laws or under any contract, agreement, law, rule, order, ordinance, franchise, instrument or other document, or result in the imposition of any lien or encumbrance on any property or assets of the Borrower (except liens in favor of the Bank). b. The Borrower has duly executed and delivered to the Bank each of this Agreement and the 1995 Revolving Note. c. Each of this Agreement and the 1995 Revolving Note is the legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its respective terms. When executed and delivered in accordance with Section 1.6 of the Letter Agreement (as amended hereby), each of the Facility Two Term Notes will be the legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms. d. The statements, representations and warranties made in the Letter Agreement continue to be correct as of the date hereof, except as supplemented and/or modified on the attached supplemental disclosure schedule. e. The covenants and agreements of the Borrower contained in the Letter Agreement (as amended hereby) and/or in the Security Agreement have been complied with on and as of the date hereof. f. No event which constitutes or which, with notice or lapse of time, or both, could constitute, an Event of Default (as defined in the Letter Agreement) has occurred and is continuing. g. No material adverse change has occurred in the financial condition of the Borrower from that disclosed in the financial statements of the Borrower as at December 31, 1994. 8. Except as expressly affected hereby, the Letter Agreement and each of the other Financing Documents remains in full force and effect as heretofore. 11 9. Except as expressly set forth above, nothing contained herein will be deemed to constitute a waiver or a release of any provision of any of the Financing Documents. Nothing contained herein will in any event be deemed to constitute an agreement to give a waiver or release or to agree to any amendment or modification of any provision of any of the Financing Documents on any other or future occasion. Executed, as an instrument under seal, as of the day and year first above written. PEGASYSTEMS INC. By Ira Vishner ------------------------------ Its Treasurer FLEET BANK OF MASSACHUSETTS, N.A. By Thomas M. Davis ------------------------------ Its Vice President 12 SUPPLEMENTAL DISCLOSURE SCHEDULE Item 2.1(a): Additional United States jurisdictions in which Borrower is qualified Texas Illinois Item 2.1(b): Stock ownership The outstanding capital stock of the Borrower is owned by the shareholders identified below: Joseph Friscia 18,000 shares Kenneth Olson 150,000 shares Richard Smith 12,000 shares Alan Trefler 7,500,000 shares Ira Vishner 150,000 shares Item 2.1(e): Litigation No litigation of the nature described in Item 2.1(e) Item 2.1(i): Location of Assets With the exception of small amounts of computer equipment located in the homes of several employees of Borrower, all assets are located in Borrower's offices in Massachusetts, New York, California, Texas and Illinois, and in the offices of Borrower's wholly-owned subsidiary in Reading, England. Addresses and landlords follow: 101 Main Street, Cambridge, MA 02142 Landlord: Riverfront Office Park Joint Venture c/o Codman Management Company, Inc. One Main Street Cambridge, MA 02142 3 New York Plaza, New York, NY 10004 Landlord: Pamela Equities Corp. 475 Park Avenue South New York, NY 10016 50 Fremont Street, San Francisco, CA 94105 Landlord: The Shorenstein Company 555 California Street San Francisco, CA 94104 9003 Airport Freeway, Ft. Worth, TX 76180 Landlord: Execusuites 9003 Airport Freeway Ft. Worth, TX 76180 Three First National Plaza, Chicago, IL 60602 Landlord: HQ Rolling Meadows 1600 Golf Road Rolling Meadows, IL 60008 The Atrium Court, Apex Plaza, Reading, Bershire RG1 1AX, England Landlord: Harvard (Total Office Facilities) plc Richard House, Bath Road Speen, Newbury, Bershire, RG13 1QY England 13 EX-10.7 11 MATERIAL CONTRACTS PROMISSORY NOTE --------------- $620,000.00 Boston, Massachusetts December 16, 1993 FOR VALUE RECEIVED, the undersigned Pegasystems Inc., a Massachusetts corporation (the "Borrower") hereby promises to pay to the order of FLEET BANK OF MASSACHUSETTS, N.A. (the "Bank") the principal amount of Six Hundred Twenty Thousand and 00/100 ($620,000.00) Dollars ("Principal"), with interest, at the rate hereinafter set forth, on the daily balance of all unpaid Principal, from the date hereof until payment in full of all Principal and interest hereunder. As used herein, "Letter Agreement" means that certain letter agreement dated December 16, 1993 between the Borrower and the Bank, as amended. Interest on all unpaid Principal shall be due and payable monthly in arrears, on the first day of each month commencing on the first such date after the advance of any Principal and continuing on the first day of each month thereafter and on the date of payment of this note in full, at fluctuating rate per annum (computed on the basis of a year of three hundred sixty (360) days for the actual number of days elapsed) which shall at all times be equal to the sum of (i) one-half of one (0.5%) percent per annum plus (ii) the Prime Rate, as in effect from time to time (but in no event in excess of the maximum rate permitted by then applicable law). A change in the aforesaid rate of interest will become effective on the same day on which any change in the Prime Rate is effective. Overdue Principal and, to the extent permitted by law, overdue interest shall bear interest at a fluctuating rate per annum which at all times shall be equal to the sum of (i) two (2%) percent per annum plus (ii) the per annum rate otherwise payable under this note (but in no event in excess of the maximum rate permitted by then applicable law), compounded monthly and payable on demand. As used herein, "Prime Rate" means that rate of interest per annum announced by the Bank from time to time as its prime rate, it being understood that such rate is merely a reference rate, not necessarily the lowest, which serves as the basis upon which effective rates of interest are calculated for obligations making reference thereto. Principal shall be repaid in thirty-five (35) equal consecutive monthly installments (each in an amount equal to $17,222.22) commencing on January 1, 1994 and continuing on the first day of each month thereafter through and including November 1, 1996 plus a thirty-sixty (36th) and final payment due on December 1, 1996 in an amount equal to all then remaining Principal and all interest accrued but unpaid thereon. The Borrower may at any time and from time to time, without premium or penalty, prepay all or any portion of said Principal, each such prepayment to be applied against Principal installments in inverse order of normal maturity. Payments of both Principal and interest shall be made, in immediately available funds, at the principal office of the Bank (now located at 75 State Street, Boston, Massachusetts 02109), or at such other address as the Bank may from time to time designate. The undersigned Borrower irrevocably authorizes the Bank to make or cause to be made, on a schedule attached to this note or on the books of the Bank, at or following the time of making the Term Loan (as defined in the Letter Agreement) evidenced by this note and of receiving any payment of Principal, an appropriate notation reflecting such transaction and the then aggregate unpaid balance of Principal. Failure of the Bank to make any such notation shall not, however, affect any obligation of the Borrower hereunder or under the Letter Agreement. The aggregate unpaid principal amount of the Term Loan evidenced by this note, as recorded by the Bank from time to time on such schedule or on such books, shall constitute prima facie evidence of such amount. The Borrower hereby (a) waives notice of and consents to any and all advances, settlements, compromises, favors and indulgences (including, without limitation, any extension or postponement of the time for payment), any and all receipts, substitutions, additions, exchanges and releases of collateral, and any and all additions, substitutions and releases of any person primarily or secondarily liable, (b) waives presentment, demand, notice, protest and all other demands and notices generally in connection with the delivery, acceptance, performance, default or enforcement of or under this note, and (c) agrees to pay all costs and expenses, including, without limitation, reasonable attorneys' fees, incurred or paid by the Bank in enforcing this note and any collateral or security therefor, all whether or not litigation is commenced. This note is one of the Term Notes referred to in, and is secured by and entitled to the benefits of, the Letter Agreement. This note is subject to prepayment as set forth in the Letter Agreement. The maturity of this note may be accelerated upon the occurrence of an Event of Default, as provided in the Letter Agreement. 2 Executed, as an instrument under seal, as of the day and year first above written. CORPORATE SEAL ATTEST: PEGASYSTEMS, INC. - ------------------------------ By: [Signature of Ira Vishner] Clerk ------------------------- Its Treasurer 3 EX-10.8 12 MATERIAL CONTRACTS Item 1.4 PROMISSORY NOTE --------------- $380,000.00 - ----------- Boston, Massachusetts November 17, 1994 ----------- FOR VALUE RECEIVED, the undersigned Pegasystems Inc., a Massachusetts corporation (the "Borrower") hereby promises to pay to the order of FLEET BANK OF MASSACHUSETTS, N.A. (the "Bank") the principal amount of Three Hundred Eighty Thousand ($380,000) Dollars ("Principal"), with interest, at the rate hereinafter set forth, on the daily balance of all unpaid Principal, from the date hereof until payment in full of all Principal and interest hereunder. As used herein, "Letter Agreement" means that certain letter agreement dated December 16, 1993 between the Borrower and the Bank. Interest on all unpaid Principal shall be due and payable monthly in arrears, on the first day of each month commencing on the first such date after the advance of any Principal and continuing on the first day of each month thereafter and on the date of payment of this note in full, at fluctuating rate per annum (computed on the basis of a year of three hundred sixty (360) days for the actual number of days elapsed) which shall at all times be equal to the sum of (i) one-half of one (0.5%) percent per annum plus (ii) the Prime Rate, as in effect from time to time (but in no event in excess of the maximum rate permitted by then applicable law). A change in the aforesaid rate of interest will become effective on the same day on which any change in the Prime Rate is effective. Overdue Principal and, to the extent permitted by law, overdue interest shall bear interest at a fluctuating rate per annum which at all times shall be equal to the sum of (i) two (2%) percent per annum plus (ii) the per annum rate otherwise payable under this note (but in no event in excess of the maximum rate permitted by then applicable law), compounded monthly and payable on demand. As used herein, "Prime Rate" means that rate of interest per annum announced by the Bank from time to time as its prime rate, it being understood that such rate is merely a reference rate, not necessarily the lowest, which serves as the basis upon which effective rates of interest are calculated for obligations making reference thereto. Principal shall be repaid in thirty-five (35) equal consecutive monthly installments (each in an amount equal to $10,555.55 [1/36th of Principal]) commencing on [first day of month following date of note] and continuing on the first day of each month thereafter through and including [first day of 35th month following month in which note is executed] plus a thirty-sixth (36th) and final payment due on [first day of 36th month following month in which note is executed] in an amount equal to all then remaining Principal and all interest accrued but unpaid thereon. The Borrower may at any time and from time to time, without premium or penalty, prepay all or any portion of said Principal, each such prepayment to be applied against Principal installments in inverse order of normal maturity. Payments of both Principal and interest shall be made, in immediately available funds, at the principal office of the Bank (now located at 75 State Street, Boston, Massachusetts 02109), or at such other address as the Bank may from time to time designate. The undersigned Borrower irrevocably authorizes the Bank to make or cause to be made, on a schedule attached to this note or on the books of the Bank, at or following the time of making the Term Loan (as defined in the Letter Agreement) evidenced by this note and of receiving any payment of Principal, an appropriate notation reflecting such transaction and the then aggregate unpaid balance of Principal. Failure of the Bank to make any such notation shall not, however, affect any obligation of the Borrower hereunder or under the Letter Agreement. The aggregate unpaid principal amount of the Term Loan evidenced by this note, as recorded by the Bank from time to time on such schedule or on such books, shall continue prima facie evidence of such amount. The Borrower hereby (a) waives notice of and consents to any and all advances, settlements, compromises, favors and indulgences (including, without limitation, any extension or postponement of the time for payment), any and all receipts, substitutions, additions, exchanges and releases of collateral, and any and all additions, substitutions and releases of any person primarily or secondarily liable, (b) waives presentment, demand, notice, protest and all other demands and notices generally in connection with the delivery, acceptance, performance, default or enforcement of or under this note, and (c) agrees to pay, to the extent permitted by law, all costs and expenses, including, without limitation, reasonable attorneys' fees, incurred or paid by the Bank in enforcing this note and any collateral or security therefor, all whether or not litigation is commenced. This note is one of the Term Notes referred to in, and is secured by and entitled to the benefits of, the Letter Agreement and the Security Agreement (as defined in the Letter Agreement). This note is subject to prepayment as set forth in the Letter Agreement. The maturity of this note may be accelerated upon the occurrence of an Event of Default, as provided in the Letter Agreement. 2 Executed, as an instrument under seal, as of the day and year first above written. CORPORATE SEAL ATTEST: PEGASYSTEMS, INC. By: [Signature of Ira Vishner] - --------------------------- ----------------------------- Clerk Its Treasurer 3 EX-10.9 13 MATERIAL CONTRACTS Item 1.6 -------- PROMISSORY NOTE --------------- $1,180,000.00 - ------------- Boston, Massachusetts June 28, 1995 ------- FOR VALUE RECEIVED, the undersigned Pegasystems Inc., a Massachusetts corporation (the "Borrower") hereby promises to pay to the order of FLEET BANK OF MASSACHUSETTS, N.A. (the "Bank") the principal amount of One Million One Hundred Eighty Thousand and 00/100 ($1,180,000) Dollars ("Principal"), with interest, at the rate hereinafter set forth, on the daily balance of all unpaid Principal, from the date hereof until payment in full of all Principal and interest hereunder. As used herein, "Letter Agreement" means that certain letter agreement dated December 16, 1993 between the Borrower and the Bank, as amended. Interest on all unpaid Principal shall be due and payable monthly in arrears, on the first day of each month commencing on the first such date after the date hereof and continuing on the first day of each month thereafter and on the date of payment of this note in full, at fluctuating rate per annum (computed on the basis of a year of three hundred sixty (360) days for the actual number of days elapsed) which shall at all times be equal to the sum of (i) one-half of one (0.5%) percent per annum plus (ii) the Prime Rate, as in effect from time to time (but in no event in excess of the maximum rate permitted by then applicable law). A change in the aforesaid rate of interest will become effective on the same day on which any change in the Prime Rate is effective. Overdue Principal and, to the extent permitted by law, overdue interest shall bear interest at a fluctuating rate per annum which at all times shall be equal to the sum of (i) two (2%) percent per annum plus (ii) the per annum rate otherwise payable under this note (but in no event in excess of the maximum rate permitted by then applicable law), compounded monthly and payable on demand. As used herein, "Prime Rate" means that rate of interest per annum announced by the Bank from time to time as its prime rate, it being understood that such rate is merely a reference rate, not necessarily the lowest, which serves as the basis upon which effective rates of interest are calculated for obligations making reference thereto. If the entire amount of any required Principal and/or interest is not paid within ten (10) days after the same is due, the Borrower shall pay to the Bank a late fee equal to five percent (5%) of the required payment, provided that such late fee shall be reduced to three percent (3%) of any required principal and interest that is not paid within fifteen (15) days of the date it is due if this note is secured by a mortgage on an owner-occupied residence of 1-4 units. Principal shall be repaid in thirty-five (35) equal consecutive monthly installments (each in an amount equal to $32,777.78 commencing on [first day of month following date of note] and continuing on the first day of each month thereafter through and including [first day of 35th month following month in which note is executed] plus a thirty-sixty (36th) and final payment due on [first day of 36th month following month in which note is executed] in an amount equal to all then remaining Principal and all interest accrued but unpaid thereon. The Borrower may at any time and from time to time, without premium or penalty, prepay all or any portion of said Principal, each such prepayment to be applied against Principal installments in inverse order of normal maturity. Payments of both Principal and interest shall be made, in immediately available funds, at the principal office of the Bank (now located at 75 State Street, Boston, Massachusetts 02109), or at such other address as the Bank may from time to time designate. The undersigned Borrower irrevocably authorizes the Bank to make or cause to be made, on a schedule attached to this note or on the books of the Bank, at or following the time of making the Facility Two Term Loan (as defined in the Letter Agreement) evidenced by this note and of receiving any payment of Principal, an appropriate notation reflecting such transaction and the then aggregate unpaid balance of Principal. Failure of the Bank to make any such notation shall not, however, affect any obligation of the Borrower hereunder or under the Letter Agreement. The aggregate unpaid principal amount of the Facility Two Term Loan evidenced by this note, as recorded by the Bank from time to time on such schedule or on such books, shall constitute prima facie evidence of such amount. The Borrower hereby (a) waives notice of and consents to any and all advances, settlements, compromises, favors and indulgences (including, without limitation, any extension or postponement of the time for payment), any and all receipts, substitutions, additions, exchanges and releases of collateral, and any and all additions, substitutions and releases of any person primarily or secondarily liable, (b) waives presentment, demand, notice, protest and all other demands and notices generally in connection with the delivery, acceptance, performance, default or enforcement of or under this note, and (c) agrees to pay all costs and expenses, including, without limitation, reasonable attorneys' fees, incurred or paid by the Bank in enforcing this note and any collateral or security therefor, all whether or not litigation is commenced. This note is one of the Facility Two Term Notes referred to in the Letter Agreement. This note is secured by, and is entitled to the benefits of, the Security Agreement (as defined in the Letter Agreement). This note is subject to prepayment as set forth in the Letter Agreement. The maturity of this note may 2 be accelerated upon the occurrence of an Event of Default, as provided in the Letter Agreement. Executed, as an instrument under seal, as of the day and year first above written. CORPORATE SEAL ATTEST: PEGASYSTEMS, INC. [Signature or Alan Trefler] - ------------------------------ By: [Signature of Ira Vishner] Clerk -------------------------- Its Treasurer 3 EX-10.10 14 MATERIAL CONTRACTS Item 1.6 PROMISSORY NOTE $165,000.00 - ----------- Boston, Massachusetts December 28, 1995 ------------ FOR VALUE RECEIVED, the undersigned Pegasystems Inc., a Massachusetts corporation (the "Borrower") hereby promises to pay to the order of FLEET BANK OF MASSACHUSETTS, N.A. (the "Bank") the principal amount of One Hundred Sixty Five Thousand and 00/100 ($165,000.00) Dollars ("Principal"), with interest, at the rate hereinafter set forth, on the daily balance of all unpaid Principal, from the date hereof until payment in full of all Principal and interest hereunder. As used herein, "Letter Agreement" means that certain letter agreement dated December 16, 1993 between the Borrower and the Bank, as amended. Interest on all unpaid Principal shall be due and payable monthly in arrears, on the first day of each month commencing on the first such date after the date hereof and continuing on the first day of each month thereafter and on the date of payment of this note in full, at fluctuating rate per annum (computed on the basis of a year of three hundred sixty (360) days for the actual number of days elapsed) which shall at all times be equal to the sum of (i) one-half of one (0.5%) percent per annum plus (ii) the Prime Rate, as in effect from time to time (but in no event in excess of the maximum rate permitted by then applicable law). A change in the aforesaid rate of interest will become effective on the same day on which any change in the Prime Rate is effective. Overdue Principal and, to the extent permitted by law, overdue interest shall bear interest at a fluctuating rate per annum which at all times shall be equal to the sum of (i) two (2%) percent per annum plus (ii) the per annum rate otherwise payable under this note (but in no event in excess of the maximum rate permitted by then applicable law), compounded monthly and payable on demand. As used herein, "Prime Rate" means that rate of interest per annum announced by the Bank from time to time as its prime rate, it being understood that such rate is merely a reference rate, not necessarily the lowest, which serves as the basis upon which effective rates of interest are calculated for obligations making reference thereto. If the entire amount of any required Principal and/or interest is not paid within ten (10) days after the same is due, the Borrower shall pay to the Bank a late fee equal to five percent (5%) of the required payment, provided that such late fee shall be reduced to three percent (3%) of any required principal and interest that is not paid within fifteen (15) days of the date it is due if this note is secured by a mortgage on an owner-occupied residence of 1-4 units. Principal shall be repaid in thirty-five (35) equal consecutive monthly installments (each in an amount equal to $4,583.33) commencing on [first day of month following date of note] and continuing on the first day of each month thereafter through and including [first day of 35th month following month in which note is executed] plus a thirty-sixty (36th) and final payment due on [first day of 36th month following month in which note is executed] in an amount equal to all then remaining Principal and all interest accrued but unpaid thereon. The Borrower may at any time and from time to time, without premium or penalty, prepay all or any portion of said Principal, each such prepayment to be applied against Principal installments in inverse order of normal maturity. Payments of both Principal and interest shall be made, in immediately available funds, at the principal office of the Bank (now located at 75 State Street, Boston, Massachusetts 02109), or at such other address as the Bank may from time to time designate. The undersigned Borrower irrevocably authorizes the Bank to make or cause to be made, on a schedule attached to this note or on the books of the Bank, at or following the time of making the Facility Two Term Loan (as defined in the Letter Agreement) evidenced by this note and of receiving any payment of Principal, an appropriate notation reflecting such transaction and the then aggregate unpaid balance of Principal. Failure of the Bank to make any such notation shall not, however, affect any obligation of the Borrower hereunder or under the Letter Agreement. The aggregate unpaid principal amount of the Facility Two Term Loan evidenced by this note, as recorded by the Bank from time to time on such schedule or on such books, shall constitute prima facie evidence of such amount. The Borrower hereby (a) waives notice of and consents to any and all advances, settlements, compromises, favors and indulgences (including, without limitation, any extension or postponement of the time for payment), any and all receipts, substitutions, additions, exchanges and releases of collateral, and any and all additions, substitutions and releases of any person primarily or secondarily liable, (b) waives presentment, demand, notice, protest and all other demands and notices generally in connection with the delivery, acceptance, performance, default or enforcement of or under this note, and (c) agrees to pay all costs and expenses, including, without limitation, reasonable attorneys' fees, incurred or paid by the Bank in enforcing this note and any collateral or security therefor, all whether or not litigation is commenced. This note is one of the Facility Two Term Notes referred to in the Letter Agreement. This note is secured by, and is entitled to the benefits of, the Security Agreement (as defined in the Letter Agreement). This note is subject to prepayment as set forth in the Letter Agreement. The maturity of this note may 2 be accelerated upon the occurrence of an Event of Default, as provided in the Letter Agreement. Executed, as an instrument under seal, as of the day and year first above written. CORPORATE SEAL ATTEST: PEGASYSTEMS, INC. - --------------------------- By: [Signature of Ira Vishner] Clerk -------------------------- Its Treasurer 3 EX-10.12 15 SECURITY AGREEMENT SECURITY AGREEMENT SECURITY AGREEMENT dated as of December 16, 1993 by and between Pegasystems Inc., a Massachusetts corporation (the "Debtor") and Fleet Bank of Massachusetts, N.A. (the "Secured Party"). WHEREAS, the Debtor has today executed and delivered to the Secured Party a letter agreement (the "Letter Agreement") of even date herewith between the Debtor and the Secured Party, which Letter Agreement provides inter alia for the making of Term Loans (as defined therein) up to an aggregate principal amount of $1,000,000; and WHEREAS, the Debtor has executed and delivered to the Secured Party and may in the future execute and deliver to the Secured Party one or more promissory notes in an aggregate original principal amount not to exceed $1,000,000 (the "Term Notes") in order to evidence the Term Loans; and WHEREAS, as a condition to making any Term Loan, the Secured Party requires that the Debtor grant to the Secured Party a security interest in the Collateral (as defined in Section 1); NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby act and agree as follows: 1. Definitions. As used in this Security Agreement, the following terms have the following meanings: "Collateral" - All of the following now or hereafter existing or owned by the Debtor or in which the Debtor shall now or hereafter have any interest: (a) all Equipment; (b) all Related Collateral; and (c) all liens, guaranties, securities, rights, remedies and privileges pertaining to, and all products and proceeds (including, without limitation, insurance proceeds) of and all accessions to, any of the foregoing items of Collateral. "Equipment" - All of the Debtor's machinery, equipment, motor vehicles, tools, furniture, furnishings and fixtures and all accessions, additions, substitutions or replacements to or for any of the foregoing and all attachments, components, accessories, parts and supplies relating thereto; all whether now owned or hereafter arising or acquired and wherever located. The Equipment includes, Without limitation, the items of Equipment described on Exhibit A hereto. "Event of Default" - The occurrence of any one or more of the following: (i) any "Event of Default" as defined in any Loan Document, (ii) any failure to pay when due any of the Obligations relating to the payment of money or (iii) any failure by the Debtor to perform or observe any of its obligations or agreements under this Security Agreement. "Lien" - Any lien, charge, encumbrance or security interest, whether voluntary or involuntary. "Loan Documents" - This Security Agreement, the Letter Agreement, the Term Notes and any other instruments or documents, letters of credit or other agreements made by the Debtor with or in favor of the Secured Party, all whether now existing or hereafter entered into or delivered. "Obligations" - The Term Notes and any and all indebtedness, liabilities and obligations of the Debtor relating to the Term Loans or any of same, whether for principal, interest, fees, charges or otherwise, now existing or hereafter arising, such term to include obligations to perform acts and refrain from taking action as well as obligations to pay money. For the purposes of this Security Agreement, "Obligations" shall not be deemed to include the "Revolving Note" or the "Revolving Loans" described in the Letter Agreement. "Person" - As defined in the Letter Agreement. "Premises" - All locations owned, leased, operated or used by the Debtor, all of which are listed on Exhibit B hereto together with the record owner of each such location. "Qualifying Equipment" - As defined in the Letter Agreement. "Related Collateral" - All of the following property of the Debtor: all of the Debtor's rights under judgments relating to any loss or damage to any Equipment; warranties, insurance claims, tort claims and chooses in action relating to any loss or damage to any Equipment; and information, data, files, writings, correspondence, books and records (including, without limitation, all electronically recorded data) relating to any Equipment. For the purposes of this Security Agreement, "Related Collateral" does not include patents, trademarks, copyrights, Debtor's proprietary software or other intellectual property of the Debtor. "UCC" - The Uniform Commercial Code as in effect from time to time in Massachusetts, except that with respect to Collateral located or deemed located in any other jurisdiction, such term shall refer to the Uniform Commercial Code as in effect in each such other jurisdiction. 2 Any defined term used in the plural preceded by the definite article shall be taken to encompass all members of the relevant class. Any defined term used in the singular preceded by "any" shall be taken to indicate any number of the members of the relevant class. 2. Grant of Security Interest. As security for the full and timely satisfaction of the Obligations, the Debtor hereby grants to the Secured Party a continuing security interest in the Collateral, and in each item thereof, all to the maximum extent that the Debtor has an interest therein or at any time in the future obtains such an interest. 3. Representations and Warranties. The Debtor represents and warrants to the Secured Party that: (a) The execution, delivery and performance by the Debtor of this Security Agreement, including the security interests herein granted or intended to be granted, has been duly authorized by all necessary corporate and other action and does not and will not: (i) require any consent or approval of its stockholders, any governmental authority or any other Person; (ii) contravene its charter or by-laws; (iii) violate any provision of, or require any filing (other than the filing of financing statements with respect to the security interests herein granted), registration, consent or approval under, any law, rule, regulation (including, without limitation, Regulation U), order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to the Debtor; (iv) result in a breach of or constitute a default or require any consent under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Debtor is party or by which it or any of its properties may be bound or affected; or (v) result in, or require, the creation or imposition of any Lien (other than as created hereunder) upon or with respect to any of the properties now owned or hereafter acquired by the Debtor. (b) This Security Agreement has been duly executed and delivered on behalf of the Debtor and is a legal, valid and binding obligation of the Debtor enforceable in accordance with its terms. 3 (c) No Obligation has been or will hereafter be incurred (d) The principal place of business and chief executive offices of the Debtor are located at 101 Main Street, Cambridge, MA 02142. Except as described on Exhibit B hereto, none of the Collateral and no other assets of the Debtor are located at any other address. The Debtor is a tenant in its Premises and the record owners of the Debtor's Premises are as set forth on Exhibit B hereto. (e) Except as set forth on Exhibit C hereto, the Debtor conducts business (and in the last five years has conducted business) under no trade name or style other than its corporate name. (f) The Debtor owns the Collateral free and clear of all Liens except (a) Liens in favor of the Secured Party, and (b) Liens, if any, listed on Exhibit D hereto. (g) The Equipment now owned by Debtor (including, without limitation, those items of Equipment listed on Exhibit A hereto) has been accepted by the Debtor and is in good repair, working order and condition, and the Debtor has not asserted, and knows of no basis for, any material warranty or other claim against any seller or manufacturer thereof. (h) This Agreement, coupled with the filing of appropriate UCC financing statements with the Secretary of The Commonwealth of Massachusetts, the City Clerk of Cambridge, MA and Middlesex South Registry of Deeds (these being the only locations in which such filing is required by the UCC in order to perfect the security interest granted herein), creates a valid and perfected security interest (of first priority, except as shown on Exhibit D) in favor of the Secured Party in all of the Collateral. 4. Covenants. (a) Payment and Performance. The Debtor shall unconditionally pay when due (or on demand if so payable) each Obligation and shall duly and punctually perform each Obligation. (b) Further Assurances. The Debtor will from time to time, at its expense, promptly execute and deliver all such further instruments and documents, and take all such further action, as may be necessary or that the Secured Party may reasonably request in order to perfect and protect the security interests granted or intended to be granted hereby or to enable the Secured Party to enforce its rights and remedies hereunder with respect to any Collateral, including, without limitation: marking or otherwise identifying Equipment; furnishing the originals of all bills of jading, trust receipts and warehousemen's receipts, with such endorsements as may be required by the Secured Party; and executing and filing financing 4 statements. Further, the Debtor hereby authorizes the Secured Party to file financing or continuation statements and amendments thereto relating to Collateral without the signature of the Debtor where permitted by law. (c) Information. The Debtor shall maintain accurate and complete records of all Collateral and its dealings with respect thereto in accordance with generally accepted accounting principles applied on a consistent basis. Upon reasonable notice from time to time (and at any time and without notice after the occurrence and during the continuance of an Event of Default), the Debtor shall permit the Secured Party and its employees, representatives and agents to conduct field audits (at the Debtor's expense) and to inspect and/or make copies of such records and/or the Collateral. The Debtor shall from time to time furnish to the Secured Party such information concerning Collateral as the Secured Party may reasonably request and will promptly notify the Secured Party if any representation or warranty of the Debtor in Section 3 hereof or in the Letter Agreement becomes inaccurate, incomplete or misleading in any material respect. Without limiting the generality of the foregoing, the Debtor will upon the Secured Party's request, with reasonable promptness, provide the Secured Party with a written listing of all Collateral, and will provide the Secured Party with such a listing immediately upon the occurrence of any Event of Default. (d) Insurance. The Debtor shall at its expense maintain fire and extended coverage insurance policies insuring the Equipment, with responsible and reputable insurance companies or associations, in amounts sufficient to provide for full replacement cost coverage (with agreed amount endorsement) and in any event not less than the amount necessary to avoid co-insurance. All such insurance shall name the Secured Party as secured party and loss payee. All policies of such insurance shall contain a provision forbidding cancellation of such insurance either by the carrier or by the insured without at least 15 days' prior written notice to the Secured Party. The Debtor shall, as often as the Secured Party shall reasonably request, deliver to the Secured Party duplicate policies of such insurance and/or binders, certificates or other evidence thereof (with evidence of premiums having been paid) from the insurer or a reputable insurance broker. in case of any casualty, loss or damage to which the following sentence is not applicable, the Debtor shall make the necessary repairs or replacements and shall be entitled to be reimbursed therefor from and to the extent of the proceeds of such insurance. After the occurrence of any Event of Default, all insurance payments in respect of Equipment shall be paid and applied as specified in Subsection 8(c) below. (e) Title; Sale or Removal of Collateral. The Debtor shall not create or suffer to exist any Lien in or on any of the 5 Collateral, except as otherwise expressly permitted by ss.4.2 of the Letter Agreement. The Debtor shall not, without the Secured Party's prior written approval, sell, transfer or remove from the Premises or otherwise dispose of any of the Collateral, except that the Debtor may remove and dispose of obsolete and worn out equipment (other than any item of Equipment which is listed on Exhibit A hereto or which is now or hereafter an item of Qualifying Equipment). Except as provided in the immediately preceding sentence, no Collateral of the Debtor will be located at any premises other than the Premises described in Subsection 3(d) above. The Debtor will not (i) move its chief executive office or principal place of business from the location described in Subsection 3(d) above, (ii) change its name or identity (or use any trade name or style except as described in Subsection 3(e) above), (iii) make or suffer to be made any change in its corporate structure, or (iv) have or acquire any office or facility in any other location (other than one or more foreign offices for its non-United States subsidiaries) until, in each case, after receipt of a certificate from the Secured Party, signed by an officer thereof, stating that the Secured Party has, to its satisfaction, obtained all documentation that it deems necessary or desirable to obtain, maintain, perfect and/or confirm the first priority security interests granted or intended to be granted herein. (f) Maintenance and Use of Collateral. The Debtor will maintain all Equipment in good order and condition, Making all necessary repairs thereto. The Debtor will not use any Equipment in violation of any applicable law or any insurance thereon. Nothing contained herein shall require the Debtor to maintain or repair any Equipment (other than any item of Equipment listed on Exhibit A hereto or other item which is now or hereafter part of the Qualifying Equipment) which is obsolete or worn out. (g) Access. The Debtor shall accord the Secured Party and the Secured Party's representatives with such access from time to time, upon reasonable notice, during normal business hours as the Secured Party and its representatives may reasonably require to all properties owned by or over which the Debtor has control, and in connection with such access, will permit the Secured Party and such representatives, from time to time as may be requested, to examine and inspect any and all of the Collateral and any and all of the Debtor's books, records, electronically stored data, papers and files related to the Collateral. The Debtor shall provide the Secured Party with such information concerning the Debtor, the Collateral, the operation of the Debtor's business and the Debtor's financial condition as the Secured Party may reasonably request from time to time. (h) Taxes. The Debtor promptly shall pay, as they become due and payable, all taxes, unemployment contributions and all other charges of any kind or nature levied, assessed or claimed 6 against the Collateral by any Person whose claim could result in a Lien, except any of the foregoing which is being contested in good faith and by appropriate proceedings which serve as a matter of law to stay the enforcement of any such Lien and as to which the Debtor has established and is maintaining adequate reserves. At its option, the Secured Party may, but shall not be obligated to, pay all taxes, unemployment contributions and any and all other charges levied, assessed or claimed against the Collateral by any Person as the Secured Party may, in its discretion, deem necessary or desirable to protect, maintain, preserve, collect or realize upon any or all of the Collateral or the value thereof or any right or remedy pertaining thereto. 5. Secured Party Appointed Attorney-in-Fact. (a) The Debtor hereby irrevocably appoints the Secured Party as the Debtor's attorney-in-fact, with full authority in the name, place and stead of the Debtor, from time to time in the Secured Party's discretion, after the occurrence and during the continuance of an Event of Default to take any action and to execute any instrument which the Secured Party may deem necessary or advisable to accomplish the purposes of this Security Agreement, including, without limitation: (i) to obtain and adjust any insurance required pursuant to this Security Agreement and/or the Letter Agreement; (ii) to ask, demand, collect, sue for, recover, compromise, receive and give acquittance for monies due and to become due under or in respect of any of the Collateral; (iii) to receive, endorse and collect any notes, drafts or other instruments, documents and chattel paper; (iv) to file any claims or take any action or institute any proceedings which the Secured Party may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of the Secured Party with respect to any of the Collateral; (v) to defend any suit, action or proceeding brought against the Debtor in respect of any Collateral, to settle, compromise or adjust any suit, action or proceeding hereinbefore described and, in connection therewith, to give such discharges or releases as the Secured Party may deem appropriate; and generally, (vi) to do all things necessary to carry out the intent of this Security Agreement. (b) The power of attorney granted pursuant to this Section 5 is a power coupled with an interest and shall be irrevocable 7 until the Obligations are paid indefeasibly in full and no commitment on the part of the Secured Party to make loans remains outstanding under the Letter Agreement. 6. Secured Party May Perform. if the Debtor fails to perform any agreement contained herein, the Secured Party may itself perform, or cause performance of, such agreement, and the reasonable expenses of the Secured Party incurred in connection therewith shall be payable by the Debtor as provided under Section 9 hereof, with interest at the rate provided in the Term Notes for overdue payments. 7. Secured Party's Duties. The powers conferred on the Secured Party hereunder are solely to protect its interests in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the safe custody of any Collateral actually in its possession and the accounting for monies actually received by it hereunder, the Secured Party shall have no duty as to any Collateral. The Secured Party shall not be liable for any acts, omissions, errors of judgment or mistakes of fact or law including, without limitation, acts, omissions, errors or mistakes with respect to the Collateral, except for those arising out of or in connection with the Secured Party's gross negligence or willful misconduct. The Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which the Secured Party accords its own like property, it being understood that the Secured Party shall be under no obligation to take any necessary steps to collect any Collateral or preserve rights against prior parties or any other rights pertaining to any Collateral, but may do so at its option, and all reasonable expenses incurred in connection therewith shall be for the sole account of the Debtor and shall be added to the Obligations. 8. Remedies. If any Event of Default shall have occurred and be continuing: (a) The Secured Party may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party under the UCC and also may without limitation: (i) require the Debtor to, and the Debtor hereby agrees that it will at its expense and upon request of the Secured Party forthwith, assemble all or any part of the Collateral as directed by the Secured Party and make it available to the Secured Party at a place or places to be designated by the Secured Party which is or are reasonably convenient to the respective parties; 8 (ii) itself or through agents, without notice to any Person and without judicial process of any kind, enter any of the Debtor's offices and facilities (or any other premises or location where any Collateral may be) and take physical possession of any Collateral or disassemble, render unusable and/or repossess any of the same, and the Debtor shall peacefully and quietly yield up and surrender the same; and (iii) without notice except as specified below, sell, lease, assign, grant an option or options to purchase or otherwise dispose of the Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board or at the Secured Party's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as are commercially reasonable. (b) The Secured Party may maintain possession of Collateral at the Premises or remove the same or any part thereof to such places as the Secured Party may elect. The Debtor waives all rights which it would otherwise have under any applicable law to prohibit entry to any premises or to require notice of any such action, to the extent permitted by law. The Debtor agrees that, to the extent notice of sale shall be required by law, 10 days, prior written notice to the Debtor shall constitute reasonable notification. Notice of any public sale shall be sufficient if it describes the Collateral to be sold in general terms, stating the items or amounts thereof and the location and nature thereof, and is published at least once in any newspaper selected by the Secured Party and of general circulation in the locale of such sale, not less than 10 days prior to the sale. The Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale-having been given and may be the purchaser at any such sale, if public, to the extent permitted by applicable law, free from any right of redemption. The Debtor shall be fully liable for any deficiency. The Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. All sales made by the Secured Party under this Subsection 8(b) must be conducted in a manner which is commercially reasonable. (c) Any cash held by the Secured Party as Collateral and all cash or other proceeds received by the Secured Party in respect of any sale of, collection from, or other realization upon all or any part of the Collateral, shall be applied by the Secured Party in the following order of priorities: First, to the payment of the costs and expenses of any sale or other reasonable expenses (including, without limitation, any reasonable legal fees and 9 expenses), liabilities and advances made or incurred by the Secured Party in connection therewith or referred to in Section 9 or provided for by the Letter Agreement; Next, to payment of interest on and principal of the Term Notes (in such order as may be provided for in the Letter Agreement or as otherwise determined by the Secured Party); Next, to the payment of any other Obligations; and Finally, after payment in full of all Obligations, to the payment to the Debtor or its successors or assigns, or to whomsoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct, of any surplus then remaining of such cash. 9. Expenses and Indemnification. The Debtor agrees to reimburse the Secured Party for and indemnify and hold harmless the Secured Party from and against any and all liability, loss, damage, cost or expense (including, without limitation, reasonable fees and disbursements of counsel, experts and agents) imposed on, incurred by or asserted against the Secured Party arising out of or in connection with: preparation of this Security Agreement, the documents relating hereto, or amendments, modifications or waivers hereof; taxes (excluding any corporate excise or income taxes payable by the Secured Party by reason hereof or otherwise) and other governmental charges in connection with this Security Agreement and the Collateral; exercise of the Secured Party's rights with respect to this Security Agreement and the Collateral; any enforcement, collection or other proceedings resulting therefrom or any negotiations or other measures to preserve the Secured Party's rights hereunder; the custody or preservation of, or the sale of or other realization upon, any of the Collateral; any failure by the Debtor to perform or observe any of the provisions of this Security Agreement; any investigative, administrative or judicial proceeding (whether or not the Secured Party is designated a party thereto) relating to or arising out of this Security Agreement; or any bankruptcy, insolvency or other similar proceeding relating to the Debtor, unless the Secured Party was at fault with respect to such liability, loss, damage, cost or expense or acted in bad faith with respect thereto. The Debtor's obligations under the preceding sentence shall constitute Obligations and shall survive the termination of this Security Agreement. 10. Termination. This Security Agreement shall remain in full force and effect so long as any Obligations remain outstanding or any commitment remains in effect under the Letter Agreement or otherwise. Upon the satisfaction in full of all of 10 the obligations and termination of all credit facilities established under the Letter Agreement or otherwise, the Secured Party shall, at the Debtor's expense, execute and deliver to the Debtor all instruments of assignment or otherwise as may be necessary to establish full title of the Debtors to any of the Collateral, subject to any prior sale or other disposition thereof pursuant to Section 8. Until then, this Security Agreement shall itself constitute conclusive evidence of the validity, effectiveness and continuing force hereof, and any Person may rely hereon. 11. Waiver; Rights Cumulative. No failure to exercise and no delay in exercising, on the part of the Secured Party, any right or remedy hereunder or otherwise shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right or remedy. Waiver by the Secured Party of any right or remedy on any one occasion shall not be construed as a bar to or waiver thereof or of any other right or remedy on any future occasion. The Secured Party's rights and remedies hereunder and under the Loan Documents shall be cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law. The provisions of this Security Agreement are not in derogation or limitation of any obligations, liabilities or duties of the Debtor under any of the other Loan Documents or any other agreement with or for the benefit of the Secured Party. No inconsistency in default provisions between this Agreement and any of the other Loan Documents or any such other agreement will be deemed to create any additional grace period or otherwise derogate from the express terms of each such default provision. No covenant, agreement or obligation of the Debtor contained herein, nor any right or remedy of the Secured Party contained herein, shall in any respect be limited by or be deemed in limitation of any inconsistent or additional provisions contained in any of the other Loan Documents or any such other agreement. 12. Severability. In the event that any provision of this Agreement or the application thereof to any Person, property or circumstance shall be held to any extent to be invalid or unenforceable, the remainder of this Security Agreement and the application of such provision to Persons, properties and circumstances other than those as to which it has been held invalid or unenforceable shall not be affected thereby, and each provision of this Security Agreement shall be valid and enforceable to the fullest extent permitted by law. 13. Binding Effect; Assignment. This Security Agreement shall be binding upon the Debtor and its successors and assigns and shall inure to the benefit of the Debtor and the Secured Party and their respective successors and assigns. 11 14. Notices. All notices and other communications under or relating to this Security Agreement shall be given in the manner and to the addresses of the parties provided for in ss.6.6 of the Letter Agreement. 15. Headings. Section headings in this Security Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. 16. Governing Law. This Security Agreement shall be governed by, and construed and enforced in accordance with, the laws of The Commonwealth of Massachusetts, except that the creation, perfection and enforcement of security interests in Collateral located in jurisdictions other than Massachusetts will be governed by the laws of the respective jurisdictions in which such Collateral is located. IN WITNESS WHEREOF, the Debtor and the Secured Party have caused this Security Agreement to be executed, as an instrument under seal, by their respective officers thereunto duly authorized, as of the date first above written. PEGASYSTEMS INC. By [Signature of Ira Vishner] ------------------------------- Its Treasurer FLEET BANK OF MASSACHUSETTS, N.A. By [Signature of Thomas M. Davies] ----------------------------- Its Vice President 12 EXHIBIT A - Equipment List EXHIBIT B - Debtor's offices and other locations, including owners of real estate EXHIBIT C - Trade names EXHIBIT D - Other existing encumbrances 13 Exhibit A: Equipment List - -------------------------- Computer Equipment Furniture and Fixtures Exhibit B: Debtor's offices and other locations, including owners of real estate - -------------------------------------------------------------------------------- 101 Main Street, Cambridge, MA 02141 Landlord: Riverfront Office Park Joint Venture c/o Codman Management Company, Inc. One Main Street Cambridge, MA 02141 3 New York Plaza, New York, NY 10004 Landlord: Pamela Equities Corp. 475 Park Avenue South New York, NY 10016 One Montgomery Street, San Francisco, CA 94104 Landlord: Goldfarb & Lipman One Montgomery Street Telesis Tower, 23rd Floor San Francisco, CA 94104 Exhibit C: Trade names - ----------------------- None Exhibit D: Other existing encumbrances - --------------------------------------- Liens in favor of furniture and equipment vendors Eaton Financial Corporation, First & Main Corporation, IBM Credit Corporation, PacificCorp Capital Inc., Phoenix Leasing Inc., and Phoenix Leasing Cash Distribution Fund V, L.P. [Pegasystems, Inc. Logo] December 15, 1993 EXHIBIT A (continued) Mr. Thomas W. Davies Vice President High Technology Group Fleet Bank Fleet Center Mail Stop: MA BOFO4M 75 State Street Boston, MA 02109-1810 Dear Tom: Enclosed are copies of invoices covering assets we have purchased in 1993. For your convenience, the software portion has been listed separately, allowing you to verify that it does not exceed the limits specified in our agreement. The assets to be financed are broken down as follows:
EQUIPMENT AND FURNITURE ==================================================================================================================== 1/5/93 2 Laser printers $2,837.40 - -------------------------------------------------------------------------------------------------------------------- 1/6/93 Color desktop printer $709.50 - -------------------------------------------------------------------------------------------------------------------- 1/8/93 3 Optical disks $2,175.00 - -------------------------------------------------------------------------------------------------------------------- 1/22/93 5 tape drives and controllers $2,455.50 - -------------------------------------------------------------------------------------------------------------------- 1/29/93 3 Computer systems $7,300.00 - -------------------------------------------------------------------------------------------------------------------- 1/29/93 5 monitors, 2 computer systems $6,510.00 - -------------------------------------------------------------------------------------------------------------------- 2/2/93 Ethernet board $207.25 - -------------------------------------------------------------------------------------------------------------------- 2/4/93 Trakker port tape $452.00 - -------------------------------------------------------------------------------------------------------------------- 2/10/93 12 modems $3,586.20 - -------------------------------------------------------------------------------------------------------------------- 2/16/93 4 printers $366.50 - -------------------------------------------------------------------------------------------------------------------- 2/25/93 NI Adapter for BA2XX $3,605.76 - -------------------------------------------------------------------------------------------------------------------- 2/25/93 TeleToolkit and EuroPak $214.28 - -------------------------------------------------------------------------------------------------------------------- 2/26/93 DEC 4100 VAX and associated disks $41,373.25 - -------------------------------------------------------------------------------------------------------------------- 3/2/93 2 Post script HP4 $611.70 - -------------------------------------------------------------------------------------------------------------------- 3/10/93 IRMA 3 Convtblbrd $429.85 - -------------------------------------------------------------------------------------------------------------------- 3/10/93 2 MicroMUM units $3,007.00 - -------------------------------------------------------------------------------------------------------------------- 3/10/93 3 Western Digital disks $1,048.50 - -------------------------------------------------------------------------------------------------------------------- 3/11/93 Cabinets, disks, memory $25,640.00 - -------------------------------------------------------------------------------------------------------------------- 3/11/93 COAX/TP convtr $819.30 Fleet Bank December 15, 1993 Page 2 - -------------------------------------------------------------------------------------------------------------------- 3/11/93 Computer card upgrade $1,280.00 - -------------------------------------------------------------------------------------------------------------------- 3/12/93 16-Port Terminal Server and rack maintenance kit $2,457.00 - -------------------------------------------------------------------------------------------------------------------- 3/17/93 20 PC Ethernet controllers $3,933.00 - -------------------------------------------------------------------------------------------------------------------- 3/18/93 Network card $131.50 - -------------------------------------------------------------------------------------------------------------------- 3/19/93 Cabinets $6,585.00 - -------------------------------------------------------------------------------------------------------------------- 3/30/93 2 controllors, 1 rack mount $976.70 - -------------------------------------------------------------------------------------------------------------------- 4/7/93 50 Computer monitors $23,500.00 - -------------------------------------------------------------------------------------------------------------------- 4/7/93 5 keyboards $300.00 - -------------------------------------------------------------------------------------------------------------------- 4/7/93 Gateway pc order $106,880.00 - -------------------------------------------------------------------------------------------------------------------- 4/16/93 2 adapters, 10 modems $3,375.00 - -------------------------------------------------------------------------------------------------------------------- 4/28/93 2 ethernet adapters $789.00 - -------------------------------------------------------------------------------------------------------------------- 4/30/93 12 drives, 15 controllors $2,613.00 - -------------------------------------------------------------------------------------------------------------------- 4/30/93 1 printer, feeder, cabinet $4,300.00 - -------------------------------------------------------------------------------------------------------------------- 5/7/93 2 laser jet printers $8,600.00 - -------------------------------------------------------------------------------------------------------------------- 5/11/93 2 HP 1500 sheet feed $860.00 - -------------------------------------------------------------------------------------------------------------------- 5/11/93 1 HP 1500 sheet feed $430.00 - -------------------------------------------------------------------------------------------------------------------- 5/14/93 6 PC's with monitors $14,100.00 - -------------------------------------------------------------------------------------------------------------------- 5/19/93 tape drive-Microsolutions $404.80 - -------------------------------------------------------------------------------------------------------------------- 5/25/93 2 Ethernet Link III $427.10 - -------------------------------------------------------------------------------------------------------------------- 5/25/93 1 PC and carrying case $2,768.95 - -------------------------------------------------------------------------------------------------------------------- 5/26/93 DPT controllor $388.70 - -------------------------------------------------------------------------------------------------------------------- 5/26/93 4000 DAT tape drive $1,688.75 - -------------------------------------------------------------------------------------------------------------------- 5/26/93 8 MB upgrade $1,376.20 - -------------------------------------------------------------------------------------------------------------------- 5/26/93 1 DCA Irmaprint $749.40 - -------------------------------------------------------------------------------------------------------------------- 5/28/93 2 GB INTNL DAT $2,445.90 - -------------------------------------------------------------------------------------------------------------------- 5/28/93 Modem $799.40 - -------------------------------------------------------------------------------------------------------------------- 5/28/93 2 cabinets $570.00 - -------------------------------------------------------------------------------------------------------------------- 5/28/93 HP 4SI cabinet $285.00 - -------------------------------------------------------------------------------------------------------------------- 6/7/93 HP Vectra PC 1GB $5,607.88 - -------------------------------------------------------------------------------------------------------------------- 6/7/93 HP Vectra PC 430 MB $4,672.90 - -------------------------------------------------------------------------------------------------------------------- 6/7/93 2 mono VGA monitors $385.50 Fleet Bank December 15, 1993 Page 3 - -------------------------------------------------------------------------------------------------------------------- 6/7/93 internal fax/modem and carrying case $544.94 - -------------------------------------------------------------------------------------------------------------------- 6/10/93 4 8MB memory $1,376.20 - -------------------------------------------------------------------------------------------------------------------- 6/10/93 Irma print $749.40 - -------------------------------------------------------------------------------------------------------------------- 6/11/93 Multimedia sound system $165.97 - -------------------------------------------------------------------------------------------------------------------- 6/23/93 3 print server $1,785.00 - -------------------------------------------------------------------------------------------------------------------- 6/29/93 6 PC's and 10 monitors $15,602.00 - -------------------------------------------------------------------------------------------------------------------- 7/21/93 Token ring $610.30 - -------------------------------------------------------------------------------------------------------------------- 8/3/93 Laser Jet printer $1,418.70 - -------------------------------------------------------------------------------------------------------------------- 8/17/93 Postscript printer $305.85 - -------------------------------------------------------------------------------------------------------------------- 8/18/93 2 Gig SCSI disk $2,240.00 - -------------------------------------------------------------------------------------------------------------------- 8/23/93 1 4mb memory expansion $183.25 - -------------------------------------------------------------------------------------------------------------------- 8/26/93 printer equipment $2,655.00 - -------------------------------------------------------------------------------------------------------------------- 8/31/93 Blazer modem $315.75 - -------------------------------------------------------------------------------------------------------------------- 8/31/93 1 HP laster jet printer $4,330.00 - -------------------------------------------------------------------------------------------------------------------- 9/3/93 modem $955.00 - -------------------------------------------------------------------------------------------------------------------- 9/9/93 ESP1 print controllor $625.00 - -------------------------------------------------------------------------------------------------------------------- 9/17/93 Desk Porte Modem $339.00 - -------------------------------------------------------------------------------------------------------------------- 9/21/93 Seagate Disk Drive $1,945.00 - -------------------------------------------------------------------------------------------------------------------- 9/22/93 7 PC's with tower cases $17,843.00 - -------------------------------------------------------------------------------------------------------------------- 9/23/93 Desk Porte Modem $339.00 - -------------------------------------------------------------------------------------------------------------------- 9/30/93 2 4MB 72pin SIMMS $420.00 - -------------------------------------------------------------------------------------------------------------------- 10/11/93 Laser Printer Cabinet $304.00 - -------------------------------------------------------------------------------------------------------------------- 10/27/93 Notebook Executive Traveller $239.98 - -------------------------------------------------------------------------------------------------------------------- 11/1/93 Display monitors and controller cards $190.00 - -------------------------------------------------------------------------------------------------------------------- 11/9/93 Seagate disk drive $1,945.00 - -------------------------------------------------------------------------------------------------------------------- 11/10/93 7 Desktop modems $2,303.00 - -------------------------------------------------------------------------------------------------------------------- 11/12/93 Laser jet printer $1,370.00 Fleet Bank December 15, 1993 Page 4 - -------------------------------------------------------------------------------------------------------------------- 11/23/93 Postscript simm and memory for laser jet printer $384.50 - -------------------------------------------------------------------------------------------------------------------- 2/12/93 Configuration equipment $21,725.00 - -------------------------------------------------------------------------------------------------------------------- 2/17/93 Configuration equipment $22,590.00 - -------------------------------------------------------------------------------------------------------------------- 3/8/93 1 sign and dir. strip $398.02 - -------------------------------------------------------------------------------------------------------------------- 3/30/93 Lobby signage light $5,000.00 - -------------------------------------------------------------------------------------------------------------------- 3/31/93 Configuration equipment $20,083.00 - -------------------------------------------------------------------------------------------------------------------- 3/31/93 Security system $12,946.40 - -------------------------------------------------------------------------------------------------------------------- 5/7/93 Marble for lobby $1,928.00 - -------------------------------------------------------------------------------------------------------------------- 6/30/93 24 Baluns $480.00 - -------------------------------------------------------------------------------------------------------------------- 1/28/93 FAX machine for SF $2,523.00 - -------------------------------------------------------------------------------------------------------------------- 2/23/93 VMX 200 $27,500.00 - -------------------------------------------------------------------------------------------------------------------- 2/25/93 Copier $15,353.10 - -------------------------------------------------------------------------------------------------------------------- 3/30/93 Telephone system $64,800.00 - -------------------------------------------------------------------------------------------------------------------- 3/31/93 42 bulletin boards $1,627.50 - -------------------------------------------------------------------------------------------------------------------- 4/3/93 Shelving $419.00 - -------------------------------------------------------------------------------------------------------------------- 5/19/93 Cubicles $47,599.32 - -------------------------------------------------------------------------------------------------------------------- 6/14/93 Thermobinder $995.00 - -------------------------------------------------------------------------------------------------------------------- 6/28/93 4 Pictures $3,605.00 - -------------------------------------------------------------------------------------------------------------------- 7/1/93 Art posters $2,510.00 - -------------------------------------------------------------------------------------------------------------------- 7/6/93 Shelving $455.80 - -------------------------------------------------------------------------------------------------------------------- 7/29/93 Multiplex slide storage system $665.00 - -------------------------------------------------------------------------------------------------------------------- 8/10/93 4 vases $425.00 - -------------------------------------------------------------------------------------------------------------------- 8/19/93 Literature rack $235.00 - -------------------------------------------------------------------------------------------------------------------- 9/10/93 NY Voice Mail $13,301.08 - -------------------------------------------------------------------------------------------------------------------- 9/19/93 Slide projector and zoom lens for SF $518.99 - -------------------------------------------------------------------------------------------------------------------- 10/7/93 Audio Equipment for the video camera $258.01 Fleet Bank December 15, 1993 Page 5 - -------------------------------------------------------------------------------------------------------------------- 10/13/93 Six desks $1,878.00 - -------------------------------------------------------------------------------------------------------------------- 10/19/93 Six desks $1,878.00 - -------------------------------------------------------------------------------------------------------------------- 10/28/93 Overhead projector $363.30 - -------------------------------------------------------------------------------------------------------------------- 12/8/93 145 office chairs $18,580.00 - -------------------------------------------------------------------------------------------------------------------- TOTAL EQUIPMENT AND FURNITURE $659,154.58 - -------------------------------------------------------------------------------------------------------------------- SOFTWARE - -------------------------------------------------------------------------------------------------------------------- 1/4/93 1C++ software $396.80 - -------------------------------------------------------------------------------------------------------------------- 1/5/93 1C++ VMS Personal License $1,280.00 - -------------------------------------------------------------------------------------------------------------------- 1/7/93 MS Video/Windows $127.65 - -------------------------------------------------------------------------------------------------------------------- 1/11/93 Microsoft software $525.00 - -------------------------------------------------------------------------------------------------------------------- 1/12/93 Software upgrade $299.00 - -------------------------------------------------------------------------------------------------------------------- 1/15/93 DCA Remote LAN Node $477.00 - -------------------------------------------------------------------------------------------------------------------- 1/15/93 BTRIEVE for Windows $402.00 - -------------------------------------------------------------------------------------------------------------------- 1/15/93 Misc. software $741.60 - -------------------------------------------------------------------------------------------------------------------- 1/15/93 Windows for workgroups $207.00 - -------------------------------------------------------------------------------------------------------------------- 1/15/93 Misc. software $111.45 - -------------------------------------------------------------------------------------------------------------------- 1/15/93 Software upgrade $129.00 - -------------------------------------------------------------------------------------------------------------------- 1/26/93 Config. Admin. Base & License $1,734.00 - -------------------------------------------------------------------------------------------------------------------- 1/28/93 Software disc $372.50 - -------------------------------------------------------------------------------------------------------------------- 1/29/93 100 Combined site license $3,250.00 - -------------------------------------------------------------------------------------------------------------------- 1/31/93 5 software packages $875.00 - -------------------------------------------------------------------------------------------------------------------- 2/8/93 Browse software $69.95 - -------------------------------------------------------------------------------------------------------------------- 2/8/93 Perf. monitor license $3,592.00 - -------------------------------------------------------------------------------------------------------------------- 2/19/93 M/S office license $398.00 - -------------------------------------------------------------------------------------------------------------------- 2/19/93 Appl. Fram (software) $565.00 - -------------------------------------------------------------------------------------------------------------------- 2/23/93 100 licenses for software (After Dark) $1,195.00 - -------------------------------------------------------------------------------------------------------------------- 2/25/93 1 SNA 3270 $3,148.80 Fleet Bank December 15, 1993 Page 6 - -------------------------------------------------------------------------------------------------------------------- 2/26/93 86 Font licenses $3,341.50 - -------------------------------------------------------------------------------------------------------------------- 2/26/93 11 software packages $8,930.10 - -------------------------------------------------------------------------------------------------------------------- 3/10/93 Windows Hijack $118.35 - -------------------------------------------------------------------------------------------------------------------- 3/10/93 10 modems & 6 VGA Graphics $5,495.00 - -------------------------------------------------------------------------------------------------------------------- 3/10/93 4 True type font licenses $153.40 - -------------------------------------------------------------------------------------------------------------------- 3/17/93 Pathworks DOS license $131.20 - -------------------------------------------------------------------------------------------------------------------- 3/25/93 1 DSSI disk $3,358.23 - -------------------------------------------------------------------------------------------------------------------- 4/7/93 35 software packages $6,125.00 - -------------------------------------------------------------------------------------------------------------------- 4/7/93 One Time Charge Programs $406.00 - -------------------------------------------------------------------------------------------------------------------- 4/14/93 1 DSSI disk $3,114.88 - -------------------------------------------------------------------------------------------------------------------- 4/30/93 Misc. software $497.00 - -------------------------------------------------------------------------------------------------------------------- 5/11/93 Univel software $204.00 - -------------------------------------------------------------------------------------------------------------------- 5/12/93 Netware Client SDK software $295.00 - -------------------------------------------------------------------------------------------------------------------- 5/12/93 LAN Workplace for DOS toolkit $399.00 - -------------------------------------------------------------------------------------------------------------------- 5/12/93 Netware NFS software $500.00 - -------------------------------------------------------------------------------------------------------------------- 5/12/93 NetWare 250 User software $500.00 - -------------------------------------------------------------------------------------------------------------------- 5/12/93 Asynch. Com 16 port $200.00 - -------------------------------------------------------------------------------------------------------------------- 5/12/93 Access Server $200.00 - -------------------------------------------------------------------------------------------------------------------- 5/12/93 LAN Workstation for Windows $200.00 - -------------------------------------------------------------------------------------------------------------------- 5/12/93 Netware for SAA v. 1.3 $200.00 - -------------------------------------------------------------------------------------------------------------------- 5/18/93 C++ V/V license $7,206.40 - -------------------------------------------------------------------------------------------------------------------- 5/24/93 Archserv software $431.60 - -------------------------------------------------------------------------------------------------------------------- 5/25/93 Novell 3.11 software $1,277.90 - -------------------------------------------------------------------------------------------------------------------- 5/25/93 10-User LAN for DOS Software $1,261.00 - -------------------------------------------------------------------------------------------------------------------- 5/25/93 1 FTP PC/TCP software $377.80 - -------------------------------------------------------------------------------------------------------------------- 5/25/93 10-User NFS Client software $882.00 - -------------------------------------------------------------------------------------------------------------------- 5/26/93 Misc. software $2,666.10 Fleet Bank December 15, 1993 Page 7 - -------------------------------------------------------------------------------------------------------------------- 5/26/93 6 Windows for Workgroups software packages $264.00 - -------------------------------------------------------------------------------------------------------------------- 5/28/93 2 HP MS-DOS $174.00 - -------------------------------------------------------------------------------------------------------------------- 5/28/93 FTP Development Kit $433.35 - -------------------------------------------------------------------------------------------------------------------- 7/2/93 Misc. software $595.00 - -------------------------------------------------------------------------------------------------------------------- 7/15/93 Arcserv software $1,454.00 - -------------------------------------------------------------------------------------------------------------------- 8/3/93 Script moudule $395.00 - -------------------------------------------------------------------------------------------------------------------- 8/4/93 ProComm plus for Windows $94.99 - -------------------------------------------------------------------------------------------------------------------- 8/4/93 C software $487.50 - -------------------------------------------------------------------------------------------------------------------- 8/6/93 PL/I to C software translator $875.00 - -------------------------------------------------------------------------------------------------------------------- 10/1/93 Windows v. 3.1 software $89.99 - -------------------------------------------------------------------------------------------------------------------- 10/7/93 VMS source code license $1,995.00 - -------------------------------------------------------------------------------------------------------------------- 10/12/93 CD Rom software $60.00 - -------------------------------------------------------------------------------------------------------------------- 10/20/93 Net Census License $315.00 - -------------------------------------------------------------------------------------------------------------------- 10/29/93 Windows Department Kit $1,950.00 - -------------------------------------------------------------------------------------------------------------------- 11/8/93 Clear software $229.00 - -------------------------------------------------------------------------------------------------------------------- 11/9/93 Misc. software $694.00 - -------------------------------------------------------------------------------------------------------------------- 11/5/93 Power++ software $495.00 - -------------------------------------------------------------------------------------------------------------------- 11/11/93 VMS 16 user license $2,757.60 - -------------------------------------------------------------------------------------------------------------------- TOTAL SOFTWARE $81,726.64 - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- TOTAL $740,881.22 ====================================================================================================================
Please prepare the appropriate documents for a term loan amount of $620,000, which is based on 80% of the total assets listed in this letter plus the outstanding balance of $27,500 on our Shawmut note due September 1994. Thanks very much for your help. Sincerely, [Signature of Ira Vishner] Ira Vishner Vice President Corporate Services IV:jc Enclosures EX-10.13 16 MATERIAL CONTRACTS LEASE BETWEEN RIVERFRONT OFFICE PARK JOINT VENTURE Landlord AND PEGASYSTEMS INC. Tenant 101 MAIN STREET, CAMBRIDGE, MASSACHUSETTS 2/12/93 INDEX ----- ARTICLE 1. REFERENCE DATA ................................................................................ 1 ARTICLE 2. DESCRIPTION OF DEMISED PREMISES ................................................................3 2.1 Demised Premises .............................................................................. 3 2.2 Appurtenant Rights ............................................................................ 3 2.3 Reservations .................................................................................. 3 ARTICLE 3. TERM OF LEASE; OPTION TO EXTEND TERM .......................................................... 3 3.1 Habendum .......................................................................................3 3.2 Term Commencement Date ........................................................................ 4 3.3 Option To Extend .............................................................................. 4 3.4 Right of First Offer .......................................................................... 4 ARTICLE 4. WORK BY LANDLORD; TENANT'S ACCESS ..............................................................5 4.1 Completion Date - Delays ...................................................................... 5 4.2 Conclusiveness of Tenant's Performance ........................................................ 6 4.3 Entry by Tenant; Interference with Construction ........................................................................ 7 ARTICLE 5. USE OF PREMISES ............................................................................... 7 5.1 Permitted Use ................................................................................. 7 5.2 Prohibited Uses ............................................................................... 7 5.3 Licenses and Permits .......................................................................... 8 ARTICLE 6. RENT .......................................................................................... 8 6.1 Yearly Fixed Rent ............................................................................. 8 6.2 Payment to Mortgagee .......................................................................... 8 6.3 Operating Expenses ............................................................................ 9 6.4 Tenant's Proportionate Share .................................................................. 9 6.5 Payment to Mortgagee ..........................................................................10 ARTICLE 7. UTILITIES AND LANDLORD'S SERVICES .............................................................10 7.1 Electricity ...................................................................................10 7.2 Water Charges .................................................................................11 7.3 Heat and Air Conditioning......................................................................11 7.4 Additional Heat, Cleaning and Air Conditioning Services ...........................................................12 7.5 Repairs and Other Services ....................................................................12 7.6 Interruption or Curtailment of Services .......................................................12 ARTICLE 8. CHANGES OR ALTERATIONS BY LANDLORD ............................................................13 2/12/93 i ARTICLE 9. FIXTURES, EQUIPMENT AND IMPROVEMENTS - REMOVAL BY TENANT ...................................................................13 ARTICLE 10. ALTERATIONS AND IMPROVEMENTS BY TENANT ........................................................14 ARTICLE 11. TENANT'S CONTRACTORS - MECHANICS' AND OTHER LIENS - STANDARD OF TENANT'S PERFORMANCE - COMPLIANCE WITH LAWS ..................................................14 ARTICLE 12. REPAIRS AND SECURITY BY TENANT ................................................................15 ARTICLE 13. INSURANCE, INDEMNIFICATION, EXONERATION AND EXCULPATION .....................................................................15 13.1 Insurance .....................................................................................15 13.2 Certificates of Insurance .....................................................................16 13.3 General .......................................................................................16 13.4 Landlord's Indemnity ..........................................................................17 13.5 Property of Tenant ............................................................................17 13.6 Bursting of Pipes, etc. .......................................................................18 13.7 Repairs and Alterations .......................................................................18 ARTICLE 14. ASSIGNMENT, MORTGAGING, SUBLETTING, ETC. ......................................................18 14.1 Restrictions ..................................................................................18 14.2 Requests to Assign or Sublet ..................................................................19 14.3 Exceptions ....................................................................................19 14.4 Excess Rent ...................................................................................20 14.5 Recapture .....................................................................................20 14.6 Further Documentation .........................................................................21 14.7 General .......................................................................................21 ARTICLE 15. MISCELLANEOUS COVENANTS .......................................................................22 15.1 Rules and Regulations .........................................................................22 15.2 Access to Premises - Shoring ..................................................................23 15.3 Accidents to Sanitary and Other Systems .......................................................24 15.4 Signs, Blinds and Drapes ......................................................................24 15.5 Estoppel Certificate ..........................................................................24 15.6 Prohibited Items ..............................................................................25 15.7 Requirements of Law; Fines and Penalties ......................................................25 15.8 Tenant's Acts - Effect on Insurance ...........................................................25 15.9 Miscellaneous .................................................................................26 ARTICLE 16. DAMAGE BY FIRE, ETC. ..........................................................................26 ARTICLE 17. WAIVER OF SUBROGATION .........................................................................27 2/12/93 ii ARTICLE 18. CONDEMNATION - EMINENT DOMAIN .................................................................28 ARTICLE 19. DEFAULT .......................................................................................30 19.1 Conditions of Limitation - Re-entry - Termination .........................................................................30 19.2 Damages - Assignment for Benefit of Creditors ........................................................................30 19.3 Damages - Termination .........................................................................31 19.4 Fees and Expenses .............................................................................32 19.5 Landlord's Remedies Not Exclusive .............................................................32 19.6 Grace Period ..................................................................................33 ARTICLE 20. END OF TERM - ABANDONED PROPERTY ..............................................................33 ARTICLE 21. RIGHTS OF MORTGAGEES ..........................................................................34 21.1 Superiority of Lease ..........................................................................34 21.2 Entry and Possession ..........................................................................34 21.3 Right to Cure .................................................................................35 21.4 Duty to Construct .............................................................................35 21.5 Prepaid Rent ..................................................................................35 21.6 Continuing Offer ..............................................................................35 21.7 Subordination .................................................................................35 21.8 Limitations on Liability ......................................................................36 ARTICLE 22. QUIET ENJOYMENT ...............................................................................36 ARTICLE 23. ENTIRE AGREEMENT - WAIVER - SURRENDER .........................................................37 23.1 Entire Agreement ..............................................................................37 23.2 Waiver by landlord ............................................................................37 23.3 Surrender .....................................................................................37 ARTICLE 24. INABILITY TO PERFORM - EXCULPATORY CLAUSE .....................................................38 ARTICLE 25. BILLS AND NOTICES .............................................................................39 ARTICLE 26. PARTIES BOUND - SEISIN OF TITLE ...............................................................39 ARTICLE 27. MISCELLANEOUS .................................................................................40 27.1 Separability ..................................................................................40 27.2 Captions ......................................................................................40 27.3 Broker ........................................................................................40 27.4 Governing Law .................................................................................40 27.5 Assignment of Rents ...........................................................................40 27.6 Parking .......................................................................................41 2/12/93 iii 27.7 Notice of Lease ...............................................................................41 27.8 Financial Statements ..........................................................................41 27.9 Letter of Credit ..............................................................................42
EXHIBIT A Description of Demised Premises EXHIBIT B Description of Land EXHIBIT C Tenant Improvements EXHIBIT D Cleaning Specifications EXHIBIT E Tenant Trade Fixtures EXHIBIT F Rules and Regulations EXHIBIT G Form of Agreement of Subordination, Non-Disturbance and Attornment EXHIBIT H Form of Letter of Credit 2/12/93 iv AGREEMENT OF LEASE AGREEMENT OF LEASE made as of the 26th day of February, 1993, by and between RIVERFRONT OFFICE PARK JOINT VENTURE, a Massachusetts joint venture (hereinafter referred to as "Landlord") and PEGASYSTEMS INC., a Massachusetts corporation (hereinafter referred to as "Tenant"). W I T N E S S E T H: Landlord hereby leases to Tenant and Tenant hereby hires from Landlord that portion of the seventh (7th) floor, as shown on the plan attached hereto as Exhibit A and made a part hereof (hereinafter referred to as the "Premises" or the "Demised Premises") contained in the building known and numbered as 101 Main Street, Cambridge, Massachusetts (hereinafter referred to as the "Building"). 1. REFERENCE DATA Each reference in this Lease to any of the terms and titles contained in this Article shall be deemed and construed to incorporate the data stated following that term or title in this Article. (1) Additional Rent: Sums or other charges payable by Tenant to Landlord under this Lease, other than Yearly Fixed Rent. (2) Approved Final Plans Date: December 16, 1992. (3) Broker: Lynch Murphy Walsh & Partners (4) Business Day: All days except Saturdays, Sundays, and days defined as "Legal Holidays" for the entire state under the laws of the Commonwealth of Massachusetts. (5) Land: The parcel of land described. on Exhibit B attached hereto and made a part hereof. (6) Landlord's Address: c/o Codman Management Company, Inc., One Main Street, Cambridge, Massachusetts 02142. (7) Landlord's Architect: Bryer Associates. 2/12/93 (8) Mortgage: A mortgage, deed of trust, trust indenture, or other security instrument of record creating an interest in or affecting title to the Land or Building or any part thereof, including the leasehold mortgage, and any and all renewals, modifications, consolidations or extensions of any such instrument. For such time as Teachers Insurance and Annuity Association ("TIAA") is the holder of a first mortgage on the Property, the term "Mortgage" shall mean only said first mortgage, and such other mortgages, if any, which TIAA shall approve. (9) Mortgagee: The holder of any Mortgage. (10) Parking Spaces: Seventy (70), provided, however, that Tenant at its option may elect to increase such number upon not less than thirty (30) days prior written notice thereof to Landlord to a maximum aggregate number of ninety-three (93). (11) Property: The Land and Building. (12) Rent: Yearly Fixed Rent and Additional Rent. (13) Rentable Area of the Demised Premises: 23,350 square feet. (14) Tenant's Address: Until the Term Commencement Date, 840 Memorial Drive, Cambridge, MA 02138, and thereafter 101 Main Street, Cambridge, MA 02142. (15) Term Commencement Date: As defined in Section 3.2. (16) Term of This Lease: As defined in Section 3.1. (17) Termination Date: As defined in Section 3.1. (18) Use of Demised Premises: General office purposes including, but not limited, to software development. 2/12/93 2 (19) Yearly Fixed Rent: (a) Year one (1) of the Term of this Lease: -------------------------------------- $364,260 (b) Year two (2) of the Term of this Lease: $409,792.50 (c) Each of years three (3) through six (6) of the Term of this Lease: $455,325
2. DESCRIPTION OF DEMISED PREMISES 2.1 Demised Premises. The Demised Premises are that portion of the Building as described above (as the same may from time to time be constituted after changes therein, additions thereto and eliminations therefrom pursuant hereto). 2.2 Appurtenant Rights. Tenant shall have, as appurtenant to the Demised Premises, rights to use in common, subject to reasonable rules from time to time made by Landlord of which Tenant is given notice, those common roadways, walkways, elevators, hallways and stairways necessary for access to that portion of the Building occupied by the Demised Premises. 2.3 Reservations. All the perimeter walls of the Demised Premises except the inner surfaces thereof, any balconies, terraces or roofs adjacent to the Demised Premises, and any space in or adjacent to the Demised Premises used for shafts, stacks, pipes, conduits, wires and appurtenant fixtures, fan rooms, ducts, electric or other utilities, sinks or other building facilities, and the use thereof, as well as the right of access through the Demised Premises for the purpose of operation, maintenance, decoration and repair as hereinafter provided, are expressly reserved to Landlord. 3. TERM OF LEASE; OPTIONS TO EXTEND TERM 3.1 Habendum. TO HAVE AND TO HOLD the Demised Premises for a term of six (6) years commencing on the Term Commencement Date and ending on the day immediately prior to the sixth (6th) anniversary thereof (the "Term of This Lease"), or on such earlier date upon which said Term may expire or be terminated pursuant to any of the conditions of limitation or other provisions of this Lease or pursuant to law (which date for the termination of the term hereof shall hereafter be called the "Termination Date"). The Term of this Lease may be extended by Tenant in accordance with the provisions of Section 3.3. 2/12/93 3 3.2 Term Commencement Date. The Term Commencement Date shall be the earlier of (a) the date on which, pursuant to permission therefor duly given by Landlord, Tenant undertakes Use of the Demised Premises for the purpose set forth in Article 1, or (b) the date on which the Tenant Improvements are substantially completed in accordance with the provisions of Section 4.1 or (c) as otherwise provided in Section 4.1. 3.3 Option to Extend. On the conditions (which conditions Landlord may at its election waive) (i) that Tenant is not then in default of its covenants and obligations under this Lease, and (ii) that Tenant is then itself occupying the entirety of the Demised Premises, Tenant may extend the Term of this Lease for up to two (2) successive additional periods of four (4) years each by giving notice to Landlord of its election to extend at least twelve (12) months prior to the end of the original Term or the initial extension period, as the case may be. The Yearly Fixed Rent payable by Tenant with respect to each such extension period shall be equal to ninety (90%) percent of the then fair market rental value of the Demised Premises (taking into account comparable first-class office space in the East Cambridge area) (1) as the same may be mutually agreed by Landlord and Tenant; provided, however that (2) if they have not so agreed in writing within two (2) months following the exercise of the option then said fair market value shall be determined by appraisers, one to be chosen by Landlord, one to be chosen by Tenant, and a third to be selected by the two first chosen. The unanimous written decision of the two first chosen, without selection and participation of a third appraiser, or otherwise the written decision of a majority of three appraisers chosen and selected as aforesaid, shall be conclusive and binding upon Landlord and Tenant. Landlord and Tenant shall each notify the other of its chosen appraiser within thirty (30) days following expiration of the aforesaid two (2) month period and, unless such two appraisers shall have reached a unanimous decision within thirty (30) days from said expiration, they shall within a further fifteen (15) days elect a third appraiser and notify Landlord and Tenant thereof. Landlord and Tenant shall instruct the appraiser to make their decisions in thirty (30) days. Landlord and Tenant shall each bear the expense of the appraiser chosen by it and shall equally bear the expense of the third appraiser (if any). Notwithstanding the foregoing, in the event the fair market value is so determined by appraisers, Tenant, at its option, may revoke its election to extend the Term of this Lease by written notice thereof to Landlord given within ten (10) Business Days of Tenant's receipt of notification of said determination of the appraisers. 3.4 Right of First Offer. In the event that, at any time during the Term of this Lease, any rentable office space on the sixth (6th) or eighth (8th) floors of in the Building becomes available for rental and Landlord wishes to lease such space to any person other than the then current occupant thereof (if any), Landlord shall first offer to Tenant the option to add such space 2/12/93 4 to the Demised Premises on the following terms and conditions. Tenant shall have the right to add all or any portion of such space to the Demised Premises by giving notice to Landlord to such effect within thirty (30) days after receipt by Tenant of written notice from Landlord of such offer. If such notice of acceptance by Tenant is not so given, then Landlord shall be free to enter into a lease for such space with any third party or parties within one year after Landlord's said notice to Tenant. As to any such space that Tenant shall so elect to add to the Demised Premises during the first year of the Term of this Lease, the Yearly Fixed Rent with respect to such additional space so added to the Demised Premises shall be $19.50 per square foot per annum. As to any such space that Tenant shall so elect to add to the Demised Premises during any year subsequent to the first year of the Term of this Lease, the Yearly Fixed Rent with respect to such additional space so added to the Demised Premises shall be ninety percent (90%) of the then fair market value of such space determined in accordance with the procedures set forth in Section 3.3. As to any such space that Tenant shall so elect to add to the Demised Premises, Landlord will provide to Tenant the following allowance for fit-up of such additional space: Space to be Added During Year Fit-up Allowance per of Term of this Lease Square Foot of Added Space -------------------- --------------------------- First $25 Second 21 Third 17 Fourth 13 Fifth 9 Sixth 5 For the purposes of determining the applicable fit-up allowance pursuant to this Section 3.4, the year in which Tenant makes its election to add additional space shall be deemed the year of the Term of this Lease in which such space is added. In each instance where Tenant shall so elect to add such additional space to the Demised Premises, Landlord and Tenant shall promptly execute an amendment to this Lease to reflect the changes occasioned thereby. 4. WORK BY LANDLORD; TENANT'S ACCESS 4.1 Completion Date; Delivery of Possession. (a) Subject to delay by causes beyond the reasonable control of Landlord or caused by the action or inaction by Tenant, Landlord shall, on or before April 1, 1993 (the "Original Term Commencement Date") substantially complete the Tenant's Improvements (as defined in Exhibit C, which Exhibit is attached hereto and incorporated by reference), insofar as is practicable in view of Tenant's Acts (as hereinafter defined) or Tenant defaults, if any. For purposes hereof, the terms substantial completion or substantially complete shall mean (i) that the said Tenant's Improvements have been completed in compliance with the Approved 2/12/93 5 Final Plans (as defined in Exhibit C) with the exception of minor punch list items so that the Demised Premises may be used for their intended purpose, excluding, however, any special items or long-lead items designated in the Approved Final Plans and identified as such by Landlord, and (ii) that a certificate of occupancy or other permission for Tenant to occupy the Demised Premises for their permitted use hereunder shall have been obtained; and (iii) that the date of substantial completion shall have been established and confirmed by a Certificate of Substantial Completion signed by Landlord's Architect, subject to Tenant's Architect's reasonable concurrence. In the event that any delay in delivery of possession of the Demised Premises to Tenant past the date set forth in this Section 4.1(a) as the "Original Term Commencement Date" is caused by or is attributable to the act or neglect of Tenant, its servants, agents, employees or independent contractors, including without limitation, as a consequence of any change orders to the Approved Final Plans requested by Tenant and consented to by Landlord (provided that notice of such anticipated delay shall be given by Landlord to Tenant) (collectively "Tenant's Acts"), the Term Commencement Date shall be the later of the Original Term Commencement Date or the date on which possession of the Demised Premises would have been delivered to Tenant but for the delay caused by Tenant's Acts and Tenant shall be liable for Rent and other obligations under this Lease from said Term Commencement Date. Landlord shall notify Tenant as soon as reasonably practical following Landlord's awareness of the occurrence of any Tenant's Act which Landlord believes is likely to cause a delay in the delivery of possession of the Demised Premises to Tenant. Each day of delay caused by Tenant's Acts shall postpone by one (1) day the Original Term Commencement Date. (b) On or before three (3) weeks prior to the Term Commencement Date, Landlord shall notify Tenant that Tenant and its contractor may have access to the Demised Premises for the purpose of preparing the same for Tenant's occupancy. Such access shall be deemed to be pursuant to a license pursuant to Section 4.3 and shall not be deemed to advance the Term Commencement Date. Notwithstanding the fact that the Term Commencement Date shall not have occurred, it is understood and agreed that the provisions of Article 13 of this Lease shall become effective immediately upon the commencement of such access to Tenant, and, Tenant on or before the commencement date of such access shall furnish to Landlord a certificate of insurance pursuant to Section 13.2. 4.2 Conclusiveness of Landlord's Performance. Tenant shall be conclusively deemed to have agreed that Landlord has performed all of its obligations under this Article 4 unless not later than sixty (60) days after the Term Commencement Date Tenant shall give Landlord written notice specifying the respects in which Landlord has not performed such obligations. 2/12/93 6 4.3 Entry by Tenant; Interference with Construction. In the event that Tenant is permitted by Landlord to enter the Demised Premises prior to the Term Commencement Date to undertake such work as is to be performed by Tenant pursuant to this Lease in order to prepare the Demised Premises for Tenant's occupancy, such entry shall be deemed to be pursuant to a license from Landlord to Tenant and shall be at the risk of Tenant. In no event shall Tenant interfere with any construction work being performed by or on behalf of Landlord in or around the Building; without limiting the generality of the foregoing, Tenant shall comply with all instructions issued by Landlord's contractors relative to the moving of Tenant's equipment and other property into the Demised Premises and shall pay any reasonable fees or costs imposed in connection therewith. 5. USE OF PREMISES 5.1 Permitted Use. Except as otherwise agreed by Landlord, Tenant, during the Term of this Lease, shall occupy and use the Demised Premises for the Permitted Use set forth in Article 1 and for no other purpose. Service and utility areas (whether or not a part of the Premises) shall be used only for the particular purpose for which they are designated. 5.2 Prohibited Uses. Tenant shall not use, or suffer or permit the use of, or suffer or permit anything to be done in or anything to be brought into or kept in, the Demised Premises or any part thereof (i) which would violate any of the covenants, agreements, terms, provisions and conditions of this Lease, (ii) for any unlawful purposes or in any unlawful manner, or (iii) which, in the reasonable judgment of Landlord shall in any way (a) impair or tend to impair the appearance or reputation of the Building, (b) impair or interfere with or tend to impair or interfere with any of the Building services or the proper and economic heating, cleaning, air conditioning or other servicing of the Building or Demised Premises, or with the use of any of the other areas of the Building, or (c) occasion discomfort, inconvenience or annoyance to any of the other tenants or occupants of the Building, whether through the transmission of noise or odors or otherwise. Without limiting the generality of the foregoing, no food or beverages shall be prepared or served for consumption on or about the Demised Premises, excepting only for consumption on the Demised Premises by Tenant's employees and invitees; no intoxicating liquors or alcoholic beverages shall be sold on or about the Demised Premises; no lottery tickets (even where the sale of such tickets is not illegal) shall be sold and no gambling, betting or wagering shall otherwise be permitted on or about the Demised Premises; no loitering shall be permitted in or about the Demised Premises; and no loading or unloading of supplies or other material to or from the Demised Premises shall be permitted on the Land except at times and in locations to be designated by Landlord. The Demised Premises shall be maintained in a sanitary condition, and all kept free of rodents and vermin. All trash and rubbish shall be suitably stored in the Demised 2/12/93 7 Premises or other locations designated by Landlord from time to time. 5.3 Licenses and Permits. If any governmental license or permit shall be required for the proper and lawful conduct of Tenant's business, and if the failure to secure such license or permit would in any way affect Landlord, Tenant, at Tenant's expense, shall duly procure and thereafter maintain such license or permit and submit the same to inspection by Landlord. Tenant, at Tenant's expense, shall at all times comply with the terms and conditions of each such license or permit. This Section 5.3 shall not be construed as limiting Landlord's obligation(s), if any, to obtain and maintain licenses and permits to operate the Building. 6. RENT 6.1 Yearly Fixed Rent. Tenant shall pay to Landlord, without any set-off or deduction, at Landlord's office, or to such other person or at such other place as Landlord may designate by notice to Tenant, the Yearly Fixed Rent set forth in Article 1. All Yearly Fixed Rent shall be paid in equal monthly installments in advance on or before the first business day of each calendar month during the Term of this Lease and shall be apportioned for any fraction of a month in which the Term Commencement Date or the last day of the Term of this Lease may fall. 6.2 Taxes. Tenant shall pay to Landlord as Additional Rent a proportionate share (as defined in Section 6.4) of all real estate taxes (including without limitation all betterment assessments and charges in lieu of such taxes and any tax on any fixture (other than a Tenant fixture) installed in the Building, even if taxed as personal property) imposed against the Building and the Land, in excess of the amount of said real estate taxes imposed against the Building and the Land for the fiscal tax year ending June 30, 1993, prorated with respect to any portion of a fiscal year in which the term of this Lease begins or ends. Such payments shall be due and payable within thirty (30) days after Tenant shall have received a copy of the relevant tax bills. If Landlord shall receive any refund of real estate taxes of which Tenant has paid a portion pursuant to this Section, then, out of any balance remaining after deducting Landlord's expenses incurred in obtaining such refund, Landlord shall pay to Tenant the same proportionate share of said balance, prorated as set forth above. Tenant shall, if, as and when demanded by Landlord and with each monthly installment of Fixed Rent, make tax fund payments to Landlord. "Tax Fund Payments" refer to such payments as Landlord shall determine to be sufficient to provide in the aggregate a fund adequate to pay, when they become due and payable, all payments required from Tenant under this Section. In the event that said tax fund payments are not adequate to pay Tenant's share of such taxes, Tenant shall pay to Landlord the amount by which such aggregate is less than the amount of said 2/12/93 8 share, such payment to be due and payable at the time set forth above. Any surplus tax fund payments shall be accounted for to Tenant after payment by Landlord of the taxes on account of which they were made, and shall be promptly refunded to Tenant. 6.3 Operating Expenses. Tenant shall pay to Landlord as Additional Rent a proportionate share (as defined in Section 6.4) of all costs and expenses incurred by Landlord in the operation and maintenance of the Building and the Land in accordance with generally accepted operational and maintenance procedures, in excess of the amount of said costs and expenses incurred by Landlord in the operation and maintenance of the Building and the land during the calendar year ending December 31, 1993, including, without limiting the generality of the foregoing, all such costs and expenses in connection with (1) insurance, license fees, janitorial service, landscaping, and snow removal, (2) wages, salaries, management fees, employee benefits, payroll taxes, on-site office expenses, administrative and auditing expenses, and equipment and materials for the operation, management, and maintenance of said Property, (3) any capital expenditure (amortized, with interest, on such reasonable basis as Landlord shall determine) made by Landlord primarily for the purpose of reducing other operating expenses (4) the furnishing of heat, air conditioning, utilities, and any other service to the common areas of the Building (i.e., areas not constituting a part of the demised premises of any tenant in the Building), (5) the operation and servicing of any computer system installed to regulate Building equipment, and (6) the furnishing of the repairs and services referred to in Section 7.5 (the foregoing being hereinafter referred to as "operating expenses"). As soon as Tenant's share of operating expenses with respect to any calendar year can be determined, the same will be certified by Landlord to Tenant and will become payable to Landlord within thirty (30) days following such certification, subject to proration with respect to any portion of a calendar year in which the Term of this Lease begins or ends. Tenant shall, if, as and when demanded by Landlord and with each monthly installment of Yearly Fixed Rent, make operating fund payments to Landlord. "Operating Fund Payments" refer to such payments as Landlord shall reasonably determine to be sufficient to provide in the aggregate a fund adequate to pay, when they become due and payable, all payments required from Tenant under this Section. In the event that operating fund payments are so demanded, and if the aggregate of said operating fund payments is not adequate to pay Tenant's share of operating expenses, Tenant shall pay to Landlord the amount by which such aggregate is less than the amount of said share, such payment to be due and payable at the time set forth above. Any surplus operating fund payments shall be accounted for to Tenant after such surplus has been determined, and shall be refunded to Tenant promptly. 6.4 Tenant's Proportionate Share. Tenant's proportionate share of taxes pursuant to Section 6.2 and operating expenses pursuant to Section 6.3, respectively, shall be computed 2/12/93 9 according to the ratio, as of the last day of the relevant fiscal year, between the Rentable Area of the Demised Premises (as defined in Article 1) and the total rentable area of all space in the Building. Computations of rentable area other than in the Demised Premises shall be made by Landlord's Architect whose good faith determination shall be conclusive and binding on Tenant. 6.5 Payment to Mortgagee. Landlord reserves the right to provide in any Mortgage given by it of the Property that some or all rents, issues, and profits and all other amounts of every kind payable to the Landlord under this Lease shall be paid directly to the Mortgagee for Landlord's account and Tenant covenants and agrees that it will, after receipt by it of notice from Landlord or Mortgagee designating such Mortgagee to whom payments are to be made by Tenant, pay such amounts thereafter becoming due directly to such Mortgagee until excused therefrom by notice from such Mortgagee. 7. UTILITIES AND LANDLORD'S SERVICES 7.1 Electricity. Tenant shall purchase the electrical energy that Tenant requires for operation of the lighting fixtures, appliances and equipment in the Demised Premises. The costs of initially installing any required meter shall be paid by Landlord, but Tenant shall keep said meter and installation equipment in good working order and repair. Landlord shall not be liable in any way to Tenant for any failure or defect in the supply or character of electrical energy furnished to the Demised Premises by reason of any requirement, act or omission of the public utility serving the Building with electricity unless due to the act or omission of Landlord. Tenant's use of electrical energy in the Demised Premises shall not at any time exceed the capacity of any of the electrical conductors and equipment in or otherwise serving the Demised Premises (Electrical capacity: (i) lighting equal to 2 watts per square foot with an allowance of 1/2 watts for additional lights; (ii) power equal to 9 watts per square foot, plus 5 watts per square foot for computer loads; and (iii) both 277/480 volts and 120/208 volts are available). In order to insure that such capacity is not exceeded and to avert possible adverse affect upon the Building electrical services, Tenant shall give notice to Landlord and obtain Landlord's prior written consent whenever Tenant shall connect to the Building electrical distribution system any fixtures, appliances or equipment other than office electronic equipment and small appliances customarily used generally in commercial offices. Any additional feeders or risers to supply Tenant's electrical requirements in addition to those originally installed and all other equipment proper and necessary in connection with such feeders or risers, shall be installed by Landlord upon Tenant's request, at the sole cost and expense of Tenant, provided that such additional feeders and risers are permissible under applicable laws and insurance regulations and the installation of such feeders or risers will not cause permanent damage or injury to the Building or cause or create a dangerous condition or 2/12/93 10 unreasonably interfere with other tenants of the Building. Tenant agrees that it will not make any alteration or material addition to the existing electrical equipment and/or appliances in the Demised Premises without the prior written consent of Landlord in each instance first obtained, which consent will not be unreasonably withheld. Landlord, at Landlord's expense, shall purchase, install and replace all light fixtures, bulbs, tubes, lamps, lenses, globes, ballasts and switches reasonably required for ordinary use in the Demised Premises (including, without limitation, any such items specified in the Approved Final Plans), provided, however, that Tenant, at Tenant's expense, shall purchase, install and replace all light fixtures, bulbs, tubes, lamps, lenses, globes, ballasts and switches which are not required to be provided for by Landlord hereunder and which Tenant is permited to and does install in the Demised Premises. 7.2 Water Charges. Landlord shall furnish commercially reasonable quantities of hot and cold water for ordinary cleaning, toilet, lavatory and drinking purposes to the extent required to service facilities shown on the Approved Final Plans. If Tenant requires, uses or consumes water for any purpose other than for such purposes, Landlord may (i) assess a reasonable charge for the additional water so used or consumed by Tenant or (ii) install a water meter and thereby measure Tenant's water consumption for all purposes. In the latter event, Landlord shall pay the cost of the meter and the cost of installing any equipment required in connection therewith, and Tenant shall keep said meter and installation equipment in good working order and repair, and shall pay for water consumed, as shown on said meter, together with the sewer charge based on said meter charges, as and when bills are rendered; provided, however, that Landlord shall remain liable to pay for commercially reasonable quantities of hot and cold water as provided above. On Tenant's default in making such payment Landlord may pay such charges and collect the same from Tenant. 7.3. Heat and Air Conditioning. Landlord shall, through the equipment of the Building furnish to and distribute in the Demised Premises heat and air conditioning as normal seasonal changes may require on Business Days from 8:00 a.m. to 6:00 p.m. and on Saturdays (other than legal or recognized holidays as defined in Article 1) from 8:00 a.m. to 12:00 noon when reasonably required for the comfortable occupancy of the Demised Premises by Tenant. Tenant agrees to lower and close the blinds or drapes when necessary because of the sun's position, whenever the air conditioning system is in operation, and to cooperate fully with Landlord with regard to, and to abide by all the regulations and requirements which Landlord may prescribe for the proper functioning and protection of the heating and air conditioning system. 2/12/93 11 7.4 Additional Heat, Cleaning and Air Conditioning Services. (a) The heating and air conditioning equipment serving the Demised Premises shall be designed so as to permit Tenant to obtain heat and air conditioning on days and at times other than as set forth in Section 7.3. Tenant's use of such additional heat and air conditioning shall be determined by a separate energy management meter or device installed by Landlord and all charges in connection therewith shall be payable directly by Tenant; provided, however, that Landlord shall provide such additional heat and air conditioning to Tenant at no charge to Tenant during the first three (3) years of the Term of this Lease. (b) Tenant will pay to Landlord a reasonable charge for any extra cleaning of the Premises required because of the carelessness or indifference of Tenant or because of the nature of Tenant's business, or furnished by Landlord at Tenant's request. Landlord will endeavor to furnish such requested extra cleaning service upon reasonable advance written notice from Tenant of its requirements in that regard. 7.5 Repairs and Other Services. Except as otherwise provided in Articles 16 and 18, subject to Tenant's obligations in Article 12 and elsewhere in this Lease, Landlord shall (a) keep and maintain the roof, exterior walls, structural floor slabs and columns, windows (exclusive of glass components), and common areas of the Building in good operating condition and repair, (b) keep and maintain in workable condition the Building's sanitary, electrical, heating, air conditioning and other systems, (c) provide cleaning services to the Demised Premises and the common areas of the Building on Business Days according to the cleaning standards generally prevailing in first class office buildings in the City of Cambridge, in accordance with Exhibit D, attached hereto, (d) provide maintenance and snow removal for all roadways, walkways and parking areas on the Property, (e) provide grounds maintenance to all landscaped areas, and (f) employ a uniformed guard to be stationed at the main entrance of the Building on an around-the-clock basis. All expenses (excluding capital expenditures other than those made primarily for the purpose of reducing operating expenses) incurred by Landlord in connection with the foregoing repairs and other services shall be included as part of operating expenses pursuant to Section 6.3. 7.6 Interruption or Curtailment of Services. Landlord reserves the right to interrupt, curtail, stop or suspend the furnishing of services and the operation of any Building system, when necessary by reason of accident or emergency, or of repairs, alterations, replacements or improvements in the reasonable judgment of Landlord desirable or necessary to be made, or of difficulty or inability in securing supplies or labor, or of strikes, or of any other cause beyond the reasonable control of 2/12/93 12 Landlord, whether such other cause be similar or dissimilar to those hereinabove specifically mentioned, until said cause has been removed. Landlord shall have no responsibility or liability for any such interruption, curtailment, stoppage, or suspension of services or systems, except that Landlord shall exercise reasonable diligence to minimize inconvenience to Tenant and to eliminate the cause of same and except that Landlord shall give reasonable notice of such interruption, curtailment, stoppage or suspension except when due to accident or emergency. 8. CHANGES OR ALTERATIONS BY LANDLORD Landlord reserves the right, exercisable by itself or its nominee, at any time and from time to time without the same constituting an actual or constructive eviction and without incurring any liability to Tenant therefor or otherwise affecting Tenant's obligations under this Lease, to make such changes, alterations, additions, improvements, repairs or replacements in or to the Building (including the Demised Premises) and the fixtures and equipment thereof, as well as in or to the street entrances, halls, passages, elevators, and stairways thereof, as it may deem necessary or desirable, and to change the arrangement and/or location of entrances or passageways, doors and doorways, and corridors, elevators, stairs, toilets, or other public parts of the Building, provided, however, that there be no unreasonable obstruction of the right of access to, or unreasonable interference with the use and enjoyment of, the Demised Premises by Tenant, except that Landlord shall not be obligated to employ labor at so-called "overtime" or other premium pay rates. Nothing contained in this Article shall be deemed to relieve Tenant of any duty, obligation or liability of Tenant with respect to making or causing to be made any repair, replacement or improvement or complying with any law, order or requirement of any governmental or other authority. Landlord reserves the right to from time to time change the address of the Building. Neither this Lease nor any use by Tenant shall give Tenant any right or easement or the use of any door or any passage or any concourse connecting with any other building or to any public convenience, and the use of such doors, passages and concourses and of such conveniences may be regulated or discontinued at any time and from time to time by Landlord and without affecting the obligation of Tenant hereunder or incurring any liability to Tenant therefor. 9. FIXTURES, EQUIPMENT AND IMPROVEMENTS - REMOVAL BY TENANT All fixtures, equipment, improvements and appurtenances attached to or built into the Demised Premises prior to or during the term, whether by Landlord at its expense or at the expense of Tenant (either or both) or by Tenant shall be and remain part of the Demised Premises and shall not be removed by Tenant at the end of the Term unless otherwise expressly provided in this Lease or identified in Exhibit E, hereto. Where not built into the Demised Premise and if furnished and installed by and at the sole 2/12/93 13 expense of Tenant, all removable electric fixtures, signs, furniture, or trade fixtures or business equipment shall not be deemed to be included in such fixtures, equipment, improvements and appurtenances and may be, and upon the request of Landlord will be, removed by Tenant upon the condition that such removal shall not materially damage the Demised Premises or the Building and that the cost of repairing any damage to the Demised Premises or the Building arising from such removal shall be paid by Tenant. 10. ALTERATIONS AND IMPROVEMENTS BY TENANT Tenant shall make no alterations, installations, removals, additions or improvements in or to the Demised Premises without Landlord's prior written consent and then only by contractors or mechanics approved by Landlord. No installations or other such work shall be undertaken or begun by Tenant until Landlord has approved written plans and specifications therefor; and no amendments or additions to such plans and specifications shall be made without prior written consent of Landlord. Any such work, alterations, decorations, installations, removals, additions and improvements shall be done at the sole expense of Tenant and at such times and in such manner as Landlord may from time to time designate. If Tenant shall make any alterations, decorations, installations, additions or improvements, then Landlord may elect at the time of its consent to such alterations or other work to require Tenant at the expiration of this Lease to restore the Demised Premises to substantially the same condition as existed at the Term Commencement Date. 11. TENANT'S CONTRACTORS - MECHANICS' AND OTHER LIENS - STANDARD OF TENANT'S PERFORMANCE - COMPLIANCE WITH LAWS Whenever Tenant shall make any alterations, decoration, installations, removals, additions or improvements or do any other work in or to the Demised Premises, Tenant will strictly observe the following covenants and agreements: (a) In no event shall any material or equipment be incorporated in or added to the Demised Premises in connection with any such alteration, decoration, installation, addition or improvement which is subject to any lien, charge, mortgage or other encumbrance of any kind whatsoever or is subject to any security interest or any form of title retention agreement. Any mechanic's lien filed against the Demised Premises or the Building for work claimed to have been done for, or materials claimed to have been furnished to Tenant shall be discharged by Tenant within thirty (30) days thereafter, at the expense of Tenant, by filing the bond required by law or otherwise. If Tenant fails so to discharge any lien, Landlord may do so at Tenant's expense and Tenant shall reimburse Landlord for any expense or cost incurred by Landlord in so doing within fifteen (15) days after rendition of a bill therefor. 2/12/93 14 (b) All installations or work done by Tenant under this or any other Article of this Lease shall be at its own expense (unless expressly otherwise provided) and shall at all times comply with (i) laws, rules, orders and regulations of governmental authorities having jurisdiction thereof; (ii) orders, rules and regulations of any Board of Fire Underwriters, or any other body hereafter constituted exercising similar functions, and governing insurance rating bureaus; (iii) plans and specifications prepared by and at the expense of Tenant theretofore submitted to Landlord for its prior written approval. (c) Tenant shall procure all necessary permits before undertaking any work in the Demised Premises; do all such work in a good and workmanlike manner, employing materials of good quality and complying with all governmental requirements and defend, save harmless, exonerate and indemnify Landlord from all injury, loss or damage to any person or property occasioned by or growing out of such work. 12. REPAIRS AND SECURITY BY TENANT Tenant shall keep or cause to be kept all and singular the Demised Premises neat and clean and in such repair, order and condition as the same are in on the Term Commencement Date or may be put in during the term hereof, reasonable use and wear thereof, damage by fire or by other insured casualty and repairs required to be made hereunder by Landlord excepted. Without limiting the generality of the foregoing, Tenant shall keep all windows and other glass whole, and shall replace the same whenever broken with glass of the same quality. Tenant shall make, as and when needed as a result of misuse by, or neglect or improper conduct (including without limitation the placement of any weight exceeding the floor load) of Tenant or Tenant's servants, employees, agents, invitees or licensees or otherwise, all repairs in and about the Demised Premises necessary to preserve them in such repair, order and condition, which repairs shall be in quality and class equal to the original work. Landlord may elect, at the expense of Tenant, either pursuant to Section 15.3 or otherwise, to make any such repairs or to repair any damage or injury to the Building or the Demised Premises caused by moving property of Tenant in or out of the Building, or by installation or removal of furniture or other property, or by misuse by, or neglect or improper conduct of, Tenant or Tenant's servants, employees, agents or licensees. 13. INSURANCE, INDEMNIFICATION, EXONERATION AND EXCULPATION 13.1 Insurance. Tenant shall procure, keep in force and pay for (a) Comprehensive Commercial Liability Insurance indemnifying Landlord, Landlord's managing agent, Tenant and (whenever Landlord shall so request) any Mortgagee against all claims and demands for injury to or death of persons or damage to property (subject to customary exclusions contained in standard form 2/12/93 15 insurance policies customarily procured by other responsible office tenants in the Greater Boston area), which may be claimed to have occurred upon the Demised Premises in the amounts which shall at the time Tenant and/or contractors enter the Premises in accordance with Article 4 of this Lease be not less than Two Hundred Thousand Dollars ($200,000) for property damage, One Million Dollars ($1,000,000) for injury or death of one person, and Two Million Dollars ($2,000,000) for injury or death of more than one person in a single accident, and from time to time thereafter shall be not less than such higher amounts, if procurable, as may be reasonably required by Landlord (each such change to be effective on the next annual renewal date of such insurance) and are then customarily carried by responsible office tenants in the Greater Boston area, (b) insurance covering any damage to the plate glass windows in or immediately about the Demised Premises, in reasonable amounts to be established from time to time by Landlord, and (c) so-called contents and improvements insurance adequately insuring all property belonging to or removable by Tenant and situated in the Demised Premises. 13.2 Certificates of Insurance. Such insurance shall be effected with insurers authorized to do business in Massachusetts under valid and enforceable policies, and such policies shall name Landlord, each Mortgagee, Tenant and the parties specified in Section 13.1 as the insureds, as their respective interests appear. Such insurance shall provide that it shall not be cancelled without at least ten (10) days' prior written notice to each insured named therein. On or before the Term Commencement Date and thereafter not less than fifteen (15) days prior to the expiration date of each expiring policy, certificates of the policies provided for in Section 13.1 issued by the respective insurers, setting forth in full the provisions thereof and issued by such insurers together with evidence satisfactory to Landlord of the payment of all premiums for such policies, shall be delivered by Tenant to Landlord and certificates as aforesaid of such policies shall, upon request of Landlord, be delivered by Tenant to the holder of any mortgage affecting the Demised Premises. 13.3 General. Tenant will save Landlord harmless, and will exonerate and indemnify Landlord, from and against any and all claims, liabilities or penalties asserted by or on behalf of any person, firm, corporation or public authority: (a) On account of or based upon any injury to person, or loss of or damage to property sustained or occurring on the Demised Premises on account of or based upon the act, omission, fault, negligence or misconduct of any person whomsoever (other than Landlord or its agents, contractors or employees); (b) On account of or based upon any injury to person or loss of or damage to property, sustained or occurring elsewhere (other than on the Demised Premises) in or about the Building (and, in particular, without limiting the generality of the 2/12/93 16 foregoing on or about the elevators, stairways, public corridors, sidewalks, concourses, arcades, malls, galleries, vehicular tunnels, approaches, areaways, roof, or other appurtenances and facilities used in connection with the Building or Demised Premises) arising out of the negligent act or omission of Tenant, its agents or employees; (c) On account of or based upon (including monies due on account of) any work or thing whatsoever done (other than by Landlord or its contractors, or agents or employees of either) in the Demised Premises during the Term of this Lease and during the period of time, if any, prior to the Term Commencement Date that Tenant may have been given access to the Demised Premises, excepting as a consequence of the negligent act or omission of Landlord, its agents or employees; and (d) On account of or resulting from the failure of Tenant to perform and discharge any of its covenants and obligations under this Lease; and, in respect of any of the foregoing items (a) - (d), from and against all costs, expenses (including reasonable attorneys' fees), and liabilities incurred in or in connection with any such claim, or any action or proceeding brought thereon; and in case any action or proceeding be brought against Landlord by reason of any such claim, Tenant upon notice from Landlord shall at Tenant's expense resist or defend such action or proceeding and employ counsel therefor reasonably satisfactory to Landlord, it being agreed that such counsel as may act for insurance underwriters of Tenant engaged in such defense shall be deemed satisfactory. 13.4 Landlord's Indemnity. Landlord will save Tenant harmless, and will exonerate and indemnify Tenant, from and against any and all claims, liabilities or penalties asserted by or on behalf of any person, firm, corporation or public authority: (a) On account of or based upon any injury to person, or loss of or damage to property sustained or occurring on the Property on account of or based upon the act, omission, fault, negligence or misconduct of Landlord, its agents or employees; and (b) On account of or resulting from the failure of Landlord to perform and discharge any of its covenants and obligations under this Lease. 13.5 Property of Tenant. In addition to and not in limitation of the foregoing, Tenant covenants and agrees that all merchandise, furniture, fixtures and property of every kind, nature and description which may be in or upon the Demised Premises or Building, in the public corridors, or on the sidewalks, areaways and approaches adjacent thereto, during the 2/12/93 17 term hereof, shall be at the sole risk and hazard of Tenant, and that if the whole or any part thereof shall be damaged, destroyed, stolen or removed from any cause or reason whatsoever no part of said damage or loss shall be charged to, or borne by Landlord. 13.6 Bursting of Pipes, etc. Landlord shall not be liable for any injury or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, electrical disturbance, water, rain or snow or leaks from any part of the Building or from the pipes, appliances or plumbing works or from the roof, street or sub-surface or from any other place or caused by dampness or by any other cause of whatever nature, unless caused by or due to the negligence of Landlord, its agents, servants or employees, and then only after (i) notice to Landlord of the condition claimed to constitute negligence an (ii) the expiration of a reasonable time after such notice has been received by Landlord without such condition having been cured or corrected; and in no event shall Landlord be liable for any loss, the risk of which is compensated by Tenant's insurance; nor shall Landlord or its agents be liable for any such damage caused by other tenants or persons in the Building or caused by operations in construction of any private, public or quasi-public work. 13.7 Repairs and Alterations - No Diminution of Rental Value. Except as otherwise provided in Articles 16 or 18, there shall be no allowance to Tenant for diminution of rental value and no liability on the part of Landlord by reason of inconvenience, annoyance or injury to Tenant arising from any repairs, alterations, additions, replacements or improvements made by Landlord, Tenant or others in or to any portion of the Building or Demised Premises, or in or to fixtures, appurtenances, or equipment thereof, or for failure by Landlord or others to make any repairs, alterations, additions or improvements in or to any portion of the Building or of the Demised Premises, or in or to the fixtures, appurtenances or equipment thereof, provided, however, that any such work performed by or on behalf of Landlord shall be subject to the provisions of Section 15.2 14. ASSIGNMENT, MORTGAGING, SUBLETTING, ETC. 14.1 Restrictions. Tenant covenants and agrees that neither this Lease nor the term and estate hereby granted nor any interest herein or therein, will be assigned, sublet, mortgaged, pledged, encumbered or otherwise transferred (whether voluntarily or by operation of law) and that neither the Demised Premises, nor any part thereof, will be encumbered in any manner by reason of any act or omission on the part of Tenant, or used or occupied, or permitted to be used or occupied, or utilized for any reason whatsoever, by anyone other than Tenant, or for any use or purpose other than a stated in Article 1 without the prior 2/12/93 18 written consent of Landlord in every case, which written consent shall not be unreasonably withheld or delayed. 14.2 Requests to Assign or Sublet. In connection with any request by Tenant for such consent to assign or sublet, Tenant shall submit to Landlord, in writing, a statement containing the name of the proposed assignee or subtenant, such information as to its financial responsibility and standing as Landlord may reasonably require, and all of the terms and provisions upon which the proposed assignment or subletting is to be made, and, unless the proposed area to be assigned or sublet shall constitute an entire floor or floors, such statement shall be accompanied by a floor plan delineating the proposed area to be assigned or sublet. As long as Tenant is not in material default under any of the terms, covenants and conditions of this Lease on Tenant's part to be observed and performed, Landlord shall not unreasonably withhold, condition or delay Landlord's prior consent to the assignment or subletting(s) by Tenant of all or parts of the Demised Premises. Each such subletting shall be for undivided occupancy by the subtenant of that part of the Demised Premises affected thereby for the use permitted under this Lease and at no time shall there be more than three (3) occupants, including Tenant, within the Demised Premises. Landlord may, however, withhold such consent if, in Landlord's reasonable judgment, the proposed assignee or subtenant is not engaged in a business consistent with the character and dignity of the Building, or will impose any additional material burden upon Landlord in the operation of the Building (to an extent greater than the burden to which Landlord would have been put if Tenant continued to use, or used, such part of the Demised Premises for its own purposes), or if Landlord has any other reasonable objections to the proposed assignment or subletting. 14.3 Exceptions. Notwithstanding the foregoing, Tenant may, without the requirement of obtaining Landlord's consent, assign this Lease or sublease any portion of the Demised Premises to any entity which is the parent, a majority-owned subsidiary of Tenant, an entity under common control with Tenant or to any entity with which Tenant may merge or consolidate or to which Tenant may sell all or substantially all of its assets as a going concern (such entity with which Tenant may merge, consolidate or to which Tenant may sell all or substantially all of its assets as aforesaid being hereinafter referred to as a "Successor"), provided that, simultaneously with any such assignment, Tenant shall deliver to Landlord an agreement in form and substance reasonably satisfactory to Landlord which contains an appropriate covenant of assumption by such assignee; and provided further that in the case of any such assignment or sublease to a Successor, Tenant shall have submitted to Landlord prior thereto financial statements or other materials reasonably satisfactory to Landlord evidencing that such Successor has financial resources comparable to that of Tenant as of the time of such assignment or sublease. 2/12/93 19 14.4 Excess Rent. If the rent received by Tenant on account of a sublease of all or any portion of the Demised Premises exceeds the Yearly Fixed Rent and Additional Rent, allocated to the space subject to the sublease in the proportion of the area of such space to the area of the entire Demised Premises, Tenant shall pay to Landlord fifty percent (50%) of such excess, monthly as received by Tenant. 14.5 Recapture. Notwithstanding the foregoing provisions of this Article: (1) in the event Tenant proposes to assign or sublet all of the Demised Premises, other than to a Successor, Landlord, at Landlord's option, may give to Tenant, within thirty (30) days after the submission by Tenant to Landlord of the statement required to be submitted in connection with such assignment or subletting, or, if Tenant so requests, within thirty (30) days after Tenant notifies Landlord that Tenant wishes to undertake such assignment or subletting, but has not yet procured a proposed assignee or subtenant, a notice terminating this Lease on the date (referred to as the "Earlier Termination Date") immediately prior to the proposed commencement date of the term of the proposed assignment or subletting, as set forth in such statement, and, in the event such notice is given, this Lease and the Term shall come to an end and expire on the Earlier Termination Date with the same effect as if it were the date originally fixed in this Lease for the end of the Term of this Lease, and the Rent shall be apportioned as of said Earlier Termination Date and any prepaid portion of Rent for any period after such date shall be refunded by Landlord to Tenant, provided, however, that in the event Landlord shall so elect to terminate this Lease, Tenant, upon written notice to Landlord given within ten (10) days of receipt by Tenant of Landlord's notice of termination, may elect to negate such termination by declaring its intent not to proceed with such assignment or subletting; or (2) in the event Tenant proposes to assign or sublet in excess of fifty percent (50%) of the Demised Premises, other than to a Successor, Landlord, at Landlord's option, may give to Tenant, within thirty (30) days after the submission by Tenant to Landlord of the statement required to be submitted in connection with such proposed assignment or subletting, a notice electing to eliminate such portion of the Demised Premises (said portion is referred to as the "Eliminated Space") from the Demised Premises effective on the date (referred to as the "Elimination Date") immediately prior to the proposed commencement date of the term of the proposed assignment or subletting, as set forth in such statement, and in the event such notice is given, unless Tenant, upon written notice to Landlord given within ten (10) days of receipt by Tenant of Landlord's notice to eliminate such space shall elect to negate such elimination by declaring Tenant's intent not to proceed with such assignment or subletting, (i) the Eliminated Space shall be eliminated from the Demised Premises effective on the Elimination Date; (ii) Tenant shall surrender the Eliminated Space to Landlord on or prior to the Elimination Date in the same manner as if said Date were the date originally fixed in this Lease for 2/12/93 20 the end of the Term of this Lease; (iii) if the Eliminated Space shall constitute less than an entire floor, Landlord, at Landlord's expense, shall have the right to make any alterations and installations in the Demised Premises required, in Landlord's judgment, reasonably exercised, to make the Eliminated Space a self-contained rental unit with access through corridors to the elevators and core toilets serving the Eliminated Space, and if the Demised Premises shall contain any core toilets or any corridors (including any corridors proposed to be constructed by Landlord pursuant to this subdivision (iii) providing access from the Eliminated Space to the core area), Landlord and any tenant or other occupant of the Eliminated Space shall have the right to use such toilets and corridors in common with Tenant and any other permitted occupants of the Demised Premises, and the right to install signs and directional indicators in or about such corridors indicating the name and location of such tenant or other occupant; (iv) the Yearly Fixed Rent shall be reduced in the proportion which the area of the Eliminated Space bears to the total area of the Demised Premises immediately prior to the Elimination Date (including an equitable portion of the area of any corridors referred to in subdivision (iii) of this sentence as part of the area of the Eliminated Space for the purpose of computing such reduction), and any prepaid Rent for any period after the Elimination Date allocable to the Eliminated Space shall be refunded by Landlord to Tenant; and (v) there shall be an equitable apportionment of any Additional Rent Payable pursuant to Article 6 for the relevant fiscal and calendar years in which said Elimination Date shall occur. 14.6 Further Documentation. At the request of Landlord, Tenant shall execute and deliver an instrument or instruments, in form satisfactory to Landlord, setting forth any modifications to this Lease contemplated in or resulting from the operation of the foregoing provisions of this paragraph; however, neither Landlord's failure to request any such instrument nor Tenant's failure to execute or deliver any such instrument shall vitiate the effect of the foregoing provisions of this Article. 14.7 General. (a) The failure by Landlord to exercise its option under this paragraph with respect to any subletting shall not be deemed a waiver of such option with respect to any extension or any subsequent subletting of the premises affected thereby. Tenant shall reimburse Landlord promptly, as Additional Rent, for reasonable legal and other expense incurred by Landlord in connection with any request by Tenant for any consent required under the provisions of this Article. (b) It is specifically understood and agreed that neither Tenant nor any other person having an interest in the possession, use, occupancy or utilization of the Demised Premises shall enter into any sublease, license, concession or other agreement (or renewals of any of the foregoing) for use, 2/12/93 21 occupancy or utilization of space in the Demised Premises which provides for rental or other payment for such use, occupancy or utilization based, in whole or in part, on the net income or profits derived by any person or entity from the space leased, used, occupied or utilized (other than an amount based on a fixed percentage or percentages of receipts or sales). Any such purported sublease or other agreement shall be absolutely void and ineffective as a conveyance of any right or interest in the possession, use, occupancy, or utilization of any part of the Demised Premises, (c) The listing of any name other than that of Tenant, whether on the doors of the Demised Premises or on the Building directory, or otherwise, shall not operate to vest any right or interest in this Lease or in the Demised Premises or be deemed to be the written consent of Landlord mentioned in this Article, it being expressly understood that any such listing is a privilege extended by Landlord revocable at will by written notice to Tenant. (d) If this Lease be assigned, or if the Demised Premises or any part thereof shall be sublet or occupied by anybody other than Tenant, Landlord may at any time and from time to time, collect rent and other charges from the assignee, subtenant or occupant and apply the aggregate amount collected to the Rent and other charges herein reserved, but no such assignment or collection shall be deemed a waiver of this covenant, or the acceptance of the assignee, subtenant or occupant as a tenant, or a release of Tenant from the further performance by Tenant of covenants on the part of Tenant herein contained. Landlord shall notify Tenant of any amounts so collected by Landlord directly from such subtenant or assignee. The consent by Landlord to an assignment or subletting or occupancy shall not in any way be construed to relieve Tenant from obtaining the express consent in writing of Landlord to any further assignment or subletting or occupancy. 15. MISCELLANEOUS COVENANTS 15.1 Rules and Regulations. Tenant and Tenant's servants, employees, and agents will faithfully observe such Rules and Regulations as are attached hereto as Exhibit F and made a part hereof or as Landlord hereafter at any time or from time to time may make and may communicate in writing to Tenant and which in the reasonable judgment of Landlord shall be necessary for the reputation, safety, care or appearance of the Property, or the preservation of good order therein, or the operation or maintenance of the Property, or the equipment thereof, or the comfort of tenants or others in the Building, provided, however, that in the case of any conflict between the provisions of this Lease and any such Rules and Regulations, the provisions of this Lease shall control, and provided further that nothing contained in this Lease shall be construed to impose upon Landlord any duty or obligation to enforce such Rules and Regulations or the terms, 2/12/93 22 covenants or conditions in any other lease as against any other tenant and Landlord shall not be liable to Tenant for violation of the same by any other tenant, its servants, employees, agents, visitors, invitees or licensees. Notwithstanding the foregoing, (i) to the extent Landlord elects to enforce such Rules and Regulations they shall be applied and enforced uniformly among all tenants and (ii) Landlord shall enforce such Rules and Regulations to the extent the failure to do so would materially interfere with Tenant's quiet enjoyment of the Demised Premises. 15.2 Access to Premises - Shoring. Tenant shall: (i) permit Landlord to erect, use and maintain pipes, ducts and conduits in and through the Demised Premises, provided the same do not materially reduce the floor area or materially adversely affect the appearance thereof; (ii) permit the Landlord and any Mortgagee of the Building or the Building and Land or of the interest of Landlord therein, and any lessor under any ground or underlying lease, and their representatives, to have free and unrestricted access to and to enter upon the Demised Premises at all reasonable hours for the purposes of inspection or of making repairs, replacements or improvements in or to the Demised Premises or the Building or equipment (including, without limitation, sanitary, electrical, heating, air conditioning or other systems) or of complying with all laws, orders and requirements of governmental or other authority or of exercising any right reserved to Landlord by this Lease (including the right during the progress of any such repairs, replacements or improvements or while performing work and furnishing materials in connection with compliance with any such laws, orders or requirements to take upon or through, or to keep and store within, the Demised Premises all necessary materials, tools and equipment); and (iii) permit Landlord, at reasonable times, to show the Demised Premises during ordinary business hours to any Mortgagee, ground lessor, prospective purchaser, prospective mortgagee, or prospective assignee of any mortgage, of the Building or of the Building and the Land or of the interest of Landlord therein, and during the period of twelve months next preceding the Termination Date to any person contemplating the leasing of the Demised Premises or any part thereof. If Tenant shall not be personally present to open and permit any entry into the Demised Premises at any time when for any reason an entry therein shall be necessary or permissible, Landlord or Landlord's agents must nevertheless be able to gain such entry by contacting a responsible representative of Tenant, whose name, address and telephone number shall be furnished by Tenant. Provided that Landlord shall incur no unreasonable additional expense thereby, Landlord shall exercise its rights of access to the Demised Premises permitted under any of the terms and provisions of this Lease in such manner as to minimize to the extent practicable interference with Tenant's use and occupation of the Demised Premises, and upon reasonable prior notice, except in the case of an emergency or where such notice is not reasonably practical. If an excavation shall be made upon land adjacent to the Demised Premises or shall be authorized to be made, Tenant shall afford, 2/12/93 23 to the party causing or party authorized to cause such excavation, license to enter upon the Demised Premises for the purpose of doing such work as said person shall deem necessary to preserve the Building from injury or damage and to support the same by proper foundations without any claim for damage or indemnity against Landlord, or diminution or abatement of Rent. 15.3 Accidents to Sanitary and other Systems. Tenant shall give to Landlord prompt notice of any fire or accident in the Demised Premises or in the Building and of any damage to, or defective condition in, any part or appurtenance of the Building's sanitary, electrical, heating and air conditioning or other systems located in, or passing through, the Demised Premises, and the damage or defective condition shall be remedied by Landlord with reasonable diligence, but if such damage or defective condition was caused by Tenant or by the employees, licensees, or invitees of Tenant, the cost to remedy the same shall be paid by Tenant. Tenant shall not be entitled to claim any eviction from the Demised Premises or any damages arising from any such damage or defect unless the same (i) shall have been occasioned by the negligence of Landlord, its agents, servants or employees and (ii) shall not, after notice to Landlord of the condition claimed to constitute negligence, have been cured or corrected within a reasonable time after such notice has been received by Landlord; and in case of a claim of eviction unless such damage or defective condition shall have rendered the Demised Premises untenantable and they shall not have been made tenantable by Landlord within a reasonable time not to exceed sixty (60) days unless the circumstances reasonably warrant a longer period of time. Landlord agrees to diligently work to correct such damage or defect, except as otherwise provided herein. 15.4 Signs, Blinds and Drapes. Tenant shall not place any signs on the exterior of the Building or on or in any window, public corridor or door visible from the exterior of the Demised Premises. No blinds may be put on or in any window nor may any Building drapes or blinds be removed by Tenant. Tenant may hang its own drapes, provided that they shall not, without the prior written approval of Landlord, in any way interfere with any Building drapery or blinds or be visible from the exterior of the Building. 15.5 Estoppel Certificate. Either party shall at any time and from time to time upon not less than twenty (20) days' prior notice by Landlord to Tenant or by a Mortgagee to Tenant, or by Tenant to Landlord, as the case may be, execute, acknowledge and deliver to the party making such request a statement in writing certifying that this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified and stating the modifications) and the dates to which Rent has been paid in advance, if any, an stating whether or not to the best knowledge of the signer of such certificate Landlord is in default in performance of any 2/12/93 24 covenant, agreement, term, provisions or condition contained in this Lease and, if so, specifying each such default of which the signer may have knowledge, it being intended that any such statement delivered pursuant hereto may be relied upon by any prospective purchaser of the Building or of the Building and the Land or of the interest of Landlord therein, any Mortgagee or prospective Mortgagee thereof, any lessor or prospective lessor thereof, any lessee or prospective lessee thereof, or any prospective assignee of any Mortgage. The form of any such estoppel certificate requested by a Mortgagee shall be satisfactory to such Mortgagee. Notwithstanding anything contained in this Lease to the contrary, the provisions of this Section 15.5 shall be inapplicable to Teachers Insurance and Annuity Association in the event said entity shall succeed to the rights of Landlord hereunder. 15.6 Prohibited Items. Tenant shall not bring or permit to be brought or kept in or on the Demised Premises or elsewhere in the Building any hazardous, inflammable, combustible or explosive fluid, material, chemical or substance (except such as are related to Tenant's use of the Demised Premises, provided that the same are stored and handled in a proper fashion consistent with all applicable legal standards). 15.7 Requirements of Law Fines and Penalties. Tenant at its sole expense shall comply with all laws, rules, orders and regulations of Federal, State, County and Municipal Authorities and with any direction of any public officer or officers, pursuant to law, which shall impose any duty upon Landlord or Tenant with respect to and arising out of Tenant's use or occupancy of the Demised Premises. Tenant shall reimburse and compensate Landlord for all expenditures made by, or damages or fines sustained or incurred by, Landlord due to nonperformance or noncompliance with or breach or failure to observe any term, covenant or condition of this Lease upon Tenant's part to be kept, observed, performed or complied with. If Tenant receives notice of any violation of law, ordinance, order or regulation applicable to the Demised Premises, it shall give prompt notice thereof to Landlord. 15.8 Tenant's Acts - Effect on Insurance. Except for permitted uses, Tenant shall not do or authorize or cause to be done any act or thing upon the Demised Premises or elsewhere in the Building which will invalidate or be in conflict with any insurance policies covering the Building and the fixtures and property therein and shall not do, or authorize or cause to be done, any act or thing upon the Demised Premises which shall subject Landlord to any liability or responsibility for injury to any person or persons or to property by reason of any business or operation being conducted on said Demised Premises or for any other reason. Tenant at its own expense shall comply with all rules, orders, regulations or requirements of the Board of Fire Underwriters or any other similar body having jurisdiction, and shall not (i) do, or permit anything to be done, in or upon the 2/12/93 25 Demised Premises, or bring or keep anything therein, except as now or hereafter permitted by the Fire Department, Board of Underwriters, Fire Insurance Rating Organization, or other authority having jurisdiction, and then only in such quantity and manner of storage as will not increase the rate for any insurance applicable to the Building, or (ii) use the Demised Premises in manner which shall increase such insurance rates on the Building or on property located therein, over that applicable when Tenant first took occupancy of the Demised Premises hereunder. If by reason of failure of Tenant to comply with the provisions hereof the insurance rate applicable to any policy of insurance shall at any time thereafter be higher than it otherwise would be, then Tenant shall reimburse Landlord for that part of any insurance premiums thereafter paid by Landlord, which shall have been charged because of such failure by Tenant. 15.9 Miscellaneous. Tenant shall not suffer or permit the Demised Premises or any fixtures, equipment or utilities therein or serving the same, to be overloaded, damaged or defaced, nor permit any hole to be drilled or made in any part thereof. 16. DAMAGE BY FIRE, ETC. In the event of loss of, or damage to, the Demised Premises or the Building by fire or other casualty, the rights and obligations of the parties hereto shall be as follows: (a) If the Demised Premises, or any part thereof, shall be damaged by fire or other casualty, Tenant shall give prompt notice thereof to Landlord, and Landlord, upon receiving such notice, shall proceed promptly and with due diligence, subject to unavoidable delays, to repair, or cause to be repaired, such damage. If the Demised Premises or any part thereof shall be rendered untenantable by reason of such damage, whether to the Demised Premises or to the Building, the Yearly Fixed Rent and Additional Rent shall proportionately abate for the period from the date of such damage to the date when such damage shall have been repaired. (b) If, as a result of fire or other casualty, the whole or a substantial portion of the Building, Demised Premises or necessary access thereto is rendered untenantable, Landlord, within forty-five (45) days from the date of such fire or other casualty, may terminate this Lease by notice to Tenant, specifying a date not less than twenty (20) nor more than forty (40) days after the giving of such notice on which the Term of this Lease shall terminate. If Landlord does not so elect to terminate this Lease, then Landlord shall proceed with diligence to repair the damage to the Demised Premises and all facilities serving the same, if any, which shall have occurred, and the Yearly Fixed Rent and Additional Rent shall meanwhile proportionately abate, all as provided in Paragraph (a) of this Section. However, if, in the event of any damage by fire or other casualty, such damage is not repaired and the Demised 2/12/93 26 Premises and all facilities serving the same restored to substantially the same condition as they were prior to such damage within three (3) months from the date of such damage, Tenant within thirty (30) days from the expiration of such three (3) month period, may terminate this Lease by notice to Landlord, specifying a date not more than sixty (60) days after the giving of such notice on which the term of this Lease shall terminate. (c) If the Demised Premises shall be rendered untenantable by fire or other casualty during the last two (2) years of the Term of this Lease, either party may terminate this Lease effective as of the date of such fire or other casualty upon notice to the other given within thirty (30) days after such fire or other casualty. (d) Landlord shall not be required to repair or replace any of Tenant's business machinery, equipment, cabinet work, furniture, personal property or other installations, and no damages, compensation or claim shall be payable by Landlord for inconvenience, loss of business or annoyance arising from any repair or restoration of any portion of the Demised Premises or of the Building. (e) The provisions of this Article shall be considered an express agreement governing any instance of damage or destruction of the Building or the Demised Premises by fire or other casualty, and any law now or hereafter in force providing for such a contingency in the absence of express agreement shall have no application. (f) In the event of any termination of this Lease pursuant to this Article, the Term of this Lease shall expire as of the effective termination date as fully and completely as if such date were the date herein originally scheduled as the Termination Date. Tenant shall have access to the Demised Premises for a period of thirty (30) days after the date of termination in order to remove Tenant's personal property. (g) Landlord's Architect's certificate, given in good faith, shall be deemed conclusive of the statements therein contained and binding upon Tenant with respect to the performance and completion of any repair or restoration work undertaken by Landlord pursuant to this Article or Article 18. Any minor or insubstantial details of construction or mechanical adjustments which remain to be done after the delivery of said certificate shall be handled on a punch list basis and thereafter promptly completed by Landlord. 17. WAIVER OF SUBROGATION In any case in which Tenant shall be obligated under any provision of this Lease to pay to Landlord any loss, cost, damage, liability, or expense suffered or incurred by Landlord, Landlord shall allow to Tenant as an offset against the amount 2/12/93 27 thereof the net proceeds of any insurance collected by Landlord for or on account of such loss, cost, damage, liability or expense, provided that the allowance of such offset does not invalidate or prejudice the policy or policies under which such proceeds were payable. In any case in which Landlord shall be obligated under any provision of this Lease to pay to Tenant any loss, cost, damage, liability or expense suffered or incurred by Tenant, Tenant shall allow to Landlord as an offset against the amount thereof (i) the net proceeds of any insurance collected by Tenant for or on account of such loss, cost, damage, liability, or expense, provided that the allowance of such offset does not invalidate the policy or policies under which such proceeds were payable and (ii) if such loss, cost, damage, liability or expense shall have been caused by a peril against which Tenant has agreed to procure insurance coverage under the terms of this Lease, the amount of such insurance coverage, whether or not actually procured by Tenant. The parties hereto shall each endeavor to procure an appropriate clause in, or endorsement on, any fire or extended coverage insurance policy covering the Demised Premises and the Building and personal property, fixtures and equipment located thereon or therein, pursuant to which the insurance companies waive subrogation or consent to a waiver of right of recovery, and having obtained such clauses and/or endorsements of waiver of subrogation or consent to a waiver of right of recovery each party hereby agrees that it will not make any claim against or seek to recover from the other for any loss or damage to its property or the property of others resulting from fire or other perils covered by such fire and extended coverage insurance; provided, however, that the release, discharge, exoneration and covenant not to sue herein contained shall be limited by the terms and provisions of the waiver of subrogation clauses and/or endorsements or clauses and/or endorsements consenting to a waiver of right of recovery and shall be co-extensive therewith. If either party may obtain such clause or endorsement only upon payment of an additional premium, such party shall promptly so advise the other party and shall be under no obligation to obtain such clause or endorsement unless such other party pays the premium. 18. CONDEMNATION - EMINENT DOMAIN In the event that the whole or any material part of the Building shall be taken or appropriated by eminent domain or shall be condemned for any public or quasi-public use, or (by virtue of any such taking, appropriation or condemnation) shall suffer any damage (direct, indirect or consequential) for which Landlord or Tenant shall be entitled to compensation then (and in any such event) this Lease and the Term hereof may be terminated at the election of Landlord by a notice in writing of its election so to terminate which shall be given by the Landlord to 2/12/93 28 Tenant within sixty (60) days following the date on which Landlord shall have received notice of such taking, appropriation or condemnation. In the event that more than twenty-five percent (25%) of the floor area of the Demised Premises shall be so taken, appropriated or condemned, then (and in any such event) this Lease and the Term hereof may be terminated at the election of Tenant by a notice in writing of its election so to terminate which shall be given by Tenant to Landlord within sixty (60) days following the date on which Tenant shall have received notice of such taking, appropriation or condemnation. Upon the giving of any such notice of termination (either by Landlord or Tenant) this Lease and the Term hereof shall terminate on or retroactively as of the date on which Tenant shall be required to vacate any part of the Demised Premises or shall be deprived of a substantial part of the means of access thereto, provided, however, that Landlord may in Landlord's notice elect to terminate this Lease and the Term hereof retroactively as of the date on which such taking, appropriation or condemnation became legally effective. In the event of any such termination, this Lease and the Term hereof shall expire as of the effective termination date as fully and completely as if such date were the date herein originally scheduled as the Termination Date. If neither party (having the right so to do) elects to terminate Landlord will, with reasonable diligence and at Landlord's expense, restore the remainder of the Demised Premises, or the remainder of the means of access, as nearly as practicably may be to the same condition as obtained prior to such taking, appropriation or condemnation in which event (i) a just proportion of the Yearly Fixed Rent and Additional Rent, according to the nature and extent of the taking, appropriation or condemnation and the resulting permanent injury to the Demised Premises and the means of access thereto, shall be permanently abated, and (ii) a just proportion of the remainder of the Yearly Fixed Rent and Additional Rent, according to the nature and extent of the taking, appropriation or condemnation and the resultant injury sustained by the Premises and the means of access thereto, shall be abated until what remains of the Premises and the means of access thereto shall have been restored as fully as may be for permanent use and occupation by Tenant hereunder. Except for any award specifically reimbursing Tenant for moving or relocation expenses and Tenant's removable fixtures and equipment, there are expressly reserved to Landlord all rights to compensation and damages created, accrued or accruing by reason of any such taking, appropriation or condemnation, in implementation and in confirmation of which Tenant does hereby acknowledge that Landlord shall be entitled to receive and retain all such compensation and damages, grants to Landlord all and whatever rights (if any) Tenant may have to such compensation and damages, and agrees to execute and deliver all and whatever further instruments of assignment as Landlord may from time to time request. In the event of any taking of the Demised Premises or any part thereof for temporary use, (i) this Lease shall be and remain unaffected thereby, and (ii) Tenant shall be entitled 2/12/93 29 to receive for itself any award made for such use, provided, that if any taking is for a period extending beyond the Term of this Lease, such award shall be apportioned between Landlord and Tenant as of the Termination Date. 19. DEFAULT 19.1 Conditions of Limitation - Re-entry - Termination. This Lease and the herein term and estate are upon the condition that if (a) Tenant shall neglect or fail to perform or observe any of the Tenant's covenants herein, including (without limitation) the covenants with regard to the payment of Rent on or before ten (10) days of its due date; or (b) Tenant shall make an assignment or trust mortgage, or other conveyance or transfer of like nature, of all or a substantial part of its property for the benefit of its creditors, or (c) the leasehold hereby created shall be taken on execution or by other process of law and shall not be revested in Tenant within sixty (60) days thereafter; or (d) a receiver, sequester, trustee or similar officer shall be appointed by a court of competent jurisdiction to take charge of all or a substantial part of Tenant's property and such appointment shall not be vacated within sixty (60) days or (e) any proceeding shall be instituted by or against Tenant pursuant to any of the provisions of any Act of Congress or State law relating to bankruptcy, reorganization, arrangements, compositions or other relief from creditors, and, in the case of any such proceeding instituted against it, if Tenant shall fail to have such proceeding dismissed within thirty (30) days or Tenant shall default in the timely payment of Rent or if Tenant is adjudged bankrupt or insolvent as a result of any such proceeding; or (f) any event shall occur or any contingency shall arise whereby this Lease, or the term and estate thereby created would (by operation of law or otherwise) devolve upon or pass to any person, firm or corporation other than Tenant, except as expressly permitted under Article 14 hereof; then, and in any such event (except as hereinafter in Article 19.2 otherwise provided) Landlord may, in a manner consistent with applicable law, immediately or at any time thereafter declare this Lease terminated by notice to Tenant or, without further demand or notice, enter into and upon the Demised Premises (or any part thereof in the name of the whole), and in either such case (and without prejudice to any remedies which might otherwise be available for arrears of rent or other charges due hereunder or preceding breach of covenant and without prejudice to Tenant's liability for damages as hereinafter stated), this Lease shall terminate. The words "re-entry" and "re-enter" as used in this Lease are not restricted to their technical legal meaning. 19.2 Damages - Assignment for Benefit of Creditors. For the more effectual securing by Landlord of the rent and other charge and payments reserved hereunder, it is agreed as a further condition of this Lease that if at any time Tenant shall make an assignment of its property for the benefit of its creditors under the terms of which the debts provable by its creditors shall be 2/12/93 30 debts provable against the estate of insolvent debtors either under the laws of the Commonwealth of Massachusetts or under some law or laws other than the Bankruptcy Code as now or hereafter enacted, then and in any such case the same shall constitute a breach of this Lease, and the term and estate hereby created shall terminate ipso facto, without entry or other action by Landlord; and notwithstanding any other provisions of this Lease Landlord shall forthwith upon such termination, without prejudice to any remedies which might otherwise be available for arrears of rent or other charges due hereunder or preceding breach of this Lease, be ipso facto entitled to recover as liquidated damages the sum of (a) the amount by which, at the time of such termination of this Lease, (i) the aggregate of the Rent projected over the period commencing with such termination and ending with the Termination Date stated in Article 1 exceeds (ii) the aggregate projected rental value of the Demised Premises for such period and (b) (in view of the uncertainty of prompt re-letting and the expense entailed in re-letting the Demised Premises) an amount equal to the Rent payable for and in respect of the calendar year next preceding the date of termination, as aforesaid. Upon such termination Landlord, may immediately or at any time thereafter, without demand or notice, enter into or upon the Demised Premises (or any part thereof in the name of the whole), and (without being taken or deemed to be guilty of any manner of trespass or conversion, and without being liable to indictment, prosecution or damages thereof) may, forcibly if necessary, expel Tenant and those claiming under Tenant from the Demised Premises and remove therefrom the effects of Tenant and those claiming under Tenant. 19.3 Damages - Termination. Upon the termination of this Lease under the provisions of this Article, then except as hereinabove in Section 19.2 otherwise provided, Tenant shall pay to Landlord the Rent payable by Tenant to Landlord up to the time of such termination, shall continue to be liable for any preceding breach of covenant, and in addition, shall pay to Landlord as damages, at the election of Landlord, either: (x) the amount by which, at the time of the termination of this Lease (or at any time thereafter if Landlord shall have initially elected damages under Subparagraph (y), below), (i) the aggregate of the Rent projected over the period commencing with such time and ending on the originally scheduled Termination Date as stated in Article 1 exceeds (ii) the aggregate projected rental value of the Demised Premises for such period, or, (y) amounts equal to the Rent which would have been payable by Tenant had this Lease not been so terminated, payable upon the due dates therefor specified herein following such termination and until the originally scheduled Termination Date 2/12/93 31 as specified in Article l, provided, however, if Landlord shall re-let the Demised Premises during such period, that Landlord shall credit Tenant with the net rents received by Landlord from such re-letting, such net rents to be determined by first deducting from the gross rents as and when received by Landlord from such re-letting the expenses incurred or paid by Landlord terminating this Lease, as well as the expenses of re-letting, including altering and preparing the Demised Premises for new tenants, brokers' commissions, and all other similar and dissimilar expenses properly chargeable against the Demised Premises and the rental therefrom, it being understood that any such re-letting may be for a period equal to or shorter or longer than the remaining term of this Lease; and provided, further, that (i) in no event shall Tenant be entitled to receive any excess of such net rents over the sums payable by Tenant to Landlord hereunder and (ii) in no event shall Tenant be entitled in any suit for the collection of damages pursuant to this Subparagraph (y) to a credit in respect of any net rents from a re-letting except to the extent that such net rents are actually received by Landlord prior to such determination. If the Demised Premises or any part thereof should be re-let in combination with other space, then proper apportionment on a square foot area basis shall be made of the rent received from such re-letting and of the expenses of re-letting. Landlord agrees to use reasonable efforts under the circumstances to attempt to re-let the Demised Premises. Suit or suits for the recovery of such damages, or any installments thereof, may be brought by Landlord from time to time at its election, and nothing contained herein shall be deemed to require Landlord to postpone suit until the date when the term of this Lease would have expired if it had not been terminated hereunder. Nothing herein contained shall be construed as limiting or precluding the recovery by Landlord against Tenant of any sums or damages to which, in addition to the damages particularly provided above, Landlord may lawfully be entitled by reason of any default hereunder on the part of Tenant. 19.4 Fees and Expenses. If Tenant shall default in the performance of any covenant on Tenant's part to be performed as in this Lease contained, Landlord may immediately, or at any time thereafter, following written notice thereof to Tenant, perform the same for the account of Tenant. If Landlord at any time is compelled to pay or elects to pay any sum of money, or do any act which will require the payment of any sum of money, by reason of the failure of Tenant to comply with any provision hereof, or if Landlord is compelled to or does incur any expense, including reasonable attorneys' fees, in instituting, prosecuting and/or defending any action or proceeding instituted by reason of any default of Tenant hereunder, Tenant shall on demand pay to Landlord by way of reimbursement the sum or sums so paid by Landlord with all interest, costs and damages. Without limiting 2/12/93 32 the generality of the foregoing, in the event that any Rent is in arrears by more than ten (10) days after written notice thereof by Landlord to Tenant, Tenant shall pay, as Additional Rent, a delinquency charge equal to one percent (1%) of the arrearage for each calendar month (or fraction thereof) during which it remains unpaid. 19.5 Landlord's Remedies Not Exclusive. The specified remedies to which Landlord may resort hereunder are cumulative and are not intended to be exclusive of any remedies or means of redress to which Landlord may at any time be lawfully entitled, and Landlord may invoke any remedy (including the remedy of specific performance) allowed at law or in equity as if specific remedies were not herein provided for. 19.6 Grace Period. Notwithstanding anything to the contrary in this Article contained, Landlord agrees not to take any action to terminate this Lease (a) for default by Tenant in the payment when due of Rent, if Tenant shall cure such default within five (5) days after written notice thereof given by Landlord to Tenant, or (b) for default by Tenant in the performance of any other covenant, if Tenant shall cure such default within a period of thirty (30) days after written notice thereof given by Landlord to Tenant (except where the nature of the default is such that remedial action should appropriately take place sooner as indicated in such written notice), or with respect to covenants other than to pay a sum of money within such additional period as may reasonably be required to cure such default if (because of governmental restrictions or any other cause beyond the reasonable control of Tenant) the default is of such a nature that it cannot be cured within such thirty (30)-day period, provided, however, (1) that there shall be no extension of time beyond such thirty (30)-day period for curing of any such default unless, not more than ten (10) days after the receipt of the notice of default, Tenant in writing (i) shall specify the cause on account of which the default cannot be cured during such period and shall advise Landlord of its intention duly to institute all steps necessary to cure the default and (ii) shall as soon as may be reasonable, duly institute and thereafter diligently prosecute to completion all steps necessary to cure such default and, (2) that no notice of the opportunity to cure default need be given, and no grace period whatsoever shall be allowed to Tenant, if the default is incurable. 20. END OF TERM - ABANDONED PROPERTY Upon the expiration or other termination of the Term of this Lease, Tenant shall peaceably quit and surrender to Landlord the Demised Premises and all alterations and additions thereto which Tenant is not entitled or required to remove under the provisions of this Lease, broom clean in good order, repair and condition excepting only reasonable use and wear and damage by fire or other casualty for which, under other provisions of this Lease, Tenant has no responsibility of repair or restoration. Tenant's 2/12/93 33 obligation to observe or perform this covenant shall survive the expiration or other termination of the term of this Lease. Any personal property in which Tenant has an interest which shall remain in the Building or on the Demised Premises after the expiration or termination of the Term of this Lease shall be conclusively deemed to have been abandoned, and may be disposed of in such manner as Landlord may see fit; provided, however, notwithstanding the foregoing, that Tenant will, upon request of Landlord made not later than thirty (30) days after the expiration or termination of the term hereof, promptly remove from the Building any such personal property or, if any part thereof shall be sold, that Landlord may receive and retain the proceeds of such sale and apply the same, at its option, against the expenses of the sale, the cost of moving and storage, any arrears of Rent payable hereunder by Tenant to Landlord and any damages to which Landlord may be entitled under Article 19 hereof or pursuant to law, with the balance if any, to be paid to Tenant. 21. RIGHTS OF MORTGAGEES 21.1 Superiority of Lease. Except as provided in Section 21.7 hereof and to the extent that it may be provided otherwise by written agreement between Tenant and a Mortgagee, this Lease shall be superior, and shall not be subordinated, to a Mortgage or to any other voluntary lien or encumbrance affecting the Land or Building or any part thereof, provided, however, that such Mortgage shall be superior, and shall not be subordinated, to this Lease with respect to the following: (a) the prior right and claim under and the prior lien of said Mortgage in, to and upon any award or other compensation heretofore or hereafter to be made for any taking by eminent domain of any part of the Demised Premises, and as to the right of disposition thereof in accordance with the provisions of the said Mortgage; or (b) the prior right and claim under the prior lien of the said Mortgage, in, to and upon any proceeds payable under all policies of fire and rent insurance upon the Demised Premises and as to the right of disposition thereof in accordance with the terms of said Mortgage; and (c) any lien, right, power or interest, if any, which may have arisen or intervened in the period between the recording of the said Mortgage and the execution of this Lease. 21.2 Entry and Possession. Upon entry and taking possession of the Property by a Mortgagee, for the purpose of foreclosure or otherwise, such Mortgagee shall have all the rights of Landlord, and shall be liable to perform all the obligations of Landlord arising and accruing during the period of such possession by such Mortgagee. 2/12/93 34 21.3 Right to Cure. No act or failure to act on the part of Landlord which would entitle Tenant under the terms of this Lease, or by law, to be relieved of Tenant's obligations hereunder or to terminate this Lease, shall result in a release or termination of such obligations or a termination of this Lease unless (i) Tenant shall have first given written notice of Landlord's act or failure to act to first Mortgagees of record, if any, and to any other Mortgagees of record on the Term Commencement Date of the Lease or whom Tenant has been given written notice, specifying the act or failure to act on the part of Landlord which could or would give basis to Tenant's rights; and (ii) such Mortgagees, after receipt of such notice, have failed or refused to correct or cure the condition complained of within a reasonable time thereafter, but nothing contained in this paragraph shall be deemed to impose any obligation on any such Mortgagees to correct or cure any such condition. "Reasonable time" as used above means and includes a reasonable time to obtain possession of the Land and Building if any such Mortgagee elects to do so and a reasonable time to correct or cure the condition if such condition is determined to exist. 21.4 Duty to Construct. Notwithstanding any other provision to the contrary contained in this Lease, if prior to substantial completion of Landlord's obligations under Article 4 any holder of a Mortgage enters and takes possession of the Property for the purpose of foreclosing such Mortgage, such holder may elect, by written notice given to Tenant and Landlord at any time within 90 days after such entry and taking possession, not to perform Landlord's obligations under Article 4, and in such event such holder and all persons claiming under it shall be relieved of all obligations to perform, and all liability for failure to perform said Landlord's obligations under Article 4 and Tenant may, without waiver of any rights which Tenant may have against Landlord, terminate this Lease and all its obligations hereunder by written notice to Landlord and such holder given within 30 days after the day on which such holder shall have given its notice as aforesaid. 21.5 Prepaid Rent. No Rent shall be paid more than thirty (30) days prior to the due dates thereof and, as to a first Mortgagee of record and any other Mortgagees of whom Tenant has been given written notice, payments made in violation of this provision shall (except to the extent that such rents are actually received by such Mortgagee) be a nullity as against such Mortgagee and Tenant shall be liable for the amount of such payments to such Mortgagee. 21.6 Continuing Offer. The covenants and agreements contained in this Lease with respect to the rights, powers and benefits of a Mortgagee (particularly, without limitation thereby, the covenants and agreements contained in this Article) constitute a continuing offer to any person, corporation or other entity, which by accepting or requiring an assignment of this Lease or by entry or foreclosure assumes the obligations herein 2/12/93 35 set forth with respect to such Mortgagee; every such Mortgagee is hereby constituted a party to this Lease as an obligee hereunder to the same extent as though its name was written hereon as such and such Mortgagee shall be entitled to enforce such provisions in its own name. 21.7 Subordination. Notwithstanding the foregoing provisions of this Article, Tenant agrees, at the request of Landlord or any Mortgagee, to execute and deliver promptly any certificate or other instrument which Landlord or such Mortgagee may request subordinating the Lease and all rights of Tenant under the Lease to any Mortgage, and to all advances made under such mortgage, provided that (i) the holder of any such Mortgage shall execute and deliver to Tenant a nondisturbance agreement to the effect that, in the event of any foreclosure of such Mortgage, such holder will not name Tenant as a party defendant to such foreclosure nor disturb its possession under the Lease, or (ii) any such Mortgage shall contain provisions substantially to the same effect as those contained in such a nondisturbance agreement. In the event Landlord shall fail to deliver to Tenant within thirty (30) days of the execution of this Lease an Agreement of Subordination, Non-Disturbance and Attornment in the form or substantially in the form of Exhibit G attached hereto, Tenant at its option by written notice thereof to Landlord within ten (10) Business Days of the expiration of said 30 day period may terminate this Lease. 21.8 Limitations on Liability. Nothing contained in the foregoing Section 21.7 or in any such nondisturbance agreement or nondisturbance provision shall, however, affect the prior rights of the holder of any Mortgage with respect to the proceeds of any award in condemnation or of any fire insurance policies affecting the Building, or impose upon any such holder any liability (i) for the erection or completion of the Building, or (ii) in the event of damage or destruction to the Building or the Demised Premises by fire or other casualty, for any repairs, replacements, rebuilding or restoration except such repairs, replacements, rebuilding or restoration as can reasonably be accomplished from the net proceeds of insurance actually receive by, or made available to, such holder, or (iii) for any default by Landlord under the Lease occurring prior to any date upon which such holder shall become Tenant's Landlord, or (iv) for any credits, offsets or claims against the rent under the Lease as a result of any acts or omissions of Landlord committed or omitted prior to such date, or (v) for return of any security deposit or other funds unless the same shall have been received by such holder, and any such agreement or provision may so state. 22. QUIET ENJOYMENT Landlord covenants that if, and so long as, Tenant keeps and performs each and every covenant, agreement, term, provision and condition herein contained on the part and on behalf of Tenant to be kept and performed, Tenant shall quietly enjoy the Demised 2/12/93 36 Premises from and against the claims of all persons claiming by, through or under Landlord subject, nevertheless, to the covenants, agreements, terms, provisions and conditions of this Lease and to the mortgages, ground leases and/or underlying leases to which this Lease is subject and subordinate. 23. ENTIRE AGREEMENT - WAIVER - SURRENDER 23.1 Entire Agreement. This Lease and the Exhibits made a part hereof contain the entire and only agreement between the parties and any and all statements and representations, written and oral, including previous correspondence and agreements between the parties hereto, are merged herein. Tenant acknowledges that all representations and statements upon which it relied in executing this Lease are contained herein and that Tenant in no way relied upon any other statements or representations, written or oral. Any executory agreement hereafter made shall be ineffective to change, modify, discharge or effect an abandonment of this Lease in whole or in part unless such executory agreement is in writing and signed by the party against whom enforcement of the change, modification, discharge or abandonment is sought. Nothing herein shall prevent the parties from agreeing to amend this Lease and the Exhibits made part hereof as long as such amendment shall be in writing and shall be duly signed by both parties. 23.2 Waiver by Landlord. The failure of Landlord to seek redress for violation, or to insist upon the strict performance, of any covenant or condition of this Lease, or any of the Rules and Regulations promulgated hereunder, shall not prevent a subsequent act, which would have originally constituted a violation, from having all the force and effect of an original violation. The receipt by Landlord of rent with knowledge of the breach of any covenant of this Lease shall not be deemed a waiver of such breach. The failure of Landlord to enforce any of such Rules and Regulations against Tenant and/or any other tenant or subtenant in the Building shall not be deemed a waiver of any such Rules and Regulations. No provisions of this Lease shall be deemed to have been waived by Landlord unless such waiver be in writing signed by Landlord. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly rent herein stipulated shall be deemed to be other than on account of the stipulated rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice of Landlord's right to recover the balance of such rent or pursue any other remedy in this Lease provided. 23.3 Surrender. No act or thing done by Landlord during the term hereby demised shall be deemed an acceptance of a surrender of the Demised Premises, and no agreement to accept such surrender shall be valid, unless in writing signed by Landlord. No employee of Landlord or of Landlord's agents shall 2/12/93 37 have any power to accept the keys of the Demised Premises prior to the termination of this Lease. The delivery of keys to any employee of Landlord or of Landlord's agents shall not operate as a termination of the Lease or a surrender of the Demised Premises. In the event that Tenant at any time desires to have Landlord underlet the Demised Premises for Tenant's account, Landlord or Landlord's agents are authorized to receive the keys for such purposes without releasing Tenant from any of the obligations under this Lease, and Tenant hereby relieves Landlord of any liability for loss of or damage to any of Tenant's effects in connection with such underletting. 24. INABILITY TO PERFORM - EXCULPATORY CLAUSE Except as otherwise expressly provided in this Lease, this Lease and the obligations of Tenant to pay rent hereunder and perform all other covenants, agreements, terms, provisions and conditions hereunder on the part of Tenant to be performed shall in no way be affected, impaired or excused because Landlord is unable to fulfill any of its obligations under this Lease or is unable to supply or is delayed in supplying any service expressly or impliedly to be supplied or is unable to make or is delayed in making any repairs, replacements, additions, alterations, improvements or decorations or is unable to supply or is delayed in supplying any equipment or fixtures if Landlord is prevented or delayed from doing so by reason of strikes or labor troubles or any other similar or dissimilar cause whatsoever beyond Landlord's reasonable control, including but not limited to, governmental preemption in connection with a national emergency or by reason of any rule, order or regulation of any department or subdivision thereof of any governmental agency or by reason of the conditions of supply and demand which have been or are affected by war, hostilities or other similar or dissimilar emergency. In each such instance of inability of Landlord to perform, Landlord shall exercise reasonable diligence to eliminate the cause of such inability to perform. Tenant shall neither assert nor seek to enforce any claim for breach of this Lease against any of Landlord's assets other than Landlord's interest in the Building of which the Premises are a part and in the rents, issues and profits thereof, and Tenant agrees to look solely to such interest for the satisfaction of any liability of Landlord under this Lease, it being specifically agreed that in no event shall Landlord (which term shall include without limitation any of the officers, trustees, directors, partners, beneficiaries, joint venturers, members, stockholders or other principals or representatives, disclosed or undisclosed of Landlord or any managing agent) ever be personally liable for any such liability. This paragraph shall not limit any right that Tenant might otherwise have to obtain injunctive relief against Landlord or to take any other action which shall not involve the personal liability of Landlord to respond in monetary damages from Landlord's assets other than the Landlord's interest in said real estate, as aforesaid. In no 2/12/93 38 event shall Landlord or Tenant ever be liable for consequential damages. 25. BILLS AND NOTICES Any notice, consent, request, bill, demand or statement hereunder by either party to the other party shall be in writing and, if received at Landlord's or Tenant's address, shall be deemed to have been duly given when either delivered or served personally or mailed in a postpaid envelope, deposited in the United States mails addressed to the respective party at its address as stated in Article 1, or if any address for notices shall have been duly changed as hereinafter provided, if mailed as aforesaid to the party at such changed address. Either party may at any time change the address for such notices, consents, requests, bills, demands or statements by delivering or mailing, as aforesaid, to the other party a notice stating the change and setting forth the changed address, provided such changed address is within the United States. All bills and statements for reimbursement or other payments or charges due from Tenant to Landlord or from Landlord to Tenant hereunder shall set forth in reasonable detail the particulars relating thereto and shall be due and payable in full thirty (30) days, unless herein otherwise provided, after submission thereof by Landlord to Tenant or by Tenant to Landlord, as the case may be. Landlord shall, at Tenant's reasonable request, promptly furnish Tenant with such additional reasonable details relating thereto as Tenant shall reasonably request. Tenant's failure to make timely payment of any amounts indicated by such bills and statements, whether for work done by Landlord at Tenant's request, reimbursement provided for by this Lease or for any other sums properly owing by Tenant to Landlord, shall be treated as a default in the payment of Rent, in which event Landlord shall have all rights and remedies provided in this Lease for the nonpayment of Rent. 26. PARTIES BOUND - SEISIN OF TITLE The covenants, agreements, terms, provisions and conditions of this Lease shall bind and benefit the successors and assigns of the parties hereto with the same effect as if mentioned in each instance where a party hereto is named or referred to, except that no violation of the provisions of Article 14 hereof shall operate to vest any rights in any successor or assignee of Tenant and that the provisions of this Article shall not be construed as modifying the conditions of limitation contained in Article 19 hereof. If in connection with or as a consequence of the sale, transfer or other disposition of the real estate (Land and/or Building either or both, as the case may be) of which the Demised Premises are a part Landlord ceases to be the owner of the reversionary interest in the Premises, Landlord shall so notify 2/12/93 39 Tenant and Landlord shall be entirely freed and relieved from the performance and observance thereafter of all covenants and obligations hereunder accruing thereafter on the part of Landlord to be performed and observed, it being understood and agreed in such event (and it shall be deemed and construed as a covenant running with the land) that the person succeeding to Landlord's ownership of said reversionary interest shall thereupon and thereafter assume, and perform and observe, any and all of such covenants and obligations of Landlord. 27. MISCELLANEOUS 27.1 Separability. If any provision of this Lease or portion of such provision or the application thereof to any person or circumstance is for any reason held invalid or unenforceable, the remainder of the Lease (or the remainder of such provision) and the application thereof to other persons or circumstances shall not be affected thereby. 27.2 Captions. The captions are inserted only as a matter of convenience and for reference, and in no way define, limit or describe the scope of this Lease nor the intent of any provision thereof. 27.3 Broker. Each party represents and warrants that it has not directly or indirectly dealt, with respect to the leasing of office space in the Building, with any broker or had its attention called to the Premises or other space to let in the Building, by any broker other than the Broker(s) (if any) listed in Article 1 whose commission shall be the responsibility of Landlord. Each party agrees to exonerate and save harmless and indemnify the other against any claims for a commission by any other broker, person or firm with whom such party has dealt in connection with the execution and delivery of this Lease or out of negotiations between Landlord and Tenant with respect to the leasing of other space in the Building. 27.4 Governing Law. This lease is made pursuant to, and shall be governed by, and construed in accordance with, the laws of the Commonwealth of Massachusetts. 27.5 Assignment of Rents. With reference to any assignment by Landlord of its interest in this Lease, or the Rent payable hereunder, conditional in nature or otherwise, which assignment is made to or held by a bank, trust company, insurance company or other institutional lender holding a Mortgage on the Building, Landlord and Tenant agree: (a) that the execution thereof by Landlord and acceptance thereof by such Mortgagee shall never be deemed an assumption by such Mortgagee of any of the obligations of the Landlord thereunder, unless such Mortgagee shall, by written notice sent to the Tenant, specifically otherwise elect; and 2/12/93 40 (b) that, except as aforesaid, such Mortgagee shall be treated as having assumed the Landlord's obligations thereunder only upon foreclosure of such Mortgagee's Mortgage and the taking of possession of the Demised Premises after having given notice of its exercise of the option stated in Article 21 hereof to succeed to the interest of the Landlord under this Lease. 27.6 Parking. Landlord shall allocate to Tenant the number of non-exclusive Parking Spaces indicated in Article 1. Landlord may, pursuant to Section 15.1, establish Rules and Regulations relative to all parking areas serving Building tenants and may further engage the services of an independent contractor to administer and control access to said parking areas. Landlord or said independent contractor shall impose separate charges for use of said parking areas, and such charges shall be payable by Tenant as Additional Rent with respect to Tenant's Parking Spaces. For the initial three (3) years of the Term of this Lease, the monthly charge for each Parking Space situated in the garage facility serving the Building shall be One Hundred Twenty-five Dollars ($125). Thereafter, the monthly charge shall be as from time to time established by Landlord or said independent contractor as the then prevailing monthly parking charge for the Building. Notwithstanding the foregoing, forty-seven (47) of the initial seventy (70) Parking Spaces shall be at no cost to Tenant during the Term of this Lease. In addition, Tenant shall have an option, to rent an additional one (1) Parking Space per 1,000 square feet of rentable area so added to the Demised Premises at a cost of $125.00 per month per Parking Space for the first three years of the Term of this Lease, and thereafter at the then prevailing monthly charge for the Building as may be from time to time established by the Landlord or said independant contractor. In addition, it is understood and agreed that in the event additional space shall be added to the Demised Premises in accordance with Article 3 hereof during the Term of this Lease, the number of Parking Spaces which shall be at no cost to Tenant shall be increased by two (2) for each additional 1,000 square feet of rentable area so added to the Demised Premises. Tenant acknowledges that Landlord has informed Tenant that Landlord intends to allocate in its tenant leases up to one hundred twenty-five percent (125%) of the actual parking spaces servicing the Building. It is further acknowledged and agreed that as a consequence of such over-allocation of parking spaces there may occasionally occur instances in which the number of parking spaces actually available to Tenant shall be less than the Parking Spaces to which Tenant is entitled under this Lease. Landlord shall incur no liability to Tenant as a consequence of such over-allocation of parking spaces. 27.7 Notice of Lease. Neither party shall record this Lease in any Registry of Deeds or Registry District. 27.8 Financial Statements. If requested by Landlord, Tenant shall furnish to Landlord promptly after they are available to 2/12/93 41 Tenant copies of Tenant's annual financial statements (audited, if available) and unaudited monthly financial statements and such other financial statements as Tenant shall furnish from time to time to any lender and/or equity holder of Tenant. It is understood and agreed that Landlord may furnish copies of any and all of such financial statements to TIAA and any other Mortgagee and to the principals of Riverfront Office Park Joint Venture, but that Landlord will not disclose such information to any other party without the prior written consent of Tenant, provided, in each case, that the recipient of such information agrees in writing to use such information solely to evaluate Tenant's credit worthiness. 27.9 Letter of Credit. Landlord acknowledges that it has received from Tenant an irrevocable letter of credit in favor of Landlord issued by Shawmut Bank, a copy of which is annexed hereto as Exhibit H to this Lease for an amount not to exceed $300,000 (the "Letter of Credit"). In the event of any default or defaults by Tenant in the payment of Rent or the performance or observance of the agreements and conditions in this Lease contained on the part of Tenant to be performed and observed continuing beyond any applicable notice and cure periods, Landlord may present the Letter of Credit for payment, in each instance, of an amount not greater than the amount ncecessary to cure such default or defaults and to compensate Landlord for any loss or damage arising from such default or defaults. One or more drawings shall be permitted under the Letter of Credit, provided, that the aggregate of all such drawings shall not exceed $300,000. It is understood and agreed that Landlord shall always have the right to apply said sum, as aforesaid in the event of any such default or defaults, without prejudice to any other remedy or remedies which Landlord may have, or Landlord may pursue any other such remedy or remedies in lieu of applying said sum. No interest shall be payable on said sum. The holder of any mortgage on the Property shall never be responsible to Tenant for said sum or its application or return unless said sum shall actually have been received in hand by such holder. 42 IN WITNESS WHEREOF, Landlord and Tenant have caused this instrument to be executed under seal, all as of the day and year first above written. RIVERFRONT OFFICE PARK JOINT VENTURE By: RIVERFRONT OFFICE PARK ASSOCIATES By: DARVEL REALTY TRUST Managing General Partner By: [Signature of Michael P. Sullivan] --------------------------------------- Michael P. Sullivan, Vice President PEGASYSTEMS INC. By: [Signature of Ira Vishner] ---------------------------------------- Ira Vishner, Vice President 2/12/93 43 [Graphic showing floorplan] EXHIBIT A 7TH FLOOR 23,350 RSF BRYER ARCHITECTS 1208 MASSACHUSETTS AVE P.O. BOX 1545 CAMBRIDGE, MA 02238 617-864-8019 101 MAIN STREET CAMBRIDGE, MA 02142 TENANT: PEGASYSTEMS, INC. DATE: 12/03/92 FLOOR KEY PLAN NOTE: THIS DRAWING IS FOR DESCRIPTIVE PURPOSES ONLY. IT HAS BEEN REDUCED FROM ITS ORIGINAL SCALE. EXHIBIT B --------- DESCRIPTION OF LAND ------------------- A certain parcel of land in the City of Cambridge, Middlesex County, Massachusetts, bounded and described as follows: Beginning at a point on the northerly line of Main Street at land now or formerly of Technology Realty Trust, and thence running; N 05(degree) 59'48"E for 105.66 feet along said Trust land to a point; thence running N 85(degree) 08'23"W for 90.03 feet along said Trust land to land now or formerly of The Badger Company, Inc., thence running N 05(degree) 59'19"E for 120.64 feet long said Badger land to a point, and continuing N 16' 13'43"E for 46.32 feet along said Badger land to a point; thence running N 72(degree) 07'10"W for 365.41 feet along said Badger land to a point in the southeasterly line of Third Street; thence running N 30(degree) 00'44"E for 40.91 feet along Third Street to a point at land of Commonwealth Gas Company; thence running S 71(degree) 46'10"E for 467.40 feet along said Commonwealth Gas Company land to a point, thence continuing S 73(degree) 39'44"E for 31.42 feet along said Commonwealth Gas Company land to a corner; thence running S 16' 20'16"W for 82.21 feet on a line across the Broad Canal to the southerly side thereof; thence running SOUTHEASTERLY along the Broad Canal by the following courses and distances: S 71(degree) 26'21"E for 97.75 feet; S 72(degree) 53'13"E for 74.12 feet; and S 76(degree) 18'57"E for 50.44 feet to a point; thence running S 05(degree)59'48"W for 154.28 feet to a point in the northerly line of Main Street; thence running N 84(degree) 07'40"W for 268.33 feet along Main Street to the point of beginning. Said parcel is shown as Lot 1 on a "Subdivision Plan of Land in Cambridge, Mass. (Middlesex County)", dated April 24, 1981, and revised September 4, 1981, drawn by Boston Survey Consultants, and prepared for Darvel Realty Trust, recorded with Middlesex Southern District Registry of Deeds in Book 14412, Page 199. 2/12/93 EXHIBIT C --------- TENANT IMPROVEMENTS ------------------- A. IMPROVEMENTS ------------ 1. Landlord's Work. Landlord shall cause the fit-up work and tenant improvements specified in the Approved Final Plans (as hereinafter defined) (all such work being referred to as "Tenant's Improvements) to be substantially completed as provided herein. 2. Tenant's Cash Allowance. Landlord shall provide to Tenant allowance (the "Fit- up Allowance") equal to the product of Twenty-five Dollars ($25.00) multiplied by the Rentable Area of the Demised Premises to pay for the cost of Tenant's Improvements. For purposes hereof, the cost of Tenant's Improvements shall be deemed to be the actual cost and expense charged to Landlord by Landlord's contractor for said Tenant's Improvements. In the event that the cost of Tenant's Improvements exceeds the Fit-up Allowance, the excess cost shall be promptly paid by Tenant, upon written request by Landlord, accompanied by reasonable supporting documentation establishing the amount then due and payable. In the event that the cost of Tenant's Improvements shall be less than the Fit-up Allowance (the difference between the cost of Tenant's Improvements and the maximum Fit-up Allowance being referred to as the "Fit-up Allowance Difference"), Landlord shall, credit the Fit-up Allowance Difference to Rent payable by Tenant under this Lease. B. PLANS AND SPECIFICATIONS ------------------------ 1. Preparation of Plans and Specifications. Tenant's Architect has prepared architectural working drawings and specifications for the build out of the fit-up work to be done to the Demised Premises. The final architectural working drawings and specifications, as approved by Landlord and Tenant, together with the electrical, mechanical and plumbing working drawings and specifications, constitute the "Approved Final Plans". Landlord shall reimburse to Tenant the sum of $33,736.50 to pay for the architectural and engineering costs and expenses of Tenant's Architect, Kodis Associates, in connection with the preparation of the Approved Final Plans and Specification, within thirty (30) days following receipt by Landlord of invoices and supporting documentation therefor. Landlord shall be solely responsible for the fees of Landlord's Architect. 2. Time Requirements. The parties agree to the following time schedule: By: Date Activity - -------- -------- January 4, 1993 General Contractor Choosen January 8, 1993 Construction Package Released January 18, 1993 Demolition Begins January 29, 1993 Construction Drawings Completed February 1, 1993 Construcion Begins March 26, 1993 Substantial Construction Completed March 27, 1993 Occupancy C. INSPECTION ---------- Tenant is authorized by Landlord to make periodic inspections of the Demised Premises during construction provided that such inspections are made during normal business hours and that Tenant is accompanied by a representative of the Landlord or Landlord's contractor. Notwithstanding the foregoing, Tenant's Architect shall be permitted access to the Demised Premises at all reasonable times for the purpose of viewing construction of Tenant's Improvements during such construction. D. FINAL INSPECTION OF PREMISES ---------------------------- Prior to the Term Commencement Date, Tenant together with the Tenant's Architect and contractor shall make a final inspection of the Demised Premises to ascertain whether substantial completion has occurred. A punchlist of items to be completed or corrected shall be prepared. E. PAYMENT OF TENANT COSTS ----------------------- In the event of a default by Tenant in payment of any amount payable by Tenant under this Exhibit C, Landlord shall (in addition to all other remedies) have the same rights as in case of default in Rent under this Lease. 2/12/93 2 EXHIBIT D --------- CLEANING SPECIFICATIONS ----------------------- OFFICE AREA: - ------------ DAILY - Monday through Friday inclusive, Massachusetts legal holidays excluded. 1. Empty all waste receptacles and remove trash to designated area, wash receptacles as necessary. Replace with new bag when soiled. 2. Empty and wipe all ashtrays. 3. Vacuum all rugs and carpets. 4. Hand dust and wipe clean with treated cloths all horizontal surfaces, including furniture, office equipment, window wills, door ledges, chair rails and convertor tops, within normal reach. 5. Wash and clean all water fountains. 6. Remove and dust under all desk equipment and telephones and replace same, with no oily residue left behind. 7. Wipe clean all brass and other bright work, including conference table pedestals. 8. Sweep and dust mop all uncarpeted areas using a dust treated mop. 9. Hand dust all grill work within normal reach. 10. Wash clean kitchen counter, sink, exterior cabinetry and wet mop floor in kitchen. Empty coffee pots and wash. Wipe down coffee makers. Clean underneath any appliances in the kitchen that are moveable (i.e. on the counter). 11. Clean the glass on the display cabinets. Also clean the glass door in the reception area. 12. Clean the conference tables and pass through surfaces. 13. Empty recycling boxes when full and put in the supply room near freight elevator. Put new bag inside. 14. Clean marble in the elevator lobby. 2/12/93 Lavatories: - ----------- 1. Sweep and damp mop floor. 2. Clean all mirrors, powder shelves, dispensers and receptacles, bright work, flushometers, piping and toilet seat hinges. 3. Wash and disinfect both sides of toilet seats. 4. Wash all basins, inside and outside of bowls, and urinals. 5. Dust clean all powder room fixtures. 6. Empty and clean paper towel and sanitary receptacles. 7. Remove waste paper and refuse to designated area. 8. Refill tissue holders, soap dispensers, towel dispensers, vending sanitary dispensers - materials to be supplied by landlord. 9. A sanitizing solution will be used in all lavatory cleaning. Main Lobby, Elevators, Building Exterior and Corridors: - ------------------------------------------------------- 1. Sweep and wash all floors. 2. Wash all rubber mats. 3. Clean all elevators, wash or vacuum floor, wipe down walls and doors. Stairwells: - ----------- 1. Sweep all stairwells. WEEKLY - ------ 1. Dust all coat racks. 2. Remove all finger marks from private entrance doors, light switches and doorways, cubicle entrances and glass in cubicles. 3. Vacuum conference room chairs and clean up any crumbs. 4. Wash refrigerator shelves. 2/12/93 2 MONTHLY - ------- Lavatories: 1. Machine scrub lavatory floor. 2. Wash all partitions and tile walls in lavatories. 3. Dust exhaust vents and ceiling diffusers. Main Lobby, Elevators, Building Exterior and Corridors: - ------------------------------------------------------- 1. All resilient tile floors in public area to be treated equivalent to spray buffing. 2. Shampoo carpeting in elevators. QUARTERLY - Render high dusting not reached in daily cleaning to include: 1. Dusting all pictures frames, charts, graphs and similar wall hangings. 2. Dusting all vertical surfaces such as walls, partitions and doors, interior glass surfaces, and both sides of sidelights. (More frequently if needed). 3. Dusting of all venetian blinds. 4. Machine clean kitchen and other tile floors and clean molding. 5. Clean behind recycling bins and under refrigerator. Main Lobby, Elevators, Building Exterior and Corridors: - ------------------------------------------------------- 1. Spot clean any metal work in lobby. 2. Spot clean any metal work surrounding building entrance doors. 3. Spot clean and polish guard desk. 4. Vacuum all corridor carpets. TWO TIMES PER YEAR: Wash interior and exterior of perimeter windows. 2/12/93 3 EXHIBIT E --------- TENANT TRADE FIXTURES --------------------- All surface mounted wall sconces located in the boardroom, interview room and elevator lobby, respectively, of the Demised Premises. 2/12/93 EXHIBIT F --------- RULES AND REGULATIONS --------------------- 1. The sidewalks, entrances, passages, courts, elevators, vestibules, stairways, corridors or halls of the Building shall not be obstructed or encumbered or used for any purpose other than ingress and egress to and from the premises demised to any tenant or occupant. 2. No awnings or other projections shall be attached to the outside walls or windows of the Building without the prior consent of Landlord. No curtains, blinds, shades, or screens shall be attached or hung in, or used in connection with, any window or door of the premises demised to any tenant or occupant, without the prior consent of Landlord. Such awnings, projections, curtains, blinds, shades, screens, or other fixtures must be of a quality type, design and color, and attached in a manner, approved by Landlord. 3. No sign, advertisement, object, notice or other lettering shall be exhibited, inscribed, painted or affixed on any part of the outside or inside of the premises demised to any tenant or occupant or of the Building without the prior written consent of Landlord. Interior signs on doors and directory tables, if any, shall be of a size, color and style approved by Landlord. 4. The sashes, sash doors, skylights, windows, and doors that reflect or admit light and air into the halls, passageways or other public places in the Building shall not be covered or obstructed, nor shall any bottles, parcels, or other articles be placed on or stored upon any window sills. 5. No show cases or other articles of any kind shall be put in front of or affixed to any part of the exterior of the Building, nor placed in the halls, corridors, vestibules or other parts of the Building. 6. The water and wash closets and other plumbing fixtures shall not be used for any purposes other than those for which they were constructed, and no sweepings, rubbish, rags, or other substances shall be thrown therein. 7. No tenant or occupant shall mark, paint, drill into, or in any way deface any part of the Building or the premises demised to such tenant or occupant. No boring, cutting or stringing of wires shall be permitted, except with the prior consent of the Landlord, and as Landlord may direct. No tenant or occupant shall install any resilient tile or similar floor covering in the premises demised to such tenant or occupant except in manner approved by Landlord. 2/12/93 8. No bicycles, vehicles or animals of any kind shall be brought into or kept in or about the premises demised to any tenant. Bicycles may be stored in racks, if any, furnished for such purpose by Landlord in a common area of the Building. No cooking shall be done or permitted in the Building by any tenant without the approval of Landlord. No tenant shall cause or permit any unusual or objectionable odors to emanate from the premises demised to such tenant. 9. Without the prior consent of Landlord, no space in the Building shall be used for manufacturing, or for the sale of merchandise, goods or property of any kind at auction. 10. No tenant shall make, or permit to be made, any unseemly or disturbing noises or disturb or interfere with other tenants or occupants of the Building or neighboring buildings or premises, whether by the use of any musical instrument, radio, television set or other audio device, unmusical noise, whistling, singing, or in any other way. Nothing shall be thrown out of any doors or windows. 11. Each tenant must, upon the termination of its tenancy, restore to Landlord all keys, either furnished to, or otherwise procured by, such tenant, including without limitation, all parking pass keys, Building keys, office keys and keys to storage areas and toilet rooms. 12. All removals from the Building, or the carrying in or out of the Building or the premises demised to any tenant, of any safes, freight, furniture, or bulky matter of any description must take place at such time and in such manner as Landlord or its agents may determine, from time to time. Landlord reserves the right to inspect all freight to be brought into the Building and to exclude from the Building all freight which violates any of the Building Rules or the provisions of such tenant's lease. 13. No tenant shall use or occupy, or permit any portion of the premises demised to such tenant to be used or occupied, as an office for a public stenographer or typist, or to a barber or manicure shop, or as an employment bureau. No tenant or occupant shall engage or pay any employees in the Building, except those actually working for such tenant or occupant in the Building, nor advertise for laborers giving an address at the Building. 14. No tenant or occupant shall purchase spring water, ice, food, beverage, lighting maintenance, cleaning towels or other like service, from any company or person not approved by Landlord, such approval not unreasonably to be withheld. 15. Landlord shall have the right to prohibit any advertising by any tenant or occupant which, in Landlord's opinion, tends to impair the reputation of the Building or its desirability as a building for offices, and upon notice from 2/12/93 2 Landlord, such tenant or occupant shall refrain from or discontinue such advertising. 16. Landlord reserves the right to exclude from the Building, between the hours of 6:00 p.m. and 8:00 a.m. on Business Days and otherwise at all hours, all persons who do not present a pass to the building signed by the Landlord. Landlord will furnish passes to persons for whom any tenant requests such passes. Each tenant shall be responsible for all persons for whom it requests such passes and shall be liable to Landlord for all wrongful acts of such persons. 17. Each tenant, before closing and leaving the premises demised to such tenant at any time, shall see that all entrance doors are locked and windows closed. 18. Each tenant shall, at its expense, provide artificial light in the premises demised to such tenant for Landlord's agents, contractors, and employees while performing janitorial or other cleaning services and making repairs or alterations in said premises. 19. No premises shall be used, or permitted to be used, for lodging or sleeping, or for any immoral or illegal purpose. 20. There shall not be used in the Building, either by any tenant or occupant or by their agents or contractors, in the delivery or receipt of merchandise, freight or other matter, any hand trucks or other means of conveyance, except those equipped with rubber tires, rubber side guards and such other safeguards as Landlord may require. 21. Canvassing, soliciting and peddling in the Building are prohibited and each tenant and occupant shall cooperate in seeking their prevention. 22. If the premises demised to any tenant become infested with vermin, such tenant, at its sole cost and expense, shall cause its premises to be exterminated from time to time, to the satisfaction of Landlord and shall employ such exterminators therefor as shall be approved by Landlord. 23. No premises shall be used, or permitted to be used, at any time, without the prior approval of Landlord, as a store for the sale or display of goods, wares or merchandise of any kind, or as a restaurant, shop, booth, bootblack or other stand, or for the conduct of any business or occupation which predominantly involves direct patronage of the general public in the premises demised to such tenant, or for manufacturing or for other similar purposes. 24. No tenant shall move, or permit to be moved, into or out of the Building or the premises demised to such tenant, any heavy or bulky matter, without the specific prior written 2/12/93 3 approval of Landlord. If any such matter requires special handing, only a person holding a Master Rigger's License shall be employed to perform such special handling. No tenant shall place, or permit to be placed on any part of the floor or floors of the premises demised to such tenant, a load exceeding the floor load per square foot which such floor was designed to carry and which is allowed by law. Landlord reserves the right to prescribe the weight and position of safes and other heavy matter, which must be placed so as to distribute the weight. 25. The requirements of tenants will be attended to only upon application at the office of the Building. Building employees shall not be required to perform, and shall not be requested by any tenant or occupant to perform any work outside of their regular duties, unless under specific instructions from the office of the managing agent of the Building. 2/12/93 4 EXHIBIT G --------- AGREEMENT OF SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT ------------------------------ THIS AGREEMENT made the ____ day of February, 1993, by and among DARVEL REALTY TRUST, a Massachusetts realty trust having a principal place of business at One Main Street, Cambridge, Massachusetts (hereinafter called "Ground Lessor"), PEGASYSTEMS, INC., a Massachusetts corporation (hereinafter called "Tenant") and TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA, a New York corporation, having its principal office and post office address at 730 Third Avenue, New York, New York 10017 (hereinafter called "Teachers"); W I T N E S S E T H: WHEREAS, Ground Lessor is the owner in fee simple of those certain premises situate, lying and being in the City of Cambridge, Middlesex County, Massachusetts, as more particularly described in Exhibit A attached hereto; and WHEREAS, under the terms of a certain lease dated September 23, 1981, as amended (hereinafter called "Ground Lease"), notice of which has been recorded with Middlesex Southern District Registry of Deeds at Book 14451, Page 245 and filed with the Middlesex Southern Registry District of the Land Court as Document No. 617399, Ground Lessor did lease, let and demise the demised premises (the "Demised Premises") to RIVERFRONT OFFICE PARK JOINT VENTURE, a Massachusetts joint venture partnership (hereinafter called "Landlord"), upon the terms and conditions therein more particularly set forth; WHEREAS, Teachers is the owner and holder of a certain promissory note secured by a Mortgage (as defined in Article I of the Sublease) constituting a first lien upon the leasehold estate created by said Ground Lease; WHEREAS, under the terms of a certain Agreement of Lease dated February __, 1993 (the "Sublease"), Landlord did lease, let and demise to Tenant a portion of the Demised Premises as therein more particularly described (the "Subleased Premises"); WHEREAS, the parties hereto desire to establish additional rights of quiet and peaceful possession for the benefit of Tenant under the said Sublease and further to define the terms, covenants and conditions precedent for such additional rights. NOW, THEREFORE, in consideration of the respective demises and of the sum of One ($1.00) Dollar and other good and valuable consideration, each to the other in hand paid, it is hereby mutually agreed as follows: 2/12/93 1. Ground Lessor consents to and approves the Sublease. 2. In the event of the cancellation or termination of the Ground Lease or of the surrender thereof, whether voluntary, involuntary or by operation of law, prior to the expiration date of the Sublease, including any extensions and renewals of the Sublease now provided thereunder, and subject to the observance and performance by Tenant of all of the terms, covenants and conditions of the Sublease on the part of Tenant to be observed and performed, Ground Lessor does hereby covenant and warrant as follows: (a) That Tenant shall have quiet peaceful possession of the Subleased Premises under the Sublease; (b) That the Sublease shall continue in full force and effect and Ground Lessor shall recognize the Sublease and the Tenant's rights thereunder and will thereby establish direct privity of estate and contract as between Ground Lessor and Tenant, with the same force and effect and with the same relative priority in time and right as though the Sublease were originally made directly from Ground Lessor in favor of Tenant, but not in respect of any amendment to such Sublease not previously approved in writing by Ground Lessor. 3. In the event of the cancellation or termination of the Ground Lease or of the surrender thereof, whether voluntary, involuntary or by operation of law, prior to the expiration date of the Sublease, including any extensions and renewals of the Sublease now provided thereunder, Tenant hereby covenants and agrees to make full and complete attornment to Ground Lessor, for the balance of the term of the Sublease, including any extensions and renewals thereof, now provided thereunder, upon the same terms, covenants and conditions as therein provided, subject, however, in all events to the terms, conditions and provisions of this Agreement, so as to establish direct privity of estate and contract as between Ground Lessor and Tenant and with the same force and effect and relative priority in time and right as though the Sublease were originally made directly from Ground Lessor to Tenant, and Tenant will thereafter make all Rent payments thereunder directly to Ground Lessor. 4. Teachers and Tenant do hereby covenant and agree that the Mortgage shall be and the same is hereby made SUBORDINATE to the Sublease and to the recognition and attornment agreements provided for in Paragraphs 2 and 3 hereof with the same force and effect as if the Sublease had been executed, delivered and recorded and the said recognition and attornment agreements aforesaid had been effected in each case prior to the execution, delivery and recording of the Mortgage, EXCEPT, HOWEVER, that this Subordination shall not affect nor be applicable to and does hereby expressly exclude: 2/12/93 2 (a) The prior right and claim under and the prior lien of the Mortgage in, to and upon any award or other compensation heretofore or hereafter to be made for any taking by eminent domain of any part of the Demised Premises, and as to the right of disposition thereof in accordance with the provisions of the Mortgage; (b) The prior right and claim under and the prior lien of the Mortgage in, to and upon any proceeds payable under all policies of fire and rent insurance upon the Demised Premises and as to the right of disposition thereof in accordance with the terms of the Mortgage; and (c) Any lien, right, power or interest, if any which may have arisen or intervened in the period between the recording of the Mortgage and the execution of the Sublease or the effective date of the recognition and attornment agreements aforesaid, whichever is later. 5. The terms, covenants and conditions hereof shall inure to the benefit of and be binding upon the respective parties hereto, their respective heirs, executors, administrators, successors and assigns. IN WITNESS WHEREOF, the parties hereto have caused this writing to be signed, sealed and delivered in their respective names and behalf, and, if a corporation, by its officers duly authorized, the day and year first above written. TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA By: ---------------------------------------- Vice President DARVEL REALTY TRUST By: [Signature of Michael P. Sullivan] ---------------------------------------- Michael P. Sullivan, Vice President PEGASYSTEMS, INC. By: [Signature of Ira Vishner] --------------------------------------- Ira Vishner, Vice President 2/12/93 3 EXHIBIT H --------- LETTER OF CREDIT-PEGASYSTEMS IRREVOCABLE STANDBY LETTER OF CREDIT RIVERFRONT OFFICE PARK JOINT VENTURE 101 Main Street Cambridge, MA 02142 Gentlemen: We hereby establish our Irrevocable Letter of Credit, No. S049087W, in favor of Riverfront Office Park Joint Venture, a Massachusetts joint venture ("Landlord"), of which Darvel Realty Trust, a Massachusetts Trust ("Darvel"), c/o Codman Management Company, One Main Street, Cambridge, MA 02142 is the Managing General Partner (together with all successors and assigns, the "Beneficiary") for the account of Pegasystems, Inc., 840 Memorial Drive, Cambridge, MA 02139 a Massachusetts Corporation, ("Tenant"), for a sum or sums not exceeding in all Three Hundred Thousand Dollars ($300,000) available by your draft(s) drawn on us accompanied by: 1. (a) A statement executed by an officer of Darvel certifying that (i) the amount of the draft represents an amount due and owing pursuant to the terms of the Agreement of Lease between Landlord and Tenant (the "Lease"), (ii) all applicable written notice(s) of such default have been given to Tenant pursuant to the provisions of the Lease, (iii) any applicable grace period has expired and (iv) the amount of this draft does not exceed the difference between (A) $300,000.00, and (B) the sum of (1) the aggregate of all Rent received by Landlord under the Lease, and (2) the sum of all previous drawings made under this Letter of Credit; and, (b) a copy of any applicable notice of default given to Tenant. This Letter of Credit shall be the absolute irrevocable and unconditional obligation of [Bank]. Partial drawings are permitted. 2/12/93 This Credit may be transferred in its entirety upon written notice to [Bank]. Said notice shall include the name and address of the transferee. We hereby agree that all drafts drawn under and in compliance with the terms of this Credit will be duly honored upon presentation to [Bank] if presented to [Bank] at its office at _____________________, Massachusetts on or before April 30, 1994. This Credit is subject to the Uniform Customs and Practice published by the International Chamber of Commerce, 1983 Revision, ICC Publication No. 400. This Letter of Credit shall be governed by Article 5 of the Uniform Commercial Code of Massachusetts, as from time to time amended. [BANK] By: ---------------------------- 2/12/93 EX-10.14 17 MATERIAL CONTRACTS AMENDMENT NO. 1 TO AGREEMENT OF LEASE ------------------------------------- THIS AMENDMENT TO AGREEMENT OF LEASE made as of the 17th day of August, 1994, by and between RIVERFRONT OFFICE PARK JOINT VENTURE, a Massachusetts joint venture (hereinafter referred to as "Landlord") and PEGASYSTEMS INC., a Massachusetts corporation (hereinafter referred to as "Tenant"). WITNESSETH: ----------- WHEREAS, the parties hereto are parties to a certain Agreement of Lease dated as of February 26, 1993 (hereinafter referred to as the "Lease"); and WHEREAS, the parties hereto desire to amend the Lease as hereinafter provided; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, it is hereby agreed as follows: 1. Effective on the Sixth Floor Expansion Space Term Commencement Date (as hereinafter defined) there shall be added to the Demised Premises a portion of the sixth (6th) floor of the Building consisting of 11,514 rentable square feet of space, as shown on the plan attached hereto as Exhibit A and made a part hereof (hereinafter referred to as the "Sixth Floor Expansion Space"). 2. (a) Subject to delay by causes beyond the reasonable control of Landlord or caused by the action or inaction by Tenant, Landlord shall, on or before November 1, 1994 (the "Original Sixth Floor Expansion Space Term Commencement Date") substantially complete the Tenant's Improvements (as defined in Exhibit B, which Exhibit is attached hereto and incorporated by reference), insofar as is practicable in view of Tenant's Acts (as hereinafter defined) or Tenant defaults, if any. For purposes hereof, the terms substantial completion or substantially complete shall mean (i) that the said Tenant's Improvements have been completed in compliance with the Sixth Floor Expansion Space Approved Final Plans (as defined in Exhibit B) with the exception of minor punch list items so that the Sixth Floor Expansion Space may be used for their intended purpose, excluding, however, any special items or long-lead items designated in the Sixth Floor Expansion Space Approved Final Plans and identified as such by Landlord, and (ii) that a certificate of occupancy or other permission for Tenant to occupy the Sixth Floor Expansion Space for their permitted use hereunder shall have been obtained; and (iii) that the date of substantial completion shall have been established and confirmed by a Certificate of Substantial Completion signed by Landlord's Architect, subject to Tenant's Architect's reasonable concurrence. In the event that any delay in delivery of possession of the Sixth Floor Expansion Space to Tenant past the date set forth in this Section 2(a) as the "Original Sixth Floor Expansion Space Term Commencement Date" is caused by or is attributable to the act or neglect of Tenant, its servants, agents, employees or independent contractors, including without limitation, as a consequence of any change orders to the Sixth Floor Expansion Space Approved Final Plans requested by Tenant and consented to by Landlord (provided that notice of such 8/3/94 anticipated delay shall be given by Landlord to Tenant) (collectively "Tenant's Acts"), the Sixth Floor Expansion Space Term Commencement Date shall be the later of the Original Sixth Floor Expansion Space Term Commencement Date or the date on which possession of the Sixth Floor Expansion Space would have been delivered to Tenant but for the delay caused by Tenant's Acts and Tenant shall be liable for Rent and other obligations under this Lease relating to the Sixth Floor Expansion Space from said Sixth Floor Expansion Space Term Commencement Date. Landlord shall notify Tenant as soon as reasonably practical following Landlord's awareness of the occurrence of any Tenant's Act which Landlord believes is likely to cause a delay in the delivery of possession of the Sixth Floor Expansion Space to Tenant. Each day of delay caused by Tenant's Acts shall postpone by one (1) day the Original Sixth Floor Expansion Space Term Commencement Date. (b) On or before three (3) weeks prior to the Sixth Floor Expansion Space Term Commencement Date, Landlord shall notify Tenant that Tenant and its contractor may have access to the Sixth Floor Expansion Space for the purpose of preparing the same for Tenant's occupancy. Such access shall be deemed to be pursuant to a license pursuant to Section 4.3 of the Lease and shall not be deemed to advance the Sixth Floor Expansion Space Term Commencement Date. Notwithstanding the fact that the Sixth Floor Expansion Space Term Commencement Date shall not have occurred, it is understood and agreed that the provisions of Article 13 of the Lease shall become effective as to the Sixth Floor Expansion Space immediately upon the commencement of such access to Tenant, and, Tenant on or before the commencement date of such access shall furnish to Landlord a certificate of insurance pursuant to Section 13.2 of the Lease. 3. Tenant shall be conclusively deemed to have agreed that Landlord has performed all of its obligations under Section 2 of this Amendment unless not later than sixty (60) days after the Sixth Floor Expansion Space Term Commencement Date Tenant shall give Landlord written notice specifying the respects in which Landlord has not performed such obligations. 4. To the extent that Tenant is permitted by Landlord to enter the Sixth Floor Expansion Space the prior to the Sixth Floor Expansion Space Term Commencement Date to undertake such work as is to be performed by Tenant in order to prepare the Sixth Floor Expansion Space for Tenant's occupancy, such entry shall be deemed to be pursuant to a license from Landlord to Tenant and shall be at the risk of Tenant. In no event shall Tenant interfere with any construction work being performed by or on behalf of Landlord in or around the Sixth Floor Expansion Space; without limiting the generality of the foregoing, Tenant shall comply with all instructions issued by Landlord's contractors relative to the moving of Tenant's equipment and other property into the Sixth Floor Expansion Space and shall pay any reasonable fees or costs imposed in connection therewith. 5. Effective on the Sixth Floor Expansion Space Term Commencement Date, Article 1(13) of the Lease is hereby amended to read in its entirety a follows: "(13) Rentable Area of the Demised Premises: 34,864 square feet." 8/3/94 2 6. Effective on the Sixth Floor Expansion Space Term Commencement Date, Article 1(19) of the Lease is hereby amended to read in its entirety as follows to reflect an increase in the Yearly Fixed Rent payable under the Lease of $224,523 per annum (based upon a rental of $19.50 per square foot per annum): "(19) Yearly Fixed Rent: (a) Year one (1) of the Term of this Lease: -------------------------------------- $364,260 (b) Year two (2) of the Term of this Lease: --------------------------------------- $409,792.50 per annum until the Sixth Floor Expansion Space Term Commencement Date, and thereafter at the rate of $634,315.50 per annum. (c) Each of years three (3) through six (6) of the Term of this Lease: ------------------------------------------- $679,848" 7. Except as expressly provided herein, as used herein, all capitalized terms shall have the same meaning as set forth in the Lease. 8. Except as herein expressly modified, the provisions of the Lease are hereby confirmed and ratified and shall continue in full force and effect. IN WITNESS WHEREOF, Landlord and Tenant have caused this instrument to be executed under seal, all as of the day and year first above written. RIVERFRONT OFFICE PARK JOINT VENTURE By: RIVERFRONT OFFICE PARK ASSOCIATES By: DARVEL REALTY TRUST Managing General Partner By: [Signature of Michael P. Sullivan] --------------------------------------- Michael P. Sullivan, Vice President PEGASYSTEMS INC. By: [Signature of Ira Vishner] -------------------------------------- Vice President 8/3/94 3 EXHIBIT B --------- SIXTH FLOOR EXPANSION SPACE TENANT IMPROVEMENTS ------------------------------------------------ A. IMPROVEMENTS ------------ 1. Landlord's Work. Landlord shall cause the fit-up work and tenant improvements specified in the Sixth Floor Expansion Space Approval Final Plans (as hereinafter defined) (all such work being referred to as "Tenant's Improvements) to be substantially completed as provided herein. 2. Tenant's Cash Allowance. Landlord shall provide to Tenant allowance (the "Fit- up Allowance") equal to the product of Twenty-five Dollars ($25.00) multiplied by the Rentable Area of the Sixth Floor Expansion Space (11,514 square feet) to pay for the cost of Tenant's Improvements. For purposes hereof, the cost of Tenant's Improvements shall be deemed to be the actual cost and expense charged to Landlord by Landlord's contractor for said Tenant's Improvements. In the event that the cost of Tenant's Improvements exceeds the Fit-up Allowance, the excess cost shall be promptly paid by Tenant, upon written request by Landlord, accompanied by reasonable supporting documentation establishing the amount then due and payable. In the event that the cost of Tenant's Improvements shall be less than the Fit-up Allowance (the difference between the cost of Tenant's Improvements and the maximum Fit-up Allowance being referred to as the "Fit-up Allowance Difference"), Landlord shall, credit the Fit-up Allowance Difference to Rent payable by Tenant under the Lease. Landlord will reimburse Tenant the sum of $16,635.63 to pay for the architectural and engineering costs and expenses of Tenant's Architect, Kodis Associates, in connection with the preparation of the Approved Final Plans and Specifications, within thirty (30) days following receipt by Landlord of invoices and supporting documentation thereof. B. PLANS AND SPECIFICATIONS ------------------------ 1. Preparation of Plans and Specifications. Landlord's Architect shall prepare architectural working drawings and specifications for the build out of the fit-up work to be done to the Sixth Floor Expansion Space. The final architectural working drawings and specifications, as approved by Landlord and Tenant, together with the electrical, mechanical and plumbing working drawings and specifications, shall constitute the "Sixth Floor Expansion Space Approved Final Plans". Landlord shall be solely responsible for the fees of Landlord's Architect. 2. Time Requirements. The parties agree to the following time schedule: By: Date Activity - --------- --------- July 15, 1994 Kodis Associates to submit preliminary telephone/data/electrical outlet location plan to Tenant for review and approval. 8/3/94 July 18, 1994 Kodis Associates to complete design development for review and approval by Tenant. July 20, 1994 Landlord's Architect to send out requests for proposals to construction managers. July 21, 1994 Tenant to submit marked up telephone/data/electrical outlet plans back to Kodis Associates for completion of these drawings. July 22, 1994 Kodis Associates to submit final telephone/data/electrical outlet locations plans to Bryer Architects for distribution to engineers. July 27, 1994 Construction manager selected. August 1, 1994 Construction manager to bid demolition work. August 12, 1994 Construction drawings complete by Kodis Associates, Bryer Architects, and Cosentini. August 29, 1994 Subcontractor bids due. August 31, 1994 Demolition completed. September 6, 1994 Construction begins. October 26, 1994 Construction substantially completed. November 1, 1994 Commencement date. C. INSPECTION ---------- Tenant is authorized by Landlord to make periodic inspections of the Sixth Floor Expansion Space during construction provided that such inspections are made during normal business hours and that Tenant is accompanied by a representative of the Landlord or Landlord's contractor. D. FINAL INSPECTION OF SIXTH FLOOR EXPANSION SPACE ----------------------------------------------- Prior to the Sixth Floor Expansion Space Term Commencement Date, Tenant together with the Landlord's Architect and contractor shall make a final inspection of the Sixth Floor Expansion Space to ascertain whether substantial completion has occurred. A punchlist of items to be completed or corrected shall be prepared. 8/3/94 5 E. PAYMENT OF TENANT COSTS ----------------------- In the event of a default by Tenant in payment of any amount payable by Tenant under this Exhibit B, Landlord shall (in addition to all other remedies) have the same rights as in case of default in Rent under the Lease. 1-263292.1 8/3/94 6 [Graphic showing floorplan] EXHIBIT A - 11,514 RSF BRYER ARCHITECTS 1208 MASSACHUSETTS AVE P.O. BOX 1545 CAMBRIDGE, MA 02238 617-864-8019 101 MAIN STREET CAMBRIDGE, MA 02142 TENANT: PEGASYSTEMS INC DATE: 08/10/94 6TH FLOOR KEY PLAN NOTE: THIS DRAWING IS FOR DESCRIPTIVE PURPOSES ONLY. IT HAS BEEN REDUCED FROM ITS ORIGINAL SCALE. EX-21.1 18 SUBSIDIARIES OF THE REGISTRANT Subsidiaries of Pegasystems Inc. -------------------------------- Name of Subsidiaries and Jurisdiction of Organization ----------------------------------------------------- Name of Subsidiary Jurisdiction of Organization ------------------ ----------------------------- Pegasystems Limited England EX-23.1 19 CONSENTS OF EXPERTS AND COUNSEL Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Experts" and "Selected Consolidated Financial Data" and to the use of our report dated May 6, 1996 (except for Notes 10 and 11, as to which the date is , 1996), in the Registration Statement on Form S-1 and the related Prospectus of Pegasystems Inc. for the registration of 3,910,000 shares of its common stock. Our audits also included the financial statement schedule of Pegasystems Inc. located at Exhibit 99.1. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Boston, Massachusetts The foregoing consent is in the form that will be signed upon the completion of the restatement of capital accounts described in Note 10 to the financial statements. ERNST & YOUNG LLP Boston, Massachusetts May 14, 1996 EX-27.1 20 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Company's consolidated financial statements, and notes thereto, included in the Company's registration statement, to which this schedule is an exhibit, and is qualified in its entirety by reference to such consolidated financial statements. 12-MOS 3-MOS DEC-31-1995 DEC-31-1996 JAN-01-1995 JAN-01-1996 DEC-31-1995 MAR-31-1996 510,424 2,643,997 0 0 9,330,064 10,061,639 433,887 433,887 0 0 9,831,788 12,613,282 3,482,849 3,703,767 (1,311,130) (1,561,056) 25,875,152 26,554,686 5,408,485 5,661,215 1,597,777 1,402,361 0 0 0 0 234,900 234,900 14,438,552 14,893,086 14,673,452 15,127,986 0 0 22,247,182 4,941,149 0 0 6,796,461 1,523,083 12,193,382 2,962,402 793,310 0 0 0 4,641,137 796,743 1,763,632 318,697 2,877,505 478,046 0 0 0 0 0 0 2,877,505 478,046 .11 .02 .11 .02
EX-99.1 21 VALUATION AND QUALIFYING ACCOUNTS Exhibit 99.1 PEGASYSTEMS, INC. Schedule II Valuation and Qualifying Accounts
Additions Charged Balance at to beginning costs Balance at of and end of Description period expenses Deductions period - ------------------------------- ---------- -------- --------- ---------- Year ended December 31, 1995 Allowance for doubtful accounts $ 0 $793,310 $359,423 433,887 Year ended December 31, 1994 Allowance for doubtful accounts 340,041 0 340,041 0 Year ended December 31, 1993 Allowance for doubtful accounts 18,087 325,862 3,908 340,041
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