PEGASYSTEMS INC (Form: 10-Q, Received: 05/10/2017 16:16:24)

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2017

☐	Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number: 1-11859

PEGASYSTEMS INC.

(Exact name of Registrant as specified in its charter)

Massachusetts

04-2787865

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)


One Rogers Street, Cambridge, MA		02142-1209
(Address of principal executive offices)		(Zip Code)

(617) 374-9600

(Registrant’s telephone number including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company,” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

There were 77,142,095 shares of the Registrant’s common stock, $.01 par value per share, outstanding on April 28, 2017.

PEGASYSTEMS INC.

Index to Form 10-Q


		Page
Part I - Financial Information

Item 1.	Unaudited Condensed Consolidated Financial Statements:
	Unaudited Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016		3
	Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016		4
	Unaudited Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and 2016		5
	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016		6
	Notes to Unaudited Condensed Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		26
Item 4.	Controls and Procedures		26

Part II - Other Information

Item 1A.	Risk Factors		28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		28
Item 6.	Exhibits		28

Signature			29

Part I—Financial Information:

Item 1. Unaudited Condensed Financial Statements:

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)


	March 31, 2017			December 31, 2016
*ASSETS*
Current assets:
Cash and cash equivalents	$	83,838		$	70,594
Marketable securities		63,948			63,167

Total cash, cash equivalents, and marketable securities		147,786			133,761
Trade accounts receivable, net of allowance of $4,780 and $4,126		263,310			265,028
Income taxes receivable		10,827			14,155
Other current assets		19,652			12,188

Total current assets		441,575			425,132
Property and equipment, net		39,947			38,281
Deferred income taxes		69,846			69,898
Long-term other assets		4,445			3,990
Intangible assets, net		40,998			44,191
Goodwill		72,828			73,164

Total assets	$	669,639		$	654,656

*LIABILITIES AND STOCKHOLDERS’ EQUITY*
Current liabilities:
Accounts payable	$	14,237		$	14,414
Accrued expenses		38,545			36,751
Accrued compensation and related expenses		39,958			60,660
Deferred revenue		186,824			175,647

Total current liabilities		279,564			287,472
Income taxes payable		4,307			4,263
Long-term deferred revenue		9,958			10,989
Other long-term liabilities		15,733			16,043

Total liabilities		309,562			318,767

Stockholders’ equity:
Preferred stock, 1,000 shares authorized; no shares issued and outstanding		—			—
Common stock, 200,000 shares authorized; 77,129 shares and 76,591 shares issued and outstanding		771			766
Additional paid-in capital		142,472			143,903
Retained earnings		223,021			198,315
Accumulated other comprehensive loss		(6,187	)		(7,095	)

Total stockholders’ equity		360,077			335,889

Total liabilities and stockholders’ equity	$	669,639		$	654,656

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)


	Three Months Ended March 31,
	2017			2016
Revenue:
Software license	$	92,390		$	68,345
Maintenance		58,965			52,975
Services		71,892			57,538

Total revenue		223,247			178,858

Cost of revenue:
Software license		1,300			1,021
Maintenance		7,218			5,915
Services		59,572			49,574

Total cost of revenue		68,090			56,510

Gross profit		155,157			122,348

Operating expenses:
Selling and marketing		71,288			61,078
Research and development		40,296			34,920
General and administrative		12,335			11,048
Acquisition-related		—			919
Restructuring		—			258

Total operating expenses		123,919			108,223

Income from operations		31,238			14,125
Foreign currency transaction gain		676			1,376
Interest income, net		165			290
Other expense, net		(279	)		(2,298	)

Income before provision for income taxes		31,800			13,493
Provision for income taxes		4,779			3,093

Net income	$	27,021		$	10,400

Earnings per share:
Basic	$	0.35		$	0.14

Diluted	$	0.33		$	0.13

Weighted-average number of common shares outstanding:
Basic		76,761			76,375
Diluted		81,875			79,235
Cash dividends declared per share	$	0.03		$	0.03

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)


	Three Months Ended March 31,
	2017		2016
Net income	$	27,021	$	10,400
Other comprehensive income, net:
Unrealized gain on available-for-sale marketable securities, net of tax		127		286
Foreign currency translation adjustments		781		(7	)

Total other comprehensive income, net		908		279

Comprehensive income	$	27,929	$	10,679

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Three Months Ended March 31,
	2017			2016
Operating activities:
Net income	$	27,021		$	10,400
Adjustments to reconcile net income to cash provided by operating activities:
Deferred income taxes		727			650
Depreciation and amortization		6,088			5,466
Stock-based compensation expense		12,508			8,935
Foreign currency transaction gain		(676	)		(1,376	)
Other non-cash		(379	)		2,712
Change in operating assets and liabilities:
Trade accounts receivable		3,383			6,697
Income taxes receivable and other current assets		(4,382	)		(201	)
Accounts payable and accrued expenses		(21,193	)		(24,822	)
Deferred revenue		9,412			1,129
Other long-term assets and liabilities		(65	)		450

Cash provided by operating activities		32,444			10,040

Investing activities:
Purchases of marketable securities		(3,322	)		(8,193	)
Proceeds from maturities and called marketable securities		2,300			15,890
Sales of marketable securities		—			6,179
Payments for acquisitions, net of cash acquired		(290	)		(255	)
Investment in property and equipment		(2,415	)		(4,251	)

Cash (used in) provided by investing activities		(3,727	)		9,370

Financing activities:
Issuance of common stock for share-based compensation plans		68			44
Dividend payments to shareholders		(2,298	)		(2,297	)
Common stock repurchases for tax withholdings for net settlement of equity awards and under share repurchase programs		(13,764	)		(17,569	)

Cash used in financing activities		(15,994	)		(19,822	)

Effect of exchange rates on cash and cash equivalents		521			(434	)

Net increase (decrease) in cash and cash equivalents		13,244			(846	)
Cash and cash equivalents, beginning of period		70,594			93,026

Cash and cash equivalents, end of period	$	83,838		$	92,180

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

Pegasystems Inc. (together with its subsidiaries, “the Company”) has prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S.”) for complete financial statements and should be read in conjunction with the Company’s audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2016.

In the opinion of management, the Company has prepared the accompanying unaudited condensed consolidated financial statements on the same basis as its audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year 2017.

2. NEW ACCOUNTING PRONOUNCEMENTS

Financial Instruments: In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires measurement and recognition of expected credit losses for financial assets measured at amortized cost, including trade accounts receivable, upon initial recognition of that financial asset using a forward-looking expected loss model, rather than an incurred loss model for credit losses. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses when the fair value is below the amortized cost of the asset, removing the concept of “other-than-temporary” impairments. The effective date for the Company will be January 1, 2020, with early adoption permitted. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements and related disclosures.

Leases: In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which requires lessees to record most leases on their balance sheets, recognizing a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. The effective date for the Company will be January 1, 2019, with early adoption permitted. The Company currently expects that most of its operating lease commitments will be subject to this ASU and recognized as operating lease liabilities and right-of-use assets upon adoption with no material impact to its results of operations and cash flows.

Revenue: In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This ASU, including subsequently issued amendments, amends the guidance for revenue recognition, creating the new Accounting Standards Codification Topic 606 (“ASC 606”). ASC 606 requires entities to apportion consideration from contracts to performance obligations on a relative standalone selling price basis, based on a five-step model. Under ASC 606, revenue is recognized when a customer obtains control of a promised good or service and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for the good or service. ASC 606 also requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

The Company has elected the full retrospective adoption model, effective January 1, 2018. The Company’s quarterly results beginning with the quarter ending March 31, 2018 and comparative prior periods will be compliant with ASC 606. The Company’s Annual Report on Form 10-K for the year ended December 31, 2018 will be the Company’s first Annual Report that will be issued in compliance with ASC 606.

The Company is still in the process of quantifying the implications of the adoption of ASC 606. However the Company currently expects the following impacts:

•

Currently, the Company recognizes revenue from term licenses and perpetual licenses with extended payment terms over the term of the agreement as payments become due or earlier if prepaid, provided all other criteria for revenue recognition have been met, and any corresponding maintenance over the maintenance term. The adoption of ASC 606 will result in revenue for performance obligations being recognized as they are satisfied. Therefore, revenue from the term license and perpetual performance obligation with extended payment terms is expected to be recognized when control is transferred to the customer and revenue from the maintenance performance obligation is expected to be recognized on a straight-line basis over the contractual maintenance term. This will result in revenue from term licenses and perpetual licenses with extended payment terms being recognized prior to amounts being billed to the customer, and in these cases the Company expects to recognize a net contract asset on the balance sheet.

•

Currently, the Company allocates revenue to licenses under the residual method when it has VSOE for the remaining undelivered elements which allocates any future credits or significant discounts entirely to the license. The adoption of ASC 606 will result in the future credits, significant discounts, and material rights under ASC 606, being allocated to all performance obligations based upon their relative selling price. Under ASC 606, additional license revenue from the reallocation of such arrangement considerations will be recognized when control is transferred to the customer.

•

Currently, the Company does not have VSOE for fixed price services, time and materials services in certain geographical areas, and unspecified future products, which results in revenue being deferred in such instances until such time as VSOE exists for all undelivered elements or recognized ratably over the longest performance period. The adoption of ASC 606 eliminates the requirement for VSOE and replaces it with the concept of a stand-alone selling price. Once the transaction price is allocated to each of the performance obligations the Company can recognize revenue as the performance obligations are delivered, either at a point in time or over time. Under ASC 606, license revenue will be recognized when control is transferred to the customer.

•

Sales commissions and other third party acquisition costs resulting directly from securing contracts with customers are currently expensed when incurred. ASC 606 will require these costs to be recognized as an asset when incurred and to be expensed over the associated contract term. As a practical expedient, if the term of the contract is one year or less, the Company will expense the costs resulting directly from securing the contracts with customers. The Company expects this to impact its multi-year cloud offerings and licenses with additional rights of use that extend beyond one year.

•

ASC 606 provides additional accounting guidance for contract modifications whereby changes must be accounted for either as a retrospective change (creating either a catch up or deferral of past revenues), prospectively with a reallocation of revenues amongst identified performance obligations, or prospectively as separate contracts which will not require any reallocation. This may result in a difference in the timing of the recognition of revenue as compared to how current contract modifications are recognized.

•

There will be a corresponding effect on tax liabilities in relation to all of the above impacts.

3. MARKETABLE SECURITIES


	March 31, 2017
(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Municipal bonds	$	36,944	$	15	$	(38	)	$	36,921
Corporate bonds		27,057		2		(32	)		27,027

	$	64,001	$	17	$	(70	)	$	63,948


	December 31, 2016
(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Municipal bonds	$	36,746	$	—	$	(139	)	$	36,607
Corporate bonds		26,610		1		(51	)		26,560

	$	63,356	$	1	$	(190	)	$	63,167

The Company considers debt securities with maturities of three months or less from the purchase date to be cash equivalents. Interest is recorded when earned. All of the Company’s investments are classified as available-for-sale and are carried at fair value. Unrealized gains and losses considered to be temporary in nature are recorded as a component of accumulated other comprehensive loss, net of related income taxes. The Company reviews all investments for reductions in fair value that are other-than-temporary. When such reductions occur, the cost of the investment is adjusted to fair value through recording a loss on investments in the unaudited condensed consolidated statements of operations. Gains and losses on investments are calculated on the basis of specific identification. As of March 31, 2017, the Company did not hold any investments with unrealized losses that are considered to be other-than-temporary.

As of March 31, 2017, remaining maturities of marketable debt securities ranged from April 2017 to August 2019, with a weighted-average remaining maturity of approximately 12 months.

4. DERIVATIVE INSTRUMENTS

The Company uses foreign currency forward contracts (“forward contracts”) to hedge its exposure to fluctuations in foreign currency exchange rates associated with its foreign currency denominated cash, accounts receivable, and intercompany receivables and payables held by its U.S. parent company and United Kingdom (“U.K.”) subsidiary.

The Company is primarily exposed to foreign currency exchange rate fluctuations in the U.S. dollar, the Euro and the Australian dollar relative to the British pound and the Euro and the Indian rupee relative to the U.S. dollar. At the end of June 2016, the U.K. held a referendum in which U.K. voters approved an exit from the European Union (the “E.U.”), commonly referred to as “Brexit”. Uncertainty continues to remain around the future effects of Brexit, resulting in continued volatility in the British pound relative to other currencies. This prolonged weakening of the British pound may continue to result in foreign currency transaction gains from the remeasurement of foreign currency denominated cash and accounts receivable held by the Company’s U.K. subsidiary with corresponding losses on the Company’s forward contracts included in other expense, net.

The forward contracts are not designated as hedging instruments. As a result, the Company records the fair value of these contracts at the end of each reporting period in the accompanying unaudited condensed consolidated balance sheets as other current assets for unrealized gains and accrued expenses for unrealized losses, with any fluctuations in the value of these contracts recognized in other expense, net, in the accompanying unaudited condensed consolidated statements of operations. The cash flows related to these forward contracts are classified as operating activities in the accompanying unaudited condensed consolidated statements of cash flows. The Company does not enter into any forward contracts for trading or speculative purposes.

As of March 31, 2017 and December 31, 2016, the total notional value of the Company’s outstanding forward contracts were $36.8 million and $128.4 million, respectively.

The fair value of the Company’s outstanding forward contracts was as follows:

(in thousands)

March 31, 2017

December 31, 2016

Recorded In:

Fair Value

Recorded In:

Fair Value

Asset Derivatives

Foreign currency forward contracts

Other current assets

628

Liability Derivatives

Foreign currency forward contracts

Accrued expenses

883

The Company had forward contracts outstanding with total notional values as follows:


	As of March 31, 2017
Currency (in thousands)	2017			2016
Euro	€	12,305		€	15,590
British pound	£	855		£	2,605
Australian dollar	A$	10,160		A$	16,025
Indian rupee	Rs	—		Rs	303,500
United States dollar	$	14,705		$	21,080

	Three Months Ended March 31,
(in thousands)	2017			2016
Loss from the change in the fair value of forward contracts included in other expense, net	$	(279	)	$	(2,297	)
Foreign currency transaction gain from the remeasurement of foreign currency assets and liabilities	$	676		$	1,376

Net gain (loss)	$	397		$	(921	)

5. FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company records its marketable securities and forward contracts at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants based on assumptions that market participants would use in pricing an asset or liability. As a basis for classifying the fair value measurements, a three-tier fair value hierarchy, which classifies the fair value measurements based on the inputs used in measuring fair value, was established as follows: (Level 1) observable inputs such as quoted prices in active markets for identical assets or liabilities; (Level 2) significant other inputs that are observable either directly or indirectly; and (Level 3) significant unobservable inputs on which there is little or no market data, which require the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

The Company’s money market funds are classified within Level 1 of the fair value hierarchy. The Company’s marketable securities classified within Level 2 of the fair value hierarchy are valued based on a market approach using quoted prices, when available, or matrix pricing compiled by third party pricing vendors, using observable market inputs such as interest rates, yield curves, and credit risk. The Company’s foreign currency forward contracts, which are all classified within Level 2 of the fair value hierarchy, are valued based on the notional amounts and rates under the contracts and observable market inputs such as currency exchange rates and credit risk. If applicable, the Company will recognize transfers into and out of levels within the fair value hierarchy at the end of the reporting period in which the actual event or change in circumstance occurs. There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2017.

The Company’s assets and liabilities measured at fair value on a recurring basis consisted of the following:


			Fair Value Measurements at Reporting Date Using
(in thousands)	March 31, 2017		Level 1		Level 2
Fair Value Assets:
Money market funds	$	85	$	85	$	—
Marketable securities:
Municipal bonds	$	36,921	$	—	$	36,921
Corporate bonds		27,027		—		27,027

Total marketable securities	$	63,948	$	—	$	63,948

Foreign currency forward contracts	$	90	$	—	$	90
Fair Value Liabilities:
Foreign currency forward contracts	$	17	$	—	$	17


			Fair Value Measurements at Reporting Date Using
(in thousands)	December 31, 2016		Level 1		Level 2
Fair Value Assets:
Money market funds	$	458	$	458	$	—
Marketable securities:
Municipal bonds	$	36,607	$	—	$	36,607
Corporate bonds		26,560		—		26,560

Total marketable securities	$	63,167	$	—	$	63,167

Foreign currency forward contracts	$	628	$	—	$	628
Fair Value Liabilities:
Foreign currency forward contracts	$	883	$	—	$	883

For certain other financial instruments, including accounts receivable and accounts payable, the carrying value approximates their fair value due to the relatively short maturity of these items.

Assets Measured at Fair Value on a Nonrecurring Basis

Assets recorded at fair value on a nonrecurring basis, such as property and equipment, and intangible assets, are recognized at fair value if they become impaired. During the first three months of 2017 and 2016, the Company did not recognize any impairments of its assets recorded at fair value on a nonrecurring basis.

6. TRADE ACCOUNTS RECEIVABLE, NET OF ALLOWANCE

Unbilled trade accounts receivable primarily relate to services earned under time and materials arrangements and to license, maintenance, and cloud arrangements that have commenced or been delivered in excess of scheduled invoicing.


(in thousands)	March 31, 2017			December 31, 2016
Trade accounts receivable	$	230,213		$	234,473
Unbilled trade accounts receivable		37,877			34,681

Total accounts receivable		268,090			269,154

Allowance for sales credit memos		(4,780	)		(4,126	)

	$	263,310		$	265,028

7. GOODWILL AND OTHER INTANGIBLE ASSETS

The following table presents the changes in the carrying amount of goodwill:


(in thousands)	2017
Balance as of January 1,	$	73,164
Purchase price adjustments to goodwill		(354	)
Currency translation adjustments		18

Balance as of March 31,	$	72,828

Intangible assets are recorded at cost and are amortized using the straight-line method over their estimated useful lives.


(in thousands)	Range of Useful Lives	Cost		Accumulated Amortization			Net Book Value
As of March 31, 2017
Customer related intangibles	4-10 years	$	63,100	$	(39,441	)	$	23,659
Technology	3-10 years		58,942		(41,603	)		17,339
Other intangibles	3 years		5,361		(5,361	)		—

Total		$	127,403	$	(86,405	)	$	40,998

As of December 31, 2016
Customer related intangibles	4-10 years	$	63,091	$	(37,573	)	$	25,518
Technology	3-10 years		58,942		(40,269	)		18,673
Other intangibles	3 years		5,361		(5,361	)		—

Total		$	127,394	$	(83,203	)	$	44,191

Amortization expense of acquired intangibles is reflected in the Company’s unaudited condensed consolidated statements of operations as follows:


	Three Months Ended March 31,
(in thousands)	2017		2016
Cost of revenue	$	1,334	$	1,346
Selling and marketing		1,866		1,530
General and administrative		—		89

Total amortization expense	$	3,200	$	2,965

Amortization of intangibles is estimated to be recorded over their remaining useful lives as follows:


(in thousands) as of March 31, 2017	Future estimated amortization expense
Remainder of 2017	$	9,129
2018		11,337
2019		5,545
2020		2,649
2021		2,626
2022 and thereafter		9,712

	$	40,998

8. ACCRUED EXPENSES


(in thousands)	March 31, 2017		December 31, 2016
Partner commissions	$	1,829	$	2,199
Other taxes		7,418		9,031
Employee reimbursable expenses		2,280		1,624
Dividends payable		2,315		2,298
Professional services contractor fees		6,581		6,550
Self-insurance health and dental claims		2,324		2,182
Professional fees		3,783		3,654
Short-term deferred rent		1,839		1,770
Income taxes payable		1,168		1,391
Acquisition-related expenses and merger consideration		—		290
Restructuring		101		105
Marketing and sales program expenses		2,865		1,508
Foreign currency forward contracts		17		883
Fixed assets in progress		2,811		855
Other		3,214		2,411

	$	38,545	$	36,751

9. DEFERRED REVENUE


(in thousands)	March 31, 2017		December 31, 2016
Term license	$	10,056	$	15,843
Perpetual license		25,240		23,189
Maintenance		122,628		112,397
Cloud		17,928		13,604
Services		10,972		10,614

Current deferred revenue		186,824		175,647

Perpetual license		6,901		7,909
Maintenance		1,744		1,802
Cloud		1,313		1,278

Long-term deferred revenue		9,958		10,989

	$	196,782	$	186,636

10. STOCK-BASED COMPENSATION

The following table presents the stock-based compensation expense included in the Company’s unaudited condensed consolidated statements of operations:


	Three Months Ended March 31,
(in thousands)	2017			2016
Cost of revenues	$	3,622		$	2,680
Operating expenses		8,886			6,255

Total stock-based compensation before tax	$	12,508		$	8,935
Income tax benefit	$	(3,815	)	$	(2,605	)

During the first three months of 2017, the Company issued approximately 564,000 shares of common stock to its employees and 9,000 shares of common stock to its non-employee directors under the Company’s share-based compensation plans.

During the first three months of 2017, the Company granted approximately 919,000 restricted stock units (“RSUs”) and 1,414,000 non-qualified stock options to its employees with total fair values of approximately $40.3 million and $18.9 million, respectively. This includes approximately 175,000 RSUs which were granted in connection with the election by employees to receive 50% of their 2017 target incentive compensation under the Company’s Corporate Incentive Compensation Plan in the form of RSUs instead of cash. Stock-based compensation of approximately $7.7 million associated with this RSU grant will be recognized over a one-year period beginning on the grant date.

The Company recognizes stock based compensation on the accelerated recognition method, treating each vesting tranche as if it were an individual grant. As of March 31, 2017, the Company had approximately $76.2 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to all unvested RSUs and unvested stock options that is expected to be recognized over a weighted-average period of 2.2 years.

11. EARNINGS PER SHARE

Basic earnings per share is computed using the weighted-average number of common shares outstanding during the applicable period. Diluted earnings per share is computed using the weighted-average number of common shares outstanding during the applicable period, plus the dilutive effect of outstanding options and RSUs, using the treasury stock method. Certain shares related to some of the Company’s outstanding stock options and RSUs were excluded from the computation of diluted earnings per share because they were anti-dilutive in the periods presented, but could be dilutive in the future.


	Three Months Ended March 31,
(in thousands, except per share amounts)	2017		2016
*Basic*
Net income	$	27,021	$	10,400

Weighted-average common shares outstanding		76,761		76,375

Earnings per share, basic	$	0.35	$	0.14

*Diluted*
Net income	$	27,021	$	10,400

Weighted-average common shares outstanding, basic		76,761		76,375
Weighted-average effect of dilutive securities:
Stock options		3,184		1,692
RSUs		1,930		1,168

Effect of assumed exercise of stock options and RSUs		5,114		2,860

Weighted-average common shares outstanding, assuming dilution		81,875		79,235

Earnings per share, diluted	$	0.33	$	0.13

Outstanding options and RSUs excluded as impact would be anti-dilutive		314		492

12. GEOGRAPHIC INFORMATION AND MAJOR CLIENTS

Geographic Information

Operating segments are defined as components of an enterprise, about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance.

The Company develops and licenses software applications for customer engagement and its Pega ^® Platform, and provides consulting services, maintenance, and training related to its offerings. The Company derives substantially all of its revenue from the sale and support of one group of similar products and services - software that provides case management, business process management, and real-time decisioning solutions to improve customer engagement and operational excellence in the enterprise applications market. To assess performance, the Company’s CODM, who is the chief executive officer, reviews financial information on a consolidated basis. Therefore, the Company determined it has one reportable segment - Customer Engagement Solutions and one reporting unit.

The Company’s international revenue is from clients based outside of the U.S. The Company derived its revenue from the following geographic areas:


	Three Months Ended March 31,
(Dollars in thousands)	2017				2016
U.S.	$	137,609	61	%	$	93,228	52	%
Other Americas		9,491	4	%		25,559	14	%
U.K.		30,190	14	%		24,355	14	%
Other EMEA ⁽¹⁾		21,846	10	%		21,267	12	%
Asia Pacific		24,111	11	%		14,449	8	%

	$	223,247	100	%	$	178,858	100	%

⁽¹⁾	Includes Europe, the Middle East and Africa, but excludes the United Kingdom.

Major Clients

Clients accounting for 10% or more of the Company’s total revenue were as follows:


	Three Months Ended March 31,
(Dollars in thousands)	2017			2016
Total revenue		223,247			178,858
Client A		—	%		10	%

No client accounted for 10% or more of the Company’s total outstanding trade receivables as of March 31, 2017 or December 31, 2016.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains or incorporates forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements about our future financial performance and business plans, the adequacy of our liquidity and capital resources, the continued payment of quarterly dividends by the Company, and the timing of revenue recognition under existing license and cloud arrangements and are described more completely in Part I of our Annual Report on Form 10-K for the year ended December 31, 2016. These forward-looking statements are based on current expectations, estimates, forecasts, and projections about the industry and markets in which we operate, and management’s beliefs and assumptions. In addition, other written or oral statements that constitute forward-looking statements may be made by us or on our behalf. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “could,” “estimate,” “may,” “target,” “strategy,” “is intended to,” “project,” “guidance,” “likely,” “usually,” or variations of such words and similar expressions are intended to identify such forward-looking statements.

These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict. Important factors that could cause actual future activities and results to differ materially from those expressed in such forward-looking statements include, among others, variation in demand for our products and services and the difficulty in predicting the completion of product acceptance and other factors affecting the timing of license revenue recognition; the ongoing consolidation in the financial services, insurance, healthcare, and communications markets; reliance on third party relationships; the potential loss of vendor specific objective evidence for our consulting services; the inherent risks associated with international operations and the continued uncertainties in international economies; foreign currency exchange rates; the financial impact of the Company’s past acquisitions and any future acquisitions; the potential legal and financial liabilities and reputation damage due to cyber-attacks and security breaches; and management of the Company’s growth. These risks, and other factors that could cause actual results to differ materially from those expressed in such forward-looking statements, are described more completely in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2016. We have no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or risks. New information, future events or risks may cause the forward-looking events we discuss in this report not to occur or to materially change.

Business overview

We develop, market, license, and support software applications for marketing, sales, service, and operations. In addition, we license our Pega ^® Platform for clients that wish to build and extend their own applications. The Pega Platform assists our clients in building, deploying, and evolving enterprise applications, creating an environment in which business and IT can collaborate to manage back office operations, front office sales, marketing, and/or customer service needs. We also provide consulting services, maintenance, and training for our software. Our software applications and Pega Platform can be deployed on Pega, partner, or customer-managed cloud architectures.

Our clients include Global 3000 companies and government agencies that seek to manage complex enterprise systems and customer service issues with greater agility and cost-effectiveness. Our strategy is to sell a client a series of licenses, each focused on a specific purpose or area of operations in support of longer term enterprise-wide digital transformation initiatives.

Our license revenue is primarily derived from sales of our applications and our Pega Platform. Our cloud revenue is derived from the licensing of our hosted Pega Platform and software application environments. Our consulting services revenue is primarily related to new license implementations.

Key Financial Metrics

In evaluating the financial condition and operating performance of our business, management focuses on the following key financial metrics:


	Three Months Ended March 31,						Increase
(Dollars in thousands, except per share amounts)	2017			2016
Total revenue	$	223,247		$	178,858		$	44,389	25	%
Recurring revenue ⁽¹⁾	$	123,502		$	115,805		$	7,697	7	%
Operating Margin		14	%		8	%
Diluted earnings per share	$	0.33		$	0.13		$	0.20	154	%
Cash flow provided by operating activities	$	32,444		$	10,040		$	22,404	223	%

⁽¹⁾	See the table below for the composition of recurring revenue.


	Three Months Ended
(Dollars in thousands)	March 31, 2017			December 31, 2016			September 30, 2016			June 30, 2016			March 31, 2016
Recurring revenue:
Term license	$	53,710		$	30,351		$	28,919		$	18,864		$	54,332
Cloud		10,827			10,798			10,873			11,269			8,498
Maintenance		58,965			57,162			55,038			55,161			52,975

Total recurring revenue	$	123,502		$	98,311		$	94,830		$	85,294		$	115,805

Recurring revenue as a percent of total revenue		55	%		49	%		52	%		45	%		65	%

Recurring revenue increased $7.7 million or 7% in the first three months of 2017 compared to the same period in 2016. Recurring revenue represented 65% of total revenue during the first three months of 2016 due to a large three year term license arrangement which was paid in advance and recognized in full in the first quarter of 2016. As recurring revenue grows in proportion to total revenue, gross profit, operating income, net income, and earnings per share may not grow as fast as historical trends due to more license revenue being recognized over longer periods.

Another key performance factor is license and cloud backlog. It is computed by adding deferred license and cloud revenue recorded on the balance sheet (See Note 9 “Deferred Revenue”) and client license and cloud contractual commitments, which are not on our balance sheet because we have not yet invoiced our clients, nor have we recognized the associated revenues (See the table of future cash receipts in Liquidity and Capital Resources - Cash Provided by Operating Activities). License and cloud backlog may vary in any given period depending on the amount and timing of when the arrangements are executed, as well as the mix between perpetual, term, and cloud license arrangements, which may depend on our clients’ deployment preferences.


	As of March 31,								% Change
(Dollars in thousands)	2017				2016				2017 vs. 2016
Deferred license and cloud revenue on the balance sheet:
Term license and cloud	$	29,297	48	%	$	18,409	32	%		59	%
Perpetual license		32,141	52	%		39,381	68	%		(18	)%

Total deferred license and cloud revenue		61,438	100	%		57,790	100	%		6	%

License and cloud contractual commitments not on the balance sheet:
Term license and cloud		416,088	92	%		287,926	87	%		45	%
Perpetual license		35,532	8	%		43,944	13	%		(19	)%

Total license and cloud commitments		451,620	100	%		331,870	100	%		36	%

Total license (term and perpetual) and cloud backlog	$	513,058			$	389,660				32	%

Total term license and cloud backlog	$	445,385	87	%	$	306,335	79	%		45	%

LOGO

Critical accounting policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. and the rules and regulations of the SEC for interim financial reporting. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions, and beliefs of what could occur in the future given available information.

There have been no changes in our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016. For more information regarding our critical accounting policies, we encourage you to read the discussion contained in Item 7 under the heading “Critical Accounting Estimates and Significant Judgments” and Note 2 “Significant Accounting Policies” included in the notes to the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2016.

Results of Operations


	Three Months Ended March 31,						Increase
(Dollars in thousands)	2017			2016
Total revenue	$	223,247		$	178,858		$	44,389	25	%
Gross profit	$	155,157		$	122,348		$	32,809	27	%
Total operating expenses	$	123,919		$	108,223		$	15,696	15	%
Income from operations	$	31,238		$	14,125		$	17,113	121	%
Operating margin		14	%		8	%
Income before provision for income taxes	$	31,800		$	13,493		$	18,307	136	%

Revenue

Software license revenue


	Three Months Ended March 31,								Increase (Decrease)
(Dollars in thousands)	2017				2016
Perpetual licenses	$	38,680	42	%	$	14,013	21	%	$	24,667		176	%
Term licenses		53,710	58	%		54,332	79	%		(622	)	(1	)%

Total license revenue	$	92,390	100	%	$	68,345	100	%	$	24,045		35	%

The mix between perpetual and term license arrangements executed in a particular period varies based on client needs. A change in the mix may cause our revenues to vary materially from period to period. A higher proportion of term license arrangements executed would generally result in more license revenue being recognized over longer periods. Additionally, some of our perpetual license arrangements include extended payment terms or additional rights of use, which may also result in the recognition of revenue over longer periods.

The increase in perpetual license revenue was primarily due to the higher value of perpetual arrangements executed and higher percentage of perpetual arrangements recognized in revenue during the first three months of 2017 compared to the same period in 2016. The aggregate value of future revenue expected to be recognized under all noncancellable perpetual licenses was $35.5 million as of March 31, 2017 compared to $43.9 million as of March 31, 2016. We expect to recognize $16.0 million of the $35.5 million as revenue during the remainder of 2017. See the table of future cash receipts in Liquidity and Capital Resources - Cash Provided by Operating Activities

The slight decrease in term license revenue was primarily due to a large three year term license arrangement which was paid in advance and recognized in full in the first quarter of 2016. If just the first year of this term license arrangement was paid in advance in the first three months of 2016, term license revenue for the first three months of 2017 would have increased by approximately 25%. The aggregate value of future revenue expected to be recognized under noncancellable term licenses and our cloud arrangements grew to $416.1 million as of March 31, 2017 compared to $287.9 million as of March 31, 2016. We expect to recognize $78.2 million of the $416.1 million as revenue during the remainder of 2017 in addition to new term license and Pega Cloud arrangements we may complete or prepayments we may receive from existing term license agreements. See the table of future cash receipts in Liquidity and Capital Resources - Cash Provided by Operating Activities.

Maintenance revenue


	Three Months Ended March 31,				Increase
(Dollars in thousands)	2017		2016
Maintenance	$	58,965	$	52,975	$	5,990	11	%

The increase in maintenance revenue was primarily due to the continued growth in the aggregate value of the installed base of our software and continued strong renewal rates well in excess of 90%.

Services revenue


	Three Months Ended March 31,								Increase (Decrease)
(Dollars in thousands)	2017				2016
Consulting services	$	59,252	82	%	$	47,176	82	%	$	12,076		26	%
Cloud		10,827	15	%		8,498	15	%		2,329		27	%
Training		1,813	3	%		1,864	3	%		(51	)	(3	)%

Total services	$	71,892	100	%	$	57,538	100	%	$	14,354		25	%

Consulting services revenue represents revenue primarily from new license implementations. Our consulting services revenue may fluctuate in future periods depending on the mix of new implementation projects we perform as compared to those performed by our enabled clients or led by our partners. The increase in consulting services revenue was primarily due to higher billable hours during the first three months of 2017 compared to the same period in 2016 driven by a large project which began in the second half of 2016.

Cloud revenue represents revenue from our Pega Cloud offerings. The increase in cloud revenue was primarily due to growth of our cloud client base.

Gross profit


	Three Months Ended March 31,						Increase
(Dollars in thousands)	2017			2016
Software license	$	91,090		$	67,324		$	23,766	35	%
Maintenance		51,747			47,060			4,687	10	%
Services		12,320			7,964			4,356	55	%

Total gross profit	$	155,157		$	122,348		$	32,809	27	%

Total gross profit %		70	%		68	%
Software license gross profit %		99	%		99	%
Maintenance gross profit %		88	%		89	%
Services gross profit %		17	%		14	%

The increase in total gross profit was primarily due to the increase in software license revenue.

The increase in services gross profit percent was primarily due to the recognition of revenue in the first quarter of 2017 related to a large project which had been delayed from prior periods, for which the associated costs had already been recognized in 2016.

Operating expenses

Amortization of intangibles


	Three Months Ended March 31,				Increase (Decrease)
(Dollars in thousands)	2017		2016
Cost of revenue	$	1,334	$	1,346	$	(12	)	(1	)%
Selling and marketing		1,866		1,530		336		22	%
General and administrative		—		89		(89	)	(100	)%

	$	3,200	$	2,965	$	235		8	%

The increase was primarily due to the amortization associated with $24.3 million of intangible assets acquired from OpenSpan in April 2016, partially offset by the full amortization in 2016 of certain technology and other intangibles acquired from Antenna Software, Inc. in October 2013.

Selling and marketing


	Three Months Ended March 31,						Increase
(Dollars in thousands)	2017			2016
Selling and marketing	$	71,288		$	61,078		$	10,210	17	%
As a percent of total revenue		32	%		34	%
Selling and marketing headcount at March 31,		900			775

Selling and marketing expenses include compensation, benefits, and other headcount-related expenses associated with our selling and marketing personnel as well as advertising, promotions, trade shows, seminars, and other programs. Selling and marketing expenses also include the amortization of customer related intangibles.

The increase was primarily due to a $5.7 million increase in compensation and benefits associated with higher headcount and a $2 million increase in sales commissions associated with the higher value of new license arrangements executed during the first three months of 2017 compared to the same period in 2016.

The increase in headcount reflects our efforts to increase our sales capacity to target new accounts in existing industries, as well as to expand coverage in new industries and geographies and to increase the number of our sales opportunities.

Research and development


	Three Months Ended March 31,						Increase
(Dollars in thousands)	2017			2016
Research and development	$	40,296		$	34,920		$	5,376	15	%
As a percent of total revenue		18	%		20	%
Research and development headcount at March 31,		1,441			1,277

Research and development expenses include compensation, benefits, contracted services, and other headcount-related expenses associated with the creation and development of our products, as well as enhancements and design changes to existing products and integration of acquired technologies.

The increase was primarily due to a $5.5 million increase in compensation and benefit expenses associated with higher headcount.

The increase in headcount primarily reflects the growth in our India research facility, which usually lowers our average compensation expense per employee, and the acquisition of OpenSpan.

General and administrative


	Three Months Ended March 31,						Increase
(Dollars in thousands)	2017			2016
General and administrative	$	12,335		$	11,048		$	1,287	12	%
As a percent of total revenue		6	%		6	%
General and administrative headcount at March 31,		384			356

General and administrative expenses include compensation, benefits, and other headcount-related expenses associated with finance, legal, corporate governance, and other administrative headcount. They also include accounting, legal, and other professional consulting and administrative fees. The general and administrative headcount includes employees in human resources, information technology, and corporate services departments whose costs are allocated to our other functional departments.

The increase was primarily due to a $2.1 million increase in compensation and benefits expenses associated with higher headcount, partially offset by a decrease of $1 million in legal fees.

Stock-based compensation

The following table summarizes stock-based compensation expense included in our unaudited condensed consolidated statements of operations:


	Three Months Ended March 31,						Increase
(Dollars in thousands)	2017			2016
Cost of revenues	$	3,622		$	2,680		$	942	35	%
Operating expenses		8,886			6,255			2,631	42	%

Total stock-based compensation before tax	$	12,508		$	8,935		$	3,573	40	%
Income tax benefit	$	(3,815	)	$	(2,605	)

The increase was primarily due to the increased value of our annual periodic equity awards granted in March 2016 and 2017. These awards generally have a five-year vesting schedule.

Non-operating income and expenses, net


	Three Months Ended March 31,						Increase (Decrease)
(Dollars in thousands)	2017			2016
Foreign currency transaction gain	$	676		$	1,376		$	(700	)	(51	)%
Interest income, net		165			290			(125	)	(43	)%
Other expense, net		(279	)		(2,298	)		2,019		(88	)%

Non-operating income (loss)	$	562		$	(632	)	$	1,194		n/m

n/m - not meaningful

We use foreign currency forward contracts (“forward contracts”) to partially mitigate our exposure to fluctuations in foreign currency exchange rates associated with our foreign currency denominated cash, accounts receivable, and intercompany receivables and payables held by our U.S. parent company in currencies other than the U.S. dollar and by our U.K. subsidiary in currencies other than the British pound.

These forward contracts are not designated as hedging instruments. As a result, we record the fair value of the outstanding contracts at the end of the reporting period in our consolidated balance sheet, with any fluctuations in the value of these contracts recognized in other expense, net.

The total change in the fair value of our foreign currency forward contracts recorded in other expense, net, during the first three months of 2017 and 2016 was a loss of $0.3 million and $2.3 million respectively.

See Note 4 “Derivative Instruments” of this Quarterly Report on Form 10-Q for discussion of our use of forward contracts.

Provision for income taxes


	Three Months Ended March 31,						Increase
(Dollars in thousands)	2017			2016
Provision for income taxes	$	4,779		$	3,093		$	1,686	55	%
Effective income tax rate		15.0	%		22.9	%

The provision for income taxes represents current and future amounts owed for federal, state, and foreign taxes. The decrease in the effective income tax rate in the first three months of 2017 compared to the same period in 2016 is primarily due to an increase in excess tax benefits generated by our stock compensation plans and a more favorable tax jurisdictional mix of earnings. The inclusion of excess tax benefits as a component of the provision for income taxes may increase volatility in future effective tax rates as the amount of excess tax benefits from share-based compensation awards is dependent upon our future stock price in relation to the fair value of awards, the timing of RSU vesting and exercise behavior of our stock option holders, and future grants of share-based compensation awards.

Liquidity and capital resources


	Three Months Ended
	March 31,
(in thousands)	2017			2016
Cash provided by (used in):
Operating activities	$	32,444		$	10,040
Investing activities		(3,727	)		9,370
Financing activities		(15,994	)		(19,822	)
Effect of exchange rate on cash		521			(434	)

Net increase (decrease) in cash and cash equivalents	$	13,244		$	(846	)


	As of			As of
	March 31, 2017			December 31, 2016
Total cash, cash equivalents, and marketable securities	$	147,786		$	133,761

The increase in cash and cash equivalents during the first three months of 2017 compared to the same period in 2016 was primarily due to the $22.4 million increase in cash provided by operating activities as a result of the $16.6 million increase in net income and the $10.6 million decrease in share repurchases under share repurchase programs, partially offset by the $14.9 million decrease in cash provided by the maturities, calls, and sales of marketable debt securities, net of purchases and the $6.8 million increase in cash used for net settlement of stock compensation awards. We believe that our current cash, cash equivalents, marketable securities, and cash flow from operations will be sufficient to fund our operations, our dividend payments, and our share repurchase program for at least the next 12 months.

We evaluate acquisition opportunities from time to time, which if pursued, could require use of our funds. On April 11, 2016, we acquired OpenSpan for $48.8 million in cash, net of cash acquired. As of March 31, 2017, $7.4 million of the cash consideration remained in escrow and will act as security for the indemnification obligations of the selling shareholders through October 2017. We paid $0.3 million during both the first three months of 2017 and 2016, representing additional cash consideration to the selling shareholders of one of the three companies acquired in 2014 based on the achievement of certain performance milestones.

As of March 31, 2017, approximately $40.2 million of our cash and cash equivalents was held in our foreign subsidiaries. If it becomes necessary to repatriate these funds, we may be required to pay U.S. tax, net of any applicable foreign tax credits, upon repatriation. We consider the earnings of our foreign subsidiaries to be permanently reinvested and, as a result, U.S. taxes on

such earnings are not provided. It is impractical to estimate the amount of U.S. tax we could have to pay upon repatriation due to the complexity of the foreign tax credit calculations. There can be no assurance that changes in our plans or other events affecting our operations will not result in materially accelerated or unexpected expenditures.

Cash provided by operating activities

The primary drivers during the first three months of 2017 and 2016 were net income of $27 million and $10.4 million, respectively.

Future Cash Receipts from Committed License and Cloud Arrangements

As of March 31, 2017, none of the amounts shown in the table below had been billed and no revenue had been recognized. The timing of cash receipts may not coincide with the timing of future expected revenue recognition.


(in thousands) as of March 31, 2017	Term and cloud contracts		Perpetual contracts ⁽¹⁾		Total
Remainder of 2017	$	78,151	$	16,016	$	94,167
2018		129,907		15,525		145,432
2019		103,110		3,245		106,355
2020		70,467		746		71,213
2021		28,665		—		28,665
2022 and thereafter		5,788		—		5,788

Total	$	416,088	$	35,532	$	451,620

⁽¹⁾	These amounts are for perpetual licenses with extended payment terms and/or additional rights of use.

Total contractual future cash receipts due from our existing license and cloud arrangements were approximately $331.9 million as of March 31, 2016.

Cash (used in) provided by investing activities

During the first three months of 2017, purchases of marketable debt securities were $3.3 million, partially offset by proceeds received from maturities and called marketable debt securities of $2.3 million. We also invested $2.4 million primarily for leasehold improvements for the build out of additional office space at our Hyderabad, India location.

During the first three months of 2016, proceeds received from sales and maturities of marketable debt securities were $22.1 million, partially offset by purchases of marketable debt securities of $8.2 million. We also invested $4.3 million primarily for internally developed software and leasehold improvements for the build out of additional office space at our corporate headquarters in Cambridge, Massachusetts.

Cash used in financing activities

We used cash primarily for repurchases of our common stock, share repurchases for tax withholdings for the net settlement of our equity awards, and the payment of our quarterly dividend.

Since 2004, our Board of Directors has approved annual stock repurchase programs that have authorized the repurchase in the aggregate of up to $195 million of our common stock. Purchases under these programs have been made on the open market.

The following table is a summary of our repurchase activity under all of our repurchase programs during the first three months of 2017 and 2016:


	Three Months Ended March 31,
	2017					2016
(Dollars in thousands)	Shares		Amount			Shares		Amount
Prior year authorization as of January 1,			$	39,385				$	40,534
Repurchases paid		29,250		(1,260	)		501,104		(11,667	)
Repurchases unsettled		5,450		(238	)		17,160		(429	)

Authorization remaining as of March 31,			$	37,887				$	28,438

In addition to the share repurchases made under our repurchase programs, we net settled the majority of our employee stock option exercises and RSU vestings, which resulted in the withholding of shares to cover the option exercise price and the minimum statutory tax withholding obligations.

During the first three months of 2017 and 2016, option and RSU holders net settled a total of 1,021,000 shares and 713,000 shares, respectively, of which only 555,000 shares and 405,000 shares, respectively, were issued to the option and RSU holders. The balance of the shares were surrendered to us to pay for the exercise price with respect to options and the applicable taxes for both options and RSUs. During the first three months of 2017 and 2016, instead of receiving cash from the equity holders, we withheld shares with a value of $12.5 million and $5.7 million, respectively, for withholding taxes, and $7.7 million and $2.1 million, respectively, for the exercise price of options.

Dividends

We declared a cash dividend of $0.03 per share and paid cash dividends of $2.3 million in the first three months of 2017 and the first three months of 2016. It is our current intention to pay a quarterly cash dividend of $0.03 per share, however, the Board of Directors may terminate or modify this dividend program at any time without notice.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Market risk represents the risk of loss that may affect us due to adverse changes in financial market prices and rates. Our market risk exposure is primarily related to fluctuations in foreign exchange rates.

We use foreign currency forward contracts to hedge our exposures to fluctuations in non-functional currency exchange rates. See Note 4 “Derivative Instruments” of this Quarterly Report on Form 10-Q for further discussion.

There were no significant changes to our quantitative and qualitative disclosures about market risk during the first three months of 2017. Please refer to Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk included in our Annual Report on Form 10-K for the year ended December 31, 2016 for a more complete discussion of our market risk exposure.

Item 4.

Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of March 31, 2017. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of March 31, 2017.

(b) Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) during the quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II—Other Information:

Item 1A.

Risk Factors

We encourage you to carefully consider the risk factors identified in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016. These risk factors could materially affect our business, financial condition, and future results and could cause our actual business and financial results to differ materially from those contained in forward-looking statements made in this Quarterly Report on Form 10-Q or elsewhere by management from time to time. There have been no material changes during the first three months of 2017 to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth information regarding our repurchases of our common stock during the first quarter of 2017:


Period	Total Number of Shares Purchased ⁽¹⁾		Average Price Paid per Share ⁽¹⁾		Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Programs ⁽¹⁾⁽²⁾		Approximate Dollar Value of Shares That May Yet Be Purchased Under Publicly Announced Share Repurchase Programs ⁽²⁾ (in thousands)
1/1/2017 - 1/31/2017		—	$	—		—	$	39,385
2/1/2017 - 2/28/2017		—	$	—		—	$	39,385
3/1/2017 - 3/31/2017		34,700	$	43.18		34,700	$	37,887

Total		34,700	$	43.18

(1)	Shares withheld to cover the option exercise price and statutory tax withholding obligations under the net settlement provisions of the company’s stock compensation awards have been excluded from the above table.

(2)

Since 2004, our Board of Directors has approved stock repurchase programs that have authorized the repurchase, in the aggregate, of up to $195 million of our common stock. On May 20, 2016, we announced that our Board of Directors extended the expiration date of the current stock repurchase program to June 30, 2017 and increased the amount of stock the Company is authorized to repurchase to $50 million between May 18, 2016 and June 30, 2017 (the “Current Program”). Under the Current Program, purchases may be made from time to time on the open market or in privately negotiated transactions. Shares may be repurchased in such amounts as market conditions warrant, subject to regulatory and other considerations. We have established a pre-arranged stock repurchase plan, intended to comply with the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-18 under the Exchange Act (the “10b5-1 Plan”). All share repurchases under the Current Program during closed trading window periods will be made pursuant to the 10b5-1 Plan.

Item 6.

Exhibits

The exhibits listed in the Exhibit Index immediately preceding such exhibits are filed or furnished, as the case may be, as part of this report and such Exhibit Index is incorporated herein by reference.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	Pegasystems Inc.

Date: May 10, 2017	By:	/s/ KENNETH STILLWELL
		Kenneth Stillwell
		Chief Financial Officer and Chief Administrative Officer
		(Principal Financial Officer)

PEGASYSTEMS INC.

Exhibit Index


Exhibit No.		Description

10.3 ⁺⁺		Form of Employee Stock Option Agreement, as amended.

10.4 ⁺⁺		Form of Restricted Stock Unit Agreement, as amended.

31.1		Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Executive Officer.

31.2		Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Financial Officer.

32		Certification pursuant to 18 U.S.C. Section 1350 of the Chief Executive Officer and the Chief Financial Officer.

101		The following materials from Pegasystems Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 formatted in XBRL (Extensible Business Reporting Language): (i) the Unaudited Condensed Consolidated Balance Sheets, (ii) the Unaudited Condensed Consolidated Statements of Operations, (iii) the Unaudited Condensed Consolidated Statements of Comprehensive Income, (iv) the Unaudited Condensed Consolidated Statements of Cash Flows, and (v) the Notes to Unaudited Condensed Consolidated Financial Statements.

⁺⁺	Management contracts and compensatory plan or arrangements

Exhibit 10.3


		PEGASYSTEMS INC.
		One Rogers Street
		Cambridge, MA 02142-1209 USA

Notice of Grant of Stock Option and Option Agreement

You have been granted an award of Nonstatutory Stock Options pursuant to the terms of the Pegasystems Inc. Amended and Restated 2004 Long-Term Incentive Plan (the “Plan”).

If you have not yet completed the acceptance process for any of your awards, you may complete the acceptance process by (A) reviewing your award details, (B) reviewing your award documents listed in this Section B of your Online Award Acceptance (the “Award Documents”), and (C) confirming your acceptance of your award.

By accepting this award, you agree that this award is granted and governed by the terms and conditions of the Plan, this notice, and all your Award Documents listed herein, including Exhibit A to this Notice of Stock Option and Option Agreement, and incorporated by reference. This notice, together with your Award Documents and your electronic acceptance, collectively comprise your total agreement (the “Award Agreement”).


Pegasystems Inc.

By:
		Alan Trefler, Chairman and
		Chief Executive Officer

PHONE 617.374 9600

FAX 617.374.9620

WWW.PEGA.COM

Exhibit A

Notice of Grant of Stock Option and Option Agreement for {Non-}U.S. Employees

1. Exercise Price . The Exercise Price is equal to Fair Market Value, as defined in Section 2(n) of the Plan, of a share of the Company’s Common Stock on the date of the Notice of Grant of Stock Option and Option Agreement for {Non-U.S. Employees} (of which this Exhibit A is a part) (the “Option Agreement”).

2. Option Exercise . Once vested, and subject to the other provisions of this Option Agreement, the Option shall remain exercisable in whole or in part at any time through and including the day immediately preceding the date set forth under the heading “Expiration” on the Option Agreement (the “Expiration Date”), after which the Option shall expire and no longer be exercisable.

The Option shall be exercisable by notice to the Company or the Company’s designated stock option administrator, which shall:

(a) state the election to exercise the Option, the number of shares of Common Stock with respect to which it is being exercised, and, if different than the Optionee, the person in whose name the stock certificate or certificates for such shares of Common Stock are to be registered, and the address and Social Security number of such person;

(b) be signed by the person or persons entitled to exercise the Option, and if the Option is being exercised by a person or persons other than the Optionee, be accompanied by proof satisfactory to the Company’s legal counsel of the right of such person or persons to exercise the Option; and

(c) if to the Company, be in writing and delivered in person or by certified mail to the Chief Financial Officer of the Company or, if to the Company’s designated stock option administrator, be in the manner and form specified by such stock option administrator.

Payment of the full purchase price of any shares of Common Stock, with respect to which the Option is being exercised, shall accompany the notice of exercise of the Option and such payment may be made in cash or check payable to the Company. Alternatively, the Optionee may elect to pay the full purchase price of any shares of Common Stock, with respect to which the Option is being exercised, by having the Company withhold, such number of shares of Common Stock as are equal in value to the full purchase price. Unless the Company has elected to have shares recorded in book entry form, the certificate or certificates for shares of Common Stock as to which the Option is exercised shall be registered in the name of the person or persons exercising the Option.

3. Termination of Service . If the Optionee terminates Service other than by reason of the Optionee’s death, Disability or Retirement, the Optionee may exercise his or her Option for three months following such termination to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of the Option).

4. Retirement of Optionee . If the Optionee terminates Service as a result of Retirement, the Optionee may exercise his or her Option for 24 months following such termination to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of the Option).

5. Disability of Optionee . If the Optionee terminates Service as a result of the Optionee’s Disability, the Optionee may exercise his or her Option for 24 months following such termination to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of the Option).

6. Death of Optionee . If the Optionee dies while a Service Provider, the Option may be exercised by the Optionee’s estate or by a person who acquires the right to exercise the Option by bequest or inheritance for 12 months following the Optionee’s termination of Service because of death.

7. Optionee’s Agreement . The Optionee agrees to all the terms stated in the Option Agreement (of which this Exhibit is a part), as well as to the terms of the Plan (which shall control in case of conflict with the Option Agreement), a copy of which is attached and of which the Optionee acknowledges receipt.

8. Withholding . The Optionee consents to fulfill all withholding obligations for all applicable payroll and income taxes with respect to the Option when they are due and arrange for satisfactory payment of all withholding obligations in a manner as set forth in Section 13(h) of the Plan. The Company may delay issuance of a certificate until proper payment of such taxes has been made by the Optionee. The Company may satisfy such withholding obligations by withholding such number of shares of Common Stock as are equal in value to the amount of the required withholding.

{8. Withholding . Regardless of any action the Company and/or the Optionee’s employer (the “Employer”) take with respect to any or all income tax (including U.S. federal, state and local tax and/or non-U.S. tax), social insurance, payroll tax, payment on account or other tax-related withholding (“Tax-Related Items”), the Optionee acknowledges that the ultimate liability for all Tax-Related Items legally due by the Optionee is and remains the Optionee’s responsibility and that the Company and/or the Employer (i) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Option, including the grant, vesting or exercise of the Options, the subsequent sale of any shares of Common Stock acquired at exercise and the receipt of any dividends; and (ii) do not commit to structure the terms of the grant or any aspect of the Option to reduce or eliminate the Optionee’s liability for Tax-Related Items.

Prior to the relevant taxable event, the Optionee shall pay or make arrangements satisfactory to the Company and/or the Employer to satisfy all withholding and payment on account obligations of the Company and/or the Employer. In this regard, the Optionee authorizes the Company and/or the Employer to withhold all applicable Tax-Related Items legally payable by the Optionee from any wages or other cash compensation paid to the Optionee by the Company and/or the Employer. Alternatively, or in addition, if permissible under local law, the Optionee authorizes the Company and/or the Employer, at its discretion and pursuant to such procedures as it may specify from time to time, to satisfy the obligations with regard to all Tax-Related Items legally payable by the Optionee by one or a combination of the following: (i) withholding otherwise deliverable shares of Common Stock, provided that the Company only withholds the amount of shares of Common Stock necessary to satisfy the minimum withholding amount; (ii) arranging for the sale of shares of Common Stock otherwise deliverable to the Optionee (on the Optionee’s behalf and at the Optionee’s direction pursuant to this authorization); or (iii) withholding from the proceeds of the sale of shares of Common Stock acquired upon exercise of the Option. If the obligation for Tax-Related Items is satisfied by withholding a number of shares of Common Stock as described herein, the Optionee is deemed to have been issued the full number of shares of Common Stock subject to the Option, notwithstanding that a number of the shares of Common Stock are held back solely for the purpose of paying the Tax-Related Items due as a result of any aspect of the Option. The Optionee shall pay to the Company and/or the Employer any amount of Tax-Related Items that the Company and/or the Employer may be required to withhold as a result of the Optionee’s participation in the Plan that cannot be satisfied by the means previously described. The Company may refuse to deliver to the Optionee any shares of Common Stock pursuant to the Option if the Optionee fails to comply with the Optionee’s obligations in connection with the Tax-Related Items as described in this section.}

9. Rights as Shareholders . The Optionee shall have no rights as a shareholder of the Company with respect to any of the shares of Common Stock covered by the Option until the issuance of a stock certificate or certificates upon the exercise of the Option, and then only with respect to the shares of Common Stock represented by such certificate or certificates.

10. Non-Transferability . The Option may not be transferred in any manner other than as permitted in Section 13(j) of the Plan {by will or by the laws of descent and distribution}. The terms of the Option shall be binding upon the executors, administrators, heirs and successors of the Optionee.

{11. Employment Agreement . In consideration for this Option, the Recipient reaffirms the terms of the Recipient’s Employment Agreement with Employer, including but not limited to the provisions (if any) related to competition and solicitation. The Recipient further agrees that to the extent the nature of the Employer’s business has evolved since the date of the Employment Agreement the covenants shall also apply to the business as evolved.}

11. {12.} Compliance with Securities, Tax and Other Law . The Option may not be exercised if the issuance of shares of Common Stock upon such exercise would constitute a violation of any applicable federal or state securities law or any other law or valid regulation. As a condition to the exercise of the Option, the Company may require the Optionee, or any person acquiring the right to exercise the Option, to make any representation or warranty that the Company deems to be necessary under any applicable securities, tax, or other law or regulation.

12. {13.} Adjustments upon Changes in Capitalization . In the event of any change in the shares subject to the Plan or to any Option granted under the Plan by reason of a merger, consolidation, reorganization, recapitalization, stock dividend, stock split, combination or exchange of shares {of Common Stock}, or other change in the structure of the Company, the number of shares {of Common Stock} subject to each outstanding Option and/or the Option price with respect to the shares {of Common Stock} shall be appropriately adjusted by the Company and such adjustment shall be final, binding and conclusive.

13. {14.} No Right to Employment . The granting of the Option does not confer upon the Optionee the right to continue in the Service of the Company {and/or the Employer}, or affect in any way the right and power of the Company {and/or the Employer} to terminate the Service of the Optionee at any time with or without assigning a reason therefor, to the same extent as the Company {and/or the Employer} might have done if the Option had not been granted.

14. {15.} No Guarantee . The Company offers no guarantee or assurance that the Company’s stock has any value at the time of this grant or will have any value or liquidity at any future time.

{16. Acknowledgment of Nature of Plan and Option . In accepting the Option, the Optionee acknowledges that:

(a) the Plan is established voluntarily by the Company, it is discretionary in nature, and it may be modified, amended, suspended or terminated by the Company at any time, unless otherwise provided in the Plan and this Option Agreement;

(b) the Option is voluntary and occasional and does not create any contractual or other right to receive future grants of Options, or benefits in lieu of Options, even if Options have been granted repeatedly in the past;

(d) the Optionee’s participation in the Plan is voluntary;

(e) the Option is an extraordinary item that does not constitute compensation for services of any kind rendered to the Company or any Related Company, and which is outside the scope of the employment contract, if any;

(f) the Option is not part of normal or expected compensation or salary for any purposes, including, but not limited to, calculation of any severance, resignation, termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement or welfare benefits or similar payments and in no event should be considered as compensation for, or relating in any way to, past services for the Company or any Related Company;

(g) in the event that the Optionee is not an Employee of the Company or any Related Company, the Option and the Optionee’s participation in the Plan will not be interpreted to form an employment or service contract or relationship with the Company or any Related Company;

(h) the future value of the underlying shares of Common Stock is unknown and cannot be predicted with any certainty;

(i) if you exercise your Option and obtain shares of Common Stock, the value of those shares of Common Stock acquired upon exercise may increase or decrease in value, even below the Option price;

(j) in consideration of the Option, no claim or entitlement to compensation or damages shall arise from termination of the Option or from any diminution in value of the Option or shares of Common Stock acquired upon exercise of the Option resulting from termination of the Optionee’s service by the Company or any Related Company (for any reason whatsoever and whether or not in breach of local labor laws) and the Optionee irrevocably releases the Company and any Related Company from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by signing the Option Agreement, the Optionee shall be deemed irrevocably to have waived the Optionee’s entitlement to pursue such claim;

(k) in the event of termination of the Optionee’s Service (whether or not in breach of local labor laws), the Optionee’s right to receive an Option and vest in the Option under the Plan, if any, will terminate effective as of the date that the Optionee is no longer actively employed and will not be extended by any notice period mandated under local law ( e.g. , active employment would not include a period of “garden leave” or similar period pursuant to local law); the Administrator shall have the exclusive discretion to determine when the Optionee is no longer actively employed for purposes of the Option;

(l) the Company is not providing any tax, legal or financial advice, nor is the Company making any recommendations regarding the Optionee’s participation in the Plan or the Optionee’s acquisition or sale of the underlying shares of Common Stock; and

(m) the Optionee is hereby advised to consult with the Optionee’s personal tax, legal and financial advisors regarding the Optionee’s participation in the Plan before taking any action related to the Plan.}

{17. Data Privacy Notice and Consent . The Optionee hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of the Optionee’s personal data as described in this Option Agreement and any other Option grant materials by and among, as applicable, the Employer, the Company and its Subsidiaries for the exclusive purpose of implementing, administering and managing the Optionee’s participation in the Plan.

The Optionee understands that the Company and the Employer may hold certain personal information about the Optionee, including, but not limited to, the Optionee’s name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title, any shares of stock or directorships held in the Company, details of all Options or any other entitlement to shares of stock granted, exercised, canceled, vested, unvested or outstanding in the Optionee’s favor, for the exclusive purpose of implementing, administering and managing the Plan (“Data”).

The Optionee understands that Data will be transferred to a third party stock plan service provider(s) as may be selected by the Company, which is assisting the Company with the implementation, administration and management of the Plan. The Optionee understands the recipients of the Data may be located in the Optionee’s country, in the United States or elsewhere, and that the data recipients’ country may have different data privacy laws and protections than the Optionee’s country. The Optionee understands that the Optionee may request a list with the names and addresses of any potential recipients of the Data by contacting the Optionee’s local human resources representative. The Optionee authorizes the Company and any other possible recipients which may assist the Company (presently or in the future) with implementing, administering and managing the Plan to receive, possess, use, retain and transfer the Data, in electronic or other form, for the sole purpose of implementing, administering and managing the Optionee’s participation in the Plan. The Optionee understands that Data will be held only as long as is necessary to implement, administer and manage the Optionee’s participation in the Plan. The Optionee understands that the Optionee may, at any time, view Data, request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing the Optionee’s local human resources representative. The Optionee understands, however, that refusing or withdrawing the Optionee’s consent may affect the Optionee’s ability to participate in the Plan. For more information on the consequences of the Optionee’s refusal to consent or withdrawal of consent, the Optionee understands that the Optionee may contact the Optionee’s local human resources representative.}

15. {18.} Amendment and Termination of Option . The Company may amend, modify or terminate any outstanding Option, provided that the Recipient’s consent to such action shall be required unless it occurs pursuant to a Sale of the Company or the Committee determines that the action would not materially and adversely affect the Recipient.

16. Standards Letter . In consideration for this Option, the Recipient reaffirms the terms of the Recipient’s Standards Letter agreement with Pegasystems, including but not limited to the provisions related to competition and solicitation. The Recipient further agrees that to the extent the nature of the Company’s business has evolved since the date of the Standards Letter the covenants shall also apply to the business as evolved.

{19. Language . If the Optionee has received this Option Agreement or any other document related to the Plan translated into a language other than English and if the translated version is different from the English version, the English version will control.}

{20. Electronic Delivery . The Company may, in its sole discretion, decide to deliver any documents related to the Option or future grants made under the Plan by electronic means or request that the Optionee consent to participate in the Plan by electronic means. The Optionee hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or a third party designated by the Company.}

17. {21.} Governing Law and Venue . The Option Agreement shall be governed by and interpreted in accordance with the laws of The Commonwealth of Massachusetts, without regard to any applicable conflicts of law provisions thereof.

For purposes of litigating any dispute that arises directly or indirectly from the relationship of the parties evidenced by this Option or this Option Agreement, the parties hereby submit to and consent to the exclusive jurisdiction of The Commonwealth of Massachusetts and agree that such litigation shall be conducted only in the courts of Middlesex County, Massachusetts, or the federal courts for the United States for the district of Massachusetts, and no other courts, where this grant of Options is made and/or to be performed.

18. {22.} Severability . In the event any one or more of the provisions of the Option Agreement shall for any reason be held to be invalid, illegal or unenforceable, the remaining provisions of the Option Agreement shall be unimpaired, and the invalid, illegal or unenforceable provision shall be replaced by a mutually acceptable provision, which being valid, legal and enforceable, comes closest to the intention of the parties underlying the invalid, illegal or unenforceable provision.

19. {23.} Definitions . All capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Plan.

{24. Exhibit B . Notwithstanding any provision herein, the Optionee’s participation in the Plan shall be subject to any special terms and conditions as set forth in Exhibit B for the Optionee’s country of residence, if any. The Exhibit B constitutes part of this Option Agreement.}

{Exhibit B

To Notice of Grant of Option and Option Agreement for Non-U.S. Employees

This Exhibit B includes additional terms and conditions that govern the Options granted to the Optionee if the Optionee resides in the countries contained herein. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Notice of Grant of Option and Option Agreement for Non-U.S. Employees ( of which this Exhibit B is a part ) or the Plan.

This Exhibit B also includes information regarding exchange controls and certain other issues of which the Optionee should be aware with respect to the Optionee’s participation in the Plan. The information is based on the securities, exchange control and other laws in effect in the respective countries as of December 2009, unless otherwise notated. Such laws are often complex and change frequently. As a result, the Company strongly recommends that the Optionee not rely on the information noted herein as the only source of information relating to the consequences of the Optionee’s participation in the Plan because the information may be out of date at the time the Optionee acquires shares of Common Stock or sells shares of Common Stock the Optionee acquires under the Plan.

In addition, the information is general in nature and may not apply to the Optionee’s particular situation, and the Company is not in a position to assure the Optionee of any particular result. Accordingly, the Optionee is strongly advised to seek appropriate professional advice as to how the relevant laws in the Optionee’s country apply to the Optionee’s specific situation.

If the Optionee is a citizen or resident of another country, or is considered a resident of another country for local law purposes, the information contained in this Exhibit B may not be applicable to the Optionee.

Australia

Withholding

This provision supplements Section 8 (Withholding):

Prior to the relevant taxable event, the Optionee will provide the Company with their Australian Tax File Number (TFN) or Australian Business Number (ABN). Failure to do so will result in the requirement for the Company to withhold Australian tax at the rate of 46.5%.

Reform to the taxation of employee share schemes

With effect from 1 July 2009, Optionee share options shall be taxed upfront, unless there is a “real risk of forfeiture”. Where there is a “real risk of forfeiture,” options shall generally be taxed at the earliest of:

•

Vesting of the option

•

Cessation of employment

•

7 years after grant

Canada

Option Exercise

The paragraphs below replace Section 2 (Option Exercise) of Exhibit A to the Option Agreement:

Once vested, the Option shall remain exercisable in whole or in part at any time through and including the day immediately preceding the date set forth under the heading “Expiration” on the Option Agreement (the “Expiration Date”), after which the Option shall expire and no longer be exercisable.

The Option shall be exercisable by notice to the Company or the Company’s designated stock option administrator, which shall:

(a)	state the election to exercise the Option and the number of shares of Common Stock with respect to which it is being exercised,

(b)	be signed by the Optionee; and

(c)	if to the Company, be in writing and delivered in person or by certified mail to the Chief Financial Officer of the Company or, if to the Company’s designated stock option administrator, be in the manner and form specified by such stock option administrator.

Payment of the full purchase price of any shares of Common Stock, with respect to which the Option is being exercised, shall accompany the notice of exercise of the Option and such payment may be made in cash or check payable to the Company. Alternatively, the Optionee may elect to pay the full purchase price of any shares of Common Stock, with respect to which the Option is being exercised, by having the Company withhold such number of shares of Common Stock as are equal in value to the full purchase price. The certificate or certificates for shares of Common Stock as to which the Option is exercised shall be registered in the name of the Optionee.

For further clarity, any shares issued of the Common Stock of the Company upon exercise of an Option shall be issued solely in the name of the Optionee and not in the name of any other person, including a person with whom the Optionee is dealing at non-arm’s length.

Upon exercise of the Option, the Optionee shall receive shares of the Common Stock of the Company and under no circumstances shall the Administrator elect to have the employee receive cash (or any other security) in lieu of the Common Stock of the Company. To this effect, section 13(e) of the Plan (and any other similar section) do not apply in Canada.

Furthermore, at all times the Optionee should hold less than 10% of the shares of the Common Stock of the Company or any Related Company.

Withholding

The paragraphs below replace Section 8 of Exhibit A to the Option Agreement:

Generally, there are Canadian requirements to withhold source deductions on stock options benefits. Although stock options benefits are considered to be remuneration subject to source deductions, Canada recognizes that requiring additional withholding from cash payments, such as normal salary, as a result of a stock option benefit can create hardship for the employee. This hardship will be created when either the benefit is very large in proportion to the employee’s normal salary or the option is exercised later in the year. As a result, employers may make withholdings from employees’ cash remuneration to the extent possible, without imposing actual hardship. Where the non-cash benefit is the only form of income received from that employer, the employer will not be required to withhold tax on the amount of such benefits.

Stock option benefits are also subject to social security taxes in Canada. These benefits are subject to Canada Pension Plan withholdings but not Employment Insurance withholdings. The province of Ontario will also levy payroll taxes to fund the Canadian health service.

The employment benefit and, if applicable, related 50% deduction will be reported on the Optionee T4 for the year in which the tradable options are exercised or sold. The Optionee must report these amounts on his or her individual income tax return for the same year.

If the Optionee qualifies and elects to defer a part of the employment benefit arising on exercise to the date of sale, the employer (i.e. the Related Company) will report the deferred benefit on the T4 slip in the year of exercise, however the benefit will not be included in income for that year. The Optionee must

complete and file Form T1212, “Statement of Deferred Security Option Benefits” with his or her federal tax return for each year in which arises a balance of deferred benefit outstanding. In the year the Optionee sells the shares, the Optionee must report the deferred benefit on his or her tax return.

Acknowledgement of nature of plan

The paragraphs below replace Section 15 of Exhibit A to the Option Agreement [new or amended paragraphs are shown in italics at g and j]:

In accepting the Option, the Optionee acknowledges that:

(a)	the Plan is established voluntarily by the Company, it is discretionary in nature, and it may be modified, amended, suspended or terminated by the Company at any time, unless otherwise provided in the Plan and this Option Agreement;

(b)	the Option is voluntary and occasional and does not create any contractual or other right to receive future grants of Options, or benefits in lieu of Options, even if Options have been granted repeatedly in the past;

(c)	all decisions with respect to future Options, if any, will be at the sole discretion of the Company;

(d)	the Optionee’s participation in the Plan is voluntary;

(e)	the Option is an extraordinary item that does not constitute compensation for services of any kind rendered to the Company or any Related Company, and which is outside the scope of the employment contract, if any;

(f)

the Option is not part of normal or expected compensation or salary for any purposes, including, but not limited to, calculation of any severance, resignation, termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement or welfare benefits or similar payments and in no event should be considered as compensation for, or relating in any way to, past services for the Company or any Related Company;

(g)	the Company has decided to grant Options under the Plan to individuals who are employees of the Company or any Related Company; and under no circumstances, the Optionee should be considered a Consultant or a “non-employee Officer or non-employee Director” of the Company or any Related Company;

(h)	the future value of the underlying shares of Common Stock is unknown and cannot be predicted with any certainty;

(i)	if you exercise your Option and obtain shares of Common Stock, the value of those shares of Common Stock acquired upon exercise may increase or decrease in value, even below the Option price;

(j)	at all times the Optionee should hold less than 10% of the shares of the Common Stock of the Company or any Related Company;

(k)

in consideration of the Option, no claim or entitlement to compensation or damages shall arise from termination of the Option or from any diminution in value of the Option or shares of Common Stock acquired upon exercise of the Option resulting from termination of the Optionee’s service by the Company or any Related Company (for any reason whatsoever and whether or not in breach of local labor laws) and the Optionee irrevocable releases the Company and any Related Company from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by signing the Option Agreement, the Optionee shall be deemed irrevocably to have waived the Optionee’s entitlement to pursue such claim;

(l)

in the event of termination of the Optionee’s Service (whether or not in breach of local labor laws), the Optionee’s right to receive an Option and vest in the Option under the Plan, if any, will terminate effective as of the date that the Optionee is no longer actively employed and will not be extended by any notice period mandated under local law (e.g., active employment would not include a period of “garden leave” or similar period pursuant to local law); the Administrator shall have the exclusive discretion to determine when the Optionee is no longer actively employed for purposes of the Option;

(m)	the Company is not providing any tax, legal or financial advice, nor is the Company making any recommendations regarding the Optionee’s participation in the Plan or the Optionee’s acquisition or sale of the underlying shares of Common Stock; and

(n)	the Optionee is hereby advised to consult with the Optionee’s personal tax, legal and financial advisors regarding the Optionee’s participation in the Plan before taking any action related to the Plan.

France

This information is correct as of November 2011.

Exchange Control Information

If the Optionee retains Shares outside of France or maintains a foreign bank account, the Optionee is required to report such to the French tax authorities when filing his or her annual tax return.

Germany

Exchange Control Information

Cross-border payments in excess of €12,500 must be reported monthly to the German Federal Bank. If the Optionee uses a German bank to transfer a cross-border payment in excess of €12,500 in connection with the sale of shares of Common Stock acquired under the Plan, the bank will make the report for the Optionee. In addition, the Optionee must report any receivables or payables or debts in foreign currency exceeding €5,000,000 on a monthly basis.

Hong Kong

Obligation to report the share option gains to the tax authority

The Optionee is obliged to declare the gains realized by the exercise, assignment or release of the share options to the Hong Kong Inland Revenue Department (“IRD”) in their Individual Tax Return for the year of assessment in which the share options are exercised, assigned or released. If the Optionee is eligible to lodge any offshore non-taxable claim on their share option gains, the Optionee is required to lodge such claim in their Individual Tax Return. Therefore, it is the Optionee’s responsibility to prove to the satisfaction of the IRD on their non-taxable claim lodged with documentary evidence in support.

Reporting requirement

Upon the commencement of Hong Kong employment/assignment of the Optionee, the Optionee’s employer (the “Employer”) is obliged to file the Commencement Notice (Form IR 56E) for reporting the term of employment and share options details to the IRD within 3 months from the date of commencement of employment. Annual Employer’s Return (Form IR 56B) is required to be filed to the IRD by end of April to report the remuneration paid/accrued to the Optionee, including the share option gains, for each year ended 31 March. Further to the filing of the said Forms, the IRD will normally create

a tax file for the Optionee and issue the annual Individual Tax Return to the Optionee (usually in May) to ascertain their tax position. If there is no Individual Tax Return issued by the IRD to the Optionee for reporting the share option gain in the year of exercise, the Optionee is obliged to voluntarily inform the IRD on this tax chargeability arising from the exercise as well as other Hong Kong taxable employment income within four months after the end of the basis period during which the year of assessment is concerned (i.e. the informing deadline is 31 July given the fiscal year ends on 31 March).

Leaving Hong Kong

If the share option is only exercised, assigned or released after the Optionee permanently departs from Hong Kong, the Employer should report the share option gains by filing the Departure Notice (Form IR 56G) and provide a copy for the Optionee. The Optionee also needs to discharge their voluntary informing chargeability obligation as mentioned above not later than 4 months after the end of the year of assessment in which the share option gains are derived. Even if the Employer fails to submit the Departure Notice to report the taxable share option gain, the Optionee still needs to comply with their own reporting obligation.

In order to assist with finalizing the salary-related tax liabilities prior to permanent departure, the Optionee is allowed, as a concession, to elect to have the tax liabilities finalized on the basis of a notional exercise of the share options. The notional gain is calculated on the basis as if the options had been exercised on a day within 7 days before the date of submission of the Optionee’s tax return for the final year of assessment in which the Optionee departs. As a further concession, the IRD is prepared to accept an election made within 3 months from the date of departure from Hong Kong if no election has been made before departure. In this case, the date of departure will be taken as the date of notional exercise for the purpose of calculating the gain.

An election once made cannot be withdrawn before the actual exercise, assignment or release, except:

(i)

within the objection period of the assessment in which the gain of the notional exercise is included; or

(ii)

total forfeiture of the options with no replacement or compensation before the actual exercise.

If it transpires that the gain in respect of the actual exercise, assignment or release is less than the amount assessed in respect of the notional exercise, the IRD has indicated in its Departmental Interpretation and Practice Note that they will favorably consider any application for appropriate amendment and re-assessment.

Withholding

The paragraphs below supplement Section 8 (Withholding) of Exhibit A to the Option Agreement.

The Employer is not required to withhold the Optionee’s share option gains unless the Optionee permanently departs from Hong Kong. The Employer is statutorily required to withhold money payment from the Optionee for a period of one month after the Departure Notification (Form IR 56G) was filed to the IRD, unless consent (by the issue of a Letter of Release to the employer with a copy to the Optionee after they have settled all their tax liabilities) is given by the IRD. Hence, if the Optionee derives share option gains and there is money paid to them by the Employer, the Employer has the withholding obligation.

India

Exchange Control Information

As per the foreign exchange laws (“regulations”) in India, there are no restrictions on the amount of remittances that the Optionee can make for acquiring Options provided that the following conditions are fulfilled:

1.	The Company issuing the shares effectively, directly or indirectly, holds in the Indian company, whose employees / directors are being offered shares, not less than 51% of its equity, and

2.	The shares under the Plan are offered by the issuing company globally on a uniform basis (with the same terms and with the same rights) .

Ireland

Restriction on Types of Shares Issued to Directors

If the Optionee is a director or shadow director of an Irish Subsidiary, the Optionee’s Options will be paid in newly issued shares of Common Stock only. In no event will the Options be settled in treasury shares.

Director Notification Requirement

If the Optionee is a director, shadow director or secretary of an Irish Subsidiary, the Optionee must notify the Irish Subsidiary in writing within five business days of receiving or disposing of an interest in the Company ( e.g ., Options, shares of Common Stock, etc.), or within five business days of becoming aware of the event giving rise to the notification requirement, or within five business days of becoming a director or secretary if such an interest exists at the time. This notification requirement also applies with respect to the interests of a spouse or minor children (whose interests will be attributed to the director, shadow director or secretary).

Italy

This information is correct as of August 2011.

Purpose

The Plan is discretionary in nature and is offered only to individual employees and/or specific categories of employees.

Nature of Plan

This provision supplements Section 11 (Acknowledgement of Nature of Plan and Option) of Exhibit A to the Option Agreement:

The Optionee understands that the Company has unilaterally, gratuitously and discretionally decided to grant Options under the Plan to individuals who may be employees of the Company or its Subsidiaries throughout the world. The decision is a limited decision that is entered into upon the express assumption and condition that any grant will not bind the Company or any Related Company. Consequently, the Optionee understands that the Option is granted on the assumption and condition that the Option and any shares of Common Stock acquired upon exercise of the Option are not a part of any employment contract (either with the Company or any Related Company) and shall not be considered a mandatory benefit, salary for any purposes (including severance compensation) or any other right whatsoever. Further, the Optionee understands that the Optionee will not be entitled to continue vesting in any Option once the Optionee’s Service with the Company or any Related Company ceases. In addition, the Option understands that this grant would not be made to the Optionee but for the assumptions and conditions referred to above; thus, the Optionee acknowledges and freely accepts that should any or all of the assumptions be mistaken or should any of the conditions not be met for any reason, then any grant of or right to the Option shall be null and void.

It is a condition of participation in the Plan that the Optionee expressly agrees to the terms of the Plan, including the provisions in this Exhibit B.

Options Payable Only in Shares of Common Stock

Notwithstanding any discretion in the Plan or anything contrary in the Option Agreement, if the Optionee is resident in Italy, the grant of Options does not provide any right for the Optionee to receive a cash payment and the Options are payable in shares of Common Stock only.

Securities Reporting

Individuals in Italy are required to report assets held abroad on their annual tax returns (Form RW) if the value of such assets exceeds 10,000 Euros at the end of the calendar year. The Italian tax authorities have taken the position that vested Stock Options in a foreign company are considered ‘assets held abroad’.

Employees must therefore also report vested Stock Options in their annual tax returns (Form Unico, Schedule RW) if the threshold is exceeded.

In addition, employees must report in Section III of Form RW the transfer of money exceeding 10,000 Euros:

•

From Italy to another jurisdiction;

•

From another jurisdiction to Italy;

•

Between non-Italian jurisdictions, if the transfer relates to investments held overseas.

This also applies to transfers to countries that have adopted the Euro.

Japan

This information is correct as of August 2009.

Exchange Control Information

Although there are no restrictions on the transfer of funds outside Japan, certain reporting obligations to the tax authorities or the Ministry of Finance may be required.

Optionees must notify the Ministry of Finance of share purchases in excess of 30,000,000 Yen. An additional notification is required for purchase of shares with a value in excess of 100,000,000 Yen.

Japanese banks including Japanese branches of foreign banks have to report transfers of funds of more than 1,000,000 Yen in and out of Japan to the government automatically. Sometimes the tax authorities check individual tax returns to these records.

Netherlands

By participating in the Plan the Optionee acknowledges that the Optionee’s Options can cease to vest on termination of employment under the terms of the Plan. It is a condition of participation in the Plan that the Optionee agrees to these terms.

New Zealand

This information is correct as of April 2017.

Disclosure required under the Financial Markets Conduct Act 2013

If you are receiving this offer in New Zealand please read the following in addition to the other documents which are provided to you by Pegasystems Inc.

Warning

This is an offer of Options. Upon the exercise of the Options, you will be granted Common Stock in Pegasystems Inc. Common Stock gives you a stake in the ownership of Pegasystems Inc. You may receive a return if dividends are paid.

If Pegasystems Inc. runs into financial difficulties and is wound up, you will be paid only after all creditors and holders of preferred shares have been paid. You may lose some or all of your investment.

New Zealand law normally requires people who offer financial products to give information to investors before they invest. This information is designed to help investors to make an informed decision.

The usual rules do not apply to this offer because it is made under an employee share purchase scheme. As a result, you may not be given all the information usually required. You will also have fewer other legal protections for this investment.

Ask questions, read all documents carefully, and seek independent financial advice before committing yourself.

Pegasystems Inc. intends to quote the stock on the NASDAQ Stock Market. This means you may be able to sell them on the NASDAQ Stock Market if there are interested buyers. You may get less than you invested. The price will depend on the demand for the shares.

Financial information

You have the right to receive from Pegasystems Inc., free of charge, a copy of its latest annual report or similar document and relevant financial statements if you ask for the same. You may obtain an electronic copy of these documents by downloading them from http://pega.ir.edgar-online.com. If you have any difficulties in accessing or downloading the same, please contact the Chief Financial Officer, Pegasystems Inc., One Rogers Street, Cambridge, Massachusetts 02142. Telephone: (617) 374-9600.

Withholding

This provision supplements Section 8 Withholding. The Employer is required to report on the employee share scheme benefit in its Employer Monthly Schedule as the benefit accrues to the Optionee. However, the Employer has the choice as to whether or not it deducts tax on the employee share scheme benefit – unless the Employer elects to do this, the obligation to return the tax on the benefit (and file a return including the same) remains with the Optionee. Further, reforms to the tax rules applicable to employee shares schemes have been proposed, which may alter how the benefit is calculated and when the taxing point(s) arises. Going forward, Optionees will need to monitor these developments.

Poland

Securities reporting

If the Optionee holds more than €10,000 of foreign securities (including following the grant of Options) the Optionee must declare details of the shares and options (whether or not the options have vested) to the National Bank of Poland. The form of declaration must be submitted within 30 days of the end of the year.

Singapore

Leaving Singapore

With effect from January 1, 2003, Optionees who are foreign citizens or are Singapore Permanent residents leaving Singapore permanently are taxed on a “deemed exercise” basis for any options or units or shares granted or issued during Singapore employment. This would also include any unvested or restricted options or units or shares granted whilst exercising employment in Singapore.

As per the deemed exercise rule, all Options, units, or stock which have been granted during Singapore employment are deemed to have been exercised, irrespective whether the Options have vested or not. The taxable value is the difference between the fair market value (which would be the fair market value one month prior to the date of departure) and the exercise price.

Director withholding

Independent Directors who are Non Resident in Singapore and have received Options by virtue of their being on the Board of the Singapore Company will be subject to tax in Singapore and liable for tax withholding.

Spain

This provision supplements Section 15 (Acknowledgment of Nature of Plan and Option) of Exhibit A to the Option Agreement:

In accepting the Options, the Optionee consents to participation in the Plan and acknowledges that the Optionee has received a copy of the Plan.

The Optionee understands that the Company has unilaterally, gratuitously and discretionally decided to grant Options under the Plan to individuals who may be employees of the Company or its Subsidiaries throughout the world. The decision is a limited decision that is entered into upon the express assumption and condition that any grant will not bind the Company or any Related Company. Consequently, the Optionee understands that the Options are granted on the assumption and condition that the Options and any shares of Common Stock acquired upon exercise of the Options are not a part of any employment contract (either with the Company or any Related Company) and shall not be considered a mandatory benefit, salary for any purposes (including severance compensation) or any other right whatsoever. Further, the Optionee understands that the Optionee will not be entitled to continue vesting in any Options once the Optionee’s Service with the Company or any Related Company ceases. In addition, the Optionee understands that this grant would not be made to the Optionee but for the assumptions and conditions referred to above; thus, the Optionee acknowledges and freely accepts that should any or all of the assumptions be mistaken or should any of the conditions not be met for any reason, then any grant of or right to the Options shall be null and void.

Exchange Control Information

The Optionee must declare the acquisition of shares of Common Stock to the Dirección General de Política Comercial e Inversiones Exteriores (the DGPCIE) of the Ministerio de Economía for statistical purposes.

As the shares are listed on a stock exchange the acquisition will be filled in a form D-5B. The form will be declared to the Registro de Inversiones of the Dirección General de Política Comercial e Inversiones Exteriores of the Ministerio de Industria, Turismo y Comercio.

The Optionee must also declare ownership of any shares of Common Stock with the Directorate of Foreign Transactions each January whilst the shares of Common Stock are owned in the following cases:

•

The shares of the company are listed on the stock exchange.

•

The shareholding in the company has to be at least 10% or more.

•

The investment is more than 1,502,530.26 Euros.

Foreign currency payments (i.e., dividends or sale proceeds) have to be declared when the amount exceed 6,010.12 Euros on form B3.

The information provided to the financial institution is the following:

•

The Optionee’s name, address, and fiscal identification number

•

Non resident’s name, address and fiscal identification number.

•

The amount of the payment, payment method, currency of origin and value in euros.

•

The reasons for the payment.

A payment is made by bank transfer the following information should be provided to the financial institution when the amount exceeds 50,000 euros:

•

Resident name, address and fiscal identification number.

•

Non resident name, address and fiscal identification number.

•

The amount, currency of origin and value of payment in euros.

•

The reason for the payment.

Switzerland

This information is correct as of April 2017.

Acknowledgment of Nature of Plan and Option

The paragraphs below are added to Section 16 (Acknowledgement of Nature of Plan and Option) of Exhibit A to the Option Agreement:

The Optionee understands that the Company has unilaterally, and discretionally decided to grant Options under the Plan to individuals who may be employees of the Company or its Subsidiaries throughout the world.

The Company has the absolute right to decide whether or not Options shall be granted to an employee. Within its absolute discretion, the Company may in particular take into account (i) the financial results of the Company, of the department for which the Employee works as well as of the stand-alone financial results of the Company, and (ii) the individual performance as well as the behavior of the Employee during the financial period. Even though Options have been granted to an Employee at several occasions, whether consecutive or not, the Employee may not infer any entitlement to any future grant of Options. The grant of Options is conditional upon the employment agreement not having been unilaterally terminated.

The grant of Options is entirely discretionary and does not create any obligation upon the Company to pay future bonus even though the Employee receives Options at several consecutive occasions. No pro rate amount will be paid.

The Optionee acknowledges that the Options are given with his full agreement instead of an extraordinary cash bonus and that he has no right to be granted further Options.

Withholding

The paragraphs below replace Section 8 (Withholding) of Exhibit A to the Option Agreement:

The Optionee shall be exclusively responsible for getting advice and obtaining any and all information about the tax consequences in connection with the Plan, in particular with the promise to grant, the grant, the holding and the exercise of Options, as well as with the issuance and transfer of Shares.

Any social contributions levied at the promise to grant, at the grant or at exercise of the Options, and at the delivery and transfer of shares shall be borne by the Company and the Optionee as provided by law.

The Optionee shall bear any and all the Employee’s withholdings (including but not limited to tax and social security) related to the grant or the exercise of Options, and shall reimburse to the Company any such tax and social security which may have been paid by the Company. However, the stamp duty on issuance of the Shares shall be borne by the Company.

As long as the Options are not tradable, the taxable benefit at the time the Options are vested corresponds to the difference between the market value of the option and the strike price.

The Company may withhold from any amounts due to the Optionee any sums which the Company is or will be required by applicable law to pay on behalf of the Optionee in respect of taxes or social security (including withholding taxes). The amounts that the Company is entitled to withhold for that purpose from amounts due to the Optionee who is an Employee of the Company are subject to applicable mandatory employment law provisions.

The Company is entitled to retain the Shares resulting from the exercise of the Options as long as, and to the extent, the Company has not been reimbursed (or has not been provided with guarantees for such reimbursement) by the Participant for any amount the Company paid on behalf of the Optionee in respect of taxes or social security.

Termination of Service

The paragraph below is added to Section 3 (Termination of Service) of Exhibit A to the Option Agreement:

If the employment agreement between the Optionee and the Company is terminated by the Company for just cause as referred to by article 337 CO so as to justify immediate termination of service, all Options held by the Participant exercisable or not, shall be automatically forfeited at the date of termination of service. The Company shall have no further obligation as from that date with regard to the Optionee under the Long - Term Incentive Plan or the Option Agreement.

Thailand

This information is correct as of April 2017.

Obligation to Request for Approval on Remittance of Subscription Price Abroad and Declaration of Dividends Received

Foreign Exchange Control

Approval on Remittance of Subscription Price Abroad : In principle, the Bank of Thailand (“BOT”) approval is not required unless the value of the shares subscribed by the employees exceeds US$1,000,000.

For any foreign currency transaction effected with the authorized juristic person with a value of US$50,000 or equivalent, the foreign currency transaction form must be submitted, referring to the reference number and the date stipulated in the BOT approval letter. However, in the case the subscription price to be remitted abroad is below US$1,000,000, the authorized juristic person (local bank) is authorized by the BOT to approve such transaction itself.

Approval on Declaration of Dividends Received : Generally, once the dividend payment is declared, the employees must immediately remit such dividend into Thailand, otherwise the BOT approval for this is required. Thus, should the dividend will be re-invested or used for other purpose according to the plan,

the approval from BOT must be obtained in advance. Local company may consider applying for BOT approval for both remittance of subscription price abroad and declaration of dividends received by the same application for time-saving.

After prescribed period (lock-up period), unless otherwise provided in the plan and subject to the BOT approval, the dividends and other compensations received under the plan must be remitted into Thailand immediately.

Personal Income Tax

Tax on Dividends

Dividends will also be subject to taxation when such dividends are actually received by employees. Similarly, dividends are subject to tax at progressive income rates ranging from 5% to 35% depending on the amount of income taxable.

Tax on Capital Gains

Capital gains (defined as the difference between the redemption proceeds and the subscription price/ value of share) are taxed at progressive income rates of 5% to 35%. No employee or employer social charges apply.

Employees must file a tax return by March 31 of the calendar year following the calendar year in which the income was received. Applicable taxes are not withheld by the employer.

Turkey

This information is correct as of April 2017.

Tax Obligations of the Optionees

There are no specific rules are regulated under Turkish tax legislation regarding the stock options. Under the general tax provisions, share options are taxable as employment income at the time of their exercise. Additionally, under certain circumstances, Optionees might be subject to stamp tax and some social security contributions.

The gain arising on the sale of the shares must be declared on the Optionee’s annual income tax return and will be subject to income tax at the Optionee’s applicable rate. There is an income tax exemption for a certain amount of gains in a calendar year but this exemption does not apply to the sale of marketable securities.

The Income Tax Law describes employment income as benefits paid in cash, in-kind or other ways, represented by money for services rendered, to persons employed by an employer and working at a certain workplace (Article 61). This definition includes all non-cash benefits provided and payments made (including allowance, compensation, cash indemnity, funds, increase, advance, dues, attendance fee, premium, bonus and reimbursement or under any other names). Payment as a certain percentage of earnings (provided it is not related to an ownership of a company and related to the employment of the concerned personnel) must also be included under this definition and considered as employment income.

The taxable event for employment income is triggered once the Optionee legally and economically has the right to dispose of the benefit or payment. Income tax is imposed upon exercise on any “spread” on the shares, which is the excess of the fair market value of the shares on the exercise date, over the aggregate exercise price paid.

The benefit (that is, the difference between the shares’ price at grant and value at vesting) is subject to withholding tax and must be declared by the Turkish resident company in the withholding tax return (Article 94, Income Tax Law). The income tax rate is applied at progressive rates ranging between 15% and 35%.

Exchange Control Information

Stock options are not are not subject to any foreign exchange restrictions. Importation of Turkish currency and instruments denominated in Turkish currency shall be free, while their exportation is free under the following principles:

(i)

Residents in Turkey and non-residents shall be free to transfer Turkish currency abroad via banks.

(ii)

Travelers may freely take Turkish currency abroad on their person, up to the equivalent of USD 5.000.

(iii)

Exportation of instruments denominated in Turkish currency shall be free.

Non-residents may freely make payments, collect money and make deposits in Turkish currency in Turkey.

Banks shall inform the authorities to be determined by the Ministry about Turkish Lira transfers abroad, excluding payments for exports, imports and invisible transactions that are above the equivalent of USD 50,000, within a 30 day-period starting from the date of transfer.

Residents in Turkey are also allowed to accept payment in foreign currency from non-residents for the transactions that they conduct in Turkey in favor of such non-residents.

United Kingdom

Withholding

The paragraphs below replace Section 8 (Withholding) of Exhibit A to the Option Agreement:

Regardless of any action the Company or the Optionee’s employer (the “Employer”) takes with respect to any or all income tax, primary and secondary Class 1 National Insurance contributions, payroll tax or other tax-related withholding attributable to or payable in connection with or pursuant to the grant, vesting, exercise, release or assignment of any Option (“Tax-Related Items”), the Optionee acknowledges that the ultimate liability for all Tax-Related Items legally due by the Optionee is and remains the Optionee’s responsibility. Furthermore, the Company and/or the Employer (i) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Option, including the grant, vesting or exercise of the Options, the subsequent sale of any shares of Common Stock acquired at exercise and the receipt of any dividends; and (ii) do not commit to structure the terms of the grant or any aspect of the Option to reduce or eliminate the Optionee’s liability for Tax-Related Items.

As a condition of any Options becoming exercisable and the issuance of shares of Common Stock upon exercise of the Options, the Company and/or the Employer shall be entitled to withhold and the Optionee agrees to pay, or make adequate arrangements satisfactory to the Company and/or the Employer to satisfy, all obligations of the Company and/or the Employer to account to HM Revenue & Customs (“HMRC”) for any Tax-Related Items by the Due Date, which is 90 days, or such other period as required under U.K. law, after the event giving rise to the Tax-Related Items (the “Chargeable Event”). In this regard, except as provided in the next sentence, such payment shall be made by means of the Company withholding and/or reacquiring a number of shares of Common Stock issued upon exercise of the Options having a Fair Market Value equal to the amount of Tax-Related Items that the Company determines it or the Employer is required to account to HMRC under applicable tax laws with respect to the Options (with such obligation determined based on any applicable minimum statutory withholding rates). In the event that the Company cannot (under applicable legal, regulatory, listing or other requirements, or otherwise) satisfy such obligation in such method, the Company may satisfy its entitlement to withhold under this

Option Agreement by either or a combination of the following methods: (i) by requiring the Optionee to pay such amount in cash or check; and/or (ii) by deducting such amount out of any other compensation otherwise payable to the Optionee. For these purposes, the Fair Market Value of the shares of Common Stock to be withheld or repurchased, as applicable, shall be determined on the date that Tax-Related Items are to be determined.

The Optionee shall pay to the Company or the Employer any amount of Tax-Related Items that the Company or the Employer may be required to account to HMRC with respect to the Chargeable Event that cannot be satisfied by the means previously described. If payment or withholding is not made by the Due Date, the Optionee agrees that the amount of any uncollected Tax-Related Items shall (assuming the Optionee is not a director or executive officer of the Company (within the meaning of Section 13(k) of the U.S. Securities and Exchange Act of 1934, as amended)), constitute a loan owed by the Optionee to the Employer, effective on the Due Date. The Optionee agrees that the loan will bear interest at the then-current HMRC Official Rate and it will be immediately due and repayable, and the Company and/or the Employer may recover it at any time thereafter by any of the means referred to above. If any of the foregoing methods of collection are not allowed under Applicable Laws or if the Optionee fails to comply with the Optionee’s obligations in connection with the Tax-Related Items as described in this section, the Company may refuse to deliver the shares of Common Stock acquired under the Plan.

Joint Election

As a condition to exercising the Options, the Optionee agrees to accept any liability for secondary Class 1 National Insurance contributions (the “Employer’s Liability”) which may be payable by the Company and/or the Employer in connection with the Options and any event giving rise to Tax-Related Items. To accomplish the foregoing, the Optionee agrees to execute a joint election with the Company (the “Election”), the form of such Election being formally approved by HMRC, and any other consent or elections required to accomplish the transfer of the Employer’s Liability to the Optionee. The Optionee further agrees to execute such other joint elections as may be required between the Optionee and any successor to the Company and/or the Employer. If the Optionee does not enter into the Election when the Optionee accepts the Option Agreement or when otherwise requested by the Company and/or Employer, or if the Election is revoked at any time by HMRC, the Optionee will not be entitled to exercise the Option unless the Optionee agree to pay an amount equal to the Employer’s Liability to the Company, the Employer and/or any Related Company. The Optionee further agrees that the Company and/or the Employer may collect the Employer’s Liability by any of the means set forth in the Withholding section of the Option Agreement.}

Exhibit 10.4


				PEGASYSTEMS INC.
				One Rogers Street
				Cambridge, MA 02142-1209 USA

Notice of Grant of Award and Award Agreement

You have been granted an award of Restricted Stock Units pursuant to the terms of the Pegasystems Inc. Amended and Restated 2004 Long-Term Incentive Plan (the “Plan”).

By accepting this award, you agree that this award is granted and governed by the terms and conditions of the Plan, this notice, and all your Award Documents listed herein and incorporated by reference. This notice, together with your Award Documents and your electronic acceptance, collectively comprise your total agreement (the “Award Agreement”).


Pegasystems Inc.

By:
		Alan Trefler, Chairman and
		Chief Executive Officer

PHONE 617.374 9600

FAX 617.374.9620

WWW.PEGA.COM

Exhibit A

Notice of Grant of Award and Award Agreement for {Non-} U.S. Employees

1. Conversion of Restricted Stock Units to Common Stock . Each restricted stock unit (“RSU”) granted in the Notice of Grant of Award and Award Agreement {for Non-U.S. Employees} (of which this Exhibit A is a part) (the “Award Agreement”) represents the right of the person receiving such grant (the “Recipient”) to receive one share of the common stock (“Common Stock”) of Pegasystems Inc. (the “Company”) subject to the vesting requirements listed in the Award Agreement and to the other terms and conditions of this Award Agreement. On each vesting date listed in the Award Agreement, the Company will issue such number of shares of Common Stock as are equal to the applicable number of RSUs vesting on such date, less such number of shares of Common Stock as are required to be withheld to satisfy Recipient’s tax withholding obligations. The Recipient shall not be entitled to receive any dividends declared on shares of Common Stock for any periods prior to the relevant vesting date, nor shall the Recipient be entitled to any dividend equivalent payouts.

2. Vesting . RSUs will vest on the dates listed in the Award Agreement if the Recipient remains in the active employment of the Company {and/or the Recipient’s employer (the “Employer”)} in good standing from the date of grant through the applicable vesting date. RSUs will cease to vest immediately upon the cessation of Recipient’s active employment with the Company, for any reason.

3. Recipient’s Agreement . The Recipient agrees to all the terms stated in the Award Agreement (of which this Exhibit is a part), as well as to the terms of the Plan (which shall control in case of conflict with the Award Agreement), a copy of which is attached and of which the Recipient acknowledges receipt.

4. Withholding . The Recipient consents to fulfill all withholding obligations for all applicable payroll and income taxes with respect to the Award when they are due and arrange for satisfactory payment of all withholding obligations in a manner as set forth in Section 13(h) of the Plan. The Company may satisfy such withholding obligations by withholding such number of shares of Common Stock as are equal in value to the amount of the required withholding.

{4. Withholding . Regardless of any action the Company and/or the Employer take with respect to any or all income tax (including U.S. federal, state and local tax and/or non-U.S. tax), social insurance, payroll tax, payment on account or other tax-related withholding (“Tax-Related Items”), the Recipient acknowledges that the ultimate liability for all Tax-Related Items legally due by the Recipient is and remains the Recipient’s responsibility and that the Company and/or the Employer (i) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Award, including the grant of the RSUs, the vesting of the RSUs, the delivery of shares of Common Stock, the subsequent sale of any shares of Common Stock acquired at vesting and the receipt of any dividends or dividend equivalents; and (ii) do not commit to structure the terms of the grant or any aspect of the Award to reduce or eliminate the Recipient’s liability for Tax-Related Items.

Prior to the relevant taxable event, the Recipient shall pay or make arrangements satisfactory to the Company and/or the Employer to satisfy all withholding and payment on account obligations of the Company and/or the Employer. In this regard, the Recipient authorizes the Company and/or the Employer to withhold all applicable Tax-Related Items legally payable by the Recipient from any wages or other cash compensation paid to the Recipient by the Company and/or the Employer. Alternatively, or in addition, if permissible under local law, the Recipient authorizes the Company and/or the Employer, at its discretion and pursuant to such procedures as it may specify from time to time, to satisfy the obligations with regard to all Tax-Related Items legally payable by the Recipient by one or a combination of the following: (i) withholding otherwise deliverable shares of Common Stock, provided that the Company only withholds the amount of shares of Common Stock necessary to satisfy the minimum withholding amount; (ii) arranging for the sale of shares of Common Stock otherwise deliverable to the

Recipient (on the Recipient’s behalf and at the Recipient’s direction pursuant to this authorization); or (iii) withholding from the proceeds of the sale of shares of Common Stock acquired upon vesting of the Award. If the obligation for Tax-Related Items is satisfied by withholding a number of shares of Common Stock as described herein, the Recipient is deemed to have been issued the full number of shares of Common Stock subject to the Award, notwithstanding that a number of the shares of Common Stock are held back solely for the purpose of paying the Tax-Related Items due as a result of any aspect of the Award. The Recipient shall pay to the Company and/or the Employer any amount of Tax-Related Items that the Company and/or the Employer may be required to withhold as a result of the Recipient’s participation in the Plan that cannot be satisfied by the means previously described. The Company may refuse to deliver to the Recipient any shares of Common Stock pursuant to the Award if the Recipient fails to comply with the Recipient’s obligations in connection with the Tax-Related Items as described in this section.}

5. Rights as Shareholders . The Recipient shall have no rights as a shareholder of the Company with respect to any of the RSUs until the issuance of shares of Common Stock at the time of vesting, and then only with respect to those shares of Common Stock issued.

6. Non-Transferability . The Award may not be transferred in any manner other than as permitted in Section 13(j) of the Plan {by will or by the laws of descent and distribution}. The terms of the Award shall be binding upon the executors, administrators, heirs and successors of the Recipient.

7. Compliance with Securities, Tax and Other Law . No shares of Common Stock may be issued if the issuance of shares would constitute a violation of any applicable federal or state securities law or any other law or valid regulation. As a condition to issuance of Common Stock, the Company may require the Recipient, or any person acquiring the right to receive the Common Stock, to make any representation or warranty that the Company deems to be necessary under any applicable securities, tax, or other law or regulation.

8. Adjustments upon Changes in Capitalization . In the event of any change in the shares subject to the Plan or to any Award granted under the Plan by reason of a merger, consolidation, reorganization, recapitalization, stock dividend, stock split, combination or exchange of shares of Common Stock, or other change in the structure of the Company, the number of RSUs and the number of shares of Common Stock shall be appropriately adjusted by the Company and such adjustment shall be final, binding and conclusive.

9. No Right to Employment . The granting of the Award does not confer upon the Recipient the right to continue in the service of the Company {and/or the Employer}, or affect in any way the right and power of the Company {and/or the Employer} to terminate the service of the Recipient at any time with or without assigning a reason therefor, to the same extent as the Company {and/or the Employer} might have done if the Award had not been granted.

10. No Guarantee . The Company offers no guarantee or assurance that the Company’s stock has any value at the time of this grant or will have any value or liquidity at any future time.

11. Standards Letter {Employment Agreement} . In consideration for this Award, the Recipient reaffirms the terms of the Recipient’s Standards Letter {Employment Agreement} with Pegasystems {the Employer}, including but not limited to the provisions {(if any)} related to competition and solicitation. The Recipient further agrees that to the extent the nature of the Company’s {Employer’s} business has evolved since the date of the Standards Letter {Employment Agreement} the covenants shall also apply to the business as evolved.

{12 . Acknowledgment of Nature of Plan and Award . In accepting the Award, the Recipient acknowledges that:

(b) the Award is voluntary and occasional and does not create any contractual or other right to receive future awards of RSUs, or benefits in lieu of RSUs, even if RSUs have been awarded repeatedly in the past;

(d) the Recipient’s participation in the Plan is voluntary;

(e) the Award is an extraordinary item that does not constitute compensation for services of any kind rendered to the Company or any Related Company, and which is outside the scope of the service or employment contract, if any;

(f) the Award is not part of normal or expected compensation or salary for any purposes, including, but not limited to, calculation of any severance, resignation, termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement or welfare benefits or similar payments and in no event should be considered as compensation for, or relating in any way to, past services for the Company or any Related Company;

(g) in the event that the Recipient is not an Employee of the Company or any Related Company, the Award and the Recipient’s participation in the Plan will not be interpreted to form an employment or service contract or relationship with the Company or any Related Company;

(h) the future value of the underlying shares of Common Stock is unknown and cannot be predicted with any certainty;

(i) in consideration of the Award, no claim or entitlement to compensation or damages shall arise from termination of the Award or from any diminution in value of the Award or shares of Common Stock acquired upon vesting of the Award resulting from termination of the Recipient’s service by the Company or any Related Company (for any reason whatsoever and whether or not in breach of local labor laws) and the Recipient irrevocably releases the Company and any Related Company from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by signing the Award Agreement, the Recipient shall be deemed irrevocably to have waived the Recipient’s entitlement to pursue such claim;

(j) in the event of termination of the Recipient’s service (whether or not in breach of local labor laws), the Recipient’s right to receive an Award and vest in the Award under the Plan, if any, will terminate effective as of the date that the Recipient is no longer actively employed and will not be extended by any notice period mandated under local law ( e.g. , active employment would not include a period of “garden leave” or similar period pursuant to local law); the Administrator shall have the exclusive discretion to determine when the Recipient is no longer actively employed for purposes of the Award;

(k) the Company is not providing any tax, legal or financial advice, nor is the Company making any recommendations regarding the Recipient’s participation in the Plan or the Recipient’s acquisition or sale of the underlying shares of Common Stock; and

(l) the Recipient is hereby advised to consult with the Recipient’s personal tax, legal and financial advisors regarding the Recipient’s participation in the Plan before taking any action related to the Plan.

13. Data Privacy Notice and Consent . The Recipient hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of the Recipient’s personal data as described in this Award Agreement and any other RSU grant materials by and among, as applicable, the Employer, the Company and its Subsidiaries for the exclusive purpose of implementing, administering and managing the Recipient’s participation in the Plan.

The Recipient understands that the Company and the Employer may hold certain personal information about the Recipient, including, but not limited to, the Recipient’s name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title, any shares of stock or directorships held in the Company, details of all RSUs or any other entitlement to shares of stock awarded, granted, canceled, vested, exercised, unvested or outstanding in the Recipient’s favor, for the exclusive purpose of implementing, administering and managing the Plan (“Data”).

The Recipient understands that Data will be transferred to a third party stock plan service provider(s) as may be selected by the Company, which is assisting the Company with the implementation, administration and management of the Plan. The Recipient understands the recipients of the Data may be located in the Recipient’s country, in the United States or elsewhere, and that the data recipients’ country may have different data privacy laws and protections than the Recipient’s country. The Recipient understands that the Recipient may request a list with the names and addresses of any potential recipients of the Data by contacting the Recipient’s local human resources representative. The Recipient authorizes the Company and any other possible recipients which may assist the Company (presently or in the future) with implementing, administering and managing the Plan to receive, possess, use, retain and transfer the Data, in electronic or other form, for the sole purpose of implementing, administering and managing the Recipient’s participation in the Plan. The Recipient understands that Data will be held only as long as is necessary to implement, administer and manage the Recipient’s participation in the Plan. The Recipient understands that the Recipient may, at any time, view Data, request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing the Recipient’s local human resources representative. The Recipient understands, however, that refusing or withdrawing the Recipient’s consent may affect the Recipient’s ability to participate in the Plan. For more information on the consequences of the Recipient’s refusal to consent or withdrawal of consent, the Recipient understands that the Recipient may contact the Recipient’s local human resources representative.}

12. {14} Amendment and Termination of Award . The Company may amend, modify or terminate any outstanding Award, provided that the Recipient’s consent to such action shall be required unless it occurs pursuant to a Sale of the Company or the Committee determines that the action would not materially and adversely affect the Recipient.

{15. Language . If the Recipient has received this Award Agreement or any other document related to the Plan translated into a language other than English and if the translated version is different from the English version, the English version will control.}

16. Electronic Delivery . The Company may, in its sole discretion, decide to deliver any documents related to the Award or future awards made under the Plan by electronic means or request that the Recipient consent to participate in the Plan by electronic means. The Recipient hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or a third party designated by the Company.}

13. {17} Governing Law and Venue . The Award Agreement shall be governed by and interpreted in accordance with the laws of The Commonwealth of Massachusetts, without regard to any applicable conflicts of law provisions thereof.

For purposes of litigating any dispute that arises directly or indirectly from the relationship of the parties evidenced by this Award or this Award Agreement, the parties hereby submit to and consent to the exclusive jurisdiction of The Commonwealth of Massachusetts and agree that such litigation shall be conducted only in the courts of Middlesex County, Massachusetts, or the federal courts for the United States for the district of Massachusetts, and no other courts, where this Award of RSUs is made and/or to be performed.

14. {18} Severability . In the event any one or more of the provisions of the Award Agreement shall for any reason be held to be invalid, illegal or unenforceable, the remaining provisions of the Award Agreement shall be unimpaired, and the invalid, illegal or unenforceable provision shall be replaced by a mutually acceptable provision, which being valid, legal and enforceable, comes closest to the intention of the parties underlying the invalid, illegal or unenforceable provision.

15. {19} Definitions . All capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Plan.

{20. Exhibit B . Notwithstanding any provision herein, the Recipient’s participation in the Plan shall be subject to any special terms and conditions as set forth in Exhibit B for the Recipient’s country of residence, if any. The Exhibit B constitutes part of this Award Agreement.}

{Exhibit B

To Notice of Grant of Award and Award Agreement for Non-U.S. Employees

This Exhibit B includes additional terms and conditions that govern the RSUs granted to the Recipient if the Recipient resides in the countries contained herein. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Notice of Grant of Award and Award Agreement for Non-U.S. Employees ( of which this Exhibit B is a part ) or the Plan.

This Exhibit B also includes information regarding exchange controls and certain other issues of which the Recipient should be aware with respect to the Recipient’s participation in the Plan. The information is based on the securities, exchange control and other laws in effect in the respective countries as of December 2009, unless otherwise notated. Such laws are often complex and change frequently. As a result, the Company strongly recommends that the Recipient not rely on the information noted herein as the only source of information relating to the consequences of the Recipient’s participation in the Plan because the information may be out of date at the time the Recipient acquires shares of Common Stock or sells shares of Common Stock the Recipient acquires under the Plan.

In addition, the information is general in nature and may not apply to the Recipient’s particular situation, and the Company is not in a position to assure the Recipient of any particular result. Accordingly, the Recipient is strongly advised to seek appropriate professional advice as to how the relevant laws in the Recipient’s country apply to the Recipient’s specific situation.

If the Recipient is a citizen or resident of another country, or is considered a resident of another country for local law purposes, the information contained in this Exhibit B may not be applicable to the Recipient.

Australia

Withholding

This provision supplements Section 8 (Withholding):

Prior to the relevant taxable event, the Recipient will provide the Company with their Australian Tax File Number (TFN) or Australian Business Number (ABN). Failure to do so will result in the requirement for the Company to withhold Australian tax at the rate of 46.5%.

Reform to the taxation of Employee share schemes

With effect from 1 July 2009, RSUs shall be taxed up front, unless there is a “real risk of forfeiture”. Where there is a “real risk of forfeiture,” RSUs shall generally be taxed at the earliest of:

•

Vesting of the award (when it is no longer subject to forfeiture)

•

Cessation of employment

•

7 years after grant

Canada

Vesting of RSUs

Income tax arises on the fair market value of the shares on vesting. No deferral election is possible for RSUs.

For further clarity, any shares issued of the Common Stock of the Company under an RSU shall be issued solely in the name of the Recipient and not in the name of any other person, including a person with whom the Recipient is dealing at non-arm’s length.

The Recipient shall receive shares of the Common Stock of the Company and under no circumstances shall the Administrator elect to have the Recipient receive cash (or any other security) in lieu of the Common Stock of the Company. To this effect, section 13(e) of the Plan (and any other similar section) do not apply in Canada.

Furthermore, at all times the Recipient should hold less than 10% of the shares of the Common Stock of the Company or any Related Company.

Withholding

The paragraphs below replace Section 4 of Exhibit A to the Award Agreement:

Generally, there are Canadian requirements to withhold source deductions on the vesting of RSUs. Although RSU benefits are considered to be remuneration subject to source deductions, Canada recognizes that requiring additional withholding from cash payments, such as normal salary, as a result of a stock benefit can create hardship for the employee. This hardship will be created when either the benefit is very large in proportion to the employee’s normal salary or the award vests later in the year. As a result, employers may make withholdings from employees’ cash remuneration to the extent possible, without imposing actual hardship. Where the non-cash benefit is the only form of income received from that employer, the employer will not be required to withhold tax on the amount of such benefits.

RSU benefits are also subject to social security taxes in Canada. These benefits are subject to Canada Pension Plan withholdings but not Employment Insurance withholdings. The province of Ontario will also levy payroll taxes to fund the Canadian health service.

The employment benefit will be reported on the Recipient T4 for the year in which the RSUs vest. The Recipient must report these amounts on his or her individual income tax return for the same year.

Acknowledgement of nature of plan

The paragraphs below replace Section 11 of Exhibit A to the Award Agreement [new or amended paragraphs are shown in italics at g and i]:

In accepting the RSU Award, the Recipient acknowledges that:

(a)	the Plan is established voluntarily by the Company, it is discretionary in nature, and it may be modified, amended, suspended or terminated by the Company at any time, unless otherwise provided in the Plan and this Agreement;

(b)	the Award is voluntary and occasional and does not create any contractual or other right to receive future grants of RSU Awards, or benefits in lieu of RSUs, even if RSUs have been granted repeatedly in the past;

(c)	all decisions with respect to future RSUs, if any, will be at the sole discretion of the Company;

(d)	the Recipient’s participation in the Plan is voluntary;

(e)	the Award is an extraordinary item that does not constitute compensation for services of any kind rendered to the Company or any Related Company, and which is outside the scope of the employment contract, if any;

(f)

the Award is not part of normal or expected compensation or salary for any purposes, including, but not limited to, calculation of any severance, resignation, termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement or welfare benefits or similar payments and in no event should be considered as compensation for, or relating in any way to, past services for the Company or any Related Company;

(g)

the Company has decided to grant Awards under the Plan to individuals who are Employees of the Company or any Related Company; and under no circumstances, the Employee should be considered a Consultant or a “non-employee Officer or non-employee Director” of the Company or any Related Company;

(h)	the future value of the underlying shares of Common Stock is unknown and cannot be predicted with any certainty;

(i)

at all times the Recipient should hold less than 10% of the shares of the Common Stock of the Company or any Related Company;

(j)

in consideration of the Award, no claim or entitlement to compensation or damages shall arise from termination of the Award or from any diminution in value of the Award or shares of Common Stock acquired resulting from termination of the Recipient’s service by the Company or any Related Company (for any reason whatsoever and whether or not in breach of local labor laws) and the Recipient irrevocable releases the Company and any Related Company from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by signing the Award Agreement, the Recipient shall be deemed irrevocably to have waived the Recipient’s entitlement to pursue such claim;

(k)

in the event of termination of the Recipient’s service (whether or not in breach of local labor laws), the Recipient’s right to receive an Award and vest in the Award under the Plan, if any, will terminate effective as of the date that the Recipient is no longer actively employed and will not be extended by any notice period mandated under local law (e.g., active employment would not include a period of “garden leave” or similar period pursuant to local law); the Administrator shall have the exclusive discretion to determine when the Recipient is no longer actively employed for purposes of the Award;

(l)	the Company is not providing any tax, legal or financial advice, nor is the Company making any recommendations regarding the Recipient’s participation in the Plan or the Recipient’s acquisition or sale of the underlying shares of Common Stock; and

(m)	the Recipient is hereby advised to consult with their personal tax, legal and financial advisors regarding the employee’s participation in the Plan before taking any action related to the Plan.

France

This information is correct as of February 2016.

Language Consent

By accepting the Award, the Recipient confirms having read and understood the documents relating to this grant (the Plan, the French RSU Plan and this Agreement) which were provided in English language. The Participant accepts the terms of those documents accordingly.

En acceptant l’attribution conditionnelle des actions, vous confirmez ainsi avoir lu et compris les documents relatifs à cette attribution (le Plan, le French RSU Plan et le présent Contrat) qui ont été communiqués en langue anglaise. Vous acceptez ainsi les termes en connaissance de cause.

Sale of the shares

The Shares held by a French Participant pursuant to a RSU shall not be sold by the latter during certain Closed Periods as provided for by Section L. 225-197-1 of the French Commercial Code, as interpreted by the French administrative guidelines.

The term “ Closed Period ” shall mean a closed period as set forth in Section L. 225-197-1 of the French Commercial Code, as amended, which is as follows:

•

ten (10) or more quotation days preceding and 3 quotation days following the disclosure to the public of the consolidated financial statements or the annual statements of the Company; or

•

any period during which the corporate management of the Company ( i.e. , those involved in the governance of the Company, such as the Board, Committee, supervisory directorate, etc.) possess confidential information which could, if disclosed to the public, significantly impact the trading price of the Common Stock, until ten (10) quotation days after the day such information is disclosed to the public.

French Tax Regime

The Recipient is solely responsible for reporting the gain from the sale of Shares pursuant to the vesting of an RSU in his annual personal income tax return and for paying the related income tax.

The gain is subject to income tax with progressive tax rates. The taxable gain may be reduced by a tax allowance depending on the number of years between the Vesting Date and the date when the Shares are sold:

•

50% between 2 and under 8 years,

•

65 % as from 8 years.

The gain is subject to social taxes at the current rate of 15.5 % on 100% of the gain (the social tax at 5.1% is tax deductible from the taxable income of the following year).

Exchange Control Information

If the Recipient retains Shares outside of France or maintains a foreign bank account, the Recipient is required to report such to the French tax authorities when filing his or her annual tax return.

Germany

Exchange Control Information

Cross-border payments in excess of €12,500 must be reported monthly to the German Federal Bank. If the Recipient uses a German bank to transfer a cross-border payment in excess of €12,500 in connection with the sale of shares of Common Stock acquired under the Plan, the bank will make the report for the Recipient. In addition, the Recipient must report any receivables or payables or debts in foreign currency exceeding €5,000,000 on a monthly basis.

Hong Kong

Obligation to report the RSUs to the tax authority

The Recipient is obliged to declare the gains realized in relation to RSUs to the Hong Kong Inland Revenue Department (“IRD”) in their Individual Tax Return for the relevant year of assessment. If the Recipient is eligible to lodge any offshore non-taxable claim on RSU gains, the Recipient is required to lodge such claim in their Individual Tax Return. Therefore, it is the Recipient’s responsibility to prove to the satisfaction of the IRD on their non-taxable claim lodged with documentary evidence in support.

The IRD has issued the revised Departmental Interpretation and Practice Note (“DIPN”) No. 38 regarding the employee share-based benefits in March 2008 which has expressed the IRD’s view on the timing and taxability of the share award benefits. This sets a general guideline for taxpayers in ascertaining the tax treatment of their share award benefits. DIPN is not legally binding and not a rule of law and the revised DIPN No. 38 may not cover every type of share award benefit. Participants should take individual tax advice on their share award benefits.

Reporting requirement

Upon the commencement of Hong Kong employment/assignment of the Recipient, the employer (the “Employer”) is obliged to file the Commencement Notice (Form IR 56E) for reporting the term of employment and RSU details to the IRD within 3 months from the date of commencement of employment. Annual Employer’s Return (Form IR 56B) is required to be filed to the IRD by end of April to report the remuneration paid/accrued to the Recipient, including the RSU gains, for each year ended 31 March. Further to the filing of the said Forms, the IRD will normally create a tax file for the Recipient and issue the annual Individual Tax Return to the Recipient (usually in May) to ascertain their tax position. If there is no Individual Tax Return issued by the IRD to the Recipient for reporting the RSU gain in the year of award or of vesting, as appropriate, the Recipient is obliged to voluntarily inform the IRD on this tax chargeability arising from the exercise as well as other Hong Kong taxable employment income within four months after the end of the basis period during which the year of assessment is concerned (i.e. the informing deadline is 31 July given the fiscal year ends on 31 March).

Leaving Hong Kong

If the RSU benefit is taxable in Hong Kong even if it is received after the Recipient permanently departs from Hong Kong, the Employer should report the RSU gains by filing the Departure Notice (Form IR 56G) and provide a copy for the Recipient. The Recipient also needs to discharge their voluntary informing chargeability obligation as mentioned above not later than 4 months after the end of the year of assessment in which the RSU gains are derived. Even if the Employer fails to submit the Departure Notice to report the taxable RSU gain, the Recipient still needs to comply with his or her own reporting obligation.

Withholding

The paragraphs below supplement Section 4 (Withholding) of Exhibit A to the RSU Award Agreement.

The Employer is not required to withhold the Recipient’s share gains unless the Recipient permanently departs from Hong Kong. The Employer is statutorily required to withhold money payment from the Recipient for a period of one month after the Departure Notification (Form IR 56G) was filed to the IRD, unless consent (by the issue of a Letter of Release to the employer with a copy to the Recipient after they have settled all their tax liabilities) is given by the IRD. If the Recipient derives share gains and there is money paid to them by the Employer, the Employer has the withholding obligation.

To facilitate finalizing the salary-related tax liabilities prior to permanent departure, the Recipient is allowed, as a concession, to elect to have the tax liabilities finalized on the basis of a deemed vesting of the share awards. The Recipient may elect to be assessed on either (i) the deemed value on a day within 7 days before the submission of the Recipient’s tax return for the final year of assessment in which the Recipient departs or (ii) the deemed value on the date of departure if the election is made within 3 months from the date of permanent departure from Hong Kong.

Once an election is accepted by the IRD and the assessment is made accordingly, the election cannot be withdrawn. A subsequent request to revise the assessment will not be entertained unless the assessment is objected to within the statutory time allowed for objection.

If the actual share award gain is higher than the amount assessed under deemed vesting, the IRD has indicated in DIPN No. 38 that it will not seek to increase the assessment for the sole reason that the value upon vesting has increased.

India

No country specific terms and conditions apply.

Italy

This information is correct as of August 2011.

Purpose

The Plan is discretionary in nature and is offered only to individual employees and/or specific categories of employees.

Nature of Plan

This provision supplements Section 11 (Acknowledgement of Nature of Plan and Award) of Exhibit A to the Award Agreement:

The Recipient understands that the Company has unilaterally, gratuitously and discretionally decided to grant RSUs under the Plan to individuals who may be employees of the Company or its Subsidiaries throughout the world. The decision is a limited decision that is entered into upon the express assumption and condition that any grant will not bind the Company or any Related Company. Consequently, the Recipient understands that the RSU is granted on the assumption and condition that the RSU and any shares of Common Stock acquired upon vesting of the RSU are not a part of any employment contract (either with the Company or any Related Company) and shall not be considered a mandatory benefit, salary for any purposes (including severance compensation) or any other right whatsoever. Further, the Recipient understands that the Recipient will not be entitled to continue vesting in any RSU once the Recipient’s service with the Company or any Related Company ceases. In addition, the Recipient understands that this award would not be made to the Recipient but for the assumptions and conditions referred to above; thus, the Recipient acknowledges and freely accepts that should any or all of the assumptions be mistaken or should any of the conditions not be met for any reason, then any grant of or right to the RSU shall be null and void.

It is a condition of participation in the Plan that the Recipient expressly agrees to the terms of the Plan, including the provisions in this Exhibit B.

RSUs Payable Only in Shares of Common Stock

Notwithstanding any discretion in the Plan or anything contrary in the Award Agreement, if the Recipient is resident in Italy, the award of RSUs does not provide any right for the Recipient to receive a cash payment and the RSUs are payable in shares of Common Stock only.

Securities Reporting

Individuals in Italy are required to report assets held abroad on their annual tax returns (Form RW) if the value of such assets exceeds 10,000 Euros at the end of the calendar year. The Italian tax authorities have taken the position that vested RSUs in a foreign company are considered ‘assets held abroad’.

Employees must therefore also report vested RSUs in their annual tax returns (Form Unico, Schedule RW) if the threshold is exceeded.

In addition, employees must report in Section III of Form RW the transfer of money exceeding 10,000 Euros:

•

From Italy to another jurisdiction;

•

From another jurisdiction to Italy;

•

Between non-Italian jurisdictions, if the transfer relates to investments held overseas.

This also applies to transfers to countries that have adopted the Euro.

Japan

This information is correct as of August 2009.

Exchange Control Information

Although there are no restrictions on the transfer of funds outside Japan, certain reporting obligations to the tax authorities or the Ministry of Finance may be required.

Recipients must notify the Ministry of Finance of share purchases in excess of 30,000,000 Yen. An additional notification is required for purchase of shares with a value in excess of 100,000,000 Yen.

Netherlands

By participating in the Plan the Recipient acknowledges that his or her Award can cease to vest on termination of employment under the terms of the Plan. It is a condition of participation in the Plan that the Recipient agrees to these terms.

New Zealand

This information is correct as of April 2017.

Disclosure required under the Financial Markets Conduct Act 2013

If you are receiving this offer in New Zealand please read the following in addition to the other documents which are provided to you by Pegasystems Inc.

Warning

This is an offer of Restricted Stock Units. Upon the vesting of the Restricted Stock Units, you will be granted Common Stock in Pegasystems Inc. Common Stock gives you a stake in the ownership of Pegasystems Inc. You may receive a return if dividends are paid.

New Zealand law normally requires people who offer financial products to give information to investors before they invest. This information is designed to help investors to make an informed decision.

Ask questions, read all documents carefully, and seek independent financial advice before committing yourself.

Financial information

Withholding

This provision supplements Section 4 Withholding. The Employer is required to report on the employee share scheme benefit in its Employer Monthly Schedule as the benefit accrues to the Recipient. However, the Employer has the choice as to whether or not it deducts tax on the employee share scheme benefit – unless the Employer elects to do this, the obligation to return the tax on the benefit (and file a return including the same) remains with the Recipient. Further, reforms to the tax rules applicable to employee shares schemes have been proposed, which may alter how the benefit is calculated and when the taxing point(s) arises. Going forward, Recipients will need to monitor these developments.

Poland

Securities reporting

If the Recipient holds more than €10,000 of foreign securities (including following the grant of Awards) the Recipient must declare details of the shares (whether or not the shares have vested) to the National Bank of Poland. The form of declaration must be submitted within 30 days of the end of the year.

Singapore

Leaving Singapore

With effect from January 1, 2003, Recipients who are foreign citizens or are Singapore Permanent residents leaving Singapore permanently are taxed on a “deemed exercise” basis for any options or units or shares granted or issued during Singapore employment. This would also include any unvested or restricted options or units or shares granted whilst exercising employment in Singapore.

As per the deemed exercise rule, all Awards, units, or stock which have been granted during Singapore employment are deemed to have been exercised, irrespective whether the Awards have vested or not. The taxable value is the fair market value (which would be the fair market value one month prior to the date of departure).

Director withholding

Independent Directors who are Non Resident in Singapore and have received Awards by virtue of their being on the Board of the Singapore Company will be subject to tax in Singapore and liable for tax withholding.

Spain

This provision supplements Section 11 (Acknowledgment of Nature of Plan and Award) of Exhibit A to the Award Agreement:

In accepting the RSUs, the Recipient consents to participation in the Plan and acknowledges that the Recipient has received a copy of the Plan.

The Recipient understands that the Company has unilaterally, gratuitously and discretionally decided to

grant RSUs under the Plan to individuals who may be employees of the Company or its Subsidiaries throughout the world. The decision is a limited decision that is entered into upon the express assumption and condition that any grant will not bind the Company or any Related Company. Consequently, the Recipient understands that the RSUs are granted on the assumption and condition that the RSUs and any shares of Common Stock acquired upon vesting of the RSUs are not a part of any employment contract (either with the Company or any Related Company) and shall not be considered a mandatory benefit, salary for any purposes (including severance compensation) or any other right whatsoever. Further, the Recipient understands that the Recipient will not be entitled to continue vesting in any RSUs once the Recipient’s employment with the Company or any Related Company ceases. In addition, the Recipient understands that this grant would not be made to the Recipient but for the assumptions and conditions referred to above; thus, the Recipient acknowledges and freely accepts that should any or all of the assumptions be mistaken or should any of the conditions not be met for any reason, then any grant of or right to the RSUs shall be null and void.

Exchange Control Information

The Recipient must declare the acquisition of shares of Common Stock to the Dirección General de Política Comercial e Inversiones Exteriores (the DGPCIE) of the Ministerio de Economía for statistical purposes.

The Recipient must also declare ownership of any shares of Common Stock with the Directorate of Foreign Transactions each January whilst the shares of Common Stock are owned in the following cases:

•

The shares of the company are listed on the stock exchange.

•

The shareholding in the company has to be at least 10% or more.

•

The investment is more than 1,502,530.26 Euros.

Foreign currency payments (i.e., dividends or sale proceeds) have to be declared when the amount exceeds 6,010.12 Euros on form B3.

The information provided to the financial institution is the following:

•

The Recipient’s name, address, and fiscal identification number

•

Non resident’s name, address and fiscal identification number.

•

The amount of the payment, payment method, currency of origin and value in euros.

•

The reasons for the payment.

A payment is made by bank transfer the following information should be provided to the financial institution when the amount exceeds 50,000 Euros:

•

Resident name, address and fiscal identification number.

•

Non resident name, address and fiscal identification number.

•

The amount, currency of origin and value of payment in euros.

•

The reason for the payment.

Switzerland

This information is correct as of April 2017

Acknowledgment of Nature of Plan and Award

The paragraphs below are added to Section 12 (Acknowledgement of Nature of Plan and Award) of Exhibit A to the Award Agreement:

The Recipient understands that the Company has unilaterally and discretionally decided to grant Awards under the Plan to individuals who may be employees of the Company or its Subsidiaries throughout the world.

The Company has the absolute right to decide whether or not Awards shall be granted to an employee. Within its absolute discretion, the Company may in particular take into account (i) the financial results of the Company, of the department for which the Employee works as well as of the stand-alone financial results of the Company, and (ii) the individual performance as well as the behavior of the Employee during the financial period. Even though Awards have been granted to an Employee at several occasions, whether consecutive or not, the Employee may not infer any entitlement to any future grant of Awards. The grant of Awards is conditional upon the employment agreement not having been unilaterally terminated.

The grant of Awards is entirely discretionary and does not create any obligation upon the Company to pay future bonus even though the Employee receives Awards at several consecutive occasions. No pro rate amount will be paid. Even the existing Awards are discretionary and the right to vest the Awards might be terminated.

Withholding

The paragraphs below replace Section 4 (Withholding) of Exhibit A to the Award Agreement:

The Recipient shall be exclusively responsible for getting advice and obtaining any and all information about the tax consequences in connection with the Plan, in particular with the promise to grant, the grant, the holding and the exercise of Award, as well as with the issuance and transfer of shares.

Any social contributions levied at the promise to grant, at the grant or at exercise of the Award, and at the delivery and transfer of shares shall be borne by the Company and the Recipient as provided by law.

The Recipient shall bear any and all tax and social security (employee’s withholdings) related to the grant or the exercise of Awards, and shall reimburse to the Company any such tax and social security which may have been paid by the Company. However, the stamp duty on issuance of the shares shall be borne by the Company.

The taxable benefit at the time the RSUs will be vested corresponds to the market value of the share. The value of the shares for tax purposes will be communicated by the Company to the Participant upon vesting of the RSU with respect to RSU Awards. The Participant shall pay income taxes on the tax value of the shares as communicated by the Company to the Participant.

The Company may withhold from any amounts due to the Recipient any sums which the Company is or will be required by applicable law to pay on behalf of the Recipient in respect of taxes or social security (including withholding taxes). The amounts that the Company is entitled to withhold for that purpose from amounts due to the Recipient who is an Employee of the Company are subject to applicable mandatory employment law provisions.

The Company is entitled to retain the shares resulting from the exercise of the Awards as long as, and to the extent, the Company has not been reimbursed (or has not been provided with guarantees for such reimbursement) by the Recipient for any amount the Company paid on behalf of the Recipient in respect of taxes or social security.

Thailand

This information is correct as of April 2017.

Obligation to Request for Approval on Remittance of Subscription Price Abroad and Declaration of Dividends Received

Foreign Exchange Control

Personal Income Tax

Tax on Award as Share(s) of the Common Stock with Free-of-Charge

The receipt of any free share(s) of the common stock is treated as the assessable income. The price of the share is subject to tax at progressive income rates ranging from 5% to 35% depending on the amount of income taxable.

Tax on Dividends

Tax on Capital Gains

Employees must file a tax return by March 31 of the calendar year following the calendar year in which the income was received. Applicable taxes are not withheld by the employer.

Turkey

This information is correct as of April 2017.

Tax Obligations of the Recipients

There are no specific rules or regulations relating to employee share plans in Turkey and therefore the tax treatment is unclear under Turkish law. Under the general tax provisions, restricted stock is taxed upon grant and RSU’s are taxed upon vesting. Additionally, under certain circumstances, Recipients might be subject to stamp tax and some social security contributions.

The gain arising on the sale of the shares must be declared on the Recipient’s annual income tax return and will be subject to income tax at the Recipient’s applicable rate. There is an income tax exemption for a certain amount of gains in a calendar year but this exemption does not apply to the sale of marketable securities.

The taxable event for employment income is triggered once the Recipient legally and economically has the right to dispose of the benefit or payment. Income tax is imposed upon exercise on any “spread” on the shares, which is the excess of the fair market value of the shares on the exercise date, over the aggregate exercise price paid.

Exchange Control Information

Restricted stock and RSUs are not subject to any foreign exchange restrictions. Importation of Turkish currency and instruments denominated in Turkish currency shall be free, while their exportation is free under the following principles:

(i)

Residents in Turkey and non-residents shall be free to transfer Turkish currency abroad via banks.

(ii)

Travelers may freely take Turkish currency abroad on their person, up to the equivalent of USD 5,000.

(iii)

Exportation of instruments denominated in Turkish currency shall be free.

Non-residents may freely make payments, collect money and make deposits in Turkish currency in Turkey.

Residents in Turkey are also allowed to accept payment in foreign currency from non-residents for the transactions that they conduct in Turkey in favor of such non-residents.

United Kingdom

RSUs Payable Only in Shares of Common Stock

Notwithstanding any discretion in the Plan or anything to the contrary in the Award Agreement, if the Recipient is resident and ordinarily resident in the United Kingdom, the grant of RSUs does not provide any right for the Recipient to receive a cash payment and the RSUs are payable in shares of Common Stock only.

Withholding

The paragraphs below replace Section 4 (Withholding) of Exhibit A to the Award Agreement:

Regardless of any action the Company or the Recipient’s employer (the “Employer”) takes with respect to any or all income tax, primary and secondary Class 1 National Insurance contributions, payroll tax or other tax-related withholding attributable to or payable in connection with or pursuant to the grant, vesting, release or assignment of any RSUs subject to the Award (“Tax-Related Items”), the Recipient acknowledges that the ultimate liability for all Tax-Related Items legally due by the Recipient is and remains the Recipient’s responsibility. Furthermore, the Company and/or the Employer (i) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the RSUs, including the grant of the RSUs, the vesting of the RSUs, the delivery of shares of Common Stock, the subsequent sale of any shares of Common Stock acquired under the Plan and the receipt of any dividends or dividend equivalents; and (ii) do not commit to structure the terms of the grant or any aspect of the RSUs to reduce or eliminate the Recipient’s liability to Tax-Related Items.

As a condition of any RSUs subject to the Award vesting and the issuance of shares of Common Stock in payment of the RSUs, the Company and/or the Employer shall be entitled to withhold, and the Recipient agrees to pay, or make adequate arrangements satisfactory to the Company and/or the Employer to satisfy, all obligations of the Company and/or the Employer to account to HM Revenue & Customs (“HMRC”) for any Tax-Related Items by the Due Date, which is 90 days, or such other period as required under U.K. law, after the event giving rise to the Tax-Related Items (the “Chargeable Event”). In this regard, except as provided in the next sentence, such payment shall be made by means of the Company withholding and/or reacquiring a number of shares of Common Stock issued in payment of (or otherwise issuable in payment of, as the case may be) the RSUs having a Fair Market Value equal to the amount of Tax-Related Items that the Company determines it or the Employer is required to account to HMRC under applicable tax laws with respect to the RSUs (with such withholding obligation determined based on any applicable minimum statutory withholding rates). In the event that the Company cannot (under applicable legal, regulatory, listing or other requirements, or otherwise) satisfy such obligation in such method, the Company and/or the Company may satisfy its entitlement to withhold under this Award Agreement by either or a combination of the following methods: (i) by requiring the Recipient to pay such amount in cash or check; and/or (ii) by deducting such amount out of any other compensation otherwise payable to the Recipient. For these purposes, the Fair Market Value of the shares of Common Stock to be withheld or repurchased, as applicable, shall be determined on the date that Tax-Related Items are to be determined.

The Recipient shall pay to the Company or the Employer any amount of Tax-Related Items that the Company or the Employer may be required to account to HMRC with respect to the Chargeable Event that cannot be satisfied by the means previously described. If payment or withholding is not made by the Due Date, the Recipient agrees that the amount of any uncollected Tax-Related Items shall (assuming the Recipient is not a director or executive officer of the Company (within the meaning of Section 13(k) of the U.S. Securities and Exchange Act of 1934, as amended)), constitute a loan owed by the Recipient to the Employer, effective on the Due Date. The Recipient agrees that the loan will bear interest at the then-current HMRC Official Rate and it will be immediately due and repayable, and the Company and/or the Employer may recover it at any time thereafter by any of the means referred to above. If any of the foregoing methods of collection are not allowed under Applicable Laws or if the Recipient fails to comply with the Recipient’s obligations in connection with the Tax-Related Items as described in this section, the Company may refuse to deliver the shares of Common Stock acquired under the Plan.

Joint Election

As a condition of the Recipient’s participation in the Plan and the vesting of the RSUs, the Recipient agrees to accept any liability for secondary Class 1 National Insurance contributions (the “Employer’s Liability”) which may be payable by the Company and/or the Employer in connection with the RSUs and any event giving rise to Tax-Related Items. To accomplish the foregoing, the Recipient agrees to execute a joint election with the Company (the “Election”), the form of such Election being formally approved by HMRC, and any other consent or elections required to accomplish the transfer of the Employer’s Liability to the Recipient. The Recipient further agrees to execute such other joint elections as may be required between the Recipient and any successor to the Company and/or the Employer. If the Recipient does not enter into the Election when the Recipient accepts the Award Agreement or when otherwise requested by the Company and/or Employer, or if the Election is revoked at any time by HMRC, the RSUs will cease vesting and become null and void, and no shares of Common Stock will be acquired under the Plan, unless the Recipient agrees to pay an amount equal to the Employer’s Liability to the Company, the Employer and/or any Related Company. The Recipient further agrees that the Company and/or the Employer may collect the Employer’s Liability by any of the means set forth in the Withholding section of the Award Agreement.}

Exhibit 31.1

CERTIFICATION

I, Alan Trefler, certify that:

I have reviewed this Quarterly Report on Form 10-Q of Pegasystems Inc.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: May 10, 2017

/s/ ALAN TREFLER

Alan Trefler

Chairman and Chief Executive Officer

(Principal Executive Officer)

Exhibit 31.2

CERTIFICATION

I, Kenneth Stillwell, certify that:

I have reviewed this Quarterly Report on Form 10-Q of Pegasystems Inc.;

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: May 10, 2017

/s/ KENNETH STILLWELL

Kenneth Stillwell

Chief Financial Officer and Chief Administrative
Officer

(Principal Financial Officer)

Exhibit 32

CERTIFICATION PURSUANT TO SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Pegasystems Inc. (the Company) on Form 10-Q for the quarter ended March 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Alan Trefler, Chairman and Chief Executive Officer of Pegasystems Inc., and Kenneth Stillwell, Chief Financial Officer and Chief Administrative Officer of Pegasystems Inc., each certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: May 10, 2017

/s/ ALAN TREFLER

Alan Trefler

Chairman and Chief Executive Officer

(Principal Executive Officer)

/s/ KENNETH STILLWELL

Kenneth Stillwell

Chief Financial Officer and Chief Administrative
Officer

(Principal Financial Officer)

Large accelerated filer

Accelerated filer

Non-accelerated filer

☐ (Do not check if smaller reporting company)

Smaller reporting company

Emerging growth company