Pegasystems Annual Report 2002

(1)

Pegasystems Annual Report 2002

It’s Simply Smart BPM

(2)

|<#>|

Pegasystems Annual Report 2002

It’s Simple

>

Our products are inherently easier to use — and easier to

change. Our vision is to empower business users to change and evolve

business processes at their desktops with just a few mouse clicks.

It’s Smart

>

Our patented business rules engine automatically selects the

right rule at the right time for the right user — resulting in improved

productivity, agility and responsiveness, and a clear competitive advantage.

And now it’s called BPM

>

We’ve been delivering financial services, healthcare

and horizontal applications that automate business processes for 20 years.

Today, the business process management (BPM) market is emerging and

Pegasystems is at the forefront.

(3)

It’s Simply Smart BPM

Pegasystems. Simply Smart BPM.

|1|

The only products on the market today that automate both the

business decisions and the processes that drive them – delivering

unprecedented ROI for our customers and partners.

(4)

Cash and Investments

(in millions)

Revenue

(in millions)

Earnings Per Share

(in dollars) ’00 ’01 ’02 ’02 ’00 ’01 ’00 ’01 ’02 ($0.71 ) $0.37 $0.43 $17. 3 $33.0 $63.4 $97.4 $95.1 $83. 5 |2| Pegasystems Annual Report 2002

Pegasystems ended 2002 with record revenue of $97.4 million and earnings per share of $0.43. We generated $27 million in positive cash flow from operations and ended the year with $63 million in cash and investments.

Our success in 2002, in the face of a challenging economic environment, is directly attributable to the skill and spirit of the entire team here at

Pegasystems, and we thank them for their efforts.

During 2002, Pegasystems strengthened its position as a leader in rules-based business process management (BPM) software. We expanded and extended our core applications to serve our target vertical markets of financial services and healthcare. We developed and launched a variety of new and enhanced products such as PegaCARD Services, which supports our re-entry into the credit card business. And we commercialized PegaRULES Process Commander — our rules-based BPM platform available for horizontal markets. We believe this suite of products, designed to deliver rules-based BPM across all industries, will provide our Company with significant growth opportunities in the coming years.

In 2002, we added names such as Bank of New York, EDS/Inland Revenue and the UK Post Office to our roster of world-class customers. Our rules-based software continues to improve the agility and productivity of our customers in the field every day. Many of our blue-chip customers renewed and extended their relationships with us during 2002, further validating the return on investment offered by our products. We will continue to leverage our strengths in the markets we currently serve, and we plan to demonstrate to a new set of customers — in new markets and industries — the benefits that our rules-based BPM platform can provide.

(5)

Great products and customers are not in themselves sufficient to enable a company to succeed — operations require the same attention. During 2002, Pegasystems strengthened its management team and continued to fine-tune internal disciplines.

We start the new year with a strong array of products, customers and operational sophistication. As we look ahead to 2003, we will continue to leverage our leadership position in the business process management market. We will use our hard-earned reputation, our world-class sales team and the support of partners such as Accenture, IBM and Sun Microsystems to generate bookings growth. And we will continue to develop exceptional products and delight our customers.

We firmly believe that Simply Smart BPM delivers what we have prom-ised and, more importantly, what our customers are asking for — intelligent productivity through automated decisions and processes. We have the products, the people and the experience to deliver on the tremendous opportunities that smart systems provide. We look forward to continued success — for our customers, our shareholders and our employees.

Thank you for your support.

Alan Trefler Chairman and Chief Executive Officer

Henry Ancona President and Chief Operating Officer

Alan Trefler (left) and Henry Ancona

(6)

Pegasystems Announces PegaCARD Services, Expands Commitment to

Card Market

June 30, 2002

The Bank of New York Selects Pegasystems’ Investigations Software

for Payments

October 1, 2002

(7)

|5|

✻

_{Financial Services}

Maybe it’s because eight of the top fifteen card issuers in North America use our products to deliver personalized service to their customers. Or, because millions of checks pass through our check research and adjustment solutions each day. Maybe it’s because our products handle more financial investigations transactional volume than any other enterprise solution in the world.

At Pegasystems, we know it’s a combination of all of these reasons that, in 2002, our innovative rules-based BPM products for

customer care and exceptions management continued to be the choice of leading financial services organizations.

It’s simple >These companies rely on our products to quickly respond to changes in

customer, competitive or market conditions. By using our products to change and evolve their own business rules, they set the stage for continuous process improvement. Resulting in greater return on investment, year after year.

And it’s smart>As we focus on our customers’ business needs, our products evolve to

meet those needs by using rules-based BPM to streamline operations, significantly decrease operational costs and maximize productivity.

“In working with Pegasystems as our preferred provider of rules-based BPM technology to support our customer service platform, PFPC is able to quickly bring products and services to market that yield a tremendous competitive advantage for our financial services customers.”

Michael Harte, Executive Vice President and Chief Information Officer, PFPC Inc.

“With Pegasystems, our international banking network can track and trace investigations independently, so they no longer have to contact our investigators for assistance. There has been an 80% drop in the number of phone calls alone, which has considerably raised our productivity levels and reduced costs by 38% at the national, international and branch levels.”

(8)

British United Provident Association Selects Pegasystems to Deliver Improved Customer Service

January 7, 2002

Health Contribution Fund of Australia Selects PegaHEALTH Member Services

April 10, 2002

(9)

|7|

✻

_{Healthcare and Insurance}

Much has changed in the marketplace since we first launched products designed specifically for healthcare payers and insurance companies. Whether it’s regulatory compliance, quality improvement or cost savings initiatives – or all of the above – today, these organizations rely more than ever before on technology to efficiently and effectively manage their business processes.

And in 2002, with the acquisition of 1mind Corporation, Pegasystems, too, changed dramatically. The addition of 1mind’s

industry knowledge – combined with its proven success in providing robust solutions to healthcare payers and insurance companies – enabled us to increase our penetration in these markets, strengthen our management and delivery teams, and deepen our domain expertise.

At Pegasystems, it’s simple>After all, it’s that expertise that sets our rules-based BPM

products for customer care and exceptions management apart.

And it’s smart>Whether automating claims management, providing superior customer service to nearly 40 million health plan members worldwide, or empowering their sales and marketing teams, 20% of the Blue Cross Blue Shield network (and a growing number of international healthcare and insurance customers) rely on our products each day to meet their challenges and maintain a competitive advantage.

“Pegasystems was our hands-down choice, given its strong record of providing simple-to-use, yet powerful applications. Pegasystems will allow us to equip our customer service representatives with the data they need to deliver personalized and responsive service, while also automating specific processes and driving new value from our back-end sys-tems. Pegasystems is providing us with a rock-solid platform for distinguished customer service.”

David Zink, Chief Information Officer, Blue Cross & Blue Shield of Rhode Island

“Installed in less than 120 days, Pegasystems’ software has reduced our claims inventory by 41% after 3 weeks of use. We have eliminated manual processes, increased the number of pended claims handled per hour, reduced overtime and increased management control. This type of return on investment is a compelling reason for other healthcare organizations to select Pegasystems.”

(10)

It’s Simply Smart BPM

✻

Pegasystems Positioned as Leader by Top Industry Analyst Firm; Confirms Expertise in Business Rules Engine Market

April 8, 2002

Pegasystems Signs Two New PegaRULES Partners,

Deepens Commitment to Alliance Program

June 21, 2002

Pegasystems Partners with Business Rule Solutions

(11)

|9|

✻

_{Horizontal BPM Applications}

At Pegasystems, BPM is more than a product category. It’s not only eliminating paper and silos of information, or automating processes to remove manual steps – it’s proving that we can deliver intelligent productivity across the extended enterprise to our customers and partners around the world.

In 2002, our horizontal BPM application, PegaRULES Process Commander, was selected by several organizations as their solution of choice to address their BPM challenges. These companies recognize

the tremendous opportunity that Simply Smart BPM offers – business adaptability, rich process management features, and superior integration technology that has put us ahead of our peers.

Through our Alliance Program, we are partnering with the world’s most innovative companies to take our horizontal BPM application to market. Our Services partners include many of the world’s leading systems integrators and consulting companies. Our Solution partners include a growing list of leading independent software vendors (ISVs) that work with us to build and market highly differentiated solutions through joint development. And our Technology partners provide complementary software, database tools, CTI and more.

For us, it’s simple>We believe that Simply Smart BPM offers what our customers want – easy-to-use and adaptable systems that have a material impact on the way work gets done. Period.

And it’s smart>Through our partnerships, we can reach further than even the extended enterprise to change the way that business does business – just by changing the rules.

“With a notable history of providing similar capabilities for large, transaction-intensive, financial services organizations, Pegasystems’ software was a clear choice to handle the high volume of inquiries received by the Inland Revenue. Because of Pegasystems’ core competency in rules-based business process management, Inland Revenue users will be able to gain fast access to the right information which will help them to deliver improved customer service.”

Bob Docherty, Technical Delivery Group, EDS

“Effective implementation of business rules is critical to creating value from customer initiatives. Pegasystems provides products that will help our clients ensure that they are managing each customer interaction in the manner they desire to optimize their relationship. Furthermore, Pegasystems' rules-based BPM technology allows customers to rapidly respond to changes in business demands, which will give our customers added agility.”

(12)

|10|

Providing enterprises with rules-based software products to improve both

agility and productivity.

Pegasystems.

Simply Smart BPM.

(13)

Directors

Henry Ancona

President and Chief Operating Officer, Pegasystems Inc. Alexander V. d’Arbeloff Former President and Chief Executive Officer,

Teradyne, Inc.;

Chairman, MIT Corporation; Co-founder, Sparkventures Richard H. Jones

Vice Chairman and Former President and Chief Operating Officer, Pegasystems Inc. Steven F. Kaplan Managing Director, The Audax Group William H. Keough

Former Senior Vice President, Chief Financial Officer and Treasurer,

The Pioneer Group, Inc. Edward A. Maybury Former President and Chief Executive Officer, Creative Systems, Inc.;

Former Chief Executive Officer, Data Architect, Inc.

James P. O’Halloran

Former Senior Vice President, Chief Financial Officer, Treasurer and Clerk, Pegasystems Inc. Edward B. Roberts David Sarnoff Professor of Management of Technology, Massachusetts Institute of Technology

Alan Trefler

Chairman and Chief Executive Officer, Pegasystems Inc. William W. Wyman Former Managing Partner, Oliver, Wyman & Company

Leadership Team

Alan Trefler Chairman and

Chief Executive Officer Henry Ancona

President and

Chief Operating Officer Christopher J. Sullivan Senior Vice President, Chief Financial Officer and Treasurer Joseph J. Friscia

Executive Vice President and General Manager, Pegasystems Application Business

Kenneth W. Olson Senior Vice President of Advanced Technology Michael R. Pyle Senior Vice President of Product Development June M. Morris, Esq. Vice President, General Counsel and Clerk Carmelina Procaccini Vice President of Human Resources

Samir Gulati

Vice President, Global Marketing

Rodney P. Jackson

Vice President, Global Services Paul McNulty

Vice President, PegaRULES Victor Khatutsky

Vice President of Rules Engineering

Shareholder Information

Annual Meeting of Shareholders

The Annual Meeting of Shareholders will take place at 9:30 a.m. on Tuesday June 3, 2003 at One Main Street, Cambridge, MA 02142.

Form 10-K Report

Additional copies of the Company’s most recent Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, are available without charge upon written request to:

Investor Relations Pegasystems Inc. 101 Main Street Cambridge, MA 02142 Or, e-mail requests to [email protected]. Please include “Investor Relations” in the subject field of your e-mail.

Registrar and Transfer Agent

State Street Bank and Trust Company c/o EquiServe, Limited Partnership P.O. Box 8040 Boston, MA 02266 Shareholder Inquiries: (781) 575-3120 www.equiserve.com

Independent Public Accountants

Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116-5022

Legal Counsel

Choate, Hall & Stewart Exchange Place 53 State Street Boston, MA 02109

Design: Schenkel/Stegman Communications Design, www

(14)

Corporate Headquarters Pegasystems Inc. 101 Main Street Cambridge, MA 02142-1590 USA (617) 374-9600 www.pega.com

North American Offices

Atlanta Chicago Concord (NH) Dallas New York San Francisco Toronto European Offices Paris Reading (UK)

Asia Pacific Offices

Melbourne Sydney

Except for the historical information contained in this Annual Report, the mat-ters discussed in the Annual Report are “forward-looking statements” (as that term is used in the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties detailed from time to time in Pegasystems’ filings with the Securities and Exchange Commission. Pegasystems draws the reader’s attention to the factors described in its report on Form 10-K for the year ending December 31, 2002 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors that May Affect Future Results.” Any such forward-looking statements speak only as of the date such statements are made, and the Company undertakes no obligation to publicly release the results of any revision to these forward-looking statements.

Pegasystems Inc. recognizes and acknowl-edges all trademarks and copyrights worldwide. The material presented here is summary in nature.