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Pegasus Solutions Reports Solid Third Quarter 2002 Results

Travel News Asia 29 October 2002

Pegasus Solutions, Inc. (Nasdaq: PEGS), a leading worldwide provider of hotel reservations-related services and technology, today announced financial results for the third quarter ended September 30, 2002.

Total revenues were $45.6 million for the third quarter of 2002, compared to $45.2 million for the third quarter of 2001. The Company's net income per diluted share for the three months ended September 30, 2002 was $0.03, compared to a net loss per diluted share of $0.44 for the third quarter of 2001. For comparative purposes, the Company adopted Statement of Financial Accounting Standards (SFAS) No.142, "Goodwill and Other Intangible Assets," on January 1, 2002, and, accordingly, did not record goodwill amortization during 2002. If SFAS 142 had been in effect during the third quarter of 2001, comparable net loss per share would have been $0.29.

Cash earnings, which excludes non-cash items in 2002 and 2001 and non-recurring items in 2001, were $0.22 per diluted share for the third quarter, a 29 percent increase compared to $0.17 per diluted share for the same quarter last year. Non-cash items consisted of amortization expense for purchased intangible assets, while non-recurring items in the third quarter of 2001 included $8.1 million of one-time restructuring charges and consulting fees associated with the restructuring.

"Considering the difficult economic climate, I am extremely pleased with our third quarter results," said John F. Davis III, chairman and chief executive officer of Pegasus Solutions. "When we originally budgeted for 2002, we had anticipated an improvement in the economy in the second half of this year.

Unfortunately, we, and others in the industry, have not seen the expected improvement in various key hotel industry metrics, including the number of reservations and average daily room rates. Since we cannot control these and other macro economic factors, we have focused on managing our discretionary costs, which has helped us overcome the lingering adverse effects of the weak economy. We have also invested internally in preparation for an eventual economic rebound. Until then, we remain committed to attaining our goal of delivering EBITDA margins on an annual basis in excess of 20 percent."

Third Quarter Highlights

* Consolidated EBITDA increased to $13.2 million, a 35 percent increase over adjusted EBITDA for the third quarter of 2001.

* EBITDA margins for Pegasus' two divisions, technology and hospitality (Utell), each improved to 29 percent, compared to third quarter 2001 adjusted EBITDA margins of 23 percent and 19 percent, respectively.

* Higher margin Internet hotel reservation transaction volumes increased 38 percent over the third quarter of 2001 and 4 percent over the second quarter of 2002.

* Financial Services continued its impressive sales performance by adding approximately 2,500 new travel agency locations to its commission processing customer base.

* Pegasus' balance sheet remains strong, including $27.0 million of cash, cash equivalents and short-term investments with no outstanding debt.

* Cash flow generated from operations during the third quarter of 2002 was $10.0 million.

* In its October 28, 2002 issue, Forbes magazine named Pegasus to its 200 Best Small Companies list.

* Pegasus added a new independent board member, Pamela H. Patsley, who also serves on its audit and corporate governance committees.

Technology Segment

Pegasus' technology division, comprised of Reservation Services, Financial Services and Property Systems and Services, generated revenues of $28.7 million for the three months ended September 30, 2002, representing a 5 percent increase over the third quarter of 2001.

Within the technology division, third quarter 2002 Reservation Services revenues were $18.7 million, a decrease of 2 percent compared to the third quarter of 2001. The decrease in revenues was primarily due to the early termination of a central reservation system (CRS) customer contract, which was substantially offset by revenues from new customers, incremental increases in revenues from existing customers and a 38 percent increase in higher margin Internet transactions year-over-year.

During the third quarter, Financial Services revenues increased to $8.2 million or 13 percent from the prior year due to increased transaction volume and a higher average travel agent fee earned from each transaction. The Company continues to receive strong interest in the new PegsPay service, which automates the exchange of funds and incentives between travel distributors and any type of travel supplier.

Property Systems and Services generated revenues of $1.8 million for the third quarter of 2002, up $750,000 over the third quarter of 2001. This increase was due to the September 2001 acquisition of Tempe-based Global Enterprise Technology Solutions, LLC (GETS) and increasing revenues from the continued rollout of PegasusCentral(TM), the Company's Web-based property system.

Hospitality Segment

The Company's Utell subsidiary had revenues for the quarter totaling $16.9 million, down 5 percent from the third quarter of 2001 due in large part to the planned strategic reduction in the number of Utell member hotels. As an expected result from the portfolio rationalization, Utell's third quarter EBITDA margin improved to 29 percent, compared to 19 percent for the same quarter in 2001.

"Our Utell team continues to execute initiatives to increase Utell revenues and margins on a per-hotel basis," stated Davis. "On a 'comparable hotel' basis, reservations made during the third quarter of 2002 for the U.S. and Asia Pacific regions experienced double-digit gains over the prior year. However, 'comparable hotel' reservations for Europe, which is our largest market, were down primarily because of decreased outbound traffic from the U.S. to Europe."

New Business and Contract Renewals

Commenting on new business and contract renewals, Davis said, "Although our sales cycle has lengthened due to the stagnant economy and weak lodging environment, we signed or renewed 37 technology customer contracts during the third quarter. In addition, I am extremely pleased that we signed a new contract with Travelodge UK earlier this month to provide both CRS and Property Systems services to its approximately 230 properties. This new contract gives us a strong presence in the European marketplace for PegasusCentral, our new Web-based property management system."

Outlook

"A year ago, we announced a strategic restructuring plan and estimated annual savings to range from  $9 million to $11 million. Our ability to execute against this plan has resulted in greater than planned  efficiencies. These savings have allowed us to overcome the shortfall in expected revenues," commented Susan K. Cole, chief financial officer of Pegasus Solutions. "Additionally, our strong balance sheet and operating cash flows have allowed us to continue investing in technology that has upgraded and improved the capacity of our IT infrastructure, enhancing both our operations and customer service. I remain confident that, when the economy improves, we have positioned our Company's cost structure to take full advantage of any incremental revenue growth. The slower than anticipated recovery in the nation's economy, the continued lack of corporate business travel and the anniversary of September 11th have all negatively affected our topline results. As a result of these factors and the uncertain timing of an economic recovery, we now project our fourth quarter 2002 revenue and cash earnings estimates to be in the range of $39 million to $42 million and $0.11 to $0.15, respectively."

Cole further commented, "We have historically had good visibility into economic and booking patterns. However, with the continued threat of war and terrorist-related activities, as well as an increasing trend of last minute travel, our visibility is not as clear. We are working hard at understanding the trends we are seeing and will hold a conference call later this year to discuss our 2003 outlook."

Davis concluded, "Because we strategically reorganized our company last year, we were well-positioned to weather the economic storm which began after September 11, 2001, and continues through today. Similarly, we continued to invest in our business, demonstrating our commitment to providing world-class operations and customer service. We intend to continue investing in new services and in enhancements to existing services so we will be at the forefront of any economic recovery or improvement in business  and leisure travel."

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