Guest-Tek Reports Third Quarter Results

Guest-Tek Reports Third Quarter Results

CALGARY, Feb. 9 /PRNewswire-FirstCall/ -- Guest-Tek Interactive Entertainment Ltd., ("Guest-Tek" or "the Company") (TSX:GTK), a world-class provider of broadband technology solutions to the hospitality industry, today reported financial results for its third fiscal quarter ended December 31, 2004. For the third fiscal quarter ended December 31, 2004, Guest-Tek reported revenues of $5.5 million, gross margin of $2.0 million and a loss of $821,000 or $0.06 per share.

The shareholders of Guest-Tek elected a new board of directors at the Company's Annual General Meeting ("AGM") on November 19, 2004. Following the AGM, the Board of Directors, initiated a major reorganization of the Company's management team and undertook a number of steps to restore profitable operations to Guest-Tek.

In late November, the new management team addressed issues related to Guest-Tek's poor sales performance experienced in the previous two quarters. A number of organizational changes were implemented through to the end of January including strengthening our management team by hiring of industry-respected individuals to fill the roles of Chief Marketing Officer, Chief Operating Officer and Chief Financial Officer. The Company has communicated a clear mandate for all employees to increase revenue from all sources and to reduce operating expenses as a percentage of sales with the ultimate objective of restoring an acceptable level of profitability to the Company.

Revenues for the third quarter of $5.5 million were down 5.6% from $5.9 million recorded over the same period last year. Sequentially, revenue increased 16.5% from $4.7 million recorded for the three months ended September 30, 2004. Revenues for the nine months ended December 31, 2004 were $15.8 million, down 4.6% from the $16.6 million recorded for the nine months ended December 31, 2003. Profitability in the quarter was impacted by a number of one-time expenses related to management reorganization and restructuring of a UK subsidiary. These extraordinary items totaled approximately $800,000.

During the quarter, Guest-Tek's GlobalSuite(TM) Internet solution for the hospitality industry was installed in 119 new hotels representing approximately 24,400 rooms compared with 87 hotels and 19,600 rooms installed during the same period last year, bringing the total number of installed hotels to 850. The sales turn around experienced in the third quarter was largely due to steps undertaken by the new management team in late November and December. The revenue in December accounted for 47% of the total revenue for the quarter. The December sales increase is partly attributable to simplifying deal negotiation processes and significant progress being made with major new accounts.

Recurring revenue increased slightly to $1.8 million in Q3 from $1.7 million in Q2. The increase was tempered by the rise in the Canadian dollar relative to the U.S. dollar during the quarter.

Gross margin increased to $1.9 million in the three months ended December 31, 2004 up 26.1% compared with $1.5 million for the three months ended September 30, 2004. However, gross margin decreased slightly compared to the $2.0 million recorded for the three months ended December 31, 2003. Gross margin as a percentage of revenue was 35.4% in the three months ended December 31, 2004. Gross margins are still being impacted by a build-up of infrastructure undertaken in early 2004 resulting from anticipated greater sales in fiscal 2005 over fiscal 2004. In particular, the Company's investment in customer support infrastructure has resulted in higher than expected cost of sales attributed to the Company's recurring revenue. The Company is targeting to achieve increases in gross margin as a percentage of sales as it works to align staffing with the current level of business.

Selling, general and administrative ("S,G&A") expense decreased to $2.2 million in the three months ended December 31, 2004 compared with $2.3 million in the three months ended September 30, 2004 and $1.4 million in three months ended December 31, 2004. Since the AGM, the new management team has begun a program to more closely align the S,G&A resources with the level of business, an effort which will be largely complete by the end of the current fiscal year. The Company incurred extraordinary and one-time costs associated with restructuring of the UK office totaling $300,000 in the third quarter.

In addition, Guest-Tek incurred $463,000 in extraordinary costs associated with its management re-organization in the third quarter.

Net loss for the quarter was $821,000, or ($0.06) per share, compared to net income of $42,000, or $0.00 per share, in the third quarter of fiscal 2004.

As at December 31, 2004 working capital was $31.4 million and total cash and cash equivalents were $27.5 million, or $2.01 per share, compared with cash equivalents of $28.2 million, or $2.07 per share, at March 31, 2004, the end of the Company's fiscal 2004 year.

Arnon Levy, Guest-Tek's CEO commented "Despite the overall poor sales performance in the December quarter, we were very encouraged with the sales turnaround we experienced in the month of December. The December performance in addition to the significant changes we have made internally make us optimistic that the Company is now positioned properly to achieve increased sequential revenue growth for the balance of fiscal 2005 and into 2006."

Outside of North America, Guest-Tek continues to grow its presence. Recently, a sales office was opened in Bangkok, to serve the Asian market. Management reorganized the UK office, removing existing management and replacing them with experienced industry sales individuals along with implementing tighter financial control. Active demand generation activities are underway in Europe as the Company begins a drive to achieve significant market presence in the region. As well, Guest-Tek's expansion into Latin America continues, building on our installations in hotels across fifteen countries in Central America, South America and the Caribbean.

On the research and development front, Guest-Tek continues to develop its OneView(TM) software to implement our vision of becoming a network operations centre for IP infrastructure in hotels. We are beginning to build the relationships necessary to allow us to support the IP networks of our customers, competitors and partners, with the ultimate aim of increasing recurring revenue.

Conference Call - February 9th at 12:00 pm (Eastern Time)

A conference call for shareholders, analysts and other members of the investment community has been scheduled at 12:00 p.m. (ET) on Wednesday February 9th. Arnon Levy, CEO and Geoff Clark, CFO, will discuss the financial results and provide updates on operations. To participate, please dial 416-640-4127 or 1-800-814-3911 approximately 10 minutes before the conference call.

The conference call can also be heard over the Internet at www.guest-tek.com. A recording of the conference call will be available through to February 16, 2005.

Please dial 416-640-1917 or 877-289-8525 and enter the reservation number 21112698 followed by the number sign to listen to the rebroadcast. The call will also be archived on the Guest-Tek web site at www.guest-tek.com.

About Guest-Tek

Based in Calgary, Alberta, Guest-Tek is a world-class provider of broadband technology solutions for the hospitality industry. Guest-Tek's GlobalSuite(TM) high-speed Internet solution enables hotels to offer their guests the convenience of wired and/or wireless broadband Internet access from guest rooms, meeting rooms and public areas. As a certified supplier with more major hotel chains than any competitor, Guest-Tek has installed its solution in close to 850 properties worldwide, including over 35 hotel brands and 40 independent boutique hotels. Guest-Tek's Common Shares trade on the Toronto Stock Exchange under the trading symbol GTK.

The above disclosure contains certain forward-looking statements that involve substantial known and unknown risks and uncertainties. These forward-looking statements are subject to numerous risks and uncertainties, certain of which are beyond Guest-Tek's control, including: the impact of general economic conditions, industry conditions, increased competition, the lack of availability of qualified personnel or management, fluctuations in foreign exchange or interest rates, stock market volatility and market valuations of companies with respect to the announced transactions and the final valuations thereof, and obtaining required approvals of regulatory authorities. Guest-Tek's actual results, performance or achievement could differ materially from those expressed in, or implied by these forward-looking statements and, accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits, including the amount of proceed, that Guest-Tek will derive there from.

GUEST-TEK INTERACTIVE ENTERTAINMENT LTD.
Consolidated Balance Sheets

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December 31, March 31,
2004 2004
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(unaudited)
Assets

Current assets:
Cash and cash equivalents $ 27,509,428 $ 28,193,404
Accounts receivable 4,993,519 7,160,475
Installations in progress 479,269 357,755
Inventory 935,090 228,002
Prepaid expenses and deposits 228,044 152,860
Future income tax asset 1,879,789 1,340,323
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$ 36,025,138 $ 37,432,819

Property and equipment 2,328,593 1,720,503

Future income tax asset 665,521 463,025

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$ 39,019,252 $ 39,616,347
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Liabilities and Shareholders' Equity

Current liabilities:
Accounts payable and accrued liabilities 3,433,216 2,887,337
Deferred revenue 991,890 834,012
Current portion of capital lease obligations 196,256 131,057
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4,621,362 3,852,406

Capital lease obligations 300,700 315,615

Deferred leasehold inducement 517,687 553,665

Shareholders' equity:
Share capital 35,991,740 35,808,472
Contributed surplus (note 1(b)) 134,782 -
Deficit (2,547,019) (913,811)
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33,579,503 34,894,661
Subsequent events (note 6)
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$ 39,019,252 $ 39,616,347
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See accompanying notes to consolidated financial statements.



GUEST-TEK INTERACTIVE ENTERTAINMENT LTD.
Consolidated Statements of Operations and Deficit
(unaudited)

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Three months ended Nine months ended
December 31, December 31,
--------------------------- ---------------------------
2004 2003 2004 2003
-------------------------------------------------------------------------
(restated - (restated -
note 2) note 2)
Revenue:
New
installations $ 3,709,808 $ 4,860,193 $ 10,519,336 $ 14,257,801
Recurring
revenue 1,816,088 995,325 5,310,408 2,338,723
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5,525,896 5,855,518 15,829,744 16,596,524
Cost of revenue 3,572,487 3,843,906 10,257,122 9,733,689
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Gross margin 1,953,409 2,011,612 5,572,622 6,862,835

Operating expenses:
Selling, general
and
administrative 2,225,487 1,359,816 6,365,839 3,495,316
Management
reorganization 463,220 - 463,220 -
Foreign currency
loss 237,668 57,608 456,451 233,074
Interest expense 9,650 901 32,607 57,317
Research and
development (net
of tax credits) 99,457 178,985 357,729 452,474
Amortization of
property and
equipment 143,830 50,215 396,017 136,178
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3,179,312 1,647,525 8,071,863 4,374,359
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(Loss) income from
operations (1,225,903) 364,087 (2,499,241) 2,488,476

Interest income 165,921 572 424,700 3,731

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(Loss) income
before income
taxes (1,059,982) 364,659 (2,074,541) 2,492,207

Income tax
(recovery) (239,162) 323,000 (583,245) 137,878

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Net (loss) income (820,820) 41,659 (1,491,296) 2,354,329
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Deficit, beginning
of period, as
previously
reported (1,724,561) (1,593,137) (321,100) (4,184,231)

Effect of
retroactive
application of
accounting change
(notes 1(a) and 2) (387,578) (592,711) (109,156)
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Deficit, beginning
of period, as
restated (1,724,561) (1,980,715) (913,811) (4,293,387)

Stock based
compensation
(note 1(b)) - - (66,245) -

Cost of repurchased
common shares for
cancellation in
excess of their
stated capital
(note 3) (1,638) - (75,667) -
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(1,726,199) (1,980,715) (1,055,723) (4,293,387)

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Deficit, end of
period $ (2,547,019) $ (1,939,056) $ (2,547,019) $ (1,939,058)
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Net (loss) income
per share:
Basic (0.06) 0.00 (0.12) 0.26
Diluted (0.06) 0.00 (0.12) 0.19
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-------------------------------------------------------------------------

Weighted average
number of shares:
Basic 12,781,903 9,129,653 12,704,560 9,044,653
Diluted 13,267,680 12,711,254 13,222,974 12,711,254
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See accompanying notes to consolidated financial statements.



GUEST-TEK INTERACTIVE ENTERTAINMENT LTD.
Consolidated Statements of Cash Flows
(Unaudited)

-------------------------------------------------------------------------
Three months ended Nine months ended
December 31, December 31,
--------------------------- ---------------------------
2004 2003 2004 2003
-------------------------------------------------------------------------
(restated - (restated -
note 2) note 2)
Cash provided by
(used in):

Operating activities:
Net (loss)
income $ (820,820) $ 41,659 $ (1,491,296) $ 2,354,329
Non-cash items:
Amortization
of property
and equipment 143,830 50,215 396,017 136,178
Amortization of
leasehold
inducement (30,450) - (91,350) -
Future income
taxes (239,162) (323,000) (583,271) 63,000
Research and
development
tax credits (48,974) - (158,691) -
Stock-based
compensation 22,433 - 68,537 -
Unrealized
foreign
exchange loss 9,119 122,220
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(964,024) 414,874 (1,737,834) 2,553,507
Net change in
non-cash working
capital 341,904 (133,947) 1,219,684 (1,452,156)

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(622,120) 280,927 (518,150) 1,101,351
Financing activities:
Repayment of bank
operating loan - (183,920) - -
Issuance of
share capital 266,833 44,499 384,380 44,499
Repurchase of
share capital (4,500) - (238,113) -
Additional share
issue costs
related to IPO - - (38,667) -
Repayment of
government
assistance - (85,003) - (210,119)
Capital lease
obligations (59,528) - 50,285 -
Net change in
non-cash
financing
activities - - 115,250 -
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202,805 (224,424) 273,135 (165,620)
Investing activities:
Purchase of
property and
equipment (353,416) (275,911) (1,004,107) (514,916)
Leasehold
inducement - - 55,371 -
Net change in
non-cash
investing
activities - - 631,995 -
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(353,416) (275,911) (316,741) (514,916)

Unrealized foreign
exchange loss (9,119) (122,220)
-------------------------------------------------------------------------

(Decrease) increase
in cash and cash
equivalents (781,851) (219,408) (683,976) 420,815

Cash and cash
equivalents,
beginning of
period 28,291,279 1,476,429 28,193,404 836,206

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Cash and cash
equivalents,
end of period $ 27,509,428 $ 1,257,021 $ 27,509,428 $ 1,257,021
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-------------------------------------------------------------------------

Interest received $ 165,921 $ 572 $ 424,700 $ 3,731
Interest paid 9,650 901 32,607 57,317
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See accompanying notes to consolidated financial statements.



Source: Guest-Tek Interactive Entertainment Ltd.

CONTACT: Arnon Levy, Chief Executive Officer, Guest-Tek, (403) 509-1010,
arnon.levy@guest-tek.com; Geoff Clark, Chief Financial Officer, Guest-Tek,
(403) 509-1010, geoff.clark@guest-tek.com


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