QuStream Corporation
TSX VENTURE : QVC

QuStream Corporation

August 09, 2005 16:05 ET

QuStream Corporation Announces Second Quarter Results

TORONTO, ONTARIO--(CCNMatthews - Aug. 9, 2005) - QuStream Corporation ("QuStream") (TSX VENTURE:QVC) is pleased to present its second quarter results for fiscal 2005.

QuStream was incorporated on September 14, 2004 to become a preferred supplier of high-quality professional video and audio equipment to the broadcasting and Pro AV industries. On December 10, 2004, QuStream acquired PESA Switching Systems, Inc. ("PESA") a leading provider of analog and digital video and audio routing equipment. Effective April 1, 2005, QuStream became a reporting issuer via a reverse take-over of a capital pool corporation. Accordingly, there are no comparative results for QuStream during the comparable second quarter period last year. In order to provide a meaningful update, QuStream is showing the results of PESA as the comparative figures in the narrative below.

Revenues increased 33% to US$5.2 million from the US$3.9 million generated in the second quarter of fiscal 2004. Including the effects of translation to the Canadian dollar, sales for the second quarter of fiscal 2005 were $6.4 million, an increase of 21% over the $5.3 million generated in the same period last year and 21% higher than the $5.3 million earned in the first quarter of fiscal 2005. Revenues for the six months ended June 30, 2005 were $11.7 million compared to $9.9 million generated in the comparable period last year, an increase of 18%.

Net income (loss) was $26,000 or $0.00 per share compared with $(0.1) million or $(0.01) per share during the first quarter of fiscal 2005.

"At the end of the first quarter, we announced that management had completed its review of the operations of PESA and was beginning to execute on our action plan to strengthen the company that we acquired. We continue to execute on that plan and have begun to see some improvements" said Fred Godard, President and Chief Executive Officer of QuStream. "We expect to see additional improvements in subsequent quarters as we fully implement our plan and roll it through the production cycle."

Significant achievements made in the second quarter included:

1. Going public on April 1, 2005 via the reverse take-over of a capital pool corporation,

2. Increasing gross margins to 46.8% up from 45.8% in the first quarter of fiscal 2005,

3. Terminating the defined benefit pension plan at PESA which will save the Company $500,000 a year beginning June 1, 2005, and

4. Introducing several new products at the National Association of Broadcasters Convention ("NAB") which include:

- Cheetah 64NE and XE low cost routing switchers in sizes of 64X64 and 64X128.

- Cheetah V5 Coax Extenders for RGBHV and DVI video over a single coax cable added to the line of Pro A/V Cheetah V5 extenders.

- FXD Photonic 16X16 router is a pure fiber solution to distribute any format video, audio, or data signal over long distances using fiber optic cabling.

- Enhancements to the 3500PRO V2.0 Control system to include full integration of Clikcontrol browser enabled control panel

- Premiere Small Scale routers for Pro A/V and Computer Generated Video applications. Sizes in 8X4, 12X8, 16X8, and 16X16

"I am very pleased that we were able to reach profitability this early", added Godard. "We have taken PESA and turned it into a profitably growing company during what is traditionally a high cost period, our NAB quarter. PESA spent approximately $370,000 in the second quarter to attend this show. PESA has become a solid platform from which to grow."

Forward-Looking Statements

The statements made in this press release that are not historical facts contain forward-looking information that involves risk and uncertainties. All statements, other than statements of historical facts, which address QuStream's expectations, should be considered forward-looking statements. Such statements made by QuStream are based on knowledge of the environment in which it currently operates, but because of factors herein listed, as well as other factors beyond its control, actual results could differ materially from the expectations expressed in the forward-looking statements. Important factors that may cause actual results to differ from anticipated results, include, but are not limited to, the impact of competitors, timing of acquisitions and expansion opportunities, technological change, and the level of future profitability. The Company wishes to caution readers not to place undue reliance on such forward-looking statements that speak only as of the date made. The Company assumes no obligation to update the information contained in this press release. Additional information concerning factors that could cause actual results to materially differ from those in such forward-looking statements is contained in the Company's filings with Canadian securities regulatory authorities and is available at www.sedar.com.



QuStream Corporation
Consolidated Balance Sheets
(In thousands of Canadian dollars)

June 30, December 31,
2005 2004
Unaudited Audited
Assets

Current assets:
Cash and cash equivalents $ 5,026 $ 3,696
Accounts receivable 2,794 2,155
Inventories 5,453 5,635
Future income taxes 382 138
Prepaid expenses & other assets 203 257
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13,858 11,881

Property, plant and equipment, net 1,127 792
Licences, net 62 78
Intangible assets, net 4,889 4,458
Future income taxes 427 521
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$ 20,363 $ 17,730
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Liabilities and Shareholders' Equity

Current liabilities:
Accounts payable $ 1,391 $ 1,048
Accrued liabilities 2,138 1,634
Deferred revenue 2 200
Warranty reserve 1,012 1,192
Future income taxes 200 200
Current portion of obligations
under capital lease 13 29
Notes payable 3,168 3,018
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7,924 7,321

Obligations under capital lease,
net of current portion 16 15
Future income taxes 1,140 956
Accrued pension obligation 2,951 2,825
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12,031 11,117
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Shareholders' equity:
Share capital 8,258 6,584
Retained earnings 43 139
Contributed surplus 32 1
Cumulative translation account (1) (111)
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8,332 6,613
Commitments and contingencies

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$ 20,363 $ 17,730
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The accompanying notes form an integral part of these consolidated
financial statements.



QuStream Corporation
Consolidated Statements of Earnings
(In thousands of Canadian dollars, except share and per
share amounts)
Unaudited


Three months Six months
ended ended
June 30, June 30,
2005 2005

Revenues $ 6,416 $ 11,748
Cost of goods sold 3,414 6,307
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Gross profit 3,002 5,441
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Operating expenses:
Research and development 673 1,286
Selling and marketing 1,582 2,676
General and administrative 523 1,119
Amortization of intangibles 139 351
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Total operating expenses 2,917 5,432
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Earnings (loss) from operations
before the following 85 9
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Other income (expense):
Interest income 17 31
Interest expense - notes payable (82) (157)
Interest expense - capital lease (1) (2)
Foreign exchange gain 5 3
Other - (1)
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(61) (126)
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Earnings (loss) from operations
before income taxes 24 (117)
Income taxes 2 21
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Net earnings (loss) $ 26 $ (96)
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Earnings (loss) per share:
Basic $ 0.00 $ (0.01)
Diluted $ 0.00 $ (0.01)

Weighted average number of
shares outstanding (000s):
Basic 19,116 16,380
Diluted 19,662 16,380

The accompanying notes form an integral part of these consolidated
financial statements.



QuStream Corporation
Consolidated Statement of Retained Earnings
(In thousands of Canadian dollars)
Unaudited


June 30,
2005

Retained earnings, beginning of period $ 139
Net earnings (loss) (96)
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Retained earnings, end of period $ 43
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The accompanying notes form an integral part of these consolidated
financial statements.



QuStream Corporation
Consolidated Statements of Cash Flows
(In thousands of Canadian dollars)
Unaudited


Three months Six months
ended ended
June 30, June 30,
2005 2005


Cash flows provided by (used in):

Operating activities:
Net earnings (loss) for the period $ 26 $ (96)
Add (deduct) items not affecting cash:
Depreciation and amortization of property
plant and equipment 118 243
Amortization of licences 9 18
Amortization of intangible assets 139 351
Stock-based compensation 21 32
Future income taxes 252 99
Loss on disposal of capital assets 3 5
Net change in non-cash working capital
balances related to operations 374 (448)
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Cash flows provided by operating activities 942 204
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Investing activities:
Purchase of property, plant and equipment (68) (569)
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Cash flows (used in) investing activities (68) (569)
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Financing activities:
Capital lease payments (9) (15)
Issuance of common shares in connection
with Maklyn reverse takeover, net of
issuance costs 1,365 1,365
Issuance of common shares, net of
issuance costs (19) 239
Exercise of options for cash 70 70
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Cash flows provided by financing activities 1,407 1,659
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Effect of exchange rate changes on cash 27 36
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Increase in cash & cash equivalents 2,308 1,330

Cash & cash equivalents, beginning of
period 2,718 3,696

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Cash & cash equivalents, end of period $ 5,026 $ 5,026
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Supplementary cash flow information:
Taxes paid - -
Interest paid 1 2
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The accompanying notes form an integral part of these consolidated
financial statements.


QuStream Corporation

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts in thousands of Canadian dollars, except per share amounts - Unaudited unless otherwise indicated)

June 30, 2005

1. Significant accounting policies

These condensed consolidated financial statements have been prepared in accordance with The Canadian Institute of Chartered Accountants ("CICA") standards for interim financial statements. These consolidated financial statements follow the same accounting policies and methods of their application as the most recent annual financial statements, however, they do not include all of the disclosure requirements for annual financial statements. For a full description of accounting policies, refer to QuStream Corporation's ("QuStream" or the "Company") 2004 Audited Consolidated Annual Financial Statements.

These financial statements have not been reviewed by our independent public accountants.

2. Business acquisitions

Fiscal 2005

Maklyn Venture Capital Corp.:

Effective April 1, 2005, the Company completed a reverse takeover of Maklyn Venture Capital Corp. ("Maklyn"), a Capital Pool Corporation. This transaction resulted in QuStream becoming listed on the Toronto Venture Exchange.

Shareholders of QuStream received 13,904,107 common shares and the shareholders of Maklyn received 5,115,000 shares in the amalgamated entity, accordingly, this transaction was accounted for as a reverse takeover of Maklyn by QuStream.

In accordance with CICA Emerging Issues Committee Abstract 10, "Reverse Takeover Accounting", ("EIC-10") this transaction did not constitute a business combination and has been accounted for as a capital transaction and resulted in share capital increasing by $1,365,000.

Fiscal 2004

PESA Switching Systems, Inc.:

Effective December 9, 2004, the Company through its wholly owned subsidiary, QuStream U.S. Holdings, Inc., acquired all of the outstanding shares of PESA Switching Systems, Inc. ("PESA") along with a U.S. $2,000,000 note receivable from PESA held by Pesa Inc., the parent company of PESA. PESA is involved in the design, manufacture, and distribution of routing and control equipment for the professional video/audio industry. The purchase was funded through the Company's cash resources. The purchase consideration totalled $8,348,000 including acquisition costs of $131,000.



Details of the acquisition are summarized as follows:

$
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Net working capital, excluding cash acquired 4,229
Property, plant and equipment 787
Future tax assets - long-term 466
Pension obligations (3,432)
Acquired intangible assets 5,271
Future tax liability related to acquired intangible assets (1,366)
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5,955
Cash acquired 2,393
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Total cost of acquisition 8,348
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The identified acquired intangible assets include existing technology, in-process research and development ("IPR&D") and trade names. The existing technology will be amortized over six year, the IPR&D will be amortized over three years, and the trade names will be amortized over a 10 year period. In accordance with CICA Handbook Section 3465, "Income Taxes", the Company has established a future tax liability related to the acquired intangible assets. The future income tax liability will be amortized over the life of the related acquired intangible asset as a reduction in the future income tax provision.

As part of the acquisition, the Company established a severance reserve of $380,000. As at June 30, 2005 the remaining reserve was $268,000 and is included in the payroll and vacation pay accrual.

This acquisition has been accounted for using the purchase method and accordingly, the results of operations have been included in these condensed consolidated financial statements from the date of acquisition.



QuStream Corporation
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts in thousands of Canadian dollars, except per
share amounts - Unaudited unless otherwise indicated)


June 30, 2005
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3. Accounts receivable

Details of accounts receivable balances are as follows:

June 30, December 31,
2005 2004
Unaudted Audited

Trade receivables 3,473 2,833
Taxes receivable - 34
Other receivables 53 14
Provision for doubtful accounts (732) (726)
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2,794 2,155
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4. Inventories

Details of inventories are as follows:

June 30, December 31,
2005 2004
Unaudted Audited

Raw materials 1,475 1,526
Work in process 3,078 3,162
Finished goods 900 947
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5,453 5,635
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5. Accrued liabilities

Details of accrued liabilities are as follows:

June 30, December 31,
2005 2004
Unaudted Audited

Payroll and vacation pay 482 229
Trade payables 1,382 811
Sales taxes 91 136
Other accruals 183 458
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2,138 1,634
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6. Property, plant and equipment

Details of property, plant and equipment are as follows:

June 30, December 31,
2005 2004
Unaudted Audited

Building 363 -
Machinery and equipment 203 166
Furniture and fixtures 739 593
Leasehold improvements 3 4
Equipment under capital lease 59 59
Accumulated depreciation /
amortization (240) (30)
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1,127 792
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7. Share capital

On April 29, 2005, the Company issued 140,000 common shares upon the exercise of 140,000 agent options held by the underwriters of Maklyn. QuStream received proceeds of $70,000 upon the exercise.

8. Stock-based compensation

The Company has established a stock option plan (the "Option Plan") to encourage ownership in the Company's shares by directors, officers and employees of the Company and its subsidiaries.

The maximum number of shares which may be issued under the Option Plan is equal to 10% of the outstanding shares of the Company. The outstanding options granted to a participant on their grant date will vest ratably every three months over five years. Unexercised options will expire 5 years from the date of grant.



Activity under the Company's Option Plan is summarized as follows:

Weighted average
exercise
Number price
# $

Outstanding, December 31, 2004 590,000 0.90
Granted 300,000 0.90
Exercised - -
Forfeited - -
Cancelled - -
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Outstanding, March 31, 2005 890,000 0.90
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Granted 350,500 1.60
Exercised - -
Forfeited - -
Cancelled (3,500) 1.60
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Outstanding, June 30, 2005 1,237,000 1.10
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Options exercisable, June 30, 2005 74,000 0.90
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During the second quarter, the Company recognized compensation expense of $21,000 for stock-based compensation, $32,000 year-to-date. A corresponding amount was credited to contributed surplus. The compensation expense was determined on the grant date by applying the Black-Scholes option pricing model, based on the following weighted average assumptions:



Three months Six months
ended ended
June 30, June 30,
2005 2005
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Risk-free interest rate 3.7% 3.7%
Dividend yield 0.0% 0.0%
Expected life 5 years 5 years
Expected volatility 37.0% 37.0%
Weighted average grant date fair
value of options granted at market price $ 0.62 $ 0.47
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The estimated fair value of the options is being amortized over their expected life on a straight-line basis.

The Black-Scholes option valuation model requires highly subjective assumptions including expected time until exercise, which greatly affect the calculated values. Accordingly, management believes that the model does not necessarily provide a reliable single measure of the fair value of the Company's stock option awards. The Company plans to grant additional stock options each year. As a result, the compensation expense recognized in the current period is not likely to be representative of the stock-based compensation expense for future periods.

9. Defined benefit pension plan

The Company maintains a non-contributory defined benefit pension plan (the "Plan") covering substantially all full-time employees of a subsidiary of the Company. The benefits are based on years of service and the employee's five highest paid compensation years during the last ten years of employment. Employees fully vest after five years of service.



Pension expense recognized during the period was as follows:

Three months Six months
ended ended
June 30, June 30,
2005 2005

Current service cost 67 167
Interest cost 64 160
Expected long-term return on plan assets (47) (117)
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84 210
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Effective June 1, 2005, the Company froze the Plan and began the process of terminating and winding up the pension plan. It is anticipated that the termination and windup process will take between 12 and 18 months.

10. Commitments and contingencies

In the normal course of operations, the Company enters into purchase commitments for inventory with third party contract manufacturers. As at June 30, 2005, the Company had committed to purchasing approximately $1,560,000 (December 31, 2004 - $1,688,000) of inventory from various suppliers.

11. Segmented information

Operating segments

The Company operates in one business segment, that being the design, development, and distribution of routing, switching, conversion and distribution products to the global professional video/audio markets. Since the products have the same manufacturing process and distribution base, the Company has determined that it does not have separately reportable operating segments.

Geographic segments

The Company's external revenues by geographic region is based on the region in which the customer is located, property, plant and equipment, other identifiable assets and intangible assets data is based on the geographic areas in which the Company operates.



Three months ended
June 30, 2005 Canada USA International Total
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Revenues 8 6,089 319 6,416
Property, plant and
equipment 378 749 - 1,127
Other identifiable assets 2,184 12,163 - 14,347
Intangible assets - 4,115 - 4,115
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Six months ended
June 30, 2005 Canada USA International Total
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Revenues 14 11,170 564 11,748
Property, plant and
equipment 378 749 - 1,127
Other identifiable assets 2,184 12,163 - 14,347
Intangible assets - 4,115 - 4,115
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The TSX Venture Exchange Inc. has not reviewed and does not accept responsibility for the adequacy or accuracy of this release.

Contact Information

  • QuStream Corporation
    Investor Contact: Paul Haber
    Chief Financial Officer
    +1 416-385-2323 x 201
    phaber@qustream.com
    or
    Wall Street Communications
    Press Contact: Chris Lesieutre
    +1 503-538-6072
    cles@wallstreetcom.tv