QuStream Corporation
TSX VENTURE : QVC

QuStream Corporation

November 08, 2005 16:05 ET

QuStream Corporation Announces Third Quarter Results

TORONTO, ONTARIO--(CCNMatthews - Nov. 8, 2005) - QuStream Corporation ("QuStream") (TSX VENTURE:QVC) is pleased to present its third 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, the comparative third quarter results for QuStream are not meaningful. In order to provide a meaningful update, QuStream is showing the results of PESA as the comparative figures in the paragraphs below.

In United States dollars, revenues for the third quarter of fiscal 2005 were US$4.8 million. Revenues for the nine months ended September 30, 2005 were US$14.3 million.

Fiscal 2004 revenues for PESA in United States dollars were US$6.7 million for the third quarter and US$14.0 million for the nine months ended September 30.

Including the effects of translation to the Canadian dollar, sales for the third quarter of fiscal 2005 were $5.7 million, and $17.5 million for the nine months ended September 30, 2005.

Net income for the third quarter was $0.1 million or $0.01 per share compared with $0.0 million or $0.00 per share during the second quarter and $(0.1) million or $(0.01) per share during the first quarter of fiscal 2005.

"I am pleased with the results of the continued operational improvements we are making at PESA" said Fred Godard, President and Chief Executive Officer of QuStream. "We remain on track to deliver our expected improvements for fiscal 2005."

Significant achievements made in the third quarter included:

1. Increasing gross margins to 48.8% up from 46.8% and 45.8% in the second and first quarters of fiscal 2005 respectively,

2. Expanding our international presence by appointing a new international dealer for Germany and expanding our current dealer relationship in Holland to now include Belgium and Luxemburg,

3. Providing new revenue opportunities by entering into a collaboration with Snell & Wilcox to allow our products to interface, and

4. Introducing six new products at the International Broadcasters Convention ("IBC") which included Cheetah 128NE, XE and WE low cost routing switchers in sizes of 128X128 and 128X156, Cheetah 256CX, 448CX, and 512CX.

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)
Unaudited
September 30, December 31,
2005 2004

Assets

Current assets:
Cash and cash equivalents $ 5,170 $ 3,696
Accounts receivable (note 3) 2,708 2,155
Inventories (note 4) 4,911 5,635
Future income taxes 131 138
Prepaid expenses & other assets 356 257
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13,276 11,881

Property, plant and equipment, net (note 6) 1,097 792
Licences, net 51 78
Intangible assets, net 4,409 4,458
Future income taxes 617 521
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$ 19,450 $ 17,730
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Liabilities and Shareholders' Equity

Current liabilities:
Accounts payable $ 1,335 $ 1,048
Accrued liabilities (note 5) 1,918 1,634
Deferred revenue - 200
Warranty reserve 985 1,192
Future income taxes 190 200
Current portion of obligations
under capital lease 12 29
Notes payable 3,243 3,018
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7,683 7,321

Obligations under capital
lease, net of current portion 7 15
Future income taxes 948 956
Accrued pension obligation 2,800 2,825
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11,438 11,117
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Shareholders' equity:
Share capital (note 7) 8,259 6,584
Retained earnings 156 139
Contributed surplus 65 1
Cumulative translation account (468) (111)
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8,012 6,613
Commitments and contingencies

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$ 19,450 $ 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

For the period
from the date
of in-
Three Nine corporation,
months months September
ended ended 14, 2004 to
September September September
30, 2005 30, 2005 30, 2004

Revenues $ 5,707 $ 17,455 $ -
Cost of goods sold 2,923 9,230 -
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Gross profit 2,784 8,225 -
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Operating expenses:
Research and development 669 1,955 -
Selling and marketing 1,054 3,730 -
General and administrative 543 1,662 -
Amortization of intangibles 238 589 -
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Total operating expenses 2,504 7,936 -
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Earnings (loss) from operations
before the following 280 289 -
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Other income (expense):
Interest income 15 46 -
Interest expense - notes payable (79) (236) -
Interest expense - capital lease (1) (3) -
Foreign exchange gain (loss) (9) (6) (6)
Other - (1) (1)
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(74) (200) (7)
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Earnings (loss) from operations
before income taxes 206 89 (7)
Provision for (recovery of)
income taxes 93 72 -
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Net earnings (loss) $ 113 $ 17 $ (7)
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Earnings (loss) per share:
Basic $ 0.01 $ 0.00 $ (0.00)
Diluted $ 0.01 $ 0.00 $ (0.00)

Weighted average number
of shares outstanding (000s):
Basic 19,159 17,317 5,134
Diluted 19,760 17,880 5,134

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


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

September 30, September 30,
2005 2004

Retained earnings, beginning of period $ 139 $ -
Net earnings (loss) 17 (7)
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Retained earnings, end of period $ 156 $ (7)
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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


For the period
from the date
of in-
Three Nine corporation,
months months September
ended ended 14, 2004 to
September September September
30, 2005 30, 2005 30, 2004

Cash flows provided by
(used in):

Operating activities:
Net earnings (loss) for
the period $ 113 $ 17 $ (7)
Add (deduct) items not
affecting cash:
Depreciation and
amortization of property
plant and equipment 104 347 -
Amortization of licences 9 27 -
Amortization of
intangible assets 238 589 -
Stock-based compensation 32 64 -
Future income taxes (136) (37) -
Loss on disposal of
capital assets - 5 -
Net change in non-cash
working capital
balances related to operations 73 (375) -
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Cash flows provided by
operating activities 433 637 (7)
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Investing activities:
Purchase of property,
plant and equipment (114) (683) -
Receipt of restricted cash - - (321)
Deferred acquisition costs - - (29)
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Cash flows (used in)
investing activities (114) (683) (350)
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Financing activities:
Capital lease payments (7) (22) -
Issuance of common shares
in connection with Maklyn
reverse takeover, net of
issuance costs - 1,365 -
Issuance of common shares,
net of issuance costs - 239 200
Amounts payable and
accrued liabilities - - 157
Exercise of options for cash 1 71 -
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Cash flows provided by
financing activities (6) 1,653 357
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Effect of exchange rate
changes on cash (169) (133) -
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Increase in cash & cash
equivalents 144 1,474 -

Cash & cash equivalents,
beginning of period 5,026 3,696 -

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Cash & cash equivalents,
end of period $ 5,170 $ 5,170 $ -
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Supplementary cash flow
information:
Taxes paid - - -
Interest paid 1 3 -
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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)

September 30, 2005
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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 condensed 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 condensed consolidated financial statements should be read in conjunction with the Company's 2004 Audited Consolidated Annual Financial Statements.

The results of operations for the nine months ended September 30, 2005 are not necessarily indicative of those to be expected for the entire year ended December 31, 2005.

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 September 30, 2005 the remaining reserve was $253,000 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.



3. Accounts receivable

Details of accounts receivable balances are as follows:

September 30, December 31,
2005 2004

Trade receivables 3,274 2,833
Taxes receivable - 34
Other receivables 36 14
Provision for doubtful accounts (602) (726)
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2,708 2,155
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4. Inventories

Details of inventories are as follows:

September 30, December 31,
2005 2004


Raw materials 1,535 1,526
Work in process 2,578 3,162
Finished goods 798 947
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4,911 5,635
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5. Accrued liabilities

Details of accrued liabilities are as follows:

September 30, December 31,
2005 2004


Payroll and vacation pay 447 229
Trade payables 813 811
Sales taxes 89 136
Other accruals 569 458
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1,918 1,634
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6. Property, plant and equipment

Details of property, plant and
equipment are as follows:

September 30, December 31,
2005 2004


Building 363 -
Machinery and equipment 215 166
Furniture and fixtures 779 593
Leasehold improvements 14 4
Equipment under capital lease 56 59
Accumulated depreciation / amortization (330) (30)
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1,097 792
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7. Share Capital

The Company has authorizd share capital consisting of an unlimited number of common shares.

As at September 30, 2005 the Company has 19,159,000 common shares issued and outstanding, compared with 13,611,000 common shares issued and outstanding at December 31, 2004.

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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Granted 30,500 2.00
Exercised (350) 1.60
Forfeited - -
Cancelled - -
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Outstanding, September 30, 2005 1,267,150 1.12
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Options exercisable, September 30, 2005 135,833 0.99
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During the third quarter, the Company recognized compensation expense of $32,000 for stock-based compensation, $64,000 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 Nine months
ended ended
September 30, September 30,
2005 2005
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Risk-free interest rate 2.5% 3.7%
Dividend yield 0.0% 0.0%
Expected life 5 years 5 years
Expected volatility 44.0% 37.0%
Weighted average grant date fair value
of options granted at market price $ 0.83 $ 0.31
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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 Nine months
ended ended
September 30, September 30,
2005 2005

Current service cost - 167
Interest cost - 160
Expected long-term return on plan assets - (117)
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- 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 18 and 24 months.

The amount recorded as accrued pension obligation represents the Company's best estimate of the amount that will ultimately be paid to Plan members less assets currently available in the pension plan. The actual payment is not determinable at this time as there are several variables that will affect the amount of the actual final liability. These variables include but are not limited to the interest rate in effect at the time of final payment as well as whether Plan members elect to receive a lump sum payment or an annuity. Any difference between the actual final payment amount and the amount accrued will be charged to profit and loss at the time the termination payment is made to Plan members.

Each reporting period, the Company will determine its experience gains or losses relative to the termination assumptions made. Any difference will be charged to profit and loss over the average remaining life expectancy of the employees.

As at September 30, 2005 the Company had an unamortized after tax actuarial gain of $122,000.

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 September 30, 2005, the Company had committed to purchasing approximately $1,978,000 (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.



As at and for the
three months ended
September 30, 2005 Canada USA International Total
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Revenues 21 4,576 1,110 5,707
Property, plant and equipment 395 702 - 1,097
Other identifiable assets 2,347 12,694 - 15,041
Intangible assets - 4,409 - 4,409
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As at and for the
nine months ended
September 30, 2005 Canada USA International Total
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Revenues 35 15,746 1,674 17,455
Property, plant and equipment 395 702 - 1,097
Other identifiable assets 2,347 12,694 - 15,041
Intangible assets - 4,409 - 4,409
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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
    QuStream Investor Contact: Paul Haber
    Chief Financial Officer
    +1 416-385-2323 x 201
    phaber@qustream.com