PEER 1 Hosting Reports Fiscal 2010 Third Quarter Results

VANCOUVER, May 13 /CNW/ - PEER 1 Network Enterprises, Inc. (TSX:PIX), operating as PEER 1 Hosting, a leading provider of online IT infrastructure, today announced the results for the three and nine months ended March 31, 2010. All amounts are stated in US dollars.

Selected Financial Highlights Comparing the Third Quarters Ended March 31, 2010 and 2009

    
    -  Revenue increased 11% to $25.1 million from $22.6 million;
    -  Gross profit increased 10% to $10.2 million from $9.2 million;
    -  Operating income decreased 17% to $2.2 million from $2.6 million;
    -  Normalized EBITDA was flat at $6.4 million; and
    -  Net income decreased to $0.5 million from $1.41 million.

    Selected Recent Operational Highlights

    -  Launched US$40 million flagship data centre in Toronto Ontario. This
       data centre is more than 40,000 square feet and equipped to offer all
       three hosting solutions - colocation, dedicated hosting and managed
       hosting - under one roof. The building is separated into four sections
       called Performance Optimized Data Centre (POD) - with each POD having
       the capacity of approximately 270 cabinets, equivalent to
       approximately 7,500 servers. The first POD was built with an estimated
       capital cost of US$10 million and includes 7,500 square feet of data
       centre space and 8,000 square feet of office space, and inventory,
       network and storage areas to support the data centre;
    -  Acquired Atlanta-based VIA Net.Works USA, Inc., a provider of
       primarily dedicated and managed hosting solutions built around the
       Microsoft platform for small and medium sized businesses;
    -  Settled via confidential mediation an action that had been pursued in
       the Supreme Court of British Columbia by WindyPoint Capital Inc., and
       others for compensation alleged to be due and owing to WindyPoint in
       connection with financial advisory and investment banking services
       that it provided to the Company in 2005. In the third quarter the
       Company took a one time charge of $440,000 in relation to the
       settlement;
    -  Announced Intention to commence a Normal Course Issuer Bid;
    -  Entered into a referral partnership with Magento, Inc., the leading
       open source eCommerce platform provider, to enable merchants using
       Magento's feature-rich eCommerce platform to deploy sites via PEER 1
       Hosting to optimize their web presence and performance; and
    -  Launched PEER 1 Hosting Channel Partner Portal to help simplify
       existing partnering program to better serve and support partners.
    

"During the quarter we launched our flagship Toronto data centre, which has since welcomed its first managed hosting and colocation customers," said Fabio Banducci, President and CEO of PEER 1 Hosting. "Interest in our new state-of-the-art data centre among small and medium size businesses continues to build and we have also attracted the interest from larger enterprise customers. In the third quarter, we also acquired VIA Net.Works USA, Inc. allowing us to leverage some technical and service synergies and further grow our U.S. customer base."

Review of the Three and Nine Months Ended March 31, 2010

Revenue increased to $25.07 million for the three months ended March 31, 2010 from $22.65 million for the three months ended March 31, 2009 and $72.34 million for the nine months ended March 31, 2010 from $69.79 million for the nine months ended March 31, 2009. The increase in revenue for the three and nine month periods is primarily attributable to organic growth, the effect of the increase in value of the Canadian dollar against the US dollar, and $0.09 million from the VIA acquisition. When adjusted for the exchange rates in effect during the period, revenue for the three months ended March 31, 2010 was $24.27 million. Taking into account the effect of the differing exchange rates between the Canadian and US dollars for the comparative period, revenue increased by 7.15% for the three months ended March 31, 2010. When adjusted for the exchange rates in effect during the period, revenue for the nine months ended March 31, 2010 was $71.16 million. Taking into account the effect of the differing exchange rates between the Canadian and US dollars for the comparative period, revenue increased by 1.96% for the nine months ended March 31, 2010.

Colocation revenue increased to $3.41 million and $10.07 million for the three and nine months ended March 31, 2010, respectively, compared with $2.90 million and $9.00 million for the same periods in the prior fiscal year. The increases in colocation revenue are attributable to organic growth as well as the increase in the value of the Canadian dollar against the US dollar. PEER 1 Hosting's efforts to secure additional data centre space are ongoing. The effect on revenue from the increase in value of the Canadian dollar against the US dollar was $0.38 million and $0.54 million for the three and nine months ended March 31, 2010 respectively.

Bandwidth revenues increased to $2.29 million and $6.41 million for the three and nine months ended March 31, 2010, respectively, compared with $1.91 million and $6.33 million for the same periods in the prior fiscal year. The increase in revenue for the three months ended March 31, 2010 is primarily attributable to the increased value of the Canadian dollar against the US dollar and increased overage charges, partly offset by pricing pressures in the market. The increase in revenue for the nine months ended March 31, 2010 is primarily attributable to the increased value of the Canadian dollar against the US dollar, partly offset by pricing pressures as well as reduced overage charges as customers experienced lower bandwidth requirements during the nine months period. The effect on revenue from the increase in value of the Canadian dollar against the US dollar was $0.29 million and $0.44 million for the three and nine months ended March 31, 2010 respectively.

Hosting Services revenues increased to $17.92 million and $51.72 million for the three and nine months ended March 31, 2010 from $16.70 million and $51.01 million for the three and nine months ended March 31, 2009. The increase for the three and nine months ended March 31, 2010 is attributable to organic growth and additional revenue from the VIA acquisition. Hosting Services revenues have not been materially impacted by foreign exchange effects as virtually all Hosting Services sales are currently denominated in US dollars.

PEER 1 Hosting's Canadian operations accounted for $5.17 million of revenue for the three months ended March 31, 2010 compared with $4.06 million of revenues for the three months ended March 31, 2009. The Company's Canadian operations accounted for $14.86 million of revenues for the nine months ended March 31, 2010 compared with $13.22 million of revenues for the nine months ended March 31, 2009. This change is primarily related to favorable foreign exchange effects of $0.80 million and $1.17 million, respectively, for the three and nine months ended March 31, 2010, and organic growth. The foreign exchange effects in revenue largely provide a natural hedge which offset exchange effects on expenses incurred in Canadian operations.

Cost of sales increased by $1.45 million to $14.85 million for the three months ended March 31, 2010 from $13.40 million for the three months ended March 31, 2009. During the three and nine months ended March 31, 2010, the Company incurred costs of $0.49 million and $1.17 million respectively related to its UK expansion which are included in cost of sales. Cost of sales as a percentage of revenue was 59.25% for the three months ended March 31, 2010 and 59.18% for the three months ended March 31, 2009. Cost of sales increased to $42.67 million for the nine months ended March 31, 2010 from $39.31 million for the nine months ended March 31, 2009. Cost of sales as a percentage of revenue increased to 58.99% for the nine months ended March 31, 2010 from 56.32% for the nine months ended March 31, 2009.

The increase in cost of sales for the three months ended March 31, 2010 compared to the same period in the prior year is primarily due to increased staff costs of $0.22 million, increased depreciation costs of $0.47 million, increased power costs of $0.17 million, increased repairs & maintenance costs of $0.24 million, increased software license cost of $0.3 million, increased Service Level Agreement ("SLA") costs of $0.10 million and increased rent costs of $0.27 million associated with data centre expansion in the UK and Toronto, offset in part by decreased costs of $0.31 million for bandwidth.

The increase in cost of sales for the nine months ended March 31, 2010 compared to the same period in the prior year is primarily due to increased staff costs of $0.61 million, increased depreciation costs of $1.15 million, increased software license costs of $0.44 million, increased power costs of $0.39 million, increased repairs and maintenance costs of $0.48 million, increased SLA costs of $0.25 million and increased rent costs of $1.13 million associated with data centre expansion in the UK, Toronto and Herndon Virginia, offset in part by decreased costs of $1.14 million for bandwidth.

Total operating expenses increased $1.41 million to $8.05 million for the three months ended March 31, 2010 from $6.64 million for the three months ended March 31, 2009. During the three months ended March 31, 2010, the Company incurred cost of $0.41 million related to its UK expansion which are included in operating expenses. Operating expenses as a percentage of revenue increased to 32.10% for the three months ended March 31, 2010 from 29.30% for the three months ended March 31, 2009. The increase in operating expenses for the three months ended March 31, 2010 is largely attributable to $0.81 million higher staff and training cost, increased travel expenses of $0.06 million, increased advertising expenses of $0.24 million, increased commission expenses of $0.40 million attributable to new sales, increased stock based compensation of $0.19 million, $0.03 million higher bank and credit card expenses, $0.01 higher insurance expense offset in part by $0.20 million lower amortization, $0.02 million in decreased bad debt expense, $0.07 million lower legal and other professional service expenses and $0.09 lower bonus expense.

Total operating expenses increased $2.09 million to $22.76 million for the nine months ended March 31, 2010 from $20.67 million for the nine months ended March 31, 2009. During the nine months ended March 31, 2010, the Company incurred cost of $1.58 million related to its UK expansion which are included in operating expenses. Operating expenses as a percentage of revenue increased to 31.47% for the nine months ended March 31, 2010 from 29.62% for the nine months ended March 31, 2009. The increase in operating expenses for the nine months ended March 31, 2010 is largely attributable to $2.14 million higher staff and training cost, increased commission expenses of $0.80 million attributable to new sales, increased travel expenses of $0.15 million, increased insurance expenses of $0.04 million and $0.01 million higher advertising expenses offset in part by $0.27 million lower amortization, $0.21 million in decreased bad debt expense, lower stock based compensation of $0.14 million, $0.50 million lower legal and other professional service expenses. The decrease in bad debt expense for both the three and nine month periods reflect a lower estimated expense for doubtful accounts that is based on management's review of specific customer payment history, the age of the accounts receivable and collection trends.

Normalized EBITDA, which excludes the one time charge associated with settlement of a legal claim, was $6.4 million for the three month periods ended March 31, 2010 and March 31, 2009.

Net income for the three months ended March 31, 2010 decreased to $0.50 million, compared with $1.4 million for the corresponding period in 2009. Earnings per share for the three months ended March 31, 2010 was $0.00, compared with $0.01 for corresponding period in 2009.

As at March 31, 2010, PEER 1 Hosting had cash and cash equivalents of $3.7 million, compared with $15.7 million at June 30, 2009.

The Company had a working capital deficit of $7.06 million at March 31, 2010 compared to working capital of $4.77 million as at June 30, 2009. The decrease in working capital is primarily due to investments in property and equipment one time costs relating to the WindyPoint legal settlement of $440,000, and the acquisition of VIA for net cash of $534,000. The Company anticipates current liquidity and cash generated from operations to be sufficient to fund operations for the foreseeable future. Subsequent to the Quarter ended March 31, 2010, the Company was advanced US$3 million under the US$25 million loan Facility A held with National Bank of Canada. This brings the total borrowing under facility A to US$5 million, leaving US$20 million available under this loan facility. The total US$5 million borrowed under this facility carries a combined interest rate of 3.11% determined as the rate of US three month Libor plus the applicable margin.

PEER 1 Hosting had 121,294,620 common shares outstanding as at March 31, 2010.

EBITDA Reconciliation

    
    EBITDA Reconciliation
    (unaudited - prepared by management)
    (in $ thousands)                                    Three Months Ended
                                                   --------------------------
                                                     31-Mar-10     31-Mar-09

    Net Profit                                             459         1,414
    Income tax expense                                     775           842
    Interest expense                                       338           405
    Amortization - licences, fixed assets and
     deferred network costs                              3,642         3,373
    Stock based compensation                               620           434
    Loss (gain) on disposal of assets                      (29)            -
    Amortization of deferred gain                          (20)          (20)
    Loss on Derivative                                     111             -
    Foreign exchange loss (gain)                            75           (48)
    -------------------------------------------------------------------------

    EBITDA                                               5,971         6,400
    Settlement of legal claim                              440             -
    Normalized EBITDA                                    6,411         6,400
    

Conference Call

PEER 1 Hosting will hold a conference call today, Thursday, May 13, 2010 at 5:30 p.m. Eastern Standard Time (EST), to discuss the results of the third quarter of fiscal 2010. The Company's full Financial Statements and Management's Discussion and Analysis are available on its website at http://www.peer1.com/investors.

To access the conference call by telephone, dial (647) 427-7450 or 1-888-231-8191. Please connect approximately 15 minutes prior to the beginning of the call. The conference call will be archived for replay until Thursday, May 20, 2010, at midnight. To access the archived conference call, dial (416) 849-0833 or 1-800-642-1687 and enter the reservation number: 72472460 followed by the number sign.

A live audio webcast of the conference call will be available at:

http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=3061300

Please connect at least 15 minutes prior to the conference call to ensure adequate time for any software download that may be required to join the webcast. The webcast will be archived at the above website for 90 days.

Non-GAAP Measures

PEER 1 Hosting reports EBITDA because it is a key measure used by management to evaluate the Company's performance. PEER 1 Hosting believes that EBITDA is useful supplemental information, as it provides an indication of the results generated by PEER 1 Hosting's main business activities prior to taking into consideration how those activities are financed and expensed. EBITDA is not a recognized measure under Canadian GAAP, and accordingly investors are cautioned that EBITDA should not be construed as an alternative to net earnings or loss determined in accordance with Canadian GAAP as an indicator of financial performance of PEER 1 Hosting, or as a measure of the company's liquidity and cash flows. PEER 1 Hosting's method of calculating EBITDA may differ from other issuers and, accordingly, EBITDA may not be comparable to similar measures presented by other issuers. The schedule above sets out PEER 1 Hosting's EBITDA calculations.

About PEER 1 Hosting

PEER 1 Hosting believes in the limitless opportunity of the Internet, and the business growth potential it provides for its more than 10,000 customers. As a global online IT hosting provider, PEER 1 Hosting offers a reliable high performance Internet network supporting scalable managed hosting, dedicated hosting through the ServerBeach brand, and colocation solutions. Backed by its 100 percent uptime guarantee and 24x7x365 FirstCall Support(TM), PEER 1 Hosting ensures customers' online presence is always fast, always available. Since 1999, PEER 1 Hosting has grown to include 17 state-of-the-art data centres and points-of-presence throughout North America and Europe. The company's headquarters are in Vancouver, Canada, with European operations headquartered in Southampton, UK. PEER 1 Hosting shares are traded on the TSX under the symbol PIX. For more information visit: www.peer1.com or www.peer1hosting.co.uk.

Forward Looking Statements

Statements in this release relating to matters that are not historical fact are forward-looking statements based on current expectations, forecasts and assumptions that involve risks and uncertainties that could cause actual outcomes and results to differ materially. Factors that could cause or contribute to such differences include, but are not limited to, general economic conditions, changes in technology, reliance on third party manufacturing, managing rapid growth, global sales risks, limited intellectual property protection and other risks and uncertainties described in PEER 1 Hosting's public filings with securities regulatory authorities.

    
                       PEER 1 NETWORK ENTERPRISES, INC.
                         Consolidated Balance Sheet
                               March 31, 2010
                   (in thousands of United States dollars)

                                                      March 31,      June 30,
                                                          2010          2009
    -------------------------------------------------------------------------
    Assets
    Current:
      Cash and cash equivalents                    $     3,696   $    15,744
      Accounts receivable                                3,872         3,449
      Future income tax asset                               98           237
      Prepaid expenses                                   1,848         1,130
    -------------------------------------------------------------------------
                                                         9,514        20,560
    Other assets                                         2,918         2,692
    Future income tax asset                              2,002         1,042
    Property and equipment                              50,332        36,856
    Equipment under capital lease                        1,062         1,013
    Goodwill (Note 3)                                    2,394         1,715
    Intangible assets                                    3,307         2,552
    -------------------------------------------------------------------------
                                                   $    71,529   $    66,430
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Liabilities
    Current:
      Accounts payable and accrued liabilities     $     9,781   $     7,936
      Deferred revenue                                   2,968         2,886
      Current portion of deferred gain                      79            79
      Current portion of deferred lease inducements        126           138
      Current portion of derivative liabilities            152            89
      Current portion of notes payable                   3,000         2,250
      Current portion of obligations under capital
       lease                                               393           211
      Income taxes payable                                  78         2,200
    -------------------------------------------------------------------------
                                                        16,577        15,789
    Deferred gain                                          433           493
    Deferred lease inducements                             566           664
    Derivative liabilities                                 190           179
    Notes payable                                       12,096        12,303
    Obligation under capital lease                         334           363
    -------------------------------------------------------------------------
                                                        30,196        29,791
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Shareholders' equity                                41,333        36,639
    -------------------------------------------------------------------------
                                                   $    71,529   $    66,430
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                       PEER 1 NETWORK ENTERPRISES, INC.
               Consolidated Statements of Shareholders' Equity
             For the Three and Nine Months Ended March 31, 2010
       (in thousands of United States dollars except number of shares)

                                              Three months ended
                                  March 31, 2010              March 31, 2009
                            Number        Amount        Number        Amount
    --------------------------------------------------------------------------
    SHARE CAPITAL
    Common shares
      Balance at
       beginning of
       period          121,260,741   $    27,942   119,294,323   $    26,940
      Stock options
       exercised            33,879            14             -             -
      Warrants
       exercised                 -             -             -             -
    -------------------------------------------------------------------------
      Balance at end
       of period       121,294,620        27,956   119,294,323        26,940
    -------------------------------------------------------------------------

    Warrants
      Balance at
       beginning of
       period              833,333            86     2,461,619           493
      Warrants
       exercised                 -             -             -             -
    -------------------------------------------------------------------------
      Balance at end
       of period           833,333            86     2,461,619           493
    -------------------------------------------------------------------------
    Total - share
     capital                              28,042                      27,433
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    CONTRIBUTED SURPLUS
      Balance at
       beginning of
       period                              5,709                       3,879
      Stock-based
       compensation                          619                         434
      Stock options
       exercised                              (5)                          -
    -------------------------------------------------------------------------
    Balance at end of
     period                                6,323                       4,313
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    RETAINED EARNINGS
      Balance at
       beginning of
       period                              6,862                       2,718
      Net income                             459                       1,414
    -------------------------------------------------------------------------
    Balance at end of
     period                                7,321                       4,132
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    ACCUMULATED OTHER
     COMPREHENSIVE
     INCOME
      Balance at
       beginning of
       period                               (315)                        (11)
      Other comprehensive
       income (loss)                         (38)                          -
    -------------------------------------------------------------------------
    Balance at end of
     period                                 (353)                        (11)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Total -
     shareholders'
     equity                          $    41,333                 $    35,867
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                               Nine months ended
                                  March 31, 2010              March 31, 2009
                            Number        Amount        Number        Amount
    -------------------------------------------------------------------------
    SHARE CAPITAL
    Common shares
      Balance at
       beginning of
       period          119,314,323   $    26,950   118,504,368   $    26,539
      Stock options
       exercised           352,011           225       111,670            60
      Warrants
       exercised         1,628,286           781       678,285           341
    -------------------------------------------------------------------------
      Balance at end
       of period       121,294,620        27,956   119,294,323        26,940
    -------------------------------------------------------------------------

    Warrants
      Balance at
       beginning of
       period            2,461,619           493     3,139,904           678
      Warrants
       exercised        (1,628,286)         (407)     (678,285)         (185)
    -------------------------------------------------------------------------
      Balance at end
       of period           833,333            86     2,461,619           493
    -------------------------------------------------------------------------
    Total - share
     capital                              28,042                      27,433
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    CONTRIBUTED SURPLUS
      Balance at
       beginning of
       period                              4,766                       2,509
      Stock-based
       compensation                        1,684                       1,826
      Stock options
       exercised                            (127)                        (22)
    -------------------------------------------------------------------------
    Balance at end of
     period                                6,323                       4,313
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    RETAINED EARNINGS
      Balance at
       beginning of
       period                              4,709                      (1,013)
      Net income                           2,612                       5,145
    -------------------------------------------------------------------------
    Balance at end of
     period                                7,321                       4,132
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    ACCUMULATED OTHER
     COMPREHENSIVE
     INCOME
      Balance at
       beginning of
       period                               (279)                        (11)
      Other comprehensive
       income (loss)                         (74)                          -
    -------------------------------------------------------------------------
    Balance at end of
     period                                 (353)                        (11)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Total -
     shareholders'
     equity                          $    41,333                 $    35,867
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                       PEER 1 NETWORK ENTERPRISES, INC.
                     Consolidated Statement of Operations
             For the Three and Nine Months Ended March 31, 2010
      (in thousands of United States dollars, except per share amounts)

                            Three months ended           Nine months ended
                       --------------------------  --------------------------
                          March 31,     March 31,     March 31,     March 31,
                              2010          2009          2010          2009
    -------------------------------------------------------------------------
    Revenue
      Colocation
       Services        $     7,143   $     5,944   $    20,616   $    18,783
      Hosting Services      17,923        16,705        51,721        51,009
                       --------------------------  --------------------------
                            25,066        22,649        72,337        69,792

    Cost of revenue         14,852        13,404        42,670        39,306
    ---------------------------------------------  --------------------------
    Gross profit            10,214         9,245        29,667        30,486
    Operating expenses       8,047         6,636        22,761        20,671
    ---------------------------------------------  --------------------------
    Operating income
     before other items      2,167         2,609         6,906         9,815
    ---------------------------------------------  --------------------------
    Other items:
      Interest income           (2)           (4)           (8)          (59)
      Settlement of
       legal claim             440                         440             -
      Gain on insurance
       recovery                  -             -           (93)            -
      Gain on disposal of
       property and
       equipment               (29)            -           (71)          (20)
      Loss on derivative       111             -           111             -
      Foreign exchange
       (gain) / loss            75           (48)          264          (132)
      Interest expense
       - long term             338           405           987         1,266
    ---------------------------------------------  --------------------------
                               933           353         1,630         1,055
    ---------------------------------------------  --------------------------
    Income before
     income taxes            1,234         2,256         5,276         8,760
    ---------------------------------------------  --------------------------
    Future income tax
     expense (recovery)       (212)          144          (712)          381
    Current income tax
     expense                   987           698         3,376         3,234
    ---------------------------------------------  --------------------------
    Income tax expense         775           842         2,664         3,615
    ---------------------------------------------  --------------------------
    Net income         $       459   $     1,414   $     2,612   $     5,145
    Other comprehensive
     income:
      Change in
       unrealized fair
       value of
       derivatives
       designated as
       cash flow hedges        (38)            -           (74)            -
    ---------------------------------------------  --------------------------
      Comprehensive
       income          $       421   $     1,414   $     2,538   $     5,145
    ---------------------------------------------  --------------------------
    ---------------------------------------------  --------------------------

    Net income
     attributable to:
      Common shares    $       459   $     1,414   $     2,612   $     5,145
    Comprehensive
     income
     attributable to:
      Common shares    $       421         1,414   $     2,538   $     5,145
    ---------------------------------------------  --------------------------
    ---------------------------------------------  --------------------------
    Basic and diluted
     earnings per
     share             $      0.00   $      0.01   $      0.02   $      0.04
    ---------------------------------------------  --------------------------
    ---------------------------------------------  --------------------------

    Weighted average
     number of shares
     outstanding:
      Basic            121,274,770   119,294,323   120,653,339   119,085,836
      Diluted          124,338,272   123,755,886   124,316,811   124,073,826



                       PEER 1 NETWORK ENTERPRISES, INC.
                     Consolidated Statement of Cash Flows
             For the Three and Nine Months Ended March 31, 2010
                   (in thousands of United States dollars)

                            Three months ended           Nine months ended
                       --------------------------  --------------------------
                          March 31,     March 31,     March 31,     March 31,
                              2010          2009          2010          2009
    ---------------------------------------------  --------------------------
    Operating
     Activities:
    Net income         $       459   $     1,414   $     2,612   $     5,145
    Adjustments for
     non-cash items:
      Amortization of
       property and
       equipment             3,560         3,050        10,055         8,693
      Amortization of
       intangible assets        82           323           569         1,051
      Increase in
       accrued interest          -            11             -            66
      Bad debt expense         174           198           388           595
      Gain on disposal
       of property and
       equipment               (29)            -           (71)          (20)
      Gain on insurance          -             -           (93)            -
      Amortization of
       deferred gain           (20)          (20)          (59)          (59)
      Amortization of
       deferred loan
       origination fees         74           110           191           350
      Future income tax
       expense                (212)          144          (712)          381
      Stock-based
       compensation
       included in
       income for the
       period                  620           434         1,684         1,825
      Decrease in
       deferred lease
       inducements             (37)          (36)         (110)          (35)

    Changes in non-cash
     working capital:
      Decrease (Increase)
       accounts receivable     405           816          (458)         (466)
      Decrease (Increase)
       in prepaid expenses     (81)          183          (657)          (30)
      Increase (Decrease)
       in accounts payable
       and accrued
       liabilities             490          (145)        1,147        (1,320)
      Increase (Decrease)
       in income taxes
       payable                  54           169        (2,122)          468
      Decrease in deferred
       revenue                (314)         (236)         (200)         (176)
    ---------------------------------------------  --------------------------
    Cash flows from
     operating activities    5,225         6,415        12,164        16,468
    ---------------------------------------------  --------------------------
    Investing Activities:
      Acquisition of
       subsidiary, net
       of cash acquired       (534)            -          (534)            -
      Investment in
       other assets           (135)           12          (362)           43
      Acquisition of
       property and
       equipment            (9,390)       (2,788)      (22,992)      (11,819)
      Acquisition of
       intangible assets      (389)         (304)       (1,325)       (1,200)
      Proceeds on
       disposition of
       equipment                29             -            71            20
    ---------------------------------------------  --------------------------
    Cash flows used in
     investing activities  (10,419)       (3,080)      (25,142)      (12,956)
    ---------------------------------------------  --------------------------
    Financing Activities:
      Proceeds from
       line of credit        2,000             -         2,000             -
      Repayments of
       notes payable          (750)         (800)       (1,500)       (2,400)
      Payment of capital
       lease obligations       (66)          (47)         (178)         (148)
      Issuance of
       capital stock             9             -           471           194
    ---------------------------------------------  --------------------------
    Cash flows from
     (used in) financing
     activities              1,193          (847)          793        (2,354)
    ---------------------------------------------  --------------------------
    Foreign exchange
     gain (loss) on
     cash and cash
     equivalents                75           (19)          137          (139)
    ---------------------------------------------  --------------------------
    (Decrease) Increase
     in cash and cash
     equivalents            (3,926)        2,469       (12,048)        1,019
    Cash and cash
     equivalents,
     beginning               7,622         9,576        15,744        11,026
    ---------------------------------------------  --------------------------
    Cash and cash
     equivalents,
     ending            $     3,696   $    12,045   $     3,696   $    12,045
    ---------------------------------------------  --------------------------
    ---------------------------------------------  --------------------------
    

SOURCE PEER 1 Network Enterprises, Inc.

For further information: For further information: For investor inquiries please contact: David Feick, The Equicom Group, (403) 218-2839, dfeick@equicomgroup.com; For media inquiries please contact: Marcela Peake, PEER 1, (604) 909-6428, mpeake@peer1.com

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PEER 1 Network Enterprises, Inc.

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