Spectrum Signal Processing Inc.
TSX : SSY
NASDAQ : SSPI

Spectrum Signal Processing Inc.

November 02, 2005 16:00 ET

Spectrum Signal Processing Reports Third Quarter 2005 Results

VANCOUVER, BRITISH COLUMBIA--(CCNMatthews - Nov. 2, 2005) - Spectrum Signal Processing Inc. (TSX:SSY)(NASDAQ:SSPI) today announced its financial results for its third quarter ended September 30, 2005. Spectrum reports all results in US dollars and in accordance with US GAAP. Key third quarter financial metrics include:

- Revenues of $3.5 million;

- Gross profit of $2.0 million, or 58% of revenue;

- Net operating expenses of $2.5 million;

- Net loss of $469,000, or $0.02 per share; and,

- A cash balance of $2.7 million at September 30, 2005.

"Our results illustrate the sharp dichotomy between our short term revenue challenges and our strong long term strategic progress," stated Pascal Spothelfer, Spectrum's President and Chief Executive Officer. "While our packet-voice revenues have declined approximately $3.0 million year-to-date 2005 versus 2004, our wireless revenues have grown over $700,000 during this same period. In addition, we have closed significant new agreements with General Dynamics C4 Systems, General Dynamics Canada and Globalstar LLC. All three accounts have the potential to produce meaningful long-term revenues."

Mr. Spothelfer added, "Currently, we believe that our revenue outlook for the next twelve to fifteen months will not be influenced by these larger opportunities. We continue to focus on increasing our flexComm™ product and service revenues through new design-ins and maximizing revenues from our existing production wins. We expect a strong new design-in pace throughout 2006 with the introduction of our SDR 4000 product line, our next generation family of small form factor, ruggedized software defined radio products. These new products are specifically targeted at large volume production opportunities and are expected to become important revenue generators in the years to come."

FINANCIAL RESULTS

Revenues for the third quarter of 2005 were $3.5 million, an increase of 3% compared to revenues of $3.4 million for the second quarter of 2005 and a decrease of 27% compared to revenues of $4.8 million for the third quarter of 2004.

Wireless revenues were $3.4 million for the third quarter of 2005, compared to $3.1 million for the second quarter of 2005 and $3.8 million for the third quarter of 2004. Packet-voice revenues were $77,000 in the third quarter of 2005, down from $255,000 for the second quarter of 2005 and down from packet-voice revenues of $1.0 million for the third quarter of 2004. The continued decline in packet-voice revenues is attributable to a decision by the company in January 2004 to cease all new development in its packet-voice product line. This decision was made in light of significant critical component supply risk and general market uncertainty pertaining to its packet-voice products. The Company expects its packet-voice product and service revenues to be nominal in future periods.

The company's gross profit for the third quarter of 2005 was $2.0 million, or a gross margin of 58% of revenues, compared to $2.1 million, or a gross margin of 61% of revenues, for the second quarter of 2005 and $2.7 million, or a gross margin of 56% of revenues, for the third quarter of 2004.

Operating expenses for the third quarter of 2005 were $2.5 million, compared to $2.5 million for the second quarter of 2005 and $2.4 million for the third quarter of 2004. Operating expenses for the third quarter of 2005 included a $231,000 expense offset recorded pursuant to the company's funding agreement with Technology Partnerships Canada ("TPC").

Spectrum recorded a net loss of $469,000 for the third quarter of 2005, or $0.02 per share, compared to a net loss of $396,000, or $0.02 per share, for the second quarter of 2005 and net earnings of $309,000, or $0.02 per share, for the third quarter of 2004.

Spectrum's cash position, net of bank indebtedness, at September 30, 2005 stood at $2.7 million, compared to $3.3 million at December 31, 2004.

TECHNOLOGY PARTNERSHIPS CANADA

On September 22, 2005 the Company was notified by Industry Canada that in the opinion of the Minister of Industry, the Company is in default of the non-solicitation provisions of its TPC contribution agreement dated March 31, 1999 due to its related engagement of two outside consultants. The Company paid Cdn$948,000 in contingent fees to these consultants for contractually specified services. Industry Canada has agreed to financial remedies with other companies found in breach of their TPC agreements' non-solicitation provisions equal to contingency fees paid for solicitation services.

In accordance with the terms of the Company's agreement, Industry Canada notified the Company that it must have either corrected the condition or event complained of, or demonstrated to the satisfaction of the Minister that it had taken steps as are necessary to correct the condition and notify the Minister of the rectification within 30 days. The Minister has since granted relief of this term in light of the Company's good faith engagement to resolve this matter.

The Company acknowledges that its engagement of one consultant to perform solicitation services was a breach of the terms of the agreement. In order to remedy this breach, the Company has remitted a payment of Cdn$60,000 ($52,000) to Industry Canada. The Company, however, disagrees with the Minister's allegation of a breach regarding the second consultant. The Company has requested that Industry Canada either provide supporting documentation for the alleged breach or withdraw the allegation in the absence of supporting documentation. While Industry Canada has not provided supporting documentation to date, it has invited the Company to discuss this matter and to review its available documentation.

For more information on the terms of Spectrum's TPC contribution agreement dated March 31, 1999, please refer to Spectrum's historical regulatory filings.

OPERATIONAL HIGHLIGHTS

Subsequent to the release of its second quarter results on July 27, 2005, Spectrum announced:

- The addition of its next generation SDR-4000 software defined radio products to its flexComm product line. This product line is designed to meet the size, weight, power consumption and production cost requirements of military communications systems designed for harsh tactical environments. Spectrum has already shipped its SDR-4000 products to a number of prime contractor and government customers;

- The listing of its products and services in the U.S. government's General Services Administration (GSA) catalogue. The GSA helps federal agencies acquire standard services and commercial-off-the-shelf products including a wide range of communications electronics products and professional engineering services. Spectrum expects its GSA listing to streamline direct sales to the U.S. government and serve to shorten the sales cycle for such transactions;

- The addition of the SDR-3000 SMRDP, an "RF to Ethernet" wideband military communications rapid-prototyping and development platform, to its flexComm product line. The SDR-3000 SMRDP is a turnkey black-side processing system designed to reduce the development cycles of Joint Tactical Radio System and other MILCOM developers;

- A $1.0 million contract with Globalstar LLC to provide a software defined radio upgrade to Globalstar's satellite gateway infrastructure. The gateway infrastructure upgrade is designed to accommodate the complex waveforms required to provide enhanced asset tracking services and to enable a variety of Radio Frequency Identification (RFID) based asset tracking applications;

- A contract with the German armed forces to supply two SDR-3002 IMRDP (International Military Communications Rapid-prototyping and Development Platform) platforms. The platforms will enhance the software defined radio capabilities within the German armed forces and provide the software and waveform tools necessary to support the Software Communications Architecture (SCA);

- That Industry Canada had notified the Company that, in the opinion of the Minister of Industry, the Company was in breach of the non-solicitation terms its TPC contribution agreement dated March 31, 1999 as a result of the Company's utilization of consultants in securing the agreement;

- An agreement with General Dynamics Canada to supply software defined radio technology and assist General Dynamics Canada in the development and demonstration of enhanced tactical military communication solutions. Spectrum's technology will be used to enhance the flexibility, interoperability and performance of General Dynamics Canada's MESHnet® family of tactical communications products;

- The addition of the HCDR-1000 CRDP, a communications intelligence rapid-prototyping and development platform, to its flexComm product line. This software defined radio platform is designed to assist developers of intelligence systems for the intercept and processing of communications signals;

- The addition of the XMC-3311, a high speed transceiver XMC/enhanced PMC (ePMC) module, to its flexComm product line. The XMC-3311 is targeted at wide bandwidth processing applications including commercial and military satellite communications, signals intelligence and electronic warfare;

- The addition of the SDR-3002 IMRDP, an international version of Spectrum's existing military communications rapid-prototyping and development platform, to its flexComm product line. The SDR-3002 IMRDP is the industry's first "RF to Ethernet" commercial-off-the-shelf solution specifically targeting international MILCOM programs; and,

- A contract to provide software defined radio technology, training and support services to the French Ministry of Interior to support the development of new communications platform for a homeland security application.

CONFERENCE CALL INFORMATION

Spectrum will conduct a conference call and live audio webcast on November 2, 2005 at 4:30 pm Eastern / 1:30 pm Pacific time. The call can be accessed via telephone or audio web cast. The conference call dial-in number is 1.866.497.3339. The live audio web cast can be accessed on Spectrum's web site at www.spectrumsignal.com. A conference call replay will be available via Spectrum's web site until November 16, 2005.

FORWARD-LOOKING SAFE HARBOUR STATEMENT

The statements by Pascal Spothelfer and the above statements contained in this Business Outlook are forward-looking statements that involve a number of risks and uncertainties. In addition to factors discussed above, among other factors that could cause actual results to differ materially are the following: change in business strategy, liquidity and capital resources, reliance on significant customers, inflation and foreign exchange fluctuations, political, business and economic conditions, growth rates of the defense and commercial wireless markets, government budget cycles, changes in customer order patterns, the cost and availability of key components, successful contract negotiations, competitive factors, technology changes, the ability to successfully develop and market new products, the acceptance of new products, pricing pressures, and the ability to grow new defense and commercial wireless business. Readers are referred to Spectrum's assumptions and other risk factors set out in the most current Annual Report filed on Form 20-F with the Securities and Exchange Commission and with the British Columbia Securities Commission. The company wishes to caution readers not to place undue reliance upon any such forward-looking statements, which reflect management's best effort to provide guidance based on all known conditions on the date the statements are made. The company may or may not update these forward-looking statements in the future.

ABOUT SPECTRUM SIGNAL PROCESSING INC.

Spectrum Signal Processing Inc. (TSX:SSY)(NASDAQ:SSPI) is a leading supplier of software defined platforms for defense electronics applications. Spectrum's products and services are optimized for military communications, signals intelligence, surveillance, electronic warfare and satellite communications applications. Spectrum's integrated, application-ready products provide its customers with compelling time-to-market and performance advantages while mitigating program risk and cost parameters. Spectrum Signal Processing (USA) Inc., based in Columbia, MD, provides application engineering services and modified commercial-off-the-shelf platforms to the US Government, its allies and its prime contractors. More information on Spectrum and its flexComm product line is available at www.spectrumsignal.com.

™ flexComm is a trademark of Spectrum Signal Processing Inc.

® MESHnet is a registered trademark of General Dynamics Canada.



Spectrum Signal Processing Inc.
Consolidated Statements of Operations and Deficit
(Expressed in thousands of United States dollars, except per share
amounts and numbers of shares)
Prepared in conformity with accounting principles generally accepted
in the United States of America

Three months ended Nine months ended
September 30, September 30,
2004 2005 2004 2005
--------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)

Sales $ 4,794 $ 3,509 $ 13,261 $ 11,006
Cost of sales 2,100 1,480 5,570 4,326
--------------------------------------------------------------------
2,694 2,029 7,691 6,680

Expenses
Administrative 805 899 2,799 2,712
Sales and
marketing 622 725 1,852 2,472
Research and
development 794 675 1,901 2,198
Amortization 144 173 431 500
Write-down of
capital assets - - 270 -
Restructuring and
other charges 23 47 2,318 55
--------------------------------------------------------------------
2,388 2,519 9,571 7,937

Earnings (loss)
from operations 306 (490) (1,880) (1,257)

Other
Interest expense 2 - 12 -
Other income (5) (21) (6) (40)
--------------------------------------------------------------------
(3) (21) 6 (40)

--------------------------------------------------------------------
Net earnings
(loss) 309 (469) (1,886) (1,217)

Deficit,
beginning of
period (22,148) (22,293) (19,953) (21,545)
--------------------------------------------------------------------
Deficit, end of
period $ (21,839) $ (22,762) $ (21,839) $ (22,762)
--------------------------------------------------------------------
--------------------------------------------------------------------

Earnings (loss)
per share
Basic $ 0.02 $ (0.02) $ (0.11) $ (0.06)
Diluted $ 0.02 $ (0.02) $ (0.11) $ (0.06)

Weighted average
shares
Basic 17,612,467 18,812,699 16,607,318 18,782,731
Diluted 18,661,468 18,812,699 16,607,318 18,782,731
--------------------------------------------------------------------
--------------------------------------------------------------------


Spectrum Signal Processing Inc.
Consolidated Balance Sheets
(Expressed in thousands of United States dollars, except numbers of
shares)
Prepared in conformity with accounting principles generally accepted
in the United States of America

December 31, September 30,
ASSETS 2004 2005
--------------------------------------------------------------------
(Unaudited)
Current assets
Cash and cash equivalents $ 3,326 $ 2,723
Restricted cash 73 24
Trade receivables, net of
allowance for doubtful accounts
of $273 (2004 - $403) 3,736 2,893
Receivable from Technology
Partnerships Canada 257 488
Inventories 1,784 1,686
Prepaid expenses 157 278
--------------------------------------------------------------------
9,333 8,092

Capital assets 1,370 1,222
Other assets 274 251
--------------------------------------------------------------------

$ 10,977 $ 9,565
--------------------------------------------------------------------
--------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------------------------------------

Current liabilities
Accounts payable $ 1,770 $ 1,637
Accrued liabilities and other
current liabilities 1,814 1,187
Deferred revenue 216 180
--------------------------------------------------------------------
3,800 3,004

Long-term obligations 905 887

Stockholders' equity
Share capital
Authorized: 50,000,000 common
shares, no par value
Issued and outstanding:
18,878,122 (2004 - 18,369,644) 28,857 29,481
Additional paid-in capital 667 688
Warrants 114 88
Deficit (21,545) (22,762)
Accumulated other comprehensive
income
Cumulative translation
adjustments (1,821) (1,821)
--------------------------------------------------------------------
6,272 5,674
--------------------------------------------------------------------

$ 10,977 $ 9,565
--------------------------------------------------------------------
--------------------------------------------------------------------


Spectrum Signal Processing Inc.
Consolidated Statements of Cash Flows
(Expressed in thousands of United States dollars)
Prepared in conformity with accounting principles generally accepted
in the United States of America

Three months ended Nine months ended
September 30, September 30,
2004 2005 2004 2005
--------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Cash flows from
operating
activities
Net earnings
(loss) $ 309 $ (469) $ (1,886) $ (1,217)
Adjustments to
reconcile net
earnings (loss)
to net cash
used for
operating
activities
Amortization 149 180 452 523
Write-down of
capital assets - - 270 -
Unrealized gain
on foreign
currency hedging
instruments - (14) - (14)
Non-cash portion
of restructuring
charges (348) 47 326 55
Changes in
operating assets
and liabilities
Restricted cash (19) (24) (62) 49
Accounts
receivable (521) (197) (192) 612
Inventories (18) (90) (177) 98
Prepaid expenses 21 54 (63) (107)
Accounts payable (428) (126) (222) (133)
Accrued
liabilities and
other current
liabilities 464 (52) 248 (700)
Deferred revenue - (60) - (36)
--------------------------------------------------------------------
Net cash used for
operating
activities (391) (751) (1,306) (870)
--------------------------------------------------------------------

Cash flows from
investing
activities
Purchase of
capital assets (21) (61) (136) (352)
--------------------------------------------------------------------
Net cash used for
investing
activities (21) (61) (136) (352)
--------------------------------------------------------------------

Cash flows from
financing
activities
Issue of shares
on exercise of
share purchase
warrants and
options, net of
issue costs 137 88 801 619
Issue of shares
for cash, net of
issue costs - - 1,978 -
--------------------------------------------------------------------
Net cash provided
by financing
activities 137 88 2,779 619
--------------------------------------------------------------------

Net increase
(decrease) in
cash and cash
equivalents
during the period (275) (724) 1,337 (603)
Cash and cash
equivalents,
beginning of
period 2,070 3,447 458 3,326
--------------------------------------------------------------------
Cash and cash
equivalents, end
of period $ 1,795 $ 2,723 $ 1,795 $ 2,723
--------------------------------------------------------------------
--------------------------------------------------------------------
Certain comparative figures have been reclassified to conform to the
presentation adopted in the current year.


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