Spectrum Signal Processing Inc.
TSX : SSY
NASDAQ : SSPI

Spectrum Signal Processing Inc.

November 02, 2006 16:05 ET

Spectrum Signal Processing Reports Third Quarter 2006 Results

Third Quarter Revenues Increase 9% Year-Over-Year

BURNABY, BRITISH COLUMBIA--(CCNMatthews - Nov. 2, 2006) - Spectrum Signal Processing Inc. (TSX:SSY)(NASDAQ:SSPI) today announced its financial results for its third quarter ended September 30, 2006. Spectrum reports all results in United States dollars and in accordance with United States GAAP. Key financial and operational metrics include:

- revenues of $3.8 million;

- gross profit of $2.1 million, representing a gross margin of 55% of revenue;

- net operating expenses of $2.8 million, including severance-related charges of $160,000;

- a net loss of $642,000, or $0.03 per share;

- a cash balance of $317,000 at September 30, 2006; and

- the announcement of a $1.1 million equity financing on October 13, 2006.

"Our goal is to return Spectrum to cash earnings break-even in 2007," stated Brent Flichel, Spectrum's President and CEO. "We have already undertaken a number of measures towards attaining this objective, including selective staff cuts, the reduction of senior management overhead and the tightening of non-labor spending across the organization. Additionally, we recently completed a modest equity financing and continue to pursue additional non-dilutive financing opportunities to strengthen our balance sheet."

FINANCIAL RESULTS

Revenues for the third quarter of 2006 were $3.8 million, consistent with revenues of $3.8 million for the second quarter of 2006 and an increase of 9% compared to revenues of $3.5 million for the third quarter of 2005.

Wireless revenues were $3.7 million for the third quarter of 2006, consistent with $3.7 million for the second quarter of 2006 and compared to $3.4 million for the third quarter of 2005. Packet-voice revenues were $93,000 in the third quarter of 2006, consistent with the second quarter of 2006 and increased from $77,000 for the third quarter of 2005.

The Company's gross profit for the third quarter of 2006 was $2.1 million, or a gross margin of 55% of revenues, compared to $2.4 million, or a gross margin of 64% of revenues, for the second quarter of 2006 and $2.0 million, or a gross margin of 58% of revenues, for the third quarter of 2005. The Company's gross margin was at the lower end of its target 55%-60% range primarily due to its sales mix and increased inventory obsolescence charges in the quarter.

Net operating expenses for the third quarter of 2006 were $2.8 million, compared to $3.0 for the second quarter of 2006 and $2.5 million for the third quarter of 2005. Operating expenses for the third quarter of 2006 included severance-related charges of $160,000. Third quarter operating expenses also included $147,000 of share-based compensation expense, compared to $26,000 for the second quarter of 2006 and nil for the third quarter of 2005. Additionally, third quarter operating expenses included $279,000 of expense offsets recorded pursuant to the Company's funding agreement with Technology Partnerships Canada, compared to $331,000 for the second quarter of 2006 and $231,000 for the third quarter of 2005. The Company expects to incur approximately $210,000 in severance charges in its fourth quarter in relation to senior management changes announced separately today.

Spectrum recorded a net loss of $642,000 for the third quarter of 2006, or $0.03 per share, compared to a net loss of $530,000, or $0.03 per share, for the second quarter of 2006 and a net loss of $469,000, or $0.02 per share, for the third quarter of 2005.

Spectrum's cash position at September 30, 2006 stood at $317,000, compared to $1.2 million at June 30, 2006. Drawings under the Company's credit facility were nil at September 30, 2006. The Company closed a $1.1 million equity financing in October 2006 and is considering additional financing alternatives to further strengthen its balance sheet.

OPERATIONAL HIGHLIGHTS

Subsequent to the release of its second quarter results on August 3, 2006, Spectrum announced:

- Senior management and Board of Director changes, including:

- The resignation of Mr. Pascal Spothelfer as Spectrum's President and Chief Executive Officer. Mr. Spothelfer will continue to serve on the Company's Board of Directors;

- The resignation of Mr. Andrew Harries from the Company's Board of Directors to allow for Mr. Brent Flichel to join the Board;

- The appointment of Mr. Brent Flichel to the position of President and Chief Executive Officer and as a member of the Company's Board of Directors;

- The appointment of Ms. Elena Kinakin to the position of Vice-President, Finance; Chief Financial Officer and Company Secretary;

- The appointment of Mr. Douglas Atterbury to the position of Vice-President, Engineering;

- The promotion of Mr. Leonard Pucker II from Chief Technology Officer to Chief Technology Officer and Vice-President, Corporate Development.

- A contract with the National Aeronautics and Space Administration (NASA) Glenn Research Center to supply multiple flexComm™ SDR-4000 software defined radio platforms to develop, integrate and demonstrate an implementation of the Space Telecommunications Radio System (STRS) architecture software on a reconfigurable, multi-function communications platform. The SDR-4000 will be used to refine the STRS Architecture, which will allow NASA to demonstrate its capabilities and benefits for future missions;

- The introduction of its flexComm Multi-Channel Transceiver core for field programmable gate arrays. The Multi-Channel Transceiver core quickly and easily implements a fully functional channelizer on Spectrum's software defined radio platforms to provide a framework for waveform development;

- The introduction of its flexComm SDR-4000 Wireless Modem Lite (WML), a lower power rugged product that supports the critical modem, link and network layer processing functions necessary in a software defined radio;

- The introduction of its flexComm SDR-4000 Tactical Military Communications (MILCOM) Rapid Deployment Platform (TMRDP). This platform equips quick response teams with an integrated platform designed for the rapid development and deployment of tactical MILCOM applications;

- A $550,000 contract with an unnamed international defense contractor to supply rugged, small form factor Software Communications Architecture (SCA) enabled flexComm SDR-4000 platforms. Spectrum's equipment will be used in the system design and development (SDD) phase of a tactical military communications program. The contract for Spectrum's SDR-4000 follows a related design-in in 2003 for SDR-3000 systems used for initial software defined radio research; and,

- The successful completion of an unbrokered private placement offering of 1,610,303 units, each unit comprised of one common share and one-quarter of one common share purchase warrant. Each unit was issued for a purchase price of $0.70 or Cdn$0.78, for gross proceeds to Spectrum of approximately $1.1 million. The proceeds of the offering have and will be used for general working capital purposes.

CONFERENCE CALL INFORMATION

Spectrum will conduct a conference call and live audio webcast on November 2, 2006 at 4:30 pm Eastern / 1:30 pm Pacific time. The call can be accessed via telephone or audio web cast.

Dial-in number: 1.866.497.3339. A replay of the call will be available from November 2, 2006 to November 9, 2006 and can be accessed by dialing 1.866.501.5559 followed by the access code 21207153#.

Web cast: The live audio web cast can be accessed on Spectrum's web site at www.spectrumsignal.com. The replay will be available on Spectrum's web site until November 9, 2006.

FORWARD-LOOKING SAFE HARBOUR STATEMENT

The statements by the Company's management 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: viability of business strategy, liquidity and capital resources, variability of quarterly and annual operating results, contract performance, risks and uncertainties associated with defense related contracts, reliance on significant customers, technological change, risk of the design-in process, competition, reliance on key personnel, inflation and foreign currency fluctuations, potential undetected errors, audit firm risk, dependence on third party suppliers, export controls, intellectual property rights, stock based compensation, contract manufacturing, environmental and safety regulations, reliance on third party distributors, international operations and markets, uncertainty of current economic and political conditions, availability of licenses, corporate governance and public disclosure regulations, reliance on information technology systems and networks and the ability to obtain adequate insurance coverage. 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, public safety, 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. Other product and company names mentioned may be trademarks and/or registered trademarks of their respective holders.



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,
2005 2006 2005 2006
--------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)

Sales $ 3,509 $ 3,812 $ 11,006 $ 10,746
Cost of sales 1,480 1,704 4,326 4,521
--------------------------------------------------------------------------
2,029 2,108 6,680 6,225

Expenses
Administrative 899 1,132 2,712 3,299
Sales and marketing 725 717 2,472 2,457
Research and development 675 772 2,198 2,432
Amortization 173 133 500 435
Restructuring and
other charges 47 - 55 38
--------------------------------------------------------------------------
2,519 2,754 7,937 8,661

--------------------------------------------------------------------------
Loss from operations (490) (646) (1,257) (2,436)

Other
Interest expense - 2 - 8
Other income (21) (6) (40) (45)
--------------------------------------------------------------------------
(21) (4) (40) (37)

--------------------------------------------------------------------------
Net loss (469) (642) (1,217) (2,399)

Deficit, beginning of period (22,293) (24,840) (21,545) (23,083)
--------------------------------------------------------------------------
Deficit, end of period $ (22,762) $ (25,482) $ (22,762) $ (25,482)
--------------------------------------------------------------------------
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Loss per share
Basic and diluted $ (0.02) $ (0.03) $ (0.06) $ (0.13)

Weighted average number
of shares
Basic and diluted 18,812,699 18,878,122 18,782,731 18,878,122
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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,
2005 2006
--------------------------------------------------------------------------
ASSETS (Unaudited)

Current assets
Cash and cash equivalents $ 2,275 $ 317
Restricted cash 24 30
Trade receivables, net of allowance for
doubtful accounts of $269 (2005-$273) 2,542 3,362
Receivable from Technology Partnerships Canada 752 608
Inventories 1,672 1,721
Prepaid expenses 184 251
--------------------------------------------------------------------------
7,449 6,289

Capital assets 1,152 818
Other assets 243 221
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$ 8,844 $ 7,328
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LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
Accounts payable $ 1,405 $ 1,774
Accrued liabilities and other
current liabilities 1,059 1,414
Deferred revenue 161 146
--------------------------------------------------------------------------
2,625 3,334

Long-term obligations 866 837

Stockholders' equity
Share capital
Authorized: 50,000,000 common shares, no par value
Issued and outstanding: 18,878,122
(2005 - 18,878,122) 29,481 29,481
Additional paid-in capital 697 979
Warrants 79 -
Deficit (23,083) (25,482)
Accumulated other comprehensive income
Cumulative translation adjustments (1,821) (1,821)
--------------------------------------------------------------------------
5,353 3,157
--------------------------------------------------------------------------

$ 8,844 $ 7,328
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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,
2005 2006 2005 2006
--------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Cash flows from operating
activities
Net loss $ (469) $ (642) $ (1,217) $ (2,399)
Adjustments to reconcile
net loss to net cash
used for operating
activities
Amortization 180 140 523 457
Share-based
compensation expense - 147 - 203
Unrealized loss (gain) on
foreign currency hedging
instruments (14) (4) (14) 8
Non-cash portion of
restructuring charges 47 - 55 38
Changes in operating assets
and liabilities
Restricted cash (24) (5) 49 (6)
Accounts receivable (197) (545) 612 (676)
Inventories (90) (167) 98 (49)
Prepaid expenses 54 26 (107) (67)
Accounts payable (126) 40 (133) 369
Accrued liabilities (52) 208 (700) 280
Deferred revenue (60) (14) (36) (15)
--------------------------------------------------------------------------
Net cash used for operating
activities (751) (816) (870) (1,857)
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Cash flows from investing
activities
Purchase of capital assets (61) (19) (352) (101)
--------------------------------------------------------------------------
Net cash used for investing
activities (61) (19) (352) (101)
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Cash flows from financing
activities
Issue of shares on
exercise of share purchase
warrants and options,
net of issue costs 88 - 619 -
--------------------------------------------------------------------------
Net cash provided by
financing activities 88 - 619 -
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Net decrease in cash and
cash equivalents during
the period (724) (835) (603) (1,958)
Cash and cash equivalents,
beginning of period 3,447 1,152 3,326 2,275
--------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 2,723 $ 317 $ 2,723 $ 317
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