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FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Period April 1, 1998 to June 30, 1998
SPECTRUM SIGNAL PROCESSING INC.
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(Translation of Registrant's Name into English)
100 - 8525 BAXTER PLACE, BURNABY, B.C. V5A 4V7
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(Address of Principal Corporate Offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F:
Form 20-F X Form 40-F
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Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the information to
the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934:
Yes No X
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If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82-___.
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Spectrum Signal Processing Inc.
Index to the Form 6K
for the quarterly period ended
June 30, 1998
Part I Financial Information
Item 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets
Consolidated Statements of Operations & Retained Earnings (Deficit)
Consolidated Statements of Changes in Financial Position
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations
Signatures
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Part I FINANCIAL INFORMATION
Item 1 Financial Statements
SPECTRUM SIGNAL PROCESSING INC.
Unaudited Consolidated Balance Sheets
(prepared in accordance with US GAAP)
June 30, December 31,
1998 1997
Assets (thousands of US dollars)
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Current assets
Cash and short-term deposits $ 1,024 $ 1,384
Accounts receivable 6,032 6,550
Inventories 4,397 4,062
Prepaid expenses 430 220
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11,883 12,216
Capital assets 2,696 2,449
Acquired Technology 689 0
Other assets 2,176 1,823
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$ 17,444 $ 16,488
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Liabilities and Shareholders' Equity
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Current liabilities
Bank indebtedness $ 2,794
Accounts payable & accrued liabilities 4,566 $ 4,694
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7,360 4,694
Long-term debt 202 75
Deferred income taxes 379 1,223
Shareholders' Equity
Share capital 13,940 9,272
Authorized: 50,000,000 common shares
with no par value
Issued: 10,247,092 common shares
(1997 - 9,459,397)
Warrants 141
Contributed surplus 74 74
Retained earnings (deficit) (4,853) 1,158
Cumulative translation adjustment 201 (8)
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9,503 10,496
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$ 17,444 $ 16,488
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SPECTRUM SIGNAL PROCESSING INC.
Unaudited Consolidated Statements of Operations & Retained Earnings (Deficit)
For the periods ended June 30
(prepared in accordance with US GAAP)
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended
1998 1997 1998 1997
(thousands of US dollars (thousands of US dollars
except per share amounts) except per share amounts)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 7,144 $ 5,830 $ 12,420 $ 10,719
Cost of sales 3,183 2,830 5,133 4,569
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Gross profit 3,961 3,000 7,287 6,150
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Expenses
Administrative 862 774 1,636 1,415
Sales & marketing 2,008 984 3,724 1,880
Amortization 244 164 415 305
Research & development 1,196 79 2,037 839
Acquired in-process research &
development charge -- 740 6,168 740
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4,310 2,741 13,980 5,179
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Earnings (loss) from operations (349) 259 (6,693) 971
Other
Interest & bank charges (44) (3) (58) (8)
Other income 9 9 1 21
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Earnings (loss) before income (384) 265 (6,750) 984
taxes and discontinued
operations
Deferred income taxes (185) 385 (739) 659
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Earnings (loss) from continuing (199) (120) (6,011) 325
operations
Earnings (loss) from -- (219) -- (336)
discontinued operations
Net earnings (loss) and (199) (339) (6,011) (11)
comprehensive income (loss) for
the period
Retained earnings (deficit), (5,638) 499 1,158 171
beginning of period
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Retained earnings (deficit), ($ 5,837) $ 160 ($ 4,853) $ 160
end of period
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Earnings per share
Basic
From continuing operations ($ 0.02) ($ 0.01) ($ 0.62) $ 0.04
After discontinued operations ($ 0.02) ($ 0.04) ($ 0.62) $ 0.00
Diluted
From continuing operations ($ 0.02) ($ 0.01) ($ 0.62) $ 0.03
After discontinued operations ($ 0.02) ($ 0.04) ($ 0.62) $ 0.00
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</TABLE>
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SPECTRUM SIGNAL PROCESSING INC.
Unaudited Consolidated Statements of Cash Flows
For the periods ended June 30
(prepared in accordance with US GAAP)
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended
1998 1997 1998 1997
Cash provided by (used in): (thousands of US dollars) (thousands of US dollars)
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<S> <C> <C> <C> <C>
Operations
Net earnings (loss) from continuing operations ($ 199) ($ 120) ($6,011) $ 325
Items not involving cash
Depreciation & amortization 244 164 415 305
Deferred tax provision (185) 385 (739) 659
Acquired in-process R&D charge -- 740 6,168 740
Changes in non-cash
operating working capital
Accounts receivable 78 (2,660) 518 2,881
Inventories 693 (508) (335) (629)
Prepaid expenses (80) 142 (210) 353
Accounts payable and accrued liabilities (1,839) 2,043 (2,180) (728)
Translation adjustment (442) (9) 50 (81)
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Cash from continuing operations (1,730) 177 (2,324) 3,825
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Earnings (loss) from discontinued operations -- (219) -- (336)
Deferred taxes, an item not involving cash -- (142) -- (220)
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Cash from discontinued operations -- (361) -- (556)
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(1,730) (184) (2,324) 3,269
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Financing
Increase (decrease) in bank indebtedness 2,794 -- 2,794 --
Issue of shares, net of share issue expenses 33 21 57 31
Issue of warrants -- -- -- --
Increase (decrease) in long term debt (15) 75 127 75
Purchase of treasury shares -- (898) -- (898)
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2,812 (802) 2,978 (792)
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Investments
Purchase of fixed assets (142) (353) (661) (553)
Software and related development costs, net 25 (546) (353) (696)
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(117) (899) (1,014) (1,249)
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Increase (decrease) in cash 965 (1,885) (360) 1,228
Cash, beginning of period 59 4,610 1,384 1,497
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Cash end of period 1,024 2,725 $ 1,024 $ 2,725
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Non-cash transactions
Issuance of share and warrants on business -- 939 5,058 939
</TABLE>
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Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The statements and information contained in this Form, that are not
purely historical, constitute forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
that may cause the actual results, performance or achievements of the Company,
or developments in the Company's industry, to differ materially from the
anticipated results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, but are not limited to: the
Company's limited operating history, history of losses, lengthy sales cycles,
the Company's dependence upon large contracts and relative concentration of
customers, risks involving the management of growth and integration of
acquisitions, competition, product development risks and risks of
technological change, dependence on selected vertical markets and third-party
marketing relationships and suppliers, the Company's ability to protect its
intellectual property rights and the other risks and uncertainties detailed in
the Company's Securities and Exchange Commission filings, including the
Company's Annual Report on Form 20-F for the year ended December 31, 1997.
All financial information in this Form is expressed in United States
dollars unless otherwise noted.
The Company was founded in 1987 to manufacture and market products
for the military/aerospace and commercial market in North America using DSP
technologies licensed from Loughborough Sound Images Ltd.
The Company devotes significant resources toward product development
and related research and development activities. In recent years, the Company
has sought to enter into agreements with its OEM customers and others under
which the Company receives fees in connection with the development of products
in anticipation of production ("development contract fees"), and uses these
fees to fund such product development. The Company first derived revenues from
development contract fees in 1994. Development contract fees are recognized as
revenue upon the achievement of predetermined development milestones, which
also typically coincide with invoicing and payments. See Note 1 of the Notes
to the Company's financial statements. Costs associated with development
contract fees are generally included in research and development expenses. The
timing and amount of development contract fees and the relative mix between
products sold to the military/aerospace and commercial markets has affected
and will continue to affect period-to-period comparisons of gross profit and
income from operations.
Beginning with the first quarter of 1998, the Company adopted a
policy of publishing its financial statements in US$ and preparing all such
statements in accordance with U.S. GAAP.
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Results of Operations
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
---------------- ----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales 100% 100% 100% 100%
Cost of Sales 44.6 48.5 41.3 42.6
---- ---- ---- ----
Gross margin 55.4 51.5 58.7 57.4
Administrative, sales and marketing expenses 40.2 30.2 43.2 30.8
Depreciation and amortization expenses 3.4 2.8 3.3 2.8
Research and development expenses 16.7 1.4 16.4 7.8
Acquired in-process research and development charge -- 12.7 49.7 6.9
---- ---- ---- ----
Earnings from operations (4.9) 4.4 (53.9) 9.1
Interest and bank charges (0.6) (0.1) (0.5) (0.1)
Other income 0.1 0.2 0.0 0.2
---- ---- ---- ----
Earnings before income taxes and discontinued operations (5.4) 4.5 (54.4) 9.2
Income taxes (recovery) (2.6) 6.6 6.0 6.2
---- ---- ---- ----
Earnings from continuing operations (2.8) (2.1) (48.4) 3.0
Earnings (loss) from discontinued operations -- (3.7) -- (3.1)
---- ---- ---- ----
Net earnings (loss) (2.8)% (5.8)% (48.4)% (0.1)%
==== ==== ===== ====
</TABLE>
Quarter Ended June 30, 1998 Compared to Quarter Ended June 30, 1997
Sales. Sales from continuing operations in the quarter ended June 30,
1998 were $7,144,000, an increase of $1,314,000 or 22.5%, over sales in the
quarter ended June 30, 1997. Included in second quarter sales were development
contract fees of $221,000, or 3.1% of sales for the quarter, compared to
development contract fees in the second quarter of 1997 of Nil. The growth in
the Company's sales in the second quarter of 1998 was due primarily to
increased sales in traditional markets and the inclusion of the business of
Alex Computer which was effectively acquired in the first quarter of 1998.
Gross profit. Gross profit increased to $3,961,000 for the quarter
ended June 30, 1998 from $3,000,000 for the quarter ended June 30, 1997, an
increase of 32.0%. Gross margin (gross profit as a percentage of sales)
increased to 55.4% in the second quarter of 1998 from 51.5% in the second
quarter of 1997. The increase in gross margin was due primarily to higher
development contract fees in the second quarter of 1998.
Administrative, Sales and Marketing. Administrative, sales and
marketing ("AS&M") expenses consist primarily of salaries, sales commissions
and benefits related to the Company's sales, marketing and administrative
personnel and independent sales representatives. AS&M expenses for the second
quarter of 1998 were $2,870,000, or 40.2% of sales for the quarter, compared
to $1,758,000 in the second quarter of 1997, or 30.2% of sales for the
quarter. AS&M expenses as a percentage of sales were higher in the second
quarter of 1998 due to the costs
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associated with the integration of Alex Computer and the costs associated with
the Company's expansion into the UK and European markets.
Amortization. Amortization consists of the depreciation of the
Company's fixed assets and amortization of acquired technology. Amortization
expenses in the second quarter of 1998 were $244,000, an increase of $80,000
or 48.8%, over the second quarter of 1997. The increase in depreciation and
amortization was due primarily to increased investment in fixed assets and
acquired technology.
Research and Development. Research and development expenses consist
primarily of salaries, related personnel benefits, engineering service costs
relating to development contract fees and direct overhead costs. Research and
development expenses were $1,196,000 in the second quarter of 1998, or 16.7%
of sales for the quarter, compared to $79,000 in the second quarter of 1997,
or 1.4% of sales for the quarter. The expenses in the second quarter of 1998
consisted primarily of costs associated with new product developments
undertaken by the Company. Total research and development expenditures for
continuing operations and those capitalized as software and related
development costs were $1,265,000 in the second quarter of 1998, or 17.7% of
sales for the quarter, compared to $736,000 in the second quarter of 1997, or
12.6% of sales for the quarter.
Other Income. Other income, consisted primarily of interest income on
short-term deposits and interest expense on bank indebtedness, was an expense
of $35,000 in the second quarter of 1998, compared to income in the second
quarter of 1997 of $6,000. This change was due primarily to working capital
borrowings from the Company's bank in the second quarter of 1998.
Income Taxes. Deferred income taxes (recovery) for the second quarter
of 1998 were $(185,000) or (48.2)% of earnings before taxes and discontinued
operations, compared to $385,000, or 145.3% of earnings before taxes and
discontinued operations for the second quarter of 1997. This percentage is
unusually high because of the large acquired in-process research and
development charge in the second quarter of 1997 which is non-deductible for
tax purposes.
Net Earnings. The Company had earnings (loss) from continuing
operations in the second quarter of 1998 of $(199,000) compared to earnings
(loss) from continuing operations of $(120,000) in the second quarter of 1997.
Earnings (loss) per share (basic) from continuing operations in the second
quarter of 1998 was $(0.02) per share, compared to earnings (loss) per share
(basic) from continuing operations of $(0.01) per share in the second quarter
of 1997.
Six Months Ended June 30, 1998 Compared to Six Months ended June 30, 1997
Sales. Sales from continuing operations in the six months ended June
30, 1998 were $12,420,000, an increase of $1,701,000 or 15.9%, over sales in
the six months ended June 30, 1997. Included in sales for the six months ended
June 30, 1998 were development contract fees of $492,000, or 4.0% of sales,
compared to development contract fees for the six months ended June 30, 1997
of $647,000 or 6.0% of sales. The growth in the Company's sales in the first
half
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of 1998 was due primarily to increased sales in traditional markets and the
inclusion of the business of Alex Computer which was acquired in the first
quarter of 1998.
Gross profit. Gross profit increased to $7,287,000 for the six months
ended June 30, 1998 from $6,150,000 for the six months ended June 30, 1997, an
increase of 18.5%. Gross margin (gross profit as a percentage of sales)
increased to 58.7% in the first half of 1998 from 57.4% in the first half of
1997. The increase in gross margin was due primarily to the mix of higher
gross margin products.
Administrative, Sales and Marketing. AS&M expenses for the first six
months of 1998 were $5,360,000, or 43.2% of sales, compared to $3,295,000 in
the first six months of 1997, or 30.7% of sales. AS&M expenses as a percentage
of sales were higher in the first half of 1998 due to the costs associated
with the acquisition and integration of Alex Computer and the costs associated
with the Company's expansion into the UK and European markets.
Amortization. Amortization expenses in the first six months of 1998
were $415,000, an increase of $110,000 or 36.1%, over the first half of 1997.
The increase in depreciation and amortization was due primarily to increased
investment in fixed assets and acquired technology.
Research and Development. Research and development expenses were
$2,037,000 in the first six months of 1998, or 16.4% of sales for the half,
compared to $839,000 in the first six months of 1997, or 7.8% of sales for the
half. The expenses in the first half of 1998 consisted primarily of costs
associated with new product developments undertaken by the Company. Total
research and development expenditures for continuing operations and those
capitalized as software and related development costs were $2,432,000 in the
first half of 1998, or 19.6% of sales for the half, compared to $1,649,000 in
the first half of 1997, or 15.4% of sales for the half.
Other Income. Other income, consisting primarily of interest income
on short-term deposits and interest expense on bank indebtedness, was an
expense of $57,000 in the first half of 1998, compared to other income in the
first half of 1997 of $13,000. This change was due primarily to working
capital borrowings from the Company's bank in the first half of 1998.
Income Taxes. Deferred income taxes (recovery) for the first six
months of 1998 were $(739,000) or (10.9)% of earnings before taxes and
discontinued operations, compared to $659,000, or 67.0% of earnings before
taxes and discontinued operations for the first six months of 1997. This
percentages for the first half of both 1998 and 1997 were unusually high
because of the significant impact of the acquired in-process research and
development charge in each of the two years. The majority of these charges are
non-deductible for tax purposes.
Net Earnings. The Company had earnings (loss) from continuing
operations in the first six months of 1998 of $(6,011,000) compared to
earnings (loss) from continuing operations of $325,000 in the first six months
of 1997. Earnings (loss) per share (basic) from continuing operations in the
first half of 1998 was $(0.62) per share, compared to earnings (loss) per
share (basic) from continuing operations of $0.04 per share in the first half
of 1997.
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Earnings from continuing operations before acquired in-process research and
development charge for the first six months of 1998 was $(343,000), or
earnings (loss) per share (basic) of $(0.04) per share, compared to earnings
(loss) of $1,066,000, or earnings (loss) per share (basic) of $0.12 for the
first six months of 1997.
Liquidity and Capital Resources
The Company historically has met its operating and capital
requirements from cash flow from operations and funds generated by sale of its
equity securities.
The Company has a credit facility with the Bank of Montreal (the
"Bank") consisting of a Cdn $7,000,000 (approximately US$ 4,635,000) operating
line of credit (the "Line of Credit"). Borrowings under the Line of Credit
bear interest at the Bank's prime rate plus 1/2%, unless the borrowings are
denominated in US dollars, in which case the rate of interest is the Bank's US
base rate plus 1/2%. Borrowings are due on demand and interest is to be paid
monthly. Borrowings may not exceed certain percentages of a specified
borrowing base consisting of domestic and foreign accounts receivable. The
Line of Credit agreement requires the Company to maintain certain financial
ratios and limits capital expenditures. Borrowings under the Line of Credit
are secured by substantially all of the Company's current assets. At August
13, 1998, the Company has outstanding borrowings under the Line of Credit of
approximately US $2,342,000. In July 1998, the Company initiated an increase
to the credit facility with the Bank and an increase was granted from Cdn$
5,000,000 (approximately US$ 3,310,000). The Bank will review the facility by
November 30, 1998 before extending the recently negotiated increase.
At June 30, 1998, the Company's cash position was $1,024,000, offset
by Bank indebtedness of $2,794,000. Net cash provided by (used in) operations,
financing and investments was $(360,000) and $1,228,000 in the six months
ended June 30, 1998 and 1997 respectively. For the six months ended June 30,
1998, cash used in operations, financing and investments consisted primarily
of cash generated from the bank indebtedness and long term debt which was used
primarily for funding operations and the purchase of capital assets and
software and related development costs. The acquisition of the net assets of
Alex Computer was funded primarily through the issuance of $5,058,000 of
common shares and warrants in the six months ended June 30, 1998. For the six
months ended June 30, 1997, cash used in operations, financing, and
investments consisted primarily of cash from operations and was used primarily
to increase inventories, to fund discontinued operations, to purchase treasury
shares and for the purchase of capital assets and software and related
development costs. The acquisition of 3L Limited in the six months ended June
30, 1997 was completed with the issuance of $939,000 of common shares.
Accounts receivable, net, at June 30, 1998 and December 31, 1997 was
$6,032,000 and $6,550,000 respectively. The Company's standard collection
terms are net 30 days, subject to adjustment for certain customers.
The Company made capital expenditures of $1,014,000 during the six
months ended June 30, 1998, and $1,249,000 during the six months ended June
30, 1997 primarily for computer equipment and software and related
developments costs. In the first six months of 1997, the Company invested
$898,000 for the purchase of treasury shares and invested in the acquisition
of
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100% of the shares of 3L Limited, net of $194,000 in cash acquired. On March
17, 1998, the Company effectively acquired, pursuant to an acquisition
agreement, all the assets of Alex Computer Systems Inc.. The consideration
paid and assets acquired in connection with such acquisition were transferred
on May 1, 1998. The consideration paid by Spectrum for such acquisition
consisted of $675,000 in cash, the assumption of $1,071,000 in liabilities,
and the issuance of 772,626 Common Shares and a two year warrant to purchase
110,375 Common Shares of an exercise price of Cdn $9.06 per share.
The Company believes that cash generated from operations and
borrowings available under the Line of Credit agreement will be sufficient to
meet its working capital and capital expenditure requirements in 1998.
However, the Company may in the future require additional equity or debt
financing to meet its working capital, fixed asset and acquisition
requirements. There can be no assurance that additional financing will not be
required sooner or, if required, that it will be available on a timely basis
or on terms satisfactory to the Company.
Effects of Inflation and Foreign Currency Fluctuations
The Company believes that inflation and other changes in prices have
not had a material effect on the Company. The Company intends to continue to
sell the majority of its products in US dollars while incurring costs in
varying proportions in Canadian dollars, US dollars and other currencies.
Thus, the Company's operations are susceptible to fluctuations in the currency
exchange rates. In addition, if the Canadian dollar rises relative to the US
dollar, the Company's reported Canadian dollar sales and net income may be
materially and adversely affected. While the Company does attempt to mitigate
some of the risks of exchange rate fluctuations between the US dollar and the
Canadian dollar by denominating many of its payment obligations in US dollars
and, to a lesser extent, through the use of exchange-traded or
over-the-counter contracts, there can be no assurance that these strategies
will substantially reduce the potential adverse effect of exchange rate
fluctuations on the Company's business, financial condition or results of
operations.
Year 2000 Issue
The Company has established a Year 2000 program to coordinate and
monitor the assessment, conversion or replacement, and testing of computer
systems throughout the Company to ensure key business information and process
control systems will function successfully after December 31, 1999. Potential
Year 2000 risks could include, without limitation, a temporary inability to
engage in normal business activities such as conducting general banking tasks,
invoicing, and materials planning and purchasing. The Company has therefore
committed internal and external resources to address its potential Year 2000
problems. Progress on Year 2000 issues is centrally coordinated, with regular
reporting to the Audit Committee and the full Board of Directors. Costs
related to hardware and software replacements and/or modifications will be
capitalized and amortized at standard rates. Other costs will be expensed as
they occur. The total known cost to the Company of these Year 2000 compliance
activities has not been and is not anticipated to be material to the Company's
financial condition or results of operations in any given year. These costs
and the date on which the Company plans to complete Year 2000 modification and
testing processes are based on management's best estimates, which were derived
utilizing numerous assumptions. However, there can be no
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guarantee that these estimates will prove to be accurate and actual results
could differ significantly.
The Company also has initiated communications with suppliers with
which it does significant business to determine the extent to which the
Company may be vulnerable to such parties' failure to remedy their own Year
2000 problems. There can be no assurance that the systems of such suppliers
will be converted on a timely basis. Based on its current assessment,
management believes the Year 2000 issue will not have a material adverse
effect on the Company's business, financial conditions, or results of
operations.
Spectrum Signal Processing Inc.
Date: August 17, 1998 By: /s/ Martin C. McConnell
------------------------
Name: Martin C. McConnell
Title: VP Finance & Chief
Financial Officer & Secretary
