SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the Period July 1, 1999 to September 30, 1999
SPECTRUM SIGNAL PROCESSING INC.
(Translation of the Registrant's Name Into English)
One Spectrum Court, 2700 Production Way, Suite 200,
Burnaby, B.C., Canada, V5A 4X1
(Address of Principal Corporate Offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F of Form 40-F:
Form 20-F [X] Form 40-F [_]
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]
If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82-___.
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
The Company hereby incorporates by reference the contents of this Report on Form
6-K into its registration statement on Form F-3 (File No.333-58115).
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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SPECTRUM SIGNAL PROCESSING INC.
Consolidated Balance Sheets
(Expressed in thousands of United States dollars)
(Prepared in accordance with United States generally accepted accounting principles, unaudited)
December 31, September 30,
ASSETS 1998 1999
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(Restated)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 1,693 $ 2,657
Accounts receivable 5,404 3,466
Inventories 4,935 2,863
Deferred income tax - 173
Prepaid expenses 203 218
- -----------------------------------------------------------------------------------------------------------
12,235 9,377
Property and equipment 2,287 2,411
Other assets 4,925 4,002
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$ 19,447 $ 15,790
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LIABILITIES AND SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------
Current liabilities
Bank indebtedness $ 2,202 $ 374
Accounts payable 3,680 1,311
Accrued liabilities 1,303 2,006
Current portion of long-term debt 80
-
- -----------------------------------------------------------------------------------------------------------
7,265 3,691
Long-term debt 75 74
Deferred income taxes 346
-
Shareholders' equity
Share capital
Authorized: 50,000,000 common shares, no par value
Issued: 10,393,954 (1998 - 16,309 16,372
10,268,954)
Outstanding: 10,160,654 (1998 - 10,035,654)
Warrants 140 140
Additional paid-in capital 76 76
Treasury stock, at cost, 233,300 shares (1998 - 233,300) (1,232) (1,232)
Retained earnings (deficit) (1,671) (2,042)
Accumulated other comprehensive income
Cumulative translation adjustments (1,861) (1,289)
- -----------------------------------------------------------------------------------------------------------
11,761 12,025
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$ 19,447 $ 15,790
===========================================================================================================
</TABLE>
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<CAPTION>
SPECTRUM SIGNAL PROCESSING INC.
Consolidated Statements of Operations and Retained
Earnings (Deficit) (Expressed in thousands of United
States dollars, except numbers of shares)
(Prepared in accordance with United States generally accepted accounting principles, unaudited)
3 months ended September 30, 9 months ended September 30,
1998 1999 1998 1999
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(Restated) (Restated)
<S> <C> <C> <C> <C>
Sales $ 7,077 $ 5,238 $ 19,497 $ 18,677
Cost of sales 3,169 2,268 8,302 7,951
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Gross profit 3,908 2,970 11,195 10,726
Expenses
Administrative 760 1,150 2,396 2,951
Sales and marketing 1,771 1,610 5,495 4,692
Amortization 339 345 913 1,082
Acquired in-process research and development charge - - 2,640 -
Research and development 1,329 850 3,366 2,595
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4,199 3,955 14,810 11,320
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Earnings (loss) from operations (291) (985) (3,615) (594)
Other
Interest income (expense) and bank charges (62) (31) (120) (121)
Other income (expense) 16 14 17 92
- --------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (337) (1,002) (3,718) (623)
Income tax expense (recovery) (190) (454) (929) (252)
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) for the period (147) (548) (2,789) (371)
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Retained earnings (deficit), beginning of period (1,405) (1,494) 1,237 (1,671)
================================================================================================================================
Retained earnings (deficit), end of period $ (1,552) $ (2,042) $ (1,552) $ (2,042)
================================================================================================================================
Earnings (loss) per share
Basic $ (0.01) $ (0.05) $ (0.28) $ (0.04)
Diluted $ (0.01) $ (0.05) $ (0.28) $ (0.04)
EBITDA 64 (626) (45) 580
EBITDA per share
Basic $ 0.01 $ (0.06) $ (0.00) $ 0.06
Diluted $ 0.01 $ (0.06) $ (0.00) $ 0.06
Weighted average shares (in thousands)
Basic 10,028 10,077 9,801 10,049
Diluted 10,245 10,077 9,801 10,049
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SPECTRUM SIGNAL PROCESSING INC.
Consolidated Statements of Cash Flows
(Expressed in thousands of United States dollars)
(Prepared in accordance with United States generally accepted accounting principles, unaudited)
3 months ended September 30, 9 months ended September 30,
1998 1999 1998 1999
- --------------------------------------------------------------------------- ------------------------------- ----------------------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net earnings (loss) from operations $ (147) $ (548) $ (2,789) $ (371)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities
Amortization 526 540 1,341 1,651
Acquired in-process research and development - - 2,640 -
Deferred income taxes (190) (197)
(418) (929)
Changes in operating assets and liabilities
Accounts receivable (1,268) 2,953 (416) 1,458
Inventories 341 482 300 2,279
Prepaid expenses 29 (5) (189) (6)
Accounts payable 979 184 838 (2,224)
Accrued liabilities 308 665 27 771
Deferred revenue - - (18) -
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 578 3,853 3,361
805
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Cash flows from investing activities
Purchase of property and equipment (102) (346) (482) (549)
Software and related development costs (52) - (476) -
Acquisition of net assets of Alex Computer, net of - - (2,204) -
cash received
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Net cash used in investing activities (154) (346) (3,162) (549)
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Cash flows from financing activities
Increase (decrease) in bank indebtedness (516) (2,302) 2,223 (1,909)
Issue of shares from share options 88
63 149 63
Repayment of long-term debt (20)
(32) (40) (80)
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Net cash provided by financing activities (448) (2,271) 2,332 (1,926)
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Effect of foreign currency exchange rates on cash and 137 54 (221) 78
cash equivalents
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 113 1,290 (246) 964
during the period
Cash and cash equivalents, beginning of period 1,024 1,367 1,383 1,693
==================================================================================================================================
Cash and cash equivalents, end of period $ 1,137 $ 2,657 $ 1,137 $ 2,657
==================================================================================================================================
</TABLE>
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
When used in this Report, the words "believes", "anticipates",
"expects", and similar expressions are intended to identify forward-looking
statements. These statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected. In
addition to quarterly fluctuations, the Company's operating results are affected
by a wide variety of other factors that could materially and adversely affect
actual results, including: general economic conditions; dependence on
significant customers, suppliers and licenses; success of and requirements of
original equipment manufacturers; revenues from development contracts; rapid
changes in technology; competition; ability to manage growth and integrate
acquisitions; actions by governmental authorities; and foreign currency and
exchange rate fluctuations. As a result of these and other factors, the Company
may experience material fluctuations in future operating results on a quarterly
or annual basis which could materially and adversely affect its business,
financial condition, operating results and stock price. Furthermore, this
document and other documents filed by the Company with the SEC contain certain
forward-looking statements with respect to the business of the Company. These
forward-looking statements are subject to certain risks and uncertainties,
including those mentioned above, which may cause actual results to differ
significantly from these forward-looking statements. The Company undertakes no
obligation to publicly release the results of any revisions to these
forward-looking statements that may be to reflect events or circumstances after
the date hereof or to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events. An investment in the Company
involves various risks, including those mentioned above and those that are
detailed from time to time in the Company's SEC filings. All financial
information in this Form is expressed in United States dollars unless otherwise
noted.
GENERAL
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. The Company also enters into
agreements with its Original Equipment Manufacturer, or 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. 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 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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The following table expresses the Company's statements of operations as a
percentage of net sales.
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<CAPTION>
3 months ended Sept 30, 9 months ended Sept 30,
1998 1999 1998 1999
- -----------------------------------------------------------------------------------------------------------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 44.8% 43.3% 42.6% 42.6%
- -----------------------------------------------------------------------------------------------------------
Gross profit 55.2% 56.7% 57.4% 57.4%
Expenses
Administrative, sales and marketing 35.8% 52.7% 40.5% 40.9%
Amortization 4.8% 6.6% 4.7% 5.8%
Acquired in-process research & development charge 0.0% 0.0% 13.5% 0.0%
Research and development 18.7% 16.2% 17.3% 13.9%
- -----------------------------------------------------------------------------------------------------------
59.3% 75.5% 76.0% 60.6%
- -----------------------------------------------------------------------------------------------------------
Earnings (loss) from operations -4.1% -18.8% -18.6% -3.2%
Other
Interest income (expense) and bank charges -0.9% -0.6% -0.6% -0.6%
Other income (expense) 0.2% 0.3% 0.1% 0.5%
- -----------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes -4.8% -19.1% -19.1% -3.3%
Income tax expense (recovery) -2.7% -8.7% -4.8% -1.3%
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Net earnings (loss) for the period -2.1% -10.4% -14.3% -2.0%
===========================================================================================================
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<PAGE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 1998
SALES. Sales for the quarter ended September 30, 1999 were $5,238,000,
a decrease of $1,839,000, or 26.0%, relative to sales in the quarter ended
September 30, 1998. Included in 1999 third quarter revenues were sales of the
Company's internally developed Texas Instruments-based products of $2,162,000,
or 41.3% of sales for the quarter, compared to $3,227,000, or 45.6% of sales for
the third quarter of 1998. Also included in sales for third quarter of 1999 were
revenues from the Company's Analog Devices-based products of $1,228,000, or
23.4% of sales, compared to $1,653,000, or 23.4% of sales for the third quarter
of 1998. Also included in sales for the third quarter of 1999 were revenues from
sales of products produced by or manufactured under license from Blue Wave
Systems Inc. (formerly Loughborough Sound Images) of $284,000, or 5.4% of sales,
compared to $693,000, or 9.8% of sales for third quarter of 1998. Included in
third quarter sales were development contract fees of $458,000, or 8.7% of sales
for the quarter, compared to development contract fees of $143,000, or 2.0% of
sales for the third quarter of 1998. The decline in the Company's sales for the
third quarter of 1999 compared to sales for the third quarter of 1998 was
attributable primarily to ordinary course fluctuations in the timing and value
of orders.
GROSS PROFIT. Gross profit decreased to $2,970,000 for the third
quarter of 1999 from $3,908,000 for the third quarter of 1998, a decrease of
24.0%. Gross margin (profit as a percentage of sales) increased slightly to
56.7% for the third quarter of 1999 from 55.2% for the third quarter of 1998.
The increase in gross margin was due primarily to an increase in development
contract fees which typically have higher margins. The Company's historical
gross margin also has varied by quarter due to volume-related efficiencies,
changes in product and customer mix, amortization of deferred software and
related development costs, and provisions for manufacturing scrap and
obsolescence.
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 third quarter of 1999
were $2,760,000, or 52.7% of sales for the period, compared to $2,531,000, or
35.7% of sales for the third quarter of 1998. AS&M expenses were higher for the
third quarter of 1999 due to increased facilities related expenses associated
with the Company's move to new premises in July, 1999 as well as consulting fees
related to executive recruitment and strategic planning. As a percentage of
sales, AS&M expenses increased in the third quarter of 1999 due to lower sales
for the quarter without any corresponding decrease in AS&M expenses.
AMORTIZATION. Amortization consists of the depreciation of the
Company's fixed assets and amortization of goodwill and other intangibles.
Amortization expense for the third quarter of 1999 was $345,000, an increase of
$6,000, or 1.8% over the third quarter of 1998. The increase in amortization
expense reflects the Company's increased investment in property and equipment.
Although the Company previously reported its quarterly and annual
results for 1998 in accordance with established accounting practice, in April
1999 it adjusted certain amounts stated in its 1998 consolidated financial
statements in response to new guidance recently provided by the Securities and
Exchange Commission to the accounting profession related to the valuation of
IPR&D in purchase transactions. None of these adjustments impact the Company's
net operating cash flow.
<PAGE>
RESEARCH AND DEVELOPMENT. Research and development ("R&D") expenses
consist primarily of salaries, related personnel benefits, engineering service
costs relating to development contract fees and direct overhead costs. R&D
expenses were $850,000 for the third quarter of 1999, or 16.2% of sales for the
quarter, compared to $1,329,000, or 18.7% of sales for the third quarter of
1998. The expenses in the third quarter of 1999 consisted primarily of costs
associated with new product developments undertaken by the Company including
both Texas Instruments-based and Analog Devices-based products. Total research
and development expenditures including those capitalized as software and related
development costs were $850,000 for the third quarter of 1999, or 16.2% of sales
for the quarter, compared to $1,412,000, or 18.7% of sales for the third quarter
of 1998. The reduction in absolute R&D expenditures reflects the cost savings
achieved following the reorganization and reduction of development programs in
the fourth quarter of 1998, as well as certain cost savings arising from the
completion of the integration of the development activities of Alex Computer
Systems Inc., which was acquired in the first quarter of 1998.
OTHER INCOME. Other income, consisting primarily of interest income on
short-term deposits and interest expense on bank indebtedness, was an expense of
$17,000 for the third quarter of 1999 compared to an expense of $46,000 for the
third quarter of 1998. The decrease was due primarily to decreased working
capital borrowings under the Company's line of credit facility
INCOME TAXES. The Company's income tax recovery for the third quarter
of 1999 was $454,000 compared to a recovery of $190,000 for the third quarter of
1998.
NET LOSS. The Company had a net loss for the third quarter of 1999 of
$548,000, compared to a net loss of $147,000 for the third quarter of 1998. The
Company's loss per share (basic) for the third quarter of 1999 was $0.05,
compared to a loss per share (basic) of $0.01 for the third quarter of 1998.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 1998
SALES. Sales for the nine months ended September 30, 1999 were
$18,677,000, a decrease of $820,000, or 4.2%, relative to sales for the nine
months ended September 30, 1998. Included in sales for the period were revenues
from the Company's internally developed Texas Instruments-based products of
$8,150,000, or 43.6% of sales, compared to $8,173,000, or 41.9% of sales for the
nine months ended September 30, 1998. Also included in sales for the period were
revenues from the Company's Analog Devices-based products of $4,312,000, or
23.1% of sales, compared to $3,728,000, or 19.1% of sales for the nine months
ended September 30, 1998. Also included in sales for the period were revenues
from sales of products produced by or manufactured under license from Blue Wave
Systems Inc. of $1,604,000, or 8.6% of sales, compared to $2,714,000, or 13.9%
of sales for the nine months ended September 30, 1998. Included in sales for the
period were development contract fees of $961,000, or 5.1% of sales, compared to
development contract fees of $1,066,000, or 5.5% of sales for the nine months
ended September 30, 1998.
GROSS PROFIT. Gross profit decreased to $10,726,000 for the nine months
ended September 30, 1999 from $11,195,000 for the nine months ended September
30, 1998, a decrease of 4.2%. Gross margin remained constant at 57.4% for both
periods.
ADMINISTRATIVE, SALES AND MARKETING. AS&M expenses were $7,643,000, or
40.9% of sales for the period, compared to $7,891,000, or 40.5% of sales for
nine months ended September 30, 1998. AS&M expenses were lower in the nine
months ended September 30, 1999 primarily because AS&M expenses for same period
of 1998 included up-front costs associated with the Company's expansion into the
European marketplace, as well as expenses associated with the integration of
Alex Computer Systems Inc. prior to the realization of efficiencies derived from
economies of scale.
<PAGE>
AMORTIZATION. Amortization expense for the period was $1,082,000, an
increase of $169,000, or 18.5% over the nine months ended September 30, 1998.
The increase in amortization expense reflects the Company's investment in
goodwill and other intangibles pursuant to its acquisition of the net assets of
Alex Computer in the first quarter of 1998.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE. Acquired
In-process research and development ("IPR&D") represents the value assigned in a
purchase business combination to research and development projects of the
acquired business that were commenced but not yet completed at the date of
acquisition and which, if unsuccessful, have no alternative future use in
research and development activities or otherwise. An IPR&D charge of $2,640,000
(restated) was expensed in the first quarter of 1998 in conjunction with the
purchase of the net assets of Alex Computer Systems based on management's
discounted cash flow valuation.
Although the Company previously reported its quarterly and annual
results for 1998 in accordance with established accounting practice, in April
1999 it adjusted certain amounts stated in its 1998 consolidated financial
statements in response to new guidance recently provided by the Securities and
Exchange Commission to the accounting profession related to the valuation of
IPR&D in purchase transactions. None of these adjustments impact the Company's
net operating cash flow.
RESEARCH AND DEVELOPMENT. R&D expenses were $2,595,000, or 13.9% of
sales for the 1999 period, compared to $3,366,000, or 17.3% of sales for the
nine months ended September 30, 1998. The expenses in the period consisted
primarily of costs associated with new product developments undertaken by the
Company including both Texas Instruments-based and Analog Devices-based
products. Total research and development expenditures including those
capitalized as software and related development costs were $2,595,000, or 13.9%
of sales for the period, compared to $3,844,000, or 19.4% of sales for the nine
months ended September 30, 1998. R&D expenditures of $478,000 were capitalized
in the nine months ended September 30, 1998 in connection with certain
development activities based on Texas Instrument's C6X processor. These
development projects were completed in 1998. The reduction in absolute R&D
expenditures reflects the cost savings achieved following the reorganization and
reduction of development programs in the fourth quarter of 1998, as well as
certain cost savings arising from the completion of the integration of the
development activities of Alex Computer which was acquired in the first quarter
of 1998.
OTHER INCOME. Other income, consisting primarily of interest income on
short-term deposits and interest expense on bank indebtedness was an expense of
$29,000 for the period compared to an expense of $103,000 for the nine months
ended September 30, 1998. The decrease was due primarily to decreased working
capital borrowings under the Company's line of credit facility.
INCOME TAXES. The Company's income tax recovery for the period was
$252,000 compared to a recovery of $929,000 for the nine months ended September
30, 1998.
NET LOSS. The Company had a net loss for the period of $371,000,
compared to a net loss of $2,789,000 for the nine months ended September 30,
1998. The Company's loss per share (basic) for the period was $0.04, compared to
a loss per share (basic) of $0.28 for the nine months ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has met its operating and capital requirements
from cash flow from operations, from borrowings under its line of credit and
from 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$5,000,000 (approximately US$3,400,000) operating
line of credit (the "Line of Credit"). The
<PAGE>
Company's US dollar borrowing capacity under its Canadian dollar-denominated
Line of Credit will vary period to period based on exchange rate fluctuations.
Borrowings under the Line of Credit bear interest at the Bank's US base rate
plus 1/2%, unless the borrowings are denominated in Canadian dollars, in which
case the rate of interest is the Bank's prime 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, including a current ratio of 1.50 to 1.00 and
a debt to tangible net worth ratio of 1.25 to 1.00. The Company believes it is
in compliance with the terms of the Line of Credit. Borrowings under the Line of
Credit are secured by substantially all of the Company's current assets. The
Company's net borrowings under the Line of Credit as of September 30, 1999 were
nil.
At September 30, 1999 and December 31, 1998, the Company's net cash
surplus (deficit) was $2,283,000 and $(509,000) respectively. Net cash provided
by (used in) operations, financing and investments was $964,000 and $310,000 in
nine months ended September 30, 1999 and year ended December 31, 1998
respectively.
Accounts receivable, net at September 30, 1999 and December 31, 1998
was $3,466,000 and $5,404,000 respectively. The Company's standard collection
terms are net 30 days, subject to adjustment for certain customers.
The Company made capital expenditures of $549,000 during the nine
months ended September 30, 1999 relating primarily to the purchase of computer
equipment, furniture and fixtures, and leasehold improvements.
In March 1999, the Company entered into an agreement with Technology
Partnerships Canada ("TPC") an agency of the Canadian government, providing for
an investment in the Company to finance approximately one-third of the Company's
research and development costs to develop a new product line targeted to the
telecommunications market. The agreement provides for a maximum commitment by
TPC of $4.3 million (Cdn$6.3 million) through 2002. The Company plans to use the
funds to accelerate development of next-generation hardware and software systems
that can be deployed in high-end commercial applications, such as
telecommunications servers and wireless base stations. The investment is
structured as a repayable investment, with repayment beginning no earlier than
2001, by way of a 2.5% royalty on the new products being financed by the
investment. If the Company has not paid at least $7.8 million (Cdn$11.4 million)
in royalties to TPC by December 31, 2006, royalties shall continue to be due at
a rate of 2.5% until an aggregate of $7.8 million (Cdn$11.4 million) in
royalties has been paid. The investment is also repayable immediately upon the
occurrence of certain events of default, which include bankruptcy events.
Otherwise, the Company is not required to repay the investment except by way of
royalties, if any, on the products financed by the investment. TPC did not
receive an equity participation in the Company in connection with its
investment.
The Company believes that cash generated from operations and borrowings
available under the Line of Credit, as well as funds received from TPC, will be
sufficient to meet its working capital and capital expenditure requirements for
at least the next twelve months. However, the Company may in the future require
additional equity or debt financing to meet its working capital, property and
equipment 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.
RECENT ANNOUNCEMENTS
The Company recently announced that Barry Jinks has resigned as
President and Chief Executive Officer of the Company. Mr. Jinks will remain a
member of the Board of Directors. Martin McConnell, the Company's Vice President
of Finance and Chief Financial Officer, was appointed Acting Chief Operating
Officer and will be responsible for Mr. Jinks' duties on an interim basis.
<PAGE>
CHARGES RELATED TO ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
During 1997 and 1998, the Company completed two acquisitions, some of
the assets of which included in-process research and development. The Company
regarded its acquisition of 3L Limited as an opportunity to provide more
complete DSP software solutions. The Company regarded its acquisition of Alex
Computer as an opportunity to expand its product offerings to include products
based on the Analog Devices ("AD") processor. The acquisitions of 3L Limited and
Alex Computer were accounted for using the purchase method of accounting. A
portion of the purchase price for each acquisition was allocated to in-process
research and development, which resulted in a charge of approximately $872,000
related to the 3L Limited acquisition in 1997 and a charge of $2,640,000 related
to the Alex Computer acquisition in 1998.
The efforts required to develop the acquired in-process research and
development into commercially viable products principally relate to the
completion of all planning, designing and testing activities that are necessary
to establish that the products can meet their design requirements, including
function, features and technical performance requirements.
The Company based its determination of the acquired in-process research
and development allocation on recently issued guidance by the Securities and
Exchange Commission and considered such factors as degree of completion,
technological and market uncertainties, costs incurred and projected costs to
complete. Other than one 3L Limited project discontinued due to poor market
conditions, acquired in-process research and development projects continue to
progress, in all material respects, consistent with management's original
assumptions used to value the acquired in-process research and development.
ALEX COMPUTER SYSTEMS, INC.
The acquired in-process research and development was valued using a
cash flow model, under which projected income and expenses attributable to the
purchased research and development were identified and discounted to arrive at a
present value. Cash flows related to the acquisition of Alex Computer were
discounted using discount rates ranging from 21% to 28% depending on risks,
probabilities and uncertainties, including inherent technical, market acceptance
and other risks. The Company assumed revenues would occur evenly throughout each
relevant period. and assumed direct overhead costs as percentage of revenues of
15% for 1999, 14% for 2000 and 14% for 2001.
As of the acquisition date, Alex Computer was conducting significant
in-process research and development into five new software and hardware projects
to which a portion of the Alex Computer purchase price was allocated. At the
date of acquisition, these projects had not reached technological feasibility
and had no alternative future uses. The five in-process research and development
projects included:
RUGGED IMPEDANCE CABLES - an inter-processor connect scheme designed to
significantly increase the distance over which high bandwidth signals
may be reliably transmitted. At the time of the acquisition, Alex
Computer was in the design/testing stage of completion. The Company
estimated the fair value of the IPR&D at $60,000 and the cost of
completion at $5,000. The project was completed in July 1998. At the
time of the acquisition, the Company regarded technical feasibility as
the principal risk relating to the project.
HAMMERHEAD DEVELOPMENT SYSTEM - a development platform for GENERATION
TWO-based systems, an AD processor offering an improvement in
performance to then-existing technologies. At the time of the
acquisition, Alex Computer was at the concept/pre-design stage of
completion. The Company estimated the IPR&D had nominal value and the
cost of completion at $380,000. The Company expects to complete the
project in the year 2000. At the time of the acquisition, the
<PAGE>
Company regarded technical feasibility and market acceptance as the
principal risks relating to the project.
HAMMERHEAD VME, PCI, CPCI BOARDS AND PMC MODULES - circuit board
architectures built around AD's GENERATION TWO processor. At the time
of the acquisition, Alex Computer was at the concept/pre-design stage
of completion. The Company estimated the fair value of the IPR&D at
$1,570,000 million and the cost of completion at $705,000. Company
expects to complete the project in the year 2000. At the time of the
acquisition, the Company regarded technical feasibility, accurately
estimating future costs and market acceptance as the principal risks
relating to the project.
APEX SOFTWARE - a comprehensive programming environment that simplifies
the development of user parallel applications while retaining
efficient, optimized code. At the time of the acquisition, Alex
Computer was at the design stage of completion. The Company estimated
the fair value of the IPR&D at $590,000 and the cost of completion at
$120,000. The project was completed in late 1998. At the time of the
acquisition, the Company regarded technical feasibility as the
principal risk relating to the project.
APEX TRACE SOFTWARE - a visualization tool to provide developers with
accurate non-intrusive timings of system operation and multiple
processor interaction. At the time of the acquisition, Alex Computer
was at the design/testing stage of completion. The Company estimated
the fair value of the IPR&D at $430,000 and the cost of completion at
$140,000. The project was completed in late 1998. At the time of the
acquisition, the Company regarded technical feasibility and accurately
estimating future costs as the principal risks relating to the project.
3L LIMITED
The acquired in-process research and development was valued using a
cash flow model, under which projected income and expenses attributable to the
purchased research and development were identified and discounted to arrive at a
present value. Cash flows related to the acquisition of 3L Limited were
discounted using a 20% discount rate for risks, probabilities and uncertainties,
including inherent technical, market acceptance and other risks. The Company
assumed revenues would occur evenly throughout each relevant period and assumed
direct overhead costs as percentage of revenues of 15% for each of 1998, 1999
and 2000.
As of the acquisition date, 3L Limited was conducting significant
in-process research and development into two significant new software products
to which a portion of the 3L Limited purchase price was allocated. At the date
of acquisition, these projects had not reached technological feasibility and had
no alternative futures. Descriptions of the in-process research and development
projects are as follows:
SHARC PARALLEL C SOFTWARE - a programming environment for the SHARC
processor which simplifies the development of user parallel
applications while retaining efficient, optimized code. At the time of
the acquisition, 3L Limited was at the concept/pre-design stage of
completion. The Company estimated the fair value of the IPR&D at
$525,000 and the cost of completion at $95,000. The project was
completed in April 1998. At the time of the acquisition, the Company
regarded technical feasibility and market acceptance as the principal
risks related to the project.
C4X 3.0 PARALLEL C - a multi-processor upgrade to the C compiler tools
for Texas Instruments' C4x processor. At the time of the acquisition,
3L was at the design stage of completion. The Company estimated the
fair value of the IPR&D at $347,000 and the cost of completion at
$85,000. The project was discontinued in December 1997 due to poor
market conditions. At the time of the acquisition, the Company regarded
technical feasibility and market acceptance as the principal risks
related to the project.
<PAGE>
INFLATION, FOREIGN CURRENCY FLUCTUATIONS AND HEDGING
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 currency exchange rates.
In addition, if the Canadian dollar rises relative to the US dollar, the
Company's reported operating expenses and net income may be materially and
adversely affected. Since 1995, the Company has entered into currency derivative
contracts to attempt to reduce a portion of its exposure to foreign exchange
rate fluctuations. These contracts typically have maturities of no greater than
six months when entered into. The market price of these contracts generally
approaches the spot exchange rates as the contracts approach the expiration of
their term. The maximum amount the Company has hedged under these contracts at
any one time is Cdn$8,000,000. 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 its 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. In addition,
the Company has taken steps to ensure that all relevant non-information
technology systems will be Year 2000 compliant. The Company has determined that
its major internal system, the MRP system, is Year 2000 compliant, which means
that internal order processing and filing will be unaffected.
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 committed internal and external resources to address potential Year
2000 problems. Progress on Year 2000 issues is centrally coordinated, with
regular reporting to the Board of Directors. The Company has completed its
assessment of internal Year 2000 issues. The Company does not expect to incur
any costs in remediating (where required) any Year 2000 issues relating to its
business, other than the time spent by employees on ensuring compliance. In any
case, total costs to the Company with respect to its Year 2000 compliance
activities are 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 guarantee that these estimates
will prove to be accurate and actual results could differ significantly.
As the Company relies on third party suppliers for utilities,
transportation, and other key services, interruption of supplier operations
could affect the Company's operations, however, this risk is being assessed and
contingency plans are being developed. The Company 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. The Company has now received certificates from most key
third party suppliers stating that their systems are either Year 2000 compliant
currently or will be prior to December 31, 1999. There can be no assurance that
the systems of those suppliers that are not yet compliant, will be converted on
a timely basis.
<PAGE>
The Company believes its worst case scenario would be the failure of
one or more of its material third party suppliers to continue to supply the
Company with products. This failure would lead to an interruption of the
Company's business for an indeterminate length of time. The Company is
continuing to monitor this situation, as well as any other potential problem
areas it is able to identify.
<PAGE>
The Company's Year 2000 contingency plans are as follows: (i) all
"critical path" systems are being identified and testing will be continuous,
(ii) back-up systems are being put in place for alternate suppliers for all
aspects of production and delivery, and (iii) the Company already has in place a
redundant system of supply for its manufactured products. Continuing monitoring
and risk management are taking place and the Company's contingency plans will be
updated as new issues are identified. 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.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS
Exhibit 27. Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Spectrum Signal Processing Inc.
Date: November 12, 1999 By: /s/ Martin C. McConnell
------------------------
Name: Martin C. McConnell
Title: Vice President of Finance, Chief
Financial Officer and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Spectrum Signal Processing Inc. as of September 30, 1999
and for the nine months then ended and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,657
<SECURITIES> 0
<RECEIVABLES> 3,466
<ALLOWANCES> 0
<INVENTORY> 2,863
<CURRENT-ASSETS> 9,377
<PP&E> 5,701
<DEPRECIATION> 3,290
<TOTAL-ASSETS> 15,790
<CURRENT-LIABILITIES> 3,691
<BONDS> 0
0
0
<COMMON> 16,372
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 15,790
<SALES> 18,677
<TOTAL-REVENUES> 18,677
<CGS> 7,951
<TOTAL-COSTS> 7,951
<OTHER-EXPENSES> 11,320
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 121
<INCOME-PRETAX> (623)
<INCOME-TAX> (252)
<INCOME-CONTINUING> (371)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (371)
<EPS-BASIC> (0.04)
<EPS-DILUTED> (0.04)
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