<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 30, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM F-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SPECTRUM SIGNAL PROCESSING INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
BRITISH COLUMBIA, CANADA NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
------------------------
8525 BAXTER PLACE
BURNABY, BRITISH COLUMBIA
CANADA V5A 4V7
(604) 421-5422
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
BARRY W. JINKS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SPECTRUM SIGNAL PROCESSING INC.
8525 BAXTER PLACE
BURNABY, BRITISH COLUMBIA
CANADA V5A 4V7
(604) 421-5422
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
With copies to:
PAUL JACOBS, ESQ.
FULBRIGHT & JAWORSKI L.L.P.
666 FIFTH AVENUE
NEW YORK, NEW YORK 10103
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the 'Securities Act'), check the following box. /x/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
MAXIMUM OFFERING PROPOSED
TITLE OF EACH CLASS AMOUNT TO BE PRICE PER MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Shares, without par value......... 772,626 $ 5.125 $ 3,959,708 $1,168.11
Common Shares, without par value,
underlying warrants...................... 110,375 5.125 565,672 166.87
</TABLE>
(1) Estimated solely for purpose of calculating the registration fee pursuant to
Rule 457(c) under the Securities Act of 1933, as amended, based on the
average of the high and low prices of the Common Shares as reported on the
Nasdaq National Market on June 24, 1998.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 30, 1998
PROSPECTUS
883,001 SHARES
SPECTRUM SIGNAL PROCESSING INC.
COMMON SHARES
------------------------
This Prospectus relates to: (i) the resale of 718,543 common shares, without par
value ('Common Shares'), of Spectrum Signal Processing Inc. ('Spectrum' or the
'Company') from time to time for the account of Alex Computer Systems Inc.
('Alex Computer'); (ii) the resale of 54,083 Common Shares from time to time for
the account of Andrew Talbot ('Talbot' and, together with Alex Computer, the
'Selling Securityholders'); (iii) the resale of 102,649 Common Shares issuable
upon the exercise of a warrant held by Alex Computer; and (iv) the resale of
7,726 Common Shares issuable upon the exercise of a warrant held by Talbot
(together with the warrant held by Alex Computer, the 'Warrants').
The distribution of the Common Shares by the Selling Securityholders may be
effected from time to time in one or more transactions for their own accounts
(which may include block transactions) on the Nasdaq National Market ('Nasdaq'),
The Toronto Stock Exchange (the 'TSE') or on any exchange on which the Common
Shares may then be listed in negotiated transactions, through the writing of
options on shares (whether such options are listed on an options exchange or
otherwise), or a combination of such methods of sale, at fixed prices which may
be changed, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. The Selling
Securityholders may effect such transactions by selling Common Shares to or
through broker-dealers, including broker-dealers who may act as underwriters,
and such broker-dealers may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders for whom such
broker-dealers may act as agent or to whom they sell as principal, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions). The Selling Securityholders may also sell Common Shares
pursuant to Rule 144 promulgated under the Securities Act of 1933, as amended
(the 'Securities Act'), or may pledge Common Shares as collateral for margin
accounts and such Common Shares could be resold pursuant to the terms of such
accounts. The Selling Securityholders and any participating brokers and dealers
may be deemed to be 'underwriters' as defined in the Securities Act. See 'Plan
of Distribution.'
The Common Shares are traded on Nasdaq and the TSE under the respective
symbols 'SSPIF' and 'SSY.' The last sale prices for the Common Shares as
reported on Nasdaq the TSE on June 26, 1998, were US$5.375 and Cdn$7.900,
respectively. The Warrants are not being registered hereunder and do not trade
on any exchange or market.
None of the proceeds from the sale of the Common Shares by the Selling
Securityholders will be received by the Company. The proceeds from the exercise
of the Warrants, if any, will be received by the Company. See 'Use of Proceeds.'
The Company has agreed to bear all expenses, other than selling commissions and
fees, in connection with the registration and sale of the Common Shares being
offered by the Selling Securityholders. See 'Plan of Distribution.'
------------------------
SEE 'RISK FACTORS' BEGINNING ON PAGE 5 HEREIN FOR A DISCUSSION OF CERTAIN
MATTERS THAT SHOULD BE CONSIDERED BY POTENTIAL INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
ENFORCEABILITY OF CIVIL LIABILITIES
The Company was incorporated under the laws of the Province of British
Columbia, Canada under the Company Act (British Columbia) (the 'BC Act').
Certain of the directors and officers of the Company and certain experts named
herein are residents of Canada, and all or a substantial portion of their assets
and a substantial portion of the assets of the Company are located outside of
the United States. As a result, it may be difficult for holders of Common Shares
to effect service of legal process within the United States upon the Company or
its directors, officers and experts who are not residents of the United States
or to realize in the United States upon judgments of courts of the United States
predicated upon civil liability under the Securities Act (with the rules
promulgated thereunder by the Securities and Exchange Commission (the
'Commission') or the Securities Exchange Act of 1934, as amended (with rules
promulgated thereunder by the Commission, the 'Exchange Act'). The Company has
been advised by its Canadian counsel, Clark, Wilson, that, in such counsel's
opinion, a judgment of a United States court predicated solely upon civil
liability under such laws would probably be enforceable in Canada if the United
States court in which the judgment was obtained had a basis for jurisdiction in
the matter that is recognized by a Canadian court for such purposes. The Company
has also been advised by such counsel, however, that in such counsel's opinion
there is substantial doubt whether an original action could be brought
successfully in Canada in the first instance on the basis of liability
predicated solely upon such laws.
EXCHANGE RATE INFORMATION
The following table sets forth, for the periods indicated, the high and low
exchange rates for Canadian dollars expressed in US dollars, the average of such
exchange rates on the last day of each month during such period and the exchange
rate at the end of such period, based on the inverse of the noon buying rate in
New York City for cable transfers in foreign currencies as certified for customs
purposes by the Federal Reserve Bank of New York (the 'Noon Buying Rate').
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------- THREE MONTHS ENDED
1993 1994 1995 1996 1997 MARCH 31, 1998
--------- --------- --------- --------- --------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Exchange rate at end of period..... US$0.7544 US$0.7128 US$0.7323 US$0.7246 US$0.6991 0.7033
Average exchange rate during
period........................... 0.7729 0.7300 0.7305 0.7334 0.7223 0.6991
High exchange rate during period... 0.8046 0.7632 0.7527 0.7472 0.7415 0.7105
Low exchange rate during period.... 0.7439 0.7103 0.7023 0.7274 0.7009 0.6832
</TABLE>
CURRENCY TRANSLATION AND ACCOUNTING PRINCIPLES
The Company publishes its financial statements in Canadian dollars. All
monetary references throughout this Prospectus are expressed in Canadian dollars
('Cdn$' or '$') except where indicated as United States dollars ('US$'). All
financial information presented, except where otherwise indicated, has been
prepared in accordance with accounting principles generally accepted in Canada
('Canadian GAAP'). Canadian GAAP as applied to the Company conforms in all
material respects with accounting principles generally accepted in the United
States ('U.S. GAAP'), except as otherwise presented in the Company's financial
statements. 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.
THE SECURITIES OFFERED HEREBY MAY BE SUBJECT TO CERTAIN RESALE RESTRICTIONS
UNDER APPLICABLE CANADIAN SECURITIES LAWS. PERSONS WISHING TO SELL ANY OF SUCH
SECURITIES IN CANADA OR TO RESIDENTS OF CANADA ARE ADVISED TO SEEK LEGAL ADVICE
AS TO APPLICABLE RESALE RESTRICTIONS.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Spectrum Signal Processing Inc., a corporation organized under the laws of
the Province of British Columbia, Canada, designs, develops and markets
programmable digital signal processing ('DSP') solutions which are incorporated
into high performance applications used primarily in commercial, wireless and
military markets. Commercial off-the-shelf DSP solutions currently offered by
the Company are used in a wide range of applications, including avionics,
medical diagnostic imaging, communications, control, test and measurement,
machine vision and wireless. Spectrum's solutions incorporate proprietary and
licensed DSP software, hardware and application specific integrated circuits
('ASICs') integrated with leading manufacturers' programmable DSP
microprocessors. The Company's products are targeted toward original equipment
manufacturers ('OEMs'), and the Company's customers include Nortel, NEC,
Northrup Gruman, Siemens Medical Systems, Hewlett-Packard and Ford Motor
Company. The Company recently acquired 3L Limited, a Scotland-based company
specializing in operating systems for DSP systems with multiple DSPs in the
system, and Alex Computer Systems, Inc., a New York-based company specializing
in DSP hardware and software solutions based on Analog Devices' SHARC processor.
DSP involves the conversion of analog signals, including sound and light,
into a stream of digital values that are then processed, manipulated, exchanged
or stored by computing systems. DSP provides several advantages over analog
signal processing, including: (i) higher degrees of audio and video compression,
resulting in greater storage and communication capacity; (ii) a greater ability
to process and manipulate data, resulting in enhanced product performance; and
(iii) the ability to process and adapt to changing signals in real time. In
addition, DSP permits easier development and upgrades of multi-functional
products through the use of programmable software/ hardware combinations, thus
shortening time-to-market for new products. Although the theoretical foundation
of DSP technology existed for many years, broad applications for DSP technology
did not exist until high-speed microprocessors became available at a reasonable
cost. The foundation of a DSP system is the DSP microprocessor, or chip, first
introduced in the early 1980s by a number of semiconductor companies, including
AT&T, Texas Instruments and Motorola. Initial advances in DSP technology using
DSP chips took place in military and commercial applications where high
performance and speed were of paramount importance and cost was a secondary
consideration. In the mid-1980s, very large scale integration ('VLSI') design
and manufacturing processes developed for central processing units ('CPUs') and
memories were applied to general purpose DSP chips, driving down costs and
increasing performance exponentially. These trends, combined with the superior
processing capabilities of DSP, have led to rapid growth in DSP applications.
DSP technology is part of the foundation of the telecommunications and
multimedia revolutions of the 1990s, much as VLSI computer chips and memories
enabled the PC revolution in the 1980s. DSP technology that enables
sophisticated processing of images and voice is rapidly becoming commonplace.
DSP chips have been behind major advances in data transmission speeds, which
have dramatically reduced the cost of wireless communications (including
cellular communications), and emerging voice, audio and image manipulation
technologies.
Spectrum was formed under the laws of the Province of British Columbia,
Canada in 1987. The Company's principal executive offices are located at 8525
Baxter Place, 100 Production Court, Burnaby, British Columbia, Canada, V5A 4V7
and its telephone is (604) 421- 5422.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which are on file with the Commission (File No.
0-19906) pursuant to the Exchange Act are incorporated by reference and made a
part hereof:
(i) The Company's Annual Report on Form 20-F for the fiscal year ended
December 31, 1997.
(ii) The description of the Common Shares contained in the Company's
Report on Form 20-F dated April 8, 1992.
3
<PAGE>
The Company may incorporate by reference herein any future Report on Form
6-K by identifying in such Forms that they are being incorporated by reference
in this Registration Statement.
All documents and reports subsequently filed by the Company pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of the offering of the securities
offered hereby shall be deemed incorporated by reference into this Prospectus
and to be a part hereof from the date of the filing of such documents or
reports. The information relating to the Company in this Prospectus should be
read together with the information in the documents incorporated by reference.
Any statement contained in a document incorporated by reference herein,
unless otherwise indicated therein, speaks as of the date of the document. Any
statement contained in a document incorporated by reference herein shall be
deemed to be modified or superseded for all purposes to the extent that a
statement contained in this Prospectus modifies or replaces such statement.
The Company will furnish without charge to each person to whom this
Prospectus is delivered, upon request, a copy of any or all of the documents
described above, other than exhibits to such documents, unless such exhibits are
specifically incorporated by reference into such documents. Requests should be
addressed to: Spectrum Signal Processing Inc., 8525 Baxter Place, Burnaby,
British Columbia, Canada, V5A 4V7, (604) 421-5422.
RECENT ACQUISITIONS
In June 1997, Spectrum acquired a Scotland-based software company, 3L
Limited, in order to provide more complete DSP software solutions to its
customers. 3L Limited specializes in real-time operating systems specifically
for applications requiring multiple DSPs. 3L Limited operates on an independent
basis under the name of 3L Limited so that it can effectively sell its standard
DSP software products through its traditional channels to DSP systems vendors
and in-house developers. Spectrum's head office directs 3L Limited's product
development activities in Scotland and supports its sales activities with
marketing and promotional support. Total consideration paid for 3L Limited was
173,333 Common Shares. The acquisition was accounted for under the purchase
method.
On March 17, 1998, Spectrum effectively acquired pursuant to an acquisition
agreement the assets of another DSP company, Alex Computer Systems, Inc., a
company with strong software and hardware solutions based on Analog Devices'
SHARC-based processors. The consideration paid and assets acquired in connection
with such acquisition were transferred on May 1, 1998. This acquisition allows
Spectrum to become a strong competitor in the floating-point DSP marketplace,
with the large SHARC-based product line Alex Computer brought to Spectrum. The
software and hardware product line which Alex Computer contributes to Spectrum
allows the Company to offer a truly SHARC-based suite of system level solutions.
Total consideration paid for the assets of Alex Computer was $961,000 cash, the
assumption of $1,525,000 in liabilities, 772,626 Common Shares and a two year
warrant to purchase 110,375 Common Shares at an exercise price of Cdn$9.06 per
share. The acquisition was accounted for under the purchase method.
4
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the specific factors set
forth below, as well as the other information contained in this Prospectus,
before deciding to invest in the Common Shares offered hereby.
The statements contained in this Prospectus that are not purely historical
are forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act, including without limitation
statements regarding the Company's expectations, beliefs, intentions or
strategies regarding the future. All forward-looking statements included in this
document are based on information available to the Company on the date hereof,
and the Company assumes no obligation to update any such forward-looking
statements. The forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause actual results, experience and
the performance or achievements of the Company to be materially different from
those anticipated, expressed or implied by the forward-looking statements. In
addition, the Company's business strategy and growth strategy involve a number
of risks and challenges, and there can be no assurance that these risks and
other factors will not have a material adverse effect on the Company.
SIGNIFICANT CUSTOMERS
In 1997 and the first quarter of 1998, the Company's two largest customers
accounted for approximately 44% and 34%, respectively, of the Company's sales
and the U.S. Government (principally the U.S. Department of Defense), its
largest customer, accounted for approximately 25% and 22%, respectively, of the
Company's sales. In addition, approximately 18% of the Company's sales during
1997 were made to NAI Technologies and approximately 12% of the Company's sales
during the first quarter of 1998 were made to Siemens Medical Systems, Inc. A
significant reduction of purchases by any of the Company's largest customers
could have a material adverse effect on the Company's business, financial
condition and results of operations.
AMENDMENT OF THE LOUGHBOROUGH LICENSE
In July 1987, the Company entered an agreement with Loughborough Sound
Images Ltd. ('Loughborough') pursuant to which the Company licenses from
Loughborough certain DSP technology (the 'Loughborough License'). In 1995, 1996,
1997 and the first quarter of 1998, sales of products for the military/aerospace
and commercial markets based upon technology licensed from Loughborough and
products acquired from Loughborough for resale (collectively, 'Loughborough
Products') accounted for approximately 46%, 33%, 30% and 14%, respectively, of
the Company's sales. The recent amendment to the Loughborough License which,
among other things, changed such license to operate on a non-exclusive basis,
could result in increased competition for the Company. In particular, early in
1998, Loughborough merged with Mizar, Inc. ('Mizar'), a Texas-based company
engaged in the development and marketing of multi-processor DSP computing
subsystems, thereby providing Loughborough with a means to rapidly enter the
North American market by taking advantage of Mizar's existing North American
sales force and presence in the industry. While the Company believes that
Loughborough Products will continue to account for a decreasing percentage of
the Company's sales in 1998 and thereafter, there can be no assurance that the
terms of the amended Loughborough License and any such increase in competition
will not have a material adverse effect on the Company's business, financial
condition and results of operations.
VARIABILITY OF CUSTOMER REQUIREMENTS; NATURE AND EXTENT OF CUSTOMER COMMITMENTS
ON ORDERS
The level and timing of orders placed by the Company's OEM customers vary
due to customer attempts to manage inventory, changes in the OEM's manufacturing
and distribution strategies and variations in demand for customer products due
to, among other things, introduction of new products, product life cycles,
competitive conditions or general economic conditions. The Company generally
does not obtain long-term purchase orders or commitments but instead works with
its customers to anticipate the future volume of orders. Based on such
anticipated future volumes, the Company makes other significant commitments
regarding the levels of business that it will seek and accept, the timing of
production schedules and the levels and utilization of personnel and other
resources. From time to time, the Company will purchase components that require
a long lead time without a customer commitment to pay for them. Generally,
customers may cancel, reduce or delay purchase orders and commitments with
limited or no penalty. Significant cancellations, reductions, or delays in
orders by a customer
5
<PAGE>
or group of customers could adversely affect the Company's business, financial
condition and results of operations.
RELIANCE ON ORIGINAL EQUIPMENT MANUFACTURES
A significant component of the Company's strategy is to continue to
increase high volume product sales to OEMs. The Company's results of operations
thus will depend to a significant extent on the success achieved by its OEM
customers in developing and marketing their products. There can be no assurance
that such customers will continue to rely, or expand their reliance, on the
Company as an external source of supply for their DSP solutions, that other OEMs
will become customers of the Company or that any such customers will not
terminate supply contracts or cancel purchase orders or reschedule or decrease
their level of purchases. Any development that would result in a substantial
decrease or delay in sales to one or more significant customers, including
actions by competitors or technological changes, could have a material adverse
effect on the Company's business, financial condition and results of operations.
See 'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'
DEPENDENCE ON THIRD-PARTY SUPPLIERS
The Company purchases DSP microprocessors and certain other components from
IBM, AT&T, Analog Devices, Motorola and Texas Instruments, each of which
manufactures and is the sole supplier of the DSP microprocessors upon which
specific Spectrum products have been developed. The Company does not have long-
term agreements with IBM or any other supplier. While the Company has from time
to time experienced shortages of components supplied by third parties, such
shortages to date have not had a material adverse effect on operating results.
Inability to obtain adequate supplies of DSP chips or components could delay the
Company's ability to ship its products, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Because certain of the Company's products incorporate software developed
and maintained by third parties, the Company relies to a certain extent upon
such third parties' ability to enhance their current products, to develop new
products on a timely and cost-effective basis that will meet changing customer
needs, and to respond to emerging industry standards and other technological
changes. There can be no assurance that the Company would be able to replace the
functionality provided by the third-party software currently offered in
conjunction with the Company's products in the event that such software becomes
unavailable to the Company or obsolete or incompatible with future versions of
the Company's products. The absence of, or any significant delay in, the
replacement of that functionality could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
if any of such third-party software fails or fails to be supported by their
respective vendors, it could be necessary for the Company to redesign certain of
its products. The occurrence of any of these events could have a material
adverse effect on the Company's business, financial condition and results of
operations. Furthermore, should new releases of such third-party software prove
to be incompatible with the current version of the Company's product lines, the
resulting decline in demand for the affected products could have a material
adverse effect on the Company's business, financial condition and results of
operations.
REVENUES FROM DEVELOPMENT CONTRACTS
The Company generates a significant percentage of its total revenues from
development contracts. These development contracts generally provide the Company
with partial funding for the development of products that meet customer
specifications. Under these contracts, the Company receives payments upon
reaching certain development milestones. The Company intends to continue to
enter into development contracts with strategic partners. The Company's failure
to achieve the milestones specified in its existing development contracts, the
termination of any of these contracts or the Company's inability to secure
future development contracts could have an adverse effect on the Company's
business, financial condition and results of operations. See 'Management's
Discussion and Analysis of Financial Condition and Results of Operations' and
'Business-- Research and Product Development.'
6
<PAGE>
RAPID CHANGES IN TECHNOLOGY
The market for the Company's products is characterized by rapidly changing
technologies, evolving industry standards and frequent new product introductions
and enhancements. Accordingly, the Company's future performance will be
dependent on a number of factors, including its ability to identify emerging
technological trends in its target markets, enhance its existing products and
introduce new products and features to meet and adapt to changing customer
requirements and emerging technologies, differentiate its products from those of
its competitors and manufacture and bring products to market quickly at
cost-effective prices. There can be no assurance that the Company's competitors
will not develop future generations of competitive products that will offer
superior price, features or performance which would render the Company's
products uncompetitive or obsolete. There can also be no assurance that the
Company will successfully develop, complete, introduce and market new systems or
system enhancements, or that systems or system enhancements currently in
development or that may be developed by the Company in the future will meet
industry requirements and achieve market acceptance. Any significant delay or
failure to develop, manufacture or ship new or enhanced products could also have
a material adverse effect on the Company's business, financial condition and
results of operations. See 'Business--Research and Product Development.' In
addition, there can be no assurance that certain trends in DSP technology, such
as native signal processing and silicon integration, will not displace certain
of the Company's products, or that the Company will be able to develop new
products in response to such trends that achieve market acceptance. See
'Business--Products' and 'Business--Markets.'
From time to time, the Company and others may announce new products,
capabilities or technologies that have the potential to replace or shorten the
lifecycles of certain of the Company's products. There can be no assurance that
announcements of currently planned or other new products will not cause
customers to defer purchasing existing Company products. Delays or difficulties
associated with new product introductions or product enhancements could have a
material adverse effect on the Company's business, financial condition and
results of operations.
VARIABILITY OF QUARTERLY AND ANNUAL OPERATING RESULTS
The Company's revenues and operating results may vary significantly from
quarter to quarter as a result of a number of factors, many of which are outside
the Company's control. These factors include the general demand for computers,
computer sub-systems and high performance DSP solutions, the success achieved by
the Company's OEM customers in developing and marketing their products, the
volume and timing of orders received, the mix of products and development fees,
the timing of new product introductions by both the Company and its competitors,
pricing by both the Company and its competitors, the Company's ability to
develop and market new products, the Company's ability to manufacture its
products at high quality levels and at commercially reasonable costs, the
availability and cost of DSP microprocessors, the timing and levels of sales and
marketing expenditures and general economic conditions, and changes in the
customer's financial condition or budget. As a result of the foregoing and other
factors, the Company may experience material fluctuations in its future
operating results on a quarterly or annual basis that could have a material
adverse effect on the price of the Common Shares and the Company's business,
financial condition and results of operations.
COMPETITION
The market for DSP hardware and software products is intensely competitive.
Competitors vary in size and in the scope and breadth of the products and
services offered. Because the Company competes in diverse markets with a wide
range of products, certain competitors may have a technology or market advantage
with respect to products which relate primarily to such competitor's specific
area of expertise. Certain of the Company's competitors have significantly
greater financial, research and development, technical and marketing resources
than the Company.
The principal competitive factors in the markets in which the Company
competes include product performance, product development capabilities,
after-sale technical support, access to new technologies and price. In the
commercial market, the Company faces competition in certain targeted markets
from companies that offer more complete solutions. As a result, in some segments
of these markets, the Company's growth rate has remained relatively flat.
7
<PAGE>
Other companies participating in the DSP industry may enter the markets in
which Spectrum competes. Competitive pressures and other factors, such as new
product introductions by the Company or its competitors, may result in
significant pricing pressures that could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
following the recent amendment to the Loughborough License, the Company may
experience competition with respect to products subject to the Loughborough
License from Loughborough and/or any future Loughborough licensees or
distributors. See 'Business--Competition' and '--Amendment of the Loughborough
License.'
ABILITY TO MANAGE GROWTH AND ABILITY TO INTEGRATE RECENT ACQUISITIONS
The Company is currently experiencing a period of growth and expansion, due
in part to its recent acquisition of 3L Limited and its acquisition of
substantially all the assets of Alex Computer (the 'Alex Computer Acquisition').
See 'Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Acquisitions.' This growth has placed, and could continue to
place, a significant strain on the Company's services and support operations,
sales and administrative personnel and other resources. The Company's ability to
successfully expand its operations will depend in part upon its ability to
attract and retain highly qualified employees. The Company's ability to manage
its planned growth effectively also will require the Company to continue
improving its operational, management and financial systems and controls, to
train, motivate and manage its employees and to significantly increase its
operating expenses. There can be no assurance that the Company's revenues will
increase or that the Company will be able to effectively manage such growth and
maintain adequate systems and controls.
AVAILABILITY OF LICENSES
The Company currently licenses a wide variety of intellectual property,
such as various software and development tools, from others for use in its
products and expects to incorporate such intellectual property owned by others
into the products it develops in the future. There can be no assurance that the
Company's present licenses grant, or that its future licenses will grant, the
Company adequate rights for a sufficient period of time or that the Company will
be able to renew expired licenses on commercially reasonable terms. The
inability to obtain, maintain or renew adequate licenses could have an adverse
effect on the Company. See 'Business--Intellectual Property.'
RELIANCE ON PROPRIETARY TECHNOLOGY; LACK OF PATENT PROTECTION
The Company believes that its success is dependent to a large extent upon
its proprietary technology. The Company seeks to maintain the proprietary nature
of its technology through copyright protection and confidentiality agreements
with parties who have access to proprietary information. The Company has not
historically sought patent protection of its products in Canada, the United
States or abroad and it does not hold any patents on any of its current
products. Accordingly, the Company would not be able to avail itself of the
protection afforded by the patent laws in the event that a competitor infringed
upon the Company's proprietary rights. There can be no assurance that any steps
taken by the Company to protect its intellectual property will be adequate to
prevent misappropriation. Furthermore, there can be no assurance that others
will not independently develop technologies that are similar to or superior to
the Company's technology and obtain patents or copyrights thereon. In such
event, the Company may not be able to license such technology on reasonable
terms, or at all. Although the Company does not believe that its products and
technologies infringe upon the proprietary rights of others, there can be no
assurance that third parties will not assert infringement claims in the future.
See 'Business--Intellectual Property.'
CONTRACT MANUFACTURING
The Company currently uses non-affiliated contract manufacturers for
substantially all of its manufacturing processes. The Company intends to use
contract manufacturers to procure components, and to assemble and test the
majority of its printed circuit board assemblies. The Company's internal
manufacturing operations consist primarily of production of prototypes, test
engineering, materials purchasing and inspection, and quality control. Although
the Company has not experienced any material difficulties in obtaining
manufactured products to date, any reduction or interruption in product
manufacturing by such third-party contractors would adversely affect the
8
<PAGE>
Company's ability to continue to deliver its products and its business,
financial condition and results of operations. See 'Business--Logistics,
Manufacturing and Quality Control.'
POTENTIAL UNDETECTED ERRORS
Hardware and software products as complex and new as some of those offered
by the Company may contain undetected errors or failures when first introduced
or as new versions are released. Although the Company extensively tests its
products prior to their introduction, design errors may be discovered after
initial product sampling, resulting in delays in volume production or recalls of
products sold. Although the Company has not experienced any significant errors
to date, the occurrence of such errors could have a material adverse effect on
the Company's business, financial condition and results of operations.
INTERNATIONAL OPERATIONS AND FOREIGN CURRENCY EXCHANGE RATE FLUCTUATIONS
Sales outside Canada account for substantially all of the Company's
revenue. The Company expects that international sales, and sales to the United
States in particular, will continue to represent a substantial amount of its
revenue.
Certain risks are inherent in international operations, such as
difficulties in management, unexpected changes in regulatory requirements,
tariffs and other trade barriers, unique local technical requirements, risk of
political instability, longer accounts receivable collection cycles, potentially
adverse tax consequences and the burdens of complying with a wide variety of
foreign legislation. There can be no assurance that such factors will not have
an adverse effect on the Company's business, financial condition and results of
operations.
Substantially all of the Company's revenue has been recognized in
currencies other than the Canadian dollar, principally the U.S. dollar. Thus,
fluctuations in the exchange rates between these currencies and the Canadian
dollar could have a material effect on the Company's business, financial
condition and results of operations. In addition, if the Canadian dollar rises
relative to the U.S. dollar, the Company's reported Canadian dollar sales and
net income may be materially and adversely affected. The Company attempts to
mitigate some of the risks of exchange rate fluctuations between the U.S. dollar
and the Canadian dollar by denominating many of its payment obligations in U.S.
dollars and, to a lesser extent, through the use of over-the-counter or
exchange-traded 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 and results of operations.
DEPENDENCE ON KEY PERSONNEL
The success of the Company is dependent in large part on certain key
management and technical personnel, the loss of one or more of whom could
adversely affect the Company's business. The Company believes that its future
success depends significantly upon its ability to attract, retain and motivate
highly skilled technical, sales and management employees and consultants. Due to
the high level of competition in the computer industry generally, and in the DSP
segment of the computer industry in particular, there can be no assurance that
the Company will be successful in these efforts, and, if unsuccessful, the
Company's business and operating results will be materially and adversely
affected. The Company does not maintain key man insurance on any of its key
management and technical personnel and has no present intention of obtaining any
such insurance.
POSSIBLE VOLATILITY OF PRICE OF COMMON SHARES
The market prices for the securities of high technology companies have been
volatile. In addition to the factors set forth above, any one or more of which
could adversely affect the market price of the Common Shares, factors such as
fluctuations in the market prices of the common stock of the Company's major
competitors could cause the market price of the Common Shares to fluctuate
substantially. In addition, the stock markets from time to time have experienced
extreme price and volume fluctuations that have particularly affected the market
prices for the stocks of high technology companies and that often have been
unrelated to the operating results of such companies. These broad market
fluctuations, as well as general economic, political and market conditions such
as recessions or international currency fluctuations, could adversely affect the
market price of the Common Shares. There can be no assurance that a more active
trading market will develop and continue after completion of this
9
<PAGE>
Offering or that the market price of the Common Shares will not decline below
the public offering price of the Common Shares offered hereby.
CHANGE OF CONTROL; INVESTMENT CANADA ACT; MAJORITY OF DIRECTORS TO BE CANADIAN
An investment in the Common Shares which results in a change of control of
the Company may be subject to review and approval under the Investment Canada
Act, as amended (the 'Investment Act'), if the person acquiring control is not a
Canadian person. This Canadian regulatory environment may have the effect of
delaying or preventing a change of control of the Company. In addition, pursuant
to the BC Act, a majority of the Board of Directors must be resident Canadians
and at least one member of the Board of Directors must ordinarily be resident in
the Province of British Columbia.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Common
Shares being offered hereby. The proceeds from the exercise of the Warrant, if
any, will be received by the Company and will be used for general corporate
purposes.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Shares. The Company anticipates that all future earnings will be retained by the
Company for the development of its business. Accordingly, the Company does not
anticipate paying cash dividends on the Common Shares in the foreseeable future.
The payment of any future dividends will be at the discretion of the Company's
Board of Directors and will depend upon, among other things, future earnings,
operations, capital requirements, the general financial condition of the Company
and general business conditions. Additionally, the Company is restricted from
paying dividends pursuant to the terms of its line of credit agreement. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources.'
PRICE RANGE OF COMMON SHARES
The Common Shares have been traded under the symbol 'SSPIF' on the Nasdaq
National Market since June 1993, and under the symbol 'SSY' on The Toronto Stock
Exchange since September 1993. The following table sets forth the high and low
closing prices of the Common Shares on Nasdaq and the TSE for the periods
indicated:
<TABLE>
<CAPTION>
HIGH LOW HIGH LOW
--------- -------- ---------- ---------
<S> <C> <C> <C> <C>
CALENDAR YEAR 1996
First Quarter........................................... US$13.750 US$8.750 Cdn$18.500 Cdn$12.250
Second Quarter.......................................... 12.375 7.625 16.500 10.125
Third Quarter........................................... 9.875 5.500 12.800 7.700
Fourth Quarter.......................................... 9.125 5.875 11.900 8.000
CALENDAR YEAR 1997
First Quarter........................................... US$ 7.750 US$4.750 Cdn$10.500 Cdn$6.750
Second Quarter.......................................... 6.125 4.375 8.500 6.400
Third Quarter........................................... 9.000 4.750 11.800 6.600
Fourth Quarter.......................................... 8.250 4.750 11.250 6.750
CALENDAR YEAR 1998
First Quarter........................................... US$ 7.000 US$5.250 Cdn$ 9.850 Cdn$7.500
Second Quarter (through June 26, 1998).................. 6.500 5.250 9.200 7.600
</TABLE>
At May 5, 1998, the Company had approximately 163 shareholders of record
and 10,242,921 Common Shares outstanding, including 233,300 Common Shares held
in treasury. Of these amounts, there were 134 U.S. shareholders of record
holding a total of 9,391,450 Common Shares, or 92% of the Common Shares
outstanding.
10
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998 and as adjusted to give effect to the exercise of the Warrants.
The table set forth below should be read in conjunction with 'Management's
Discussion and Analysis of Financial Condition and Results of Operations' and
the Company's financial statements and notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
----------------------
ACTUAL AS ADJUSTED
------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt.......................................................... $ 81 $ 81
------- -----------
------- -----------
Long-term debt, net of current portion..................................................... $ 227 $ 227
Shareholders' equity:
Common Shares, no part value, 50,000,000 shares authorized; 10,237,526 shares
issued and outstanding(1)............................................................. 20,307 21,507
Warrants................................................................................. 200 --
Contributed Surplus........................................................................ 106 106
Retained earnings.......................................................................... 2,261 2,261
------- -----------
Total shareholders' equity............................................................... 22,874 23,874
------- -----------
Total capitalization..................................................................... $23,182 $24,182
------- -----------
------- -----------
</TABLE>
- ------------------
(1) Does not include 1,646,657 Common Shares issuable upon exercise of
outstanding options and 367,741 additional Common Shares reserved for
issuance pursuant to the Company's Stock Option Plan. See 'Management--Stock
Option Plan.'
SELECTED FINANCIAL DATA
The selected financial data for the Company presented below under the
captions 'Statements of Operations Data' for the years 1993, 1994, 1995, 1996
and 1997 and 'Balance Sheet Data' as of December 31, 1993, 1994, 1995, 1996 and
1997, is derived from the Company's financial statements which have been audited
by KPMG, independent auditors. The Company's financial statements as of December
31, 1996 and 1997 and for each of the years in the three year period ended
December 31, 1997 and the auditors' report thereon are included elsewhere in
this Prospectus. The 'Statements of Operations Data' for fiscal years 1993 and
1994 and the 'Balance Sheet Data' as of December 31, 1993, 1994 and 1995 are
derived from audited financial statements that are not included herein. Data as
at March 31, 1998 and for the three months ended March 31, 1998 and 1997 have
been derived from unaudited financial statements included elsewhere in this
Prospectus and, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the results of operations for the periods presented. Results for
the three months ended March 31, 1998 are not necessarily indicative of the
results to be expected for the full year ending December 31, 1998. This selected
financial data should be read in conjunction with 'Management's Discussion and
Analysis of Financial Condition and Results of Operations' and the financial
statements and notes thereto included elsewhere in this Prospectus.
For a description of the Company's unaudited pro forma results of
operations as if the acquisition of Alex Computer had taken place on January 1,
1997, see 'Pro Forma Consolidated Financial Statements' included elsewhere in
this Prospectus.
11
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31, MARCH 31,
--------------------------------------------------- ------------------ ---------------------
1993 1994 1995 1996 1997 1997 1998(1) 1997 1998(1)
------- ------- ------- ------- ------- ------- ------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(CANADIAN GAAP) (CANADIAN GAAP) (U.S. GAAP AND US$)(2)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Sales.................... $12,743 $16,389 $17,712 $27,358 $36,452 $ 6,617 $ 7,492 US$4,889 US$ 5,276
Cost of sales............ 6,470 7,115 7,807 11,373 15,548 2,353 2,769 1,739 1,950
------- ------- ------- ------- ------- ------- ------- -------- ---------
Gross profit............. 6,273 9,274 9,905 15,985 20,904 4,264 4,723 3,150 3,326
Administrative, sales and
marketing expenses..... 4,950 8,083 7,228 9,449 11,006 2,079 4,120 1,537 2,490
Depreciation and
amortization
expenses............... 229 355 579 678 944 188 272 141 171
Research and development
expenses(3)............ 570 462 1,839 2,905 3,528 1,028 1,194 760 760
Acquired in-process
research and
development charge..... -- -- -- -- -- -- -- -- 6,168
------- ------- ------- ------- ------- ------- ------- -------- ---------
Earnings (loss) from
operations............. 524 374 259 2,953 5,426 969 (863) 712 (6,344)
Interest and bank
charge................. (21) (41) (42) (31) 4 (7) (20) (5) (14)
Other income............. 366 268 664 39 15 16 (12) 12 (8)
------- ------- ------- ------- ------- ------- ------- -------- ---------
Earnings (loss) before
income taxes and
discontinued
operations............. 869 601 881 2,961 5,445 978 (895) 719 (6,366)
Income taxes
(recovery)............. 386 164 501 987 2,138 371 (366) 274 (554)
------- ------- ------- ------- ------- ------- ------- -------- ---------
Earnings (loss) from
continuing
operations............. 483 437 380 1,974 3,307 607 (529) 445 (5,812)
Earnings (loss) from
discontinued
operations............. -- (2,602) (1,410) 176 (737) (159) -- (117) --
------- ------- ------- ------- ------- ------- ------- -------- ---------
Net earnings (loss)...... $ 483 $(2,165) $(1,030) $ 2,150 $ 2,570 $ 448 $ (529) US$ 328 US$(5,812)
------- ------- ------- ------- ------- ------- ------- -------- ---------
------- ------- ------- ------- ------- ------- ------- -------- ---------
Basic Earnings (loss) per
share from continuing
operations............. $ 0.06 $ 0.05 $ 0.04 $ 0.21 $ 0.36 $ 0.07 $ (0.06) US$ 0.05 US$ (0.62)
Basic Earnings (loss) per
share from discontinued
operations............. -- (0.30) (0.15) 0.02 (0.08) (0.02) -- (0.01) --
------- ------- ------- ------- ------- ------- ------- -------- ---------
Basic Earnings (loss) per
share.................. $ 0.06 $ (0.25) $ (0.11) $ 0.23 $ 0.28 $ 0.05 $ (0.06) US$ 0.04 US$ (0.62)
------- ------- ------- ------- ------- ------- ------- -------- ---------
------- ------- ------- ------- ------- ------- ------- -------- ---------
Weighted average number
of common shares
outstanding (basic).... 8,024 8,759 9,001 9,195 9,235 9,229 9,356 9,229 9,356
Fully diluted earnings
(loss) per share from
continuing
operations............. $ 0.06 $ 0.05 $ 0.04 $ 0.21 $ 0.34 $ 0.06 $ (0.06) US$ 0.05 US$ (0.62)
Fully diluted earnings
(loss) per share from
discontinued
operations............. -- (0.30) (0.15) 0.02 (0.07) (0.01) -- (0.02) --
------- ------- ------- ------- ------- ------- ------- -------- ---------
Fully diluted earnings
(loss) per share....... $ 0.06 $ (0.25) $ (0.11) $ 0.23 $ 0.27 $ 0.05 $ (0.06) US$ 0.03 US$ (0.62)
------- ------- ------- ------- ------- ------- ------- -------- ---------
------- ------- ------- ------- ------- ------- ------- -------- ---------
Weighted average number
of common shares
outstanding (fully
diluted)............... 8,338 9,080 9,343 9,528 10,146 9,392 9,356 9,619 9,356
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------- AT MARCH 31, AT MARCH 31,
1993 1994 1995 1996 1997 1998 1998(1)
------- ------- ------- ------- ------- ------------------ ---------------------
(CANADIAN GAAP) (CANADIAN GAAP) (U.S. GAAP AND US$)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.......... $12,048 $ 6,964 $ 7,668 $ 9,705 $10,748 $ 8,119 US$ 4,860
Total assets............. 15,486 14,804 15,525 20,678 24,733 33,807 17,510
Long-term debt, net of
current maturities..... 196 52 13 -- 107 227 219
Shareholders' equity..... 13,090 11,136 11,048 13,694 16,155 22,874 9,868
</TABLE>
- ------------------
(1) Includes results of operations of Alex Computer from March 17, 1998, the
effective date of the acquisition of substantially all the assets of Alex
Computer. The consideration paid and assets acquired in connection with such
acquisition were transferred on May 1, 1998.
(2) In the first quarter of 1998, the Company adopted U.S. GAAP and began
reporting its results of operations in US dollars.
(3) Amounts shown for the year 1993 are net of tax credits and governmental
grants in the amount of $142,000.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's financial statements and the notes thereto included elsewhere in
this Prospectus. This Prospectus contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties.
The Company's actual results could differ materially. Factors that could cause
or contribute to such differences include, but are not limited to, those
discussed in 'Risk Factors' as well as those discussed below and elsewhere in
this Prospectus.
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.
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.
The Company publishes its financial statements in Canadian dollars. All
financial information, except where indicated otherwise, has been prepared in
accordance with Canadian GAAP, which conforms in all material respects to U.S.
GAAP, except as otherwise presented in the Company's financial statements.
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.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Sales..................................................................... 100.0% 100.0% 100.0%
Cost of sales............................................................. 44.1 41.6 42.7
----- ----- -----
Gross margin.............................................................. 55.9 58.4 57.3
Administrative, sales and marketing expenses.............................. 40.8 34.5 30.2
Depreciation and amortization expenses.................................... 3.3 2.5 2.6
Research and development expenses......................................... 10.4 10.6 9.7
----- ----- -----
Earnings from operations.................................................. 1.4 10.8 14.9
Interest and bank charges................................................. (0.2) (0.1) 0.0
Other income.............................................................. 3.7 0.1 0.0
----- ----- -----
Earnings before income taxes and discontinued operations.................. 4.9 10.8 14.9
Income taxes (recovery)................................................... 2.8 3.6 5.8
----- ----- -----
Earnings from continuing operations....................................... 2.1 7.2 9.1
Earnings (loss) from discontinued operations.............................. (7.9) 0.6 (2.0)
----- ----- -----
Net earnings (loss)....................................................... (5.8)% 7.8% 7.1%
----- ----- -----
----- ----- -----
</TABLE>
QUARTER ENDED MARCH 31, 1998 COMPARED TO QUARTER ENDED MARCH 31, 1997
Sales. Sales from continuing operations in the quarter ended March 31,
1998 were $7,492,000, an increase of $875,000, or 13.2%, over sales in the
quarter ended March 31, 1997. Included in first quarter sales were development
contract fees of $385,000, or 5.1% of sales for the quarter, compared to
development contract fees in the first quarter of 1997 of $875,000, or 13.2% of
sales for the quarter. The growth in the Company's sales in
13
<PAGE>
the first quarter of 1998 was due primarily to increased sales in traditional
markets and the inclusion of the business of Alex Computer at March 17, 1998.
Gross Profit. Gross profit increased to $4,723,000 for the quarter ended
March 31, 1998 from $4,264,000 for the quarter ended March 31, 1997, an increase
of 10.8%. Gross margin (gross profit as a percentage of sales) decreased to
63.0% in the first quarter of 1998 from 64.4% in the first quarter of 1997. The
decrease in gross margin was due primarily to higher development contract fees
in the first quarter of 1997.
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 first quarter of 1998
were $4,120,000, or 55.0% of sales for the quarter, compared to $2,079,000 in
the first quarter of 1997, or 31.4% of sales for the quarter. AS&M expenses as a
percentage of sales were higher in the first quarter of 1998 due to the costs
associated with the acquisition 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 first quarter of 1998 were $272,000, an increase of $84,000, or 44.7%, over
the first 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 $1,194,000 in the first quarter of 1998, or 15.9% of
sales for the quarter, compared to $1,028,000 in the first quarter of 1997, or
15.5% of sales for the quarter. The expenses in the first 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
$1,777,000 in the first quarter of 1998, or 23.7% of sales for the quarter,
compared to $1,246,000 in the first quarter of 1997, or 18.8% of sales for the
quarter.
Other Income. Other income, consisting primarily of interest income on
short-term deposits was $(12,000) in the first quarter of 1998 compared to other
income in the first quarter of 1997 of $16,000.
Income Taxes. Deferred income taxes (recovery) for the first quarter of
1998 were $(366,000) or (40.9)% of earnings before taxes and discontinued
operations, compared to $371,000, or 37.9% of earnings before taxes and
discontinued operations for the first quarter of 1997.
Net Earnings. The Company had earnings (loss) from continuing operations
in the first quarter of 1998 of $(529,000) compared to earnings from continuing
operations of $607,000 in the first quarter of 1997. Earnings (loss) per share
(basic) from continuing operations in the first quarter of 1998 was $(0.06) per
share, compared to earnings per share (basic) from continuing operations of
$0.07 per share in the first quarter of 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Sales. Sales from continuing operations in 1997 were $36,452,000, an
increase of $9,094,000, or 33.2%, over sales in 1996. Included in 1997 sales
were development contract fees of $2,210,000, or 6.1% of 1997 sales, compared to
development contract fees in 1996 of $2,642,000, or 9.7% of 1996 sales.
Development contract fees included fees generated in 1997 and 1996 from the
development of ASICs for applications in the Company's ASICs and software
business. The growth in the Company's 1997 sales was due primarily to increased
sales in its traditional markets.
Gross Profit. Gross profit increased to $20,904,000 for 1997 from
$15,985,000 for 1996, an increase of 30.8%. Gross margin (gross profit as a
percentage of sales) decreased to 57.3% in 1997 from 58.4% in 1996. The decrease
in gross margin was due primarily to the reduction in development contract fees
in 1997 over 1996 and increased royalties on certain licensed products.
Administrative, Sales and Marketing. AS&M expenses for 1997 were
$11,006,000, or 30.2% of 1997 sales, compared to $9,449,000 in 1996, or 34.5% of
1996 sales. AS&M expenses as a percentage of sales were lower in 1997 compared
to 1996 due to the increase in sales without a commensurate increase in the
level of AS&M expenses.
14
<PAGE>
Amortization. Amortization expenses in 1997 were $944,000, an increase of
$266,000, or 39.2%, over 1996. 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
$3,528,000 in 1997, or 9.7% of 1997 sales, compared to $2,905,000 in 1996, or
10.6% of 1996 sales. The expenses in 1997 consisted primarily of costs
associated with development contract fees relating to ASICs and software and
military/aerospace projects. Total research and development expenditures for
continuing operations and those capitalized as software and related development
costs were $5,465,000 in 1997, or 15.0% of 1997 sales, compared to $3,765,000 in
1996, or 13.8% of 1996 sales.
Other Income. Other income, consisting primarily of interest income on
short-term deposits was $15,000 in 1997 compared to other income in 1996 of
$39,000.
Income Taxes. Deferred income taxes for 1997 were $2,138,000, or 39.3% of
earnings before taxes and discontinued operations, compared to $987,000, or
33.3% of earnings before taxes and discontinued operations for 1996.
Net Earnings. The Company had earnings from continuing operations in 1997
of $3,307,000 compared to earnings of $1,974,000 in 1996. Earnings per share
(basic) from continuing operations in 1997 was $0.36 per share, compared to
earnings per share (basic) from continuing operations of $0.21 per share in
1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Sales. Sales from continuing operations in 1996 were $27,358,000, an
increase of $9,646,000, or 54.5%, over sales in 1995. Included in 1996 sales
were development contract fees of $2,318,000, or 8.5%, of sales, compared to
development contract fees in 1995 of nil. Development contract fees included
fees generated in 1996 by the development of ASICs for a multimedia application
in the Company's new ASICs and software market segment. The growth in the
Company's 1996 sales was due primarily to increased sales in its traditional
markets.
Gross Profit. Gross profit increased to $15,985,000 for 1996 from
$9,905,000 for 1995, an increase of 61.3%. Gross margin increased to 58.4% in
1996 from 55.9% in 1995. The increase in gross margin was due primarily to the
increase in development contract fees in 1996 over 1995.
Administrative, Sales and Marketing. AS&M expenses in 1996 were
$9,449,000, or 34.5% of sales, compared to $7,228,000, or 40.8%, of sales in
1995. AS&M expenses as a percentage of sales were significantly lower in 1996
compared to 1995 due to the increase in sales of traditional products and
development contract fees in 1996.
Amortization. Amortization expenses in 1996 were $678,000, an increase of
$99,000, or 17.1% over 1995. The increase in amortization was due primarily to
increased investment in fixed assets.
Research and Development. Research and development expenditures were
$2,905,000 in 1996, or 10.6% of sales, compared to $1,839,000, or 10.4%, of
sales in 1995. The expenditures in 1996 consisted primarily of costs associated
with development contract fees relating to ASICs and software and
military/aerospace projects.
Other Income. Other income for 1996 was $39,000 compared to other income
in 1995 of $664,000, which consisted primarily of a gain arising from the sale
of securities issued by QSound Labs, Inc. in connection with the formation of a
50/50 joint venture. The remainder of other income consisted primarily of
interest income on short-term deposits.
Income Taxes (Recovery). Deferred income taxes for 1996 were $987,000
which resulted from the drawing down of a portion of the deferred income taxes
previously recorded. Income tax provision for continuing oprations was $501,000
in 1995.
Net Earnings (Loss). The Company had earnings from continuing operations
in 1996 of $1,974,000 compared to earnings of $380,000 in 1995. Earnings per
share from continuing operations in 1996 was $0.21 per share, compared to
earnings per share of $0.04 per share in 1995.
15
<PAGE>
DISCONTINUED OPERATIONS
In 1993, the Company introduced its first Computer Telephony ('CTI')
products for sale to OEMs and to consumers directly through retail distribution
channels. In 1994, the Company developed a new release of its CTI product for
high volume production targeted to leading OEM customers such as IBM and OMRON.
In 1994, the Company recorded a charge against inventory relating to its first
generation retail CTI product, and in 1995 the Company terminated its retail
distribution efforts due to high marketing costs and a failure to achieve
significant market penetration, which resulted in operating losses. In 1997, the
Company initiated plans to discontinue the operations of its desktop CTI
business due to low gross margins prevalent in this market segment. The Company
expects to close operations in this business in 1998. Sales of desktop CTI
products accounted for 31.2% of sales in 1995, 32.2% of sales in 1996 and 1.9%
of sales in 1997.
Sales of the Company's desktop CTI products in 1997 were $719,000, a
decrease of $8,837,000, or 92.5% over sales from this business in 1996. Gross
profit from discontinued operations in 1997 was $265,000, a decrease of
$1,742,000, or 86.8%, from gross profit from this business in 1996. Operating
expenses from discontinued operations in 1997 totaled $1,475,000, a decrease of
$269,000, or 15.4%, from operating expenses from this business in 1996. In 1997,
the net loss from discontinued operations totaled $737,000, or $0.08 per share
(basic), compared to net earnings of $176,000, or $0.02 per share (basic), in
1996.
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 $5,000,000 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 May 5, 1998, the Company has outstanding borrowings under the
Line of Credit of approximately $2,470,000.
At December 31, 1996, December 31, 1997 and March 31, 1998, the Company's
cash position was $2,038,000, $1,979,000 and $84,000 respectively. Net cash
provided by (used in) operations, financing and investments was $116,000,
($59,000) and $(1,895,000) in the years ended December 31, 1996 and 1997, and
the quarter ended March 31, 1998, respectively. For the quarter ended March 31,
1998, cash used in operations, financing and investments consisted primarily of
cash generated from the issuance of Common Shares, warrants and long term debt
which was used primarily for the acquisition of the net assets of Alex Computer,
and the purchase of capital assets and software and related development costs.
For 1997, cash used in operations, financing and investments consisted primarily
of cash from operations, and proceeds from the issuance of common shares upon
the exercise of options which was used primarily for the acquisition of 3L
Limited, to increase inventories, fund discontinued operations, purchase of
treasury shares and for the purchase of capital assets and software and related
development costs. In 1996, cash provided by operations, financing and
investments consisted principally of cash from continuing and discontinued
operations and the receipt of funds upon the exercise of outstanding stock
options. This was used primarily to increase accounts receivable and for the
purchase of capital assets and software and related development costs.
Accounts receivable, net, at December 31, 1996, December 31, 1997, and
March 31, 1998 was $11,493,000, $9,367,000 and $8,675,000, respectively. The
Company's standard collection terms are net 30 days, subject to adjustment for
certain customers.
The Company made capital expenditures of $2,085,000 during the year ended
December 31, 1996, $3,194,000 during the year ended December 31, 1997, and
$1,209,000 during the quarter ended March 31, 1998, primarily for computer
equipment and software and related development costs. In 1997, the Company
invested $1,665,000 in the purchase of treasury shares and invested $1,039,000
in the acquisition of 100% of the shares of 3L Limited, net of $268,000 in cash
acquired. On March 17, 1998, the Company effectively acquired pursuant to an
acquisition agreement all the assets of Alex Computer. The consideration paid
and assets acquired in connection
16
<PAGE>
with such acquisition were transferred on May 1, 1998. The consideration paid by
Spectrum for such acquisition consisted of $961,000 in cash, the assumption of
$1,525,000 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 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 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.
17
<PAGE>
BUSINESS
Spectrum designs, develops and markets programmable digital signal
processing ('DSP') solutions which are incorporated into high performance
applications used primarily in commercial, wireless and military markets.
Commercial off-the-shelf DSP solutions currently offered by the Company are used
in a wide range of applications, including avionics, medical diagnostic imaging,
communications, control, test and measurement, machine vision and wireless.
Spectrum's solutions incorporate proprietary and licensed DSP software, hardware
and application specific integrated circuits ('ASICs') integrated with leading
manufacturers' programmable DSP microprocessors. The Company recently acquired
3L Limited, a Scotland-based company specializing in operating systems for DSP
systems with multiple DSPs in the system, and Alex Computer Systems, Inc., a New
York-based company specializing in DSP hardware and software solutions based on
Analog Devices' SHARC processor.
INDUSTRY BACKGROUND
DSP involves the conversion of analog signals, including sound and light,
into a stream of digital values that are then processed, manipulated, exchanged
or stored by computing systems. DSP provides several advantages over analog
signal processing, including: (i) higher degrees of audio and video compression,
resulting in greater storage and communication capacity; (ii) a greater ability
to process and manipulate data, resulting in enhanced product performance; and
(iii) the ability to process and adapt to changing signals in real time. In
addition, DSP permits easier development and upgrades of multi-functional
products through the use of programmable software/ hardware combinations, thus
shortening time-to-market for new products. Although the theoretical foundation
of DSP technology existed for many years, broad applications for DSP technology
did not exist until high-speed microprocessors became available at a reasonable
cost. The foundation of a DSP system is the DSP microprocessor, or chip, first
introduced in the early 1980s by a number of semiconductor companies, including
AT&T, Texas Instruments and Motorola. Initial advances in DSP technology using
DSP chips took place in military and commercial applications where high
performance and speed were of paramount importance and cost was a secondary
consideration. In the mid-1980s, very large scale integration ('VLSI') design
and manufacturing processes developed for central processing units ('CPUs') and
memories were applied to general purpose DSP chips, driving down costs and
increasing performance exponentially. These trends, combined with the superior
processing capabilities of DSP, have led to rapid growth in DSP applications.
DSP technology is part of the foundation of the telecommunications and
multimedia revolutions of the 1990s, much as VLSI computer chips and memories
enabled the PC revolution in the 1980s. DSP technology that enables
sophisticated processing of images and voice is rapidly becoming commonplace.
DSP chips have been behind major advances in data transmission speeds, which
have dramatically reduced the cost of wireless communications (including
cellular communications), and emerging voice, audio and image manipulation
technologies.
PRODUCTS
DSP Systems. The Company's DSP product line ranges from development,
off-the-shelf and customer boards, to a broad range of DSP software and ASICs
capabilities and products. The Company currently offers DSP boards and hardware
modules based on a variety of floating and fixed-point programmable DSP
microprocessors (such as Analog Devices' SHARC DSP and Texas Instruments' C6x
DSPs). The Company has also begun developing a series of chips or ASICs designed
specifically to increase the performance of its products--the first in this
series is the 'Hurricane' PCI-to-DSP bridge chip. On the software side, Spectrum
also provides operating system software (e.g., Spectrum's Prism, 3L Limited's
Diamond and Alex Computers' APEX-Pro), software algorithms and libraries, and
debugging tools. The Company's broad line of DSP microprocessors (developed by
Texas Instruments, Analog Devices, NEC and Motorola), hardware interfaces,
modular product architectures, ASICs capabilities and software development tools
allow customers to tailor Spectrum products to a wide variety of applications.
The prices for the over 100 products for commercial, wireless and military
markets currently offered by the Company generally range from US$1,000 to
US$10,000 per board for standard products (including the Company's catalog
product offerings), to up to US$30,000 for the Company's customized DSP boards.
18
<PAGE>
A complete DSP system involves a number of hardware and software components
that are integrated onto a single DSP board. At the core, all solutions start
with a DSP chipset. A chipset consists of one or more DSP microprocessors which
are bundled with other chips such as ASIC, memory and audio chips. The chipset
along with numerous other components are mounted on a circuit board which is
then installed into a computer system. In addition to this specialized hardware,
these boards require specialized software to provide instructions for specific
applications. The software typically includes DSP algorithms, DSP operating
system software and host software. Other than the DSP microprocessor, the
Company has the capability to design and develop all the DSP hardware and
software for each DSP system.
Software. In June 1997, Spectrum acquired a Scotland-based software
company, 3L Limited, in order to provide more complete DSP software solutions to
its customers. 3L Limited specializes in real-time operating systems
specifically for applications requiring multiple DSPs. 3L Limited operates on an
independent basis under the name of 3L Limited so that it can effectively sell
its standard DSP software products through its traditional channels to DSP
systems vendors and in-house developers. Spectrum's head office directs 3L
Limited's product development activities in Scotland and supports its sales
activities with marketing and promotional support. 3L Limited's software is
relatively unique in the DSP market and allows Spectrum to gain a competitive
advantage by enabling the Company to offer a real-time-operating system,
designed specifically for DSP systems with multiple processors (typical Spectrum
products), to its customers as part of its standard DSP system solution.
In March 1998, Spectrum acquired the assets of another DSP company, Alex
Computer Systems, Inc., a company with strong software and hardware solutions
based on Analog Devices' SHARC-based processors. This acquisition allows
Spectrum to become a strong competitor in the floating-point DSP marketplace,
with the large SHARC-based product line Alex Computer brought to Spectrum. One
of Alex Computer's key strengths is its software capability. On the software
side, Alex Computer contributes an outstanding software combination to
complement the software Spectrum had for the SHARC-based product line. The
software and hardware product line which Alex Computer contributes to Spectrum
allows the Company to offer a truly SHARC-based suite of system level solutions.
MARKETS
General Commercial. The Company's commercial products historically have
been general purpose in nature and targeted to a wide range of applications. The
Company believes there is significant opportunity in the commercial market due
in part to the constant introduction of new ways to implement DSP technology
into traditionally non-DSP commercial applications. Typical applications in this
market include: medical diagnostic imaging (e.g., MRI and ultrasound), to test
and measurement, control, audio, machine vision and image processing. The
Company's customers in this market include: Sunkist, DCA, Nortel,
Hewlett-Packard and Ford Motor Company.
Radar/Sonar. Applications for the military and the aerospace market
generally attract the newest, most sophisticated DSP system solutions. The
market is driven by a demand for sophisticated commercial (rather than custom)
off-the-shelf DSP hardware solutions supported by time-saving software
development tools from reliable, quality DSP system suppliers. The balance of
hardware and software sophistication, together with reliable supply, is key to
differentiating the Company's solutions from those of its competitors. The
leading-edge position of the Company's customers in this market forces them to
adopt new technology whenever it offers even a modest increase in capability.
This causes rapid product cycle updates (requiring new hardware) and increases
the development and integration costs and schedules, requiring improved software
tools. The Company's customers in this market include: Boeing, Raytheon, Jet
Propulsion Labs and the U.S. Department of Defense (Naval Undersea Warfare
Center).
Signal Intelligence. Multiprocessing DSP often is required in military
applications, including electronic countermeasures, surveillance and encryption.
While overall defense spending has been decreasing, the Company believes that
spending for technological improvements and enhancements will continue. DSP
solutions are used to satisfy communications and intelligence requirements of
the U.S. Department of Defense. Spectrum has developed custom digital receiver
hardware modules for the U.S. Department of Defense that complement certain
Spectrum off-the-shelf products and provide a cost effective and short
time-to-market product for electronic surveillance and intelligence
applications. The Company began shipping its first production volumes of these
19
<PAGE>
systems in the third quarter of 1996. The Company's customers in this market
include: NAI, the U.S. Department of Defense and Hewlett-Packard.
Wireless. The telecommunications industry historically has been a major
user of DSP technology. Telecommunications applications such as high-speed
digital modems and cellar base stations are based on DSP, which is instrumental
in the development of digital cellular networks, including subscriber sets and
base stations. The Company is dedicated to providing complete solutions to
companies in the wireless industry which, the Company believes, will need to
incorporate DSP technology into next generation cellular base station and other
wireless technologies.
CUSTOMERS
The Company has established a diversified base of customers for its DSP
system solutions, representing a wide range of industries and applications. In
1997, the Company conducted business with over 400 customers. The Company's two
largest customers accounted for approximately 44% and 34% of the Company's sales
in 1997 and the first quarter of 1998, respectively. The Company's largest
customer, the U.S. Government (principally the U.S. Department of Defense),
accounted for approximately 25% and 22% of the Company's sales in 1997 and the
first quarter of 1998, respectively. In addition, approximately 18% of the
Company's sales during 1997 were made to NAI Technologies and approximately 12%
of the Company's sales during the first quarter of 1998 were made to Siemens
Medical Systems, Inc.
The following chart shows several of the Company's representative customers
for each of the Company's targeted markets:
<TABLE>
<CAPTION>
COMMERCIAL RADAR/SONAR SIGNAL INTELLIGENCE WIRELESS
- ------------------- --------------------------- --------------------------- -------------------
<S> <C> <C> <C>
Sunkist Growers U.S. Department of Defense U.S. Department of Defense Motorola
Siemens Medical Lockheed Martin Watkins-Johnson Silicon Wireless
Halliburton Boeing Hewlett-Packard
Ford Motors Westinghouse Applied Signal Technologies
Integrated Systems Northrup Grumman Raytheon
Raytheon E-Systems NAI Technologies
</TABLE>
LOGISTICS, MANUFACTURING AND QUALITY CONTROL
The Company's logistics operations include manufacturing, purchasing,
quality assurance, customer service and after-sale technical support and at May
5, 1998 employed 28 persons. The Company employs an outsourcing model for
substantially all product manufacturing. Product manufacturing consists of
board-level products, cable assemblies and some silicon manufacturing. The
Company believes that outsourcing most of its manufacturing allows it to focus
more of its resources on research and product development, marketing, sales and
customer support while producing a flexible, cost effective source of
manufacturing capacity. Standards for assembly, testing and quality assurance
have been established and documented and are monitored through a quality control
program throughout the assembly and final inspection process. Additionally, the
Company must meet certain specified quality goals under several of its customer
supply agreements. The Company achieved ISO 9002 certification in January 1994
and ISO 9001 certification in December 1994.
The Company supports its ISO 9001 quality standards with after-sale
technical support, which is especially desired by customers relying on the
Company's design engineers rather than an in-house engineering capability. The
Company's support hotline is staffed with application engineers who are
experienced in a broad variety of hardware and software products. The
application engineers document all problems or questions reported by customers
creating a database that assists in the timely resolution of future questions.
This database also serves as a tool to the product managers for redefinition and
improvements to the Company's product line.
20
<PAGE>
SUPPLIERS
The Company's DSP solutions include a number of products and components
that are sourced from third-party suppliers, including Texas Instruments,
Motorola, AT&T and Analog Devices. The Company attempts to use standard parts
and components which are available from multiple vendors in its DSP solutions,
although certain DSP solutions are based upon manufacturer-specific DSP
microprocessors. The Company believes that each supplier has a manufacturing
capability in more than one location which reduces the risk of an interruption
in product availability. The Company does not have long-term agreements with any
of these suppliers. The availability of many of these components is dependent in
part on the Company's ability to accurately forecast its future requirements.
While the Company has from time to time experienced shortages of these
components, such shortages to date have not had a material adverse effect on
operating results.
RESEARCH AND PRODUCT DEVELOPMENT
The Company believes that continued investment in research and development
will be critical to the Company's future success. At May 5, 1998, the Company
employed 80 persons in the area of research and product development, focusing on
the development of next generation products for military aerospace and
commercial applications and new multimedia products and ongoing enhancement of
existing ASICs, DSP and Windows software and modules. The Company generates a
significant percentage of its total revenues from development contracts,
primarily with key customers. These development contracts have provided the
Company with partial funding for the development of certain of its products and
sometimes provide for a production commitment. Under these contracts, the
Company receives payments upon reaching certain development milestones. The
Company is currently conducting development work under development contracts
with several of its customers. The Company intends to continue to seek
development contracts with strategic partners.
During 1995, 1996, 1997 and the first quarter of 1998, the Company's
research and development expenditures were approximately $3,612,000, $4,637,000,
$5,888,000 and $1,777,000, respectively.
ENGINEERING
Building on its expertise in developing DSP solutions, the Company provides
a broad range of off-the-shelf and custom programmable DSP products for a
variety of applications. To help its customers build better products using DSP
technology, Spectrum's own team of engineers uses a broad array of proprietary
and licensed DSP technologies to identify the appropriate hardware and/or
software solution for each application. The Company's engineers work with their
customers' counterparts early in the design process to ensure that the benefits
of DSP are fully realized in the customer's end product. Established DSP design
components are utilized to create solutions that meet unique processing and
input/output expansion requirements. The engineering team will then conduct
pre-production tests to give customers the opportunity to observe how a product
functions in an application so that necessary adjustments can be made before
final production. When a DSP design has been approved by the customer, the
Company will manufacture the product in the quantity desired by the customer.
The Company's engineers also assist customers with project management, test
software developments, board layout and manufacture, and system integration and
testing.
INTELLECTUAL PROPERTY
The Company believes that its success is dependent to a large extent upon
its proprietary technology. The Company has acquired expertise in developing,
and has developed, a number of proprietary DSP technologies, including: board
designs from consumer-focused single processor DSP solutions to
military/aerospace-focused multi-processing DSP systems, DSP audio and telephony
software, industry standard application interface software, user-interface
application software, ASICs and operating systems. The Company seeks to maintain
the proprietary nature of its technology through copyright protection, embedded
software and confidentiality agreements with parties who have access to
proprietary information. The Company historically has not sought patent
protection of its products in Canada, the United States or abroad and it does
not hold any patents on any of its current products. With respect to its own
products, the Company claims copyright protection for every circuit board, ASIC
or software developed internally. The Company has registered in Canada and the
United States trademarks for MEDIA-LINK(Registered), DSP-LINK(Registered) and
VASP(Registered).
21
<PAGE>
In July 1987, the Company entered an agreement with Loughborough pursuant
to which the Company licenses certain DSP technology. In consideration of the
license, the Company issued to Loughborough 1,000,000 Common Shares, which were
subsequently sold by Loughborough. In addition, the Company is required to pay
Loughborough a 5% royalty on certain of the products for the military/aerospace
and commercial markets based upon technology licensed from Loughborough and
products acquired from Loughborough for resale and must pay a flat fee on a per
product basis for certain other Loughborough Products purchased by the Company
pursuant to such license. In 1995, 1996, 1997 and the final quarter of 1998,
sales of Loughborough Products accounted for approximately 46%, 33%, 30% and
14%, respectively, of the Company's sales. In 1997, the Company and Loughborough
agreed to extend the term of the Loughborough License on a non-exclusive basis
through 2004 with respect to Loughborough Products originally released prior to
January 1997 and through December 1998 with respect to Loughborough Products
originally released subsequent to January 1997. Under the terms of the
Loughborough License, as amended, the Company is not permitted to sell any
product supplied by a third party which is equivalent to a Loughborough Product
unless the Company and Loughborough are unable to agree on competitive terms for
the supply of such product by Loughborough. See 'Risk Factors--Amendment of the
Loughborough License.'
The Company has entered into several licensing agreements pursuant to which
a third-party vendor licenses software or know-how to the Company. The Company
then typically pays a per unit sale royalty to the licensor at an amount
sometimes subject to renegotiation. Under the agreements, the licensed material
remains the sole property of the third-party and there is no right to the
material after termination of the respective agreement. The agreements are
generally non-exclusive and have an indefinite or a three to five year term and
are terminable either for cause or for convenience, upon proper notice.
There can be no assurance that any steps taken by the Company to protect
its intellectual property will be adequate to prevent misappropriation.
Furthermore, there can be no assurance that others will not independently
develop technologies that are similar to or superior to the Company's technology
and obtain patents or copyrights thereon. In such event, the Company may not be
able to license such technology on reasonable terms, or at all. Although the
Company does not believe that its products and technologies infringe upon the
proprietary rights of others, there can be no assurance that third parties will
not assert infringement claims in the future.
COMPETITION
The market for DSP hardware and software products is intensely competitive.
Competitors vary in size and in the scope and breadth of the products and
services offered. Because the Company competes in diverse markets with a wide
range of products, certain competitors may have a technology or market advantage
with respect to products which relate primarily to such competitor's specific
area of expertise. Certain of the Company's competitors have significantly
greater financial, research and development, technical and marketing resources
than the Company.
The principal competitive factors in the markets in which the Company
competes include product performance, product development capabilities,
after-sale technical support, access to new technologies and price. In the
commercial market, the Company faces competition in certain targeted markets
from companies that offer more complete solutions. As a result, in some segments
of these markets, the Company's growth rate has remained relatively flat.
Other companies participating in the DSP industry may enter the markets in
which Spectrum competes. Competitive pressures and other factors, such as new
product introductions by the Company or its competitors, may result in
significant pricing pressures that could have a material adverse effect on the
Company's business, financial condition and results of operations. See
'--Intellectual Property.' In addition, there can be no assurance that certain
trends in DSP technology, such as native signal processing and silicon
integration, will not displace certain of the Company's products, or that in
response to such trends the Company will be able to develop new products that
achieve market acceptance.
22
<PAGE>
AMENDMENT OF THE LOUGHBOROUGH LICENSE
In 1995, 1996, 1997 and the first quarter of 1998, sales of Loughborough
Products accounted for approximately 46%, 33%, 30% and 14%, respectively, of the
Company's sales. The recent amendment to the Loughborough License which, among
other things, changed such license to operate on a non-exclusive basis, could
result in increased competition. In particular, early in 1998, Loughborough
merged with Mizar, Inc. ('Mizar'), a Texas-based company engaged in the
development and marketing of multi-processor DSP computing subsystems, thereby
providing Loughborough with a means to rapidly enter the North American market
by taking advantage of Mizar's existing North American sales force and presence
in the industry. While the Company believes that Loughborough Products will
continue to account for a decreasing percentage of the Company's sales in 1998
and thereafter, there can be no assurance that the terms of the amended
Loughborough License and any such increase in competition will not have a
material adverse effect on the Company's business, financial condition and
results of operations. See 'Risk Factors--Amendment of the Loughborough
License.'
SALES
The Company's sales force is comprised of 28 persons and headed by the Vice
President-Sales. The department is divided into two separate groups: (i)
military/aerospace; and (ii) commercial, and ASICs and software.
The military/aerospace and commercial group is made up of inside sales
personnel, field applications engineers, field sales managers and a channel
sales director. The sales group is organized into five main geographic regions:
the Eastern Region, managed from the sales office in Westborough, Massachusetts,
the federal region, managed from the sales office in Landover, Maryland, the
Western Region, managed from the sales office in Mountainview, California, the
Central Region, managed from the Company's headquarters and the Canadian and
overseas markets, also managed from the Company's headquarters. The Company also
makes use of third-party sales representative firms which have a technical sales
force experienced with similar product lines and an established customer base.
ASICs and DSP software sales are managed primarily from the Company's
headquarters.
The Company currently has distribution agreements in place with
international distributors in Canada, Israel, Japan, Sweden, Germany, Korea,
Taiwan, Australia, South Africa and Denmark.
MARKETING
The marketing department, comprised of 23 persons, is divided into four
groups: product marketing, market development, marketing communications and 3L
Limited marketing.
The product marketing group focuses on developing new product ideas and
assessing market demand for products that are developed internally or sourced
externally. As a new product approaches production, the product managers
coordinate the product roll out process. This includes writing data sheets and
press releases, ensuring that the product is complete (hardware, software,
documentation) and conducting sales training. Ongoing activities in product
management include generating sales forecasts, pricing analysis for volume
contracts, competitive analysis and product catalog updates.
The market development group handles forward looking market trends and
makes recommendations to the product marketing group regarding required product
features for new product development. The group also develops business cases for
new product proposals, researches new technologies, and provides direction to
the Company regarding key and target markets areas.
The 3L Limited marketing group helps define new products, and provides
product development and feature direction, competitive product and company
research, and promotional and collateral support.
The key objectives in the Company's marketing communications program are to
increase awareness of the company externally, handle public relations, increase,
product awareness and generate leads through promotional activities. These
objectives are pursued by a comprehensive program that includes press releases,
press tours, applications articles, direct mail, advertising, catalog and
brochure production, prospect and customer database use, trade shows, and joint
marketing programs with chip vendors and strategic partners.
23
<PAGE>
EMPLOYEES
As of May 5, 1998, the Company had a total of 177 full-time employees, of
which 46 were administrative personnel, 51 were sales and marketing personnel
and 80 were members of the engineering team. None of the Company's employees are
represented by labor unions or collective bargaining units. The Company believes
that its relationship with its employees is good.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
Kenneth A. Spencer.............................. 54 Chair of the Board and Director
Barry W. Jinks(1)(2)............................ 44 President, Chief Executive Officer and Director
Martin McConnell................................ 46 Vice President, Finance, Chief Financial Officer
and Secretary
Brian Lowe...................................... 47 Vice President, Sales
Douglas Johnson................................. 34 Vice President, Logistics
David Hobbs..................................... 42 Vice President, Engineering
Ronald Wages.................................... 35 Vice President, Marketing
Joseph Abrams(3)................................ 62 Director
Dr. Karl H. Brackhaus(1)(2)..................... 51 Director
John E. Brennan................................. 51 Director
Charles C. Johnston(2).......................... 63 Director
Samuel Znaimer(1)(2)(3)......................... 41 Director
</TABLE>
- ------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Acquisition Committee
Dr. Kenneth A. Spencer has been Chair of the Board since December 1997 and
a Director since October 1997. In 1983, Dr. Spencer co-founded Creo Products
Inc. ('Creo'), a Burnaby, British Columbia based high tech company supplying
digital pre-press systems. Dr. Spencer stepped down from an active role in Creo
in 1995 and is currently a Director of that company. Previous posts held by Dr.
Spencer include Vice President and General Manager at MacDonald Dettwiler, and
General Manager of Glenayre Technologies Inc.
Barry W. Jinks has been President of the Company since 1991 and Chief
Executive Officer since 1992. Mr. Jinks has been a Director since 1989 and
served as Vice President Marketing, Engineering for the Company from 1989 to
1991. From 1986 to 1989, Mr. Jinks held several senior positions with LSI Logic
of Canada, a company engaged in the semiconductor industry, most recently as
Director of Marketing.
Martin McConnell has been Vice President, Finance, Chief Financial Officer
and Secretary of the Company since 1993. From 1985 to 1993, Mr. McConnell was
associated with Epic Data Inc., a company involved in factory data collection
systems, in several management positions, most recently serving as Executive
Vice President.
Brian Lowe has been Vice President, Sales of the Company since 1992. From
1977 to 1992, Mr. Lowe held several management positions with Epic Data Inc.,
most recently serving as Vice President, Sales.
Douglas Johnson has been Vice President, Logistics of the Company since
1994. From 1990 to 1994, Mr. Johnson served as Director of Logistics for the
Company. From 1987 to 1990, Mr. Johnson was Corporate Materials Manager with LSI
Logic of Canada.
24
<PAGE>
David Hobbs has been a Vice President, Engineering of the Company since
1994. From 1990 to 1994, Mr. Hobbs held several senior management positions with
the Company in engineering. From 1987 to 1990, Mr. Hobbs held several lead
positions with Gemini Technology Inc., an ASIC design company, most recently
serving as Senior Engineer.
Ronald Wages has been Vice President, Marketing of the Company since April
of 1997. From 1987 to 1997, Mr. Wages held several positions with Texas
Instruments, most recently as Marketing Manager responsible for worldwide DSP
marketing programs and strategic DSP marketing in North America.
Joseph Abrams has been a Director of the Company since 1993. From 1980 to
1990, Mr. Abrams was President of AGS Computers Inc., a computer software
consulting and products company. Since 1990, Mr. Abrams has been a member of the
board of directors of Merisel Inc., a computer products distribution company.
Since 1995, Mr. Abrams has been a member of the board of directors of Phonetel,
a pay telephone company.
Dr. Karl H. Brackhaus has been a Director of the Company since 1990. Since
1976, Mr. Brackhaus has been President and CEO of Dynapro Systems Inc., a
company involved in the design and manufacture of computer based industrial
display systems.
John E. Brennan has been a Director of the Company since 1995. Since 1992,
Mr. Brennan has been President and a Director of Activated Communications Inc.,
a communications company. Since 1991, he has been President of Paging
Dimensions, Inc., a paging company, and President of RCS, Inc., a leasing
company. Since 1990, he has also served as Vice Chairman of Southern Union
Company, a natural gas distribution company. From 1986 until its merger with
Bell Atlantic Corporation in 1992, he served as President and Chief Operating
Officer of Metro Mobile CTS, Inc., a cellular telephone company of which he was
a co-founder.
Charles C. Johnston has been a Director of the Company since 1992. Mr.
Johnston is presently an active private investor. From 1990 to 1992, Mr.
Johnston was Chairman of Teleglobe Inc., a computer services company. Since
January 1990, Mr. Johnson has been a member of the Board of Directors of
Teleglobe Inc. From 1969 to 1989, he was Chairman and Chief Executive Officer of
ISI Systems Inc., a computer service company.
Samuel Znaimer has been a Director of the Company since 1990. Since 1983,
Mr. Znaimer has been Senior Vice President of Ventures West Capital Ltd., a
venture capital company.
There is no family relationship between any Director or executive officer.
There are no arrangements or understandings between any Director or executive
officer.
The Board of Directors met eight times in 1997. Under the BC Act, a
majority of the Board of Directors must be resident Canadians and at least one
member of the Board of Directors must ordinarily be resident in the Province of
British Columbia. All directors hold office until the next meeting of the
shareholders of the Company and until their successors are elected and
qualified. Officers are appointed to serve, at the discretion of the Board of
Directors, until their successors are appointed.
The Board of Directors established an Audit Committee and a Compensation
Committee. The Audit Committee, whose members are Messrs. Brackhaus, Jinks and
Znaimer, is charged with reviewing the Company's annual audit and meeting with
the Company's independent accountants to review the Company's internal controls
and financial management practices. The Audit Committee met once in 1997. The
Compensation Committee, whose members are Messrs. Brackhaus, Johnston and Jinks,
recommend to the Board of Directors the compensation for the Company's key
employees. The Compensation Committee met twice in 1997.
The Acquisition Committee, whose members are Messrs. Znaimer and Abrams,
formed to make recommendations to the Board of Directors on acquisition
opportunities, met twice in 1997.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Aggregate compensation paid to all directors and officers as a group for
services in all capacities during 1997 was Cdn$1,390,000. The following table
sets forth information concerning all cash and non-cash compensation awarded to,
earned by or paid to the Company's Chief Executive Officer in 1997.
25
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER ANNUAL SECURITIES
SALARY BONUS COMPENSATION UNDERLYING
NAME AND PRINCIPAL POSITION YEAR (CDN$) (CDN$) (CDN$) OPTIONS(#)
- ------------------------------------------------------ ---- -------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Barry W. Jinks ....................................... 1997 $221,025 $146,023 $286 13,000
President and Chief Executive Officer 1996 193,200 115,391 330 --
1995 168,000 -- 330 --
</TABLE>
The following table sets forth certain information with respect to the
aggregate number and value of options exercisable by the Company's Chief
Executive Officer at December 31, 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
SHARES VALUE YEAR END(#) FISCAL YEAR END (CDN$)(1)
ACQUIRED ON REALIZED ----------------------------- -----------------------------
NAME EXERCISE(#) (CDN$) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Barry W.
Jinks........ 0 N/A 328,171 133,001 $ 1,596,420 $60,000
</TABLE>
- ------------------
(1) Total value of 'in-the-money' unexercised options is based on the difference
between the last sales price of the Common Shares on The Toronto Stock
Exchange on December 31, 1997 (Cdn$7.50 per share) and the exercise price of
the 'in-the-money' options, multiplied by the number of 'in-the-money'
option shares.
Directors' Compensation
In 1997, the Board of Directors approved a fee of Cdn$1,000 for each
meeting attended in person. The Board also approved the grant of an annual
option to each member of the Board of Directors to purchase 3,000 Common Shares.
Additionally, the Chair of Board, the Chair of a committee of the Board and each
member of a committee of the Board will be granted an annual option to purchase
1,000 Common Shares. All options will have an exercise price equal to the market
price of the Common Shares on the date of grant.
In addition to the above, Kenneth Spencer, a Director of the Company, also
acts as a consultant for the Company and receives a consulting fee of $20,000
per year, payable quarterly. For the last completed financial year, Mr. Spencer
received a total of $5,000 in consulting fees.
No other compensation was paid to directors of the Company during the last
completed fiscal year.
Executive Compensation Plan
Under the Company's Executive Compensation Plan, cash bonuses may be earned
by officers based upon the achievement of targets relating to key strategic
objectives, financial performance of the Company and individual performance.
These bonuses are reported in the year they were earned, based upon Company and
individual performance. Bonuses earned in any particular year are paid out in
the first quarter of the following year.
STOCK OPTION PLAN
In June 1995, the Company adopted a stock option plan (the 'Plan') which
permits the granting of options to acquire Common Shares to the directors,
senior officers and employees of the Company. It is the Company's intention to
grant options under the Plan to all employees. The purpose of the Plan is to
attract and retain the services of the directors, officers and employees and to
provide added incentive to such persons by encouraging share ownership in the
Company. Under the Plan, the exercise price must be not less than the market
price of the Common Shares at the time the option is granted, and the option
term may not exceed ten years. Other terms and conditions of the options granted
under the Plan are determined by the Board of Directors or by a committee
appointed to administer the Plan. Options granted under the Plan are
non-transferable and generally terminate on cessation of employment with the
Company.
26
<PAGE>
The maximum number of Common Shares which may be issued under the Plan is
2,650,000 shares and no individual may hold options to purchase Common Shares
exceeding 5% of the number of Common Shares outstanding from time to time.
At May 5, 1998, options to purchase an aggregate of 1,644,990 Common Shares
were outstanding under options issued to directors, officers and eligible
employees under the Plan. Exercise prices under the foregoing options range from
Cdn$0.70 to Cdn$16.10 per share. Of such options, options to purchase 1,043,172
Common Shares have been granted to directors and officers of the Company. Option
grants by the Board of Directors prior to the adoption of the Plan were ratified
on an annual basis by the Company's shareholders. Substantially all such shares
so granted are now deemed to have been granted pursuant to the Plan and count
toward the 2,650,000 shares reserved for issuance under the Plan.
PRINCIPAL AND SELLING SECURITYHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Shares as of May 5, 1998 by (i) each person known to the
Company to be the beneficial owner of more than five percent of the outstanding
Common Shares, (ii) each of the Company's directors and executive officers, and
(iii) all directors and executive officers of the Company as a group. Unless
otherwise indicated below, the persons named below have sole voting and
investment power with respect to the number of shares set forth opposite their
names, subject to community property laws where applicable.
<TABLE>
<CAPTION>
NUMBER OF
COMMON SHARES COMMON COMMON SHARES
BENEFICIALLY OWNED SHARES BEING BENEFICIALLY OWNED
BEFORE THE OFFERING(2) OFFERED AFTER THE OFFERING(2)
----------------------- ------------ -----------------------
NAME AND ADDRESS(1) NUMBER PERCENT NUMBER PERCENT
- ----------------------------------------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
George Henry(3).......................... 811,454 8.1% -- 811,454 7.4%
c/o G. Howard Associates Inc.
1725 York Avenue
New York, New York 10128
Kenneth A. Spencer....................... 10,000 * -- 10,000 *
Barry W. Jinks(4)........................ 357,199 3.6% -- 357,199 3.2%
Martin McConnell(5)...................... 79,500 * -- 79,500 *
Brian Lowe(6)............................ 59,600 * -- 59,600 *
Douglas Johnson(7)....................... 47,000 * -- 47,000 *
David Hobbs(8)........................... 55,000 * -- 55,000 *
Ronald Wages(9).......................... 16,666 * -- 16,666 *
Joseph Abrams(9)......................... 46,000 * -- 46,000 *
Dr. Karl H. Brackhaus(10)................ 31,000 * -- 31,000 *
John E. Brennan(11)...................... 69,000 * -- 69,000 *
Charles C. Johnston(12).................. 329,100 3.3% -- 329,100 3.0%
Samuel Znaimer(12)....................... 34,000 * -- 34,000 *
Andrew Talbot(13)
c/o Alex Informatics Inc.
1930 Gagnon Street
Lachine, PQ H8T 3M6
Canada................................. 61,809 * 61,809 -- --
Alex Computer(14)
c/o Alex Informatics Inc.
1930 Gagnon Street
Lachine, PQ H8T 3M6
Canada................................. 821,192 8.1% 821,192 -- --
All directors and executive officers
as a group (12 persons)(15)............ 1,134,065 11.3% 1,134,065 10.4%
</TABLE>
(Footnotes on next page)
27
<PAGE>
(Footnotes from previous page)
- ------------------
* Less than one percent.
(1) Except as otherwise noted, the address of the named shareholder is c/o
Spectrum Signal Processing Inc., 8525 Baxter Place, Burnaby, British
Columbia, Canada V5A 4V7.
(2) Percentages of outstanding Common Shares are based upon 10,009,621 Common
Shares outstanding as of May 5, 1998, net of 233,300 Common Shares held in
treasury. Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission which attribute beneficial
ownership of securities to persons who possess sole or shared voting power
and/or investment power with respect to those securities. Options included
in the table are exercisable within 60 days of May 5, 1998.
(3) Includes 5,000 Common Shares issuable upon the exercise of options.
(4) Includes 330,771 Common Shares issuable upon the exercise of options.
(5) Includes 76,500 Common Shares issuable upon the exercise of options.
(6) Includes 59,000 Common Shares issuable upon the exercise of options.
(7) Includes 46,000 Common Shares issuable upon the exercise of options.
(8) Includes 50,500 Common Shares issuable upon the exercise of options.
(9) Amount reflects Common Shares issuable upon the exercise of options.
(10) Includes 15,000 Common Shares issuable upon the exercise of options.
(11) Includes 5,000 Common Shares issuable upon the exercise of options.
(12) Includes 30,000 Common Shares issuable upon the exercise of options.
(13) Represents 54,083 Common Shares acquired from Alex Computer and 7,726
Common Shares issuable upon the exercise of the Warrants acquired from Alex
Computer, in each case immediately following the closing of the Alex
Computer Acquisition.
(14) Includes 102,649 Common Shares issuable upon the exercise of the Warrants.
(15) Includes 680,437 Common Shares issuable upon the exercise of options.
DESCRIPTION OF SHARE CAPITAL
The Company's authorized capital stock consists of 50,000,000 Common
Shares, no par value. As of May 31, 1998, there were 10,241,254 Common Shares
outstanding (including 233,300 Common Shares held in treasury).
COMMON SHARES
Holders of Common Shares on an applicable record date are entitled to
receive such dividends as may be declared by the Board of Directors out of funds
legally available therefor and, in the event of liquidation, to share pro rata
in any distribution of the Company's assets after payment, or provision for the
payment, of all debts and other liabilities. Holders of Common Shares ordinarily
are entitled to one vote on a poll for each share held of record on the
applicable record date on all matters presented to a vote of shareholders,
including the election of directors. Holders of Common Shares have no cumulative
voting rights or preemptive rights to purchase or subscribe for any stock or
other securities and there are no conversion rights or redemption or sinking
fund provisions with respect to such shares. All outstanding Common Shares are,
and the Common Shares offered hereby will be, when issued, fully paid
nonassessable.
CERTAIN RIGHTS OF SHAREHOLDERS
In accordance with the provisions of the BC Act, the amendment of certain
rights of holders of a class of shares, including Common Shares, requires the
approval of not less than three-quarters of the votes cast by the holders of
such shares voting at a special meeting of such holders. Pursuant to the
Company's Articles, a quorum for a special meeting of the holders of the Common
Shares is two persons, present in person or by proxy, representing not less than
5% of the shares entitled to vote at the meeting. Therefore, it is possible for
the rights of the holders of Common Shares of the Company to be modified
otherwise than by the affirmative vote of the
28
<PAGE>
holders of a majority of the then issued and outstanding Common Shares. In
certain circumstances where the rights of the Common Shares may be amended,
however, holders of Common Shares, as applicable, have the right under the BC
Act to dissent from such amendment and require that the Company pay them the
then fair value of their Common Shares.
LIMITATIONS AFFECTING HOLDERS OF COMMON SHARES
There is no law or government decree or regulation in Canada that restricts
the export or import of capital, or that affects the remittance of dividends,
interest or other payments to a non-resident holder of Common Shares, other than
withholding tax requirements. See 'Certain Tax Considerations.'
There is no limitation imposed by Canadian law or by the Articles or other
charter documents of the Company on the right of a non-resident to hold or vote
Common Shares of the Company, other than as provided in the Investment Act.
The Investment Act generally prohibits implementation of a reviewable
investment by an individual, government or agency thereof, corporation,
partnership, trust or joint venture that is not a 'Canadian' as defined in the
Investment Act (a 'non-Canadian'), unless, after review, the minister
responsible for the Investment Act is satisfied that the investment is likely to
be a net benefit to Canada.
An investment in Common Shares of the Company by a 'WTO investor' (an
individual or other entity that is a national of, or has the right of permanent
residence in, a member of the World Trade Organization, current members of which
include the European Community, Germany, Japan, Mexico, the United Kingdom and
the United States, or a WTO investor-controlled entity, as defined in the
Investment Act) would be reviewable under the Investment Act if it were an
investment to acquire direct control of the Company and the value of the assets
of the Company equalled or exceeded $160 million in 1995 dollars, as indicated
on the Company's most recent financial statements. In subsequent years, such
threshold amount may be increased or decreased in accordance with the provisions
of the Investment Act.
An investment in Common Shares of the Company by a non-Canadian (other than
a WTO investor) would be reviewable under the Investment Act if it were an
investment to acquire control of the Company and the value of the assets were
$5.0 million or more, as indicated on the Company's most recent financial
statements.
A non-Canadian, whether a WTO investor or otherwise, would acquire control
of the Company for the purposes of the Investment Act if he, she or it acquired
a majority of the Common Shares. The acquisition of less than a majority, but
one-third or more of the Common Shares, would be presumed to be an acquisition
of control of the Company unless it could be established that the Company was
not controlled in fact by the acquiror through the ownership of Common Shares.
Certain transactions in relation to Common Shares would be exempt from the
Investment Act, including:
A. an acquisition of Common Shares if the acquisition were made in
connection with the person's business as a trader or dealer in securities;
B. an acquisition of control of the Company in connection with the
realization of a security interest granted for a loan or other financial
assistance and not for any purpose related to the provisions of the
Investment Act; and
C. an acquisition of control of the Company by reason of an
amalgamation, merger, consolidation or corporate reorganization following
which the ultimate direct or indirect control in fact of the Company,
through the ownership of voting interests, remains unchanged.
In addition, the Investment Act sets out other restrictions, including
notification requirements, which could impact on the acquisition of control of
the Company by a non-Canadian.
TRANSFER AGENT
The Transfer Agent for the Common Shares is Montreal Trust Company of
Canada, at its offices in Vancouver, British Columbia, Canada and Toronto,
Ontario, Canada.
29
<PAGE>
CERTAIN TAX CONSIDERATIONS
CERTAIN U.S. FEDERAL TAX CONSIDERATIONS
The following summary describes certain of the material U.S. federal income
tax consequences to U.S. Holders (as defined below) arising from the purchase,
ownership and disposition of Common Shares. This summary is based on the
provisions of the Internal Revenue Code of 1986, as amended (the 'Code'), final,
temporary and proposed U.S. Treasury Regulations promulgated thereunder, and
administrative and judicial interpretations thereof, all as in effect as of the
date hereof, and all of which are subject to change, possibly with retroactive
effect.
This summary does not deal with all aspects of U.S. federal income taxation
that may be relevant to particular U.S. Holders in light of their particular
circumstances, or to U.S. Holders subject to special rules, including, without
limitation, certain retirement plans, insurance companies, U.S. Holders of
securities held as part of a 'straddle,' 'synthetic security,' 'hedge,'
'conversion transaction' or other integrated investment, persons that enter into
'constructive sales' involving Common Shares or substantially identical property
with other investments, U.S. Holders whose functional currency is not the United
States dollar, certain expatriates or former long-term residents of the United
States, financial institutions, broker-dealers, tax-exempt organizations and
U.S. Holders who own (directly, indirectly or through attribution) 10% or more
of the Company's outstanding voting stock. The following discussion does not
address the effect of any applicable state, local or foreign tax laws. This
summary does not consider the tax treatment of persons who own Common Shares
through a partnership or other pass-through entity, and deals only with Common
Shares held as 'capital assets' as defined in Section 1221 of the Code.
This discussion is addressed only to 'U.S. Holders.' A U.S. Holder is a
holder of Common Shares that is a U.S. citizen, an individual resident in the
United States for U.S. federal income tax purposes, a domestic corporation, an
estate the income of which is includible in its gross income for U.S. federal
income tax purposes without regard to its source, or a trust if either: (i) a
U.S. court is able to exercise primary supervision over the administration of
the trust and one or more U.S. persons have the authority to control all the
substantial decisions of the trust or (ii) the trust was in existence on August
20, 1996 and, in general, would have been treated as a U.S. Holder under rules
applicable prior to such time, provided the trust elects to continue such
treatment thereafter.
U.S. HOLDERS OF COMMON SHARES ARE ADVISED TO CONSULT WITH THEIR OWN TAX
ADVISORS WITH RESPECT TO THE U.S. FEDERAL, STATE AND LOCAL TAX CONSEQUENCES, AS
WELL AS THE TAX CONSEQUENCES IN OTHER JURISDICTIONS, OF THE PURCHASE, OWNERSHIP
AND SALE OF COMMON SHARES APPLICABLE IN THEIR PARTICULAR TAX SITUATIONS.
Sale or Exchange of Common Shares
A U.S. Holder's sale or exchange of Common Shares generally will result in
the recognition of capital gain or loss by such U.S. Holder in an amount equal
to the difference between the amount realized and the U.S. Holder's tax basis in
the Common Shares sold. If a U.S. Holder's holding period on the date of the
sale or exchange is more than one year, such gain or loss will be long-term
capital gain or loss. The Taxpayer Relief Act of 1997 (the '1997 Act') includes
substantial changes to the federal income taxation of capital gains by non-
corporate U.S. Holders. Under the 1997 Act, long-term capital gains realized on
the sale of Common Shares by non-corporate U.S. Holders will be subject to a
maximum 28% federal income tax rate if the Common Shares sold have been held for
more than one year but not more than 18 months at the time of the sale or
exchange, or a maximum 20% federal income tax rate if the Common Shares sold
have been held for more than 18 months at such time. U.S. Holders who are
corporations would be subject to a maximum federal income tax rate of 35%
regardless of their holding period. If the U.S. Holder's holding period on the
date of the sale or exchange was one year or less, such gain or loss will be
short-term capital gain (generally subject to the same effective federal income
tax rates as ordinary income) or loss. See 'Certain Canadian Federal Income Tax
Considerations-Taxation of Capital Gains on Sale of Common Shares' for a
discussion of taxation by Canada of capital gains realized on the sale or
exchange of Common Shares. In general, any capital gain recognized by a U.S.
Holder upon the sale or exchange of Common Shares will be treated as U.S. source
income for U.S. foreign tax credit purposes. Under current law, the source of
any loss on the sale, exchange or other disposition of Common Shares
30
<PAGE>
is uncertain. Under proposed regulations, which may be applied retroactively,
any such loss may be allocated against foreign source income. Capital losses
realized upon the sale, exchange or other disposition of Common Shares generally
are deductible only against capital gains and not against ordinary income,
except that in the case of noncorporate taxpayers, a capital loss is deductible
only to the extent of capital gains plus ordinary income of up to $3,000.
A U.S. Holder's tax basis in his, her or its Common Shares generally will
be the purchase price paid therefor by such U.S. Holder. The holding period of
each Common Share owned by a U.S. Holder will commence on the day following the
date of the U.S. Holder's purchase of such Common Share and will include the day
on which the Common Share is sold by such U.S. Holder.
Treatment of Dividend Distributions
For U.S. federal income tax purposes, the gross amount of any distribution
made with respect to, or in some cases a partial purchase or redemption of,
Common Shares (including the amount of any Canadian taxes withheld therefrom)
will be included in a U.S. Holder's income as ordinary dividend income to the
extent that the dividends are paid out of current or accumulated earnings and
profits of the Company, as determined based on U.S. tax principles. Such
dividends will not be eligible for the dividends received deduction allowed to
U.S. corporations under Section 243 of the Code. Dividend distributions in
excess of the Company's current and accumulated earnings and profits will be
treated first as a non-taxable return of the U.S. Holder's tax basis in his, her
or its Common Shares to the extent thereof and then as a gain from the sale of
Common Shares. Dividends paid in Canadian dollars will be includible in income
in a U.S. dollar amount based on the exchange rate at the time of their receipt.
Any gain or loss resulting from currency fluctuations during the period from the
date a dividend is paid to the date such payment is converted into U.S. dollars
generally will be treated as ordinary income or loss.
Dividends paid to a U.S. Holder with respect to Common Shares will be
treated as foreign source dividend income for U.S. foreign tax credit limitation
purposes. Subject to certain conditions and limitations, any Canadian
withholding tax imposed on such dividends generally will be eligible for credit
against such U.S. Holder's U.S. federal income tax liability or, at the U.S.
Holder's election, may be claimed as a deduction against income in determining
such tax liability. The limitations on claiming a foreign tax credit include
computation rules under which foreign tax credits allowable with respect to
specific classes of income cannot exceed the U.S. federal income taxes otherwise
payable with respect to each such class of income. Dividends with respect to the
Common Shares generally will be classified as 'passive income' for purposes of
computing the foreign tax credit limitation. Foreign income taxes exceeding the
credit limitation for the year of payment or accrual may be carried back for two
taxable years and forward for five taxable years in order to reduce U.S. federal
income taxes, subject to the credit limitation applicable in each of such years.
Other restrictions on the foreign tax credit include a prohibition on the use of
the credit to reduce liability for the U.S. individual and corporation
alternative minimum taxes by more than 90%. In addition, a U.S. Holder generally
will not be entitled to claim a credit for Canadian tax withheld unless the U.S.
Holder has held the Common Shares for at least 16 days within the 30 day period
beginning 15 days before the applicable ex-dividend date. The calculation of
allowable foreign tax credits and, in the case of a U.S. Holder that elects to
deduct foreign taxes, the availability of deductions for foreign taxes paid
involve the application of rules that depend on a U.S. Holder's particular
circumstances. Accordingly, U.S. Holders should consult their own tax advisors
regarding their eligibility for foreign tax credits or deductions.
Information Reporting and Backup Withholding
Any dividends paid on the Common Shares to U.S. Holders may be subject to
U.S. information reporting requirements and the 31% U.S. backup withholding tax.
In addition, the proceeds of a U.S. Holder's sale of Common Shares may be
subject to information reporting and the 31% U.S. backup withholding tax. Backup
withholding will not apply if the holder (i) is a corporation or other exempt
recipient or (ii) the holder provides a U.S. taxpayer identification number,
certifies as to no loss of exemption from backup withholding and otherwise
complies with any applicable backup withholding requirements. Any amounts
withheld under the U.S. backup withholding tax rules will be allowed as a refund
or a credit against the U.S. Holder's U.S. federal income tax, provided the
required information is furnished to the U.S. Internal Revenue Service.
31
<PAGE>
CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material Canadian Federal income
tax considerations relevant to an investment in the Common Shares by a holder
who, for income tax purposes, is resident in the United States and not in
Canada, holds the Common Shares as capital property, deals at arm's length with
the Company, does not use or hold the Common Shares in carrying on a business
through a permanent establishment or in connection with a fixed base in Canada
and, in the case of an individual investor, is also a United States citizen. The
tax consequences of an investment in the Common Shares by an investor who is not
as described above may be expected to differ from the tax consequences discussed
herein.
This discussion is based upon the provisions of the Income Tax Act (Canada)
(the 'Tax Act'), regulations under the Tax Act, specific proposals to amend the
Tax Act publicly announced prior to the date hereof, the Canada-United States
Income Tax Convention (1980), as amended (the 'Convention'), and administrative
practices published by Revenue Canada, all of which are subject to change. Any
such change, which may or may not be retroactive, could alter the tax
consequences to a holder as otherwise described herein. The discussion does not
take in account the tax laws of the various provinces or territories of Canada.
Taxation of Distributions from the Company
Dividends paid or credited on the Common Shares to U.S. residents will be
subject to a Canadian withholding tax. Under the Convention, the rate of
withholding tax generally applicable is 15% of the gross amount of the
dividends, including stock dividends and payments deemed to be dividends upon
the repurchase of Common Shares by the Company, as described below. The rate of
withholding tax is reduced if the beneficial owner of the dividend is a company
which owns at least 10% of the voting stock of the Company at the time the
dividend is paid. In this case, the rate is 5% of the gross amount of the
dividends.
If Common Shares are purchased by the Company, a holder will be deemed to
have received a dividend to the extent that the amount paid on the repurchase
exceeds the paid-up capital, as defined in the Tax Act, of the Common Shares
acquired. The portion, if any, of the acquisition proceeds that are deemed to be
a dividend will be subject to Canadian withholding tax on dividends, as
described above. Further, the holder will be deemed to have disposed of the
Common Shares for the amount paid by the Company for the Common Shares less the
amount deemed to have been received as a dividend. If this results in a capital
gain to a holder, the tax consequences will be as described below.
Taxation of Capital Gains on Sale of Common Shares
Under the Tax Act, a holder will not be subject to Canadian tax on any
capital gain realized on an actual or deemed disposition of a common share,
including a deemed disposition at death, provided that he did not hold the
Common Share as capital property used in carrying on a business in Canada, or
that neither he nor persons with whom he did not deal at arm's length alone or
together owned 25% or more of the issued shares of any class of the Company at
any time in the five years immediately preceding the disposition.
A holder who otherwise would be liable for Canadian tax in respect of a
capital gain realized on an actual or deemed disposition of a Common Share will
be relieved under the Convention from such liability unless:
A. the Common Share formed part of the business property of a
permanent establishment in Canada that the Holder had within the
twelve-month period preceding the disposition; or
B. the holder
1. was resident in Canada for 120 months during any 20-year period
preceding the disposition, and
2. was resident in Canada at any time during the 10 years
immediately preceding the disposition, and
3. owned the Common Share when he ceased to be a resident of
Canada.
32
<PAGE>
PLAN OF DISTRIBUTION
The Company is registering the Common Shares offered hereby on behalf of
the Selling Securityholders. All expenses of the registration of securities in
connection with the registration of the shares offered hereby are to be borne by
the Company, except that the Selling Securityholders will pay underwriting
discounts, selling commissions, and fees and expenses, if any, of counsel or
other advisers to the Selling Securityholders.
The distribution of the Common Shares by the Selling Securityholders (or
their respective donees and pledgees) may be effected from time to time in one
or more transactions (which may involve block transactions) in the
over-the-counter market (including the Nasdaq National Market) or any exchange
on which the Common Shares may then be listed, in negotiated transactions,
through the writing of options on shares (whether such options are listed on an
options exchange or exchange or otherwise), or a combination of such methods of
sale, at market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. The Selling Securityholders
(or their respective donees and pledgees) may effect such transactions by
selling shares to or through broker-dealers, and such broker-dealer may receive
compensation in the form of underwriting discounts, concessions or commissions
from the Selling Securityholders and/or purchasers of shares for whom they may
act as agent (which compensation may be in excess of customary commissions). The
Selling Securityholders (or their respective donees and pledgees) may also sell
such Common Shares pursuant to Rule 144 promulgated under the Securities Act, or
may pledge shares as collateral for margin accounts and such shares could be
resold pursuant to the terms of such accounts. The Selling Securityholders and
any broker-dealers that act in connection with the sale of the Common Shares
might be deemed to be 'underwriters' within the meaning of Section 2(11) of the
Securities Act and any commission received by them and any profit on the resale
of the Common Shares as principal might be deemed to be underwriting discounts
and commissions under the Securities Act. The Selling Securityholders may agree
to indemnify any agent, dealer or broker-dealer that participates in
transactions involving sales of the shares against certain liabilities,
including liabilities arising under the Securities Act.
Because the Selling Securityholders may be deemed to be 'underwriters'
within the meaning of Section 2(11) of the Securities Act, the Selling
Securityholders will be subject to prospectus delivery requirements under the
Securities Act. Furthermore, in the event of a 'distribution' of the shares,
such Selling Securityholders, any selling broker or dealer and any 'affiliated
purchasers' may be subject to Regulation M under the Exchange Act, which
Regulation prohibits, with certain exceptions, any such person from bidding for
or purchasing any security which is the subject of such distribution until his
participation in that distribution is completed. In addition, Regulation M under
the Exchange Act prohibits, with certain exceptions, any 'stabilizing bid' or
'stabilizing purchase' for the purpose of pegging, fixing or stabilizing the
price of the Common Shares in connection with this offering.
33
<PAGE>
In order to comply with certain state securities laws, if applicable, the
Common stock will not be sold in a particular state unless the Common Shares
have been registered or qualified for sale in such state or an exemption from
registration or qualification is available and complied with.
LEGAL MATTERS
The validity of the issuance of the Common Shares will be passed upon for
the Company by Clark, Wilson, Vancouver, British Columbia, Canada. Fulbright &
Jaworski L.L.P., New York, New York, has acted as U.S. counsel to the Company in
connection with this Offering.
EXPERTS
The financial statements of the Company included in this Prospectus have
been audited by KPMG, independent auditors, as set forth in their reports
thereon appearing elsewhere herein and in the Registration Statement, and have
been included in reliance upon such reports and upon the authority of said firm
as experts in accounting and auditing. The audited financial statements of Alex
Computer included in this Prospectus have been audited by Ciaschi, Dietershagen,
Little & Mickelson, LLP, independent auditors, as set forth in their reports
thereon appearing elsewhere herein and in the Registration Statement, and have
been included in reliance upon such reports and upon the authority of said firm
as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
F-3 relating to the Common Shares offered hereby. This Prospectus does not
contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto. Statements contained in this Prospectus as to
the contents of any contract or any other document referred to are not
necessarily complete and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified by such reference. For further information
with respect to the Company and the Common Shares offered hereby, reference is
hereby made to the Registration Statement and to the exhibits and schedules
thereto. A copy of the Registration Statement may be inspected by anyone without
charge and may be obtained at prescribed rates at the Public Reference Section
of the Commission, maintained by the Commission at its principal office located
at 450 Fifth Street, N.W., Washington, D.C. 20549, the New York Regional Office
located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies may also be obtained through the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
The Company is currently exempt from the rules under the Exchange Act
prescribing the furnishing and content of proxy statements, and its officers,
directors and principal shareholders are exempt from the reporting and
short-swing profit recovery provisions contained in Section 16 of the Exchange
Act. The Company is not required under the Exchange Act to publish financial
statements as frequently or as promptly as are United States companies subject
thereto. The Company intends, however, to continue to furnish its shareholders
with annual reports containing audited financial statements and quarterly
reports containing unaudited financial statements as well as such other reports
as may from time to time be authorized by the Board of Directors or be required
under law. In the past, the management of the Company has solicited proxies from
its shareholders and intends to continue this policy.
34
<PAGE>
GLOSSARY
<TABLE>
<S> <C>
Algorithm........................ A defined procedure for solving a problem or performing an operation.
Algorithms are implemented on a computer through a stored sequence of
instructions.
Analog signal.................... A continuously-varying electrical representation of natural phenomena such as
temperature, pressure, sound and light.
ASIC............................. Application-specific integrated circuit. A broad term that refers to
integrated circuits that are custom, semi-custom or user-programmable.
Chipset.......................... One or more DSP microprocessors which are bundled with other chips such as
ASIC, memory and audio chips.
Digital signal................... The representation of information as discrete values (e.g., a stream of digits
in the form 1s and 0s). Modern electronic equipment uses digital rather than
analog techniques so that computer technology may be employed.
DSP micro-processor.............. A specialized microprocessor optimized for the unique processing and data flow
requirements of DSP algorithms and software. DSP microprocessors differ from
most microprocessors in two respects: (i) the primary function of the
microprocessor is to mathematically process continuous external signals rather
than manipulate stored data; and (ii) the data is processed in real time
rather than in the 'batch' approach often used in general data processing.
Modem............................ A modulator/demodulator circuit pair that provides a means of sending digital
information over analog links such as the public telephone network.
PC............................... An IBM compatible Personal Computer generally designed with an Intel or Intel
compatible X86 microprocessor.
Real time........................ Processing that can be done with minimal or no perceptible delay between the
user's action and the computer's response.
</TABLE>
35
<PAGE>
INDEX TO FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF
SPECTRUM SIGNAL PROCESSING INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Auditors' Report........................................................................................... F-3
Consolidated Balance Sheets (audited) at December 31, 1996 and 1997 and (unaudited) at March 31, 1998...... F-4
Consolidated Statements of Operations and Retained Earnings (Deficit) (audited) for the years ended
December 31, 1995, 1996, and 1997, and (unaudited) for the three months ended March 31, 1997 and 1998.... F-5
Consolidated Statements of Changes in Financial Position (audited) for the years ended December 31, 1995,
1996, and 1997, and (unaudited) for the three months ended March 31, 1997 and 1998....................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
INDEX TO FINANCIAL STATEMENTS OF
ALEX COMPUTER SYSTEMS, INC. (YEAR END)
<TABLE>
<S> <C>
Independent Auditors' Report............................................................................... F-25
Balance Sheets (audited) at July 31, 1997 and 1996......................................................... F-26
Statements of Income and Retained Earnings (audited) for the years ended July 31, 1997 and 1996............ F-27
Statements of Cash Flows (audited) for the years ended July 31, 1997 and 1996.............................. F-28
Notes to Financial Statements.............................................................................. F-29
</TABLE>
INDEX TO FINANCIAL STATEMENTS OF
ALEX COMPUTER SYSTEMS, INC. (INTERIM)
<TABLE>
<S> <C>
Balance Sheet (unaudited) at February 28, 1998............................................................. F-35
Statement of Earnings and Retained Earnings (unaudited) for the seven months ended February 28, 1998....... F-36
Statement of Cash Flows (unaudited) for the seven months ended February 28, 1998........................... F-37
Notes to Financial Statements.............................................................................. F-38
INDEX TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF
SPECTRUM SIGNAL PROCESSING INC.
Pro Forma Consolidated Statements of Earnings (unaudited) for the year ended December 31, 1997 and for the
three months ended March 31, 1998........................................................................ F-43
Notes to Pro Forma Consolidated Financial Statements....................................................... F-44
</TABLE>
F-1
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Auditors' Report........................................................................................... F-3
Consolidated Balance Sheets................................................................................ F-4
Consolidated Statements of Operations and Retained Earnings (Deficit)...................................... F-5
Consolidated Statements of Changes in Financial Position................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-2
<PAGE>
AUDITORS' REPORT
The Board of Directors
Spectrum Signal Processing Inc.
We have audited the consolidated balance sheets of Spectrum Signal Processing
Inc. as at December 31, 1997 and 1996 and the consolidated statements of
operations and retained earnings (deficit) and changes in financial position for
each of the years in the three year period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 1997
and 1996 and the results of its operations and the changes in its financial
position for each of the years in the three year period ended December 31, 1997,
in accordance with generally accepted accounting principles in Canada.
Significant differences between Canadian and United States generally accepted
accounting principles are quantified and explained in note 15 to the
consolidated financial statements.
KPMG
CHARTERED ACCOUNTANTS
Richmond, Canada
February 5, 1998, except as to note 14
which is as of June 29, 1998
F-3
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1996 1997 1998
------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and short-term deposits................................................ $ 2,038 $ 1,979 $ 84
Accounts receivable, net of allowance for doubtful accounts of $233
(1997--$243, 1996--$321)................................................. 11,493 9,367 8,675
Inventories................................................................. 2,396 5,809 7,228
Prepaid expenses............................................................ 707 315 1,461
------- ------- ------------
16,634 17,470 17,448
Capital assets (Note 4)....................................................... 2,920 3,501 3,961
Other assets (Note 5)......................................................... 1,124 3,762 12,398
------- ------- ------------
$20,678 $24,733 $ 33,807
------- ------- ------------
------- ------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities.................................... 6,916 6,722 9,248
Current portion of long-term debt (Note 6).................................. 13 -- 81
------- ------- ------------
6,929 6,722 9,329
Long-term debt (Note 6)....................................................... -- 107 227
Deferred income taxes......................................................... 55 1,749 1,377
Shareholders' equity
Share capital (Note 7)...................................................... 13,368 13,259 20,307
Warrants (Note 7)........................................................... -- -- 200
Contributed surplus (Note 7)................................................ 106 106 106
Retained earnings........................................................... 220 2,790 2,261
------- ------- ------------
13,694 16,155 22,874
Commitments (Note 10).........................................................
Subsequent events (Note 14)...................................................
------- ------- ------------
$20,678 $24,733 $ 33,807
------- ------- ------------
------- ------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
(EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------- ------------------
1995 1996 1997 1997 1998
------- ------- ------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales.................................................... $17,712 $27,358 $36,452 $6,617 $7,492
Cost of sales............................................ 7,807 11,373 15,548 2,353 2,769
------- ------- ------- ------- ------
9,905 15,985 20,904 4,264 4,723
Expenses
Administrative......................................... 2,839 4,158 4,372 867 1,683
Sales and marketing.................................... 4,389 5,291 6,634 1,212 2,437
Amortization........................................... 579 678 944 188 272
Research and development............................... 1,839 2,905 3,528 1,028 1,194
------- ------- ------- ------- ------
9,646 13,032 15,478 3,295 5,586
------- ------- ------- ------- ------
Earnings (loss) from operations.......................... 259 2,953 5,426 969 (863)
------- ------- ------- ------- ------
Other revenue (expense)
Interest and bank charges.............................. (42) (31) 4 (7) (20)
Other income (expense)................................. 664 39 15 16 (12)
------- ------- ------- ------- ------
622 8 19 9 (32)
------- ------- ------- ------- ------
Earnings (loss) before income taxes and discontinued
operations............................................. 881 2,961 5,445 978 (895)
Deferred income taxes (Note 8)........................... 501 987 2,138 371 (366)
------- ------- ------- ------- ------
Earnings (loss) from continuing operations............... 380 1,974 3,307 607 (529)
Earnings (loss) from discontinued operation (Note 12).... (1,410) 176 (737) (159) --
------- ------- ------- ------- ------
Net earnings (loss)...................................... (1,030) 2,150 2,570 448 (529)
Retained earnings (deficit), beginning of year........... (900) (1,930) 220 220 2,790
------- ------- ------- ------- ------
Retained earnings (deficit), end of year................. $(1,930) $ 220 $ 2,790 $ 668 $2,261
------- ------- ------- ------- ------
------- ------- ------- ------- ------
Earnings (loss) per share (Note 9)
Basic
From continuing operations.......................... $ 0.04 $ 0.21 $ 0.36 $ 0.07 $(0.06)
------- ------- ------- ------- ------
------- ------- ------- ------- ------
After discontinued operations....................... $ (0.11) $ 0.23 $ 0.28 $ 0.05 $(0.06)
------- ------- ------- ------- ------
------- ------- ------- ------- ------
Fully diluted
From continuing operations.......................... $ 0.04 $ 0.21 $ 0.34 $ 0.06 $(0.06)
------- ------- ------- ------- ------
------- ------- ------- ------- ------
After discontinued operations....................... $ (0.11) $ 0.23 $ 0.27 $ 0.05 $(0.06)
------- ------- ------- ------- ------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH PROVIDED BY (USED IN)
Operations
Earnings (loss) from continuing operations................. $ 380 $ 1,974 $ 3,307 $ 607 $ (529)
Items not involving cash
Amortization............................................ 579 678 944 188 272
Deferred income taxes................................... 501 987 2,138 371 (366)
Gain on sale of marketable securities................... (540) -- -- -- --
Changes in non-cash operating working capital
Accounts receivable..................................... (1,389) (4,818) 2,270 7,516 692
Inventories............................................. (429) 754 (3,394) (183) (1,419)
Prepaid expenses........................................ (182) (322) 419 284 (1,146)
Accounts payable and accrued liabilities................ 953 2,491 (446) (3,749) 2,532
--------- --------- --------- --------- ---------
Cash from continuing operations.............................. (127) 1,744 5,238 5,034 24
--------- --------- --------- --------- ---------
Earnings (loss) from discontinued operations............... (1,410) 176 (737) (159) --
Deferred income taxes, an item not involving cash.......... (501) 87 (473) (102) --
--------- --------- --------- --------- ---------
Cash from discontinued operations............................ (1,911) 263 (1,210) (261) --
--------- --------- --------- --------- ---------
(2,038) 2,007 4,028 4,773 24
--------- --------- --------- --------- ---------
Financing
Deferred share issue costs................................. -- (263) 263 -- --
Issue of shares, net of share issue expenses............... 942 496 1,556 14 7,048
Issue of warrants.......................................... -- -- -- -- 200
Increase (Decrease) in long-term debt...................... (144) (39) (8) -- 201
--------- --------- --------- --------- ---------
798 194 1,811 14 7,449
--------- --------- --------- --------- ---------
Investments
Purchase of treasury shares................................ -- -- (1,665) -- --
Purchase of capital assets................................. (909) (1,421) (1,447) (503) (690)
Software and related development costs, net................ (196) (664) (1,747) -- (519)
Proceeds from marketable securities........................ 1,925
Decrease in loan receivable................................ 1,357
Acquisition of the shares of 3L Limited, net of cash
acquired of $268........................................ -- -- (1,039) -- --
Acquired technology related to acquisition of net assets of
Alex Computer Systems Inc............................... -- -- -- -- (8,159)
--------- --------- --------- --------- ---------
$ 2,177 (2,085) (5,898) (503) (9,368)
--------- --------- --------- --------- ---------
Increase (decrease) in cash and short-term deposits.......... 937 116 (59) 4,284 (1,895)
Cash and short-term deposits, beginning of year.............. 985 1,922 2,038 2,038 1,979
--------- --------- --------- --------- ---------
Cash and short-term deposits, end of year.................... $ 1,922 $ 2,038 $ 1,979 $ 6,322 $ 84
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND MARCH 31, 1998 ARE UNAUDITED
(AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS,
EXCEPT PER SHARE AMOUNTS AND NUMBERS OF SHARES)
The Company was incorporated under the laws of British Columbia and its
principal business activities include the design, manufacture and marketing of
digital signal processing systems for incorporation into high performance
applications for original equipment manufacturers for commercial markets such as
surveillance and wireless base stations, remote sensing, and multi-channel
modems and for military and aerospace markets.
1. SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with accounting
principles generally accepted in Canada, which, in the case of the Company,
generally conform with those established in the United States, except as
explained in Note 15.
Basis of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary 3L Limited. All material intercompany balances
and transactions have been eliminated.
Unaudited financial information
The financial information as at March 31, 1998 and for the three months
ended March 31, 1998 and 1997 is unaudited; however such financial information
reflects all adjustments (consisting solely of normal recurring adjustments)
required for a fair presentation of the financial information for the interim
periods presented.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, particularly the
recoverability of capital and other assets, and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from the estimates.
Cash and short term deposits
Cash includes short term deposits, which are all highly marketable
securities with a term to maturity of three months or less when acquired. Short
term deposits are valued at cost.
Inventories
The Company uses the average cost method of accounting for its inventory.
Inventories are valued at the lower of cost and net realizable value and consist
of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1996 1997 1998
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Finished goods......................................................... $1,011 $3,125 $ 3,848
Raw materials.......................................................... 1,385 2,684 3,380
------ ------ -----------
$2,396 $5,809 $ 7,228
------ ------ -----------
------ ------ -----------
</TABLE>
F-7
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND MARCH 31, 1998 ARE UNAUDITED
(AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS,
EXCEPT PER SHARE AMOUNTS AND NUMBERS OF SHARES)
1. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Research and development costs
Research costs are expensed as incurred. Development costs are expensed as
incurred unless they meet certain criteria under generally accepted accounting
principles for deferral and amortization. Software and related development
costs, after the establishment of technological feasibility and commercial
viability, are capitalized until the product is available for general release to
customers. Amortization is provided on a product by product basis over the
estimated economic life of the product, not to exceed three years. Amortization
commences when the product is available for general release to customers.
Research and development costs and capitalized software and related development
costs can be summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
-------------------------- ----------------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Research & development expense
Continuing operations............................. $1,839 $2,905 $3,528 $1,028 $1,194
Discontinued operations........................... 1,577 872 423 57 --
Capitalized software and related development costs..... 196 860 1,937 218 583
------ ------ ------ ------ ------
$3,612 $4,637 $5,888 $1,303 $1,777
------ ------ ------ ------ ------
</TABLE>
Capital assets
Capital assets are initially recorded at cost. Amortization is subsequently
provided on the following assets using the declining balance basis at the
following annual rates:
<TABLE>
<S> <C>
Computer equipment..................................................................... 30%
Computer software...................................................................... 20%
Furniture and fixtures................................................................. 20%
Laboratory equipment................................................................... 20%
</TABLE>
Amortization of leasehold improvements is provided on a straight-line basis
over the lesser of their estimated useful lives or five years.
License
The Company has the North American license to manufacture and distribute
computer peripherals for digital signal processing systems designed by
Loughborough Sound Images Ltd. The license was recorded at a nominal value of $1
and expired in July 1997. During 1997, the Company negotiated a non-exclusive
extension of manufacturing rights to 2002 and distribution rights to January 17,
1999. Both the manufacturing and distribution rights may be extended under
certain conditions.
Translation of foreign currencies
All monetary assets and liabilities denominated in foreign currency have
been translated into Canadian dollars at the rate of exchange in effect at the
balance sheet date. Other assets, revenue and expense items are translated at
the rates prevailing at their respective transaction dates. Gains and losses
resulting from foreign exchange translation are reflected in earnings for the
period.
F-8
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND MARCH 31, 1998 ARE UNAUDITED
(AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS,
EXCEPT PER SHARE AMOUNTS AND NUMBERS OF SHARES)
1. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Acquired Technology
The excess of the cost of acquisitions over the value assigned to
identifiable net tangible assets acquired is allocated to acquired technology.
The acquired technology is stated on the basis of cost less accumulated
amortization of March 31, 1998--$91 (December 31, 1996--nil, December 31,
1997--$49) and is amortized on a straight line basis over 7 years with one half
of the annual rate in the year of addition.
Revenue Recognition
DSP Products revenue is recognized upon shipment, which is when title
passes to the customer. Computer telephony integration ('CTI') product revenue,
which is included in discontinued operations, is recognized upon the later of
shipment or transfer of title. Revenue from product development contracts is
recognized upon reaching certain development milestones which are generally
correlated to the timing of payments.
Warranty
The Company generally provides a one year warranty to the original
purchaser. Warranty costs are accrued based on a best estimate, with reference
to past experience, at the time of sale.
Income taxes
The Company follows the allocation method for accounting for income taxes.
Under this method, recognition is given in the financial statements to the tax
effects of timing differences between income and expenditures for financial
statement and income tax purposes.
The Company follows the cost reduction method of accounting for investment
tax credits whereby the benefit of tax credits is recognized as a reduction in
the cost of the related asset or expenditure when there is reasonable assurance
the tax credits will be realized.
Share issue costs
The costs of issuing common shares, net of income tax recoveries thereon,
are applied to reduce the stated value of such shares.
Deferred share issue costs
The majority of the costs incurred in the 1996 form F-1 registration and
preliminary prospectus process were expensed in 1996. The process was abandoned
in 1997 and therefore all the remaining deferred costs were expensed to
operations.
Concentration of credit risk
Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily accounts receivable. Credit risk in
receivables is limited to original equipment manufacturers and to dealers and
distributors of hardware and software products. The Company performs on-going
credit evaluations of its customers' financial condition and requires letters of
credit or other guarantees whenever deemed necessary.
Substantially all of the Company's revenues have been recognized in
currencies other than the Canadian dollar, principally the United States dollar.
Fluctuations in the exchange rates between these currencies and the Canadian
dollar could have a material effect on the Company's business, financial
condition and results of
F-9
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND MARCH 31, 1998 ARE UNAUDITED
(AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS,
EXCEPT PER SHARE AMOUNTS AND NUMBERS OF SHARES)
1. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
operations. The Company attempts to mitigate some of this risk by denominating
many of its payment obligations in United States dollars, and, to a lesser
extent, through the use of future exchange contracts.
Technological risks
The market for the Company's products is characterized by rapidly changing
technologies, evolving industry standards and frequent new product introductions
and enhancements. There can be no assurance that the Company will successfully
develop, complete, introduce, and market new products or product enhancements,
or that the products or product enhancements currently in development or that
may be developed by the Company in the future will meet industry requirements
and achieve market acceptance. Any significant delay or failure to develop,
manufacture or ship new or enhanced products could have a material adverse
effect on the Company's business, financial condition and results of operation.
Impairment of long-lived assets
The Company monitors the recoverability of long-lived assets, based on
factors such as current market value, future asset utilization, business climate
and future undiscounted cash flows expected to result from the use of the
related assets. The Company's policy is to record an impairment loss in the
period when it is determined that the carrying amount of the asset may not be
recoverable.
Joint Venture
The Company entered into a 50/50 joint venture with QSound Labs Inc. in
1994 to pursue the development of computer chips and soundboard design for
multimedia personal computers. The joint venture was an operating entity and its
significant financial operating policies were, by contractual arrangement,
jointly controlled by both parties. Each party performed certain research and
product development activities, subject to budgetary controls, for which they
were reimbursed 50% of the incurred costs from the other party. The joint
venture completed its operations in 1995. The following amounts relate to the
Company's proportionate share in the joint venture and are included in the
Company's accounts:
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
-------------- -----------
1996 1997 1998
----- ----- -----------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEETS
Current assets............................................................ -- -- --
Non-current assets........................................................ -- -- --
Current liabilities....................................................... -- -- --
Non-current liabilities................................................... -- -- --
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31 MARCH 31
----------------------- --------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
Gross revenues............................................... $ 67 -- -- -- --
Costs and expenses........................................... $(269) -- -- -- --
----- ----- ----- ----- -----
Loss from continuing operations and Net Loss................. $(202) -- -- -- --
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
F-10
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND MARCH 31, 1998 ARE UNAUDITED
(AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS,
EXCEPT PER SHARE AMOUNTS AND NUMBERS OF SHARES)
1. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31 MARCH 31
----------------------- --------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF CHANGES IN FINANCIAL POSITION
CASH USED IN
Operations
Net loss..................................................... $(202) -- -- -- --
Accounts receivable.......................................... $ (67) $ 67 -- -- --
----- ----- ----- ----- -----
Increase (Decrease) in cash.................................. $(269) 67 -- -- --
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
Comparative figures
Certain comparative figures have been reclassified to conform with the
presentation adopted in the current period.
2. ACQUISITION OF 3L LIMITED
On June 20, 1997 the Company acquired all of the outstanding shares of 3L
Limited. The acquisition has been accounted for using the purchase method of
accounting and the results of operations have been consolidated since the date
of acquisition. The Company's interest in the net assets acquired at assigned
values are as follows:
<TABLE>
<S> <C>
Cash................................................................................. $ 268
Current assets....................................................................... 190
Capital Assets....................................................................... 27
Acquired technology.................................................................. 1,204
Current liabilities.................................................................. (382)
------
Acquisition cost..................................................................... $1,307
------
------
Consideration
173,333 common shares........................................................... $1,300
Expenses on acquisition......................................................... 7
------
$1,307
------
------
</TABLE>
The following unaudited pro-forma results of operations assume that the
acquisition occurred as of the beginning of the respective periods presented.
The unaudited pro-forma information given below does not
F-11
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND MARCH 31, 1998 ARE UNAUDITED
(AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS,
EXCEPT PER SHARE AMOUNTS AND NUMBERS OF SHARES)
2. ACQUISITION OF 3L LIMITED--(CONTINUED)
purport to be indicative of the results that actually would have been obtained
if the operations were combined during the periods presented, and is not
intended to be a projection of future results or trends.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1996 1997
------- -------
(UNAUDITED)
<S> <C> <C>
Revenue........................................................................... $28,346 $36,973
Earnings from continuing operations............................................... 2,029 3,283
Net earnings...................................................................... 2,205 2,546
Earnings per share
From continuing operations................................................... $ 0.22 $ 0.36
------- -------
------- -------
Net.......................................................................... $ 0.24 $ 0.28
------- -------
------- -------
</TABLE>
3. ACQUISITION OF NET ASSETS OF ALEX COMPUTER SYSTEMS, INC.
On March 17, 1998 the Company acquired the majority of the operating assets
and liabilities of Alex Computer Systems, Inc. of Ithaca, New York. The
acquisition has been accounted for using the purchase method of accounting and
the results of operations have been consolidated since the date of the
acquisition. The Company's interest in the net assets acquired at assigned
values are as follows (unaudited):
<TABLE>
<S> <C>
Cash................................................................................ $ 14
Current assets...................................................................... 1,551
Capital assets...................................................................... 325
Acquired technology................................................................. 8,159
Current liabilities................................................................. (1,275)
Long-term liabilities............................................................... (200)
-------
Acquisition cost.................................................................... $ 8,574
-------
-------
Consideration
772,626 common shares.......................................................... $ 7,000
110,375 warrants............................................................... 200
Cash.............................................................................. 961
Expenses on acquisition........................................................... 413
-------
$ 8,574
-------
-------
</TABLE>
The following unaudited pro-forma results of operations assume that the
acquisition occurred as of the beginning of the respective periods presented.
The unaudited pro-forma information given below does not
F-12
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND MARCH 31, 1998 ARE UNAUDITED
(AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS,
EXCEPT PER SHARE AMOUNTS AND NUMBERS OF SHARES)
3. ACQUISITION OF NET ASSETS OF ALEX COMPUTER SYSTEMS, INC.--(CONTINUED)
purport to be indicative of the results that actually would have been obtained
if the operations were combined during the periods presented, and is not
intended to be a projection of future results or trends.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
----------------
1997 1998
------ ------
(UNAUDITED)
<S> <C> <C>
Revenue.............................................................................. $7,697 $8,913
Earnings from continuing operations.................................................. 624 (149)
Net earnings (loss).................................................................. 465 (149)
Earnings (loss) per share
From continuing operations...................................................... $ 0.07 ($0.01)
------ ------
------ ------
Net............................................................................. $ 0.05 ($0.01)
------ ------
------ ------
</TABLE>
4. CAPITAL ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment.................................................... $ 2,432 $ 3,007 $ 3,769
Computer software..................................................... 1,020 1,346 1,403
Furniture and fixtures................................................ 837 1,077 1,253
Laboratory equipment.................................................. 469 719 824
Leasehold improvements................................................ 349 424 448
------- ------- -----------
5,107 6,573 7,697
Less accumulated amortization......................................... (2,187) (3,072) (3,736)
------- ------- -----------
Net book value........................................................ $ 2,920 $ 3,501 $ 3,961
------- ------- -----------
------- ------- -----------
</TABLE>
5. OTHER ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Software and related development costs................................ $ 860 $ 2,607 $ 3,126
Acquired technology, net of accumulated amortization of $91
(1997--$49)......................................................... -- 1,155 9,272
Deferred share issue costs............................................ 263 -- --
License............................................................... 1 -- --
------- ------- -----------
$ 1,124 $ 3,762 $12,398
------- ------- -----------
------- ------- -----------
</TABLE>
F-13
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND MARCH 31, 1998 ARE UNAUDITED
(AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS,
EXCEPT PER SHARE AMOUNTS AND NUMBERS OF SHARES)
6. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Small Business Assistance program, repayable in monthly principal
payments of $3 plus interest at 6%.................................. $ 13 $ -- $ --
Development loan
The company has received a loan from Lothian and Edinburgh
Enterprise Limited ('LEEL') for the purpose of product
development. There are no formal terms of repayment, and royalty
payments are to be made to LEEL based on gross sales revenue of
the particular product. If the company does not meet all the
terms of the loan it becomes repayable on demand................. -- 107 108
Capital lease
The Company entered into a sale/lease back, whereby it sold $350,000
worth of office equipment at its book value and is leasing it
back over 30 months at monthly installments of $12,000 including
interest at 9.58% with a final payment of $34,930 on August 1,
1999............................................................. -- -- 200
------- ------- -----------
13 107 308
Less: current portion................................................. (13) -- (81)
------- ------- -----------
$ -- $ 107 $ 227
------- ------- -----------
------- ------- -----------
</TABLE>
Minimum principal repayments over the term of the capital lease is as
follows:
<TABLE>
<S> <C>
1998........................................................... 81
1999........................................................... $119
</TABLE>
7. SHARE CAPITAL
(a) Authorized
The authorized capital of the Company consists of 50,000,000 common shares
with no par value
F-14
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND MARCH 31, 1998 ARE UNAUDITED
(AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS,
EXCEPT PER SHARE AMOUNTS AND NUMBERS OF SHARES)
7. SHARE CAPITAL--(CONTINUED)
(b) Issued and outstanding:
<TABLE>
<CAPTION>
NUMBER OF STATED
SHARES VALUES
---------- -------
<S> <C> <C>
Outstanding, December 31, 1994........................................................... 8,899,902 $11,968
Issued for cash from share options..................................................... 264,072 942
---------- -------
Outstanding, December 31, 1995........................................................... 9,163,974 $12,910
Issued for cash from share options..................................................... 79,709 496
---------- -------
Outstanding, December 31, 1996........................................................... 9,243,683 13,406
Issued for cash from share options..................................................... 42,381 256
Issued for acquisition of 3L Limited................................................... 173,333 1,300
---------- -------
Outstanding, December 31, 1997........................................................... 9,459,397 14,962
Issued for cash from share options..................................................... 5,499 48
Issued for net assets of Alex Computer Systems Inc..................................... 772,626 7,000
---------- -------
Outstanding, March 31, 1998 (unaudited).................................................. 10,237,522 $22,010
---------- -------
---------- -------
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Share Capital.................................................................. $13,406 $14,962 $22,010
less 233,300 shares held in treasury (1996--16,400, 1997-- 233,300).......... (38) (1,703) (1,703)
------- ------- -----------
$13,368 $13,259 $20,307
------- ------- -----------
------- ------- -----------
</TABLE>
(c) Stock option plan
The Company has reserved 2,250,000 common shares for issuance under its
stock option plan. The plan provides for the granting of stock options to
directors, officers and eligible employees at the fair market value of the
Company's stock at the grant date.
F-15
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND MARCH 31, 1998 ARE UNAUDITED
(AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS,
EXCEPT PER SHARE AMOUNTS AND NUMBERS OF SHARES)
7. SHARE CAPITAL--(CONTINUED)
Options generally vest over three years in equal amounts at the anniversary
date of the grant. Options generally have a five year term with ten years being
the maximum. Stock option activity for 1995, 1996, 1997, and the three months
ended March 31, 1998 is presented below:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
--------- ---------------
<S> <C> <C>
Outstanding, December 31, 1994........................................... 1,322,650 $ 0.70-$ 7.50
Granted................................................................ 194,000 $ 6.38-$17.00
Exercised.............................................................. (264,072) $ 0.70-$ 7.00
Cancelled.............................................................. (35,932) $ 6.00-$ 6.25
--------- ---------------
Outstanding, December 31, 1995........................................... 1,216,646 $ 0.70-$17.00
Granted................................................................ 416,556 $ 8.00-$16.10
Exercised.............................................................. (79,709) $ 2.14-$ 9.00
Cancelled.............................................................. (59,597) $ 4.80-$17.00
--------- ---------------
Outstanding, December 31, 1996........................................... 1,493,896 $ 0.70-$17.00
Granted................................................................ 330,353 $ 7.00-$ 8.50
Exercised.............................................................. (42,381) $ 1.86-$ 9.90
Cancelled.............................................................. (124,580) $ 2.38-$17.00
--------- ---------------
Outstanding, December 31, 1997........................................... 1,657,288 $ 0.70-$16.10
Exercised.............................................................. (5,499) $ 6.00-$ 7.55
Cancelled.............................................................. (1,400) $ 7.55
--------- ---------------
Outstanding, March 31, 1998 (unaudited).................................. 1,650,389 $ 0.70-$16.10
--------- ---------------
--------- ---------------
Exercisable at:
December 31, 1995...................................................... 505,866
December 31, 1996...................................................... 731,898
December 31, 1997...................................................... 902,491
March 31, 1998 (unaudited)............................................. 896,992
---------
---------
</TABLE>
The options outstanding at March 31, 1998 expire between August 6, 1998 and
June 11, 2007.
(d) Warrants
As part of the consideration on the purchase at March 17, 1998 of the net
assets of Alex Computer Systems Inc., the Company issued warrants to purchase
110,375 common shares of the Company at $9.06. The warrants expire on April 30,
2000. The fair value of the warrants was estimated to be $1.81 per warrant,
using the Black-Scholes option-pricing model.
(e) Escrow shares
There are 42,985 shares, related to the 3L Limited acquisition, held in
escrow at March 31, 1998 which will be released on June 20, 2000.
(f) Contributed surplus
During 1994, the Company purchased and sold 248,000 of its common shares
for proceeds in excess of cost of $106.
F-16
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND MARCH 31, 1998 ARE UNAUDITED
(AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS,
EXCEPT PER SHARE AMOUNTS AND NUMBERS OF SHARES)
8. INCOME TAXES
Income tax expense varies from the amounts that would be computed by
applying the Canadian federal and provincial income tax rate of 45.6% for each
of the periods presented to earnings before income taxes and discontinued
operations as shown in the following table:
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
------------------------ -------------
1995 1996 1997 1997 1998
---- ------ ------ ---- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Combined Canadian federal and provincial income taxes at
expected rate............................................. $402 $1,350 $2,483 $446 $(408)
Permanent and other differences............................. 99 5 7 -- 1
Recoveries not tax effected................................. -- -- -- -- 41
Reduction of income taxes from use of unrecorded tax
benefits.................................................. -- (368) (352) (75) --
---- ------ ------ ---- -----
501 987 2,138 371 (366)
---- ------ ------ ---- -----
---- ------ ------ ---- -----
</TABLE>
As at March 31, 1998 the Company has earned investment tax credits of
approximately $300 and claimed an additional $4,100 which are available to
reduce future years' income taxes payable. These investment tax credits expire
between 2000 and 2007. The potential tax benefits that may arise from the
utilization of the $4,100 have not been recognized in these financial
statements.
The Company has losses for UK income tax purposes of approximately $180
which can be carried forward indefinitely to reduce future taxable income.
9. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is calculated based upon the weighted
average number of shares outstanding during the following periods: March 31,
1997--9,228,935; March 31, 1998--9,356,210; (December 31, 1995--9,000,552;
December 31,1996--9,194,558; December 31, 1997--9,234,926).
Fully diluted earnings (loss) per share reflect the dilutive effect of the
conversion of the stock options outstanding at the end of the period or those
options exercised during the period, as if they had been exercised at the
beginning of the period or the date granted, if later. The number of shares used
for the calculation of the fully diluted earnings per share is March 31,
1997--9,392,107; March 31, 1998--9,356,210; (December 31, 1995--9,343,141;
December 31,1996--9,527,772; December 31, 1997--10,146,238). Interest on the
funds which would have been received had the options been exercised, in the
amount of March 31, 1997--$5; March 31, 1998--$40; (December 31, 1995--$18;
December 31, 1996--$24; December 31, 1997--$180) net of income tax, has been
imputed at a rate of 4% for each period presented.
F-17
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND MARCH 31, 1998 ARE UNAUDITED
(AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS,
EXCEPT PER SHARE AMOUNTS AND NUMBERS OF SHARES)
10. COMMITMENTS
The Company has entered into various operating lease agreements with
remaining terms of up to five years, for office premises and equipment. As at
December 31, 1997 the minimum lease payments in each of the next five years are
approximately as follows:
<TABLE>
<S> <C>
1998....................................................................... $ 774
1999....................................................................... 671
2000....................................................................... 665
2001....................................................................... 658
2002....................................................................... 259
------
$3,027
------
------
</TABLE>
11. SEGMENTED INFORMATION
In the opinion of management, the Company operates in one industry segment,
being the design, manufacture and marketing of digital signal processing
systems. Substantially all assets and operations are in Canada. A summary of
sales by region and by major customers is as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
----------------------------- ----------------
1995 1996 1997 1997 1998
------- ------- ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
By Region
United States.................................... $12,870 $21,395 $30,995 $5,272 $5,175
Canada and other................................. 4,842 5,963 5,457 1,345 2,317
------- ------- ------- ------ ------
Total Sales........................................ 17,712 $27,358 $36,452 6,617 7,492
------- ------- ------- ------ ------
------- ------- ------- ------ ------
By Major Customer
United States Government and related
subcontractors................................ $ 2,615 $ 8,569 $ 9,156 $1,995 $1,684
NAI Technologies................................. -- 718 6,736 -- --
IBM, substantially all from discontinued
operations.................................... 4,241 8,689 415 -- --
Siemens Medical Systems.......................... -- -- -- -- 876
Nikon Corporation................................ -- -- -- -- 710
------- ------- ------- ------ ------
</TABLE>
12. DISCONTINUED OPERATIONS
The Company initiated plans during 1997 to discontinue the operation of its
desktop Computer Telephony board business ('CTI'). The CTI division is in the
business of developing boards which integrate telephone, fax, and modem
functions into computers and selling them to OEMs and end users. The Company
expects to close operations in this business in 1998. Accordingly, the results
of operations and changes in financial position have been disclosed separately
from those of continuing operations for the periods presented. The financial
position of these discontinued operations continues to be consolidated in
accordance with generally accepted accounting principles.
F-18
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND MARCH 31, 1998 ARE UNAUDITED
(AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS,
EXCEPT PER SHARE AMOUNTS AND NUMBERS OF SHARES)
12. DISCONTINUED OPERATIONS--(CONTINUED)
The operating results of this business segment were as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
-------------------------- -------------
1995 1996 1997 1997 1998
------ ------ ------ ----- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue.......................................... $8,034 $9,556 $ 719 84 --
Gross Margin..................................... 1,790 2,007 265 24 --
Expenses......................................... 3,701 1,744 1,475 285 --
Provision for taxes.............................. (501) 87 (473) (102) --
------ ------ ------ ----- ----
Earnings (loss) from discontinued operations..... (1,410) $ 176 $ (737) $(159) --
------ ------ ------ ----- ----
------ ------ ------ ----- ----
</TABLE>
The net assets of discontinued operations are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- MARCH 31,
1996 1997 1998
------ ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets........................................................... $1,240 $517 --
Current liabilities...................................................... (258) -- --
------ ---- ----
$ 982 $517 --
------ ---- ----
------ ---- ----
</TABLE>
13. FINANCIAL INSTRUMENTS
a) Fair value of financial instruments
Carrying amounts of certain of the Company's financial instruments,
including accounts receivable and accounts payable and accrued liabilities
approximate fair value due to their short maturities. Based on borrowing rates
currently available to the Company for loans with similar terms, the carrying
value of its long-term debt approximates fair value.
b) Foreign exchange hedging
The Company utilizes future exchange contracts to manage its exposure to
fluctuations in foreign exchange rates. These instruments are used for purposes
other than trading and are employed in connection with an underlying asset,
liability or anticipated transaction. At March 31, 1998, the Company had a
futures exchange contract with a notional principal of $3,000 (December 31,
1996--nil; December 31, 1997--$1,500) Canadian dollars maturing June 15, 1998.
14. SUBSEQUENT EVENTS
a) The Company is filing a Form F-3 registration statement dated June 29,
1998 with the SEC in order to qualify 772,626 common shares and 110,375
warrants, exercisable at $9.06 per share, for distribution in the United States.
b) Subsequent to March 31, 1998 up to June 29, 1998, 232,175 stock options
were granted at an exercise price of $7.50 and 7,066 stock options were
exercised.
F-19
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND MARCH 31, 1998 ARE UNAUDITED
(AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS,
EXCEPT PER SHARE AMOUNTS AND NUMBERS OF SHARES)
15. UNITED STATES ACCOUNTING PRINCIPLES
The Company's financial statements presented herein have been prepared in
accordance with Canadian generally accepted accounting principles ('GAAP').
There are no material reconciling items between United States GAAP and Canadian
GAAP that affect net earnings or total assets or liabilities and shareholders'
equity except as follows:
EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
---------------------------- -----------------
1995 1996 1997 1997 1998
------- ------ ------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Earnings (loss) from continuing operations under
Canadian GAAP...................................... 380 $1,974 $ 3,307 607 $ (529)
Acquired in-process research and development......... -- -- (1,155) -- (7,744)
Reversal of amortization of acquired in process
research and development........................... -- -- -- -- 42
------- ------ ------- ------ -------
Earnings from continuing operations under U.S.
GAAP............................................... 380 $1,974 $ 2,152 607 $(8,231)
Earnings (loss) from discontinued operations......... (1,410) 176 (737) (159) --
------- ------ ------- ------ -------
Net earnings under U.S. GAAP......................... (1,030) $2,150 $ 1,415 448 $(8,231)
------- ------ ------- ------ -------
------- ------ ------- ------ -------
</TABLE>
EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED MARCH 31,
------------------------ ---------------
1995 1996 1997 1997 1998
------ ----- ----- ----- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Basic
From continuing operations................................ $ 0.04 $0.21 $0.23 $0.07 $(0.88)
------ ----- ----- ----- ------
------ ----- ----- ----- ------
After discontinued operations............................. $(0.11) $0.23 $0.15 $0.05 $(0.88)
------ ----- ----- ----- ------
------ ----- ----- ----- ------
Diluted
From continuing operations................................ $ 0.04 $0.20 $0.22 $0.06 $(0.88)
------ ----- ----- ----- ------
------ ----- ----- ----- ------
After discontinued operations............................. $(0.11) $0.22 $0.15 $0.05 $(0.88)
------ ----- ----- ----- ------
------ ----- ----- ----- ------
</TABLE>
During 1997, the Company adopted Statement of Financial Accounting Standard
No. 128 ('FAS 128'), Earnings Per Share. Accordingly, historical earnings per
share have been re-stated under FAS 128. Basic earnings per share is the same
under Canadian and United States GAAP. Diluted earnings per share under United
States GAAP is based on the weighted average number of common shares
outstanding. When dilutive, stock options and warrants are included as share
equivalents using the Treasury Stock method.
F-20
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND MARCH 31, 1998 ARE UNAUDITED
(AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS,
EXCEPT PER SHARE AMOUNTS AND NUMBERS OF SHARES)
15. UNITED STATES ACCOUNTING PRINCIPLES--(CONTINUED)
The following weighted average number of shares were used for the
computation of diluted earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
----------------------------------- ----------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Weighted average shares used in
computation of basic earnings per
share................................ 9,000,552 9,194,558 9,234,926 9,228,935 9,356,210
Weighted average shares from assumed
conversion of dilutive options....... 574,510 587,733 372,994 389,890 --
--------- --------- --------- --------- ---------
Weighted average shares used in
computation of diluted earnings per
share................................ 9,575,062 9,782,291 9,607,920 9,618,825 9,356,210
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Statement of cash flows
Under United States GAAP, cash flows provided by financing and used in
investing would decrease by $7,200 for the three months ended March 31, 1998
($1,300 for the year ended December 31, 1997), which represents the share
consideration paid for the acquisition of certain net assets of Alex Computer
Systems, Inc. (1997-3L Limited) which are non-cash transactions which would not
be reflected in the statement of cash flows.
Balance Sheets
Under United States GAAP, amounts paid for in-process process research and
development acquired through a business combination are expensed at the time of
acquisition. Accordingly under United States GAAP, the other assets and retained
earnings would be reduced $8,857 at March 31, 1998 (December 31, 1996--nil,
December 31, 1997--$1,155).
Accounts payable and accrued liabilities
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1996 1997 1998
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Accounts payable....................................................... $4,525 $4,277 $ 5,202
Accrued liabilities.................................................... 1,515 2,418 3,969
Deferred revenue....................................................... 876 27 77
------ ------ -----------
$6,916 $6,722 $ 9,248
------ ------ -----------
------ ------ -----------
</TABLE>
F-21
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND MARCH 31, 1998 ARE UNAUDITED
(AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS,
EXCEPT PER SHARE AMOUNTS AND NUMBERS OF SHARES)
15. UNITED STATES ACCOUNTING PRINCIPLES--(CONTINUED)
Line of credit
The Company has a credit facility with the Bank of Montreal (the 'Bank')
consisting of a $5,000,000 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.
Income taxes
Under United States GAAP, deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
Temporary differences are tax-effected at current rates whereas under Canadian
GAAP, temporary differences are tax-effected at historic rates. There was no
deferred tax effect of changes in tax rates during 1997.
The tax effect of the temporary differences that give rise to deferred tax
assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- MARCH 31,
1996 1997 1998
------ ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets
Tax loss carry forwards.............................................. $ -- $ 43 $ 515
Research and development expenses.................................... 834 -- --
Investment tax credits recoverable................................... 330 327 327
Share issue costs.................................................... 247 121 121
Other................................................................ 3 37 37
------ ------- -----------
Total gross deferred tax assets...................................... 1,414 528 1,000
------ ------- -----------
------ ------- -----------
Deferred tax liabilities
Research and development expenses.................................... -- (943) (1,043)
Tax depreciation in excess of accounting............................. (706) (847) (847)
Investment tax credits............................................... (148) (148) (148)
Other................................................................ (615) (339) (339)
------ ------- -----------
Total deferred tax liabilities....................................... (1,469) (2,277) (2,377)
------ ------- -----------
Net deferred tax liabilities........................................... $ (55) $(1,749) $(1,377)
------ ------- -----------
------ ------- -----------
</TABLE>
Stock Based Compensation
The Company adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123 ('FAS 123'), Accounting for Stock-Based
Compensation, for United States GAAP purposes, to account for grants under the
company's existing stock based compensation plans. Accordingly, no compensation
cost has been recognized for the stock option plan. Had compensation cost for
the Company's stock option plan been
F-22
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND MARCH 31, 1998 ARE UNAUDITED
(AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS,
EXCEPT PER SHARE AMOUNTS AND NUMBERS OF SHARES)
15. UNITED STATES ACCOUNTING PRINCIPLES--(CONTINUED)
determined based on the fair value at the grant date for awards under those
plans consistent with the measurement provisions of FAS 123, the Company's net
earnings and earnings per share under United States GAAP would have been
adjusted as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
--------------------------- -----------------
1995 1996 1997 1997 1998
------- ------ ------ ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net earnings (loss)--as reported..................... $(1,030) $2,150 $1,415 $ 448 $(8,231)
Net earnings (loss)--pro forma....................... $(1,116) $1,368 $ 119 $ 169 $(8,585)
Basic earnings (loss) per share--as reported......... $ (0.11) $ 0.23 $ 0.15 $ 0.05 $ (0.88)
Basic earnings (loss) per share--pro forma........... $ (0.12) $ 0.15 $ 0.01 $ 0.02 $ (0.92)
Diluted earnings (loss) per share--as reported....... $ (0.11) $ 0.22 $ 0.15 $ 0.05 $ (0.88)
Diluted earnings (loss) per share--pro forma......... $ (0.12) $ 0.14 $ 0.01 $ 0.02 $ (0.92)
</TABLE>
Pro-forma amounts reflect options granted after 1994 and may not be
representative of amounts in future years.
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Expected dividend yield............................................. 0% 0% 0%
Expected Stock Price Volatility..................................... 45% 45% 27%
Risk-free interest rate............................................. 8% 8% 7.5%
Expected life of options............................................ 4.5 years 4.5 years 4.5 years
</TABLE>
The weighted average fair value of the options granted is years ended
December 31, 1995--$6.48, 1996--$6.26, and 1997--$2.89. No options were granted
during the three months ended March 31, 1998 and 1997.
Recent United States accounting standards
Statement of Financial Accounting Standards FAS 130, 'Reporting
Comprehensive Income' and FAS 131, 'Disclosures about Segments of an Enterprise
and Related Information' are required to be implemented by the company effective
for the year ending December 31, 1998. The Company does not expect the effect of
these pronouncements to be material to the financial statements.
F-23
<PAGE>
ALEX COMPUTER SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
JULY 31, 1997 AND 1996
<TABLE>
<S> <C>
Independent Auditors' Report............................................................................... F-25
Balance Sheets............................................................................................. F-26
Statements of Income and Retained Earnings................................................................. F-27
Statements of Cash Flows................................................................................... F-28
Notes to Financial Statements.............................................................................. F-29
</TABLE>
F-24
<PAGE>
INDEPENDENT AUDITORS' REPORT
Stockholders
Alex Computer Systems, Inc.
Ithaca, New York
We have audited the accompanying balance sheets of Alex Computer Systems, Inc.,
as of July 31, 1997 and 1996, and the related statements of income and retained
earnings, and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Alex Computer Systems, Inc. as
of July 31, 1997 and 1996, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
CIASCHI, DIETERSHAGEN, LITTLE &
MICKELSON, LLP
August 28, 1997
Ithaca, New York
F-25
<PAGE>
ALEX COMPUTER SYSTEMS, INC.
BALANCE SHEETS
(EXPRESSED IN UNITED STATES DOLLARS)
JULY 31,
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........................................................... $ 35,451 $ 49,376
Accounts receivable................................................................. 1,175,122 471,945
Accounts receivable--shareholder.................................................... 156,690 6,160
Inventory........................................................................... 306,256 225,673
Deposits paid--purchases............................................................ 85,500 77,586
Deferred marketing costs............................................................ 105,350 --
Deferred income tax benefit......................................................... 266,505 216,077
---------- ----------
Total current assets............................................................. 2,130,874 1,046,817
Property and equipment, at cost, less accumulated
depreciation of $32,101 in 1997 and $53,626 in 1996................................. 266,406 158,472
Software development costs, less accumulated
amortization of $296,868 in 1997 and $144,531 in 1996............................... 744,471 628,049
---------- ----------
Total assets..................................................................... $3,141,751 $1,833,338
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 404,124 $ 392,131
Accounts payable--shareholder....................................................... 80,871 60,858
NY corporation tax payable.......................................................... 602 349
Deferred income tax liability--current portion...................................... 90,342 62,710
Line of credit...................................................................... 629,318 --
Lease payable--current portion...................................................... 85,617 --
---------- ----------
Total current liabilities........................................................ 1,290,874 516,048
Long-term liabilities:
Deferred income tax liability--noncurrent portion................................... 271,026 188,132
Lease payable--noncurrent portion................................................... 118,594 --
Due to shareholder.................................................................. 962,500 832,500
---------- ----------
Total liabilities................................................................ 2,642,994 1,536,680
---------- ----------
Stockholders' equity:
Common stock, $1 par value per share; 1,500 shares
authorized; 1,000 shares issued and outstanding.................................. 1,000 1,000
Paid in capital..................................................................... 254,000 254,000
Retained earnings................................................................... 243,757 41,658
---------- ----------
Total stockholders' equity....................................................... 498,757 296,658
---------- ----------
Total liabilities & stockholders' equity......................................... $3,141,751 $1,833,338
---------- ----------
---------- ----------
</TABLE>
See Independent Auditors' Report and Notes to Financial Statements
F-26
<PAGE>
ALEX COMPUTER SYSTEMS, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(EXPRESSED IN UNITED STATES DOLLARS)
FOR THE YEARS ENDED JULY 31,
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Sales, net............................................................................ $2,991,677 $1,241,850
Cost of goods sold.................................................................... 1,570,413 463,919
---------- ----------
Gross profit..................................................................... 1,421,264 777,931
Other income.......................................................................... 44,036 68,580
---------- ----------
Total income..................................................................... 1,465,300 846,511
---------- ----------
Expenses:
Advertising......................................................................... 89,004 35,756
Insurance........................................................................... 10,388 4,508
Legal/accounting.................................................................... 15,152 9,279
Office expense...................................................................... 38,759 35,705
Wages............................................................................... 243,915 170,471
Payroll taxes....................................................................... 21,538 13,278
Health insurance.................................................................... 47,687 33,210
Commissions......................................................................... 4,357 1,471
Consulting.......................................................................... 187,191 144,171
Postage and shipping................................................................ 8,511 4,920
Rent................................................................................ 46,207 25,440
Telephone........................................................................... 31,475 21,524
Travel.............................................................................. 106,964 75,957
Food/entertainment.................................................................. 23,750 12,916
Exhibition costs.................................................................... 25,162 20,345
Printing............................................................................ 27,592 9,075
Miscellaneous....................................................................... 4,523 2,238
Equipment lease..................................................................... 3,762 3,731
Lease--sales tax.................................................................... 4,059 --
Interest expense.................................................................... 27,650 --
Bank charges........................................................................ 9,299 5,000
Depreciation........................................................................ 44,273 43,967
Amortization software development costs............................................. 181,319 102,494
---------- ----------
Total expenses................................................................... 1,202,537 775,456
---------- ----------
Income before provision for income tax........................................... 262,763 71,055
Provision for income tax.............................................................. (60,664) (31,189)
---------- ----------
Net income....................................................................... 202,099 39,866
Retained earnings, beginning of year.................................................. 41,658 1,792
---------- ----------
Retained earnings, end of year........................................................ $ 243,757 $ 41,658
---------- ----------
---------- ----------
</TABLE>
See Independent Auditors' Report and Notes to Financial Statements.
F-27
<PAGE>
ALEX COMPUTER SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(EXPRESSED IN UNITED STATES DOLLARS)
FOR THE YEARS ENDED JULY 31,
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income.......................................................................... $ 202,099 $ 39,866
Adjustments to reconcile net income to net cash (used) by operating activities:
Depreciation................................................................... 44,273 43,967
Amortization--software development costs....................................... 181,319 102,494
Increase in deferred income tax benefit........................................ (50,428) (135,999)
Increase in deferred income tax liability...................................... 110,526 166,839
(Increase) decrease in:
Accounts receivable......................................................... (703,177) (378,030)
Accounts receivable--shareholder............................................ (150,530) (6,160)
Inventory................................................................... (80,583) (203,940)
Deposits paid--purchases.................................................... (7,914) (77,586)
Deferred marketing costs.................................................... (105,350) --
Increase (decrease) in:
Accounts payable............................................................ 11,993 281,690
Accounts payable--shareholder............................................... 20,013 40,744
Accrued liabilities......................................................... -- (1,355)
New York State corporation tax payable...................................... 253 --
----------- ---------
Cash (used) by operating activities............................................ (527,506) (127,470)
----------- ---------
Cash flows from investing activities:
Purchase of property and equipment.................................................. (36,278) (164,122)
Capitalization of software development costs........................................ (413,670) (520,220)
----------- ---------
Net cash (used) by investing activities..................................... (449,948) (684,342)
----------- ---------
Cash flows from financing activities:
Proceeds from line of credit........................................................ 1,851,179 --
Repayment of line of credit......................................................... (1,221,861) --
Proceeds from sale/leaseback........................................................ 246,000 --
Payment of lease.................................................................... (41,789) --
Advances from shareholder........................................................... 130,000 832,500
----------- ---------
Net cash provided by financing activities................................... 963,529 832,500
----------- ---------
Net (decrease) increase in cash and cash equivalents........................ (13,925) 20,688
Cash and cash equivalents, beginning of year.......................................... 49,376 28,688
----------- ---------
Cash and cash equivalents, end of year................................................ $ 35,451 $ 49,376
----------- ---------
Supplemental disclosures:
Income taxes paid................................................................... $ 349 $ 349
----------- ---------
Interest paid....................................................................... $ 27,650 $ --
----------- ---------
----------- ---------
</TABLE>
See Independent Auditors' Report and Notes to Financial Statements
F-28
<PAGE>
ALEX COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
JULY 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity
Alex Computer Systems, Inc. (the Company) was incorporated on September 15,
1994 and is located in Ithaca, New York. The sole shareholder is the Canadian
company, Alex Informatics, Inc. The Company designs and sells advanced, high
performance parallel processing systems.
Method of Accounting
The Company uses the accrual method of accounting for both financial
statement presentation and federal income tax purposes.
Revenue Recognition
Sales revenue is recognized when the product is shipped to the customer.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results may differ from those estimates.
Cash and Cash Equivalents
For purposes of the statement of cash flows, cash equivalents include
highly liquid debt instruments purchased with original maturity of three months
or less. Cost approximates fair market value for all cash and cash equivalents.
Accounts Receivable
Accounts receivable are recorded without provision for bad debts, which are
expensed in the year in which the receivables are determined to be
uncollectible. The amounts recorded at July 31, are considered by management to
be fully collectible.
Inventories
Inventories are recorded at the lower of cost or net realizable value, with
cost being determined by a manner which approximates the first-in, first-out
method. Inventory consists primarily of assemblies and electronic components
purchased for resale.
Property and Equipment
Property and equipment are carried at cost. The cost of property and
equipment is depreciated over the estimated useful lives of the related assets.
Depreciation for both tax and financial statement purposes is provided using the
modified accelerated cost recovery system. Software is amortized on a
straight-line basis over 3 years.
Expenditures for major renewals and betterments that extend the useful
lives of property and equipment are capitalized. Expenditures for maintenance
and repairs are charged to expense as incurred.
F-29
<PAGE>
ALEX COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN UNITED STATES DOLLARS)
JULY 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Deferred Marketing Costs
Deferred marketing costs represent costs incurred for signed contracts that
will begin in 1997-1998 and extend 2-5 years. These costs will be amortized over
2 years for book purposes.
Software Development Costs
Software developments costs for each product are carried on the balance
sheet at the lower of unamortized capital costs or its net realizable value.
Direct costs of producing product masters incurred subsequent to establishing
technological feasibility are capitalized. Those costs include coding and
testing performed subsequent to establishing technological feasibility.
Production costs that are to be used as an integral part of a product or process
are charged to expense until both (a) technological feasibility has been
established and (b) all research and development activities for the other
components of the product or process have been completed. Capitalization of
computer software costs is discontinued when the product is available for
general release to customers.
The realizability of these costs requires considerable judgement from
management related to the estimated useful lives and anticipated future sales.
Capitalized software costs are amortized on a product-by-product basis using the
straight-line method over the remaining estimated economic life (5 years).
Income Taxes
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences that arise from capitalizing and amortizing
software development costs for financial statement purposes and expensing these
costs for tax purposes. Deferred tax assets are also recognized for operating
losses and the R&D tax credits that are available to offset future federal
income taxes.
Foreign Currency Translation
The Company buys its products from foreign suppliers and sells its products
to foreign customers. Foreign purchases and sales are translated at the rate of
exchange in effect on the dates they occur.
2. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
1997
-------------------------------------
ACCUMULATED BOOK
ASSET COST DEPRECIATION VALUE
- --------------------------------------------------------------------------- -------- ------------- --------
<S> <C> <C> <C>
Furniture, fixtures and equipment.......................................... $ 52,507 $ 7,501 $ 45,006
Leased assets.............................................................. 246,000 24,600 221,400
-------- ------------- --------
Totals................................................................ $298,507 $32,101 $266,406
-------- ------------- --------
-------- ------------- --------
<CAPTION>
1996
-------------------------------------
ACCUMULATED BOOK
ASSET COST DEPRECIATION VALUE
- --------------------------------------------------------------------------- -------- ------------- --------
<S> <C> <C> <C>
Furniture, fixtures and equipment.......................................... $ 90,495 $30,088 $ 60,407
Telephone system........................................................... 7,021 2,722 4,299
Demonstration equipment.................................................... 23,461 9,371 14,090
Software technology........................................................ 60,000 8,333 51,667
Research & development..................................................... 31,121 3,112 28,009
-------- ------------- --------
Totals................................................................ $212,098 $53,626 $158,472
-------- ------------- --------
-------- ------------- --------
</TABLE>
F-30
<PAGE>
ALEX COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN UNITED STATES DOLLARS)
JULY 31, 1997 AND 1996
2. PROPERTY AND EQUIPMENT--(CONTINUED)
Depreciation expense for the years ended July 31, 1997 and 1996 amounted to
$44,273 and $43,967, respectively.
3. SOFTWARE DEVELOPMENT COSTS
<TABLE>
<CAPTION>
1997
--------------------------------------
BOOK
ASSET COST AMORTIZATION VALUE
- ------------------------------------------------------------------------- ---------- ------------ --------
<S> <C> <C> <C>
Software development costs............................................... $1,041,339 $296,868 $744,471
---------- ------------ --------
---------- ------------ --------
<CAPTION>
1996
--------------------------------------
AMORTIZATION BOOK
ASSET COST DEPRECIATION VALUE
- ------------------------------------------------------------------------- ---------- ------------ --------
<S> <C> <C> <C>
Software development costs............................................... $ 772,580 $144,531 $628,049
---------- ------------ --------
---------- ------------ --------
</TABLE>
Software development costs capitalized for the years ended July 31, 1997
and 1996 amounted to $413,670 and $520,220, respectively. Amortization expense
for the years ended July 31, 1997 and 1996 amounted to $181,319 and $102,494,
respectively.
On January 31, 1997 software development costs with a cost of $144,911, and
accumulated amortization of $28,982, was reclassified to property and
equipment--leased assets.
4. RELATED PARTY TRANSACTIONS
The Company entered into the following related party transactions with its
shareholder, Alex Informatics, Inc.:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Sales to shareholder for the years ended July 31,..................... $160,530 $ 6,160
Purchases from shareholder for the years ended July 31,............... 20,013 40,744
Trade receivables due from shareholder as of July 31,................. 156,690 6,160
Trade payables due from shareholder as of July 31,.................... 80,871 60,858
Advances from shareholder for the years ended July 31,................ 130,000 832,500
Advances due shareholder as of July 31,............................... 962,500 832,500
</TABLE>
5. LEASE COMMITMENTS
The Company leased office space on Prospect Street, Ithaca, New York, at a
cost of $2,120 per month, through March 1, 1997.
Effective March 1, 1997 the Company entered into a lease for office space
at 950, Danby Road, Ithaca, New York, for a two year term, for $5,833 per month,
expiring March 1, 1999.
In addition, the Company leases a photocopier for $182 per month for 36
months expiring in November, 1997, and a postage machine for $387 per quarter
for 63 months expiring in August, 1999.
Future minimum lease payments are as follows:
<TABLE>
<S> <C>
1998........................................................... $70,728
1999........................................................... 42,383
2000........................................................... 387
</TABLE>
F-31
<PAGE>
ALEX COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN UNITED STATES DOLLARS)
JULY 31, 1997 AND 1996
6. DUE TO SHAREHOLDER
As of July 31, 1997 and 1996, the Company was obligated to its shareholder
for a non-interest bearing advance, payable upon demand in the amount of
$962,500 and $832,500, respectively.
7. INCOME TAXES
The provision for income tax consists of the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Taxes currently payable................................................. $ 566 $ 349
Deferred income tax expense............................................. 60,098 30,840
------- -------
Net provision for income tax.......................................... $60,664 $31,189
------- -------
------- -------
</TABLE>
As of July 31, 1997 and 1996, the Company had net operating loss
carryforwards and research and development tax credits of $543,627 and $526,506
and $49,380 and $14,465, respectively.
8. DEFERRED INCOME TAXES
Deferred income taxes represent the tax effects of timing differences
between financial and taxable income that arise because certain transactions are
included in taxable income in different years than in financial statement
income. The sources of these differences and the tax effect of each are as
follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Deferred tax asset:
Tax benefit of loss carryforward.................................... $217,125 $201,612
Tax benefit of research and development credit...................... 49,380 14,465
-------- --------
Total deferred tax asset......................................... $266,505 $216,077
-------- --------
-------- --------
Deferred tax liability:
Difference between tax and book software development costs.......... $319,292 $250,842
Deferred marketing costs............................................ 42,076 --
-------- --------
Total deferred tax liability..................................... 361,368 250,842
Less current portion............................................. 90,342 62,710
-------- --------
Noncurrent portion............................................... $271,026 $188,132
-------- --------
-------- --------
</TABLE>
9. CONCENTRATION OF CREDIT RISK
The Company's cash funds are located in one financial institution. Deposits
are federally insured up to $100,000. Deposits may exceed this amount throughout
the year.
10. LINE OF CREDIT
On August 14, 1996, the Company obtained a $1,500,000 revolving credit
facility with Chittenden Bank for short-term working capital. Interest is
payable monthly at the prime rate (as published daily in the Wall Street
Journal) plus 1%. Advances under the line of credit are based on a formula of
80% of eligible accounts receivable, as defined in the loan agreement. The bank
has first security interest in all accounts receivable, inventory, contract
rights and general intangibles. The note is guaranteed by the shareholder. The
agreement includes requirements for minimum operating ratios and prohibits
substantial changes in management or ownership and payment of dividends without
consent of the lender. As of July 31, 1997 and 1996, the balance of the line of
credit was $629,318 and $nil, respectively.
F-32
<PAGE>
ALEX COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN UNITED STATES DOLLARS)
JULY 31, 1997 AND 1996
11. LEASE PAYABLE
On January 31, 1997, the Company entered into a sales/leaseback agreement
with Newcourt Financial USA, Inc. The Company sold $246,000 worth of office
equipment at its book value and is leasing it back over 30 months. The agreement
calls for 30 monthly installments of $8,457, including interest at 9.58% with a
final payment of $24,600 on August 1, 1999. The balance of the lease as of July
31, was as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
$204,211 $ --
Less current portion.................................................. (85,617) --
-------- --------
Noncurrent portion.................................................. $118,594 $ --
-------- --------
-------- --------
</TABLE>
Future principal payment requirements are as follows:
<TABLE>
<S> <C>
1998....................................... $85,617
1999....................................... 94,189
2000....................................... 24,405
</TABLE>
F-33
<PAGE>
ALEX COMPUTER SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
SEVEN MONTHS ENDED FEBRUARY 28, 1998
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Balance Sheet.............................................................................................. F-35
Statement of Earnings and Retained Earnings................................................................ F-36
Statement of Cash Flows.................................................................................... F-37
Notes to Financial Statements.............................................................................. F-38
</TABLE>
F-34
<PAGE>
ALEX COMPUTER SYSTEMS, INC.
BALANCE SHEET
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
FEBRUARY 28,
1998
-----------------
(UNAUDITED)
<S> <C>
ASSETS
Current assets
Accounts receivable.......................................................................... $ 699,667
Accounts receivable--shareholder............................................................. 178,583
Inventory.................................................................................... 489,912
Deposits paid--purchases..................................................................... 85,500
Deferred marketing costs..................................................................... 64,380
Deferred income tax benefit (Note 4)......................................................... 153,802
-----------------
1,671,844
Property and equipment, at cost, less accumulated depreciation (Note 2)........................ 301,790
Software development costs, less accumulated depreciation (Note 3)............................. 622,981
-----------------
$ 2,596,615
-----------------
-----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Cheques issued in excess of funds on deposit................................................. $ 173,516
Accounts payable............................................................................. 308,262
Accounts payable--shareholder................................................................ 87,740
Deferred income tax liability--current portion (Note 4)...................................... 90,342
Line of credit (Note 5)...................................................................... 184,933
Lease payable--current portion (Note 6)...................................................... 91,238
Due to shareholder (Note 7).................................................................. 795,500
-----------------
1,731,531
Long-term liabilities
Deferred income tax liability--non-current portion (Note 4).................................. 202,932
Lease payable--non-current portion (Note 6).................................................. 56,807
-----------------
Total liabilities............................................................................ $ 1,991,270
-----------------
Stockholders' equity
Common stock, $1 par value per share, 1,500 shares authorized;
1,000 shares issued and outstanding....................................................... 1,000
Paid-in capital.............................................................................. 254,000
Retained earnings............................................................................ 350,345
-----------------
605,345
-----------------
Commitments (Note 8)
$ 2,596,615
-----------------
-----------------
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE>
ALEX COMPUTER SYSTEMS, INC.
STATEMENT OF EARNINGS AND RETAINED EARNINGS
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
FEBRUARY 28,
1998
------------------
(UNAUDITED)
<S> <C>
Sales, net................................................................................... $1,990,875
Cost of goods sold........................................................................... 868,618
------------------
Gross profit................................................................................. 1,122,257
Other income................................................................................. 3,743
------------------
1,126,000
Expenses
Advertising................................................................................ 57,353
Insurance.................................................................................. 12,023
Legal and accounting....................................................................... 11,023
Office expense............................................................................. 10,945
Wages...................................................................................... 261,832
Payroll taxes.............................................................................. 30,761
Health insurance........................................................................... 20,009
Commissions................................................................................ 3,880
Research and development................................................................... 197,928
Postage and shipping....................................................................... 1,697
Rent....................................................................................... 41,863
Telephone.................................................................................. 15,346
Travel..................................................................................... 59,149
Food and entertainment..................................................................... 11,717
Exhibition costs........................................................................... 13,932
Printing................................................................................... 5,418
Miscellaneous.............................................................................. 362
Equipment lease............................................................................ 3,257
Lease--sales tax........................................................................... 5,413
Interest expense........................................................................... 11,492
Bank charges............................................................................... 30,843
Depreciation............................................................................... 47,070
Amortization software development costs.................................................... 121,490
------------------
974,803
------------------
Earnings before income taxes................................................................. 151,197
Deferred income taxes........................................................................ 44,609
------------------
Net earnings................................................................................. 106,588
Retained earnings, beginning of period....................................................... 243,757
------------------
Retained earnings, end of period............................................................. $ 350,345
------------------
------------------
</TABLE>
See accompanying notes to financial statements.
F-36
<PAGE>
ALEX COMPUTER SYSTEMS, INC.
STATEMENT OF CASH FLOWS
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
FEBRUARY 28,
1998
------------------
(UNAUDITED)
<S> <C>
Cash flow from operating activities
Net earnings............................................................................... $ 106,588
Adjustments to reconcile net earnings to net cash from
operating activities
Depreciation............................................................................ 47,070
Amortization--software development costs................................................ 121,490
Reduction in deferred income tax benefit................................................ 112,703
Reduction in deferred income tax liability.............................................. (68,094)
(Increase) decrease in
Accounts receivable................................................................... 475,455
Accounts receivable--shareholder...................................................... (21,893)
Inventory............................................................................. (183,656)
Deferred marketing costs.............................................................. 40,970
Increase (decrease) in
Accounts payable...................................................................... (95,862)
Accounts payable--shareholder......................................................... 6,869
New York State corporation tax payable................................................ (602)
------------------
Cash from by operating activities............................................................ 541,038
------------------
Investments
Purchase of property and equipment......................................................... (82,454)
------------------
Financing
Repayment of line of credit................................................................ (444,385)
Payment of lease........................................................................... (56,166)
Advances from shareholder.................................................................. (167,000)
------------------
(667,551)
------------------
Decrease in cash and cash equivalents........................................................ (208,967)
Cash and cash equivalents, beginning of period............................................... 35,451
------------------
Cheques issued in excess of funds on deposit, end of period.................................. $ (173,516)
------------------
------------------
Supplemental disclosures
Income taxes paid............................................................................ $ 602
------------------
------------------
Interest paid................................................................................ $ 11,492
------------------
------------------
</TABLE>
See accompanying notes to financial statements.
F-37
<PAGE>
ALEX COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
SEVEN MONTHS ENDED FEBRUARY 28, 1998
(EXPRESSED IN UNITED STATES DOLLARS)
1. SIGNIFICANT ACCOUNTING POLICIES
(a) Business activity
Alex Computer Systems, Inc. (the 'Company') was incorporated on September
15, 1994 and is located in Ithaca, New York. The sole shareholder as at February
28, 1998 is a Canadian company, Alex Informatics, Inc. The Company designs and
sells advanced, high performance parallel processing systems.
(b) Method of accounting
The Company uses the accrual method of accounting for both financial
statement presentation and federal income tax purposes.
(c) Revenue recognition
Sales revenue is recognized when the product is shipped to the customer.
(d) Use of estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results may differ from those estimates.
(e) Cash and cash equivalents
For purposes of the statement of cash flows, cash equivalents include
highly liquid debt instruments purchased with original maturity of three months
or less. Cost approximates fair market value for all cash and cash equivalents.
(f) Accounts receivable
Accounts receivable are recorded without provision for bad debts, which are
expensed in the year in which the receivables are determined to be
uncollectible. The amounts recorded at February 28, are considered by management
to be fully collectible.
(g) Inventories
Inventories are recorded at the lower of cost or net realizable value, with
cost being determined by a manner which approximates the first-in, first-out
method. Inventory consists primarily of assemblies and electronic components
purchased for resale.
(h) Property and equipment
Property and equipment are carried at cost. The cost of property and
equipment is depreciated over the estimated useful lives of the related assets.
Depreciation for both tax and financial statement purposes is provided using the
modified accelerated cost recovery system. Software is amortized on a
straight-line basis over three years.
F-38
<PAGE>
ALEX COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
SEVEN MONTHS ENDED FEBRUARY 28, 1998
(EXPRESSED IN UNITED STATES DOLLARS)
1. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(h) Property and equipment, continued
Expenditures of major renewals and betterments that extend the useful lives
of property and equipment are capitalized. Expenditures for maintenance and
repairs are charged to expense as incurred.
(i) Deferred marketing costs
Deferred marketing costs represent costs incurred for signed contracts that
will begin in 1997-1998 and extend two to five years. These costs will be
amortized over two years for book purposes.
(j) Software development costs
Software development costs for each product are carried on the balance
sheet at the lower of unamortized capital costs or its net realizable value.
Direct costs of producing product masters incurred subsequent to establishing
technological feasibility are capitalized. Those costs include coding and
testing performed subsequent to establishing technological feasibility.
Production costs that are to be used as an integral part of a product or process
are charged to expense until both (a) technological feasibility has been
established and (b) all research and development activities for the other
components of the product or process have been completed. Capitalization of
computer software costs is discontinued when the product is available for
general release to customers.
The realizability of these costs requires considerable judgement from
management related to the estimated useful lives and anticipated future sales.
Capitalized software costs are amortized on a product-by-product basis using the
straight-line method over the remaining estimated economic life (five years).
(k) Foreign currency translation
The Company buys its products from foreign suppliers and sells its products
to foreign customers. Foreign purchases and sales are translated at the rate of
exchange in effect on the dates they occur.
2. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
1998
----------
<S> <C>
Furniture, fixtures and equipment....................................... $ 91,679
Research and development equipment...................................... 43,282
Leased assets........................................................... 246,000
----------
380,961
Less: accumulated depreciation.......................................... (79,171)
----------
Net book value.......................................................... $ 301,790
----------
----------
</TABLE>
3. SOFTWARE DEVELOPMENT COSTS
<TABLE>
<CAPTION>
1998
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
------------ ----------- --------
<S> <C> <C> <C>
Software development costs...................................... $ 1,041,339 $(418,358) $622,981
------------ ----------- --------
------------ ----------- --------
</TABLE>
F-39
<PAGE>
ALEX COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
SEVEN MONTHS ENDED FEBRUARY 28, 1998
(EXPRESSED IN UNITED STATES DOLLARS)
3. SOFTWARE DEVELOPMENT COSTS--(CONTINUED)
Software development costs capitalized for the seven months ended February
28, 1998 amounted to $Nil. Amortization expense for the seven months ended
February 28, 1998 amounted to $121,490.
4. DEFERRED INCOME TAXES
Deferred income taxes represent the tax effects of timing differences
between financial and taxable income that arise because certain transactions are
included in taxable income in different years than in financial statement
income. The sources of these differences and the tax effect of each are as
follows:
<TABLE>
<CAPTION>
1998
----------
<S> <C>
Deferred income tax asset
Tax benefit of loss carryforward.......................................................... $ 104,422
Tax benefit of research and development credit............................................ 49,380
----------
Total deferred income tax asset............................................................. $ 153,802
----------
----------
Deferred income tax liability
Difference between tax and book software development costs................................ $ 267,187
Deferred marketing costs.................................................................. 26,087
----------
Total deferred income tax liability......................................................... 293,274
Less current portion........................................................................ (90,342)
----------
Non-current portion......................................................................... $ 202,932
----------
----------
</TABLE>
5. LINE OF CREDIT
On August 14, 1996, the Company obtained a $1,500,000 revolving credit
facility with Chittenden Bank for short-term working capital. Interest is
payable monthly at the prime rate (as published daily in the Wall Street
Journal) plus 1%. Advances under the line of credit are based on a formula of
80% of eligible accounts receivable, as defined in the loan agreement. The bank
has first security interest in all accounts receivable, inventory, contract
rights and general intangibles. The note is guaranteed by the shareholder. The
agreement includes requirements for minimum operating ratios and prohibits
substantial changes in management or ownership and payment of dividends without
consent of the lender. As of February 28, 1998, the balance of the line of
credit was $184,933.
6. LEASE PAYABLE
On January 31, 1997, the Company entered into a sales/leaseback agreement
with Newcourt Financial USA, Inc. The Company sold $246,000 worth of office
equipment at its book value and is leasing it back over 30 months. The agreement
calls for 30 monthly instalments of $8,457, including interest at 9.58% with a
final payment of $24,600 on August 1, 1999. The balance of the lease as of
February 28, was as follows:
<TABLE>
<CAPTION>
1998
----------
<S> <C>
Lease payable........................................................... $ 148,045
Less current portion.................................................... (91,238)
----------
Non-current portion..................................................... $ 56,807
----------
----------
</TABLE>
F-40
<PAGE>
ALEX COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
SEVEN MONTHS ENDED FEBRUARY 28, 1998
(EXPRESSED IN UNITED STATES DOLLARS)
6. LEASE PAYABLE--(CONTINUED)
Future principal payment requirements are as follows:
<TABLE>
<S> <C>
1998..................................................................... $ 91,238
1999..................................................................... 56,807
</TABLE>
7. DUE TO SHAREHOLDER
As of February 28, 1998, the Company was obligated to its shareholder for a
non-interest bearing advance, payable upon demand in the amount of $795,500.
8. COMMITMENTS
Effective March 1, 1997, the Company entered into a lease for office space
at 950 Danby Road, Ithaca, New York, for a two-year-term, for $5,833 per month,
expiring March 1, 1999.
In addition, the Company leases a postage machine for $387 per quarter for
63 months expiring in August, 1999.
Future minimum lease payments are as follows:
<TABLE>
<S> <C>
1998.................................................................... $ 175,000
1999.................................................................... 86,000
</TABLE>
9. CONCENTRATION OF CREDIT RISK
The Company's cash funds are located in one financial institution. Deposits
are federally insured up to $100,000. Deposits may exceed this amount throughout
the year.
F-41
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
INDEX TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma Consolidated Statements of Earnings............................................................. F-43
Notes to Pro Forma Consolidated Financial Statements...................................................... F-44
</TABLE>
F-42
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
PRO FORMA CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------
ALEX
COMPUTER
SYSTEMS
COMPANY INC. ADJUSTMENTS PRO FORMA
------- -------- ----------- ---------
(NOTE 2)
<S> <C> <C> <C> <C>
Sales................................... $36,452 $4,456 $ -- $40,908
Cost of sales........................... 15,548 2,084 -- 17,632
------- -------- ----------- ---------
20,904 2,372 -- 23,276
Expenses:
Administrative........................ 4,372 309 -- 4,681
Sales and marketing................... 6,634 625 -- 7,259
Amortization.......................... 944 332 (261)(a) 2,180
1,165(b)
Research and development.............. 3,528 240 -- 3,768
------- -------- ----------- ---------
15,478 1,506 904 17,888
------- -------- ----------- ---------
Earnings (loss) from operations......... 5,426 866 (904) 5,388
Other revenue (expense):
Interest and bank charges............. 4 (83) -- (79)
Other income (expense)................ 15 60 -- 75
------- -------- ----------- ---------
19 (23) -- (4)
------- -------- ----------- ---------
Earnings (loss) before income taxes and
discontinued operations............... 5,445 843 (904) 5,384
Income taxes (recovery)................. 2,138 211 (406)(d) 1,943
------- -------- ----------- ---------
Earnings (loss) from continuing
operations............................ $3,307 $ 632 $ (498) $ 3,441
------- -------- ---------
------- -------- ----------- ---------
-----------
Earnings (loss) per share (note 3):
Basic:
From continuing operations......... $ 0.34
Fully diluted:
From continuing operations......... 0.33
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
--------------------------------------------------
ALEX
COMPUTER
SYSTEMS
COMPANY INC. ADJUSTMENTS PRO FORMA
------- -------- ----------- ---------
(NOTE 1(b)) (NOTE 2)
<S> <C> <C> <C> <C>
Sales...................................$ 7,492 $ 1,421 $ -- $ 8,913
Cost of sales........................... 2,769 613 -- 3,382
----------- ----------- ----------- ---------
4,723 808 -- 5,531
Expenses:
Administrative........................ 1,683 24 (593)(c) 1,114
Sales and marketing................... 2,437 317 (35)(a) 2,719
Amortization.......................... 272 108 (72)(a) 599
291 (b)
Research and development.............. 1,194 102 -- 1,296
----------- ----------- ----------- ---------
5,586 551 (409) 5,728
----------- ----------- ----------- ---------
Earnings (loss) from operations......... (863) 257 409 (197)
Other revenue (expense):
Interest and bank charges............. (20) (18) -- (38)
Other income (expense)................ (12) 6 -- (6)
----------- ----------- ----------- ---------
(32) (12) -- (44)
----------- ----------- ----------- ---------
Earnings (loss) before income taxes and
discontinued operations............... (895) 245 409 (241)
Income taxes (recovery)................. (366) 73 201 (d) (92)
----------- ----------- ----------- ---------
Earnings (loss) from continuing
operations............................$ (529) $ 172 $ 208 $ (149)
----------- ----------- ----------- ---------
----------- ----------- ----------- ---------
Earnings (loss) per share (note 3):
Basic:
From continuing operations......... $ (0.01)
Fully diluted:
From continuing operations......... (0.01)
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
F-43
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1997 AND THREE MONTHS ENDED MARCH 31, 1998
(EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT NUMBER OF SHARES)
1. BASIS OF PRESENTATION
The pro forma consolidated financial statements of Spectrum Signal
Processing Inc. (the 'Company') reflect, on a unaudited basis, the consolidated
results of the Company's operations from continuing operations as if the
acquisition of certain intellectual property and tangible assets and assumption
of certain liabilities of Alex Computer Systems, Inc. ('Alex') had taken place
at January 1, 1997, after giving effect to the adjustments described in note 2.
These pro forma consolidated financial statements are not necessarily indicative
of the results of operations that would have been attained had the acquisition
taken place at the beginning of the periods presented and do not purport to be
indicative of the effects that may be expected to occur in the future.
The pro forma consolidated financial statements have been compiled from
financial information in the:
(a) audited consolidated financial statements of the Company for the
year ended December 31, 1997, and the unaudited consolidated financial
statements of the Company for the three months ended March 31, 1998;
(b) the unaudited financial statements of Alex for the year ended
December 31, 1997, and for the period January 1, 1998 to March 17, 1998,
the date of acquisition translated from United States dollars into Canadian
dollars; and
(c) the additional information set out in note 2.
The pro forma consolidated financial statements are prepared in accordance
with generally accepted accounting principles ('GAAP') in Canada, and, except as
set forth in note 4, also comply, in all material respects with United States
GAAP. The pro forma consolidated statements of earnings exclude non-recurring
charges or credits directly attributable to the transactions set out herein.
2. PRO FORMA STATEMENT OF EARNINGS ADJUSTMENTS
The pro forma consolidated statements of earnings give effect to the
following:
(a) to eliminate historical amortization on deferred costs that were
not acquired by the Company.
(b) to record the amortization on the technology acquired from Alex.
(c) to eliminate non-recurring charges directly attributable to the
acquisition, net of tax.
(d) to adjust income taxes to reflect the effective rates.
3. EARNINGS (LOSS) PER SHARE
The weighted average number of shares outstanding equals the weighted
average shares outstanding as set out in the consolidated financial statements
of the Company, adjusted to give pro forma effect to the issuance of 772,626
common shares on the acquisition of Alex. Per share information is presented as
if the common shares issued were issued at the beginning of the periods
presented.
Earnings (loss) per share is calculated based on the following weighted
average number of shares:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------------
<S> <C> <C>
Basic..................................................... 10,007,552 10,000,064
Fully diluted............................................. 10,918,864 --
</TABLE>
F-44
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1997 AND THREE MONTHS ENDED MARCH 31, 1998
(EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT NUMBER OF SHARES)
4. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
Under accounting principles generally accepted in the United States,
acquired in-process research and development is charged to expense at the date
of consummation of an acquisition. Accordingly, the Company has the following
material reconciling items:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------------
<S> <C> <C>
Pro forma earnings (loss) from continuing operations under
Canadian GAAP........................................... $ 3,441 $ (149)
Acquired in-process research and development..............
3L Limited.............................................. (1,155) --
Alex Computer Systems, Inc.............................. (7,744) --
Reversal of amortization of acquired in-process research
and development......................................... 1,165 333
------------ ------------------
Pro forma earnings (loss) from continuing operations under
United States GAAP...................................... $ (4,293) $ 184
------------ ------------------
------------ ------------------
</TABLE>
F-45
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES
OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH AN OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF THE TIME
SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Enforceability of Civil Liabilities............ 2
Exchange Rate Information...................... 2
Currency Translation and Accounting
Principles................................... 2
Prospectus Summary............................. 3
Incorporation of Certain Documents by
Reference.................................... 3
Risk Factors................................... 5
Use of Proceeds................................ 10
Dividend Policy................................ 10
Price Range of Common Shares................... 10
Capitalization................................. 11
Selected Financial Data........................ 11
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 13
Business....................................... 18
Management..................................... 24
Principal and Selling Securityholders.......... 27
Description of Share Capital................... 28
Certain Tax Considerations..................... 30
Plan of Distribution........................... 32
Legal Matters.................................. 33
Experts........................................ 33
Additional Information......................... 33
Glossary....................................... 34
Index to Financial Statements.................. F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
883,001 SHARES
SPECTRUM SIGNAL
PROCESSING INC.
COMMON SHARES
------------------------
PROSPECTUS
------------------------
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an itemized statement of all estimated
expenses in connection with the issuance and distribution of the securities
being registered:
<TABLE>
<S> <C>
SEC filing fee..................................................................... $ 1,335
Nasdaq National Market listing fee................................................. 16,471
The Toronto Stock Exchange Listing Fee............................................. 9,448
Printing and engraving expenses.................................................... 10,000+
Legal fees and expenses............................................................ 50,000+
Accounting fees and expenses....................................................... 40,000+
Miscellaneous...................................................................... 7,746+
-------
Total......................................................................... 135,000+
-------
</TABLE>
- ------------------
+ Estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company Act (British Columbia) provides as follows with respect to
indemnification of directors and officers:
'Sec. 128. Indemnification.--(1) A company, with the approval of the
court, may indemnify a person who is a director or former director of the
company or is a director or former director of a corporation of which the
company is or was a shareholder, and the person's heirs and personal
representatives, against all costs, charges and expenses, including an
amount paid to settle an action or satisfy a judgment, actually and
reasonably incurred by the person, including an amount paid to settle an
action or satisfy a judgment in a civil, criminal or administrative action
or proceeding to which the person is made a party because of being or
having been a director, including an action brought by the company or
corporation, if
(a) the person acted honestly and in good faith with a view to the
best interests of the corporation of which the person is or was a
director; and
(b) in the case of a criminal or administrative action or
proceeding, the person had reasonable grounds for believing that the
person conduct was lawful.
(2) The court, on the application of a company, director or a former
director, may make an order approving an indemnity under this section and
the court may make any further order it considers appropriate.
(3) On an application under subsection (2), the court may order notice
to be given to any interested person.
(4) A company may purchase and maintain insurance for the benefit of a
person referred to in this section against any liability incurred by the
person as a director or officer.
(5) Subsections (1) to (3) apply to officers or former officers of a
company or of a corporation of which the company is or was a shareholder.'
The Company's Articles provide as follows with respect to indemnification
of directors and officers:
19.1 Subject to the provisions of the Company Act, the directors shall cause the
Company to indemnify a director or former director of the Company and the
directors may cause the Company to indemnify a director or former director
or a corporation of which the Company is or was a shareholder and the heirs
and personal representatives of any such person against all costs, charges
and expenses, including an amount paid to settle an action or satisfy a
judgment, actually and reasonable incurred by him or them including an
amount paid to settle an action or satisfy a judgment in a civil, criminal
or administrative action or
II-1
<PAGE>
proceeding to which he is or they made a party be reason of his being or
having been a director of the Company or a director of such corporation,
including any action brought by the Company or any such corporation. Each
director of the Company on being elected or appointed shall be deemed to
have contracted with the Company on the terms of the foregoing indemnity.
19.2 Subject to the provisions of the Company Act, the directors may cause the
Company to indemnify any officer, employee or agent of the Company or of a
corporation of which the Company is or was a shareholder (notwithstanding
that he is also a director) and his heirs and personal representatives
against all costs, charges and expenses whatsoever incurred by him or them
and resulting from his acting as an officer, employee or agent of the
Company or such corporation. In addition, the Company shall indemnify the
Secretary or an Assistant Secretary of the Company (if he shall not be a
full time employee of the Company and notwithstanding that he is also a
director) and his respective heirs and legal representatives against all
costs, charges and expenses whatsoever incurred by him or them and arising
out of the functions assigned to the Secretary by the Company Act or these
Articles and each such Secretary and Assistant Secretary shall on being
appointed be deemed to have contracted with the Company on the terms of the
foregoing indemnity.
19.3 The failure of a director or officer of the Company to comply with the
provisions of the Company Act or of the Memorandum or these Articles shall
not invalidate any indemnity to which he is entitled under this Part.
19.4 The directors may cause the Company to purchase and maintain insurance for
the benefit of any person who is or was serving as a director, officer,
employee or agent of the Company or has a director, officer, employee or
agent of any corporation of which the Company is or was a shareholder and
his heirs or personal representatives against any liability incurred by him
as such director, officer, employee or agent.
The Company's directors and officers are insured against losses arising
from any claim against them as such for wrongful acts or omissions, subject to
certain limitations.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------------------------
<S> <C> <C>
3.1 -- Certificate of Incorporation (incorporated by reference to the Company's Report on Form 20-FR filed
on February 26, 1992).
3.2 -- Articles of the Company (incorporated by reference to the Company's Report on Form 20-FR filed on
February 26, 1992)).
4 -- Specimen Share Certificate (incorporated by reference to the Company's Registration Statement on Form
F-1 (No. 333-4820)).
5 -- Opinion of Clark, Wilson.
10.1 -- License Agreement, dated July 31, 1987, between Loughborough Sound Images Ltd. and the Company
(incorporated by reference to the Company's Report on Form 20-FR filed on February 26, 1992).
10.2 -- Distribution and Manufacturing Agreement, dated January 17, 1997, between Loughborough Sound Images
PLC and the Company (incorporated by reference to the Company's Report on Form 20-F filed on June 30,
1997).*
10.3 -- Stock Option Plan (incorporated by reference to the Company's Registration Statement on Form F-1 (No.
333-4820).
10.4 -- Lease agreement, as amended, between KAB Properties Inc. and the Company (incorporated by reference
to the Company's Registration Statement on Form F-1 (No. 333-4820)).
10.5 -- General Security Agreement, dated March 8, 1991, between the Bank of Montreal and the Company;
Agreement dated January 31, 1995 executed by the Company (incorporated by reference to the Company's
Registration Statement on Form F-1 (No. 333-4820)).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------------------------
<S> <C> <C>
10.6 -- Lending Agreement dated March 12, 1991, as amended, between the Bank of Montreal and the Company;
Commitment Letter dated January 4, 1995 between the Company and the Bank of Montreal (incorporated by
reference to the Company's Registration Statement on Form F-1 (No. 333-4820)).
10.7 -- Commitment Letter dated November 14, 1997 between the Company and the Bank of Montreal.
10.8 -- Share Purchase Agreement, dated May 27, 1997, among the Company, 3L Limited and the shareholders of
3L Limited.
10.9 -- Asset Purchase Agreement, dated March 20, 1998, among the Company, Alex Computer Systems, Inc. and
Alex Informatics Inc.
10.10 -- Registration Agreement, dated April 30, 1998, among the Company and Alex Computer Systems, Inc.
10.11 -- Share Purchase Warrant Certificate to purchase 7,726 Common Shares issued to Andrew Talbot.
10.12 -- Share Purchase Warrant Certificate to purchase 102,649 Common Shares issued to Alex Computer Systems,
Inc.
23.1 -- Consent of KPMG.
23.2 -- Consent of Ciaschi, Dietershagen, Little & Mickelson, LLP.
23.3 -- Consent of Clark, Wilson (contained in Exhibit 5).
24 -- Power of Attorney (included on the signature page to this Registration Statement).
27 -- Financial Data Schedule.
* Confidentiality requested. Confidential portions have been omitted and filed separately with the
Commission, as required by Rule 24b-2 of the Securities Exchange Act of 1934.
</TABLE>
- ------------------
* Previously filed.
(b) Financial Statement Schedules.
Not required or are not applicable or the information is included in the
financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other that the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(a) (1) To file, during any period in which offers or sales are being made,
a post-effective amendment of this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from
II-3
<PAGE>
the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering
price set forth in the 'Calculation of Registration Fee' table in the
effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
of any material change to such information in the registration
statement.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) To file a post-effective amendment to the Registration Statement to
include any financial statements required by Rule 3-19.
(b) The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the registrant's
annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN VANCOUVER, BRITISH COLUMBIA, CANADA,
ON JUNE 29, 1998.
SPECTRUM SIGNAL PROCESSING INC.
By: /s/ Barry W. Jinks
------------------------------
Barry W. Jinks
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Barry W. Jinks and Martin McConnell, or
either of them, his true and lawful attorney-in-fact and agent with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same with all
exhibits thereto, and all documents in connection therewith, with the Securities
and Exchange Commission, granting said attorney-in-fact and agent, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as full to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or either of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------------- --------------
<C> <S> <C>
/s/ KENNETH A. SPENCER Chair of the Board of Directors June 29, 1998
- ------------------------------------------
Kenneth A. Spencer
/s/ BARRY W. JINKS President and Chief Executive Officer and June 29, 1998
- ------------------------------------------ Director (principal executive officer)
Barry W. Jinks
/s/ MARTIN MCCONNELL Vice President, Chief Financial Officer and June 29, 1998
- ------------------------------------------ Treasurer (principal financial and accounting
Martin McConnell officer)
/s/ JOSEPH ABRAMS Director June 29, 1998
- ------------------------------------------
Joseph Abrams
Director June , 1998
- ------------------------------------------
Dr. Karl H. Brackhaus
/s/ JOHN E. BRENNAN Director June 26, 1998
- ------------------------------------------
John E. Brennan
/s/ CHARLES C. JOHNSTON Director June 30, 1998
- ------------------------------------------
Charles C. Johnston
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------------- --------------
<S> <C> <C>
/s/ SAMUEL ZNAIMER Director June 29, 1998
- ------------------------------------------
Samuel Znaimer
Authorized Representative in the
United States:
/s/ CHARLES C. JOHNSTON Director June 30, 1998
- ------------------------------------------
Charles C. Johnston
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
3.1 -- Certificate of Incorporation (incorporated by reference to the Company's Report on Form 20-FR filed
on February 26, 1992).
3.2 -- Articles of the Company (incorporated by reference to the Company's Report on Form 20-FR filed on
February 26, 1992)).
4 -- Specimen Share Certificate (incorporated by reference to the Company's Registration Statement on Form
F-1 (No. 333-4820)).
5 -- Opinion of Clark, Wilson.
10.1 -- License Agreement, dated July 31, 1987, between Loughborough Sound Images Ltd. and the Company
(incorporated by reference to the Company's Report on Form 20-FR filed on February 26, 1992).
10.2 -- Distribution and Manufacturing Agreement, dated January 17, 1997, between Loughborough Sound Images
PLC and the Company (incorporated by reference to the Company's Report on Form 20-F filed on June 30,
1997).*
10.3 -- Stock Option Plan (incorporated by reference to the Company's Registration Statement on Form F-1 (No.
333-4820).
10.4 -- Lease agreement, as amended, between KAB Properties Inc. and the Company (incorporated by reference
to the Company's Registration Statement on Form F-1 (No. 333-4820)).
10.5 -- General Security Agreement, dated March 8, 1991, between the Bank of Montreal and the Company;
Agreement dated January 31, 1995 executed by the Company (incorporated by reference to the Company's
Registration Statement on Form F-1 (No. 333-4820)).
10.6 -- Lending Agreement dated March 12, 1991, as amended, between the Bank of Montreal and the Company;
Commitment Letter dated January 4, 1995 between the Company and the Bank of Montreal (incorporated by
reference to the Company's Registration Statement on Form F-1 (No. 333-4820)).
10.7 -- Commitment Letter dated November 14, 1997 between the Company and the Bank of Montreal.
10.8 -- Share Purchase Agreement, dated May 27, 1997, among the Company, 3L Limited and the shareholders of
3L Limited.
10.9 -- Asset Purchase Agreement, dated March 20, 1998, among the Company, Alex Computer Systems, Inc. and
Alex Informatics Inc.
10.10 -- Registration Agreement, dated April 30, 1998, among the Company and Alex Computer Systems, Inc.
10.11 -- Share Purchase Warrant Certificate to purchase 7,726 Common Shares issued to Andrew Talbot.
10.12 -- Share Purchase Warrant Certificate to purchase 102,649 Common Shares issued to Alex Computer Systems,
Inc.
23.1 -- Consent of KPMG.
23.2 -- Consent of Ciaschi, Dietershagen, Little & Mickelson, LLP.
23.3 -- Consent of Clark, Wilson (contained in Exhibit 5).
24 -- Power of Attorney (included on the signature page to this Registration Statement).
27 -- Financial Data Schedule.
</TABLE>
- ------------------
* Confidentiality requested. Confidential portions have been omitted and filed
separately with the Commission, as required by Rule 24b-2 of the Securities
Exchange Act of 1934.
<PAGE>
[LETTERHEAD OF CLARK, WILSON]
Reply attention of: David J. Cowan
Direct Telephone: (604) 643-3178
Email Address: [email protected]
Our File No.: 11718-1
June 29, 1998
Spectrum Signal Processing Inc.
8525 Baxter Place
100 Production Court
Burnaby, B.C.
V5A 4V7
Dear Sirs:
We refer to the registration statement and amendments
thereto on Form F-3 ("Registration Statement"), filed by Spectrum Signal
Processing Inc. (the "Company") with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Act"),
relating to 772,626 previously issued shares (the "Shares") of the
Company's common shares and a further 110,375 shares (the "Warrant
Shares") of the Company's common shares to be issued by the Company upon
the exercise of certain previously issued share purchase warrants (the
"Warrants").
As counsel for the Company, we have examined such
corporate records, documents and such questions of law as we have
considered necessary or appropriate for the purposes of this opinion and,
upon the basis of such examination, advise you that in our opinion, the
Shares and the Warrant Shares have been duly and validly authorized and
the Shares have been and the Warrant Shares will be, upon exercise of the
Warrants in accordance with their terms, legally issued, fully paid and
non-assessable.
We consent to the filing of this opinion as an exhibit
to the Registration Statement and reference to this firm under the
captions "Enforceability of Civil Liabilities" and "Legal Matters" in the
prospectus contained therein. This consent is not to be construed as an
<PAGE>
- 2 -
admission that we are a party whose consent is required to be filed with
the Registration Statement under the provisions of the Act.
Yours truly,
/s/ Clark Wilson
----------------
CLARK, WILSON
DJC/wpc
<PAGE>
[BANK OF MONTREAL LETTERHEAD]
November 14, 1997
Spectrum Signal Processing Inc.
#100 - 8525 Baxter Place
Burnaby, B.C.
V5A-4V7
Attention: Mr. Marty McConnell, C.A.
Vice President, Finance
Dear Sirs:
Re: Financing Request
We are pleased to advise that Bank of Montreal has agreed to
make available the following funding, subject to certain terms and
conditions as highlighted. This Term Sheet will supersede any Term Sheets
previously issued.
FACILITY #1
Borrower: Spectrum Signal Processing Inc. "Spectrum"
Amount: $5,000,000 Canadian (change from $4,000,000)
Purpose: To provide fluctuating working capital,
margined against receivables
Type: Demand, revolving. Advanced via FirstBank Cash
Management Account (FCMA), which provides an
overdraft limit on a regular Bank of Montreal
current account
Interest Rates: FCMA - Prime + .50%, payable monthly (change
from P + .75%)
US Rev - Base rate + .5%, payable monthly
(change from B + .75%)
<PAGE>
Options: Bank of Montreal will make available the
operating line in any combination of the
following products to an aggregate limit as
detailed under Availability below:
Letters of Credit and/or Guarantee: (L/C's or
L/G's to a maximum of $250,000) - In various
currencies (Canadian dollar equivalent). Terms
not to exceed one year, without specific
approval by the Bank.
U.S. Dollar Revolving Demand Loans: (Canadian
dollar equivalent). In multiples of US$50,000
Canadian Dollar Demand Loans: (via FCMA)
Foreign Exchange Forward Contracts (FEFC):
Terms not to exceed one year. Restricted to
not more than $500,000 in Canadian Dollar risk
content @ 10%. (I.E., total FEFC's
outstanding, converted to Canadian Dollars
multiplied by 10% is not to exceed $500,000 at
any time.
MasterCard Facility: Standard rates and fees.
To a maximum limit of $60,000. Included in the
total but not part of the margin
Availability: Total advances under this facility (via FCMA,
US Rev, FEFC, (L/C's, L/G's), are at all times
to be contained within 75% of the account
managers valuation of good quality Canadian
and U.S. accounts receivable, after deducting
accounts past due 61 days and over (91 days
for government), holdbacks, accounts in
dispute, priority payables, related party
accounts and receivables eligible below
plus
90% of the account managers estimated worth of
good quality acceptably insured (i.e. Export
Development Corporation ("EDC") or American
Credit Indemnity ("ACI") accounts receivable
of the borrower, where insurance has been
assigned to the Bank, after deducting accounts
past due 61 days and over (91 days for
government or quasi-government), holdbacks,
accounts in dispute, priority payables and
related party accounts
plus
75% of non-insured foreign receivables which
are supported by (in order of preference)
-2-
<PAGE>
1. Letter of Credit from correspondent or
recognized Bank acceptable to the Bank
2. Specific accounts where prior
approval from the Bank has been
obtained
after deducting accounts past due 61 days and
over (91 days for government or
quasi-government), holdbacks, accounts in
dispute, priority payables and related party
accounts
Fees: FCMA Facility Fee - $600 per month, plus
standard activity fees
Letter of Credit/Guarantee - Standard 1.2%
per annum, plus $300 per facility
FEFC - Standard differential plus $100 per
contract
Financial Covenants:
To be tested monthly based on the in-house
consolidated financial statements. Spectrum
will:
1. Ensure Capital expenditures are
approved by way of an annual Capital
Projects Budget. Unplanned additional
Capital expenditures to be allowed to
a maximum of $100,000 per annum
without the Bank's prior written
consent
2. Maintain its ratio of current assets
to current liabilities at greater
than 1.45:1
3. Maintain its ratio of Debt to
Tangible Net Worth at less than
1.50:1
For the purposes of these Covenants, all
relevant terms, including without limitation,
"Capital expenditure", "Current assets",
"deferred revenue", and "current liabilities"
shall be determined by generally accepted
accounting principles ("GAAP"), consistently
applied.
"Debt" shall be defined as "current
liabilities" (as defined above), plus Long
Term Liabilities as per GAAP, less Deferred
Taxes and Subrogated Shareholder Loans.
-3-
<PAGE>
"Tangible Net Worth" is to be defined as
equity per financial statements less
intangibles, plus subrogated shareholder
loans.
"Intangibles" will include, but not be limited
to Deferred Development Costs. The Bank may,
from time to time, determine other deductions
from Tangible Net Worth, such as Investments
unrelated to the core business of the
Borrower.
Reporting Requirements:
Spectrum is to provide the Bank with the
following information in a form acceptable to
the Bank:
Annually
Annual Audited Consolidated Financial
Statements within 90 days of the fiscal year
end. Unaudited, unconsolidated financial
statements for each subsidiary is to be made
available as requested.
Budget for the next fiscal year prior to the
start of that fiscal year. These detailed
projections will include: projected Balance
Sheet, Income Statement, and Cashflow
Statement, all prepared on a quarterly basis
together with the underlying assumptions, and
based on the consolidated statements of
Spectrum Signal Processing Inc.
Commentary on Product development, Marketplace
developments, or competitors, or more often
(if requested by the Bank).
Monthly reporting package to be delivered by
the 25th of the following month and to
include:
Aged listing of accounts receivable
Interim income statement and balance sheet, to
include comparison to budget, and commentary
on significant variances (10% or greater) on
any line, all based on the consolidated entity
Orderbook summary including backlog, with
analysis of any contract cancellations, if
requested by the Bank
Periodically
Commentary on changes, (if any), to the senior
management team
-4-
<PAGE>
Updated financial projections, if
significantly different from earlier versions
Security:
The following security is currently held by the Bank:
1. FirstBank Cash Management Account Agreement
- to be replaced
2. General Security Agreement, registered in the first
position via PPSA in B.C.
3. General Assignment of Book Debts, registered in the
first position via PPSA in B.C. and in other following
Provinces in Canada - Alberta, Saskatchewan, Manitoba,
Ontario, Quebec, and Newfoundland.
4. UCC filings with respect to the above in California,
Texas, Massachusetts, and Washington.
5. Section 427 inventory security.
6. EDC Continuation Endorsement and Direction to Pay.
7. Fire insurance with loss payable to Bank of Montreal,
complete with Standard Mortgage Clause
- policy expires October 30, 1997. Please have
your agent forward the renewal
To Be Obtained:
1. Replacement FirstBank Cash Management Account Agreement
2. Confirmation of the renewal of the fire insurance coverage
The above facilities are subject to review at any time
at the discretion of the Bank.
This letter is provided for information purposes only. The agreements
between Spectrum Signal Processing Inc. and Bank of Montreal will be
evidenced by way of
-5-
<PAGE>
formal agreements and/or security documents (collectively the "Loan
Documents") between the parties. In the event of any discrepancy between
this letter and the Loan Documents then the Loan Documents shall take
precedence.
Please signify your agreement with the Terms and Conditions of
this Term Sheet by signing and returning a copy of this letter to the
attention of the undersigned. The Spectrum account is considered to be
one of the Prime accounts in the Innovation and Technology Centre, and we
trust that this financing package reflects this position.
Yours truly,
/s/ E. Daniel Darts
E. Daniel Darts
Senior Account Manager
We hereby accept and agree with the terms of the above described Term
Sheet.
Spectrum Signal Process Inc.
Per: /s/ Martin McConnell
------------------------------------------
Per: ------------------------------------------
-6-
<PAGE>
SHARE PURCHASE AGREEMENT
THIS AGREEMENT dated for reference the 27th day of May 1997.
BETWEEN:
THE PARTIES LISTED IN SCHEDULE M
(hereinafter called the "Vendors")
OF THE FIRST PART
AND:
SPECTRUM SIGNAL PROCESSING INC., a company incorporated
in the Province of British Columbia with a principal
place of business at Suite 100, 8525 Baxter Place,
Burnaby, B.C. V5A 4V7, CANADA
(hereinafter called the "Purchaser")
OF THE SECOND PART
WITNESSES THAT WHEREAS:
A. Other than as specified in clause C, the Vendors are the registered and
beneficial owners of the Vendors' Shares;
B. The Vendors have agreed to sell and assign to the Purchaser, and the
Purchaser has agreed to purchase, the Vendors' Shares;
C. The Vendors have undertaken to procure the transfer of the Minority Shares
(as hereinafter defined) to the Purchasers on the terms further set out in this
Agreement;
D. The Principals are directors, officers and shareholders of the Company and
have substantial proprietary and financial interests in the Company;
THEREFORE in consideration of the premises and the mutual covenants and
agreements herein set forth, the parties covenant and agree with each other as
follows:
1. DEFINITIONS AND INTERPRETATION
1.1 In this Agreement:
(a) "Accounts Payable" means all of the trade accounts and
other debts and accrued charges owed by the Company as
at the date specified in Schedule A (other than the
Permitted Liens), and which are enumerated and
described in Schedule A, together with those trade
accounts reasonably incurred in the normal and ordinary
course of the Business between the date specified in
Schedule A and the Closing Date, whether the same are
due or to become due at or after the Closing Date;
<PAGE>
2
(b) "Accounts Receivable" means all of the trade accounts,
notes, and other debts arising out of the operation of
the Business owing to the Company as at the Closing
Date, whether due or to become due as at or after the
Closing Date, and which are enumerated and described in
Schedule B together with those accounts receivable
arising in the normal and ordinary course of the
Business between the date specified in Schedule B and
the Closing Date;
(c) "B.C. Act" means the Securities Act (British Columbia);
(d) "Business" means the business of developing,
manufacturing, marketing, sales, licensing and leasing
of input/output software for multiple processors, and
known as 3L Limited, carried on by the Company at or
about 86/92 Causewayside, Edinburgh, Scotland;
(e) "Business Assets" means all of the real property,
personal property, choses in action, intangible or
intellectual property and all other assets of
whatsoever nature owned or leased by the Company or in
which the Company has any right or interest or the
right to acquire an interest, including, without
limitation, the Accounts Receivable, the Contracts and
the assets listed in Schedule E;
(f) "Closing" means the completion of the transactions
contemplated hereby in accordance with the terms
hereof;
(g) "Closing Date" means June 20, 1997;
(h) "Company" means 3L Limited, a company incorporated in
Scotland (No. SC105642) having its registered office at
Orchard Brae House, 30 Queensferry Road, Edinburgh, EH4
2HG;
(i) "Consents" means the consents, waivers and approvals
set out in Schedule F;
(j) "Contracts" means all of the commitments, agreements,
contracts, instruments, leases and other documents
entered into by the Company, by which the Company is
bound or to which the Company or the Business Assets
are subject (other than the Permitted Liens) and which
are enumerated and described in Schedule G;
(k) "Escrow Agreements" means those agreements with the
Principals and Rani Robertson in substantially the form
attached as Schedule J;
(l) "Financial Statements" means the audited balance sheet
of the Company for the fiscal year ending as at the
Statement Date and the audited Profit and Loss
statement for the year then ended and the unaudited
balance sheet of the Company as at February 28, 1997,
copies of which are attached hereto as Schedule K;
(m) "Indebtedness" means any and all advances, debts,
duties, endorsements, guarantees, liabilities,
obligations, responsibilities and undertakings of a
Party assumed, created, incurred or made, whether
voluntary or involuntary, however arising, whether due
or not due, absolute, inchoate or contingent,
liquidated or unliquidated, determined or undetermined,
direct or indirect, express or implied, and whether
such Parties may be liable individually or jointly with
others;
<PAGE>
3
(n) "Lien" means any mortgage, debenture, charge,
hypothecation, pledge, lien, or other security interest
or encumbrance of whatever kind or nature, regardless
of form and whether consensual or arising by laws,
statutory or otherwise that secures the payment of any
Indebtedness or the performance of any obligation or
creates in favour of or grants to any Party all
proprietary right;
(o) "Minority Shareholders" means the parties listed in
Schedule P;
(p) "Minority Shares" means the shares in the capital of
the Company set against the names of each of the
Minority Shareholders described in Schedule P;
(q) "1933 Act" means the United States Securities Act of 1933;
(r) "Ontario Act" means the Securities Act (Ontario);
(s) "Party" means an individual, corporation, body
corporate, partnership, joint venture, society,
association, trust or unincorporated organisation or
any trustee, executor, administrator, or other legal
representative;
(t) "Permitted Liens" means the Liens enumerated and
described in Schedule M;
(u) "Purchase Price" means the price to be paid by the
Purchaser for all of the Vendors' Shares and the
Minority Shares, based on the equivalent of $16.39 per
Vendors' Share or Minority Share (CDN $1.3 million for
79,300 shares);
(v) "Purchaser's Solicitors" means Clark, Wilson, Barristers
and Solicitors;
(w) "Principals" means Ian Young, Alan Culloch and Peter
Robertson;
(x) "Share Price" means the closing price of one Spectrum
common share on the Toronto Stock Exchange on the day
prior to the date of execution of this Agreement;
(y) "Spectrum Shares" means those common shares in the
capital of the Purchaser that are to be issued to the
Vendors and the Minority Shareholders pursuant to this
Agreement;
(z) "Statement Date" means the last day of the last
completed financial year of the Company, being
September 30, 1996;
(aa) "U.S. Person" means a U.S. Person as defined under
Regulation S as promulgated under
the 1933 Act;
(ab) "Vendors' Solicitors" means Fyfe Ireland, WS,
Solicitors;
(ac) "Vendors' Shares" means the shares in the capital of
the Company set against the names of each of the
Vendors described in Schedule N, together with all
warrants, options and other interests of any kind which
the Vendors, may have in the Company;
(ad) "Warranties" means the representation and warranties
of the Principals and the
<PAGE>
4
Vendors set out in Sections 4 and 5 herein;
1.2 In this Agreement, except as otherwise expressly provided:
(a) "Agreement" means this agreement, including the
preamble and the Schedules hereto, as it may from time
to time be supplemented or amended and in effect;
(b) all references in this Agreement to a designated
"Section" or other subdivision or to a Schedule is to
the designated Section or other subdivision of, or
Schedule to, this Agreement;
(c) the words "herein", "hereof" and "hereunder" and other
words of similar import refer to this Agreement as a
whole and not to any particular Section or other
subdivision or Schedule;
(d) the headings are for convenience only and do not form a
part of this Agreement and are not intended to
interpret, define, or limit the scope, extent or intent
of this Agreement or any provision hereof;
(e) the singular of any term includes the plural, and vice
versa, the use of any term is equally applicable to any
gender and, where applicable, a body corporate, the
word "or" is not exclusive and the word "including" is
not limiting (whether or not non-limiting language,
such as "without limitation" or "but not limited to" or
words of similar import, is used with reference
thereto);
(f) any accounting term not otherwise defined has the
meanings assigned to it in accordance with generally
accepted accounting principles applicable in the UK;
(g) any reference to a statute includes and is a reference
to that statute and to the regulations made pursuant
thereto, with all amendments made thereto and in force
from time to time, and to any statute or regulations
that may be passed which has the effect of
supplementing or superseding that statute or
regulations;
(h) where any representation or warranty is made "to the
knowledge of" any Party, such Party will not be liable
for a misrepresentation or breach of warranty by reason
of the fact, state of facts, or circumstance in respect
of which the representation or warranty is given being
untrue if such Party proves:
(i) that such Party conducted a reasonable
investigation so as to provide reasonable
grounds for a belief that there had been no
misrepresentation or breach of warranty; and
(ii) that fact, state of facts, or circumstance
could not reasonably be expected to have been
determined as a result of that reasonable
investigation, irrespective of the actual
investigation conducted by such Party;
(i) except as otherwise provided, any dollar amount
referred to in this Agreement is in Canadian Funds; and
(j) any other term defined within the text of this Agreement has
the meanings so ascribed.
<PAGE>
5
1.3 The following are the Schedules to this Agreement:
SCHEDULE DESCRIPTION
A Accounts Payable
B Accounts Receivable
C Authorised and Issued Capital of the Companies
D Banking Arrangement
E Business Assets
F Consents
G Contracts
H Directors and Officers
I Employee List
J Escrow Agreements
K Financial Statement
L Litigation
M Permitted Liens
N Vendors
O Vendors' Solicitors' Opinion
P Minority Shareholders
Q Pension Details
R Purchaser's Solicitors' Opinion
2. PURCHASE AND SALE
2.1 Subject to the terms and conditions of this Agreement, at the
Closing, the Vendors will assign to the Purchaser all of the Vendors'
Shares and shall cause the transfer of all of the Minority Shares to the
Purchaser and the Purchaser will issue to the Vendors and the Minority
Shareholders the Spectrum Shares to the extent of the Purchase Price in
full and final satisfaction therefor.
2.2 The Purchase Price will be paid by the Purchaser to the
Vendors and the Minority Shareholders for the Vendors' Shares and the Minority
Shares by an exchange of shares, based on the equivalent of $16.39 per share for
the Vendors' Shares and the Minority Shares. The number of Spectrum Shares to be
issued will be determined on the Closing Date by dividing the Purchase Price by
the Share Price. Entitlements to fractions of a Spectrum Share so calculated
shall be ignored.
2.3 The Purchase Price will be paid as follows:
(a) as to the number of Spectrum Shares equivalent to the
shares owned by the Vendors and the Minority
Shareholders who are not Principals nor Rani Robertson,
the shares will be issued on the Closing Date, and
(b) as to the number of Spectrum Shares equivalent to the
shares owned by the Principals and Rani Robertson,
two-thirds will be issued on the Closing Date, and the
remaining one-third will be escrowed pursuant to the
Escrow Agreements.
<PAGE>
6
3. CLOSING AND ADJUSTMENTS
3.1 The Closing will take place at 10:00 a.m. local time, on the
Closing Date at the offices of the Purchaser's Solicitors at 800 - 885 West
Georgia Street, Vancouver, British Columbia, or at such other place, date and
time as may be mutually agreed upon by the parties hereto.
4. PRINCIPALS' WARRANTIES AND REPRESENTATIONS
4.1 Each of the Principals severally warrants and represents to
the Purchaser, with the intent that the Purchaser will rely thereon in entering
into this Agreement and in concluding the purchase and sale contemplated herein,
that:
(a) the authorised and issued capital of the Company is as
described in Schedule C and the Vendors' Shares and the
Minority Shares are validly issued and outstanding as
fully paid and non-assessable;
(b) no Party has any agreement, right or option, consensual
or arising by law, present or future, contingent or
absolute, or capable of becoming an agreement, right or
option:
(i) to require the Company to issue any further or
other shares in its capital or any other
security convertible or exchangeable into
shares in its capital or to convert or
exchange any securities into or for shares in
the capital of the Company;
(ii) for the issue or allotment of any of the authorised
but unissued shares in the capital of the Company;
(iii) to require the Company to purchase, redeem or
otherwise acquire any of the issued and
outstanding shares in the capital of the
Company; or
(iv) to purchase or otherwise acquire any shares in the
capital of the Company;
(c) the Company is a company duly incorporated, validly
existing and in good standing under the laws of its
jurisdiction of incorporation;
(d) the officers of the Company are as described in Schedule H;
(e) all alterations to the Memorandum and Articles of
Association of the Company since its incorporation have
been duly approved by the shareholders of the Company;
(f) the Company has the power, authority and capacity to carry on
the Business as presently conducted by it;
(g) the Company has the power, authority and capacity to own and
use all of the Business Assets;
(h) save as set out in the Schedule the Company owns and
possesses and has good and marketable title to and
possession of all the Business Assets free and clear of
all Liens, except the Permitted Liens;
<PAGE>
7
(i) the Company has no bank, trust, savings, chequing or
other accounts or deposits, safety deposit boxes or
other depositories except as set out in Schedule D
which Schedule is a true and complete list showing the
name of each bank, trust company or other financial
institution in which the Company has accounts, deposits
or safety deposit boxes and the names of all persons
authorised to draw thereon or have access thereto;
(j) save as set out in the Schedule the Company does not
own or possess any asset other than the Business Assets
and does not have any interest in the assets or
business of any other Party;
(k) to the best of the Principal's knowledge and belief the
Company holds all licences and permits required for the
conduct in the ordinary course of the Business and for the
uses to which the Business Assets have been or may be put and
all such licences and permits are in good standing and the
conduct and uses of the same by the Company are in compliance
with all laws, zoning and other bylaws, building and other
restrictions, rules, regulations and ordinances applicable to
the Company, the Business or the Business Assets, and, to the
best of the Principal's knowledge, the execution and delivery
of this Agreement nor the completion of the purchase and sale
hereby contemplated will give any person the right to
terminate or cancel the said licences or permits or affect
such compliance;
(l) assuming that all corporate and regulatory procedures,
consents and authorisations required by the Purchaser
in respect of the issue of the Spectrum Shares and the
performance of the other obligations of the Purchaser
hereunder are duly and validly acquired or complied
with, as the case may be, the making of this Agreement
and the transfer of the Vendor's Shares and the
Minority Shares as contemplated hereby and the
performance of and compliance with the terms of the
Vendors' obligations hereunder does not and will not:
(i) conflict with or result in a breach of or violate
any of the terms, conditions, or provisions of the
Memorandum or Articles of Association of the Company;
(ii) conflict with or result in a breach of or
violate any of the terms, conditions or
provisions of any law, judgement, order,
injunction, decree, regulation or ruling of
any court or U.K. governmental authority to
which the Company is subject or constitute or
result in a default under any agreement,
contract or commitment to which the Company is
a party;
(iii) give to any Party any remedy, cause of action,
right of termination, cancellation or
acceleration in or with respect to any
agreement, contract, or commitment to which
the Company is a Party including the Contracts
and the Permitted Liens;
(iv) give to any U.K. government or governmental
authority, any regional district, district or
municipality or any subdivision thereof, including
any U.K. governmental department, commission, bureau,
board, or administrative agency any right of
termination, cancellation, or suspension of, or
constitute a breach of or result in a default under
any permit, license, control, or authority issued to
the Company and which is necessary or desirable in
connection with the conduct and operation of the
Business and the
<PAGE>
8
ownership, leasing or use of the Business Assets; or
(v) constitute a default by the Company or an
event which, with the giving of notice or
lapse of time or both, might constitute an
event of default or non-observance under any
agreement, contract, indenture or other
instrument relating to any Indebtedness of the
Company which would give any Party the right
to accelerate the maturity for the payment of
any amount payable under that agreement,
contract, indenture, or other instrument
including the Contracts and the Permitted
Liens;
(m) the Financial Statements were prepared in accordance
with generally accepted accounting principles applied
on a basis consistent with prior years, and in each
case, give a true and fair view of the financial
condition and position of the Company as at the date of
such Financial Statements' Statement Date and the
results of its operations for the period ended on the
Statement Date;
(n) the provisions for doubtful accounts receivable as
recorded in the Financial Statements are, and
collections since the Statement Date have proven them
to be, adequate;
(o) so far as the Principal's are aware the Accounts
Receivable are bona fide, good and collectable without
set-off or counterclaim save and except as described in
Schedule B hereto;
(p) the stock shown in the Financial Statements is valued
therein at the lower of cost or market value and none
of the stock included there in is obsolete, damaged or
unsaleable in the ordinary course of the Business;
(q) there is no Indebtedness of the Company which is not
disclosed or reflected in the Financial Statements,
except Accounts Payable, and the aggregate of all
Accounts Payable does not, as at the date hereof and
will not, as at the Closing Date exceed $250,000 ;
(r) so far as the Principals are aware the Company has been
assessed for corporation tax for all years to and
including the fiscal year of the Company ended on the
Statement Date, and the Company has withheld and
remitted to the applicable tax collecting authority all
amounts required to be remitted respecting payments to
employees or to non-residents, or otherwise and has
paid all instalments of corporate taxes due and
payable;
(s) so far as the Principals are aware all tax returns and reports
of the Company required by law to be filed prior to the date
hereof including all income tax returns and corporation
capital tax returns have been filed and so far as the
Principal is aware are true, complete and correct, and all
taxes and other government charges including all income,
excise, sales, business and property taxes and other rates,
charges, assessment, levies, duties, taxes, contributions,
fees and licenses required to be paid have, so far as the
Vendor is aware, been paid, and if not required to be paid
as at the date hereof, have been accrued in the Financial
Statements;
(t) so far as the Principals are aware adequate provision
has been made for taxes payable by the Company for
which tax returns are not yet required to be filed and
<PAGE>
9
there are no agreements, waivers or other arrangements
providing for an extension of time with respect to the
filing of any tax return or payment of any tax,
governmental charge or deficiency by the Company, and
to the knowledge of the Principals, the Company and its
officers, directors or employees there are no
contingent tax liabilities or any grounds which would
prompt a re-assessment;
(u) so far as the Principals are aware the Company has made
all elections required to be made under the applicable
tax legislation in connection with any distributions by
the Company and, so far as the Principals are aware,
all such elections were true and correct and in the
prescribed forms and were made within the prescribed
time periods;
(v) all material transactions of the Company have been
promptly and properly recorded or filed in or with its
respective books and records;
(w) the Company has not experienced nor, so far as the
Principals are aware, has there been any occurrence or
event which has had, or might reasonably be expected to
have, a materially adverse effect on the Business or
the result of its operations;
(x) except as disclosed in Schedule I, the Company has no
employment, consulting or management contract or commitment
with any Party, including those with any director or officer
of the Company, whether oral, written, or implied which
cannot be terminated by the Company without cause upon
giving thirty (30) days' written notice without the payment
of or any liability to pay any bonus, damages, share of
profits, or penalty and none of the employees of the Company
have been certified to be represented by a trade union or
have entered into a collective agreement or otherwise
attempted to be represented by a trade union and there are
no collective agreements or proceedings which are or could
become an obligation of or be binding upon the Company;
(y) the name of each present employee of the Company, the duration
of the employment of each such employee with the Company and
the remuneration and benefit obligations of the Company in
respect of each such employee is accurately set out in
Schedule I, and the full amounts of salaries, fees,
pensions, bonuses, commissions and other remuneration of any
nature, including accrued vacation pay, severance pay and
unpaid earned wages of the present or former officers,
directors, employees, salesmen, consultants and agents of
the Company, which should have been paid as at the Closing
Date, will have been paid up to the Closing Date;
(z) the Company has not received notice of any complaints
filed by any of the employees against the Company and
is not aware of any facts or circumstances that may
give rise to any complaints claiming that the Company
has violated any applicable employee or human rights or
similar legislation in the jurisdictions in which the
Business is conducted or any complaints or proceedings
of any kind involving the Company;
(aa) save as disclosed in Schedule Q, there are no pension,
profit sharing, incentive, bonus, group insurance or
similar plans or other compensation plans affecting the
Company and the Company has no unfunded or unpaid
liability in respect of any such plan;
<PAGE>
10
(ab) save as disclosed in Schedule I, the Company does not
have any contract, agreement, undertaking or
arrangement, whether oral, written or implied, which
cannot be terminated on not more than one month's
notice and the Company has no outstanding agreement,
contract or commitment (whether written or oral)
whatsoever relating to or affecting the conduct of the
Business or any of the Business Assets or for the
purchase, sale or lease of any of the Business Assets
other than the Contracts;
(ac) so far as the Principals are aware there is no basis
for and there are no actions, suits, judgements,
investigations or proceedings outstanding of which the
Principals are aware or pending or affecting the
Company at law or in equity or before or by any court
or federal, provincial, state, municipal or other
governmental authority, department, commission, board,
tribunal, bureau or agency of which the Principals are
aware and the Company is not a party to or threatened
with any litigation except as described in Schedule L;
(ad) the Company has no knowledge of any infringement of the
intangibles described in Schedule E, any misleading or
similar names to the Company's name or trade or brand
name in use in any area where the Business is
conducted, or of any infringement by the Company of any
patent, trademark, trade or brand name or copyright,
whether registered or unregistered;
(ae) so far as the Principals are aware the Company:
(i) is not in breach of any of the terms,
covenants, conditions, or provisions of, is
not in default under, and has not done or
omitted to do anything which, with the giving
of notice or lapse of time or both, would
constitute a breach of or a default under any
Contract; and
(ii) is not in breach or default under any
judgement, injunction or other order or aware
of any judicial, administration, governmental,
or other authority or arbitrator by which the
Company is bound or to which the Company or
any Business Assets are subject;
and the Company has not received notice that any default,
breach, or violation is being alleged;
(af) the Company has not guaranteed, or agreed to guarantee, any
Indebtedness or other obligation of any Party except as
described in the Financial Statements;
(ag) reasonable wear and tear excepted, the Business Assets
required for the normal conduct of the Company's
Business are in good working order and in a functional
state of repair and to the knowledge of the Principal,
there are no latent defects; and
(ah) other than as disclosed in the Finance Statements or the
notes thereto since the Statement Date:
(i) no dividends of any kind or other distribution on
any shares of the Company have been declared or
paid by the Company;
(ii) no single capital expenditure or commitment
therefor exceeding $5,000 has
<PAGE>
11
been made by the Company and the aggregate of
all capital expenditures or commitments made
by the Company since the Statement Date does not
exceed $11,000;
(iii) there has been no material adverse change in
the financial condition or position of the
Company and no damage, loss or destruction
materially affecting the Business Assets or
the right, capacity, or ability of the Company
to carry on the Business;
(iv) save as disclosed in Schedules I and Q the
Company has not increased the pay of or paid
or agreed to pay any pension, bonus, share of
profits or other similar benefit to or for the
benefit of any agent, employee, director, or
officer of the Company, except increases in
the normal course of business to employees
other than officers and directors;
(v) the Company has conducted the Business in the
usual and normal manner and has maintained the
Business Assets in as good condition as
prevailed prior to the Statement Date and has
made all necessary repairs and replacements
thereto; and
(vi) the Company has not waived or surrendered any
right of material value.
5. VENDORS' REPRESENTATIONS AND WARRANTIES
5.1 Each of the Vendors severally warrants and represents to the
Purchaser, with the intent that the Purchaser will rely thereon in
entering into this Agreement and in concluding the purchase and sale
contemplated herein, that:
(a) the Vendor is the registered holder of the Vendors'
Shares set opposite his name in Schedule N, free and
clear of all Liens and the Vendor has no interest,
legal or beneficial, direct or indirect, in any shares
of, or the assets or business of, the Company other
than such Vendors' Shares;
(b) the Company is not indebted to the Vendor and the Vendor has
no claims of any kind against the Company;
(c) the Vendor has the power and capacity and good and
sufficient right and authority to enter into this
Agreement on the terms and conditions herein set forth
and to transfer the legal and beneficial title and
ownership of the Vendors' Shares set opposite his name
in Schedule N to the Purchaser;
(d) the making of this Agreement and the completion of the
transactions contemplated hereby and the performance of
and compliance with the terms hereof does not and will
not conflict with or result in a breach of or violate
any of the terms, conditions or provisions of any UK
law, judgement, order, injunction, decree, regulation
or ruling of any court or governmental authority to
which the Vendor is subject or constitute or result in
a default under any agreement, contract or commitment
to which the Vendor is a party;
(e) the Vendor does not have any specific information
relating to the Company which is not generally known or
which has not been disclosed to the Purchaser and which if
<PAGE>
12
known to the Purchaser could reasonably be expected
to have a materially adverse effect on the value of the
Vendor's Shares;
(f) the Vendor is either:
(i) not a U.S. Person and is not acquiring the
Spectrum Shares for the account or benefit of
a U.S. Person, in which case the Vendor is
aware that the Spectrum Shares have not been
registered under the 1933 Act and may not be
offered or sold in the United States during
the 40 day period commencing on the date of
issuance of the Spectrum Shares unless the
Spectrum Shares are registered under the 1933
Act or an exemption from the 1933 Act is
available; or
(ii) a U.S. Person, in which case the Vendor is
aware that the Spectrum Shares to be issued to
him have not been registered under the 1933
Act and may not be offered or sold unless:
(1) the sale is to the Purchaser;
(2) the sale is made outside the United
States in a transaction meeting the
requirements of Rule 904 of
Regulation S under the 1933 Act and
in compliance with applicable local
laws and regulations;
(3) the sale is made pursuant to the
exemption from the registration
requirements under the 1933 Act
provided by Rule 144 thereunder if
available and in accordance with any
applicable state securities or "Blue
Sky" laws; or
(4) the Spectrum Shares are sold in a
transaction that does not require
registration under the 1933 Act or
any applicable U.S. state laws and
regulations governing the offer and
sale of securities, and it has prior
to such sale furnished to the
Purchaser an opinion of counsel
reasonably satisfactory to the
Purchaser;
and the certificates representing such
Spectrum Shares will bear a legend evidencing
such restrictions on resale; provided that if
the Spectrum Shares are being sold under
clause (ii) above, the legend may be removed
by providing a declaration to the registrar
and transfer agent of the Purchaser in the
form agreed upon by the Purchaser (or as the
Purchaser may reasonably prescribe from time
to time);
(g) the Vendor is aware that the Spectrum Shares will be
issued pursuant to exemptions from registration and
prospectus requirements which are available under the
B.C. Act and the Ontario Act and as a consequence:
(i) the Vendor may be restricted from using most
of the civil remedies available under such
legislation including a right of rescission
which would exist in connection with the use
of a prospectus to issue the Spectrum Shares;
(ii) the Purchaser is relieved from certain
obligations that would otherwise apply under
such legislation including the obligation to
amend a prospectus, if used
<PAGE>
13
to issue the Spectrum Shares, in circumstances
where a material change occurred in the affairs
of the Purchaser;
(iii) the Spectrum Shares are restricted from
transfer within the province of British
Columbia for a period of one year from the
date of the issuance of the Spectrum Shares;
(iv) the Spectrum Shares may not be resold within the
province of Ontario or otherwise to Canadian
residents for a period of 40 days from the date of
the issuance of the Spectrum Shares and in this
regard the Purchaser shall be entitled to take such
steps as the Purchaser determines appropriate,
including the issuing of temporary certificates, to
ensure compliance with this resale restriction. In
this regard the Purchaser shall issue the Vendors at
Closing with temporary certificates representing the
Spectrum Shares, which temporary certificates shall
be exchangeable for definitive share certificates
representing the Spectrum Shares upon the delivery by
each Vendor on or after the date which is 40 days
from the Closing Date
6. PURCHASER'S WARRANTIES AND REPRESENTATIONS
6.1 The Purchaser warrants and represents to the Vendors, with
the intent that the Vendors will rely thereon in entering into this Agreement
and in concluding the purchase and sale contemplated herein, that:
(a) the Purchaser is a corporation duly incorporated,
validly existing and in good standing under the laws of
British Columbia and has the power, authority and
capacity to enter into this Agreement and to carry out
its terms;
(b) the execution and delivery of this Agreement and the
completion of the transactions contemplated hereby has
been duly and validly authorised by all necessary
corporate action on the part of the Purchaser, and this
Agreement constitutes a legal, valid and binding
obligation of the Purchaser in accordance with its
terms except as limited by laws of general application
affecting the rights of creditors;
(c) the Purchaser is not a "non-Canadian" within the meaning
of the Investment Canada Act;
(d) the assets and gross revenues of the Purchaser and its
affiliates are such that the transactions contemplated
herein are exempted from the provisions of Part IX of
the Competition Act;
(e) assuming that all corporate and regulatory procedures,
consents and authorisations required by the Purchaser
in respect of the issue of the Spectrum Shares and the
performance of the other obligations of the Purchaser
hereunder are duly and validly acquired or complied
with, as the case may be, the making of this Agreement
and the issuance of the Spectrum Shares as contemplated
hereby and the performance of and compliance with the
terms of the Purchaser's obligations hereunder does not
and will not:
(i) conflict with or result in a breach of or violate
any of the terms, conditions, or provisions of the
Memorandum or Articles of Association of the
Purchaser;
<PAGE>
14
(ii) conflict with or result in a breach of or
violate any of the terms, conditions or
provisions of any law, judgement, order,
injunction, decree, regulation or ruling of
any court or Canadian governmental authority,
domestic or foreign, to which the Purchaser is
subject or constitute or result in a default
under any agreement, contract or commitment to
which the Purchaser is a party;
(iii) give to any Party any remedy, cause of action,
right of termination, cancellation or
acceleration in or with respect to any
agreement, contract, or commitment to which
the Purchaser is a Party;
(iv) give to any Canadian government or governmental
authority, any regional district, district or
municipality or any subdivision thereof, including
any Canadian governmental department, commission,
bureau, board, or administrative agency any right
of termination, cancellation, or suspension of, or
constitute a breach of or result in a default
under any permit, license, control, or authority
issued to the Purchaser and which is necessary or
desirable in connection with the conduct and
operation of the business of the Purchaser and the
ownership, leasing or use of the business assets
of the Purchaser; or
(v) constitute a default by the Purchaser or an
event which, with the giving of notice or
lapse of time or both, might constitute an
event of default or non-observance under any
agreement, contract, indenture or other
instrument relating to any indebtedness of the
Purchaser which would give any Party the right
to accelerate the maturity for the payment of
any amount payable under that agreement,
contract, indenture, or other instrument;
(f) there are no facts or circumstances of which the
Purchaser is aware, or of which it ought to be aware,
at the Closing Date which could result in a material
reduction in the Spectrum Share Price as at the close
of business on the last business day prior to the
Closing Date. For the purposes of this clause
"material" shall be deemed to mean a reduction of 10%
or more.
7. PRINCIPALS' ACKNOWLEDGEMENTS
7.1 The Principals acknowledge that:
(a) the experience, knowledge and know-how of the Principals
represents a significant value to the Purchaser in
purchasing the Company;
(b) the Principals are an integral part of the business of the
Company;
(c) the Purchaser is relying on the continued involvement
of the Principals in the Company in entering into this
Agreement;
(d) the sudden departure of any of the Principals from the
Company without provision for succession would have a
materially adverse effect on the business of the
Company.
7.2 Accepting the above, each of the Principals further severally
covenant and agree, with the intention that the Purchaser will rely
thereon in entering into this Agreement and in concluding the purchase
and sale contemplated herein, that:
<PAGE>
15
(a) the Principals will not leave the Company's employ without
adequate notice being given;
(b) the Principals will work with the Company to make
reasonable provisions for their succession in the event
of their departure from the Company.
8. COVENANTS
8.1 Between the date of this Agreement and the Closing, the
Vendors:
(a) will cause the Company to afford to the Purchaser and
its authorised representatives access during normal
business hours to all properties, books, contracts,
commitments, records of the Company and furnish such
copies (certified if requested) thereof and other
information as the Purchaser may reasonably request,
and to permit the Purchaser and its authorised
representatives to make such audit of the books of
account of the Company and physical verification of the
Business Assets as the Purchaser may reasonably see
fit;
(b) will diligently take all reasonable steps to obtain,
prior to the Closing, all consents and approvals
required to complete the transactions contemplated
herein in accordance with the terms and conditions
hereof including the Consents;
(c) will cause the Company to maintain insurance coverage
of the scope and in the amounts presently held;
(d) will cause the Company to conduct its business and
affairs diligently and only in the ordinary course, and
preserve and maintain the goodwill of the Company, the
Business Assets and the Business;
(e) will not permit the Company to make or agree to make
any payment to any director (executive or
non-executive), officer, employee or agent of the
Company except in the ordinary course of business and
at the regular rates of salary, fees and commission for
such person or as reasonable reimbursement for expenses
incurred by such person in connection with the Company;
(f) the Vendors shall on or before May 31, 1997 cause the
repayment in full of the outstanding loan of the
Company to Stuart McGarrity.
8.2 Both before and after the Closing, the Vendors and the
Purchaser will each use their best efforts to obtain the release of the Vendors,
from the obligations in respect of any guarantee and other security granted by
the Vendors, provided that nothing herein will require the Purchaser to
grant any indemnity or guarantee of any of the indebtedness of the
Company to any Party or to pay any sum of money to any Party.
8.3 The Purchaser shall use its reasonable best efforts to obtain
the approvals contemplated in clause 11.1(h) herein on or before the Closing
Date.
9. CLAIMS AND LIMITATIONS REGARDING WARRANTIES
9.1 The liabilities of the parties in respect of the
representations and warranties given by any of them herein shall be restricted
in the following respects:
<PAGE>
16
(a) no claim under such representations and warranties may
be made after 18 months from the Closing Date unless
such claim has been intimated in writing giving
reasonable details thereof, before the said date;
(b) the Vendors shall not be liable for any claim in
respect of any breach of the Warranties which arises
directly as a result of any change in the date to which
the Company makes up its accounts, or in the accounting
bases, policy or practice of the Purchaser or of the
Company, other than any change made so as to comply
with any Statements of Standard Accounting Practice or
Financial Reporting Standards in the UK (including the
method of submission of taxation returns) introduced or
having effect on or after Closing.
9.2 The Purchaser shall not be entitled to recover any damages
in respect of any breach or breaches by the Vendors of the Warranties unless and
until the aggregate amount of all claims hereunder exceeds the sum of $10,000
whereupon the Purchaser may (subject to the other limitations contained herein)
recover the full amount of that and every other claim hereunder subject to the
provisions of subsection 9.3 herein.
9.3 Each of the Vendors shall be individually liable in respect
of the Warranties up to a maximum amount equivalent to that proportion of the
Purchase Price which is equal to the percentage of the total Vendors' Shares
which each individual Vendor holds.
9.4 Each claim made in respect of the Warranties shall be made against
all the Vendors giving same and shall be pro-rated among them, so that
each Vendor shall be liable to the Purchaser in respect of only that
proportion of the claim which is equivalent to the proportion that the
Consideration such Vendor received bears to the total Consideration paid
by the Purchaser.
9.5 No claim in respect of any breach or breaches of the
Warranties shall be made to the extent that:
(a) specific provision or allowance therefor has been made
in the Financial Statements or the subject matter
thereof is otherwise taken account of in the Financial
Statements; or
(b) such claim would not have arisen but for a change or
changes in legislation made after the date hereof
(whether relative to taxation, rates of taxation or
otherwise) or the withdrawal of any extra-statutory
concession previously made by the Inland Revenue; or
(c) it is in respect of liability to Corporation Tax for
which the Company is liable on actual profits or gains
earned arising or accruing in the ordinary course of
business since the Statement Date.
9.6 If the Vendors make any payment by way of damages for breach
of the Warranties (the "Damages Payment") and the Company or the Purchaser
receives any payment from a third party (including from any insurer) in respect
of the same subject matter which gave rise to the claim in respect of which the
Damages Payment was made, the Purchaser shall, once it or the Company has
received such payment and after deduction of all costs and expenses reasonably
and properly incurred in connection with such claim or its recovery, forthwith
pay to the Vendors an amount equal to the lesser of (a) such benefit, and (b)
the Damages Payment.
<PAGE>
17
9.7 Any payment made by the Vendors in respect of a breach of the
warranties shall be deemed to be pro tanto a reduction in the Purchase
Price, and may be settled by the retransfer of such number of the
Purchaser's shares (at the Share Price at which they were issued to the
Vendors) to the Purchaser as is required.
9.8 The Purchaser acknowledges that, save for the information
set out in the warranties themselves and the factual information contained in
the Disclosure Letter they have not relied in relation to the purchase of the
Shares on any warranties or representations or expression of opinion of any
description by the Vendors, the Company, or the agents of them in relation to
the value or amount of the assets and liabilities of the Company, of the
prospects of the business or the affairs of the Company.
9.9 In the application of this clause 9 to clause 4 above, the
words "the Principals", shall be deemed to be substituted for the words "the
Vendors", with the intent and purpose that the limitations and other provisions
contained in this clause 9 shall apply equally to any claim made in respect of
any breach of the Principals' representations and warranties contained in clause
4 hereof as well as any breach of the Vendors' representations and warranties
contained in clause 5 hereof.
9.10 The amount of any claim under the Warranties shall be reduced
by the amount of any tax benefit received by the Purchaser or the Company or the
amount of any relief from or reduction available to the Purchaser or the Company
in respect of Taxation directly and specifically arising by virtue of the loss
and damage in respect of which such claim is made.
10. NON-MERGER
10.1 Save as disclosed in the Schedules to this Agreement or the
Disclosure Letter, the representations, warranties, covenants and
agreements of the Principals and the Vendors contained herein and those
contained in the documents and instruments delivered pursuant hereto will
be true at and as of the Closing as though made at the Closing and will
survive the Closing Date, and notwithstanding the completion of the
transactions herein contemplated, the waiver of any condition contained
herein (unless such waiver expressly releases the Vendors of such
representation, warranty, covenant or agreement), or any investigation by
the Purchaser, the same will remain in full force and effect.
10.2 The representations, warranties, covenants and agreements of
the Purchaser contained herein and those contained in the documents and
instruments delivered pursuant hereto will be true at and as of the Closing as
though made at the Closing and will survive the Closing Date, and
notwithstanding the completion of the transactions herein contemplated, the
waiver of any condition contained herein (unless such waiver expressly releases
the Purchaser of such representation, warranty, covenant or agreement), or any
investigation by the Vendors, the same will remain in full force and effect.
11. CONDITIONS PRECEDENT
11.1 The obligations of the Purchaser to consummate the
transactions herein contemplated are subject to the fulfilment of each of the
following conditions at the times stipulated:
(a) the representations and warranties of the Principals
and the Vendors contained herein are true and correct
in all respects at and as of the Closing except as may
be in writing disclosed to and approved by the
Purchaser in a letter (the "Disclosure Letter") from
the Vendors' Solicitors to the Purchaser's Solicitors;
(b) all covenants, agreements and obligations hereunder on
the part of the Vendors to
<PAGE>
18
be performed or complied with at or prior to the Closing,
including the Vendors' obligation to deliver the documents
and instruments herein provided for, have been performed and
complied with at and as of the Closing;
(c) between the date hereof and the Closing, the Company
will not have experienced any event, circumstance or
condition or have taken any action or become subject to
any action of any character adversely affecting the
Company or the Business or as would materially reduce
the value of the Company, the Business or the Vendors'
Shares to the Purchaser;
(d) no damage by fire, negligence or otherwise to the
Business Assets will have occurred since the date
hereof and prior to the Closing which, in the sole
opinion of the Purchaser, will materially and adversely
affect the Business Assets, the Business or the
Company's operations, prospects or earnings;
(e) on or before the Closing Date no federal, provincial,
regional or municipal government or any agency thereof
will have enacted any statute or regulation, announced
any policy or taken any action that will materially and
adversely affect the Business or the Business Assets or
the right of the Purchaser to the full enjoyment
thereof;
(f) none of the Principals will have left the Company prior to
Closing;
(g) on the Closing Date the Principals will have executed
the Employment Agreements and the Principals and Rani
Robertson will have executed the Escrow Agreements;
(h) on or before the Closing Date the Vendors will have obtained
the Consents;
(i) on or before the Closing Date of this Agreement and the
transactions contemplated hereby shall have been
approved by The Toronto Stock Exchange and by all other
regulatory authorities having jurisdiction whose
approval is required; and
(j) on or before the Closing Date, the Purchasers shall
have received the stock transfer forms and certificates
representing the Minority Shares, duly endorsed for
transfer to the Purchaser, together with releases, in a
form acceptable to the Purchaser, executed by each of
the Minority Shareholders.
11.2 The conditions set forth in Section 11.1 are for the exclusive
benefit of the Purchaser and may be waived by the Purchaser in writing in whole
or in part at any time. Notwithstanding anything to the contrary contained
herein the Vendors will receive and retain, as outright and non-refundable
consideration, the sum of $100.00 upon the Vendors signing this Agreement and in
consideration therefor the Vendors covenant and agree not to withdraw their
acceptance of the offer constituted by this Agreement, prior to the time for
removal of any subject conditions contained herein.
11.3 The obligations of the Vendors to consummate the transactions
herein contemplated are subject to the fulfilment of each of the following
conditions at the times stipulated, that:
(a) the representations and warranties of the Purchaser
contained herein are true and correct in all material
respects at and as of the Closing except as may be in
writing disclosed to and approved by the Vendors; and
<PAGE>
19
(b) all covenants, agreements and obligations hereunder on
the part of the Purchaser to be performed or complied
with at or prior to the Closing, including in
particular the Purchaser's obligations to deliver the
documents and instruments herein provided for, have
been performed and complied with as at the Closing.
11.4 The conditions set forth in Section 0 are for the exclusive
benefit of the Vendors and may be waived by the Vendors in whole or in part at
any time.
12. TRANSACTIONS OF THE VENDORS AT THE CLOSING
12.1 At the Closing, the Vendors will execute and deliver or
cause to be executed and delivered all documents, instruments, resolutions and
share certificates as are necessary to effectively transfer and assign the
Vendors' Shares and the Minority Shares to the Purchaser, free and clear of all
Liens, including:
(a) a closing agenda in the form satisfactory to the Purchaser's
Solicitors;
(b) certified copies of resolutions of the directors of the
Company authorising the transfer of the Vendors' Shares
and the Minority Shares subject to the relevant stock
transfer forms being duly stamped and the registration
of the Vendors' Shares in the name of the Purchaser and
authorising the issue of new share certificates
representing the Vendors' Shares and the Minority
Shares in the name of the Purchaser;
(c) waivers in writing in a form satisfactory to the
Purchaser's Solicitors signed by all the shareholders
of the Company, of any rights they may have, whether
pursuant to the provisions of the Articles of the
Company or otherwise, in respect of the transfer to the
Purchaser of the Vendors' Shares and the Minority
Shares;
(d) stock transfer forms and share certificates
representing the Vendors' Shares and the Minority
Shares in the name of the Vendors and the Minority
Shareholders, duly endorsed for transfer to the
Purchaser;
(e) duly issued share certificates in the name of the
Purchaser representing the Vendors' Shares and the
Minority Shares;
(f) resignations in writing of Gordon McAndrew and Noraddin
Nakhaee as officers and signing officers of the
Company;
(g) all corporate records and books of account of the
Company including, without limiting the generality of
the foregoing, minute books, share register books,
share certificate books and annual reports;
(h) the corporate seal of the Company and all keys to any
automobiles owned by the Company and to any premises
used by the Company;
(i) releases, in form and substance satisfactory to the Purchaser,
acting reasonably, executed by the Vendors and the Minority
Shareholders in favour of the Company releasing the Company
from any and all manner of actions, causes of action, suits,
proceedings, debts, dues, profits, expenses, contracts,
damages, claims, demands and liabilities whatsoever, in law
or equity, which the Vendors and the Minority Shareholders
ever had, now have, or may have against the Company for or
by reason of any matter, cause or thing whatsoever done or
omitted to be done by the
<PAGE>
20
Company up to the Closing other than in respect of obligations
of the Company to the Vendors and the Minority Shareholders
arising in respect of:
(i) earned but unpaid salary, fees and unpaid benefits
for the then current pay period; and
(ii) any obligations of the Company pursuant to
indemnities granted to such persons by the
Company in connection with their acts as
directors of the Company provided that such
indemnities shall be ineffective in respect of
any act or omission which would constitute a
default or breach pursuant to this Agreement
or which render any representation or warranty
given hereunder untrue or inaccurate;
(j) a Closing Warranty and Certificate from the Vendors
confirming that the conditions to be satisfied by the
Vendors, unless waived, set out in Section 11.1 have
been satisfied at the Closing and that all
representations and warranties of the Vendors contained
in this Agreement are true at and as of the
(k) an opinion of the Vendors' Solicitors in the form
attached hereto as Schedule O, with such changes as may
be agreed upon by the Purchaser's Solicitors;
(l) Escrow Agreements executed by the Principals and Rani
Robertson in the form in Schedule J; and
(m) all such other documents and instruments as the
Purchaser's Solicitors may reasonably require.
13. TRANSACTIONS OF THE PURCHASER AT THE CLOSING
13.1 The Purchaser will deliver or cause to be delivered the
following at the Closing:
(a) share certificates representing the Spectrum Shares;
(b) the Escrow Agreements for the Principals and Rani Robertson,
as applicable;
(c) confirmation, in a form agreed by the Vendors, of the
allotment of the Spectrum Shares referred to in clause
13.1(a) above;
(d) a Closing Warranty and Certificate from the Purchaser
confirming that the conditions to be satisfied by the
Purchaser, unless waived, set out in Section 11.1 have
been satisfied at the Closing and that all
representations and warranties of the Purchaser
contained in this Agreement are true at and as of the
Closing.
(e) an opinion of the Purchaser's Solicitors in the form
attached hereto as Schedule R, with such changes as may
be agreed upon by the Vendor's Solicitors;
<PAGE>
21
14. TIME OF THE ESSENCE
14.1 Time is of the essence of this Agreement.
15. FURTHER ASSURANCES
15.1 The parties will execute and deliver such further documents
and instruments and do all such acts and things as may be reasonably necessary
or requisite to carry out the full intent and meaning of this Agreement and to
effect the transactions contemplated by this Agreement.
16. SUCCESSORS AND ASSIGNS
16.1 This Agreement will enure to the benefit of and be binding
upon the parties hereto and their respective heirs, executors, administrators,
successors and permitted assigns. This Agreement may not be assigned by either
Party hereto without the prior written consent of the other Party.
17. COUNTERPARTS
17.1 This Agreement may be executed in several counterparts,
each of which will be deemed to be an original and all of which will together
constitute one and the same instrument.
18. NOTICE
18.1 Any notice required or permitted to be given under this
Agreement will be validly given if in writing and delivered or sent by fax to
the following addresses:
(a) If to the Vendors:
c/o 3L Limited
86/92 Causewayside
Edinburgh, Scotland
Fax No.: 44 131 662 4556
with a copy to the Vendors' Solicitors as follows:
Fyfe Ireland WS
Orchard Brae House
30 Queensferry Road
Edinburgh EH4 2HG
Scotland
Attention: Morag L. Radcliffe
Fax No.: 44 131 343 3166
<PAGE>
22
(b) If to the Purchaser:
Spectrum Signal Processing Inc.
Suite 100, 8525 Baxter Place
Burnaby, British Columbia
V5A 4V7 CANADA
Fax No.: (604) 421-1764
with a copy to the Purchaser's Solicitors as follows:
Clark, Wilson
Barristers and Solicitors
#800 - 885 West Georgia Street
Vancouver, B.C.
V6C 3H1
Attention: William C. Helgason
Fax No.: (604) 687-6314
or to such other address as any Party may specify by notice in writing to the
other.
18.2 Any notice delivered on a business day will be deemed
conclusively to have been effectively given on the date notice was delivered.
19. AGENTS
19.1 The Vendors warrant to the Purchaser that no agent or other
intermediary has been engaged by the Vendors in connection with the purchase and
sale herein contemplated.
20. TENDER
20.1 Tender may be made upon the Vendors or Purchaser or upon the
Vendors' Solicitors or Purchaser's Solicitors.
21. PROPER LAW
<PAGE>
23
21.1 This Agreement will be governed by and construed in accordance
with the laws of British Columbia and the parties will attorn to the Courts
thereof.
IN WITNESS WHEREOF the parties have caused this Agreement to be executed
and delivered this ____ day of _______________ , 199___ .
SIGNED, SEALED AND DELIVERED by )
PETER SALKELD ROBERTSON in the presence of:)
)
/s/ Illegible )
- -------------------------------------- )
Name )
) /s/ Peter S. Robertson
- -------------------------------------- ) -------------------------------
Address ) PETER SALKELD ROBERTSON
)
- -------------------------------------- )
)
)
- -------------------------------------- )
Occupation )
)
SIGNED, SEALED AND DELIVERED by ALAN DONALD)
CULLOCH in the presence of: )
)
/s/ Illegible )
- -------------------------------------- )
Signature )
) /s/ Alan Culloch
- -------------------------------------- ) -------------------------------
Print Name ) ALAN DONALD CULLOCH
)
- -------------------------------------- )
Address )
)
- -------------------------------------- )
)
)
- -------------------------------------- )
Occupation )
)
SIGNED, SEALED AND DELIVERED by IAN )
ALEXANDER YOUNG in )
the presence of: )
)
/s/ Illegible )
- -------------------------------------- )
Signature )
) /s/ Ian Young
- -------------------------------------- ) -------------------------------
Print Name ) IAN ALEXANDER YOUNG
)
- -------------------------------------- )
Address )
)
- -------------------------------------- )
)
)
- -------------------------------------- )
Occupation )
)
<PAGE>
24
SIGNED, SEALED AND DELIVERED by GEORGE )
GORDON MCANDREW in the presence of: )
)
/s/ Illegible )
- -------------------------------------- )
Signature )
) /s/ Illegible
- -------------------------------------- ) -------------------------------
Print Name ) GEORGE GORDON MCANDREW
)
- -------------------------------------- )
Address )
)
- -------------------------------------- )
)
)
- -------------------------------------- )
Occupation )
)
SIGNED, SEALED AND DELIVERED by NORADDIN )
NAKHAEE in the presence of: )
)
/s/ Illegible )
- -------------------------------------- )
Signature )
) /s/ Noraddin Nakhaee
- -------------------------------------- ) -------------------------------
Print Name ) NORADDIN NAKHAEE
)
- -------------------------------------- )
Address )
)
- -------------------------------------- )
)
)
- -------------------------------------- )
Occupation )
)
SIGNED, SEALED AND DELIVERED by J. STUART )
MCGARRITY in the presence of: )
)
/s/ Illegible )
- -------------------------------------- )
Signature )
) /s/ Peter S. Roberts as attorney
) for J. Stuart McGarrity
- -------------------------------------- ) -------------------------------
Print Name ) J. STUART MCGARRITY
)
- -------------------------------------- )
Address )
)
- -------------------------------------- )
)
)
- -------------------------------------- )
Occupation
<PAGE>
25
SIGNED, SEALED AND DELIVERED by RANI )
ROBERTSON in the presence of: )
)
/s/ Illegible )
- -------------------------------------- )
Signature )
) /s/ Rani Robertson
- -------------------------------------- ) -------------------------------
Print Name ) RANI ROBERTSON
)
- -------------------------------------- )
Address )
)
- -------------------------------------- )
)
)
- -------------------------------------- )
Occupation )
SPECTRUM SIGNAL PROCESSING INC.
Per: /s/ Barry Jinks
--------------------------------
Authorised Signatory
<PAGE>
ASSET PURCHASE AGREEMENT
THIS AGREEMENT dated for reference the 20th day of March, 1998
AMONG:
ALEX COMPUTER SYSTEMS, INC., a company duly incorporated
pursuant to the laws of the State of Delaware and having
its principal place of business at 950 Danby Road, Suite
200, Ithaca, N.Y. U.S.A. 14850
(herein called the "Vendor")
OF THE FIRST PART
AND:
ALEX INFORMATICS INC., a company duly incorporated
pursuant to the laws of the Province of Quebec and having
its principal place of business at 1930 Gagnon Street,
Lachine, Quebec, Canada, H8T 3M6
(herein called the "Principal")
OF THE SECOND PART
AND:
SPECTRUM SIGNAL PROCESSING INC., a company incorporated
pursuant to the laws of the Province of British Columbia
having a principal place of business at Suite 100, 8525
Baxter Place, Burnaby, British Columbia, V5A 4V7, Canada
(herein called the "Purchaser")
OF THE THIRD PART
WITNESSES THAT WHEREAS:
A. The Vendor carries on the business comprised of the
development, marketing and sale of ADI Sharc processor based board level
products and software systems, as described in Schedule "7" - Intellectual
Property hereto, and known as "Alex Computer Systems" (the
<PAGE>
2
"Business") at or about 950 Danby Road, Suite 200, Ithaca, New York, United
States of America;
B. The Purchaser is a Canadian corporation doing business in
the United States of America and intends to incorporate a wholly-owned
subsidiary corporation in the United States of America to own the assets
purchased by the Purchaser pursuant to this Agreement;
C. The Principal is the sole shareholder and owner of the Vendor
and has a substantial proprietary and financial interest in the Vendor;
D. The Vendor has agreed to sell and the Purchaser has agreed
to purchase (subject to certain exclusions hereinafter described) substantially
all the property, assets, and undertaking of the Business on the terms and
conditions herein provided;
NOW THEREFORE in consideration of the premises and the respective covenants,
agreements representations, warranties and indemnities of the parties herein
contained and for other good and valuable consideration (the receipt and
sufficiency of which is hereby acknowledged) the parties hereto covenant and
agree as follows:
1. DEFINED TERMS
1.1 For the purposes of this Agreement, unless the context
otherwise requires, the following terms shall have the respective meanings set
out below and grammatical variations of such terms shall have corresponding
meanings:
(a) "Adjustment Date" means January 31, 1998;
(b) "Affiliate" has the meaning given to that term in Rule 144
of the Securities Act of 1933 (United States), as amended;
(c) "Associate" has the meaning given to that term in the
Securities and Exchange Act of 1934 (United States), as
amended;
(d) "Assumed Indebtedness" means the aggregate
indebtedness of the Vendor owing to the creditors which is
being assumed by the Purchaser as described in Schedule "14"
hereto, but does not include the Excluded Indebtedness;
(e) "Audited Financial Statements" means the audited financial
statements of the Vendor as at and for the financial years
ended July 31, 1996 and July 31, 1997, including the notes
thereto and the report of the Vendor's auditors thereon, a
copy of which is annexed hereto as Schedule "1" - Financial
Statements;
(f) "Business" means the business carried on by the Vendor
consisting of the development, marketing and sale of ADI Sharc
processor based board level products and software systems, as
described in Schedule "7" - Intellectual Property hereto, and
known as Alex Computer Systems;
<PAGE>
3
(g) "Business Assets" means all property and assets of the
Business of every kind and description and wherever situate,
including:
(i) leasehold title to the Leased Property described in
Schedule "2" - Leased Property hereto;
(ii) all Equipment of the Business;
(iii) all Inventory of the Business;
(iv) all right, title, benefit, and interest under the
Material Contracts described in Schedule "4" - Material
Contracts hereto;
(v) all customer lists, brochures, samples, price lists,
advertising material, production records, employee
manuals, personnel records, accounting and other books
and records, and all other information, correspondence,
documents, and material exclusively relating to the
Business;
(vi) all right, title, and interest of the Vendor in and to
all the Intellectual Property Rights and the
Intellectual Property, including the Intellectual
Property described in Schedule "7" - Intellectual
Property hereto, and any and all licences,
Contracts and other agreements or instruments
exclusively relating thereto;
(vii) all permits, licences, consents, authorizations, and
approvals pertaining to the Business including those
described in Schedule "6" - Permits and Licences
hereto;
(viii) all prepaid expenses;
(ix) all accounts receivable;
(x) all computer hardware;
(xi) all cash on hand or on deposit; and
(xii) the Goodwill of the Business;
(h) "Business Day" means any day (other than a Saturday or
a Sunday) on which the main branch of the Bank of
Montreal in Vancouver, British Columbia, Canada, is
open for business;
(i) "Closing" means the completion of the transactions
contemplated in this Asset Purchase Agreement;
<PAGE>
4
(j) "Closing Date" means April 24, 1998, or such other date as
the Vendor and the Purchaser may mutually determine, but in no
event will the Vendor and the Purchaser extend such date
beyond April 30, 1998;
(k) "Contract" means any agreement, indenture, contract, lease,
deed of trust, license, option, instrument or other
commitment, whether written or oral;
(l) "Employee Plans" means each employee plan, retirement,
pension, bonus, stock purchase, profit sharing, stock option,
deferred compensation, severance or termination pay,
insurance, medical, hospital, dental, vision care, drug, sick
leave, disability, salary continuation, legal benefits,
unemployment benefits, vacation, incentive or other
compensation plan or arrangement or other employee benefit
that is maintained, or otherwise contributed to or required to
be contributed to, by the Vendor relating to the Business or
the Business Assets for the benefit of employees or former
employees of the Vendor described in Schedule "5" - Employee
Matters;
(m) "Employees" means those employees of the Vendor who are
employed in the Business immediately prior to the time of
Closing;
(n) "Encumbrance" means any encumbrance, lien, charge, hypothec,
pledge, mortgage, title retention agreement, security interest
of any nature, adverse claim, exception, reservation,
easement, right of occupation, any matter capable of
registration against title, option, right of preemption,
privilege or any Contract to create any of the foregoing;
(o) "Environmental Laws" means all applicable national, state,
municipal and local laws, statutes, ordinances, by-laws and
regulations, and orders, directives and decisions rendered by
any ministry, department or administrative or regulatory
agency relating to the protection of the environment,
occupational health and safety or the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or
handling of any Hazardous Substances;
(p) "Environmental Permits" means all licences, permits,
approvals, consents, certificates, registrations and other
authorizations under Environmental Laws required for the
operation of the Business, all of which are described in
Schedule "6" - Licenses and Permits.
(q) "Equipment" means all chattels, equipment, fixtures,
furnishings, machinery, vehicles and supplies used in
connection with the Business or situate upon the Leased
Property as at the date hereof including the items described
in Schedule "3" - Machinery and Equipment hereto;
(r) "Exchange Rate" means the average of the daily closing rate
of exchange during the thirty (30) days immediately preceding
the date this Agreement is
<PAGE>
5
executed by the parties hereto for converting United States
Dollars to Canadian Dollars as published by the Bank of Canada
for each relevant day as of 4:00 p.m. E.S.T.;
(s) "Excluded Assets" means any and all accounts receivable of
the Vendor from the Principal or any Affiliate or Associate of
the Principal, all deferred income tax benefits of the Vendor,
deferred marketing costs of the Vendor and software
development costs of the Vendor;
(t) "Excluded Indebtedness" means any indebtedness of the Vendor
to the Principal or any Affiliate or Associate of the
Principal or of the Vendor and any indebtedness of the Vendor
to RPA relating to royalties payable by the Vendor to RPA and
any other indebtedness of the Vendor to RPA arising prior to
the Adjustment Date, and for greater certainty the Purchaser
shall assume and be responsible for all payments payable to
RPA (excluding royalties) after the Adjustment Date;
(u) "Financial Statements" means the Audited Financial Statements
and the Interim Financial Statements;
(v) "Goodwill" means the goodwill of the Business, together with
the exclusive right of the Purchaser to represent itself as
carrying on the Business in continuation of and in succession
to the Vendor, the exclusive right of the Purchaser to the
name "Alex Computer Systems" as part of or in connection with
the Business for the two (2) year period immediately following
the Closing Date, and all existing sales and marketing
information and material that is directly associated with the
name "Alex Computer Systems";
(w) "Hazardous Substances" means any pollutants, contaminants,
chemical or industrial toxic, or hazardous waste or
substances;
(x) "Improvements" means any and all corrections, changes,
enhancements, modifications, refinements, updates, new
functions, new features, new releases and all other
improvements to the ADI Sharc processor based board level
products and software systems or the Intellectual Property
generally;
(y) "including" means including without limitation or prejudice
to the generality of any description, definition, term or
phrase preceding that word, and the word "include" and its
derivative expressions will be construed accordingly;
(z) "Intellectual Property" means any and all ideas, concepts,
inventions, discoveries, works, trade secrets, know-how,
confidential information, processes, prototypes, devices,
samples, developments, technical advances, computer software
programs and documentation therefor, specifications and source
code listings, data or compilations of information,
algorithms, literary and artistic works, designs and all other
forms of industrial and
<PAGE>
6
intellectual property made, conceived, or actually or
constructively reduced to practice by or on behalf of the
Vendor, which are derived or arising from, or related or
ancillary to, or embodied by or in the ADI Sharc processor
based board level products and software systems and all other
industrial and intellectual property necessary to conduct the
Business and all Improvements thereto;
(aa) "Intellectual Property Rights" means all worldwide industrial
and intellectual property Rights in and to the Intellectual
Property (whether registered or unregistered and including all
goodwill attaching to any of the foregoing) and all
applications for patent, copyright, trade-mark, industrial
design, integrated circuit topography or other industrial or
intellectual property protection and all resulting
registrations and includes any and all rights to exploit and
commercialize the Intellectual Property, the Intellectual
Property Rights, and the ADI Sharc processor based board level
products and software systems throughout the world;
(bb) "Interim Financial Statements" means the interim unaudited
financial statements of the Vendor as at and for the periods
ended January 31, 1998 and February 28, 1998, copies of which
are annexed hereto as Schedule "1";
(cc) "Inventory" means all of the inventory set forth in
Schedule "21" - Inventory hereto;
(dd) "Leased Property" means all the leased real property that is
used in the Business and leased by the Vendor, including the
real property described in Schedule "2" - Leased Property
herein;
(ee) "Leases" means all of the leases of the Leased Property,
whether as lessor or lessee leased by the Vendor as set forth
in Schedule "2" - Leased Property and all leases of personal
property as described in Schedule "4" - Material Contracts;
(ff) "Licences" means all licences, permits, approvals,
consents, certificates, registrations and authorizations
(whether governmental, regulatory, or otherwise) required for
the conduct in the ordinary course of the operations of the
Business and the uses to which the Business Assets have been
put;
(gg) "Losses" means, in respect of any matter, all claims,
demands, proceedings, losses, damages, liabilities,
deficiencies, costs and expenses (including all reasonable
legal and other professional fees and disbursements, interest,
penalties and amounts paid in settlement) arising as a
consequence of such matter;
<PAGE>
7
(hh) "Material Contracts" means all agreements, indentures,
Contracts, leases, deeds of trust, licences, options,
instruments or other commitments, whether written or oral,
including the benefit of all unfilled orders received by the
Vendor and forward commitments to purchase made by the Vendor,
which the Vendor is entitled to or possessed of in connection
with the Business and the Business Assets, including all
right, title, benefit and interest in respect of the
Contracts, leases, engagements and commitments described in
Schedule "4" - Material Contracts hereto;
(ii) "Permitted Encumbrances" means:
(i) liens for taxes, assessments and governmental
charges due and being contested in good faith
and diligently by appropriate proceedings (and
for the payment of which adequate provision
has been made);
(ii) liens for taxes either not due and payable or due
but for which notice of assessment has not been
given; and
(iii) the Encumbrances described in Schedule "8";
(jj) "Prime Rate" means the annual variable rate of interest
quoted or published from time to time by the Bank of
Montreal at its main branch in Vancouver, British
Columbia as the "prime rate" of interest charged by it
for Canadian dollar loans made in Canada to its most
credit worthy customers;
(kk) "Purchase Price" means the aggregate sum payable by the
Purchaser to the Vendor for the Business Assets plus or minus
any adjustments pursuant to Clause 5.3 hereof;
(ll) "RPA" means RPA Electronics Design, LLC;
(mm) "Rights" means any and all worldwide proprietary, possessory,
use and ownership rights, titles, and interests (whether
beneficial or legal) of all kinds whatsoever, howsoever
arising and whether partial or whole in nature, and all legal
protection recognized by law (whether by statute, common law
or otherwise) whether domestic or foreign;
(nn) "Share Price" means the average closing price of a common
share in the capital of the Purchaser on the NASDAQ National
Market System during the thirty (30) trading days prior to the
date this Agreement is executed by the parties hereto, as
published by the National Association of Securities Dealers,
Inc., rounded to the third decimal point and converted from
United States Dollars to Canadian Dollars at the Exchange
Rate;
<PAGE>
8
(oo) "Spectrum Shares" means those common shares in the capital
of the Purchaser being issued by the Purchaser as part of the
payment of the Purchase Price;
(pp) "Spectrum Warrant" means a warrant to purchase a common share
in the capital of the Purchaser at the Warrant Price, valid
for two (2) years from the Closing Date, in the form annexed
as Schedule "20" - Spectrum Warrant hereto;
(qq) "Transferred Employees" means those Employees who accept
offers of employment made by the Purchaser commencing after
the Closing Date;
(rr) "Warrant Price" means the greater of the Share Price or the
closing price of a common share in the capital of the
Purchaser on the NASDAQ National Market System at the close of
business on the trading day immediately preceding the date
this Agreement is executed by the parties hereto, as published
by the National Association of Securities Dealers, Inc., and
converted from United States Dollars to Canadian Dollars at
the Exchange Rate; and
(ss) "Warrant Shares" means those common shares in the capital of
the Purchaser issuable upon exercise of the Spectrum Warrants;
1.2 Currency
Unless otherwise indicated, all dollar amounts in this Agreement are expressed
in Canadian funds.
1.3 Sections and Headings
The division of this Agreement into Articles, sections
and subsections and the insertion of headings are for convenience of
reference only and shall not affect the interpretation of this Agreement.
Unless otherwise indicated, any reference in this Agreement to an
Article, section, subsection or Schedule refers to the specified Article,
section or subsection of or Schedule to this Agreement.
1.4 Number, Gender and Persons
In this Agreement, words importing the singular number
only shall include the plural and vice versa, words importing gender
shall include all genders and words importing persons shall include
individuals, corporations, partnerships, associations, trusts,
unincorporated organizations, governmental bodies and other legal or
business entities of any kind whatsoever.
1.5 Accounting Principles
Any reference in this Agreement to generally accepted
accounting principles refers to generally accepted accounting principles
that have been established in Canada, including those
<PAGE>
9
approved from time to time by the Canadian Institute of Chartered Accountants or
any successor body thereto.
1.6 Entire Agreement
This Agreement constitutes the entire agreement between
the parties with respect to the subject matter hereof and supersedes all
prior agreements, understandings, negotiations and discussions, whether
written or oral, including, without limitation, the Purchase Offer dated
March 17, 1998. There are no conditions, covenants, agreements,
representations, warranties or other provisions, express or implied,
collateral, statutory or otherwise, relating to the subject matter hereof
except as herein provided.
1.7 Time of Essence
Time shall be of the essence of this Agreement.
1.8 Applicable Law
This Agreement shall be construed, interpreted and
enforced in accordance with, and the respective rights and obligations of
the parties shall be governed by, the laws of the Province of British
Columbia and the federal laws of Canada applicable therein, and each
party irrevocably and unconditionally submits to the non-exclusive
jurisdiction of the courts of such province and all courts competent to
hear appeals therefrom.
1.9 Amendments and Waivers
No amendment or waiver of any provision of this
Agreement shall be binding on either party unless consented to in writing
by such party. No waiver of any provision of this Agreement shall
constitute a waiver of any other provision, nor shall any waiver
constitute a continuing waiver unless otherwise provided.
1.10 Schedules
The following Schedules are attached to and form part
of this Agreement: All terms defined in the body of this Agreement will
have the same meaning in the Schedule attached hereto.
Schedule 1 - Financial Statements
Schedule 2 - Leased Property
Schedule 3 - Machinery and Equipment
Schedule 4 - Material Contracts
Schedule 5 - Employee Matters
Schedule 6 - Licences and Permits
Schedule 7 - Intellectual Property
Schedule 8 - Permitted Encumbrances
Schedule 9 - Insurance Policies
<PAGE>
10
Schedule 10 - Legal and Regulatory Proceedings
Schedule 11 - Consents
Schedule 12 - Environmental Matters
Schedule 13 - Non-Competition Agreement
Schedule 14 - Assumed Indebtedness
Schedule 15 - Form of Letter to regular and major customers
Schedule 16 - Major Customers
Schedule 17 - Assignment and Assumption Agreement
Schedule 18 - Non-Solicitation Agreement
Schedule 19 - Confidentiality Agreement
Schedule 20 - Spectrum Warrant
Schedule 21 - Inventory
Schedule 22 - Registration Agreement
Schedule 23 - Escrow Agreement
Schedule 24 - Assumption Agreement
Schedule 25 - Investment Representation Letter
Schedule 26 - Warrant Valuation
2. PURCHASE AND SALE
2.1 Subject to the terms and conditions of this Agreement, on the
Closing Date but with effect from the Adjustment Date, the Vendor will sell,
transfer, and assign to the Purchaser and the Purchaser agrees to purchase from
the Vendor, free and clear of all Encumbrances except as may be otherwise
specifically provided for herein as Permitted Encumbrances, the Business Assets.
2.2 The Excluded Assets and the Excluded Indebtedness are
specifically excluded from the within purchase and sale.
2.3 All quotations for the sale or purchase of Inventory or
supplies made or received by the Vendor and not confirmed to contractual
commitment will be deemed to be assigned to the Purchaser at the Closing to be
accepted, confirmed or withdrawn or otherwise acted upon by the Purchaser in its
own name, for its own account and in accordance with its own business judgment.
3. PURCHASE PRICE AND ALLOCATION
3.1 The Purchase Price payable by the Purchaser to the Vendor
for the Business Assets will be the sum of EIGHT MILLION ONE HUNDRED & SIXTY-ONE
THOUSAND ($8,161,000) DOLLARS, plus the value of the Assumed Indebtedness.
3.2 The Purchase Price will be allocated among the various items
comprising the Business Assets and the Vendor and the Purchaser agree to report
the sale and purchase of the Business Assets for all tax purposes in a manner
consistent with the following:
(a) to the Equipment, the sum of $374,278;
(b) to the Inventory, the sum of $763,840;
<PAGE>
11
(c) to the Goodwill, excluding the right to use the
"Alex Computer Systems" name, the sum of $773,410;
(d) to the prepaid expenses, the sum of $121,196;
(e) to the Accounts Receivable, the sum of $1,028,215;
(f) to the Non-Solicitation Agreements, the sum of
$600,000;
(g) to the Non-Competition Agreements, the sum of
$2,500,000;
(h) to the License Agreement respecting the name "Alex
Computer Systems", the sum of $2,000,000;
(i) to the Technology Assignment, the sum of $10.00; and
(j) to the remaining Business Assets and other ancillary
agreements, the sum of $51.00.
4. PAYMENT OF THE PURCHASE PRICE
4.1 The Purchase Price will be paid as follows:
(a) as to SEVEN MILLION ($7,000,000) DOLLARS of the Purchase
Price by delivery on the Closing Date by the Purchaser to the
Vendor or the Vendor's solicitors in trust of the number of
common shares in the capital of the Purchaser equivalent to
SEVEN MILLION ($7,000,000) DOLLARS divided by the Share Price,
entitlements to fractions of a common share in the capital of
the Purchaser so calculated will be ignored; the Spectrum
Shares shall be represented by four (4) share certificates,
each such share certificate representing twenty-five (25%) per
cent of the Spectrum Shares, or as may be reasonably directed
by the Vendor or the Vendor's solicitor in writing;
(b) as to TWO HUNDRED THOUSAND ($200,000) DOLLARS of the Purchase
Price, calculated in accordance with Schedule "26" hereto, by
delivery on the Closing Date by the Purchaser to the Vendor or
the Vendor's solicitors in trust Spectrum Warrants for the
number of common shares in the capital of the Purchaser
equivalent to ONE MILLION($1,000,000) DOLLARS divided by the
Warrant Price, entitlements to fractions of a common share in
the capital of the Purchaser so calculated will be ignored, or
as may be reasonably directed by the Vendor or the Vendor's
solicitors;
(c) as to NINE HUNDRED AND SIXTY-ONE THOUSAND ($961,000) DOLLARS
of the Purchase Price, subject to Clause 5.3, by solicitors'
trust cheque payable to the Vendor's solicitors in trust on
the Closing Date; and
<PAGE>
12
(d) as to the Assumed Indebtedness, by assumption of the
Assumed Indebtedness.
5. CLOSING, POSSESSION, AND ADJUSTMENTS
5.1 The Closing will take place at 10:00 a.m. local time,
on the Closing Date at the offices of Clark, Wilson, 800 - 885 West Georgia
Street, Vancouver, British Columbia, or at such other place, date, and time as
may be mutually agreed upon by the parties hereto.
5.2 The Vendor will deliver possession of the Business Assets,
free of any other claim to possession and any tenancies, to the Purchaser on the
Closing Date.
5.3 The Purchase Price will be reduced by the full amount of the
costs incurred by the Vendor in association with the New Jersey office of the
Principal for the months of February, March and April of 1998, as determined by
the Chief Financial Officers of the Vendor and the Principal acting reasonably.
5.4 All revenues and expenses of the Business and relating to
the Business Assets will be adjusted between the Vendor and the Purchaser as at
the commencement of business on the Adjustment Date to the effect that in
respect of any period before that time the Vendor will bear all expenses and
receive all revenues relating to the Business and the Business Assets and that
from and after said time the Purchaser will bear all expenses and receive all
revenues relating to the Business and the Business Assets.
6. ASSUMPTION OF LIABILITY
6.1 It is understood and agreed that from and after the Closing
Date the Purchaser will assume, pay, discharge and satisfy the Assumed
Indebtedness of the Vendor to the creditors described in Schedule "14" - Assumed
Indebtedness, and that at the Closing the Vendor and the Purchaser will execute
and deliver an Assumption Agreement, in the form attached hereto as Schedule
"24", whereby the Purchaser covenants to assume and pay the Assumed Indebtedness
and to indemnify and save harmless the Vendor in respect thereof.
6.2 Subject to the provisions of this Agreement, the Purchaser
agrees to assume, pay, satisfy, discharge, perform and fulfil, from and after
the Closing Date, all obligations and liabilities of the Vendor in respect of:
(a) the Material Contracts described in Schedule "4" and
those Contracts described in Schedules "5" - Employee
Matters and Schedule "7" - Intellectual Property which
are assigned to the Purchaser as set out in the
Assignment and Assumption Agreement attached hereto as
Schedule "17";
(b) the licences, permits, approvals, consents, registrations,
certificates and other authorizations described in Schedule
"6" - Permits and Licences;
<PAGE>
13
(c) the agreements entered into by the Vendor prior to the
Closing Date in the ordinary course of the Business for the
provision of services or goods to the Vendor; and
(d) the agreements entered into by the Vendor prior to the Closing
Date in the ordinary course of the Business for the sale of
inventories by the Vendor or the provision of services by the
Vendor.
At the Closing Date, the Vendor and the Purchaser will deliver an Assignment and
Assumption Agreement whereby the Vendor assigns all right, title, benefit and
interest under the Material Contracts to the Purchaser and the Purchaser
covenants to assume, perform and discharge set obligations and liabilities from
and after the Closing Date and to indemnify and save harmless the Vendor in
respect thereof.
6.3 Both before and after the Closing Date, the Vendor and the
Purchaser will make all reasonable efforts to obtain the release of the Vendor
and as may be applicable the Principal of their obligations in respect of the
Assumed Indebtedness and the Material Contracts, and without limiting the
generality of Clause 22.1 the Vendor and the Purchaser will execute and deliver
such documents and instruments and do such acts and things as may be required
for said purposes.
6.4 Without in any way limiting Clause 9.4, the Purchaser shall
not assume, and the Vendor shall be solely responsible for and shall indemnify
and hold harmless the Purchaser from and against, all product liability, product
warranty and other claims and obligations made on or before the Adjustment Date
respecting products manufactured or sold by the Vendor in connection with the
Business up to the Adjustment Date, provided such claim shall have been
disclosed in writing to the Purchaser within 15 days of receipt of such claim
and the Vendor shall have the right to contest such claim. The Purchaser may
satisfy any such obligations not assumed by it where it is required to do so by
law or by order of any court or regulatory authority having jurisdiction over it
or where it determines in good faith to do so for valid business reasons and, in
any such case, the Vendor shall reimburse the Purchaser forthwith following
demand for all expenses incurred by the Purchaser in connection therewith
including all labour and material costs incurred in repairing or replacing
products.
7. REPRESENTATIONS AND WARRANTIES OF THE VENDOR AND THE PRINCIPAL
7.1 The Vendor and the Principal represent and warrant to the
Purchaser, with the intent that the Purchaser will rely thereon in entering into
this Agreement and in concluding the transactions contemplated hereby, that, as
at the Closing Date:
(a) the Vendor is a corporation duly incorporated, validly
existing, and in good standing under the laws of
Delaware, and has the power, authority, and capacity to
carry on the Business as presently conducted and to
enter into this Agreement and carry out its terms;
<PAGE>
14
(b) the execution and delivery of this Agreement and the
completion of the transaction contemplated hereby have been
duly and validly authorized by all necessary corporate action
on the part of the Vendor, and this Agreement constitutes a
valid and binding obligation of the Vendor enforceable against
the Vendor in accordance with its terms; except as enforcement
may be limited by bankruptcy, insolvency and other laws
affecting the rights of creditors generally and except that
equitable remedies may be granted only in the discretion of a
court of competent jurisdiction;
(c) Schedule "2" sets forth the Municipal addresses and complete
and accurate legal descriptions of all the Leased Property,
where indicated, that is used in the Business and leased by
the Vendor;
(d) the Vendor is not a party to any lease or agreement to lease
in respect of any real property, whether as lessor or lessee,
and which is in relation to the Business, other than the
Leases described in Schedule "2" Leased Property. Schedule "2"
sets out the parties to each of the leases of the Leased
Property, their dates of execution and expiry dates, any
options to renew, the locations of leased lands and premises
and the rent payable thereunder. Except as described in
Schedule "2", the Vendor occupies the Leased Property and has
the exclusive right to occupy and use the Leased Property.
Each of the Leases of both real and personal property is in
good standing and in full force and effect, and neither the
Vendor nor any other party thereto is in breach of any
covenants, conditions or obligations contained therein. The
Vendor has provided a true and complete copy of each Lease and
all amendments thereto to the Purchaser;
(e) Schedule "5" - Employee Matters, discloses all material
particulars pertaining to the employment or engagement of any
officers, directors, employees, and agents of the Vendor
including particulars of any Contracts, engagements, or
commitments, whether oral or written, respecting bonuses,
commissions, pensions, profit sharing, health benefits, group
insurance and other such benefits;
(f) the Vendor is not, nor is any employer which is associated,
related to or otherwise connected to the Vendor, a party to
any collective agreement relating to the Business with any
union, association of employees or bargaining agent, and no
part of the Business, or any associated, related or otherwise
connected business, is bound by any such collective agreement
or has been certified as a unit appropriate for collective
bargaining and there are no proceedings under any applicable
the labour relations or similar legislation or applications
for certification which are or could result in an obligation
of or be binding upon the Vendor or any employer which is
associated, related to or otherwise connected to the Vendor
and there are no circumstances under which the provisions of
the such labour relations or
<PAGE>
15
similar legislation can apply to the transactions contemplated
by this agreement;
(g) save as disclosed to the Purchaser, the Vendor has not
received notice of any complaints filed by any of the
employees against the Vendor and is not aware of any facts or
circumstances that may give rise to any complaints claiming
that the Vendor has violated any applicable employee or human
rights or similar legislation in jurisdictions in which the
Business is conducted or any complaints or proceedings of any
kind involving the Vendor. All levies, assessments and
penalties made against the Vendor pursuant to any applicable
workers' compensation legislation have been paid by the Vendor
and the Vendor has not been reassessed under any such
legislation;
(h) all accruals for unpaid vacation pay, premiums for
unemployment insurance, health premiums, pension plan
premiums, accrued wages, salaries and commissions and
employment benefit plan payments have been reflected in the
books and records of the Vendor;
(i) except as will be remedied by the consents, approvals,
releases, and discharges described in Schedule "11" - Consents
hereto, neither the execution and delivery of this Agreement
nor the performance of the Vendor's obligations hereunder
will:
(i) violate or constitute default under the constating
documents, by-laws, or articles of the Vendor, any
order, decree, judgment, statute, by-law, rule,
regulation, or restriction applicable to the Vendor,
the Business or any of the Business Assets, or any
Contract, agreement, instrument, covenant, mortgage,
or security, including in particular the Material
Contracts, the instruments described in Schedule "14" -
Assumed Indebtedness, and the matters disclosed in
Schedule "5" - Employee Matters, to which the Vendor
is a party and which relate to the Business or which
are binding upon the Vendor and which relate to the
Business,
(ii) give any person the right to terminate or cancel any
of the Material Contracts, the instruments described
in Schedule "14" - Assumed Indebtedness, or the
employee matters disclosed in Schedule "5" - Employee
Matters,
(iii) result in any fees, duties, taxes, assessments,
penalties or other amounts becoming due or payable,
other than such as may become payable under any
national, federal, state, provincial or local tax
legislation;
<PAGE>
16
(iv) give rise to acceleration of the time for
payment of any moneys payable or for the performance of
any obligation to be performed under the Material
Contracts, the instruments described in Schedule "14" -
Assumed Indebtedness, or the matters disclosed in
Schedule "5" - Employee Matters,
(v) give rise to the creation or imposition of any
Encumbrance on any of the Business Assets, or
(vi) violate or constitute default under any licence, permit,
approval, consent or authorization held by the Vendor
and necessary to the operation of the Business.
(j) except as will be remedied by the releases and
discharges described in Schedule "11", the Vendor owns
and possesses and has good and marketable title to the
Business Assets free and clear of all Encumbrances of
every kind and nature whatsoever except as disclosed in
Schedule "8" - Permitted Encumbrances, hereto;
(k) except as otherwise disclosed in Schedule "3" - Machinery and
Equipment, and reasonable wear and tear excepted, the Business
Assets are in good working order and in a functional state of
repair and to the best of the knowledge of the Vendor there
are no latent defects thereto;
(l) the Business Assets comprise all property and assets used
by the Vendor in connection with the Business;
(m) except as disclosed in Schedule "8" - Permitted Encumbrances,
hereto, the Vendor does not have any indebtedness which might
by operation of law or otherwise now or hereafter constitute
an Encumbrance upon any of the Business Assets;
(n) no person other than the Purchaser has any written or oral
agreement or option or any right or privilege (whether by law,
preemptive or contractual) capable of becoming an agreement or
option for the purchase or acquisition from the Vendor of any
of the Business Assets, other than pursuant to purchase orders
accepted by the Vendor in the ordinary course of the Business;
(o) the Vendor has the exclusive right to possess, use and
occupy the Leased Property. All buildings, structures,
improvements and appurtenances situated on the Leased Property
are in good operating condition and in a state of good
maintenance and repair and are adequate and suitable for the
purposes for which they are currently being used, and the
Vendor has adequate rights of ingress and egress for the
operation of the Business in the ordinary course. Without
limiting the generality of the foregoing:
<PAGE>
17
(i) all accounts for work and services performed and
materials placed or furnished upon or in respect
of the Leased Property at the request of the Vendor
have been fully paid and satisfied, and no person is
entitled to claim a lien under any builders' or
mechanics' lien or similar legislation against the
Leased Property or any part thereof, other than current
accounts in respect of which the payment due date has
not yet passed;
(ii) there is nothing owing in respect of the Leased Property
by the Vendor to any municipal corporation or to any
other corporation or commission owning or operating a
utility for water, gas, electrical power or energy,
steam or hot water, or for the use thereof, other than
current accounts in respect of which the payment due
date has not yet passed; and
(iii) there are no outstanding levies, charges or fees
assessed against the Leased Property by any public
authority (including development or improvement levies,
charges or fees);
(p) except as otherwise provided in this Agreement,
Schedule "4" - Material Contracts, discloses all
Contracts, engagements, and commitments, whether oral
or written, relating to the Business or the Business
Assets including in particular Contracts, engagements,
and commitments:
(i) out of the ordinary course of Business,
(ii) which entail the payment of in excess of $5,000.00
during any one year period,
(iii) respecting ownership of or title to any interest or
claim in or to any real or personal property making up
the Business Assets,
(iv) respecting the Intellectual Property;
(v) respecting any agreement of guarantee, support,
indemnification, assumption or endorsement of, or any
similar commitment with respect to, the obligations,
liabilities (whether accrued, absolute, contingent or
otherwise) or indebtedness of any other
person except for cheques endorsed for collection in
the ordinary course of the Business;
(vi) any employment or consulting Contracts or any other
Contract with any officer, employee or consultant,
other than oral Contracts of indefinite hire terminable
by the Vendor without cause on reasonable notice;
<PAGE>
18
(vii) any profit-sharing, bonus, stock option, pension,
retirement, disability, stock purchase, medical,
dental, hospitalization, insurance or similar plan or
agreement providing benefits to any current or former
director, officer, employee or consultant;
(viii) any trust indenture, mortgage, promissory note, loan
agreement, guarantee or other Contracts for the
borrowing of money or a leasing transaction of the type
required to be capitalized in accordance with generally
accepted accounting principles;
(ix) any Contracts for capital expenditures in excess of
$25,000 in the aggregate;
(x) any Contract for the sale of any assets other than
sales of inventory to customers in the ordinary course
of the Business;
(xi) any Contract pursuant to which the Vendor is a lessor
of any machinery, equipment, motor vehicles,
furniture, fixtures or other personal property;
(xii) any confidentiality, secrecy or non-disclosure
Contract, (whether the Vendor is a beneficiary or
obligant thereunder) relating to any proprietary or
confidential information or any non-competition or
similar Contract;
(q) Schedule "4" - Material Contracts, contains an accurate
and complete description of all material particulars
respecting the Material Contracts and except as
disclosed in said Schedule:
(i) there has not been any default in any obligation or
liability in respect of the Material Contracts by the
Vendor and the Vendor has performed all of the
obligations required to be performed by it and is
entitled to all benefits under the Material Contracts;
(ii) there has not been any amendment, modification,
variation, surrender, or release of the Material
Contracts, and
(iii) each of said Material Contracts is in good standing
and in full force and effect and the Vendor has
performed all of the obligations required to be
performed by it and is entitled to all benefits
thereunder, and is not in default or alleged to be in
default in respect of any Material Contract or any
other Contracts, engagements or commitments provided
for in this Agreement, to which the Vendor is a party
or by which it is bound;
<PAGE>
19
(r) Schedule "14" - Assumed Indebtedness, contains an
accurate and complete description of all instruments
evidencing or pertaining to and all material
particulars respecting the Assumed Indebtedness
including the amounts thereof as at the dates therein
specified (or where the exact amount cannot be
obtained, reasonably accurate estimates thereof) and
the material terms of repayment and interest rates
applicable thereto;
(s) the amount of Assumed Indebtedness at the Closing Date
will not exceed $1,500,000;
(t) all Licences required for the conduct in the
ordinary course of the operations of the Business and the uses
to which the Business Assets have been put have been obtained
and are in good standing and such conduct and uses are in
compliance with such licences and permits and with all laws,
zoning and other bylaws, building and other restrictions,
rules, regulations, and ordinances applicable to the Business
and the Business Assets and neither the execution and delivery
of this Agreement nor the completion of the purchase and sale
hereby contemplated will give any person the right to
terminate or cancel the said licenses or permits or affect
such compliance;
(u) except as disclosed in Schedule "10" - Legal and Regulatory
Proceedings, there are no actions, suits, proceedings,
investigations, complaints, orders, directives, or notices of
defect or non-compliance by or before any court, governmental
or domestic commission, department, board, tribunal, or
authority, or administrative, licensing, or regulatory agency,
body, or officer issued, pending, and to the best of the
Vendor's knowledge threatened against or affecting the Vendor
or in respect of the Business or any of the Business Assets
and which would have a material adverse affect on the
Business;
(v) the Financial Statements of the Vendor attached hereto
as Schedule "1" - Financial Statements, were prepared in
accordance with generally accepted accounting principles
consistently applied and are true and correct and present
fairly and completely the assets, liabilities (whether
accrued, absolute, contingent or otherwise), and the financial
condition of the Vendor and the results of the operation of
the Business for the periods reported thereby. The financial
position and condition of the Vendor is now at least as good
as that shown on or reflected in the interim financial
statements provided to the Purchaser;
(w) the books and records of the Vendor present fairly and
completely in all material respects, in accordance with
generally accepted accounting practices consistently applied,
the matters which said books and records purport to present,
and all material financial transactions of the Vendor relating
to the Business have been accurately recorded in said books
and records;
<PAGE>
20
(x) there is no requirement to make any filing with, give any
notice to or to obtain any licence, permit, certificate,
registration, authorization, consent or approval of, any
governmental or regulatory authority as a condition to the
lawful consummation of the transactions contemplated by this
Agreement, except for the filings, notifications, licences,
permits, certificates, registrations, consents and approvals
described in Schedule "11" - Consents, or that relate solely
to the identity of the Purchaser or the nature of any business
carried on by the Purchaser. There is no requirement under any
Material Contract relating to the Business or the Business
Assets to which the Vendor is a party or by which it is bound
to give any notice to, or to obtain the consent or approval
of, any party to such agreement, instrument or commitment
relating to the consummation of the transactions contemplated
by this Agreement except for the notifications, consents and
approvals described in Schedule "11" - Consents;
(y) since the Adjustment Date, the Business has been carried
on only in the ordinary and normal course consistent with past
practices and there has not been:
(i) any change, event, or circumstance which would
materially adversely affect the affairs,
assets, liabilities, earnings, prospects,
operation, or condition of the Business,
(ii) any Loss, damage, or destruction, whether or not
covered by insurance, which would materially
adversely affect the affairs, prospects, operations,
or condition of the Business or the Business
Assets;
(iii) any material increase in the compensation or benefits
payable or to become payable by the Vendor to any
of its officers, directors, employees, or agents;
(iv) any obligation or liability (whether absolute,
accrued, contingent or otherwise and whether due
or to become due) incurred by the Vendor in connection
with the Business, other than those incurred in the
ordinary and normal course of the Business and
consistent with past practice;
(v) any licence, sale, assignment, transfer, disposition,
pledge, mortgage or granting of a security interest
or other Encumbrance on or over any of the Business
Assets, other than sales of inventory to customers
in the ordinary and normal course of the Business;
(vi) any capital expenditures or commitments relating to
the Business or Business Assets in excess of $10,000;
or
<PAGE>
21
(vii) any change in the accounting or tax practices followed
by the Vendor;
(z) the Vendor has duly filed on a timely basis all tax returns
and reports required to be filed by it including all national,
state and local income tax returns and has paid all taxes that
are due and payable, and all assessments, re-assessments,
governmental charges, penalties, interest and fines due and
payable by it prior to the Closing Date. The Vendor has made
adequate provision for taxes payable in respect of the
Business for the current period and any previous period for
which tax returns are not yet required to be filed. The Vendor
has withheld from each payment made to any of its past or
present employees and officers or directors, the amount of all
taxes and other deductions required to be withheld therefrom,
and has paid the same to the proper tax or other receiving
officers within the time required under any applicable
legislation;
(aa) all required tax returns have been filed and are true,
complete and correct, and all taxes and other government
charges including all income, excise, sales, business and
property taxes and other rates, charges, assessments, levies,
duties, taxes, contributions, fees and licenses required to be
paid have been paid for all periods prior to the Closing Date
and the Vendor does not have any deferred tax liability except
as expressly stated in the Financial Statements;
(bb) there are no agreements, waivers or other arrangements
providing for an extension of time with respect to the filing
of any tax return by or payment of any tax, governmental
charge or deficiency by the Vendor, and to the knowledge of
the Vendor there are no contingent tax liabilities or any
grounds which would prompt a reassessment, including
aggressive treatment of income and expenses in filing earlier
tax returns;
(cc) the Vendor, in respect of the Business and the Business
Assets, has been and is in compliance with all Environmental
Laws;
(dd) the Vendor has obtained all necessary Environmental
Permits. Each Environmental Permit is valid, subsisting and in
good standing, and the Vendor is not in default or breach of
any Environmental Permit and no proceeding is pending or
threatened to revoke or limit any Environmental Permit;
(ee) the Vendor has never received any notice of or been prosecuted
for non-compliance with any Environmental Laws, nor has the
Vendor settled any allegation of non-compliance short of
prosecution. There are no orders or directions relating to
environmental matters requiring any work, repairs or
construction or capital expenditures to be made with respect
to the
<PAGE>
22
Business or the Business Assets, nor has the Vendor
received notice of any of the same;
(ff) the Vendor has not received any notice that the Vendor is
potentially responsible for national, state, municipal or
local clean-up site or corrective action under any
Environmental Laws in connection with the Business. The
Vendor, in connection with the Business, has not received any
request for information in connection with any national,
state, municipal or local inquiries as to disposal sites;
(gg) Schedule "7" - Intellectual Property, sets out:
(i) all worldwide registrations of and
applications for patent, copyright,
trade-mark, industrial design, integrated
circuit topography or other industrial or
intellectual property protection of the
Intellectual Property and the ADI Sharc
processor based board level products and
software systems in general;
(ii) all licences, agreements and other Contracts
that comprise or relate to the ADI Sharc processor
based board level products and software systems and the
Intellectual Property in general;
(iii) all trade or brand names, business names, trade-marks
and service marks of the Vendor used in association
with the ADI Sharc processor based board level
products and software systems and the Intellectual
Property in general; and
(iv) all other industrial or intellectual property necessary
to conduct the Business;
(hh) except as set forth in Schedule "7" - Intellectual Property
hereto, the Vendor is the legal and beneficial owner of the
Intellectual Property Rights and the Intellectual Property,
including that set out in Schedule "7" - Intellectual Property
hereto, free and clear of all Encumbrances, and is not a party
to or bound by any Contract or any other obligation whatsoever
that limits or impairs its ability to sell, transfer, assign
or convey, or that otherwise affects, the Intellectual
Property Rights or the Intellectual Property. No person has
been granted any interest in or right to use all or any
portion of the Intellectual Property;
(ii) the Intellectual Property was created as original works by
employees of the Vendor in the course of their employment, was
created as original works by independent contractors hired by
the Vendor, or was legally obtained by the Vendor from third
parties. The Vendor has obtained written assignments of the
Intellectual Property and the Intellectual Property Rights
from RPA and all other independent contractors involved in the
creation of the Intellectual
<PAGE>
23
Property. As at the Closing Date, the Vendor will have
obtained waivers of moral rights from all employees,
independent contractors and third parties involved in the
creation of the Intellectual Property;
(jj) as at the Closing Date, there are no royalties owing,
due, accruing due or payable by the Vendor to RPA with respect
to any of the Intellectual Property;
(kk) to the knowledge of the Vendor, the conduct of the Business,
including the use of the Intellectual Property, does not
infringe upon the industrial or intellectual property rights,
domestic or foreign, of any other person. The Vendor is not
aware of a claim of any infringement or breach of any
industrial or intellectual property rights of any other
person, nor has the Vendor received any notice that the
conduct of the Business, including the use of the Intellectual
Property, infringes upon or breaches any industrial or
intellectual property rights of any other person, and the
Vendor, after due inquiry, has no knowledge of any
infringement or violation of any of its Intellectual Property
Rights;
(ll) the Vendor is not aware of any state of facts that casts
doubt on the validity or enforceability of any of the
Intellectual Property Rights. The Vendor has provided to the
Purchaser a true and complete copy of all Contracts and
amendments thereto that comprise or relate to the Intellectual
Property and the Intellectual Property Rights;
(mm) the Vendor has the Business Assets insured against Loss or
damage by all insurable hazards or risks on a replacement cost
basis and such insurance coverage will be continued in full
force and effect to and including the Closing Date;
(nn) with respect to the Business:
(i) the Vendor has not since January 31, 1998 made any
payment or loan to, or borrowed any moneys from or is
otherwise indebted to, any officer, director, employee,
shareholder or any other person not dealing at arm's
length with the Vendor or any Affiliate or Associate
of any of the foregoing, except as disclosed in the
Financial Statements and except for usual employee
reimbursements and compensation paid in the ordinary
course of the Business; and
(ii) except for Contracts of employment described in
Schedule "5" - Employee Matters, hereto, the
Vendor is not a party to any Contract with
any officer, director, employee, shareholder or
any other person not dealing at arm's length
with the Vendor or any Affiliate or Associate of
any of the foregoing.
<PAGE>
24
No officer, director or shareholder of the Vendor and no
entity that is an Affiliate or Associate of one or more of
such individuals:
(iii) owns, directly or indirectly, any interest in
(except for shares representing less than one per cent
of the outstanding shares of any class or series of any
publicly traded company), or is an officer, director,
employee or consultant of, any person that is, or is
engaged in business as, a competitor of the
Business or a lessor, lessee, supplier, distributor,
sales agent or customer of the Business;
(iv) owns, directly or indirectly, in whole or in part,
any property that the Vendor uses in the operations
of the Business; or
(v) has any cause of action or other claim whatsoever
against, or owes any amount to, the Vendor in
connection with the Business, except for any
liabilities reflected in the Financial Statements
and claims in the ordinary course of business such as
for accrued vacation pay and accrued benefits under
Employee Plans;
(oo) Schedule "16" - Major Customers, sets out the major
customers of the Business and there has been no
termination or cancellation of, and no modification or
change in, the Vendor's business relationship with any
major customer or group of major customers. The Vendor
has no reason to believe that the benefits of any
relationship with any of the major customers or
suppliers of the Business will not continue after the
Closing Date in substantially the same manner as prior
to the date of this Agreement;
(pp) except as disclosed in Schedule "5" - Employee Matters,
there are no Employee Plans with respect to the employees of
the Vendor;
(qq) there are no liabilities of the Vendor or its Associates
or Affiliates, whether or not accrued and whether or not
determined or determinable, in respect of which the Purchaser
may become liable on or after the Closing Date, other than the
Assumed Indebtedness; and
(rr) neither this Agreement nor any document to be delivered by
the Vendor nor any certificate, report, statement or other
documents furnished by the Vendor in connection with the
negotiation of this Agreement contains or will contain any
untrue statement of a material fact or omits or will omit to
state a material fact necessary to make the statement
contained herein or therein not misleading. The Vendor had
disclosed to the Purchaser everything material or cogent in
connection with the business and affairs of the Vendor and its
status, and nothing stated to the Purchaser has been
misleading.
<PAGE>
25
8. REPRESENTATIONS OF THE PURCHASER
8.1 The Purchaser represents and warrants to the Vendor as
follows, with the intent that the Vendor will rely thereon in entering into this
Agreement and in concluding the purchase and sale contemplated hereby,
that:
(a) the Purchaser is a corporation duly incorporated,
validly existing, and in good standing under the laws
of British Columbia and has the power, authority, and
capacity to enter into this Agreement and to carry out
its terms;
(b) the execution and delivery of this Agreement and the
completion of the transactions contemplated hereby has been
duly and validly authorized by all necessary corporate action
on the part of the Purchaser, and this Agreement constitutes a
valid and binding obligation of the Purchaser in accordance
with its terms;
(c) as at the Closing Date, all necessary steps and corporate
proceedings will have been taken by the Purchaser to duly
create and issue the Spectrum Shares and the Spectrum Warrants
and to reserve the Warrant Shares;
(d) as at the Closing Date, the Spectrum Shares will be duly and
validly created, issued and registered in the name of the
Vendor, or such other name as the Vendor may direct the
Purchaser in writing, and will be outstanding as fully paid
and non-assessable, but will be subject to the Registration
Agreement, the Escrow Agreement and any obligations or
requirements imposed on the Vendor by any and all applicable
securities legislation or securities exchange commission;
(e) as at the Closing Date, all documents will have been filed,
all proceedings will have been taken and all legal
requirements imposed upon the Purchaser will have been
fulfilled under the securities legislation in the Province of
British Columbia and the State of New York to permit the
issuance and sale by the Purchaser and the purchase by the
Vendor of the Spectrum Shares and the Spectrum Warrants and to
reserve the Warrant Shares, subject to the filing by the
Purchaser, within the prescribed time periods, of such reports
as are required under applicable securities legislation;
(f) the Purchaser is a reporting issuer in good standing for the
purposes of the Securities Act (British Columbia) and the
Securities Act (Ontario);
(g) as at the Closing Date, subject in part to the
representations of the Vendor contained in the letter referred
to in Clause 12.1(k)(v), all documents will have been filed,
all requisite proceedings will have been taken, and all
approvals, permits, exemptions, consents, orders and
authorizations required under all applicable securities
legislation and in accordance with the
<PAGE>
26
requirements of the NASDAQ Stock Market and The Toronto Stock
Exchange imposed on the Purchaser will have been obtained for
the valid issuance, delivery, distribution and sale of the
Spectrum Shares and the Spectrum Warrants and the reservation
of the Warrant Shares by the Purchaser and that the Spectrum
Shares will be approved for listing on the NASDAQ Stock Market
and The Toronto Stock Exchange;
(h) the Spectrum Shares, the Spectrum Warrants and the Warrant
Shares are being issued pursuant to certain exemptions from
the registration and prospectus requirements of the Securities
Act (British Columbia) as a result of which the Spectrum
Shares, the Spectrum Warrants and the Warrant Shares will be
restricted from resale within the province of British Columbia
for a period of 12 months from the Closing Date such
restrictions do not however preclude the resale of such
securities outside of British Columbia during the restricted
period;
(i) as of the date of this Agreement, the Purchaser is in good
standing with respect to the filing of annual returns under
the Companies Act (British Columbia);
(j) as at the date of execution of this Agreement, the authorized
capital of the Purchaser consists of 50,000,000 Common Shares,
of which 9,459,397 Common Shares are issued and outstanding as
fully paid and non-assessable; and
(k) to the Purchaser's knowledge, the obligations of the Purchaser
under this Agreement and all agreements referred to herein,
and the creation and issue of the Spectrum Shares and the
Spectrum Warrants will not conflict with the constating
documents of the Purchaser, any existing law applicable to the
Purchaser, and any agreement to which the Purchaser is a
party.
9. COVENANTS OF THE VENDOR
9.1 Between the date of this Agreement and the Closing Date,
the Vendor:
(a) will not sell or dispose of any of the Business Assets,
except only the sale of Inventory in the ordinary
course of business and will preserve the Business
Assets intact without any further Encumbrances;
(b) will not make or agree to make any payment to any of the
officers, directors, employees, or agents of the Vendor except
in the ordinary course of business and at the regular rates of
compensation now in effect or as reasonable reimbursement for
expenses incurred by such persons in connection with the
Business;
<PAGE>
27
(c) will conduct the Business diligently and only in
the ordinary course consistent with past practice, keep the
Business Assets in their present state, and endeavour to
preserve the organization of the Business intact and the
goodwill of the suppliers and customers and others having
business relations with the Vendor relating to the Business;
(d) will maintain insurance coverage of the scope and in the
amounts presently held in full force and effect and shall take
out, at the expense of the Purchaser, such additional
insurance as may reasonably be requested by the Purchaser and
shall give all notices and present all claims under all
policies of insurance in a due and timely fashion;
(e) will afford the Purchaser and its authorized representatives
full access during normal business hours to the Business
Assets and all other property and assets utilized in the
Business and without limitation all title documents, abstracts
of title, deeds, leases, Contracts, financial statements,
policies, reports, licenses, books, records, and other such
material relating to the Business, and furnish such copies
thereof and other information, as the Purchaser may reasonably
request;
(f) will use its best efforts to procure and obtain at or prior
to the Closing Date all such consents, approvals, releases,
and discharges as may be required to effect the transactions
contemplated hereby from all national, state, municipal or
other governmental or regulatory bodies and from all other
third parties as necessary;
(g) will, forthwith upon the execution hereof, deliver to the
Purchaser true copies of the Material Contracts and full
particulars of and true copies of all instruments evidencing
or pertaining to the Assumed Indebtedness;
(h) will, at the request of the Purchaser execute such consents,
authorizations and directions as may be necessary to permit
any inspection of the Business or any of the Business Assets
or to enable the Purchaser or its authorized representatives
to obtain full access to all files and records relating to the
Business or the Business Assets maintained by government or
other public authorities;
(i) will permit the Purchaser's representatives or consultants
to conduct all such testing and inspection in respect of
environmental matters at such locations of the Business as the
Purchaser may determine, in its sole discretion, as may be
required to satisfy the Purchaser in respect of such matters;
(j) will pay and discharge the liabilities of the Vendor
relating to the Business in the ordinary course and consistent
with the previous practice of the Vendor, except those
contested in good faith by the Vendor;
<PAGE>
28
(k) will use its best efforts to take or cause to be taken all
necessary corporate action, steps and proceedings to approve
and authorize validly and effectively the transfer of the
Business Assets to the Purchaser and the execution and
delivery of this Agreement and any other Agreements or
documents contemplated hereby including the passing of a
special resolution of shareholders required by Section 271 of
the General Corporation law of the State of Delaware and to
cause all necessary meetings of directors and shareholders of
the Vendor to be held for such purpose; and
(l) will not, without the prior written consent of the Purchaser,
enter into any transaction or refrain from doing any action
that, if effected before the date of this Agreement, would
constitute a breach of any representation, warranty, covenant
or other obligation of the Vendor contained herein, and the
Vendor shall not enter into any material supply agreements
relating to the Business or make any material decisions or
enter into any material Contracts with respect to the Business
without the consent of the Purchaser, which consent shall not
be unreasonably withheld.
9.2 For a reasonable period after the Closing Date, the Vendor
will, at the request of the Purchaser, allow and execute such consents,
authorizations and directions as may be necessary to permit the Purchaser
or its authorized representatives full access to all corporate, financial
and other files and records of the Vendor relating to the Business or the
Business Assets and such files and records relating to the Business or
the Business Assets as are maintained by government or other public
authorities.
9.3 The Vendor will within 30 days after the Closing Date,
change its name to a name dissimilar to the Business name, but the
Purchaser recognizes the existing and future right of the Principal and
Associates and Affiliates of the Principal to use names which include the
word "Alex". However, the Vendor and the Principal hereby agree that they
will not, and they will cause their Associates and Affiliates not to, use
the word "Alex" or the name "Alex Computer Systems", or any variation
thereof, as a corporate name, business name, trade name or trade-mark in
the Digital Signal Processor ("DSP") marketplace or in connection with
DSPs.
9.4 The Vendor and the Principal covenant and agree to indemnify
and hold harmless the Purchaser from and against:
(a) except as to the Assumed Indebtedness which by the
terms hereof are specifically to be assumed or paid by
the Purchaser, any and all debts, obligations, and
liabilities, whether accrued, absolute, contingent, or
otherwise, existing immediately prior to the Adjustment
Date, respecting the Business or the Business Assets
and any amount by which the Assumed Indebtedness
exceeds the sum of $1,500,000; and the Purchaser may,
but will not be bound to, pay or perform same and all
moneys so paid by the Purchaser in doing so will
constitute indebtedness of the Vendor to the Purchaser
hereunder;
<PAGE>
29
(b) any and all damage or deficiency resulting from any
misrepresentation, misstatement, breach of warranty, or the
non-fulfilment of any covenant on the part of the Vendor under
this Agreement or under any document or instrument delivered
pursuant hereto or in connection herewith;
(c) any and all claims, actions, suits, proceedings, demands,
assessments, judgments, charges, penalties, costs, and
expenses (including the full amount of all reasonable legal
expenses invoiced to the Purchaser) which arise or are made or
claimed against or are suffered or incurred by the Purchaser
in respect of any of the foregoing; and
(d) any and all Losses suffered or incurred by the Purchaser as a
result of or arising directly or indirectly out of or in
connection with the operation of the Business up to the
Closing Date.
9.5 The Vendor, the Principal and the Purchaser acknowledge and
agree that the aggregate liability of the Vendor and the Principal to the
Purchaser in respect of indemnification claims made by the Purchaser
under Clause 9.4 shall not exceed the aggregate amount of EIGHT MILLION
NINE HUNDRED AND SIXTY-ONE THOUSAND ($8,961,000) Dollars, and that no
claims for indemnification may be made by the Purchaser against the
Vendor or the Principal pursuant to Clause 9.4 unless and until said
claims exceed FIFTY THOUSAND ($50,000) Dollars in the aggregate, in which
event the amount of all such claims may, subject to the terms and
conditions hereof, be recovered by the Purchaser.
9.6 The Vendor will, effective the Closing Date, terminate the
employment of all employees of the Business and will be responsible for all
wages, salaries, bonuses, benefits, termination or severance pay, holiday pay,
and all other compensation and benefits owing to said employees and all
remittances payable to the Internal Revenue Service, any workers compensation
authority, Medical or Health Plans and all Employee Plans, and other such
remittances, in respect of any period up to and including the Closing Date or
which become payable by reason of the purchase and sale contemplated hereby. The
Vendor will not be liable for any employee liabilities arising after the Closing
Date except those employee liabilities associated with employees of the Vendor
who do not accept employment with the Purchaser.
9.7 The exercise of any rights or inspection by or on behalf of
the Purchaser under Clause 9.1 shall not mitigate or otherwise affect any of the
representations and warranties of the Vendor and the Principal hereunder which
shall continue in full force and effect as provided in Clause 7.1.
10. COVENANTS OF THE PURCHASER
10.1 Between the date of this Agreement and the Closing Date, the
Purchaser will make all reasonable efforts to obtain and procure in
co-operation with the Vendor all consents, approvals, releases, and
discharges required to effect the transactions contemplated hereby.
<PAGE>
30
10.2 Without limiting the provisions of Clauses 6.1 and 6.2
hereof, the Purchaser will, from and after the Closing Date, pay as and when
same become due and payable all debts and liabilities of the Business which
relate to any period after the Adjustment Date and punctually observe and
perform all obligations to be performed in respect of the Business which relate
to any period after said date. The Purchaser will indemnify and save harmless
the Vendor from and against:
(a) all claims, actions, suits, proceedings, demands,
assessments, judgments, charges, penalties, costs, and
expenses (including the full amount of all reasonable
legal expenses invoiced to the Vendor) which arise or
are made or claimed against or suffered or incurred by
the Vendor as a result of the Purchaser's failure to so
pay, observe, or perform including the Purchaser's
failure to pay, satisfy, discharge, perform or fulfil
any of the Assumed Indebtedness;
(b) any breach by the Purchaser of or any inaccuracy of any
representation or warranty contained in this Agreement or in
any agreement, instrument, certificate or other document
delivered pursuant hereto; and
(c) any breach or non-performance by the Purchaser of any
covenant to be performed by it that is contained in this
Agreement or in any agreement, certificate or other document
delivered pursuant hereto.
10.3 The Purchaser undertakes to offer employment to all of the
Vendor's employees on terms at least as favourable as the terms under which said
employees are currently employed by the Vendor. The Purchaser covenants to
assume all employee expenses as of the Adjustment Date and employee liabilities
as of the Closing Date for those employees of the Vendor who accept employment
with the Purchaser.
10.4 The Vendor, the Principal and the Purchaser acknowledge
and agree that the aggregate liability of the Purchaser in respect of
indemnification claims made by the Vendor under Clause 10.2 shall not exceed the
aggregate amount of TWO MILLION ($2,000,000) Dollars, and that no claims for
indemnification may be made by the Vendor against the Purchaser pursuant to
Clause 10.2 unless and until said claims exceed FIFTY THOUSAND ($50,000) Dollars
in the aggregate, in which event the amount of all such claims may, subject to
the terms and conditions hereof, be recovered by the Vendor.
11. NON MERGER
11.1 The representations, warranties, covenants, and agreements
of the Vendor and the Principal contained herein and those contained in the
documents and instruments delivered pursuant hereto or in connection herewith
will survive the Closing Date for a period of two (2) years, with the exception
of those representations, warranties, covenants, and agreements of the Vendor
with respect to title to the Business Assets, the Intellectual Property and all
environmental matters all of which shall survive the Closing Date indefinitely,
and notwithstanding the completion of the transactions contemplated hereby, the
waiver of any condition contained herein (unless such waiver
<PAGE>
31
expressly releases the Vendor and the Principal of such representation,
warranty, covenant, or agreement), or any investigation by the Purchaser, same
will remain in full force and effect.
11.2 The representations, warranties, covenants, and
agreements of the Purchaser contained herein and those contained in the
documents and instruments delivered pursuant hereto or in connection herewith
will survive the Closing Date for a period of two (2) years, and notwithstanding
the completion of the transactions contemplated hereby, the waiver of any
condition contained herein (unless such waiver expressly releases the Purchaser
of such representation, warranty, covenant, or agreement), or any investigation
by the Vendor, same will remain in full force and effect.
12. CONDITIONS PRECEDENT
12.1 The obligation of the Purchaser to consummate the transactions
herein contemplated is subject to the fulfilment of each of the following
conditions precedent at the times stipulated:
(a) that the representations and warranties of the Vendor
and the Principal contained herein are true and correct
on and as at the Closing Date with the same force and
effect as if such representations and warranties were
made as at the Closing Date, except as may be in
writing disclosed to and approved by the Purchaser;
(b) that all the terms, covenants, conditions, agreements, and
obligations hereunder on the part of the Vendor to be
performed or complied with at or prior to the Closing Date,
including in particular the Vendor's and the Principal's
obligations to deliver the documents and instruments herein
provided for in Clauses 13 and 14 respectively, have been
performed and complied with as at the Closing Date;
(c) that between the date hereof and the Closing Date no change,
event, or circumstance has occurred which materially adversely
affects the Business Assets or the prospects, operation, or
condition of the Business or which, significantly reduces the
value of the Business or the Business Assets to the Purchaser;
(d) that between the date hereof and the Closing Date there
has not been any substantial Loss, damage, or destruction,
whether or not covered by insurance, to any of the Business
Assets;
(e) no legal or regulatory action or proceeding shall
be pending or threatened by any person to enjoin, restrict or
prohibit the purchase and sale of the Business Assets
contemplated hereby;
(f) that at the Closing Date, there shall have been obtained
from all appropriate national, state, municipal or other
governmental or administrative bodies such licences, permits,
consents, approvals, certificates, registrations and
<PAGE>
32
authorizations as are required to be obtained by the Vendor to
permit the change of ownership of the Business Assets
contemplated hereby, and all notices, consents and approvals
with respect to the transfer or assignment of the Material
Contracts, including those described in Schedule "4" hereof
have been obtained;
(g) that at the Closing Date, there shall have been
delivered to the Purchaser an opinion of Vendor's
counsel in form and content satisfactory to Purchaser's
counsel;
(h) that at the Closing Date, the Vendor shall have given
or obtained the notices, consents and approvals
described in Schedule "11" - Consents, including the
consent of Softech, Inc. to the transaction
contemplated by this Agreement, in each case in form
and substance satisfactory to the Purchaser, acting
reasonably;
(i) that at the Closing Date, the Purchaser will have completed
a due diligence review of the Vendor and the Business Assets
to the Purchaser's satisfaction;
(j) that at the Closing Date, the Vendor and the Principal
will have executed and delivered, in a form satisfactory to
the Purchaser:
(i) a Non-Competition Agreement in the form attached as
Schedule "13" - Non-Competition Agreement hereto;
(ii) a Non-Solicitation Agreement in the form attached as
Schedule "18" - Non-Solicitation Agreement hereto;
(iii) a Confidentiality Agreement in the form attached as
Schedule "19" - Confidentiality Agreement hereto;
(iv) the Escrow Agreement in substantially the form
attached as Schedule "21" - Escrow Agreement hereto; and
(v) an investment representation letter in substantially
the form attached as Schedule "25" hereto;
(k) that at the Closing Date, an employment agreement and a
non-competition agreement satisfactory to the Purchaser
will have been executed by Mr. Andrew Talbot;
(l) that at the Closing Date, a two year engineering consulting
services agreement satisfactory to the Purchaser will have
been executed by RPA;
(m) that the Board of Directors of the Purchaser has approved the
transactions contemplated herein;
<PAGE>
33
(n) that at the Closing Date, all necessary regulatory
authorities have approved or consented to the issuance of the
Spectrum Shares and the Spectrum Warrants.
The foregoing conditions of this Clause 12.1 are for the exclusive benefit of
the Purchaser and may be waived in whole or in part by the Purchaser at any
time. If any of the conditions contained in this Clause 12.1 shall not be
performed or fulfilled at or prior to the Closing Date to the satisfaction of
the Purchaser, acting reasonably, the Purchaser, may, by notice to the Vendor,
terminate this Agreement and the obligations of the Vendor and the Purchaser
under this agreement, provided that the Purchaser may also bring an action
pursuant to Clause 9.4 against the Vendor and the Principal for damages suffered
by the Purchaser where the non-performance or non-fulfilment of the relevant
condition is as a result of a breach of covenant, representation or warranty by
the Vendor or the Principal.
12.2 The obligation of the Vendor to consummate the transactions
herein contemplated is subject to the fulfilment of each of the following
conditions precedent at the times stipulated:
(a) that the representations and warranties of the
Purchaser contained herein are true and correct on and
as of the Closing Date with the same force and effect
as if such representations and warranties were made as
at the Closing Date, except as may be in writing
disclosed to and approved by the Vendor;
(b) that all terms, covenants, conditions, agreements, and
obligations hereunder on the part of the Purchaser to be
performed or complied with at or prior to the Closing,
including in particular the Purchaser's obligation to deliver
the documents and instruments herein provided for in Clause
15, have been performed and complied with as at the Closing;
(c) that at the Closing Date, there shall have been delivered
to the Vendor an opinion of Purchaser's counsel in form and
content satisfactory to Vendor's counsel that, inter alia:
(i) the Purchaser is in good standing,
(ii) the Agreement is not in conflict with the Purchaser's
constating documents,
(iii) the execution, delivery and performance of this
Agreement has been authorized by all necessary
corporate action, and
(iv) the Spectrum Shares have been duly and validly created,
authorized, allotted and issued as fully paid and
non-assessable shares; and
(d)
<PAGE>
34
(e) that at the Closing Date, all necessary authorities have
approved or consented to the issuance of the Spectrum Shares
and the Spectrum Warrants.
The foregoing conditions of this Clause 12.2 are for the exclusive benefit of
the Vendor and may be waived in whole or in part by the Vendor at any time. If
any of the conditions contained in this Clause 12.2 shall not be performed or
fulfilled at or prior to the Closing Date to the satisfaction of the Vendor
acting reasonably, the Vendor may, by notice to the Purchaser, terminate this
Agreement and the obligations of the Vendor and the Purchaser under this
Agreement, provided that the Vendor may also bring an action pursuant to Clause
10.2 against the Purchaser for damages suffered by it where the non-performance
or non-fulfilment of the relevant condition is as a result of a breach of
covenant, representation or a warranty by the Purchaser.
13. TRANSACTIONS OF THE VENDOR AT THE CLOSING
13.1 At the Closing Date, the Vendor will execute and deliver or
cause to be executed and delivered all deeds, conveyances, bills of sale,
transfers, assignments, agreements, certificates, documents, and instruments as
may be necessary to effectively vest good and marketable title to the Business
Assets in the Purchaser free and clear of any Encumbrances (except the Permitted
Encumbrances or as may be otherwise specifically provided herein) and without
limiting the foregoing, will execute and deliver or cause to be executed and
delivered:
(a) an assignment of the leasehold estate in and to the Leased
Property;
(b) the Assignment and Assumption Agreement described in Clause
6.2 hereof;
(c) a bill of sale (Absolute) for the Equipment;
(d) a general conveyance of the Business Assets;
(e) all consents, approvals, releases, and discharges as may be
required to effect the transactions contemplated hereby,
including in particular those described in Schedule "11" -
Consents;
(f) signed letters on the Vendor's letterhead in the
form attached hereto as Schedule "15" and addressed envelopes
directed to each of the regular customers of the Business;
(g) a certified copy of a resolution of the Directors of the
Vendor duly passed authorizing the execution and delivery of
this Agreement and the completion of the transactions
contemplated hereby;
(h) a certified copy of a special resolution of the shareholders
of the Vendor duly passed authorizing and approving the sale
of the Business Assets as contemplated hereby pursuant to
Section o 271 of the General Corporation Law of the State of
Delaware;
<PAGE>
35
(i) a certificate of an officer of the Vendor dated
the Closing, acceptable in form and content to the solicitors
for the Purchaser, certifying that the conditions set out in
Clause 12.1 have been satisfied;
(j) for the purposes of Clauses 6.1 hereof, a certificate of an
officer of the Vendor setting forth the names and addresses of
the creditors pertaining to the Assumed Indebtedness and the
amount of the indebtedness or liability due or payable to each
such creditor;
(k) certificates of payment issued by the appropriate government
authorities certifying that all requisite taxes under
national, state and local tax legislation owing by the Vendor
have been paid;
(l) the favourable legal opinion of the solicitors for the Vendor,
in form satisfactory to solicitors for the Purchaser, to the
effect that all necessary steps and corporate proceedings have
been taken by the Vendor to permit the sale of the Business
and the Business Assets as contemplated hereby, that this
Agreement and all documents and instruments delivered pursuant
hereto have been duly and validly authorized, executed, and
delivered by the Vendor and will constitute valid and legally
binding obligations of the Vendor, and confirming such other
matters as the Purchaser's solicitors may reasonably require;
(m) a Non-Competition Agreement in the form attached hereto as
Schedule "13", duly executed by the Vendor and the Principal;
(n) a Non-Solicitation Agreement in the form attached as
Schedule "18", duly executed by the Vendor and the Principal;
(o) a Confidentiality Agreement in the form attached as
Schedule "19", duly executed by the Vendor and the Principal;
(p) an investment letter in substantially the form attached hereto
as Schedule "25", duly executed by the Vendor;
(q) all such documents and instruments as may be necessary to
transfer or assign the Intellectual Property;
(r) executed releases by any third parties which have any
Encumbrances against the Business Assets other than the
Permitted Encumbrances;
(s) certified copies of any and all insurance policies relating to
the Business and Business Assets with transfer and consent
forms duly endorsed;
<PAGE>
36
(t) executed assignments of all Leases described under the heading
Leased Property in Schedule "2" and all leases of personal
property as described in Schedule "4" - Material Contracts;
(u) the License Agreement respecting the grant to the
Purchaser of the right to use the "Alex Computer Systems"
name;
(v) an executed Escrow Agreement in substantially the form
attached as Schedule "21" - Escrow Agreement hereto; and
(w) all such other documents and instruments as the Purchaser's
solicitors may reasonably require.
14. TRANSACTIONS OF THE PRINCIPAL AT THE CLOSING
14.1 At the Closing Date, the Principal will execute and deliver
or cause to be executed and delivered all certificates, documents, and
instruments as may be necessary and consistent with its representations and
covenants contained herein, and without limiting the foregoing, will execute and
deliver or cause to be executed and delivered:
(a) the consent of Softech, Inc. to the transaction contemplated
by this Agreement;
(b) a Non-Competition Agreement in the form attached hereto as
Schedule "13", duly executed by the Vendor and the Principal;
(c) a Non-Solicitation Agreement in the form attached as
Schedule "18", duly executed by the Vendor and the Principal;
(d) a Confidentiality Agreement in the form attached as
Schedule "19", duly executed by the Vendor and the Principal;
(e) the License Agreement respecting the grant to the
Purchaser of the right to use the "Alex Computer Systems"
name;
(f) all such other documents and instruments as the Purchaser's
solicitors may reasonably require.
15. TRANSACTIONS OF THE PURCHASER AT THE CLOSING
15.1 At the Closing the Purchaser will deliver or cause to be
delivered to the Vendor:
(a) the Spectrum Shares;
(b) the Spectrum Warrants;
(c) the Assumption Agreement described in Clause 6.1 hereof;
<PAGE>
37
(d) a solicitors' trust account cheque payable to the Vendor's
solicitors in trust for the balance of the Purchase Price;
(e) a certified copy of a resolution of the Directors of the
Purchaser duly passed authorizing the execution and delivery
of this Agreement and the completion of the transactions
contemplated hereby;
(f) a certified copy of a resolution of the Directors of the
Purchaser duly passed authorizing the allotment and issuance
of the Spectrum Shares and the Spectrum Warrants and reserving
the Warrant Shares;
(g) a certificate of the secretary of the Purchaser dated as of
the Closing Date, acceptable in form and content to the
solicitors for the Vendor, certifying that the conditions
precedent set out in Clause 12.2 have been satisfied;
(h) the favourable legal opinion of the solicitors for the
Purchaser, in form satisfactory to solicitors for the Vendor
and the Principal, to the effect that all necessary steps and
corporate proceedings have been taken by the Purchaser to
permit the purchase of the Business and the Business Assets as
contemplated hereby, that this Agreement and all documents and
instruments delivered pursuant hereto have been duly and
validly authorized, executed, and delivered by the Purchaser
and will constitute valid and legally binding obligations of
the Purchaser, and confirming such other matters as the
Vendor's and the Principal's solicitors may reasonably
require;
(i) the Assignment and Assumption Agreement described in Clause
6.2 hereof;
(j) confirmation from the British Columbia and Ontario Securities
Commissions that the Purchaser is a reporting issuer in good
standing;
(k) The Toronto Stock Exchange acceptance letter regarding the
Spectrum Shares; and
(l) all such other documents and instruments as the Vendor or its
solicitors may reasonably require.
16. BULK SALES COMPLIANCE
16.1 The Purchaser hereby waives compliance by the Vendor with the
provisions of the bulk sales laws of any state of the United States of America,
and the Vendor warrants and agrees to pay and discharge when due all claims of
creditors that could be asserted against the Purchaser by reason of such
non-compliance to the extent such liabilities are not specifically assumed by
the Purchaser pursuant hereto. Notwithstanding Clause 9.5 hereof, the Vendor
hereby agrees to indemnify and hold the Purchaser harmless from, against and in
respect of (and shall on demand reimburse the Purchaser for) any Losses suffered
or incurred by the Purchaser by reason of the failure of the Vendor to pay or
discharge any such claim.
<PAGE>
38
17. TAXES
17.1 The Purchaser shall be liable for and shall pay all national,
federal, state and provincial sales taxes (including any retail sales taxes and
land transfer taxes) and all other taxes, duties, fees or other like charges of
any jurisdiction properly payable in connection with the transfer of the
Business Assets by the Vendor to the Purchaser or the transaction contemplated
by this Agreement, excepting any and all income or corporate taxes of the Vendor
and the Principal.
17.2 The Purchaser acknowledges that the Purchaser shall pay
all taxes with respect to the ownership, use and operation of the Business
Assets after the Closing Date.
18. ASSETS AT RISK
18.1 From the date hereof to the Closing Date, the Business Assets
will remain at the risk of the Vendor. If any of the Business Assets are lost,
damaged, or destroyed prior to the time of Closing, the Purchaser may in lieu of
terminating this Agreement pursuant to Clause 12.1 elect by notice in writing to
the Vendor to complete the purchase to the extent possible, and at the option of
the Purchaser, either:
(a) the Purchase Price will be reduced by an amount equal
to the cost of making good such Loss, damage, or
destruction; or
(b) the Vendor will assign and pay over to the Purchaser all
insurance moneys payable in respect of such Loss, damage, or
destruction.
19. COSTS, PENALTIES AND LIQUIDATED DAMAGES
19.1 Subject to Clause 19.2, each of the Vendor, the Principal
and the Purchaser will bear its own costs with respect to the transactions
contemplated by this Agreement.
19.2 Notwithstanding Clause 19.1, the costs related to the
registration of the Spectrum Shares and the Spectrum Warrants only with the
Securities and Exchange Commission will be borne as follows:
(a) by the Purchaser, reasonable legal and accounting fees to a
maximum of NINETEEN THOUSAND ($19,000) DOLLARS; and
(b) by the Vendor, all legal and accounting fees in excess of
NINETEEN THOUSAND ($19,000) DOLLARS.
19.3 If the condition precedent in Clause 12.1(h) of this
Agreement is not satisfied as at the Closing Date and the transaction
contemplated by this Agreement is not completed:
(a) the Vendor will, forthwith upon receiving a statement
thereof from the Purchaser, indemnify the Purchaser for
the full amount of all costs and expenses reasonably
incurred by the Purchaser in pursuing the transaction
contemplated by this Agreement, including, all auditing
costs, legal costs
<PAGE>
39
and expenses (on a solicitor and own client basis) and the
costs of due diligence, arising between March 12, 1998 and the
Closing Date, or such other date as the failure to complete
the transaction contemplated by this Agreement is acknowledged
in writing by the Purchaser and the Principal; and
(b) the Principal will forthwith pay to the Purchaser the sum of
ONE HUNDRED THOUSAND ($100,000) DOLLARS, which sum the
Principal expressly agrees is not a penalty but rather is a
genuine pre-estimate of the liquidated damages that the
Purchaser will suffer (in excess of the costs indemnified by
the Vendor pursuant to Clause 19.3(a) of this Agreement) as a
result of the Principal's failure to satisfy the condition
precedent in Clause 12.1(h) of this Agreement.
19.4 If the Purchaser fails to file a registration statement in
accordance with Clause 20.1 of this Agreement, within the time limit set out
therein, then the Purchaser will pay to the Principal the sum of ONE HUNDRED
THOUSAND ($100,000) DOLLARS, which sum the Purchaser expressly agrees is not a
penalty but rather is a genuine pre-estimate of the liquidated damages that the
Principal will suffer as a result of the Purchaser's failure to comply with
Clause 20.1 of this Agreement, provided that such failure to file is not due in
any way to any act, error or omission of the Vendor or the Principal.
Notwithstanding such payment by the Purchaser, the obligation of the Purchaser
pursuant to Clause 20.1 to file a registration statement shall continue. The
Vendor acknowledges that the Purchaser may be required to prepare or obtain
certain financial statements of the Vendor in order to file or submit such
registration statement with or to the U.S. Securities and Exchange Commission,
and the Vendor agrees to fully co-operate and assist the Purchaser in preparing
such financial statements.
20. REGISTRATION AND HOLDBACK AGREEMENTS
20.1 In accordance with the Registration Agreement attached as
Schedule "22" - Registration Agreement hereto, the Purchaser will file, as soon
as is reasonably practical but within sixty (60) days after the Closing Date, a
single demand registration of the Spectrum Shares and the Spectrum Warrants by
filing a registration statement with the United States Securities and Exchange
Commission, which registration will remain effective for a period of one (1)
year from the Closing Date.
20.2 The Vendor will not sell or transfer more than twenty-five
(25%) per cent of the Spectrum Shares held by the Vendor in a calendar quarter,
for a period of eighteen (18) months from the Closing Date, and will enter into
an escrow agreement on terms and conditions to the reasonable satisfaction of
the Purchaser, the Vendor and the Principal.
20.3 The Vendor and the Principal have agreed to a holdback equal
to seven and one-half (7-1/2%) percent of the Spectrum Shares to be held by an
escrow agent as indemnification for and in respect of losses suffered or
incurred by the Purchaser for which the Vendor or Principal are obligated to
indemnify the Purchaser pursuant to Clause 9.4 hereof and in accordance with the
provisions of an escrow agreement which shall be on terms and conditions to the
reasonable
<PAGE>
40
satisfaction of the Purchaser, the Vendor and the Principal, and in
accordance with the terms described in that certain letter dated April 13, 1998
from the Purchaser to the Principal and accepted by the Principal on April 13,
1998, and which is annexed hereto as Schedule "23".
21. AGENTS
21.1 The Vendor warrants to the Purchaser that no agent or other
intermediary has been engaged by the Vendor in connection with the
purchase and sale herein contemplated, and if there are any agent's
commissions which become due and payable such costs and expenses will be
the sole liability of the Vendor.
22. FURTHER ASSURANCES
22.1 From time to time subsequent to the Closing Date, the parties
covenant and agree, at the expense of the requesting party, to promptly
execute and deliver all such further documents and instruments and do all
such further acts and things as may be required to carry out the full
intent and meaning of this Agreement and to effect the transactions
contemplated hereby.
23. PAYMENT
23.1 If this Agreement contains subject conditions then
notwithstanding anything to the contrary contained herein the Purchaser will pay
the Vendor as outright and non-refundable consideration, the sum of $100.00 upon
the Vendor signing this Agreement and in consideration therefor the Vendor
covenants and agrees not to withdraw its acceptance of the offer constituted by
this Agreement, prior to the time for removal of any subject conditions
contained herein.
24. ASSIGNMENT
24.1 This Agreement may not be assigned by any party hereto
without the prior written consent of the other parties hereto.
25. SUCCESSORS AND ASSIGNS
25.1 This Agreement will enure to the benefit of and be binding
upon the parties hereto and their respective successors and permitted assigns.
26. JOINT AND SEVERAL COVENANTS
26.1 All representations, warranties, covenants, agreements,
liabilities, and obligations entered into or imposed upon the Vendor or the
Principal hereunder will be deemed to be both joint and several as between the
Vendor and the Principal.
27. COUNTERPARTS
27.1 This Agreement may be executed in several counterparts, each
of which will be deemed to be an original and all of which will together
constitute one and the same instrument.
<PAGE>
41
28. NOTICES
28.1 Any notice required or permitted to be given under this
Agreement will be in writing and may be given by personal service or by prepaid
registered mail, posted in Canada, and addressed to the proper party at the
address stated below:
(a) if to the Vendor:
Goodman, Phillips and Vineberg
1501 McGill College Avenue - 26th Floor
Montreal, PQ H3A 3N9
CANADA
Attention: Claude Jodoin
------------------------
(b) if to the Principal:
ALEX INFORMATICS INC.
1930 Gagnon Street
Lachine, PQ H8T 3M6
CANADA
Attention: Marc R. Labrosse
---------------------------
(c) if to the Purchaser:
SPECTRUM SIGNAL PROCESSING INC., Suite 100, 8525 Baxter
Place Burnaby, British Columbia V5A 4V7
CANADA
Attention: General Counsel
--------------------------
or to such other address as any party may specify by notice. Any notice sent by
registered mail as aforesaid will be deemed conclusively to have been
effectively given on the fifth business day after posting; but if at the time of
posting or between the time of posting and the third business day thereafter
there is a strike, lockout or other labour disturbance affecting postal service,
then such notice will not be effectively given until actually received.
29. TENDER
29.1 Tender may be made upon the Vendor or Purchaser or upon the
solicitors for the Vendor or Purchaser and money may be tendered by bank draft
issued by a Canadian chartered bank. If the Vendor or the Purchaser is comprised
of more than one person, then tender on any one person will be sufficient.
<PAGE>
42
30. REFERENCE DATE
30.1 This Agreement is dated for reference the 20th day of
March, 1998, but will become binding as of the date of execution and delivery by
all parties hereto and subject to compliance with the terms and conditions
hereof, the transfer and possession of the Business Assets shall be deemed to
take effect as at the close of business on the Closing Date.
31. REFERENCES TO AGREEMENT
31.1 The terms "this Agreement", "hereof", "herein", "hereby",
"hereto", and similar terms refer to this Agreement and not to any particular
clause, paragraph or other part of this Agreement. References to particular
clauses are to clauses of this Agreement unless another document is specified.
IN WITNESS WHEREOF the parties have executed and delivered these presents
on the 17th day of April, 1998.
THE CORPORATE SEAL OF SPECTRUM SIGNAL PROCESSING INC. was )
hereunto affixed in the presence of: )
)
/s/ Barry Jinks )
- -------------------------------------- )
Authorized Signatory )
) C/S
- -------------------------------------- )
Authorized Signatory )
)
THE CORPORATE SEAL OF ALEX COMPUTER SYSTEMS, INC. was )
hereunto affixed in the presence of: )
)
/s/ Andrew Talbot )
- -------------------------------------- )
Authorized Signatory )
) C/S
- -------------------------------------- )
Authorized Signatory )
)
<PAGE>
43
THE CORPORATE SEAL OF ALEX INFORMATICS INC. was hereunto )
affixed in the presence of: )
)
/s/ Andrew Talbot )
- -------------------------------------- )
Authorized Signatory )
) C/S
- -------------------------------------- )
Authorized Signatory )
)
<PAGE>
LIST OF SCHEDULES
Schedule Description
1 Financial Statements
2 Leased Property
3 Machinery and Equipment
4 Material Contracts
5 Employee Matters
6 Licences and Permits
7 Intellectual Property
8 Permitted Encumbrances
9 Insurance Policies
10 Legal and Regulatory Proceedings
11 Consents
12 Environmental Matters
13 Non-Competition Agreement
14 Assumed Indebtedness
15 Form of Letter to regular and major customers
16 Major Customers
17 Assignment and Assumption Agreement
18 Non-Solicitation Agreement
19 Confidentiality Agreement
20 Spectrum Warrant
21 Inventory
22 Registration Agreement
23 Escrow Agreement
24 Assumption Agreement
25 Investment Representation Letter
26 Warrant Valuation
<PAGE>
REGISTRATION AGREEMENT
Dated as of April 30, 1998
among
SPECTRUM SIGNAL PROCESSING INC.
and
ALEX COMPUTER SYSTEMS, INC.
<PAGE>
REGISTRATION AGREEMENT
This Registration Agreement (this "Agreement") is made
and entered into as of April 30, 1998, among Spectrum Signal Processing
Inc., a corporation incorporated pursuant to the Laws of the Province of
British Columbia ("Spectrum") and Alex Computer Systems, Inc., a Delaware
corporation (the "Shareholder").
This Agreement is made pursuant to the Asset Purchase
Agreement, dated as of April __, 1998, by and among Spectrum, Alex
Informatics Inc. and the Shareholder (the "Acquisition Agreement"), which
provides for the issuance by Spectrum to the Shareholder of certain
common shares of Spectrum ("Common Shares"), and certain warrants to
purchase Common Shares. In order to induce the Shareholder to enter into
the Acquisition Agreement, Spectrum has agreed to provide the
registration rights set forth in this Agreement.
The parties hereby agree as follows:
SECTION 1. DEFINITIONS.
Capitalized terms used herein and not otherwise defined
shall have the meanings assigned to those terms in the Acquisition
Agreement. As used in this Agreement, the following capitalized terms
shall have the following meanings:
Advice: As defined in Section 3(c) hereof.
Exchange Act: The Securities Exchange Act of 1934, as
amended.
NASD: National Association of Securities Dealers, Inc.
Prospectus: The prospectus included in any Registration
Statement, as amended or supplemented by any prospectus supplement and by
all other amendments thereto (including post-effective amendments) and
all material incorporated by reference in such prospectus.
Registrable Securities: Registrable Securities means,
collectively, (i) the Common Shares issued pursuant to Clause 15.1(a) of
the Acquisition Agreement (the "Issued Securities") and (ii) the Common
Shares issuable upon exercise of the warrants issued pursuant to Clause
15.1(b) of the Acquisition Agreement (such Registrable Securities to be
adjusted for any stock dividend, subdivision, split, combination or
exchange in respect of such shares).
Registration Expenses: As defined in Section 4 hereof.
Registration Statement: Any registration statement of
Spectrum which covers any of the Registrable Securities pursuant to the
provisions of this Agreement, including the Prospectus, amendments and
supplements to such registration statement
-1-
<PAGE>
(including post-effective amendments), and all exhibits to and all
material incorporated by reference in such registration statement.
SEC: The Securities and Exchange Commission.
Securities Act: The Securities Act of 1933, as amended.
Shelf Registration: As defined in Section 2(a) hereof.
Stop Order: As defined in Section 3(a)(iii) hereof.
SECTION 2. SHELF REGISTRATION.
(a) As promptly as practicable after the Closing Date
(but in any event on or before the 60th day after the Closing Date (the
"Target Date"), Spectrum shall file with the SEC (or submit to the SEC
for review on a confidential basis) a "shelf" registration with respect
to all Registrable Securities on any appropriate form pursuant to Rule
415 (or similar rule that may be adopted by the SEC) under the Securities
Act (the "Shelf Registration") and shall use its reasonable good faith
efforts to have such Shelf Registration declared effective by the SEC as
promptly as practicable thereafter. In the event Spectrum does not file
or otherwise submit to the SEC for review the Shelf Registration on or
prior to the Target Date, Spectrum shall pay to the Shareholder the sum
of Cdn$100,000, provided that the payment of such sum shall not relieve
Spectrum of its other obligations under this Agreement, which shall
remain in effect.
(b) Spectrum shall use its reasonable good faith
efforts to keep the Shelf Registration continuously effective until the
earliest to occur of (i) all of the Registrable Securities having been
sold under the Shelf Registration, (ii) such time as all of the
Registrable Securities are freely tradable pursuant to Rule 144 under the
Securities Act or similar provision, (iii) the date on which another
exemption exists that permits the public sale of any and all of the
Registrable Securities under the Securities Act and (iv) twelve months
from the Closing Date.
SECTION 3. REGISTRATION PROCEDURES.
(a) In connection with the Shelf Registration,
Spectrum will:
(i) prepare and file with the SEC a
Registration Statement on any appropriate form under the Securities Act,
which form shall be available for the sale of the Registrable Securities,
and use its reasonable good faith efforts to cause any such Registration
Statement to become effective; provided, that before filing any
Registration Statement or any Prospectus or any amendments or supplements
thereto, Spectrum will promptly furnish to the Shareholder copies of all
such documents proposed to be filed.
-2-
<PAGE>
(ii) prepare and file with the SEC such
amendments and post-effective amendments to any such Registration
Statement as may be necessary to keep such Registration Statement
effective for the period set forth in Section 2(b) hereof; cause the
Prospectus to be supplemented by any required Prospectus supplement, and
as so supplemented to be filed pursuant to Rule 424 under the Securities
Act; and comply in all material respects with the provisions of the
Securities Act with respect to the disposition of all securities covered
by any such Registration Statement during the applicable period.
(iii) notify the Shareholder promptly
(1) when the Prospectus or any Prospectus supplement or post-effective
amendment relating to the Registrable Securities has been filed, and,
with respect to any Registration Statement or any post-effective
amendment relating to such Registrable Securities, when the same has
become effective, (2) of any request by the SEC for amendments or
supplements to such Registration Statement or the Prospectus relating to
such Registrable Securities or for additional information, (3) of the
issuance by the SEC of any order suspending the effectiveness of such
Registration Statement (the "Stop Order") or the initiation of any
proceedings for that purpose, (4) of the receipt by Spectrum of a
notification with respect to the suspension of the qualification of such
Registrable Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose and (5) of the existence
of any fact which makes untrue any statement of a material fact made in
such Registration Statement, the Prospectus relating to such Registrable
Securities or any document incorporated therein by reference or which
requires the making of any changes in such Registration Statement, the
Prospectus relating to such Registrable Securities or any document
incorporated therein by reference in order to make the statements therein
not misleading.
(iv) make every reasonable effort to obtain
the withdrawal of any Stop Order at the earliest possible moment.
(v) furnish to the Shareholder, without
charge, at least one conformed copy of the Registration Statement
registering such Registrable Securities and any post-effective amendment
thereto, including financial statements and schedules, all documents
incorporated therein by reference.
(vi) deliver to the Shareholder, without
charge, as many copies of the Prospectus relating to the registration of
such Registrable Securities (including each preliminary prospectus) and
any amendment or supplement thereto as the Shareholder may reasonably
request. Spectrum consents to the use of such Prospectus or any amendment
or supplement thereto by the Shareholder in connection with the offering
and sale of the Registrable Securities covered by the Prospectus or any
amendment or supplement thereto.
(vii) prior to any public offering of
Registrable Securities, register, or qualify or cooperate with the
Shareholder in connection with the registration or qualification of, such
Registrable Securities for offer and sale under the securities or
-3-
<PAGE>
"blue sky" laws of such jurisdictions as any Shareholder may reasonably
request in writing and do any and all other acts or things necessary or
advisable to enable the disposition in such jurisdictions of such
Registrable Securities covered by a Registration Statement; provided,
that Spectrum will not be required to qualify generally to do business in
any jurisdiction where it is not then so qualified or to take any action
which would subject it to general service of process or to taxation as a
foreign corporation doing business in any such jurisdiction where it is
not then so subject.
(viii) cooperate with the Shareholder to
facilitate the timely preparation and delivery of certificates
representing such Registrable Securities to be sold and not bearing any
restrictive legends.
(ix) if any fact contemplated by clause
(iii)(5) of this Section 3(a) shall exist, prepare a supplement or
post-effective amendment as required by law to the applicable
Registration Statement or the related Prospectus or any document
incorporated therein by reference or file any other required document so
that, as thereafter delivered to the purchasers of the Registrable
Securities, the Prospectus will not contain an untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading.
(x) cause all Registrable Securities
covered by a Registration Statement to be listed on the Nasdaq National
Market.
(b) Spectrum may require the Shareholder to furnish to
Spectrum such information regarding the Shareholder and the distribution
of such securities as Spectrum may from time to time reasonably request
in writing. The Shareholder agrees to furnish promptly to Spectrum all
information required to be disclosed in order to make the information
previously furnished to Spectrum by the Shareholder not materially
misleading.
(c) The Shareholder agrees by acquisition of such
Registrable Securities that, upon receipt of any notice from Spectrum of
the existence of any fact of the kind described in Section 3(a)(iii)(5)
hereof, the Shareholder will forthwith discontinue disposition of
Registrable Securities until the Shareholder's receipt of the copies of
the supplemented or amended Prospectus contemplated by Section 3(a)(ix)
hereof, or until he is advised in writing (the "Advice") by Spectrum or
Spectrum's counsel that the use of the Prospectus may be resumed.
SECTION 4. REGISTRATION EXPENSES.
The following expenses incident to Spectrum's
performance of or compliance with this Agreement will be borne by
Spectrum: (i) all registration and filing fees and expenses; (ii) fees
and expenses of compliance with federal securities or state or other
jurisdiction's "blue sky" laws; (iii) expenses of printing (including,
without limitation, prospectuses); (iv) fees and disbursements of counsel
for Spectrum; (v) fees
-4-
<PAGE>
and disbursements of all independent certified public accountants of
Spectrum; and (vi) fees and expenses of listing the Registrable
Securities on any securities exchange or market in accordance with
Section 3(a)(x) hereof. Notwithstanding the foregoing, the Shareholder
shall reimburse Spectrum for expenses incurred under clauses (iv) and (v)
of the immediately preceding sentence in excess of US$15,000 in the
aggregate as a condition precedent to the effectiveness of any
Registration Statement.
All such expenses set forth in clauses (i) - (vi) above
are herein called "Registration Expenses."
SECTION 5. INDEMNIFICATION.
(a) With respect to the Registration Statement,
Spectrum agrees to indemnify and hold harmless, to the full extent
permitted by law, the Shareholder and each Person who controls the
Shareholder (within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) against all losses, claims, damages,
liabilities and expenses (including, without limitation, all reasonable
legal expenses or disbursements in giving testimony or furnishing
documents in response to a subpoena or otherwise and the costs, expenses
and disbursements of investigating, preparing or defending any such
action, suit, proceeding or investigation, whether or not in connection
with litigation in which an indemnified party is a party and whether or
not involving a third party, and, subject to Section 5(c), all amounts
paid in settlement of a claim or litigation) (collectively, the "Losses")
as and when incurred, arising out of, based upon or in connection with
any untrue or alleged untrue statement of a material fact contained in
any Registration Statement, Prospectus or preliminary Prospectus or in
any application or other document or communication (in this Section 5
collectively called an "application") executed by or on behalf of
Spectrum or based upon written information furnished by or on behalf of
Spectrum filed in any jurisdiction in order to qualify the Registrable
Securities under the "blue sky" or securities laws thereof or filed with
the SEC, or arising out of, based upon or in connection with any omission
or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, except insofar as such Losses are caused by any such untrue
statement or omission or alleged untrue statement or omission based upon
information (a) relating to the Shareholder, furnished in writing to
Spectrum by or on behalf of the Shareholder for use therein or (b) made
in any preliminary prospectus if a copy of the Prospectus (as amended or
supplemented) was not sent or given by or on behalf of the Shareholder to
the Person asserting any such Loss (if required by law so to have been
delivered) at or prior to the written confirmation of the sale of the
Registrable Securities as required by the Securities Act, and the
Prospectus (as so amended or supplemented) would have corrected such
untrue statement or omission, provided, however, that Spectrum shall have
timely furnished copies of such Prospectus (as so amended or
supplemented) to the Shareholder in compliance with the provisions
hereof.
(b) In connection with the Registration Statement, the
Shareholder will furnish to Spectrum in writing such information as
Spectrum reasonably requests for
-5-
<PAGE>
use in connection with any Registration Statement, Prospectus or
preliminary Prospectus and agrees, severally and not jointly, to
indemnify and hold harmless, to the full extent permitted by law,
Spectrum, its directors and officers who sign the Registration Statement
and each Person who controls Spectrum (within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act) against any
losses, claims, damages, liabilities and reasonable expenses resulting
from any untrue or alleged untrue statement of a material fact or any
omission or alleged omission of a material fact required to be stated in
the Registration Statement or Prospectus or preliminary Prospectus or
necessary to make the statements therein not misleading, to the extent
that the same resulted from or are contained in any information relating
to the Shareholder furnished in writing by the Shareholder to Spectrum
specifically for use in such Registration Statement, Prospectus or
preliminary Prospectus. In no event shall the liability of any selling
Shareholder hereunder be greater in amount than the dollar amount of the
proceeds received by the Shareholder upon the sale (whether prior to or
subsequent to the incurrence of any such liability) of the Registrable
Securities giving rise to such indemnification obligation.
(c) Any Person entitled to indemnification hereunder
will (i) give prompt notice to the indemnifying party of any claim with
respect to which it seeks indemnification; provided, that the failure to
deliver such notice shall not relieve the indemnifying party of its
indemnification obligations hereunder, unless the indemnifying party is
prejudiced by the failure to deliver such notice and (ii) permit such
indemnifying party to assume the defense of such claim with counsel
reasonably satisfactory to the indemnified party (including, to the
extent any settlement involves the payment of money, the right to settle
any such claim or proceeding); provided, however, that any Person
entitled to indemnification hereunder shall have the right to employ
separate counsel and to participate in the defense of such claim, but the
fees and expenses of such counsel shall be at the expense of such Person
unless (a) the indemnifying party has agreed to pay such fees or
expenses, or (b) the indemnifying party shall have failed to assume the
defense of such claim and employ counsel reasonably satisfactory to such
Person or (c) in the judgment of any such Person, based upon advice of
independent counsel, there may be one or more legal defenses available to
it which are different from or additional to those available to the
indemnifying person, or a conflict of interest or potential conflict of
interest exists between such Person and the indemnifying party in respect
of such claims (in which case, if the Person notifies the indemnifying
party in writing that such Person elects to employ separate counsel at
the expense of the indemnifying party, the indemnifying party shall not
have the right to assume the defense of such claim on behalf of such
Person). The indemnifying party will not be subject to any liability for
any settlement made without its consent (but such consent will not be
unreasonably withheld or delayed). No indemnifying party will be required
to consent to entry of any judgment or entry into any settlement which
does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such indemnified party of a release from all
liability in respect of such claim or litigation. An indemnifying party
will not, in connection with substantially similar or related actions in
the same jurisdiction arising out of the same general allegations or
circumstances, be obligated to pay the fees and expenses of more
-6-
<PAGE>
than one counsel for all parties indemnified by such indemnifying party
with respect to such claim (in addition to all local counsel which are
necessary in the opinion of counsel for such indemnified party in order
to adequately represent such Person), unless there may be one or more
legal defenses available to it which are different from or additional to
those available to the indemnifying person, in which event the
indemnifying party shall be obligated to pay the fees and expenses of,
such additional counsel or counsels.
(d) If a claim for indemnification provided for in the
preceding clauses (a) and (b) is made but it is found in a final judgment
by a court of competent jurisdiction (not subject to further appeal) that
such indemnification may not be enforced in such case, then the
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by the indemnified party as a
result of such Loss in such proportion as is appropriate to reflect the
relative fault of the indemnified party and the indemnifying party and
the relative benefits to be received by each such party, as well as any
other relevant equitable considerations; provided, that no Shareholder
shall be required to contribute in an amount greater than the dollar
amount of the proceeds received by the Shareholder with respect to the
sale of the Registrable Securities giving rise to the indemnification
obligation under this Section 5. The relative fault of Spectrum on the
one hand and the Shareholder on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact
relates to information supplied by Spectrum on the one hand or by the
Shareholder on the other hand and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent
such statement or omission. The amount paid or payable by an indemnified
party shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such
action or claim. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. No party shall be liable for contribution under this
clause (d) except to the extent and under such circumstances as such
party would have been liable to indemnify under this Section 5 if such
indemnification were available or sufficient.
(e) The indemnity and contribution agreements contained
in this Section 5 are in addition to any liability that the indemnifying
Persons may otherwise have to the indemnified Persons referred to above.
SECTION 6. HOLDBACK AGREEMENT
The Shareholder agrees to give notice to Spectrum of
any sale of Issued Securities pursuant to an effective Registration
Statement on the date of the said sale specifying the date of sale and
the amount of Issued Securities sold pursuant thereto. The Shareholder
acknowledges and agrees (i) not to sell more than 179,636 Issued
Securities between the earlier of June 1, 1998 and the date on which the
Registration
-7-
<PAGE>
Statement is declared effective and August 31, 1998, (ii) not to sell
more than 179,636 Issued Securities between September 1, 1998 and
November 30, 1998, (iii) not to sell more than 179,636 Issued Securities
between December 1, 1998 and February 28, 1999, and (iv) not to sell more
than 179,636 Issued Securities between March 1, 1999 and May 31, 1999.
The Shareholder shall obtain Spectrum's prior written consent for any
sale other than as permitted herein.
SECTION 7. MISCELLANEOUS.
7.1 AMENDMENTS AND WAIVERS.
The provisions of this Agreement may not be amended,
modified or supplemented, and waivers or consents to or departures from
the provisions hereof may not be given unless Spectrum has obtained the
written consent of the holders of a majority of the outstanding
Registrable Securities.
7.2 NOTICES.
All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery,
first-class mail (registered or certified, return receipt requested,
telecopier, or air courier guaranteeing overnight delivery):
(1) if to the Shareholder, initially at the address set
forth in the Acquisition Agreement, and thereafter at
such other address, notice of which is given in
accordance with the provisions of this Section 7.2.
(2) if to Spectrum, initially at its address set forth
in the Acquisition Agreement and thereafter at such
other address, notice of which is given in accordance
with the provisions of this Section 7.2, with a copy to
Fulbright & Jaworski L.L.P., 666 Fifth Avenue, New
York, New York
10103, Attention: Paul Jacobs, Esq.
All such notices and communications shall be deemed to
have been duly given: at the time delivered by hand, if personally
delivered; five business days after being deposited in the mail, postage
prepaid, if mailed; when receipt acknowledged if telecopied; and on the
next business day, if timely delivered to an air courier guaranteeing
overnight delivery.
7.3 SUCCESSORS AND ASSIGNS.
This Agreement shall inure to the benefit of and be
binding upon the successors and assigns of each of the parties,
including, without limitation and without the need for an express
assignment, subsequent holders of Registrable Securities.
-8-
<PAGE>
7.4 COUNTERPARTS.
This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
7.5 HEADINGS.
The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning
hereof.
7.6 GOVERNING LAW.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT
REGARD TO THE CONFLICT OF LAW RULES THEREOF.
7.7 SEVERABILITY.
In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the
remaining provisions contained herein shall not be affected or impaired
thereby.
7.8 ENTIRE AGREEMENT.
This Agreement together with the Acquisition Agreement
(including the exhibits and schedules thereto) is intended by the parties
as a final expression of their agreement and intended to be a complete
and exclusive statement of the agreement and understanding of the parties
hereto in respect of the subject matter contained herein. There are no
restrictions, promises, warranties or undertakings, other than those set
forth or referred to herein with respect to the registration rights
granted by Spectrum with respect to the Registrable Securities. This
Agreement supersedes all prior agreements and understandings between the
parties with respect to such subject matter.
-9-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this
Agreement as of the date first written above.
SPECTRUM SIGNAL PROCESSING INC.
By:/s/ Barry Jinks
---------------------------------
Name: Barry Jinks
Title: President & CEO
ALEX COMPUTER SYSTEMS, INC.
By: /s/ Andrew Talbot
-----------------------------
Name:
Title:
-10-
<PAGE>
7,726 Share Purchase Warrants Void After April 30, 2000
SHARE PURCHASE WARRANT CERTIFICATE
SPECTRUM SIGNAL PROCESSING INC.
(Incorporated under the laws of British Columbia)
THIS IS TO CERTIFY THAT, for value received, ANDY TALBOT (the "Warrant
Holder") of 212 Brooktondale Road, Brooktondale, New York, U.S.A. 14817
shall have the right to purchase from Spectrum Signal Processing Inc.
(the "Company"), upon and subject to the terms and conditions hereinafter
referred to, at any time and from time to time up to 4:00 p.m. (Vancouver
time) on April o , 2000 (the "Expiry Time") one fully paid and
non-assessable common share in the capital of the Company for each
warrant represented hereby at a price of (CDN) $9.06 per share (the
"Exercise Price"). After the Expiry Time this warrant certificate and all
rights conferred hereby shall be void and of no value.
The right to purchase common shares in the capital of the Company may
only be exercised by the Warrant Holder within the time hereinbefore set
out by:
(a) duly completing and executing the subscription form
attached hereto, in the manner therein indicated;
(b) surrendering this warrant certificate to the Company's
Registrar and Transfer Agent, Montreal Trust Company of
Canada at its principal office in Vancouver, British
Columbia; and
(c) paying the appropriate purchase price for the common
shares of the Company subscribed for, either in cash or
by certified cheque.
Upon surrender and payment, the Company will issue to the Warrant Holder
the number of common shares subscribed for. Within three business days of
surrender and payment the Company will mail to the Warrant Holder a
certificate evidencing the common shares subscribed for. If the Warrant
Holder subscribes for a lesser number of common shares than the number of
shares permitted by this warrant certificate, the Company shall within
three business days of surrender of this certificate as set forth above
cause to be delivered to the Warrant Holder a further warrant certificate
in respect of the common shares referred to in this warrant certificate
but not subscribed for.
<PAGE>
- 2 -
In the event of any subdivision of the common shares of the Company as
such are constituted on the date hereof, at any time while the warrants
represented by this certificate are outstanding, into a greater number of
common shares, the Company will thereafter deliver at the time or times
of purchase of the shares hereunder, in addition to the number of shares
in respect of which the right to purchase is then being exercised, such
additional number of shares as result from such subdivision without any
additional payment or other consideration therefore.
In the event of any consolidation of the common shares of the Company as
such common shares are constituted on the date hereof, at any time while
the warrants represented by this certificate are outstanding, into a
lesser number of common shares, the number of shares represented by this
warrant certificate shall thereafter be deemed to be consolidated in like
manner and any subscription by the Warrant Holder for shares hereunder
shall be deemed to be a subscription for shares of the Company as
consolidated.
In the event of any reclassification of the common shares of the Company
at any time while this warrant certificate is outstanding, the Company
shall thereafter deliver at the time of purchase of shares hereunder the
number of shares of the appropriate class resulting from the
reclassification as the Warrant Holder would have been entitled to
receive in respect of the number of shares so purchased had right to
purchase been exercised before such reclassification.
If at any time while this warrant certificate is outstanding the Company
shall pay any stock dividend upon the common shares of the Company in
respect of which the right to purchase is herein given, the Company shall
thereafter deliver at the time of purchase of shares hereunder, in
addition to the number of shares in respect of which the right to
purchase is then being exercised, the additional number of shares of the
appropriate class as would have been outstanding on the record date for
the payment of the stock dividend.
In the event of any reclassification, capital reorganization or other
change of outstanding common shares of the Company (other than a
subdivision or combination of the outstanding common shares) or in the
event of any consolidation or merger of the Company with or into another
corporation (other than a merger in which the Company is the continuing
corporation and that does not result in any reclassification, capital
reorganization or other change of outstanding common shares of the class
issuable upon exercise of the warrants represented by this certificate)
or in the event of any sale, lease, transfer or conveyance to another
corporation of the property and assets of the Company as an entirety or
substantially as an entirety, the Company shall, as a condition precedent
to such transaction, cause effective provisions to be made so that the
Warrant Holder shall have the right thereafter, by exercising the
warrants represented by this certificate, to purchase the kind and amount
of shares of stock and other securities and property (including cash)
receivable upon such reclassification, capital reorganization or other
change, consolidation, merger, sale or conveyance by a holder of the
number of common shares that might have been received upon the exercise
of the warrants represented by this certificate immediately prior to such
reclassification, capital reorganization, change, consolidation, merger,
sale or conveyance. Any such provision shall include provisions for
adjustments in respect of such shares of stock and other securities and
property that shall be as nearly equivalent as may be practicable to the
adjustments provided for in
<PAGE>
- 3 -
this certificate. The foregoing provisions of this certificate shall
similarly apply to successive reclassifications, capital reorganizations
and changes of common shares and to successive consolidations, mergers,
sales or conveyances.
The Company's Registrar and Transfer Agent will maintain a register of
Warrant Holders and register of transfers. A transferee of any of the
warrants represented by this certificate will be recorded on the register
as a holder by delivering to the Company or to the Company's Registrar
and Transfer Agent this warrant certificate with the attached transfer
form duly completed and endorsed for transfer. A transfer of warrants
will not be recorded if the Company's Registrar and Transfer Agent is of
the opinion that the transfer is in breach of any applicable securities
law. A new warrant certificate will be issued and delivered to the
transferee and, for transfers of less than all of the warrants
represented by this certificate, a new certificate for the balance of the
warrants retained by the transferor will be issued and delivered to the
transferor within ten days after the date on which the transfer is
recorded in the register of transfers.
The holding of this warrant certificate or the warrants represented
hereby shall not constitute the Warrant Holder a member of the Company.
Time shall be of the essence hereof.
This warrant certificate shall not be valid for any purchase whatever
until it has been countersigned by or on behalf of the Company's
Registrar and Transfer Agent.
IN WITNESS WHEREOF THE COMPANY has caused this warrant certificate to be
issued by its duly authorized signatory.
SPECTRUM SIGNAL PROCESSING INC.
Per:
/s/ Barry Jinks
______________________________
Authorized Signatory
MONTREAL TRUST COMPANY OF CANADA
Per:
/s/ June P. Glover
______________________________
Authorized Signatory
DATE: ________________________
<PAGE>
SUBSCRIPTION FORM
TO: SPECTRUM SIGNAL PROCESSING INC. AND
MONTREAL TRUST COMPANY OF CANADA
Dear Sirs:
The undersigned hereby exercises the right to purchase and hereby
subscribes for ____________ common shares in the capital stock of
SPECTRUM SIGNAL PROCESSING INC. referred to in the warrant certificate
surrendered herewith according to the conditions thereof and herewith
makes payment by cash or certified cheque of the purchase price in full
for the said shares.
Please issue a certificate for the shares being purchased as follows in
the name of the undersigned:
NAME: _______________________________
(Please Print)
ADDRESS: ______________________________
______________________________
______________________________
Please deliver a warrant certificate in respect of the common shares
referred to in the warrant certificate surrendered herewith but not
presently subscribed for, to the undersigned.
DATED this _______ day of ___________________, 19_______.
_____________________________
(Signature)
<PAGE>
102,649 Share Purchase Warrants Void After April 30, 2000
SHARE PURCHASE WARRANT CERTIFICATE
SPECTRUM SIGNAL PROCESSING INC.
(Incorporated under the laws of British Columbia)
THIS IS TO CERTIFY THAT, for value received, ALEX COMPUTER SYSTEMS, INC.
(the "Warrant Holder") of Suite 200 - 950 Danby Road, Ithaca, New York,
U.S.A. 14850 shall have the right to purchase from Spectrum Signal
Processing Inc. (the "Company"), upon and subject to the terms and
conditions hereinafter referred to, at any time and from time to time up
to 4:00 p.m. (Vancouver time) on April o , 2000 (the "Expiry Time") one
fully paid and non-assessable common share in the capital of the Company
for each warrant represented hereby at a price of (CDN) $9.06 per share (the
"Exercise Price"). After the Expiry Time this warrant certificate and all
rights conferred hereby shall be void and of no value.
The right to purchase common shares in the capital of the Company may
only be exercised by the Warrant Holder within the time hereinbefore set
out by:
(a) duly completing and executing the subscription form
attached hereto, in the manner therein indicated;
(b) surrendering this warrant certificate to the Company's
Registrar and Transfer Agent, Montreal Trust Company of
Canada at its principal office in Vancouver, British
Columbia; and
(c) paying the appropriate purchase price for the common
shares of the Company subscribed for, either in cash or
by certified cheque.
Upon surrender and payment, the Company will issue to the Warrant Holder
the number of common shares subscribed for. Within three business days of
surrender and payment the Company will mail to the Warrant Holder a
certificate evidencing the common shares subscribed for. If the Warrant
Holder subscribes for a lesser number of common shares than the number of
shares permitted by this warrant certificate, the Company shall within
three business days of surrender of this certificate as set forth above
cause to be delivered to the Warrant Holder a further warrant certificate
in respect of the common shares referred to in this warrant certificate
but not subscribed for.
<PAGE>
- 2 -
In the event of any subdivision of the common shares of the Company as
such are constituted on the date hereof, at any time while the warrants
represented by this certificate are outstanding, into a greater number of
common shares, the Company will thereafter deliver at the time or times
of purchase of the shares hereunder, in addition to the number of shares
in respect of which the right to purchase is then being exercised, such
additional number of shares as result from such subdivision without any
additional payment or other consideration therefore.
In the event of any consolidation of the common shares of the Company as
such common shares are constituted on the date hereof, at any time while
the warrants represented by this certificate are outstanding, into a
lesser number of common shares, the number of shares represented by this
warrant certificate shall thereafter be deemed to be consolidated in like
manner and any subscription by the Warrant Holder for shares hereunder
shall be deemed to be a subscription for shares of the Company as
consolidated.
In the event of any reclassification of the common shares of the Company
at any time while this warrant certificate is outstanding, the Company
shall thereafter deliver at the time of purchase of shares hereunder the
number of shares of the appropriate class resulting from the
reclassification as the Warrant Holder would have been entitled to
receive in respect of the number of shares so purchased had right to
purchase been exercised before such reclassification.
If at any time while this warrant certificate is outstanding the Company
shall pay any stock dividend upon the common shares of the Company in
respect of which the right to purchase is herein given, the Company shall
thereafter deliver at the time of purchase of shares hereunder, in
addition to the number of shares in respect of which the right to
purchase is then being exercised, the additional number of shares of the
appropriate class as would have been outstanding on the record date for
the payment of the stock dividend.
In the event of any reclassification, capital reorganization or other
change of outstanding common shares of the Company (other than a
subdivision or combination of the outstanding common shares) or in the
event of any consolidation or merger of the Company with or into another
corporation (other than a merger in which the Company is the continuing
corporation and that does not result in any reclassification, capital
reorganization or other change of outstanding common shares of the class
issuable upon exercise of the warrants represented by this certificate)
or in the event of any sale, lease, transfer or conveyance to another
corporation of the property and assets of the Company as an entirety or
substantially as an entirety, the Company shall, as a condition precedent
to such transaction, cause effective provisions to be made so that the
Warrant Holder shall have the right thereafter, by exercising the
warrants represented by this certificate, to purchase the kind and amount
of shares of stock and other securities and property (including cash)
receivable upon such reclassification, capital reorganization or other
change, consolidation, merger, sale or conveyance by a holder of the
number of common shares that might have been received upon the exercise
of the warrants represented by this certificate immediately prior to such
reclassification, capital reorganization, change, consolidation, merger,
sale or conveyance. Any such provision shall include provisions for
adjustments in respect of such shares of stock and other securities and
property that shall be as nearly equivalent as may be practicable to the
adjustments provided for in
<PAGE>
- 3 -
this certificate. The foregoing provisions of this certificate shall
similarly apply to successive reclassifications, capital reorganizations
and changes of common shares and to successive consolidations, mergers,
sales or conveyances.
The Company's Registrar and Transfer Agent will maintain a register of
Warrant Holders and register of transfers. A transferee of any of the
warrants represented by this certificate will be recorded on the register
as a holder by delivering to the Company or to the Company's Registrar
and Transfer Agent this warrant certificate with the attached transfer
form duly completed and endorsed for transfer. A transfer of warrants
will not be recorded if the Company's Registrar and Transfer Agent is of
the opinion that the transfer is in breach of any applicable securities
law. A new warrant certificate will be issued and delivered to the
transferee and, for transfers of less than all of the warrants
represented by this certificate, a new certificate for the balance of the
warrants retained by the transferor will be issued and delivered to the
transferor within ten days after the date on which the transfer is
recorded in the register of transfers.
The holding of this warrant certificate or the warrants represented
hereby shall not constitute the Warrant Holder a member of the Company.
Time shall be of the essence hereof.
This warrant certificate shall not be valid for any purchase whatever
until it has been countersigned by or on behalf of the Company's
Registrar and Transfer Agent.
IN WITNESS WHEREOF THE COMPANY has caused this warrant certificate to be
issued by its duly authorized signatory.
SPECTRUM SIGNAL PROCESSING INC.
Per:
/s/ Barry Jinks
- ----------------------------
Authorized Signatory
MONTREAL TRUST COMPANY OF CANADA
Per:
/s/ June P. Glover
- ----------------------------
Authorized Signatory
DATE:
-----------------------
<PAGE>
SUBSCRIPTION FORM
TO: SPECTRUM SIGNAL PROCESSING INC. AND
MONTREAL TRUST COMPANY OF CANADA
Dear Sirs:
The undersigned hereby exercises the right to purchase and hereby
subscribes for ____________ common shares in the capital stock of
SPECTRUM SIGNAL PROCESSING INC. referred to in the warrant certificate
surrendered herewith according to the conditions thereof and herewith
makes payment by cash or certified cheque of the purchase price in full
for the said shares.
Please issue a certificate for the shares being purchased as follows in
the name of the undersigned:
NAME: _______________________________
(Please Print)
ADDRESS: ______________________________
______________________________
______________________________
Please deliver a warrant certificate in respect of the common shares
referred to in the warrant certificate surrendered herewith but not
presently subscribed for, to the undersigned.
DATED this _______ day of ___________________, 19_______.
_________________________________
(Signature)
<PAGE>
<PAGE>
[LETTERHEAD OF KPMG]
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
The Board of Directors
Spectrum Signal Processing Inc.
We consent to the use of our report included in the registration statement on
Form F-3 and related prospectus of Spectrum Signal Processing Inc. and the
reference to our firm under the heading "Experts" in the prospectus.
/s/ KPMG
---------------------
Chartered Accountants
Richmond, Canada
June 29, 1998
<PAGE>
[LETTERHEAD OF CIASCHI, DIETERSHAGEN, LITTLE & MICKELSON, LLP]
ACCOUNTANTS' CONSENT
The Board of Directors
Spectrum Signal Processing Inc.
We consent to the use of our report on the financial statements of Alex Computer
Systems, Inc. in the registration statement on Form F-3 of Spectrum Signal
Processing Inc., which report is dated August 28, 1997 and relates to the
balance sheets of Alex Computer Systems, Inc. as of July 31, 1997 and 1996 and
the related statements of earnings and retained earnings and cash flows for the
years then ended. We also consent to the reference to our firm under the heading
"Experts" in the prospectus.
/s/ Ciaschi, Dietershagen, Little & Mickelson, LLP
- -----------------------------------------------------------
Ciaschi, Dietershagen, Little & Mickelson, LLP
Certified Public Accountants
Ithaca, New York
June 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Form F-3 for the year ended December 31, 1997 and the three months
ended March 31, 1998, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> Year 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-END> DEC-31-1997 MAR-31-1998
<CASH> 1,979 84
<SECURITIES> 0 0
<RECEIVABLES> 9,367 8,675
<ALLOWANCES> 243 233
<INVENTORY> 5,809 7,228
<CURRENT-ASSETS> 17,470 17,448
<PP&E> 3,501 3,961
<DEPRECIATION> 3,072 3,736
<TOTAL-ASSETS> 24,733 33,807
<CURRENT-LIABILITIES> 6,722 9,329
<BONDS> 0 0
0 0
0 0
<COMMON> 13,259 20,307
<OTHER-SE> 2,896 2,567
<TOTAL-LIABILITY-AND-EQUITY> 24,733 33,807
<SALES> 36,452 7,492
<TOTAL-REVENUES> 36,471 7,492
<CGS> 15,548 2,769
<TOTAL-COSTS> 15,478 5,586
<OTHER-EXPENSES> 0 32
<LOSS-PROVISION> 31 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 5,445 (895)
<INCOME-TAX> 2,138 (366)
<INCOME-CONTINUING> 3,307 (529)
<DISCONTINUED> (737) 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,570 (529)
<EPS-PRIMARY> 0.28 (0.06)
<EPS-DILUTED> 0.27 (0.06)
</TABLE>
