<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 4, 1999
REGISTRATION NO. 333-58115
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
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. / /
------------------------
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.
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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 4, 1999
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 "SSPI" and "SSY." The last sale prices for the Common Shares as reported
on Nasdaq and the TSE on May 28, 1999, were US$1.75 and Cdn$2.50, 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 , 1999
<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"). The
Noon Buying Rate at May 28, 1999 was US$0.6791.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Exchange rate at end of period..... US$0.7128 US$0.7323 US$0.7246 US$0.6991 US$0.6504
Average exchange rate during
period........................... 0.7300 0.7305 0.7334 0.7223 0.6703
High exchange rate during period... 0.7632 0.7829 0.7472 0.7415 0.7105
Low exchange rate during period.... 0.7103 0.7023 0.7274 0.7009 0.6341
</TABLE>
CURRENCY TRANSLATION AND ACCOUNTING PRINCIPLES
Beginning with the first quarter of 1998, the Company adopted a policy of
publishing its financial statements in United States dollars ("US$" or "$") and
preparing its financial statements in accordance with accounting principles
generally accepted in the United States ("U.S. GAAP"). In accordance with the
views of the Commission, the Company has restated the historical financial
statements and data contained herein to U.S. GAAP and using US$. All monetary
references throughout this Prospectus are expressed in US$ except where
indicated as Canadian dollars ("Cdn$"). All financial information presented in
this Prospectus, except where otherwise indicated, has been prepared 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 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, and all amendments
thereto, 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.
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.
3
<PAGE>
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 $675,000 cash, the
assumption of approximately $1,074,000 in liabilities, 772,626 Common Shares and
a two year warrant to purchase 110,375 Common Shares at an exercise price of
$6.34 per share. The acquisition was accounted for under the purchase method of
accounting, with substantially all of the purchase price allocated to in-process
research and development and acquired technology. The Company recorded a
$2,640,000 charge to earnings at the time of acquisition in relation to the
acquired in-process research and development. Amortization is recorded using the
straight-line method over the estimated useful lives of the respective assets,
generally three to six years. The Company estimates that it will incur an
additional $1,350,000 in research and development costs to complete these
projects.
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 1998, the Company's two largest customers accounted for
approximately 44% and 32%, respectively, of the Company's sales. The U.S.
Government (principally the U.S. Department of Defense), its largest customer,
accounted for approximately 25% and 24%, respectively, of the Company's sales
during such periods. In addition, approximately 10% of the Company's sales
during 1997 were made to NAI Technologies, the Company's second largest customer
during such period, and approximately 9% of the Company's sales during 1998 were
made to Siemens Medical Systems, Inc., the Company's second largest customer
during such period. 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. In addition, while the
Company is not aware of any current plans by the Department of Defense that may
result in decreased military contract funding which would affect the Company's
operations, there can be no assurance that U.S. military contracts will continue
to be funded at the same level.
AMENDMENT OF THE LOUGHBOROUGH LICENSE
In July 1987, the Company entered into an agreement with Loughborough Sound
Images Ltd. ("Loughborough") pursuant to which the Company licenses from
Loughborough certain DSP technology (the "Loughborough License"). In 1996, 1997
and 1998, sales of products based upon technology licensed from Loughborough and
products acquired from Loughborough for resale (collectively, "Loughborough
Products") accounted for approximately 33%, 30% and 19%, respectively, of the
Company's sales. The Loughborough License was amended in January 1997 to, among
other things, change such license to operate on a non-exclusive basis, a change
which 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. The Company believes that
Loughborough Products will continue to account for a decreasing percentage of
the Company's sales.
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 or group of customers could adversely affect the Company's
business, financial condition and results of operations.
5
<PAGE>
RELIANCE ON ORIGINAL EQUIPMENT MANUFACTURERS
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. Sales to OEMs accounted for 71%, 86% and 89% of the
Company's revenues during 1996, 1997 and 1998, respectively. 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 AND SOFTWARE PROVIDERS
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. Revenues generated from development contracts during
1996, 1997 and 1998 were approximately 8.5%, 6.1% and 5.9% of the Company's
revenues during such periods, respectively. 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
historically has been successful in meeting these 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."
RAPID CHANGES IN TECHNOLOGY AND PRODUCT OBSOLESCENCE
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
6
<PAGE>
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.
IN-PROCESS RESEARCH AND DEVELOPMENT
Over the last two years, the Company completed two acquisitions, some of
the assets of which involved in-process research and development. Although the
Company historically has been able to accurately forecast costs associated with
research and development activities, there can be no assurance that the
Company's estimates of the costs of completing the acquired in-process research
and development initiatives will be accurate. Furthermore, unexpected technical
delays in completing these initiatives could lengthen development schedules and
result in the Company missing opportunities to generate revenues based on the
products or technologies developed from these initiatives. There can be no
assurance that the products derived from acquired in-process research and
development activities will achieve market acceptance.
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.
INTENSE 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. In addition,
following the recent amendment to the Loughborough
7
<PAGE>
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; RELATED
LOSSES
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").
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. Examples of this strain include increased cost and manpower
in the administrative and engineering areas to bring the business and accounting
practices of the acquired companies in line with Spectrum's existing
manufacturing and accounting procedures. In addition, the acquisitions of 3L
Limited and Alex Computer each resulted in a charge related to the write-off of
acquired in process research and development that substantially impacted the
Company's results of operations during the year each company was acquired. The
amount of the charge taken in 1997 relating to the acquisition of 3L Limited was
$865,000. The amount of the charge taken in 1998 relating to the acquisition of
Alex Computer was $2.6 million, which accounted for most of the Company's loss
for 1998.
The Company manages the integration of newly-acquired operations and
mitigates this strain on its existing operations through the use of core
acquisition teams. The management team of newly-acquired operations is typically
retained to maintain operational continuity. 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. The Company does not presently have
plans to acquire any additional companies.
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. To date, the recent economic difficulties being felt in parts of Asia
have not had a significant, direct impact on the Company's business, financial
condition and results of operations although the Company believes that the Asian
economic crisis has created a more conservative purchasing atmosphere in the
computer industry generally.
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 operating expenses have been recognized
in currencies other than the U.S. dollar, principally the Canadian dollar. Thus,
fluctuations in the exchange rates between these currencies and the U.S. 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 U.S. dollar operating expenses 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. For
the years ended December 31, 1997 and 1998, the Company had foreign currency
translation gains of $323,000 and $287,000, respectively.
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. Although the Company generally obtains non-competition and
confidentiality agreements from its officers and other employees, the Company
has not entered into any employment agreements with any of its employees, and
there can be no assurance that the Company's employees will continue in their
present capacity for any particular period of time. 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.
RISKS OF YEAR 2000 NONCOMPLIANCE
A significant percentage of the software that runs most of the computers
worldwide relies on two-digit codes to reflect the last two digits of a year in
performing computations and decision-making functions. Commencing on January 1,
2000, these computer programs may fail due to the inability to interpret date
codes properly, for example, misinterpreting "00" as the year 1900 rather than
2000. While the Company does not expect to incur any costs in updating such
programs, there can be no assurance that such conversion programs will be
successful at the expected cost. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
9
<PAGE>
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. Finally, the exercise of certain existing
stock options which have exercise prices below the then-prevailing market price
of the Common Shares could have a depressive effect on 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 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 Warrants, if
any, will be received by the Company and will be used for general corporate
purposes. If exercised in full, the Company would receive $680,000 in connection
with the exercise of the Warrants.
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, as well
as pursuant to the terms of its agreement with Technology Partnerships Canada.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
10
<PAGE>
PRICE RANGE OF COMMON SHARES
The Common Shares have been traded under the symbol "SSPI" 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......................................... 6.563 4.625 9.200 7.000
Third Quarter.......................................... 5.625 2.500 7.800 4.100
Fourth Quarter......................................... 4.000 2.500 6.750 3.550
CALENDAR YEAR 1999
First Quarter.......................................... US$ 3.688 US$1.875 Cdn$ 5.500 Cdn$ 2.750
</TABLE>
At March 31, 1999, the Company had 159 shareholders of record and
10,268,954 Common Shares outstanding, including 233,300 Common Shares held in
treasury. Of these amounts, there were 131 U.S. shareholders of record holding a
total of 9,350,017 Common Shares, or 91.05% of the Common Shares outstanding.
11
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 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 DECEMBER 31,
1998
----------------------
ACTUAL AS ADJUSTED
------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt.......................................................... $ 80 $ 80
------- ---------
------- ---------
Long-term debt, net of current portion..................................................... $ 75 $ 75
Shareholders' equity:
Common Shares, no par value, 50,000,000 shares authorized; 10,268,954 shares
issued and outstanding(1)............................................................. 16,309 16,990
Warrants................................................................................. 140 --
Treasury stock, at cost, 233,300 shares.................................................. (1,232) (1,232)
Additional paid-in capital................................................................. 76 76
Retained earnings.......................................................................... (1,671) (1,671)
Accumulated other comprehensive earnings
Cumulative translation adjustment........................................................ (1,861) (1,861)
------- ---------
Total shareholders' equity............................................................... 11,761 12,302
------- ---------
Total capitalization..................................................................... $11,836 $ 12,377
------- ---------
------- ---------
</TABLE>
- ------------------
(1) Does not include 1,763,884 Common Shares issuable upon exercise of
outstanding options and 55,541 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 1994, 1995, 1996, 1997
and 1998 and "Balance Sheet Data" as of December 31, 1994, 1995, 1996, 1997 and
1998 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, 1998 and the auditors' report thereon are included elsewhere
in this Prospectus. The "Statements of Operations Data" for fiscal year 1994 and
the "Balance Sheet Data" as of December 31, 1994 and 1995 are derived from
audited financial statements that are not included herein. 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.
12
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1994 1995 1996 1997 1998(1)
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
(U.S. GAAP)
STATEMENTS OF OPERATIONS DATA:
Sales.............................................................. $11,999 $12,904 $20,063 $26,207 $26,000
Cost of sales...................................................... 5,209 5,688 8,340 11,180 10,607
------- ------- ------- ------- -------
Gross profit....................................................... 6,790 7,216 11,723 15,027 15,393
General and administrative......................................... 1,635 2,068 3,049 3,146 3,417
Sales and marketing................................................ 4,283 3,198 3,880 4,769 7,204
Depreciation and amortization expenses............................. 260 422 497 644 1,299
Research and development expense................................... 338 1,340 2,130 2,536 4,374
Acquired in-process research and development charge................ -- -- -- 872 2,640
------- ------- ------- ------- -------
Earnings (loss) from operations.................................... 274 188 2,167 3,060 (3,541)
Interest and bank charges.......................................... (30) (31) (23) 2 (149)
Other income....................................................... 196 484 29 12 (7)
------- ------- ------- ------- -------
Earnings (loss) before income taxes and discontinued operations.... 440 641 2,173 3,074 (3,697)
Income taxes (recovery)............................................ 120 365 724 1,534 (789)
------- ------- ------- ------- -------
Earnings (loss) from continuing
operations....................................................... 320 276 1,449 1,540 (2,908)
Earnings (loss) from discontinued operations....................... (1,905) (1,027) 129 (535) --
------- ------- ------- ------- -------
Net earnings (loss)................................................ $(1,585) $ (751) $ 1,578 $ 1,005 $(2,908)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Foreign currency translation....................................... (506) 216 (108) (357) (894)
------- ------- ------- ------- -------
Comprehensive earnings (loss)...................................... (2,091) (535) 1,470 648 (3,802)
------- ------- ------- ------- -------
Basic Earnings (loss) per share from continuing operations......... $ 0.04 $ 0.03 $ 0.16 $ 0.17 $ (0.29)
Basic Earnings (loss) per share from discontinued operations....... (0.22) (0.11) 0.01 (0.06) --
------- ------- ------- ------- -------
Basic Earnings (loss) per share.................................... $ (0.18) $ (0.08) $ 0.17 $ 0.11 $ (0.29)
------- ------- ------- ------- -------
Weighted average number of common shares outstanding (basic)....... 8,759 9,001 9,195 9,235 9,860
Diluted earnings (loss) per share from continuing operations....... $ 0.04 $ 0.03 $ 0.15 $ 0.16 $ (0.29)
Diluted earnings (loss) per share from discontinued operations..... (0.21) (0.11) 0.01 (0.06) --
------- ------- ------- ------- -------
Diluted earnings (loss) per share.................................. $ (0.17) $ (0.08) $ 0.16 $ 0.10 $ (0.29)
------- ------- ------- ------- -------
Weighted average number of common shares outstanding (Diluted)..... 9,120 9,575 9,782 9,608 9,860
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................................................... $ 4,964 $ 5,614 $ 7,032 $ 7,514 4,970
Total assets....................................................... 10,552 11,368 14,983 16,484 19,447
Long-term debt, net of current maturities.......................... 37 10 -- 75 75
Shareholders' equity............................................... 7,937 8,088 9,923 10,487 11,761
</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.
13
<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. Under the terms of a typical development
contract, Spectrum is obligated to deliver a finished DSP system or product
consisting of hardware, custom chip set and software, all to meet performance
specifications established between the parties. The Company first derived
revenues from development contract fees in 1994. Development contract fees are
recognized as revenue upon the achievement of predetermined development
milestones, which also typically coincide with invoicing and payments. See
Note 1 of the Notes to the Company's financial statements. Costs associated with
development contract fees are generally included in research and development
expenses. The timing and amount of development contract fees and the relative
mix between products sold to the military/aerospace and commercial markets has
affected and will continue to affect period-to-period comparisons of gross
profit and income from operations.
Beginning with the first quarter of 1998, the Company adopted a policy of
publishing its financial statements in United States dollars and preparing its
financial statements in accordance with U.S. GAAP. In accordance with the views
of the Commission, the Company has re-stated the historical financial statements
and data contained herein to U.S. GAAP and using US$.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Sales..................................................................... 100.0% 100.0% 100.0%
Cost of sales............................................................. 41.6 42.7 40.8
----- ----- -----
Gross margin.............................................................. 58.4 57.3 59.2
Administrative, sales and marketing expenses.............................. 34.5 30.2 40.9
Depreciation and amortization expenses.................................... 2.5 2.5 5.0
Research and development expenses......................................... 10.6 9.7 16.8
Acquired in-process research and development charge....................... -- 3.3 10.1
----- ----- -----
Earnings from operations.................................................. 10.8 11.6 (13.6)
Interest and bank charges................................................. (0.1) 0.0 (0.6)
Other income.............................................................. 0.1 0.0 0.0
----- ----- -----
Earnings before income taxes and discontinued operations.................. 10.8 11.6 (14.2)
Income taxes (recovery)................................................... 3.6 5.8 3.0
----- ----- -----
Earnings from continuing operations....................................... 7.2 5.8 (11.2)
Earnings (loss) from discontinued operations.............................. 0.6 (2.0) 0.0
----- ----- -----
Net earnings (loss)....................................................... 7.8% 3.8% (11.2)%
----- ----- -----
----- ----- -----
</TABLE>
14
<PAGE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Sales. Sales from continuing operations for 1998 were relatively constant
at $26,000,000, compared to sales of $26,207,000 for 1997. Included in sales for
1998 were development contract fees of $1,530,000, or 5.9% of sales for the
year, compared to development contract fees of $1,589,000, or 6.1% of sales, for
1997. Also included in sales for 1998 were revenues from the Company's
internally developed C3X, C4X and C6X products of $7,511,000, or 28.9%, of sales
for the year, compared to $6,205,000, or 23.7%, of sales for 1997. Also included
in sales for 1998 were revenues from the sale of Loughborough Products of
$4,872,000, or 18.7% of sales, compared to sales of Loughborough Products of
$12,234,000, or 46.7% of sales, during 1997. Sales for 1998 also reflect the
inclusion of $5,791,000, or 22.3% of sales, from Alex Computer which was
acquired in 1998.
Gross Profit. Gross profit increased to $15,393,000 for 1998 from
$15,027,000 for 1997, an increase of 2.4%. Gross margin (profit as a percentage
of sales) increased to 59.2% for 1998 from 57.3% for 1997. The increase in gross
margin was due primarily to increased sales in higher gross margin, internally
developed products as opposed to licensed products.
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 1998 were $10,621,000, or
40.9% of sales for the year, compared to $7,915,000, or 30.2%, of sales for
1997. AS&M expenses are net of foreign exchange gains of $287,000 for 1998,
compared to foreign exchange gains of $323,000 for 1997. AS&M expenses were
higher by $2,706,000 in 1998 due mainly to the costs associated with increased
European and Asian sales and marketing initiatives (approximately $1,016,000),
an increase in the Company's North American sales and marketing staff levels
(approximately $1,062,000) and the inclusion of AS&M expenses of Alex Computer
Systems, which was acquired in1998 (approximately $650,000).
Amortization. Amortization consists of the depreciation of the Company's
fixed assets and amortization of goodwill and other intangibles. Amortization
expense for 1998 was $1,299,000, an increase of $655,000, or 101.7%, over 1997.
The increase in amortization expense was due primarily to the amortization of an
increased investment in goodwill and other intangibles related to the
acquisition of the net assets of Alex Computer in 1998.
Acquired In-process Research and Development Charge. Acquired in-process
research and development ("IPR&D") represents the value assigned in a purchase
business combination to research and development projects of the acquired
business that were commenced but not yet completed at the date of acquisition
and which, if unsuccessful, have no alternative future use in research and
development activities or otherwise. An IPR&D charge of $2,640,000 was expensed
in 1998, compared to $872,000 in 1997. The 1998 charge was recorded in
connection with the purchase of the net assets of Alex Computer based on
management's discounted cash flow valuation. The 1997 charge was recorded in
conjunction with the purchase of 3L Limited.
Although the Company previously reported its quarterly and annual results
for 1998 in accordance with established accounting practice, in April 1999 it
adjusted certain amounts stated in its 1998 consolidated financial statements in
response to new guidance recently provided by the Securities and Exchange
Commission to the accounting profession related to the valuation of IPR&D in
purchase transactions. None of these adjustments impact the Company's net
operating cash flow.
Research and Development. Research and development ("R&D") expenses
consist primarily of salaries, related personnel benefits, engineering service
costs relating to development contract fees and direct overhead costs. R&D
expenses were $4,374,000 for 1998, or 16.8% of sales for the period, compared to
$2,536,000 for 1997, or 9.7% of sales for the period. The expenses in 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
$4,851,000 for 1998, or 18.7% of sales for the year, compared to $4,233,000, or
16.2% of sales for 1997.
Other Income. Other income, consisting primarily of interest income on
short-term deposits and interest expense on bank indebtedness, was an expense of
$156,000 for 1998 compared to other income of $14,000 for
15
<PAGE>
1997. This change was due primarily to increased working capital borrowings
under the Company's Line of Credit during 1998.
Income Taxes. The Company's income tax provision (recovery) for 1998 was
$(789,000), or (21.3%) of earnings before taxes and discontinued operations,
compared to $1,534,000, or 49.9% of earnings before taxes and discontinued
operations for 1997. The percentage for 1998 was unusually low due to the
significant impact of the acquired IPR&D charge in the first quarter of 1998, a
significant portion of which is non-deductible for tax purposes. The Company's
income tax provision (recovery) for 1998 was 74.6% of earnings before taxes and
the charge related to IPR&D. Excluding the portion of the income tax provision
related to the acquired IPR&D, the remaining income tax provision was 30.3% of
earnings before taxes and the charge related to IPR&D.
Net Earnings. The Company had earnings (loss) from continuing operations
for 1998 of $(2,908,000), compared to earnings (loss) from continuing operations
for 1997 of $1,540,000. Earnings (loss) per share (basic) from continuing
operations in 1998 was $(0.29) per share, compared to earnings (loss) per share
(basic) from continuing operations of $0.17 per share in 1997. Earnings (loss)
from continuing operations before the charge related to acquired IPR&D for 1998
was $(268,000), or earnings (loss) of $(0.03) per share (basic), compared to
earnings (loss) from continuing operations before the charge related to acquired
IPR&D of $2,412,000, or earnings (loss) of $0.26 per share (basic) in 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Sales. Sales from continuing operations in 1997 were $26,207,000, an
increase of $6,144,000, or 30.6%, over sales in 1996. Included in 1997 sales
were development contract fees of $1,589,000, or 6.1% of 1997 sales, compared to
development contract fees in 1996 of $1,700,000, or 8.5% 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 the
release of new products directed at the signal intelligence marketplace which
generated an incremental $7,699,000 in sales, as well as an increase in sales of
Loughborough Products of $1,240,000. This growth in sales was offset in part by
declines in general commercial sales of approximately $2,689,000. The Company
believes the sale of Loughborough Products will continue to account for a
decreasing percentage of the Company's sales. See "Business--Amendment of the
Loughborough License."
Gross Profit. Gross profit increased to $15,027,000 for 1997 from
$11,723,000 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
$7,915,000, or 30.2% of 1997 sales, compared to $6,929,000 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.
Amortization. Amortization expenses in 1997 were $644,000, an increase of
$147,000, or 29.4%, 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
$2,536,000 in 1997, or 9.7% of 1997 sales, compared to $2,130,000 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 $3,890,000 in 1997, or 14.8% of 1997 sales, compared to $2,753,000 in
1996, or 13.8% of 1996 sales.
Other Income. Other income, consisting primarily of interest income on
short-term deposits was $14,000 in 1997 compared to other income in 1996 of
$6,000.
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Income Taxes. Deferred income taxes for 1997 were $1,534,000, or 49.9% of
earnings before taxes and discontinued operations, compared to $724,000, or
33.3% of earnings before taxes and discontinued operations for 1996.
Net Earnings. The Company had earnings from continuing operations in 1997
of $1,540,000 compared to earnings of $1,449,000 in 1996. Earnings per share
(basic) from continuing operations in 1997 was $0.17 per share, compared to
earnings per share (basic) from continuing operations of $0.16 per share in
1996.
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 the low gross margins prevalent in this market segment. Sales of
desktop CTI products accounted for 32.2% of sales in 1996 and 1.9% of sales in
1997. The Company's desktop CTI operations were closed effective December 31,
1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has met is operating and capital requirements from
cash flow from operations and from funds generated by sale of its equity
securities.
The Company has a credit facility with the Bank of Montreal (the "Bank")
consisting of a Cdn$5,000,000 (approximately US$3,300,000) operating line of
credit (the "Line of Credit"). The Company's US dollar borrowing capacity under
its Canadian dollar-denominated Line of Credit will vary period to period based
on exchange rate fluctuations. Borrowings under the Line of Credit bear interest
at the Bank's US base rate plus 1/2%, unless the borrowings are denominated in
Canadian dollars, in which case the rate of interest is the Bank's prime rate
plus 1/2%. Borrowings are due on demand and interest is to be paid monthly.
Borrowings may not exceed certain percentages of a specified borrowing base
consisting of domestic and foreign accounts receivable and inventories. The Line
of Credit agreement requires the Company to maintain certain financial ratios,
including a current ratio of 1.50 to 1.00 and a debt to tangible net worth ratio
of 1.25 to 1.00. The Company believes it is in substantial compliance with the
terms of the Line of Credit. Borrowings under the Line of Credit are secured by
substantially all of the Company's current assets. At March 31, 1999, the
Company had net outstanding borrowings under the Line of Credit of approximately
US$233,000.
At December 31, 1998 and December 31, 1997, the Company's net cash
(overdraft) position was $(509,000) and $1,383,000 respectively. Net cash
provided by (used in) operations, financing and investments was $310,000 and
$(94,000) in the years ended December 31, 1998 and 1997 respectively. For 1998,
cash used in operations, financing and investments consisted primarily of cash
generated from the issuance of Common Shares, warrants and long-term debt. Cash
was used primarily for the acquisition of the net assets of Alex Computer
Systems, funding operations, and the purchase of property and equipment 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 outstanding
stock options. Cash was used primarily for the acquisition of 3L Limited, to
increase inventories, fund discontinued operations, purchase treasury shares and
for the purchase of property and equipment and software and related development
costs. For 1996, cash provided by operations, financing and investments
consisted principally of cash from continuing and discontinued operations and
the proceeds from the issuance of Common Shares upon the exercise of outstanding
stock options. Cash was used primarily to increase accounts receivable and for
the purchase of property and equipment and software and related development
costs.
Accounts receivable, net at December 31, 1998 and December 31, 1997 was
$5,404,000 and $6,549,000 respectively. The Company's standard collection terms
are net 30 days, subject to adjustment for certain customers.
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The Company made capital expenditures of $1,036,000 and $2,433,000 during
1998 and 1997, respectively, primarily for computer equipment and software and
related development costs. In 1997, the Company invested $1,202,000 in the
purchase of treasury shares and invested $746,000 in the acquisition of 100% of
the shares of 3L Limited, net of $188,000 in cash acquired. On March 17, 1998,
the Company effectively acquired pursuant to an acquisition agreement the net
assets of Alex Computer Systems. The consideration paid by the Company consisted
of $675,000 in cash, the assumption of $1,074,000 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 (USD$6.34) per share.
In March 1999, the Company enterted into an agreement with Technology
Partnerships Canada ("TPC"), an agency of the Canadian government, providing for
an investment in the Company to finance approximately one-third of the Company's
research and development costs to develop a new product line targeted to the
telecommunications market. The agreement provides for a maximum commitment by
TPC of $4.35 million. The Company plans to use the funds to accelerate
development of next-generation hardware and software systems that can be
deployed in high-end commercial applications, such as telecommunications servers
and wireless base stations. The investment is structured as a repayable
investment, with repayment beginning no earlier than 2001, by way of royalties
on the new products being financed by the investment. The investment is also
repayable immediately upon the occurrence of certain events of default, which
include bankruptcy events.
The Company believes that cash generated from operations and borrowings
available under the Line of Credit, as well as funds received from TPC, will be
sufficient to meet its working capital and capital expenditure requirements in
1999. However, the Company may in the future require additional equity or debt
financing to meet its working capital, property and equipment and acquisition
requirements. There can be no assurance that additional financing will not be
required sooner, or, if required, that it will be available on a timely basis or
on terms satisfactory to the Company.
LITIGATION
The Company has initiated a lawsuit against Alex Informatics Inc. seeking
recovery of approximately $255,000 in expenses incurred in connection with the
acquisition of the net assets of Alex Computer reimbursable to Spectrum under
the terms of the acquisition agreement relating to the purchase of that company.
INFLATION, FOREIGN CURRENCY FLUCTUATIONS AND HEDGING
The Company believes that inflation and other changes in prices have not
had a material effect on the Company. The Company intends to continue to sell
the majority of its products in US dollars while incurring costs in varying
proportions in Canadian dollars, US dollars and other currencies. Thus, the
Company's operations are susceptible to fluctuations in currency exchange rates.
In addition, if the Canadian dollar rises relative to the US dollar, the
Company's reported operating expenses and net income may be materially and
adversely affected. Since 1995, the Company has entered into futures contracts
to attempt to reduce a portion of its exposure to foreign exchange rate
fluctuations. Such contracts typically have maturities of no greater than three
months when entered into. The market price of such contracts generally
approaches the spot exchange rates as the contract approaches expiration of its
term. The maximum amount the Company has hedged under such futures contracts at
any one time is Cdn$3,000,000. While the Company does attempt to mitigate some
of the risks of exchange rate fluctuations between the US dollar and the
Canadian dollar by denominating many of its payment obligations in US dollars
and, to a lesser extent, through its use of exchange-traded or over-the-counter
contracts, there can be no assurance that these strategies will substantially
reduce the potential adverse effect of exchange rate fluctuations on the
Company's business, financial condition or results of operations.
YEAR 2000 ISSUE
The Company has established a Year 2000 program to coordinate and monitor
the assessment, conversion or replacement, and testing of computer systems
throughout the Company to ensure key business information and process control
systems will function successfully after December 31, 1999. In addition, the
Company is taking steps to ensure that all relevant non-information technology
systems will be Year 2000 compliant. 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
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determined that its major internal system, the MRP system, is Year 2000
compliant, which means that internal order processing and filling will be
unaffected.
The Company has committed 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. The Company
has completed its assessment of internal Year 2000 issues. The Company does not
expect to incur any costs in remediating (where required) any Year 2000 issues
relating to its business, other than the time spent by employees on ensuring
compliance. In any case, total costs to the Company with respect to its Year
2000 compliance activities are not anticipated to be material to the Company's
financial condition or results of operations in any given year. These costs and
the date on which the Company plans to complete Year 2000 modification and
testing processes are based on management's best estimates, which were derived
utilizing numerous assumptions. However, there can be no guarantee that these
estimates will prove to be accurate and actual results could differ
significantly.
As the Company relies on third party suppliers for utilities,
transportation, and other key services, interruption of supplier operations
could affect the Company's operations, however, this risk is being assessed and
contingency plans being developed. The Company has initiated communications with
suppliers with which it does significant business to determine the extent to
which the Company may be vulnerable to such parties' failure to remedy their own
Year 2000 problems. The Company expects to complete its assessment of third
party Year 2000 risks by June 30, 1999. There can be no assurance that the
systems of such suppliers will be converted on a timely basis.
The Company's Year 2000 contingency plans are as follows: (i) all "critical
path" systems are being identified and testing will be continuous, (ii) back-up
systems are being put in place for alternate suppliers for all aspects of
production and delivery, and (iii) the Company already has in place a redundant
system of supply for its manufactured products. Continuing monitoring and risk
management are taking place and the Company's contingency plans will be updated
as new issues are identified. Based on its current assessment, management
believes the Year 2000 issue will not have a material adverse effect on the
Company's business, financial conditions, or results of operations.
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<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 the operating assets and
liabilities of 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 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 $1,000 to $10,000
per board for standard products (including the Company's catalog product
offerings), to up to $30,000 for the Company's customized DSP boards.
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
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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 net 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: Siemens Medical, NEC, Halliburton
and Sunkist. Sales to these customers represented 13% of the Company's sales for
the year ended December 31, 1998. The Company's commercial products accounted
for approximately 53%, 34% and 50% of sales during 1996, 1997 and 1998,
respectively.
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 commercal (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, and the U.S.
Department of Defense. Sales to these customers represented 2% of the Company's
sales for the year ended December 31, 1998. The Company's radar/sonar products
accounted for approximately 5%, 3% and 3% of sales during 1996, 1997 and 1998,
respectively.
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
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systems in the third quarter of 1996. The Company's customers in this market
include: Hewlett-Packard, GTE, and the U.S. Department of Defense. Sales to
these customers represented 37% of the Company's sales for the year ended
December 31, 1998. The Company's signal intelligence products accounted for
approximately 40%, 60% and 44% of sales during 1996, 1997 and 1998,
respectively.
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, 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. The Company's customers in this market include: Motorola and
Silicon Wireless. Sales to these customers represented 1% of the Company's sales
for the year ended December 31, 1998. The Company's wireless products accounted
for approximately 2%, 3% and 2% of sales during 1996, 1997 and 1998,
respectively.
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 32% of the Company's sales
in 1997 and 1998, respectively. The Company's largest customer, the U.S.
Government (principally the U.S. Department of Defense), accounted for
approximately 25% and 24% of the Company's sales in 1997 and 1998, respectively.
In addition, approximately 10% of the Company's sales during 1997 were made to
NAI Technologies and approximately 9% of the Company's sales during 1998 were
made to Siemens Medical Systems, Inc., each of which was the Company's second
largest customer during the respective periods.
The following chart shows several of the Company's representative customers
for each of the Company's targeted markets:
<TABLE>
<CAPTION>
GENERAL COMMERCIAL RADAR/SONAR SIGNAL INTELLIGENCE WIRELESS
- ------------------- --------------------------- --------------------------- -------------------
<S> <C> <C> <C>
Siemens Medical U.S. Department of Defense U.S. Department of Defense Motorola
Halliburton Boeing Hewlett-Packard Silicon Wireless
NEC GTE
Sunkist
</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
March 31, 1999 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.
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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 March 31, 1999, the Company
employed 60 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 1996, 1997 and 1998, the Company's research and development
expenditures were approximately $3,400,000, $4,233,000 and $4,851,000,
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).
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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 1996, 1997 and 1998, sales of Loughborough Products
accounted for approximately 33%, 30% and 19%, 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.
AMENDMENT OF THE LOUGHBOROUGH LICENSE
In 1996, 1997 and 1998, sales of Loughborough Products accounted for
approximately 33%, 30% and 19%, 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
24
<PAGE>
particular, early in 1998, Loughborough merged with Mizar, Inc., 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, as the Company moves away from those product lines,
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 24 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 company's headquarters, 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 22 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.
EMPLOYEES
As of March 31, 1999, the Company had a total of 150 full-time employees,
of which 44 were administrative personnel, 46 were sales and marketing personnel
and 60 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.
25
<PAGE>
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)............................ 45 President, Chief Executive Officer and Director
Martin McConnell................................ 47 Vice President, Finance, Chief Financial Officer
and Secretary
Brian Lowe...................................... 48 Vice President, Sales
Douglas Johnson................................. 35 Vice President, Logistics
David Hobbs..................................... 43 Vice President, Engineering
Ronald Wages.................................... 36 Vice President, Marketing
Andrew Harries.................................. 37 Director
Pascal Spothelfer............................... 39 Director
John E. Brennan................................. 52 Director
Charles C. Johnston(2).......................... 63 Director
Samuel Znaimer(1)(2)(3)......................... 42 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.
26
<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.
Andrew Harries has been a Director of the Company since 1999. Mr. Harries
is currently Vice-President, Marketing of Sierra Wireless Inc., a wireless data
modem company he co-founded in 1993.
Pascal Spothelfer has been a Director of the Company since 1999.
Mr. Spothelfer is currently the Senior Vice-President, Strategic Development at
Teekay Shipping (Canada) Ltd. From 1994 to 1998, Mr. Spothelfer served as the
Chief Operating Officer and later President and CEO of NovAtel Inc., a high tech
company specializing in global positioning 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 nine times in 1998. 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 twice in 1998. 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 once in 1998.
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 1998.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Aggregate compensation paid to all directors and officers as a group for
services in all capacities during 1998 was $694,790. 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 1998.
27
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS(#)
- ------------------------------------------------------ ---- -------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Barry W. Jinks........................................ 1998 $158,155 $ -- $291 13,000
President and Chief Executive Officer 1997 158,910 104,985 205 13,000
1996 141,684 84,622 242 --
</TABLE>
The following table sets forth certain information with respect to the
aggregate number and value of options exercisable by the Company's Chief
Executive Officer at December 31, 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
SHARES VALUE YEAR END(#) FISCAL YEAR END(1)
ACQUIRED ON REALIZED ----------------------------- -----------------------------
NAME EXERCISE(#) (CDN$) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Barry W.
Jinks........ 0 N/A 410,771 63,401 $ 861,538 $ 0
</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 Nasdaq National
Market on December 31, 1998 ($2.88 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 1998, the Board of Directors approved a fee of $670 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 $13,407
per year, payable quarterly. For the last completed financial year, Mr. Spencer
received a total of $13,407 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.
28
<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 March 31, 1999, options to purchase an aggregate of 1,763,884 Common
Shares were outstanding under options issued to directors, officers and eligible
employees under the Plan. Exercise prices under the foregoing options range from
$0.48 to $10.47 per share. Of such options, options to purchase 1,018,672 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 March 31, 1999 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>
COMMON SHARES NUMBER OF COMMON SHARES
BENEFICIALLY OWNED COMMON BENEFICIALLY OWNED
BEFORE THE OFFERING(2) SHARES BEING AFTER THE OFFERING(2)
----------------------- OFFERED -----------------------
NAME AND ADDRESS(1) NUMBER PERCENT ------------ NUMBER PERCENT
- ----------------------------------------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
George Henry(3).......................... 811,454 8.1% -- 811,454 8.1%
c/o G. Howard Associates Inc.
1725 York Avenue
New York, New York 10128
Kenneth A. Spencer(4).................... 23,334 * -- 23,334 *
Barry W. Jinks(5)........................ 439,199 4.2% -- 439,199 4.2%
Martin McConnell(6)...................... 87,000 * -- 87,000 *
Brian Lowe(7)............................ 67,100 * -- 67,100 *
Douglas Johnson(8)....................... 54,500 * -- 54,500 *
David Hobbs(9)........................... 65,500 * -- 65,500 *
Ronald Wages(10)......................... 35,334 * -- 35,334 *
Andrew Harries........................... -- * -- -- *
Pascal Spothelfer........................ -- * -- -- *
John E. Brennan(11)...................... 77,334 * -- 77,334 *
Charles C. Johnston(12).................. 317,434 3.2% -- 317,434 3.2%
Samuel Znaimer(12)....................... 22,334 * -- 22,334 *
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 8.2% 821,192 -- --
All directors and executive officers
as a group (12 persons)(15)............ 1,189,069 11.0% 1,189,069 11.0%
</TABLE>
(Footnotes on next page)
29
<PAGE>
(Footnotes from previous pages)
- ------------------
* 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 10,035,654 Common
Shares outstanding as of December 31, 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 December 31, 1998.
(3) Includes 8,334 Common Shares issuable upon the exercise of options.
(4) Includes 3,334 Common Shares issuable upon exercise of options.
(5) Includes 410,771 Common Shares issuable upon the exercise of options.
(6) Includes 84,000 Common Shares issuable upon the exercise of options.
(7) Includes 66,500 Common Shares issuable upon the exercise of options.
(8) Includes 53,500 Common Shares issuable upon the exercise of options.
(9) Includes 58,000 Common Shares issuable upon the exercise of options.
(10) Includes 33,334 Common Shares issuable upon the exercise of options.
(11) Includes 8,334 Common Shares issuable upon the exercise of options.
(12) Includes 18,334 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 754,441 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 March 31, 1999, there were 10,268,954 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
30
<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 $115 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
$3.6 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.
31
<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
32
<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 $2,157.
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.
33
<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.
34
<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.
35
<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.
36
<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>
37
<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, 1997 and 1998........................................ F-4
Consolidated Statements of Operations (audited) for the years ended December 31, 1996, 1997,
and 1998................................................................................................. F-5
Consolidated Statements of Stockholders' Equity (Deficit) (audited) for the years ended December 31, 1996,
1997 and 1998............................................................................................ F-6
Consolidated Statements of Cash Flows (audited) for the years ended December 31, 1996, 1997, and
1998..................................................................................................... F-7
Notes to Consolidated Financial Statements................................................................. F-8
</TABLE>
INDEX TO FINANCIAL STATEMENTS OF
ALEX COMPUTER SYSTEMS, INC. (YEAR END)
<TABLE>
<S> <C>
Independent Auditors' Report............................................................................... F-23
Balance Sheets (audited) at July 31, 1997 and 1996......................................................... F-24
Statements of Income and Retained Earnings (audited) for the years ended July 31, 1997 and 1996............ F-25
Statements of Cash Flows (audited) for the years ended July 31, 1997 and 1996.............................. F-26
Notes to Financial Statements.............................................................................. F-27
</TABLE>
INDEX TO FINANCIAL STATEMENTS OF
ALEX COMPUTER SYSTEMS, INC. (INTERIM)
<TABLE>
<S> <C>
Balance Sheet (unaudited) at February 28, 1998............................................................. F-33
Statements of Earnings and Retained Earnings (unaudited) for the seven months ended February 28, 1998...... F-34
Statements of Cash Flows (unaudited) for the seven months ended February 28, 1998.......................... F-35
Notes to Financial Statements.............................................................................. F-36
</TABLE>
INDEX TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF
SPECTRUM SIGNAL PROCESSING INC.
<TABLE>
<S> <C>
Pro Forma Consolidated Statements of Operations (unaudited) for the years ended December 31, 1997 and
1998..................................................................................................... F-41
Notes to Pro Forma Consolidated Financial Statements....................................................... F-42
</TABLE>
F-1
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
INDEX TO FINANCIAL STATEMENTS
(PREPARED IN ACCORDANCE WITH ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE
UNITED STATES)
<TABLE>
<S> <C>
Auditors' Report........................................................................................... F-3
Consolidated Balance Sheets................................................................................ F-4
Consolidated Statements of Operations...................................................................... F-5
Consolidated Statements of Stockholders' Equity............................................................ F-6
Consolidated Statements of Cash Flows...................................................................... F-7
Notes to Consolidated Financial Statements................................................................. F-8
</TABLE>
F-2
<PAGE>
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Spectrum Signal Processing
Inc. as at December 31, 1998 and 1997 and the consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
three year period ended December 31, 1998. 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, 1998
and 1997 and the results of its operations and its cash flows for each of the
years in the three year period ended December 31, 1998 in accordance with
generally accepted accounting principles in the United States.
On February 4, 1999, we reported separately to the shareholders of the Company
on the consolidated financial statements as at and for the periods presented
above, which consolidated financial statements were prepared in accordance with
Canadian generally accepted accounting principles.
KGMG LLP
Chartered Accountants
Richmond, Canada
February 4, 1999
F-3
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
------- -------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................................................. $ 1,693 $ 1,383
Accounts receivable, net of allowance for doubtful accounts of $173 (1997--$170).......... 5,404 6,549
Inventories............................................................................... 4,935 4,061
Prepaid expenses.......................................................................... 203 220
------- -------
12,235 12,213
Property and equipment (Note 3)............................................................. 2,287 2,448
Other assets (Note 4)....................................................................... 4,925 1,823
------- -------
$19,447 $16,484
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank indebtedness (Note 5)................................................................ $ 2,202 $ --
Accounts payable.......................................................................... 3,680 2,990
Accrued liabilities....................................................................... 1,303 1,690
Deferred revenue.......................................................................... -- 19
Current portion of long-term debt (Note 5)................................................ 80 --
------- -------
7,265 4,699
Long-term debt (Note 5)..................................................................... 75 75
Deferred income taxes (Note 7).............................................................. 346 1,223
Shareholders' equity
Share capital (Note 6)
Authorized 50,000,000 common shares, no par value
Issued 10,268,954 (1997--9,459,397).................................................... 16,309 11,373
Outstanding 10,035,654 (1997--9,226,097)
Warrants (Note 6)........................................................................... 140 --
Additional paid-in capital.................................................................. 76 76
Treasury stock, at cost, 233,300 shares (1997--233,300)..................................... (1,232) (1,232)
Retained earnings (deficit)................................................................. (1,671) 1,237
Accumulated other comprehensive income
Cumulative translation adjustments........................................................ (1,861) (967)
------- -------
Commitments and contingencies (Notes 9 & 14)................................................ 11,761 10,487
------- -------
$19,447 $16,484
------- -------
------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER SHARE AMOUNTS)
PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Sales (Note 10).................................................................. $26,000 $26,207 $20,063
Cost of sales.................................................................... 10,607 11,180 8,340
------- ------- -------
15,393 15,027 11,723
Expenses
Administrative................................................................. 3,417 3,146 3,049
Sales and marketing............................................................ 7,204 4,769 3,880
Amortization................................................................... 1,299 644 497
Acquired in-process research and development charge............................ 2,640 872 --
Research and development....................................................... 4,374 2,536 2,130
------- ------- -------
18,934 11,967 9,556
------- ------- -------
Earnings (loss) from operations.................................................. (3,541) 3,060 2,167
Other
Interest income (expense) and bank charges..................................... (149) 2 (23)
Other income (expense)......................................................... (7) 12 29
------- ------- -------
(156) 14 6
------- ------- -------
Earnings (loss) before income taxes and discontinued operations.................. (3,697) 3,074 2,173
Income tax expense (recovery) (Note 7)
Current........................................................................ 88 -- --
Deferred....................................................................... (877) 1,534 724
------- ------- -------
(789) 1,534 724
------- ------- -------
Earnings (loss) from continuing operations....................................... (2,908) 1,540 1,449
Earnings (loss) from discontinued operations (Note 11)........................... -- (535) 129
------- ------- -------
Net earnings (loss).............................................................. $(2,908) $ 1,005 $ 1,578
------- ------- -------
------- ------- -------
Earnings (loss) per share (Note 8)
Basic
From continuing operations.................................................. $ (0.29) $ 0.17 $ 0.16
After discontinued operations............................................... $ (0.29) $ 0.11 $ 0.17
Diluted
From continuing operations.................................................. $ (0.29) $ 0.16 $ 0.15
After discontinued operations............................................... $ (0.29) $ 0.10 $ 0.16
Weighted average shares (in thousands)
Basic....................................................................... 9,860 9,235 9,195
Diluted..................................................................... 9,860 9,608 9,782
------- ------- -------
------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT NUMBER OF SHARES)
PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES.
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL WARRANTS TREASURY STOCK RETAINED OTHER
-------------------- PAID IN ---------------- ------------------ EARNINGS COMPREHENSIVE
NUMBER AMOUNT CAPITAL NUMBER AMOUNT NUMBER AMOUNT (DEFICIT) INCOME (LOSS)
---------- ------- ---------- ------- ------ -------- ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance
December 31, 1995.. 9,163,974 $9,891 $ 76 -- $ -- (16,400) $ (30) $(1,346) $ (502)
Net earnings....... -- -- -- -- -- -- -- 1,578 --
Foreign currency
translation...... -- -- -- -- -- -- -- -- (108)
Issued for cash
from share
options.......... 79,709 364 -- -- -- -- -- -- --
---------- ------- ---- ------- ---- -------- ------- -------- -------
Balance
December 31, 1996.. 9,243,683 10,255 76 -- -- (16,400) (30) 232 (610)
Net earnings....... -- -- -- -- -- -- -- 1,005 --
Foreign currency
translation...... -- -- -- -- -- -- -- -- (357)
Issued for cash
from share
options.......... 42,381 184 -- -- -- -- -- -- --
Issued for
acquisition of 3L
Limited.......... 173,333 934 -- -- -- -- -- -- --
Purchase of
treasury stock... -- -- -- -- -- (216,900) (1,202) -- --
---------- ------- ---- ------- ---- -------- ------- -------- -------
Balance
December 31, 1997.. 9,459,397 11,373 76 -- -- (233,300) (1,232) 1,237 (967)
Net loss........... -- -- -- -- -- -- -- (2,908) --
Foreign currency
translation...... -- -- -- -- -- -- -- -- (894)
Issued for cash
from share
options.......... 36,931 149 -- -- -- -- -- -- --
Issued for net
assets of Alex
Computer
Systems.......... 772,626 4,787 -- -- -- -- -- -- --
Issuance of
warrants......... -- -- -- 110,375 140 -- -- -- --
---------- ------- ---- ------- ---- -------- ------- -------- -------
Balance,
December 31, 1998.. 10,268,954 $16,309 $ 76 110,375 $140 (233,300) $(1,232) $(1,671) $(1,861)
---------- ------- ---- ------- ---- -------- ------- -------- -------
---------- ------- ---- ------- ---- -------- ------- -------- -------
<CAPTION>
COMPREHENSIVE
TOTAL INCOME (LOSS)
-------- -------------
<S> <C> <C>
Balance
December 31, 1995.. $ 8,089 $ --
-------
-------
Net earnings....... 1,578 1,578
Foreign currency
translation...... (108) (108)
Issued for cash
from share
options.......... 364 --
-------- -------
Balance
December 31, 1996.. 9,923 1,470
-------
-------
Net earnings....... 1,005 1,005
Foreign currency
translation...... (357) (357)
Issued for cash
from share
options.......... 184 --
Issued for
acquisition of 3L
Limited.......... 934 --
Purchase of
treasury stock... (1,202) --
-------- -------
Balance
December 31, 1997.. 10,487 648
-------
-------
Net loss........... (2,908) (2,908)
Foreign currency
translation...... (894) (894)
Issued for cash
from share
options.......... 149 --
Issued for net
assets of Alex
Computer
Systems.......... 4,787 --
Issuance of
warrants......... 140 --
-------- -------
Balance,
December 31, 1998.. $ 11,761 $(3,802)
-------- -------
-------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)............................................................... $(2,908) $1,005 $1,578
Deduct (add) earnings (loss) from discontinued operations......................... -- 535 (129)
------- ------ ------
Earnings (loss) from continuing operations........................................ (2,908) 1,540 1,449
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities
Amortization................................................................... 1,915 781 641
Acquired in-process research and development................................... 2,640 872 --
Deferred income taxes.......................................................... (826) 1,534 724
Deferred share issue costs..................................................... -- 193 --
Changes in operating assets and liabilities
Accounts receivable............................................................ 1,154 1,882 (3,440)
Inventories.................................................................... (739) (2,311) 571
Prepaid expenses............................................................... 2 311 (230)
Accounts payable............................................................... 149 (366) 501
Accrued liabilities............................................................ 150 488 635
Deferred revenue............................................................... (18) (616) 635
------- ------ ------
Net cash provided by continuing operations.......................................... 1,519 4,308 1,486
------- ------ ------
Earnings (loss) from discontinued operations...................................... -- (535) 129
Deferred income taxes, an item not involving cash................................. -- (340) 64
------- ------ ------
Net cash provided by (used for) discontinued operations............................. -- (875) 193
------- ------ ------
Net cash provided by operating activities........................................... 1,519 3,433 1,679
------- ------ ------
Cash flows from investing activities:
Purchase of property and equipment................................................ (559) (1,040) (1,042)
Proceeds from disposition of property and equipment............................... 1 -- --
Software and related development costs............................................ (477) (1,393) (631)
Acquisition of net assets of Alex Computer, net of cash received.................. (2,204) -- --
Cash received on acquisition of 3L Limited, net of expenses....................... -- 188 --
------- ------ ------
Net cash used for investing activities.............................................. (3,239) (2,245) (1,673)
Cash flows from financing activities:
Increase in bank indebtedness..................................................... 2,036 -- --
Payment of deferred share issue costs............................................. -- -- (193)
Issue of shares from share options................................................ 149 184 364
Principal payments on long-term debt.............................................. (61) (7) (30)
Purchase of treasury shares....................................................... -- (1,202) --
------- ------ ------
Net cash provided by (used for) financing activities................................ 2,124 (1,025) 141
Effect of foreign currency exchange rates on cash and cash equivalents.............. (94) (257) (77)
------- ------ ------
Net increase (decrease) in cash and cash equivalents during the year................ 310 (94) 70
Cash and cash equivalents, beginning of year........................................ 1,383 1,477 1,407
------- ------ ------
Cash and cash equivalents, end of year.............................................. $ 1,693 $1,383 $1,477
------- ------ ------
------- ------ ------
</TABLE>
See accompanying notes to consolidated financial statements.
See supplementary information (Note 13).
F-7
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS EXCEPT SHARE AMOUNTS AND
NUMBERS OF SHARES)
PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES.
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 the United States.
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.
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 property and equipment 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 cash equivalents
Cash equivalents include short term deposits, which are all highly
marketable securities with a 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,
----------------
1998 1997
------ ------
<S> <C> <C>
Finished goods....................................................................... $2,683 $2,185
Work in progress..................................................................... 1,132 --
Raw materials........................................................................ 1,120 1,876
------ ------
$4,935 $4,061
------ ------
------ ------
</TABLE>
Research and development costs
Research and development costs are expensed as incurred. Software
development costs related to software which will become an integral part of the
Company's products are, after the establishment of technological feasibility,
capitalized until the product is available for general release to customers.
Annual amortization is the greater of the ratio of current product revenue to
the total current and anticipated product revenue or the straight-line method
over the remaining estimated economic life, generally three years. Amortization
commences when
F-8
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS EXCEPT SHARE AMOUNTS AND
NUMBERS OF SHARES)
PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES.
1. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Research and development expense
Continuing operations................................................. $4,374 $2,536 $2,130
Discontinued operations............................................... -- 304 639
Capitalized software and related development costs.................... 477 1,393 631
------ ------ ------
$4,851 $4,233 $3,400
------ ------ ------
------ ------ ------
</TABLE>
Property and equipment
Property and equipment 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 the lease term.
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.
Employee stock plans
The Company accounts for its employee stock option plans using the
intrinsic value method.
Translation of foreign currencies
A majority of the Company's shareholders, customers, and industry analysts
are located in the United States. Accordingly, effective January 1, 1998, the
Company adopted the U.S. dollar as its reporting currency. Historical figures
previously reported in Canadian dollars have been translated into U.S. dollars
as follows: assets and liabilities are translated into U.S. dollars at the rate
of exchange in effect at the balance sheet date and revenue and expense items
are translated at the average rates for the period. Unrealized gains and losses
resulting from the translation to the reporting currency are accumulated in a
separate component of shareholders' equity, described as cumulative translation
adjustments.
The Company's functional currency is the Canadian dollar. The Company's
financial statements are prepared in Canadian dollars before translation to the
U.S. dollar reporting currency. Accordingly, foreign
F-9
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS EXCEPT SHARE AMOUNTS AND
NUMBERS OF SHARES)
PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES.
1. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
currency denominated balances of the Company are measured in Canadian dollars.
Under this method, monetary assets and liabilities denominated in a foreign
currency have been remeasured in Canadian dollars at the rate of exchange in
effect at the balance sheet date. Other assets, revenue and expense items are
measured using the rate of exchange prevailing at their respective transaction
dates. Exchange gains and losses resulting from the remeasurement of foreign
denominated monetary assets and liabilities in Canadian dollars are reflected in
earnings for the period.
Financial statements of foreign operations for which the functional
currency is the local currency are translated into Canadian dollars using the
current rate at the balance sheet date. Under this method, assets and
liabilities are translated into Canadian dollars at the rate of exchange in
effect at the balance sheet date and revenue and expense items are translated at
the average rates for the period. Unrealized gains and losses resulting from the
translation of the financial statements are deferred and accumulated in a
separate component of shareholders' equity, described as cumulative translation
adjustments.
Goodwill and other intangibles
Goodwill and other intangibles are stated on the basis of cost, based on
fair value at the acquisition date, less accumulated amortization. Amortization
is recorded utilizing the straight-line method over the estimated lives of the
respective assets, generally three to six years.
Revenue recognition
Revenue is recognized upon the later of shipment or when title passes to
the customer. 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 calculates its provision for income taxes in accordance with
Statement of Financial Accounting Standard No. 109 "Accounting for Income Taxes"
("FAS 109"), which requires an asset and liability approach to financial
accounting for income taxes. Under this method, deferred income taxes are
recognized for the future income tax consequences attributable to differences
between the financial statement carrying values and their respective income tax
basis (temporary differences). The resulting changes in the net deferred tax
asset or liability are included in income. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which temporary differences are expected to be recovered or settled.
The effect on deferred income tax assets and liabilities of a change in tax
rates is included in income in the period that includes the enactment date.
Deferred income tax assets are evaluated and if realization is not considered
"more likely than not", a valuation allowance is provided.
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.
F-10
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS EXCEPT SHARE AMOUNTS AND
NUMBERS OF SHARES)
PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES.
1. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Share issue costs
The costs of issuing common shares, net of income tax recoveries thereon,
are applied to reduce the proceeds of such shares.
Foreign currency hedging instruments
The Company enters into future exchange contracts to hedge its foreign
currency risks. Such contracts must be effective at reducing the foreign
currency risk associated with the underlying transaction being hedged and must
be designated as a hedge at the inception of the contract.
The Company currently uses future exchange contracts as hedges of firmly
committed transactions. For these contracts, gains and losses are recognized as
other income or expense in the current period, generally consistent with the
period in which the gain or loss of the underlying transaction is recognized.
Impairment of long-lived assets
The Company monitors the recoverability of long-lived assets, based on
factors such as 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, at
which time the asset is written down to fair market value.
Comparative figures
Certain comparative figures have been reclassified to conform with the
presentation adopted in the current year.
Recent accounting pronouncements
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("FAS") No. 130, "Reporting Comprehensive Income." FAS
No. 130 established standards for reporting and displaying comprehensive income
and its components in the financial statements. The Company adopted FAS No. 130
for its fiscal year 1998.
The FASB issued FAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." FAS No. 131 established standards for the manner in
which public companies report information about operating segments in annual and
interim financial statements. The Company adopted FAS No. 131 for its fiscal
year ended 1998.
The FASB issued FAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities". FAS No. 133 established standards relating to the
recognition and disclosure of all aspects of derivative instruments and hedging
activities. The Company is currently evaluating the impact of FAS No. 133. The
Company will be required to implement FAS No. 133 for its fiscal year ended
2000.
The American Institute of Certified Public Accountants ("AICPA") issued
Statement of Position ("SOP") 97-2, "Software Revenue Recognition." SOP 97-2
established standards relating to the recognition of all aspects of software
revenue. SOP 97-2 required the Company to modify certain aspects of its revenue
recognition policies. The adoption of SOP 97-2 did not have a material impact on
the Company's consolidated results of operations. The Company implemented SOP
97-2 for its fiscal year 1998, on a prospective basis.
F-11
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS EXCEPT SHARE AMOUNTS AND
NUMBERS OF SHARES)
PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES.
1. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
The AICPA issued SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 requires certain costs related
to the development or purchase of internal-use software, including "upgrades and
enhancements," to be capitalized an amortized over the estimated useful life of
the software. SOP 98-1 is effective for transactions entered into in fiscal
years beginning after December 15, 1998. The Company does not expect the
adoption of SOP 98-1 to have a material impact on the Company's consolidated
results of operations.
2. 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:
<TABLE>
<S> <C>
Cash........................................................................................... $ 10
Current assets................................................................................. 1,093
Property and equipment......................................................................... 229
Goodwill and other intangibles................................................................. 4,243
Acquired in-process research and development................................................... 2,640
Current liabilities............................................................................ (933)
Long-term liabilities.......................................................................... (141)
------
Acquisition cost............................................................................... $7,141
------
------
Consideration
772,626 common shares..................................................................... $4,787
110,375 warrants.......................................................................... 140
Cash...................................................................................... 675
Expenses on acquisition................................................................... 1,539
------
$7,141
------
------
</TABLE>
Each Common Share issued pursuant to the acquisition agreement was valued
at the average closing price of the Common Shares on the NASDAQ National Market
during the 30 trading days prior to the date of the acquisition agreement.
Acquired technology valued at $1,010 was acquired as part of the
acquisition of the net assets of Alex Computer Systems ("Alex"). Acquired
technology consisted of Alex's generation one product line, a two-year license
for the use of the Alex name as well as Alex's product brand names, customer
account lists, sales and distribution channels, technical development expertise,
patents, copyrights and existing technical inventory. The Company has
capitalized the value attributable to acquired technology in accordance with the
provisions of FAS No. 2 "Accounting for Research and Development Costs."
Amortization is recorded utilizing the straight-line method over the estimated
useful lives of the respective assets, generally three to five years.
Acquired in-process research and development represents the value assigned
in a purchase business combination to research and development projects of the
acquired business that were commenced but not yet completed at the date of
acquisition and which, if unsuccessful, have no alternative future use in
research and development activities or otherwise. Acquired in-process research
and development consisted of Alex's generation two research and development
projects. Such generation two research and development projects did
F-12
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS EXCEPT SHARE AMOUNTS AND
NUMBERS OF SHARES)
PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES.
2. ACQUISITION OF NET ASSETS OF ALEX COMPUTER SYSTEMS INC.--(CONTINUED)
not represent an improvement of nor redesign of its generation one products. In
accordance with FAS No. 2 as interpreted by FASB interpretation No. 4, amounts
assigned to acquired in-process research and development meeting the above
criteria must be charged to expense at the date of consummation of the purchase
business combination. In this regard, a charge of $2,640 was recorded in
conjunction with the purchase of the net assets of Alex Computer Systems based
on managements' discounted cash flow valuation.
The following unaudited pro-forma results of operations assume that the
acquisition occurred as of the beginning of the respective periods presented.
The pro-forma information given below does not 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,
------------------
1998 1997
------- -------
(UNAUDITED)
<S> <C> <C>
Revenue................................................................................ $27,033 $29,544
Earnings (loss) from continuing operations............................................. (2,911) 2,650
Net earnings (loss).................................................................... (2,911) 2,115
Earnings (loss) per share
From continuing operations........................................................ $ (0.30) $ 0.29
Net............................................................................... $ (0.30) $ 0.23
</TABLE>
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Computer equipment................................................................ $ 2,527 $ 2,103
Computer software................................................................. 1,039 941
Furniture and fixtures............................................................ 820 753
Laboratory equipment.............................................................. 619 503
Leasehold improvements............................................................ 296 296
------- -------
5,301 4,596
Less accumulated amortization..................................................... (3,014) (2,148)
------- -------
Net book value.................................................................... $ 2,287 $ 2,448
------- -------
------- -------
</TABLE>
4. OTHER ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Software and related development costs, net of accumulated amortization
of $876 (1997--$274)............................................................ $ 1,534 $ 1,823
Goodwill and other intangibles, net of accumulated amortization of $554
(1997--nil)..................................................................... 3,391 --
------- -------
$ 4,925 $ 1,823
------- -------
------- -------
</TABLE>
F-13
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS EXCEPT SHARE AMOUNTS AND
NUMBERS OF SHARES)
PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES.
5. LONG-TERM DEBT AND BANK INDEBTEDNESS
(a) Bank Indebtedness
The Company has a credit facility with the Bank of Montreal (the "Bank")
consisting of a Cdn $5,000,000 (approximately US$3,300,000) operating line of
credit (the "Line of Credit"). The Company's US dollar borrowing capacity under
its Canadian dollar denominated Line of Credit will vary period to period based
on exchange rate fluctuations. Borrowings under the Line of Credit bear interest
at the Bank's U.S. base rate plus 1/2%, unless borrowings are denominated in
Canadian dollars, in which case the rate of interest is the Bank's prime rate
plus 1/2%. Borrowings are due on demand and interest is to be paid monthly.
Borrowings may not exceed certain percentages of a specified borrowing base
consisting of domestic and foreign accounts receivable and inventories. 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.
(b) Long-term debt
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1997
---- ----
<S> <C> <C>
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........................................................ $ 75 $ 75
Capital lease
The Company leases office equipment under a capital lease expiring August 1, 1999.
Under the terms of the lease, the Company makes monthly installments of $8,
including interest at 9.58%, with a final payment of $24 on August 1, 1999......... 80 --
---- ----
155 75
Less: current portion................................................................... (80) --
---- ----
$ 75 $ 75
---- ----
---- ----
</TABLE>
Minimum principal repayments over the term of the capital lease are as follows:
<TABLE>
<S> <C>
1999.................................................................................. $ 84
Less: amount representing interest.................................................... (4)
----
80
Less: current portion................................................................. (80)
----
$ --
----
----
</TABLE>
F-14
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS EXCEPT SHARE AMOUNTS AND
NUMBERS OF SHARES)
PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES.
6. SHARE CAPITAL
(a) Stock option plan
The Company has reserved 2,650,000 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.
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.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1998 1997
------------------------------------- -------------------------------------------
NUMBER OF WEIGHTED AVERAGE EXERCISE NUMBER OF WEIGHTED AVERAGE EXERCISE
SHARES PRICE SHARES PRICE
--------- -------------------------- --------------- --------------------------
CDN USD CDN USD
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year............... 1,657,288 $ 6.63 $4.54 1,493,896 $ 6.69 $4.58
Granted...................................... 312,200 6.80 4.42 330,353 7.74 5.30
Exercised.................................... (36,931) 5.94 3.86 (42,381) 6.03 4.13
Canceled..................................... (168,673) 7.29 4.74 (124,580) 10.22 6.99
--------- ------- ----- --------- ------- -----
Outstanding, end of year..................... 1,763,884 $ 6.62 $4.31 1,657,288 $ 6.63 $4.54
--------- ------- ----- --------- ------- -----
Exercisable, end of year..................... 975,197 $ 5.69 $3.70 918,201 $ 5.34 $3.66
Weighted-average fair value of options
granted during the year.................... $ 4.42 $2.96 $ 2.89 $1.98
<CAPTION>
1996
-------------------------------------------
NUMBER OF WEIGHTED AVERAGE EXERCISE
SHARES PRICE
--------------- --------------------------
CDN USD
<S> <C> <C> <C>
Outstanding, beginning of year............... 1,216,646 $ 6.38 $4.37
Granted...................................... 416,556 12.50 8.56
Exercised.................................... (79,709) 6.23 4.27
Canceled..................................... (59,597) 11.72 8.03
--------- ------- -----
Outstanding, end of year..................... 1,493,896 $ 6.69 $4.58
--------- ------- -----
Exercisable, end of year..................... 709,456 $ 4.43 $3.03
Weighted-average fair value of options
granted during the year.................... $ 6.26 $4.29
</TABLE>
Information regarding the stock options outstanding at December 31, 1998 is
summarized below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------------------------
WEIGHTED
AVERAGE
REMAINING
SHARES CONTRACTUAL
RANGE OF EXERCISE PRICES OUTSTANDING LIFE WEIGHTED AVERAGE EXERCISE PRICE
- ----------------------------------- ----------- ---------- --------------------------------
CAD USD
<S> <C> <C> <C> <C>
$ 0.70-$ 4.87...................... 391,697 2.76 years $ 2.25 $ 1.46
$ 5.75-$ 9.90...................... 1,371,731 4.41 years 7.84 5.10
$10.55-$14.75...................... 123 2.50 years 14.75 9.59
$16.10-$16.10...................... 333 2.42 years 16.10 10.47
--------- ---------- ------ ------
$ 0.70-$16.10...................... 1,763,884 4.04 years $ 6.60 $ 4.29
<CAPTION>
OPTIONS EXERCISABLE
---------------------------------------------
SHARES
RANGE OF EXERCISE PRICES EXERCISABLE WEIGHTED AVERAGE EXERCISE PRICE
- ----------------------------------- ---------- --------------------------------
CAD USD
<S> <C> <C> <C>
$ 0.70-$ 4.87...................... 324,172 $ 1.84 $ 1.20
$ 5.75-$ 9.90...................... 650,721 7.60 4.94
$10.55-$14.75...................... 82 14.75 9.59
$16.10-$16.10...................... 222 16.10 10.47
---------- ------ ------
$ 0.70-$16.10...................... 975,197 $ 5.69 $ 3.70
</TABLE>
The options outstanding at December 31, 1998 expire between April 4, 1999
and June 10, 2008.
The Company adopted only the disclosure provisions of Statement of
Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock Based
Compensation", to account for grants under the Company's existing stock based
compensation plans. All options are issued with an exercise price equal to the
market value of the stock on the date of grant. Accordingly, no compensation
cost has been recognized for the stock option plan. Had compensation cost for
the Company's stock option plan been determined based on the fair
F-15
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS EXCEPT SHARE AMOUNTS AND
NUMBERS OF SHARES)
PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES.
6. SHARE CAPITAL--(CONTINUED)
value at the grant date for awards under those plans consistent with the
measurement provisions of FAS 123, the Company's net earnings (loss) and
earnings (loss) per share would have been adjusted as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1998 1997 1996
-------- ------ ------
<S> <C> <C> <C>
Net earnings (loss)--as reported......................................... $ (2,908) $1,005 $1,578
Net earnings (loss)--pro forma........................................... (3,848) 86 1,003
Basic earnings (loss) per share--as reported............................. (0.29) 0.11 0.17
Basic earnings (loss) per share--pro forma............................... (0.39) 0.01 0.11
Diluted earnings (loss) per share--as reported........................... (0.29) 0.10 0.16
Diluted earnings (loss) per share--pro forma............................. (0.39) 0.01 0.10
</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,
-------------------------------------
1998 1997 1996
--------- ---------- ----------
<S> <C> <C> <C>
Expected dividend yield.......................................... 0% 0% 0%
Expected stock price volatility.................................. 82% 27% 45%
Risk-free interest rate.......................................... 5.5% 7.5% 8%
Expected life of options......................................... 4.7 years 4.5 years 4.5 years
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
(b) 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 Cdn $9.06 (USD $5.89). The warrants
expire on April 30, 2000. The fair value of the warrants was estimated to be Cdn
$1.81 (USD $1.27) per warrant, using the Black-Scholes option-pricing model.
F-16
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS EXCEPT SHARE AMOUNTS AND
NUMBERS OF SHARES)
PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES.
7. INCOME TAXES
Earnings (loss) from continuing operations before provision of income taxes
consisted of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1998 1997 1996
-------- ------ ------
<S> <C> <C> <C>
Canadian................................................................. $ (1,796) $2,462 $2,958
Foreign.................................................................. (1,901) 612 (785)
-------- ------ ------
$ (3,697) $3,074 $2,173
-------- ------ ------
-------- ------ ------
</TABLE>
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Current
Canadian................................................................. $ -- $ -- $ --
Foreign.................................................................. 88 -- --
------ ------ ------
Total current............................................................ 88 -- --
------ ------ ------
Deferred
Canadian................................................................. (444) 1,115 843
Foreign.................................................................. (433) 419 (119)
------ ------ ------
Total deferred........................................................... (877) 1,534 724
------ ------ ------
Income tax provision....................................................... $ (789) $1,534 $ 724
------ ------ ------
------ ------ ------
</TABLE>
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>
YEARS ENDED DECEMBER 31,
----------------------------
1998 1997 1996
-------- ------ ------
<S> <C> <C> <C>
Combined Canadian federal and
provincial income taxes at expected rate............................... $ (1,686) $1,406 $ 990
Acquired in-process research and
development, not tax deductible........................................ 300 398 --
Permanent and other differences.......................................... 111 (76) 4
Change in valuation allowance............................................ 302 (194) (270)
Foreign losses tax effected at lower rates 96 -- --
State taxes.............................................................. 88 -- --
-------- ------ ------
$ (789) $1,534 $ 724
-------- ------ ------
-------- ------ ------
</TABLE>
As at December 31, 1998 the Company, for Canadian income tax purposes, has
claimed investment tax credits of approximately $6,736 which are available to
reduce future years' income taxes payable. These investment tax credits expire
between 2000 and 2008. The potential tax benefits that may arise from the
utilization of $6,227 of these tax credits have not been recognized in these
financial statements, because their realization is not considered more likely
than not.
F-17
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS EXCEPT SHARE AMOUNTS AND
NUMBERS OF SHARES)
PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES.
7. INCOME TAXES--(CONTINUED)
The Company has losses for UK income tax purposes of approximately $445
which can be carried forward indefinitely to reduce future taxable income.
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,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets
Tax loss carry forwards........................................................ $ 106 $ 30
Acquired technology and in-process research and
development................................................................. 867 --
Investment tax credits recoverable............................................. 213 229
Share issue costs.............................................................. 109 85
Other 50 25
-------- --------
Total gross deferred tax assets................................................ 1,345 369
Less: valuation allowance...................................................... (539) (237)
-------- --------
Total deferred tax assets...................................................... 806 132
-------- --------
Deferred tax liabilities
Research and development expenses.............................................. (551) (659)
Tax depreciation in excess of accounting....................................... (504) (592)
Investment tax credits......................................................... (97) (104)
-------- --------
Total deferred tax liabilities................................................. (1,152) (1,355)
-------- --------
Net deferred tax liabilities..................................................... $ (346) $ (1,223)
-------- --------
-------- --------
</TABLE>
8. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share 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, for purposes of
computing diluted earnings per share.
The following weighted average number of shares were used for the
computation of earnings (loss) per share:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Weighted average shares used in computation of
basic earnings per share....................................... 9,860,218 9,234,926 9,194,558
Weighted average shares from assumed conversion
of dilutive options............................................ -- 372,994 587,733
--------- --------- ---------
Weighted average shares used in computation of
diluted earnings per share..................................... 9,860,218 9,607,920 9,782,291
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-18
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS EXCEPT SHARE AMOUNTS AND
NUMBERS OF SHARES)
PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES.
9. 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, 1998, the minimum lease payments in each of the next five years are
approximately as follows:
<TABLE>
<S> <C>
1999....................................................................... $ 640
2000....................................................................... 742
2001....................................................................... 742
2002....................................................................... 712
2003....................................................................... 712
------
$3,548
------
------
</TABLE>
10. SEGMENTED INFORMATION
In the opinion of management, the Company operates in the digital signal
processing systems industry, and all sales of its products and services are made
in this segment. Management of the Company makes decisions about allocating
resources based on the one operating segment. Substantially all assets and
operations are in Canada. A summary of sales by region and by major customers is
as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
By Region
United States........................................................ $21,821 $22,284 $15,690
Canada and other..................................................... 4,179 3,923 4,373
------- ------- -------
Total Sales............................................................ $26,000 $26,207 $20,063
------- ------- -------
------- ------- -------
By Major Customer
Customer A........................................................... $ 6,251 $ 6,583 $ 6,284
Customer B........................................................... -- 4,843 527
Customer C........................................................... 2,098 1,827 --
</TABLE>
11. DISCONTINUED OPERATIONS
The Company adopted a plan 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
ceased operations in this business as of December 31, 1997. Accordingly, the
results of operations have been disclosed separately from those of continuing
operations for the years presented. The financial position of these discontinued
operations was consolidated in accordance with generally accepted accounting
principles.
F-19
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS EXCEPT SHARE AMOUNTS AND
NUMBERS OF SHARES)
PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES.
11. DISCONTINUED OPERATIONS--(CONTINUED)
The operating results of this business segment were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Revenue......................................................... $ -- $ 517 $7,008
Gross margin.................................................... -- 191 1,472
Expenses........................................................ -- 1,066 1,279
Provision for taxes............................................. -- (340) 64
------- ------ ------
Earnings (loss) from discontinued operations.................... $ -- $ (535) $ 129
------- ------ ------
------- ------ ------
</TABLE>
The net assets of discontinued operations are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1998 1997
------ ----
<S> <C> <C>
Current assets............................................................... $ -- $361
Current liabilities.......................................................... -- --
------ ----
$ -- $361
------ ----
------ ----
</TABLE>
12. FINANCIAL INSTRUMENTS
a) Fair value of financial instruments
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, bank indebtedness,
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 risk management
The Company utilizes future exchange contracts to manage its exposure to
fluctuations in foreign exchange rates which typically expire within three
months. These instruments are used for purposes other than trading and are
employed in connection with an underlying asset or liability. At December 31,
1998, the Company had futures exchange contracts with a notional principal of
$1,061 (December 31, 1997--$1,020) maturing March 16, 1999. At December 31, 1998
and December 31, 1997, deferred gains and losses on future exchange contracts
were not material to the consolidated financial statements. The counterparties
to these contracts are major commercial financial institutions. Management
believes that losses related to credit risk are remote.
The fair values of future exchange contracts are evaluated by obtaining
quotes from brokers. At December 31, 1998 and December 31, 1997 there were no
carrying amounts related to future exchange contracts on the consolidated
balance sheets. Future exchange contracts to sell $1,061 had an estimated fair
value of $1,051 at December 31, 1998 compared to future exchange contracts to
sell $1,020 with an estimated fair value of $980 at December 31, 1997.
c) 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
F-20
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS EXCEPT SHARE AMOUNTS AND
NUMBERS OF SHARES)
PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES.
12. FINANCIAL INSTRUMENTS--(CONTINUED)
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.
A substantial amount 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 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.
13. SUPPLEMENTARY INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-----------------------
1998 1997 1996
------- ---- ----
<S> <C> <C> <C>
Cash paid for
Interest paid............................................................... $ 149 $ 3 $ 3
Income taxes paid........................................................... 15 -- --
Foreign exchange gains...................................................... 287 323 5
Non-cash financing activities
Issue of shares for acquisition of the net assets of
Alex Computer Systems, net of share issue expenses....................... 4,787 -- --
Issue of warrants for acquisition of the net assets of
Alex Computer Systems.................................................... 140 -- --
Issue of shares for acquisition of
3L Limited, net of share issue expenses.................................. -- 934 --
</TABLE>
14. UNCERTAINTY DUE TO THE YEAR 2000
The Year 2000 Issues arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may recognize
the year 2000 as 1900 or some other date, resulting in errors when information
using year 2000 dates is processed. In addition, similar problems may arise in
some systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting the
entity, including those related to the efforts of customers, suppliers, or other
third parties, will be fully resolved.
F-21
<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-23
Balance Sheets............................................................................................. F-24
Statements of Income and Retained Earnings................................................................. F-25
Statements of Cash Flows................................................................................... F-26
Notes to Financial Statements.............................................................................. F-27
</TABLE>
F-22
<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-23
<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-24
<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-25
<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-26
<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-27
<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
-------- ------- --------
-------- ------- --------
</TABLE>
<TABLE>
<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-28
<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-29
<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-30
<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-31
<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-33
Statements of Earnings and Retained Earnings............................................................... F-34
Statements of Cash Flows................................................................................... F-35
Notes to Financial Statements.............................................................................. F-36
</TABLE>
F-32
<PAGE>
ALEX COMPUTER SYSTEMS, INC.
BALANCE SHEET
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
FEBRUARY 28,
1998
-----------------
(UNAUDITED)
<S> <C>
ASSETS
Current assets
Cash and cash equivalents.................................................................... $ 67,667
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
-----------
1,739,511
Property and equipment, at cost, less accumulated depreciation (Note 2)........................ 301,790
Software development costs, less accumulated depreciation (Note 3)............................. 622,981
-----------
$ 2,664,282
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Cheques issued in excess of funds on deposit................................................. $ 241,183
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
-----------
1,799,198
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............................................................................ $ 2,058,937
-----------
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)
$ 2,664,282
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE>
ALEX COMPUTER SYSTEMS, INC.
STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
FEBRUARY 28,
----------------------------------------
1997 1998
------------------ ------------------
(UNAUDITED)
<S> <C> <C>
Sales, net............................................................................ $1,575,308 $1,990,875
Cost of goods sold.................................................................... 879,954 868,618
---------- ----------
Gross profit.......................................................................... 695,354 1,122,257
Other income.......................................................................... 208 3,743
---------- ----------
695,562 1,126,000
Expenses
Advertising......................................................................... 58,519 57,353
Insurance........................................................................... 3,790 12,023
Legal and accounting................................................................ 11,382 11,023
Office expense...................................................................... 25,227 10,945
Wages............................................................................... 202,170 261,832
Payroll taxes....................................................................... 92,471 30,761
Health insurance.................................................................... 24,055 20,009
Commissions......................................................................... 4,358 3,880
Research and development............................................................ 243,739 197,928
Postage and shipping................................................................ 3,892 1,697
Rent................................................................................ 19,933 41,863
Telephone........................................................................... 19,112 15,346
Travel.............................................................................. 79,631 59,149
Food and entertainment.............................................................. 14,296 11,717
Exhibition costs.................................................................... 12,137 13,932
Printing............................................................................ 19,935 5,418
Miscellaneous....................................................................... 4,000 362
Equipment lease..................................................................... 2,047 3,257
Lease--sales tax.................................................................... -- 5,413
Interest expense.................................................................... 8,458 11,492
Bank charges........................................................................ 11,205 30,843
Depreciation........................................................................ 25,826 47,070
Amortization software development costs............................................. 105,769 121,490
---------- ----------
991,952 974,803
---------- ----------
Earnings (loss) before income taxes................................................... (296,390) 151,197
Deferred income taxes................................................................. (35,387) 44,609
---------- ----------
Net earnings (loss)................................................................... (261,003) 106,588
Retained earnings, beginning of period................................................ 41,658 243,757
---------- ----------
Retained earnings (deficit), end of period............................................ $ (219,345) $ 350,345
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE>
ALEX COMPUTER SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
FEBRUARY 28,
----------------------------------------
1997 1998
------------------ ------------------
(UNAUDITED)
<S> <C> <C>
Cash flow from operating activities
Net earnings (loss)................................................................... $ (261,003) $ 106,588
Adjustments to reconcile net earnings (loss) to net cash provided by (used in)
operating activities
Depreciation....................................................................... 25,826 47,070
Amortization--software development costs........................................... 105,769 121,490
Reduction in deferred income tax benefit........................................... 49,867 112,703
Reduction in deferred income tax liability......................................... (35,387) (68,094)
(Increase) decrease in
Accounts receivable.............................................................. (389,014) 475,455
Accounts receivable--shareholder................................................. 6,160 (21,893)
Inventory........................................................................ (28,496) (183,656)
Deposits paid.................................................................... 32,086
Deferred marketing costs......................................................... -- 40,970
Increase (decrease) in
Accounts payable................................................................. (66,950) (95,862)
Accounts payable--shareholder.................................................... (60,858) 6,869
New York State corporation tax payable........................................... (314) (602)
---------- ----------
Cash provided by (used in) operating activities......................................... (622,314) 541,038
---------- ----------
Financing
Increase (decrease) in bank indebtedness.............................................. 240,389 (203,202)
Increase (decrease) in lease payable.................................................. 246,000 (56,166)
Increase (decrease) in shareholder advances........................................... 130,000 (167,000)
---------- ----------
Cash provided by (used in) financing activities......................................... 616,389 (426,368)
---------- ----------
Investments
Purchase of property and equipment.................................................... (12,574) (82,454)
---------- ----------
Cash used in investing activities....................................................... (12,574) (82,454)
---------- ----------
(Decrease) increase in cash and cash equivalents........................................ (18,499) 32,216
Cash and cash equivalents, beginning of period.......................................... 49,376 35,451
---------- ----------
Cash and cash equivalents, end of period................................................ $ 30,877 $ 67,667
---------- ----------
---------- ----------
Supplemental disclosures
Income taxes paid....................................................................... $ 314 $ 602
---------- ----------
---------- ----------
Interest paid........................................................................... $ 8,458 $ 11,492
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-35
<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-36
<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-37
<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-38
<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-39
<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 Operations........................................................... F-41
Notes to Pro Forma Consolidated Financial Statements...................................................... F-42
</TABLE>
F-40
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(EXPRESSED IN THOUSANDS OF UNITED STATES 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................................... $26,207 $3,293 $ -- $29,500
Cost of sales........................... 11,180 1,540 12,720
--
------- ------ ------- -------
15,027 1,753 -- 16,780
Expenses
Administrative........................ 3,146 228 -- 3,374
Sales and marketing................... 4,769 462 -- 5,231
Amortization.......................... 644 246 -- 890
Acquired in-process research and
development charge................. 872 -- -- 872
Research and development.............. 2,536 177 -- 2,713
------- ------ ------- -------
11,967 1,113 -- 13,080
------- ------ ------- -------
Earnings (loss) from operations......... 3,060 640 -- 3,700
Other revenue (expense)
Interest and bank charges............. 2 (61) -- (59)
Other income (expense)................ 12 44 -- 56
------- ------ ------- -------
14 (17) -- (3)
------- ------ ------- -------
Earnings (loss) before income taxes and
discontinued operations............... 3,074 623 -- 3,697
Income taxes (recovery)................. 1,534 156 1,690
------- ------ ------- -------
Earnings (loss) from continuing
operations............................ $1,540 $ 467 $ -- $ 2,007
------- ------ -------
------- ------ ------- -------
-------
Earnings (loss) per share (note 3)
Basic
From continuing operations......... $ 0.20
Diluted
From continuing operations......... 0.19
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------
ALEX
COMPUTER
SYSTEMS
COMPANY INC. ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ---------
(NOTE 1(B)) (NOTE 2)
<S> <C> <C> <C> <C>
Sales...................................$ 26,000 $ 1,001 $ -- $27,001
Cost of sales........................... 10,607 432 11,039
--
----------- ------- ------- -------
15,393 569 -- 15,962
Expenses
Administrative........................ 3,417 17 -- 3,434
Sales and marketing................... 7,204 223 -- 7,427
Amortization.......................... 1,299 78 -- 1,377
Acquired in-process research and
development charge................. 2,640 -- (2,640)(a) --
Research and development.............. 4,374 72 -- 4,446
----------- ------- ------- -------
18,934 390 (2,640) 16,684
----------- ------- ------- -------
Earnings (loss) from operations......... (3,541) 179 2,640 (722)
Other revenue (expense)
Interest and bank charges............. (149) (13) -- (162)
Other income (expense)................ (7) 4 -- (3)
----------- ------- ------- -------
(156) (9) -- (165)
----------- ------- ------- -------
Earnings (loss) before income taxes and
discontinued operations............... (3,697) 170 2,640 (887)
Income taxes (recovery)................. (789) 52 399 (b) (338)
----------- ------- ------- -------
Earnings (loss) from continuing
operations............................$ (2,908) $ 118 $ 2,241 $ (549)
----------- ------- ------- -------
----------- ------- ------- -------
Earnings (loss) per share (note 3)
Basic
From continuing operations......... $ (0.05)
Diluted
From continuing operations......... --
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
F-41
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
YEARS ENDED DECEMBER 31, 1997 AND 1998
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT NUMBER OF SHARES)
1. BASIS OF PRESENTATION
The pro forma consolidated financial statements of Spectrum Signal
Processing Inc. (the "Company") reflect, on an 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
years ended December 31, 1997 and 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; 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 the United States. The
pro forma consolidated statements of earnings (loss) exclude non-recurring
charges or credits directly attributable to the transactions set out herein.
2. PRO FORMA STATEMENTS OF EARNINGS (LOSS) ADJUSTMENTS
The pro forma consolidated statements of earnings (loss) give effect to the
following:
(a) to eliminate the acquired in-process research and development
charge that is a direct result of the acquisition.
(b) 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>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
Basic......................................................... 10,007,552 10,018,977
Diluted....................................................... 10,380,546 --
</TABLE>
F-42
<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................... 11
Capitalization................................. 12
Selected Financial Data........................ 12
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 14
Business....................................... 20
Management..................................... 26
Principal and Selling Securityholders.......... 29
Description of Share Capital................... 30
Certain Tax Considerations..................... 32
Plan of Distribution........................... 35
Legal Matters.................................. 36
Experts........................................ 36
Additional Information......................... 36
Glossary....................................... 37
Index to Financial Statements.................. F-1
</TABLE>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
883,001 SHARES
SPECTRUM SIGNAL
PROCESSING INC.
COMMON SHARES
------------------------
PROSPECTUS
------------------------
, 1999
------------------------------------------------------
------------------------------------------------------
<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.*
27 -- Financial Data Schedule.
</TABLE>
- ------------------
* Previously filed.
** 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.
(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
II-3
<PAGE>
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 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 AMENDMENT NO. 3 TO ITS REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN VANCOUVER,
BRITISH COLUMBIA, CANADA, ON MAY 31, 1999.
SPECTRUM SIGNAL PROCESSING INC.
By: /s/ BARRY W. JINKS
----------------------------------
Barry W. Jinks
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 3 TO ITS REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
<S> <C> <C>
/s/ Kenneth A. Spencer Chair of the Board of Directors May 31, 1999
- ------------------------------------------
Kenneth A. Spencer
/s/ BARRY W. JINKS President and Chief Executive Officer and May 31, 1999
- ------------------------------------------ Director (principal executive officer)
Barry W. Jinks
/s/ MARTIN MCCONNELL Vice President, Chief Financial Officer and May 31, 1999
- ------------------------------------------ Treasurer (principal financial and
Martin McConnell accounting officer)
/s/ Pascal Spothelfer
- ------------------------------------------ Director May 31, 1999
Pascal Spothelfer
/s/ Andrew Harries
- ------------------------------------------ Director May 28, 1999
Andrew Harries
/s/ John E. Brennan Director May 31, 1999
- ------------------------------------------
John E. Brennan
/s/ Charles C. Johnston Director May 31, 1999
- ------------------------------------------
Charles C. Johnston
/s/ Samuel Znaimer Director May 31, 1999
- ------------------------------------------
Samuel Znaimer
Authorized Representative in the
United States:
/s/ Charles C. Johnston Director May 31, 1999
- ------------------------------------------
Charles C. Johnston
* /s/ MARTIN MCCONNELL
-------------------------------------
Martin McConnell
Attorney-in-Fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------ ----------------------------------------------------------------------------------------------- -----------
<S> <C> <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.*
27 -- Financial Data Schedule.
</TABLE>
- ------------------
* Previously filed.
** 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>
Exhibit 23.1
[LETTERHEAD OF KPMG LLP]
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 LLP
Chartered Accountants
Richmond, Canada
June 2, 1999
<PAGE>
Exhibit 23.2
[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 3, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Form F-3 for the years ended December 31, 1997 and 1998, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-END> DEC-31-1997 DEC-31-1998
<CASH> 1,383 1,693
<SECURITIES> 0 0
<RECEIVABLES> 6,549 5,404
<ALLOWANCES> 170 173
<INVENTORY> 4,061 4,935
<CURRENT-ASSETS> 12,213 12,235
<PP&E> 2,448 2,287
<DEPRECIATION> 2,148 3,014
<TOTAL-ASSETS> 16,484 19,447
<CURRENT-LIABILITIES> 4,699 7,265
<BONDS> 0 0
0 0
0 0
<COMMON> 11,373 16,309
<OTHER-SE> (886) (4,548)
<TOTAL-LIABILITY-AND-EQUITY> 16,484 19,447
<SALES> 26,207 26,000
<TOTAL-REVENUES> 26,221 26,000
<CGS> 11,180 10,607
<TOTAL-COSTS> 11,095 16,294
<OTHER-EXPENSES> 872 2,647
<LOSS-PROVISION> 22 14
<INTEREST-EXPENSE> 0 149
<INCOME-PRETAX> 3,074 (3,697)
<INCOME-TAX> 1,534 (789)
<INCOME-CONTINUING> 1,540 (2,908)
<DISCONTINUED> (535) 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,005 (2,908)
<EPS-BASIC> 0.11 (0.29)
<EPS-DILUTED> 0.10 (0.29)
</TABLE>
