<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 22, 1999
REGISTRATION NO. 333-58115
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
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 JANUARY 22, 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 "SSPIF" and "SSY." The last sale prices for the Common Shares as
reported on Nasdaq and the TSE on January 20, 1999, were US$3.00 and Cdn$4.70,
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 January 18, 1999 was US$0.6543.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Exchange rate at end of period..... US$0.7544 US$0.7128 US$0.7323 US$0.7246 US$0.6991
Average exchange rate during
period........................... 0.7729 0.7300 0.7305 0.7334 0.7223
High exchange rate during period... 0.8046 0.7632 0.7829 0.7472 0.7415
Low exchange rate during period.... 0.7439 0.7103 0.7023 0.7274 0.7009
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1998
------------------
<S> <C>
Exchange rate at end of period..... US$0.6552
Average exchange rate during
period........................... 0.6831
High exchange rate during period... 0.7105
Low exchange rate during period.... 0.6341
</TABLE>
CURRENCY TRANSLATION AND ACCOUNTING PRINCIPLES
Beginning with the first quarter of 1998, the Company adopted a policy of
publishing its financial statements in United States dollars ("US$" 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 $677,000 cash, the
assumption of $2,050,000 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.
4
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the specific factors set
forth below, as well as the other information contained in this Prospectus,
before deciding to invest in the Common Shares offered hereby.
The statements contained in this Prospectus that are not purely historical
are forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act, including without limitation
statements regarding the Company's expectations, beliefs, intentions or
strategies regarding the future. All forward-looking statements included in this
document are based on information available to the Company on the date hereof,
and the Company assumes no obligation to update any such forward-looking
statements. The forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause actual results, experience and
the performance or achievements of the Company to be materially different from
those anticipated, expressed or implied by the forward-looking statements. In
addition, the Company's business strategy and growth strategy involve a number
of risks and challenges, and there can be no assurance that these risks and
other factors will not have a material adverse effect on the Company.
SIGNIFICANT CUSTOMERS
In 1997 and the first nine months of 1998, the Company's two largest
customers accounted for approximately 44% and 40%, 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 30%,
respectively, of the Company's sales during such periods. In addition,
approximately 18% of the Company's sales during 1997 were made to NAI
Technologies, the Company's second largest customer during such period, and
approximately 10% of the Company's sales during the first nine months of 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 1995, 1996,
1997 and the first nine months of 1998, sales of products based upon technology
licensed from Loughborough and products acquired from Loughborough for resale
(collectively, "Loughborough Products") accounted for approximately 46%, 33%,
30% and 11%, 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 43%, 71%, 86% and 75% of
the Company's revenues during 1995, 1996, 1997 and the first nine months of
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
1995, 1996, 1997 and the first nine months of 1998 were approximately 0.1%,
8.5%, 6.1% and 3.3% 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
6
<PAGE>
those of its competitors and manufacture and bring products to market quickly at
cost-effective prices. There can be no assurance that the Company's competitors
will not develop future generations of competitive products that will offer
superior price, features or performance which would render the Company's
products uncompetitive or obsolete. There can also be no assurance that the
Company will successfully develop, complete, introduce and market new systems or
system enhancements, or that systems or system enhancements currently in
development or that may be developed by the Company in the future will meet
industry requirements and achieve market acceptance. Any significant delay or
failure to develop, manufacture or ship new or enhanced products could also have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Research and Product Development." In
addition, there can be no assurance that certain trends in DSP technology, such
as native signal processing and silicon integration, will not displace certain
of the Company's products, or that the Company will be able to develop new
products in response to such trends that achieve market acceptance. See
"Business--Products" and "Business--Markets."
From time to time, the Company and others may announce new products,
capabilities or technologies that have the potential to replace or shorten the
lifecycles of certain of the Company's products. There can be no assurance that
announcements of currently planned or other new products will not cause
customers to defer purchasing existing Company products. Delays or difficulties
associated with new product introductions or product enhancements could have a
material adverse effect on the Company's business, financial condition and
results of operations.
VARIABILITY OF QUARTERLY AND ANNUAL OPERATING RESULTS
The Company's revenues and operating results may vary significantly from
quarter to quarter as a result of a number of factors, many of which are outside
the Company's control. These factors include the general demand for computers,
computer sub-systems and high performance DSP solutions, the success achieved by
the Company's OEM customers in developing and marketing their products, the
volume and timing of orders received, the mix of products and development fees,
the timing of new product introductions by both the Company and its competitors,
pricing by both the Company and its competitors, the Company's ability to
develop and market new products, the Company's ability to manufacture its
products at high quality levels and at commercially reasonable costs, the
availability and cost of DSP microprocessors, the timing and levels of sales and
marketing expenditures and general economic conditions, and changes in the
customer's financial condition or budget. As a result of the foregoing and other
factors, the Company may experience material fluctuations in its future
operating results on a quarterly or annual basis that could have a material
adverse effect on the price of the Common Shares and the Company's business,
financial condition and results of operations.
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 License, the Company may
experience competition with respect to products subject to the Loughborough
License from Loughborough and/or any future Loughborough licensees or
distributors. See "Business--Competition" and "--Amendment of the Loughborough
License."
ABILITY TO MANAGE GROWTH AND ABILITY TO INTEGRATE RECENT ACQUISITIONS
The Company is currently experiencing a period of growth and expansion, due
in part to its recent acquisition of 3L Limited and its acquisition of
substantially all the assets of Alex Computer (the "Alex Computer Acquisition").
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Acquisitions." This growth has placed, and could continue to
place, a significant strain on
7
<PAGE>
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. 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.
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
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
8
<PAGE>
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 year ended December 31, 1997 and the nine months ended September 30, 1998,
the Company had foreign currency translation gains of $323,000 and $319,000,
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."
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.
9
<PAGE>
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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
PRICE RANGE OF COMMON SHARES
The Common Shares have been traded under the symbol "SSPIF" on the Nasdaq
National Market since June 1993, and under the symbol "SSY" on The Toronto Stock
Exchange since September 1993. The following table sets forth the high and low
closing prices of the Common Shares on Nasdaq and the TSE for the periods
indicated:
<TABLE>
<CAPTION>
HIGH LOW HIGH LOW
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
CALENDAR YEAR 1996
First Quarter.......................................... US$13.750 US$8.750 Cdn$18.500 Cdn$12.250
Second Quarter......................................... 12.375 7.625 16.500 10.125
Third Quarter.......................................... 9.875 5.500 12.800 7.700
Fourth Quarter......................................... 9.125 5.875 11.900 8.000
CALENDAR YEAR 1997
First Quarter.......................................... US$ 7.750 US$4.750 Cdn$10.500 Cdn$ 6.750
Second Quarter......................................... 6.125 4.375 8.500 6.400
Third Quarter.......................................... 9.000 4.750 11.800 6.600
Fourth Quarter......................................... 8.250 4.750 11.250 6.750
CALENDAR YEAR 1998
First Quarter.......................................... US$ 7.000 US$5.250 Cdn$ 9.850 Cdn$ 7.500
Second Quarter......................................... 6.563 4.625 9.200 7.600
Third Quarter.......................................... 5.625 2.500 7.700 3.950
Fourth Quarter (up to December 31, 1998)............... 4.000 2.500 5.500 3.550
</TABLE>
At December 31, 1998, the Company had 160 shareholders of record and
10,268,954 Common Shares outstanding, including 233,300 Common Shares held in
treasury. Of these amounts, there were 132 U.S. shareholders of record holding a
total of 9,350,017 Common Shares, or 91.05% of the Common Shares outstanding.
10
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 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 SEPTEMBER 30,
1998
----------------------
ACTUAL AS ADJUSTED
------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt.......................................................... $ 94 $ 94
------- -------
------- -------
Long-term debt, net of current portion..................................................... $ 101 $ 101
Shareholders' equity:
Common Shares, no par value, 50,000,000 shares authorized; 10,268,954 shares
issued and outstanding(1)............................................................. 16,439 17,120
Warrants................................................................................. 141 --
Treasury stock, at cost, 233,300 shares.................................................. (1,232) (1,232)
Additional paid-in capital................................................................. 76 76
Retained earnings.......................................................................... (4,763) (4,763)
Accumulated other comprehensive earnings
Cumulative translation adjustment........................................................ (1,199) (1,199)
------- -------
Total shareholders' equity............................................................... 9,462 10,002
------- -------
Total capitalization..................................................................... $ 9,563 $10,103
------- -------
------- -------
</TABLE>
- ------------------
(1) Does not include 1,804,743 Common Shares issuable upon exercise of
outstanding options and 123,066 additional Common Shares reserved for
issuance pursuant to the Company's Stock Option Plan. See "Management--Stock
Option Plan."
SELECTED FINANCIAL DATA
The selected financial data for the Company presented below under the
captions "Statements of Operations Data" for the years 1993, 1994, 1995, 1996
and 1997 and "Balance Sheet Data" as of December 31, 1993, 1994, 1995, 1996 and
1997, is derived from the Company's financial statements which have been audited
by KPMG, independent auditors. The Company's financial statements as of
December 31, 1996 and 1997 and for each of the years in the three year period
ended December 31, 1997 and the auditors' report thereon are included elsewhere
in this Prospectus. The "Statements of Operations Data" for fiscal years 1993
and 1994 and the "Balance Sheet Data" as of December 31, 1993, 1994 and 1995 are
derived from audited financial statements that are not included herein. Data as
at September 30, 1998 and for the nine months ended September 30, 1998 and 1997
have been derived from unaudited financial statements included elsewhere in this
Prospectus and, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the results of operations for the periods presented. Results for
the nine months ended September 30, 1998 are not necessarily indicative of the
results to be expected for the full year ending December 31, 1998. This selected
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and notes thereto included elsewhere in this Prospectus.
For a description of the Company's unaudited pro forma results of
operations as if the acquisition of Alex Computer had taken place on January 1,
1997, see "Pro Forma Consolidated Financial Statements" included elsewhere in
this Prospectus.
11
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997 1998(1)
------ ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
(U.S. GAAP)
STATEMENTS OF OPERATIONS DATA:
Sales............................................ $9,880 $11,999 $12,904 $20,063 $26,207 $18,304 $19,497
Cost of sales.................................... 5,016 5,209 5,688 8,340 11,180 8,044 8,302
------ ------- ------- ------- ------- ------- -------
Gross profit..................................... 4,864 6,790 7,216 11,723 15,027 10,260 11,195
General and administrative....................... 1,457 1,635 2,068 3,049 3,146 2,256 2,396
Sales and marketing.............................. 2,381 4,283 3,198 3,880 4,769 3,295 5,495
Depreciation and amortization expenses........... 178 260 422 497 644 452 596
Research and development expenses(3)............. 442 338 1,340 2,130 2,536 1,615 3,366
Acquired in-process research and development
charge......................................... -- -- -- -- 872 872 6,168
------ ------- ------- ------- ------- ------- -------
Earnings (loss) from operations.................. 406 274 188 2,167 3,060 8,490 (6,826)
Interest and bank charges........................ (16) (30) (31) (23) 2 (14) (120)
Other income..................................... 284 196 484 29 12 25 17
------ ------- ------- ------- ------- ------- -------
Earnings (loss) before income taxes and
discontinued operations........................ 674 440 641 2,173 3,074 1,781 (6,929)
Income taxes (recovery).......................... 299 120 365 724 1,534 996 (929)
------ ------- ------- ------- ------- ------- -------
Earnings (loss) from continuing
operations..................................... 375 320 276 1,449 1,540 785 (6,000)
Earnings (loss) from discontinued operations..... -- (1,905) (1,027) 129 (535) (500) --
------ ------- ------- ------- ------- ------- -------
Net earnings (loss).............................. $ 375 $(1,585) $ (751) $ 1,578 $ 1,005 $ 285 $(6,000)
------ ------- ------- ------- ------- ------- -------
------ ------- ------- ------- ------- ------- -------
Foreign currency translation..................... (212) (506) 216 (108) (357) (268) (231)
------ ------- ------- ------- ------- ------- -------
Comprehensive earnings (loss).................... 163 (2,091) (535) 1,470 648 17 (6,231)
------ ------- ------- ------- ------- ------- -------
Basic Earnings (loss) per share from continuing
operations..................................... $ 0.05 $ 0.04 $ 0.03 $ 0.16 $ 0.17 $ 0.09 $ (0.61)
Basic Earnings (loss) per share from discontinued
operations..................................... -- (0.22) (0.11) 0.01 (0.06) (0.06) --
------ ------- ------- ------- ------- ------- -------
Basic Earnings (loss) per share.................. $ 0.05 $ (0.18) $ (0.08) $ 0.17 $ 0.11 $ 0.03 $ (0.61)
------ ------- ------- ------- ------- ------- -------
Weighted average number of common shares
outstanding (basic)............................ 8,024 8,759 9,001 9,195 9,235 9,229 9,801
Diluted earnings (loss) per share from continuing
operations..................................... $ 0.04 $ 0.04 $ 0.03 $ 0.15 $ 0.16 $ 0.08 $ (0.61)
Diluted earnings (loss) per share from
discontinued operations........................ -- (0.21) (0.11) 0.01 (0.06) (0.05) --
------ ------- ------- ------- ------- ------- -------
Diluted earnings (loss) per share................ $ 0.04 $ (0.17) $ (0.08) $ 0.16 $ 0.10 $ 0.03 $ (0.61)
------ ------- ------- ------- ------- ------- -------
Weighted average number of common shares
outstanding (Diluted).......................... 8,453 9,120 9,575 9,782 9,608 9,615 9,801
</TABLE>
<TABLE>
<CAPTION>
AT
AT DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------- -------------
1993 1994 1995 1996 1997 1998
------- ------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................. $ 9,089 $ 4,964 $ 5,614 $ 7,032 $ 7,514 $ 4,791
Total assets................................ 11,683 10,552 11,368 14,983 16,484 17,502
Long-term debt, net of current maturities... 148 37 10 -- 75 101
Shareholders' equity........................ 9,875 7,937 8,088 9,923 10,487 9,462
</TABLE>
- ------------------
(1) Includes results of operations of Alex Computer from March 17, 1998, the
effective date of the acquisition of substantially all the assets of Alex
Computer. The consideration paid and assets acquired in connection with such
acquisition were transferred on May 1, 1998.
(2) Amounts shown for the year 1993 are net of tax credits and governmental
grants in the amount of $110,000.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's financial statements and the notes thereto included elsewhere in
this Prospectus. This Prospectus contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties.
The Company's actual results could differ materially. Factors that could cause
or contribute to such differences include, but are not limited to, those
discussed in "Risk Factors" as well as those discussed below and elsewhere in
this Prospectus.
GENERAL
The Company was founded in 1987 to manufacture and market products for the
military/aerospace and commercial market in North America using DSP technologies
licensed from Loughborough.
The Company devotes significant resources toward product development and
related research and development activities. In recent years, the Company has
sought to enter into agreements with its OEM customers and others under which
the Company receives fees in connection with the development of products in
anticipation of production ("development contract fees"), and uses these fees to
fund such product development. 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,
---------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Sales..................................................................... 100.0% 100.0% 100.0%
Cost of sales............................................................. 44.1 41.6 42.7
----- ----- -----
Gross margin.............................................................. 55.9 58.4 57.3
Administrative, sales and marketing expenses.............................. 40.8 34.5 30.2
Depreciation and amortization expenses.................................... 3.3 2.5 2.5
Research and development expenses......................................... 10.4 10.6 9.7
Acquired in-process research and development charge....................... -- -- 3.3
----- ----- -----
Earnings from operations.................................................. 1.4 10.8 11.6
Interest and bank charges................................................. (0.2) (0.1) 0.0
Other income.............................................................. 3.7 0.1 0.0
----- ----- -----
Earnings before income taxes and discontinued operations.................. 4.9 10.8 11.6
Income taxes (recovery)................................................... 2.8 3.6 5.8
----- ----- -----
Earnings from continuing operations....................................... 2.1 7.2 5.8
Earnings (loss) from discontinued operations.............................. (7.9) 0.6 (2.0)
----- ----- -----
Net earnings (loss)....................................................... (5.8)% 7.8% 3.8%
----- ----- -----
----- ----- -----
</TABLE>
13
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Sales. Sales from continuing operations in the nine months ended September
30, 1998 were $19,497,000, an increase of $1,193,000, or 6.5%, over sales for
the nine months ended September 30, 1997. Included in sales for the first nine
months of 1998 were development contract fees (as described in "Risk
Factors--Revenues from Development Contracts") of $635,000, or 3.3% of sales for
the period, compared to development contract fees for the nine months ended
September 30, 1997 of $1,426,000, or 7.8% of sales for such period. Included in
sales for the first nine months of 1998 were revenues from sales of the
Company's signal intelligence products of $9,000,000, or 46% of sales for the
period, compared to $10,800,000, or 59% of sales for the nine months ended
September 30, 1997. Sales for the first nine months of 1998 also reflect the
inclusion of $3,601,000 of sales from Alex Computer which was acquired in 1998,
offset in part by a decline in sales of traditional C3X and C4X products due to
the introduction of the next generation C6X products.
Gross Profit. Gross profit increased to $11,195,000 for the nine months
ended September 30, 1998 from $10,260,000 for the nine months ended September
30, 1997, an increase of 9.1%. Gross margin (gross profit as a percentage of
sales) increased to 57.4% in the first nine months of 1998 from 56.1% in the
first nine months of 1997. The increase in gross margin was due primarily to
increased sales of 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 the first nine months of
1998 were $7,891,000, or 40.5% of sales for the period, compared to $5,551,000
in the first nine months of 1997, or 30.3% of sales for the period. AS&M
expenses as a percentage of sales were higher in the first nine months of 1998
due to the costs associated with increased European and Asian sales and
marketing initiatives (approximately $410,000 excluding salaries and benefits),
the inclusion of AS&M expenses of Alex Computer (approximately $370,000), the
inclusion of the AS&M expenses of 3L Limited (approximately $260,000), and an
increase in sales and marketing staff levels ($470,000).
Amortization. Amortization consists of the depreciation of the Company's
fixed assets and amortization of acquired technology. Amortization expenses in
the first nine months of 1998 were $596,000, an increase of $144,000 or 31.9%
over the first nine months of 1997. The increase in depreciation and
amortization was due primarily to increased investment in fixed assets and
acquired technology.
Research and Development. Research and development expenses consist
primarily of salaries, related personnel benefits, engineering service costs
relating to development contract fees and direct overhead costs. Research and
development expenses were $3,366,000 in the first nine months of 1998, or 17.3%
of sales for the period, compared to $1,615,000 in the first nine months of
1997, or 8.8% of sales for the period. The expenses in the first nine months of
1998 consisted primarily of costs associated with new product developments
undertaken by the Company. Total research and development expenditures for
continuing operations and those capitalized as software and related development
costs were $3,826,000 in the first nine months of 1998, or 19.6% of sales for
the period, compared to $3,168,000 in the first nine months of 1997, or 17.3% of
sales for the period.
Other Income. Other income, consisting primarily of interest income on
short-term deposits and interest expense on bank indebtedness was an expense of
$103,000 in the first nine months of 1998 compared to other income in the first
nine months of 1997 of $11,000. This change was due primarily to working capital
borrowings from the Company's bank in the first nine months of 1998.
Income Taxes. Deferred income taxes (recovery) for the first nine months
of 1998 were $(929,000) or (13.4)% of earnings before taxes and discontinued
operations, compared to $996,000, or 55.9% of earnings before taxes and
discontinued operations for the first nine months of 1997. The percentage for
the first nine months of 1998 was unusually low due to the significant impact of
the acquired in-process research and development charge in first quarter of
1998. The majority of this charge is non-deductible for tax purposes.
Net Earnings. The Company had earnings (loss) from continuing operations
in the first nine months of 1998 of $(6,000,000) compared to earnings (loss)
from continuing operations of $785,000 in the first nine months of 1997.
Earnings (loss) per share (basic) from continuing operations in the first nine
months of 1998 was $(0.61) per share, compared to earnings per share (basic)
from continuing operations of $0.09 per share in the first nine
14
<PAGE>
months of 1997. Earnings from continuing operations before the charge related to
acquired in-process research and development for the first nine months of 1998
was $(301,000), or earnings (loss) per share (basic) of $(0.03) per share,
compared to earnings (loss) of $1,157,000, or earnings (loss) per share (basic)
of $0.13 for the first nine months of 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.
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.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Sales. Sales from continuing operations in 1996 were $20,063,000, an
increase of $7,159,000, or 54.5%, over sales in 1995. Included in 1996 sales
were development contract fees of $1,700,000, or 8.5%, of sales, compared to
development contract fees in 1995 of 0.1%. Development contract fees included
fees generated in 1996 by the development of ASICs for a multimedia application
in the Company's new ASICs and software market segment. The growth in the
Company's 1996 sales was primarily due to a $1,687,000 increase in development
contract fees, as well as the release of new products directed at the signal
intelligence marketplace
15
<PAGE>
which generated an incremental $4,670,000 in sales. In addition, sales of
Loughborough Products increased by $686,000 during 1996.
Gross Profit. Gross profit increased to $11,723,000 for 1996 from
$7,216,000 for 1995, an increase of 62.4%. Gross margin increased to 58.4% in
1996 from 55.9% in 1995. The increase in gross margin was due primarily to the
increase in development contract fees in 1996 over 1995.
Administrative, Sales and Marketing. AS&M expenses in 1996 were
$6,929,000, or 34.5% of sales, compared to $5,266,000, or 40.8%, of sales in
1995. AS&M expenses as a percentage of sales were significantly lower in 1996
compared to 1995 due to the increase in sales of traditional products and
development contract fees in 1996.
Amortization. Amortization expenses in 1996 were $497,000, an increase of
$75,000, or 17.8% over 1995. The increase in amortization was due primarily to
increased investment in fixed assets.
Research and Development. Research and development expenditures were
$2,130,000 in 1996, or 10.6% of sales, compared to $1,340,000, or 10.4%, of
sales in 1995. The expenditures in 1996 consisted primarily of costs associated
with development contract fees relating to ASICs and software and
military/aerospace projects.
Other Income. Other income for 1996 was $6,000 compared to other income in
1995 of $453,000, which consisted primarily of a gain arising from the sale of
securities issued by QSound Labs, Inc. in connection with the formation of a
50/50 joint venture. The remainder of other income consisted primarily of
interest income on short-term deposits.
Income Taxes (Recovery). Deferred income taxes for 1996 were $224,000
which resulted from the drawing down of a portion of the deferred income taxes
previously recorded. Income tax provision for continuing oprations was $365,000
in 1995.
Net Earnings (Loss). The Company had earnings from continuing operations
in 1996 of $1,449,000 compared to earnings of $276,000 in 1995. Earnings per
share from continuing operations in 1996 was $0.16 per share, compared to
earnings per share of $0.03 per share in 1995.
DISCONTINUED OPERATIONS
In 1993, the Company introduced its first Computer Telephony ("CTI")
products for sale to OEMs and to consumers directly through retail distribution
channels. In 1994, the Company developed a new release of its CTI product for
high volume production targeted to leading OEM customers such as IBM and OMRON.
In 1994, the Company recorded a charge against inventory relating to its first
generation retail CTI product, and in 1995 the Company terminated its retail
distribution efforts due to high marketing costs and a failure to achieve
significant market penetration, which resulted in operating losses. In 1997, the
Company initiated plans to discontinue the operations of its desktop CTI
business due to low gross margins prevalent in this market segment. The Company
expects to close operations in this business in 1998. Sales of desktop CTI
products accounted for 31.2% of sales in 1995, 32.2% of sales in 1996 and 1.9%
of sales in 1997.
Sales of the Company's desktop CTI products in 1997 were $517,000, a
decrease of $6,491,000, or 92.3% over sales from this business in 1996. Gross
profit from discontinued operations in 1997 was $191,000, a decrease of
$1,281,000, or 89.0%, from gross profit from this business in 1996. Operating
expenses from discontinued operations in 1997 totaled $1,066,000, a decrease of
$213,000, or 16.7%, from operating expenses from this business in 1996. In 1997,
the net loss from discontinued operations totaled $535,000, or $0.06 per share
(basic), compared to net earnings of $129,000, or $0.01 per share (basic), in
1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has met its operating and capital requirements
from cash flow from operations and funds generated by sale of its equity
securities.
The Company has a credit facility with the Bank of Montreal (the "Bank")
consisting of a 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
16
<PAGE>
exchange rate fluctuations. Borrowings under the Line of Credit bear interest at
the Bank's US base rate plus 1/2%, unless the borrowings are denominated in
Canadian dollars, in which case the rate of interest is the Bank's prime rate
plus 1/2%. Borrowings are due on demand and interest is to be paid monthly.
Borrowings may not exceed certain percentages of a specified borrowing base
consisting of domestic and foreign accounts receivable. The Line of Credit
agreement requires the Company to maintain certain financial ratios, including a
current ratio of 1.50 to 1.00 and a debt to tangible net worth ratio of 1.25 to
1.00, and limits capital expenditures to Cdn$100,000 per annum, unless approved
by the Bank. 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 December 31, 1998, the
Company had outstanding borrowings under the Line of Credit of approximately
US$995,000.
At December 31, 1996, December 31, 1997 and September 30, 1998, the
Company's net cash position was $1,477,000, $1,383,000 and $1,196,000,
respectively. Net cash provided by (used in) operations, financing and
investments was $70,000, $(94,000) and $(246,000) in the years ended
December 31, 1996 and 1997, and the nine months ended September 30, 1998,
respectively. For the nine months ended September 30, 1998, cash used in
operations, financing and investments consisted primarily of cash generated from
the issuance of Common Shares, warrants and long-term debt which was used
primarily for the acquisition of the net assets of Alex Computer, funding
operations and the purchase of capital assets and software and related
development costs. For 1997, cash used in operations, financing and investments
consisted primarily of cash from operations, and proceeds from the issuance of
Common Shares upon the exercise of options which was used primarily for the
acquisition of 3L Limited, to increase inventories, fund discontinued
operations, purchase of treasury shares and for the purchase of capital assets
and software and related development costs. In 1996, cash provided by
operations, financing and investments consisted principally of cash from
continuing and discontinued operations and the receipt of funds upon the
exercise of outstanding stock options. This was used primarily to increase
accounts receivable and for the purchase of capital assets and software and
related development costs.
Accounts receivable, net, at December 31, 1996, December 31, 1997, and
September 30, 1998 was $8,328,000, $6,549,000 and $7,137,000, respectively. The
Company's standard collection terms are net 30 days, subject to adjustment for
certain customers.
The Company made capital expenditures of $1,529,000 during the year ended
December 31, 1996, $2,296,000 during the year ended December 31, 1997, and
$580,000 during the nine months ended September 30, 1998, 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 $193,000 in cash
acquired. On March 17, 1998, the Company effectively acquired pursuant to an
acquisition agreement all the assets of Alex Computer. The consideration paid
and assets acquired in connection with such acquisition were transferred on
May 1, 1998. The consideration paid by Spectrum for such acquisition consisted
of $677,000 in cash, the assumption of $2,050,000 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 $6.34 per share.
The Company believes that cash generated from operations and borrowings
available under the Line of Credit will be sufficient to meet its working
capital and capital expenditure requirements in 1998. However, the Company may
in the future require additional equity or debt financing to meet its working
capital, fixed asset and acquisition requirements. There can be no assurance
that additional financing will not be required sooner or, if required, that it
will be available on a timely basis or on terms satisfactory to the Company.
LITIGATION
The Company has initiated a lawsuit against Alex Computer seeking recovery
of approximately $255,000 in expenses incurred in connection with the
acquisition of Alex Computer reimbursable to Spectrum under the terms of the
acquisition agreement relating thereto.
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<PAGE>
INFLATION, FOREIGN CURRENCY FLUCTUATIONS AND HEDGING
The Company believes that inflation and other changes in prices have not
had a material effect on the Company. The Company intends to continue to sell
the majority of its products in US dollars while incurring costs in varying
proportions in Canadian dollars, US dollars and other currencies. Thus, the
Company's operations are susceptible to fluctuations in currency exchange rates.
In addition, if the Canadian dollar rises relative to the US dollar, the
Company's reported operating expenses and net income may be materially and
adversely affected. Since 1995, the Company has entered into 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 million. 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 determined that its major internal
system, the MRP system, is Year 2000 compliant, which means that internal order
processing and filing will be unaffected.
The Company has committed internal and external resources to address its
potential Year 2000 problems. Progress on Year 2000 issues is centrally
coordinated, with regular reporting to the Audit Committee and the full Board of
Directors. 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 March 31, 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.
18
<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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<PAGE>
microprocessors which are bundled with other chips such as ASIC, memory and
audio chips. The chipset along with numerous other components are mounted on a
circuit board which is then installed into a computer system. In addition to
this specialized hardware, these boards require specialized software to provide
instructions for specific applications. The software typically includes DSP
algorithms, DSP operating system software and host software. Other than the DSP
microprocessor, the Company has the capability to design and develop all the DSP
hardware and software for each DSP system.
Software. In June 1997, Spectrum acquired a Scotland-based software
company, 3L Limited, in order to provide more complete DSP software solutions to
its customers. 3L Limited specializes in real-time operating systems
specifically for applications requiring multiple DSPs. 3L Limited operates on an
independent basis under the name of 3L Limited so that it can effectively sell
its standard DSP software products through its traditional channels to DSP
systems vendors and in-house developers. Spectrum's head office directs 3L
Limited's product development activities in Scotland and supports its sales
activities with marketing and promotional support. 3L Limited's software is
relatively unique in the DSP market and allows Spectrum to gain a competitive
advantage by enabling the Company to offer a real-time-operating system,
designed specifically for DSP systems with multiple processors (typical Spectrum
products), to its customers as part of its standard DSP system solution.
In March 1998, Spectrum acquired the assets of another DSP company, Alex
Computer Systems, Inc., a company with strong software and hardware solutions
based on Analog Devices' SHARC-based processors. This acquisition allows
Spectrum to become a strong competitor in the floating-point DSP marketplace,
with the large SHARC-based product line Alex Computer brought to Spectrum. One
of Alex Computer's key strengths is its software capability. On the software
side, Alex Computer contributes an outstanding software combination to
complement the software Spectrum had for the SHARC-based product line. The
software and hardware product line which Alex Computer contributes to Spectrum
allows the Company to offer a truly SHARC-based suite of system level solutions.
MARKETS
General Commercial. The Company's commercial products historically have
been general purpose in nature and targeted to a wide range of applications. The
Company believes there is significant opportunity in the commercial market due
in part to the constant introduction of new ways to implement DSP technology
into traditionally non-DSP commercial applications. Typical applications in this
market include: medical diagnostic imaging (e.g., MRI and ultrasound), to test
and measurement, control, audio, machine vision and image processing. The
Company's customers in this market include: Siemens Medical, NEC, Halliburton
and Elbit. Sales to these customers represented 13% of the Company's sales for
the year ended December 31, 1997. The Company's commercial products accounted
for approximately 69%, 53%, 34% and 47% of sales during 1995, 1996, 1997 and the
first nine months of 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 commercial (rather than custom)
off-the-shelf DSP hardware solutions supported by time-saving software
development tools from reliable, quality DSP system suppliers. The balance of
hardware and software sophistication, together with reliable supply, is key to
differentiating the Company's solutions from those of its competitors. The
leading-edge position of the Company's customers in this market forces them to
adopt new technology whenever it offers even a modest increase in capability.
This causes rapid product cycle updates (requiring new hardware) and increases
the development and integration costs and schedules, requiring improved software
tools. The Company's customers in this market include: Boeing, Lavison, Seabeam
and Xontech. Sales to these customers represented 2% of the Company's sales for
the year ended December 31, 1997. The Company's radar/sonar products accounted
for approximately 2%, 5%, 3% and 3% of sales during 1995, 1996, 1997 and the
first nine months of 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
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<PAGE>
surveillance and intelligence applications. The Company began shipping its first
production volumes of these systems in the third quarter of 1996. The Company's
customers in this market include: Hewlett-Packard, NAI, the U.S. Department of
Defense and Raytheon. Sales to these customers represented 52% of the Company's
sales for the year ended December 31, 1997. The Company's signal intelligence
products accounted for approximately 26%, 40%, 60% and 46% of sales during 1995,
1996, 1997 and the first nine months of 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, including subscriber sets and
base stations. The Company is dedicated to providing complete solutions to
companies in the wireless industry which, the Company believes, will need to
incorporate DSP technology into next generation cellular base station and other
wireless technologies. The Company's customers in this market include: Motorola,
SED Systems and Watkins-Johnson. Sales to these customers represented 2% of the
Company's sales for the year ended December 31, 1997. The Company's wireless
products accounted for approximately 3%, 2%, 3% and 4% of sales during 1995,
1996, 1997 and the first nine months of 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 40% of the Company's sales
in 1997 and the first nine months of 1998, respectively. The Company's largest
customer, the U.S. Government (principally the U.S. Department of Defense),
accounted for approximately 25% and 30% of the Company's sales in 1997 and the
first nine months of 1998, respectively. In addition, approximately 10% of the
Company's sales during 1997 were made to NAI Technologies and approximately 10%
of the Company's sales during the first nine months of 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>
COMMERCIAL RADAR/SONAR SIGNAL INTELLIGENCE WIRELESS
- ------------------- --------------------------- --------------------------- -------------------
<S> <C> <C> <C>
Sunkist Growers U.S. Department of Defense U.S. Department of Defense Motorola
Siemens Medical Lavison Hewlett-Packard SED Systems
Halliburton Boeing Raytheon Watkins-Johnson
NEC Seabeam NAI Technologies
Elbit Xontech
</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
December 31, 1998 employed 28 persons. The Company employs an outsourcing model
for substantially all product manufacturing. Product manufacturing consists of
board-level products, cable assemblies and some silicon manufacturing. The
Company believes that outsourcing most of its manufacturing allows it to focus
more of its resources on research and product development, marketing, sales and
customer support while producing a flexible, cost effective source of
manufacturing capacity. Standards for assembly, testing and quality assurance
have been established and documented and are monitored through a quality control
program throughout the assembly and final inspection process. Additionally, the
Company must meet certain specified quality goals under several of its customer
supply agreements. The Company achieved ISO 9002 certification in January 1994
and ISO 9001 certification in December 1994.
The Company supports its ISO 9001 quality standards with after-sale
technical support, which is especially desired by customers relying on the
Company's design engineers rather than an in-house engineering capability. The
Company's support hotline is staffed with application engineers who are
experienced in a broad variety of hardware and software products. The
application engineers document all problems or questions reported by customers
creating a database that assists in the timely resolution of future questions.
This database also serves as a tool to the product managers for redefinition and
improvements to the Company's product line.
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<PAGE>
SUPPLIERS
The Company's DSP solutions include a number of products and components
that are sourced from third-party suppliers, including Texas Instruments,
Motorola, AT&T and Analog Devices. The Company attempts to use standard parts
and components which are available from multiple vendors in its DSP solutions,
although certain DSP solutions are based upon manufacturer-specific DSP
microprocessors. The Company believes that each supplier has a manufacturing
capability in more than one location which reduces the risk of an interruption
in product availability. The Company does not have long-term agreements with any
of these suppliers. The availability of many of these components is dependent in
part on the Company's ability to accurately forecast its future requirements.
While the Company has from time to time experienced shortages of these
components, such shortages to date have not had a material adverse effect on
operating results.
RESEARCH AND PRODUCT DEVELOPMENT
The Company believes that continued investment in research and development
will be critical to the Company's future success. At December 31, 1998, the
Company employed 76 persons in the area of research and product development,
focusing on the development of next generation products for military aerospace
and commercial applications and new multimedia products and ongoing enhancement
of existing ASICs, DSP and Windows software and modules. The Company generates a
significant percentage of its total revenues from development contracts,
primarily with key customers. These development contracts have provided the
Company with partial funding for the development of certain of its products and
sometimes provide for a production commitment. Under these contracts, the
Company receives payments upon reaching certain development milestones. The
Company is currently conducting development work under development contracts
with several of its customers. The Company intends to continue to seek
development contracts with strategic partners.
During 1995, 1996, 1997 and the first nine months of 1998, the Company's
research and development expenditures were approximately $2,632,000, $3,392,000,
$4,194,000 and $3,826,000, 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).
22
<PAGE>
In July 1987, the Company entered an agreement with Loughborough pursuant
to which the Company licenses certain DSP technology. In consideration of the
license, the Company issued to Loughborough 1,000,000 Common Shares, which were
subsequently sold by Loughborough. In addition, the Company is required to pay
Loughborough a 5% royalty on certain of the products for the military/aerospace
and commercial markets based upon technology licensed from Loughborough and
products acquired from Loughborough for resale and must pay a flat fee on a per
product basis for certain other Loughborough Products purchased by the Company
pursuant to such license. In 1995, 1996, 1997 and the first nine months of 1998,
sales of Loughborough Products accounted for approximately 46%, 33%, 30% and
11%, 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 1995, 1996, 1997 and the first nine months of 1998, sales of
Loughborough Products accounted for approximately 46%, 33%, 30% and 11%,
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,
23
<PAGE>
could result in increased competition. In 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 26 persons and headed by the Vice
President-Sales. The department is divided into two separate groups: (i)
military/aerospace; and (ii) commercial, and ASICs and software.
The military/aerospace and commercial group is made up of inside sales
personnel, field applications engineers, field sales managers and a channel
sales director. The sales group is organized into five main geographic regions:
the Eastern Region, managed from the sales office in Westborough, Massachusetts,
the federal region, managed from the sales office in Landover, Maryland, the
Western Region, managed from the sales office in Mountainview, California, the
Central Region, managed from the Company's headquarters and the Canadian and
overseas markets, also managed from the Company's headquarters. The Company also
makes use of third-party sales representative firms which have a technical sales
force experienced with similar product lines and an established customer base.
ASICs and DSP software sales are managed primarily from the Company's
headquarters.
The Company currently has distribution agreements in place with
international distributors in Canada, Israel, Japan, Sweden, Germany, Korea,
Taiwan, Australia, South Africa and Denmark.
MARKETING
The marketing department, comprised of 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.
24
<PAGE>
EMPLOYEES
As of December 31, 1998, the Company had a total of 167 full-time
employees, of which 43 were administrative personnel, 48 were sales and
marketing personnel and 76 were members of the engineering team. None of the
Company's employees are represented by labor unions or collective bargaining
units. The Company believes that its relationship with its employees is good.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
Kenneth A. Spencer.............................. 54 Chair of the Board and Director
Barry W. Jinks(1)(2)............................ 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
Joseph Abrams(3)................................ 62 Director
Dr. Karl H. Brackhaus(1)(2)..................... 51 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.
25
<PAGE>
David Hobbs has been a Vice President, Engineering of the Company since
1994. From 1990 to 1994, Mr. Hobbs held several senior management positions with
the Company in engineering. From 1987 to 1990, Mr. Hobbs held several lead
positions with Gemini Technology Inc., an ASIC design company, most recently
serving as Senior Engineer.
Ronald Wages has been Vice President, Marketing of the Company since April
of 1997. From 1987 to 1997, Mr. Wages held several positions with Texas
Instruments, most recently as Marketing Manager responsible for worldwide DSP
marketing programs and strategic DSP marketing in North America.
Joseph Abrams has been a Director of the Company since 1993. From 1980 to
1990, Mr. Abrams was President of AGS Computers Inc., a computer software
consulting and products company. Since 1990, Mr. Abrams has been a member of the
board of directors of Merisel Inc., a computer products distribution company.
Since 1995, Mr. Abrams has been a member of the board of directors of Phonetel,
a pay telephone company.
Dr. Karl H. Brackhaus has been a Director of the Company since 1990. Since
1976, Mr. Brackhaus has been President and CEO of Dynapro Systems Inc., a
company involved in the design and manufacture of computer based industrial
display systems.
John E. Brennan has been a Director of the Company since 1995. Since 1992,
Mr. Brennan has been President and a Director of Activated Communications Inc.,
a communications company. Since 1991, he has been President of Paging
Dimensions, Inc., a paging company, and President of RCS, Inc., a leasing
company. Since 1990, he has also served as Vice Chairman of Southern Union
Company, a natural gas distribution company. From 1986 until its merger with
Bell Atlantic Corporation in 1992, he served as President and Chief Operating
Officer of Metro Mobile CTS, Inc., a cellular telephone company of which he was
a co-founder.
Charles C. Johnston has been a Director of the Company since 1992.
Mr. Johnston is presently an active private investor. From 1990 to 1992,
Mr. Johnston was Chairman of Teleglobe Inc., a computer services company. Since
January 1990, Mr. Johnson has been a member of the Board of Directors of
Teleglobe Inc. From 1969 to 1989, he was Chairman and Chief Executive Officer of
ISI Systems Inc., a computer service company.
Samuel Znaimer has been a Director of the Company since 1990. Since 1983,
Mr. Znaimer has been Senior Vice President of Ventures West Capital Ltd., a
venture capital company.
There is no family relationship between any Director or executive officer.
There are no arrangements or understandings between any Director or executive
officer.
The Board of Directors met eight times in 1997. Under the BC Act, a
majority of the Board of Directors must be resident Canadians and at least one
member of the Board of Directors must ordinarily be resident in the Province of
British Columbia. All directors hold office until the next meeting of the
shareholders of the Company and until their successors are elected and
qualified. Officers are appointed to serve, at the discretion of the Board of
Directors, until their successors are appointed.
The Board of Directors established an Audit Committee and a Compensation
Committee. The Audit Committee, whose members are Messrs. Brackhaus, Jinks and
Znaimer, is charged with reviewing the Company's annual audit and meeting with
the Company's independent accountants to review the Company's internal controls
and financial management practices. The Audit Committee met once in 1997. The
Compensation Committee, whose members are Messrs. Brackhaus, Johnston and Jinks,
recommend to the Board of Directors the compensation for the Company's key
employees. The Compensation Committee met twice in 1997.
The Acquisition Committee, whose members are Messrs. Znaimer and Abrams,
formed to make recommendations to the Board of Directors on acquisition
opportunities, met twice in 1997.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Aggregate compensation paid to all directors and officers as a group for
services in all capacities during 1997 was $999,000. The following table sets
forth information concerning all cash and non-cash compensation awarded to,
earned by or paid to the Company's Chief Executive Officer in 1997.
26
<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 ....................................... 1997 $158,910 $104,985 $205 13,000
President and Chief Executive Officer 1996 141,684 84,622 242 --
1995 122,395 -- 240 --
</TABLE>
The following table sets forth certain information with respect to the
aggregate number and value of options exercisable by the Company's Chief
Executive Officer at December 31, 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
SHARES VALUE YEAR END(#) FISCAL YEAR END(1)
ACQUIRED ON REALIZED ----------------------------- -----------------------------
NAME EXERCISE(#) (CDN$) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Barry W.
Jinks........ 0 N/A 328,171 133,001 $ 1,116,377 $41,958
</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, 1997 ($5.438 per share) and the exercise price of the
"in-the-money" options, multiplied by the number of "in-the-money" option
shares.
Directors' Compensation
In 1997, the Board of Directors approved a fee of $720 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 $14,380
per year, payable quarterly. For the last completed financial year, Mr. Spencer
received a total of $3,595 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.
27
<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 December 31, 1998, options to purchase an aggregate of 1,804,743 Common
Shares were outstanding under options issued to directors, officers and eligible
employees under the Plan. Exercise prices under the foregoing options range from
$0.49 to $11.03 per share. Of such options, options to purchase 1,077,672 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 December 31, 1998 by (i) each person known
to the Company to be the beneficial owner of more than five percent of the
outstanding Common Shares, (ii) each of the Company's directors and executive
officers, and (iii) all directors and executive officers of the Company as a
group. Unless otherwise indicated below, the persons named below have sole
voting and investment power with respect to the number of shares set forth
opposite their names, subject to community property laws where applicable.
<TABLE>
<CAPTION>
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).................... 28,333 * -- 28,333 *
Barry W. Jinks(5)........................ 399,200 3.8% -- 399,200 3.8%
Martin McConnell(6)...................... 87,000 * -- 87,000 *
Brian Lowe(7)............................ 67,100 * -- 67,100 *
Douglas Johnson(8)....................... 54,500 * -- 54,500 *
David Hobbs(9)........................... 62,500 * -- 62,500 *
Ronald Wages(10)......................... 18,666 * -- 18,666 *
Joseph Abrams(11)........................ 34,333 * -- 34,333 *
Dr. Karl H. Brackhaus(12)................ 34,333 * -- 34,333 *
John E. Brennan(13)...................... 77,333 * -- 77,333 *
Charles C. Johnston(14).................. 317,433 3.0% -- 317,433 3.0%
Samuel Znaimer(14)....................... 22,333 * -- 22,333 *
Andrew Talbot(15)
c/o Alex Informatics Inc.
1930 Gagnon Street
Lachine, PQ H8T 3M6
Canada................................. 61,809 * 61,809 -- --
Alex Computer(16)
c/o Alex Informatics Inc.
1930 Gagnon Street
Lachine, PQ H8T 3M6
Canada................................. 821,192 8.1% 821,192 -- --
All directors and executive officers
as a group (12 persons)(17)............ 1,203,064 11.2% 1,203,064 11.2%
</TABLE>
(Footnotes on next page)
28
<PAGE>
(Footnotes from previous page)
- ------------------
* Less than one percent.
(1) Except as otherwise noted, the address of the named shareholder is c/o
Spectrum Signal Processing Inc., 8525 Baxter Place, Burnaby, British
Columbia, Canada V5A 4V7.
(2) Percentages of outstanding Common Shares are based upon 10,035,654 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 8,333 Common Shares issuable upon the exercise of options.
(4) Includes 3,333 Common Shares issuable upon exercise of options.
(5) Includes 370,772 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 16,666 Common Shares issuable upon the exercise of options.
(11) Amount reflects Common Shares issuable upon the exercise of options.
(12) Includes 18,333 Common Shares issuable upon the exercise of options.
(13) Includes 8,333 Common Shares issuable upon the exercise of options.
(14) Includes 18,333 Common Shares issuable upon the exercise of options.
(15) 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.
(16) Includes 102,649 Common Shares issuable upon the exercise of the Warrants.
(17) Includes 732,103 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 December 31, 1998, 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,
29
<PAGE>
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 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.
30
<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
31
<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.
32
<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.
33
<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.
34
<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.
35
<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>
36
<PAGE>
INDEX TO FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF
SPECTRUM SIGNAL PROCESSING INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Auditors' Report........................................................................................... F-3
Consolidated Balance Sheets (audited) at December 31, 1996 and 1997 and (unaudited) at September 30,
1998..................................................................................................... F-4
Consolidated Statements of Operations (audited) for the years ended December 31, 1995, 1996, and 1997, and
(unaudited) for the nine months ended September 30, 1997 and 1998........................................ F-5
Consolidated Statements of Retained Earnings (Deficit) for the years ended December 31, 1995, 1996 and 1997
and (unaudited) for the nine months ended September 30, 1997 and 1998.................................... F-6
Consolidated Statements of Cash Flows (audited) for the years ended December 31, 1995, 1996, and 1997, and
(unaudited) for the nine months ended September 30, 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-26
Balance Sheets (audited) at July 31, 1997 and 1996......................................................... F-27
Statements of Income and Retained Earnings (audited) for the years ended July 31, 1997 and 1996............ F-28
Statements of Cash Flows (audited) for the years ended July 31, 1997 and 1996.............................. F-29
Notes to Financial Statements.............................................................................. F-30
</TABLE>
INDEX TO FINANCIAL STATEMENTS OF
ALEX COMPUTER SYSTEMS, INC. (INTERIM)
<TABLE>
<S> <C>
Balance Sheet (unaudited) at February 28, 1998............................................................. F-36
Statement of Earnings and Retained Earnings (unaudited) for the seven months ended February 28, 1998....... F-37
Statement of Cash Flows (unaudited) for the seven months ended February 28, 1998........................... F-38
Notes to Financial Statements.............................................................................. F-39
INDEX TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF
SPECTRUM SIGNAL PROCESSING INC.
Pro Forma Consolidated Statements of Earnings (unaudited) for the year ended December 31, 1997 and for the
nine months ended September 30, 1998..................................................................... F-44
Notes to Pro Forma Consolidated Financial Statements....................................................... F-45
</TABLE>
F-1
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Auditors' Report........................................................................................... F-3
Consolidated Balance Sheets................................................................................ F-4
Consolidated Statements of Operations...................................................................... F-5
Consolidated Statements of Retained Earnings (Deficit)..................................................... F-6
Consolidated Statements of Cash Flows...................................................................... F-7
Notes to Consolidated Financial Statements................................................................. F-8
</TABLE>
F-2
<PAGE>
AUDITORS' REPORT
The Board of Directors
Spectrum Signal Processing Inc.
We have audited the consolidated balance sheets of Spectrum Signal Processing
Inc. as at December 31, 1997 and 1996 and the consolidated statements of
operations and retained earnings (deficit) and cash flows for each of the years
in the three year period ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 1997
and 1996 and the results of its operations and its cash flows for each of the
years in the three year period ended December 31, 1997, in accordance with
generally accepted accounting principles in the United States.
We have also reported on the financial statements of Spectrum Signal Processing
Inc. for the same periods presented in accordance with Canadian generally
accepted accounting principles.
KPMG LLP
Chartered Accountants
Richmond, Canada
February 5, 1998, except as to note 15 which is as of January 20, 1999
F-3
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1996 1997 1998
------- ------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.................................................. $ 1,477 $ 1,383 $ 1,137
Accounts receivable, net of allowance for doubtful accounts of $159
(1997--$170, 1996--$233)................................................ 8,328 6,549 7,137
Inventories................................................................ 1,736 4,061 3,976
Prepaid expenses........................................................... 512 220 397
------- ------- --------
12,053 12,213 12,647
Property and equipment (Note 4).............................................. 2,116 2,448 2,430
Other assets (Note 5)........................................................ 814 1,823 2,425
------- ------- --------
$14,983 $16,484 $ 17,502
------- ------- --------
------- ------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank indebtedness (Note 6)................................................. $ -- $ -- $ 2,333
Accounts payable........................................................... 3,279 2,990 4,312
Accrued liabilities........................................................ 1,098 1,690 1,117
Deferred revenue........................................................... 635 19 --
Current portion of long-term debt (Note 6)................................. 9 -- 94
------- ------- --------
5,021 4,699 7,856
Long-term debt (Note 6)...................................................... -- 75 101
Deferred income taxes (Note 8)............................................... 39 1,223 83
Shareholders' equity
Authorized 50,000,000 common shares, no par value issued and outstanding
(Note 7) 10,268,954 (1996--9,243,683 1997--9,459,397)...................... 10,255 11,373 16,439
Warrants (Note 7)............................................................ -- -- 141
Additional paid-in capital (Note 7).......................................... 76 76 76
Treasury stock, at cost, 233,300 shares (1996--16,400 1997--233,300)......... (30) (1,232) (1,232)
Retained earnings (deficit).................................................. 232 1,237 (4,763)
Accumulated other comprehensive income
Cumulative translation adjustments......................................... (610) (967) (1,199)
------- ------- --------
9,923 10,487 9,462
Commitments (Note 10)........................................................
Subsequent events (Note 15)..................................................
------- ------- --------
$14,983 $16,484 $ 17,502
------- ------- --------
------- ------- --------
</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)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- -------------------------------------
1995 1996 1997 1997 1998
------- ------- ------- ---------------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales (note 11)........................................... $12,904 $20,063 $26,207 $ 18,304 $19,497
Cost of sales............................................. 5,688 8,340 11,180 8,044 8,302
------- ------- ------- -------- -------
7,216 11,723 15,027 10,260 11,195
Expenses
Administrative.......................................... 2,068 3,049 3,146 2,256 2,396
Sales and marketing..................................... 3,198 3,880 4,769 3,295 5,495
Amortization............................................ 422 497 644 452 596
Acquired in-process research and development charge..... -- -- 872 872 6,168
Research and development................................ 1,340 2,130 2,536 1,615 3,366
------- ------- ------- -------- -------
7,028 9,556 11,967 8,490 18,021
------- ------- ------- -------- -------
Earnings (loss) from operations........................... 188 2,167 3,060 1,770 (6,826)
Other revenue (expense)
Interest and bank charges............................... (31) (23) 2 (14) (120)
Other income............................................ 484 29 12 25 17
------- ------- ------- -------- -------
453 6 14 11 (103)
------- ------- ------- -------- -------
Earnings (loss) before income taxes and discontinued
operations.............................................. 641 2,173 3,074 1,781 (6,929)
Deferred income taxes (note 8)............................ 365 724 1,534 996 (929)
------- ------- ------- -------- -------
Earnings (loss) from continuing operations................ 276 1,449 1,540 785 (6,000)
Earnings (loss) from discontinued operations
(note 12)............................................... (1,027) 129 (535) (500) --
------- ------- ------- -------- -------
Net earnings (loss)....................................... (751) 1,578 1,005 285 (6,000)
Other comprehensive earnings
Foreign currency translation............................ 216 (108) (357) (268) (231)
------- ------- ------- -------- -------
Comprehensive earnings (loss)............................. $ (535) $ 1,470 $ 648 $ 17 $(6,231)
------- ------- ------- -------- -------
------- ------- ------- -------- -------
Earnings (loss) per share (note 9)
Basic
From continuing operations........................... $ 0.03 $ 0.16 $ 0.17 $ 0.09 $ (0.61)
After discontinued operations........................ $ (0.08) $ 0.17 $ 0.11 $ 0.03 $ (0.61)
Diluted
From continuing operations........................... $ 0.03 $ 0.15 $ 0.16 $ 0.08 $ (0.61)
After discontinued operations........................ $ (0.08) $ 0.16 $ 0.10 $ 0.03 $ (0.61)
Weighted average shares (in thousands)
Basic................................................ 9,001 9,195 9,235 9,229 9,801
Diluted.............................................. 9,575 9,782 9,608 9,615 9,801
------- ------- ------- -------- -------
------- ------- ------- -------- -------
</TABLE>
F-5
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT)
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- --------------------------------------
1995 1996 1997 1997 1998
------- ------- ------- ----------------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Retained earnings (deficit), beginning of period.......... $ (595) $(1,346) $ 232 $ 232 $ 1,237
Net earnings (loss)....................................... (751) 1,578 1,005 285 (6,000)
------- ------- ------- ------- -------
Retained earnings (deficit), end of period................ $(1,346) $ 232 $ 1,237 $ 517 $(4,763)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</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)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH PROVIDED BY (USED IN)
Cash flow from operating activities:
Earnings (loss) from continuing operations................... $ 276 $ 1,449 $ 1,540 $ 785 $ (6,000)
Adjustments to reconcile to net earnings (loss)
Amortization............................................... 422 497 644 452 596
Acquired in-process research & development................. -- -- 872 872 6,168
Deferred income taxes...................................... 365 724 1,534 996 (929)
Gain on sale of marketable securities...................... (405) -- -- -- --
Deferred share issue costs................................. -- -- 193 -- --
Translation adjustment..................................... 148 (77) (257) (26) (211)
Changes in operating assets and liabilities
Accounts receivable........................................ (1,120) (3,440) 1,882 1,615 48
Inventories................................................ (367) 571 (2,311) (1,868) 545
Prepaid expenses........................................... (137) (230) 311 433 (177)
Accounts payable........................................... 766 1,136 122 2,091 490
Accrued liabilities........................................ -- -- -- (1,098) (1,715)
Deferred revenue........................................... -- 635 (616) (635) (19)
--------- --------- --------- --------- ---------
Net cash provided by (used for) continuing operations.......... (52) 1,265 3,914 3,617 (1,204)
--------- --------- --------- --------- ---------
Earnings (loss) from discontinued operations................. (1,027) 129 (535) (500) --
Deferred income taxes, an item not involving cash............ (365) 64 (340) (318) --
--------- --------- --------- --------- ---------
Net cash provided by (used for) discontinued operations........ (1,392) 193 (875) (818) --
--------- --------- --------- --------- ---------
(1,444) 1,458 3,039 2,799 (1,204)
--------- --------- --------- --------- ---------
Cash flow from financing activities:
Increase in bank indebtedness................................ -- -- -- -- 2,333
Payment of deferred share issue costs........................ -- (193) -- -- (30)
Issue of shares, net of share issue expenses................. 686 364 184 141 149
Purchase of treasury shares.................................. -- -- (1,202) (1,022) --
Increase (decrease) in long-term debt........................ (101) (30) (7) 74 44
--------- --------- --------- --------- ---------
Net cash provided by (used for) financing activities........... 585 141 (1,025) (807) 2,496
--------- --------- --------- --------- ---------
Total cash generated for investing activities.................. (859) 1,599 2,014 1,992 1,292
Cash flow from investing activities:
Purchase of property and equipment........................... (662) (1,042) (1,040) (1,883) (495)
Software and related development costs, net.................. (143) (487) (1,256) -- (85)
Proceeds from marketable securities.......................... 1,402 -- -- -- --
Decrease in loan receivable.................................. 967 -- -- -- --
Cash received on acquisition of 3L Limited, net of expenses.. -- -- 188 188 --
Acquisition of Alex.......................................... -- -- -- -- (958)
--------- --------- --------- --------- ---------
Net cash provided by (used for) investing activities........... 1,564 (1,529) (2,108) (1,695) (1,538)
--------- --------- --------- --------- ---------
Increase (decrease) in cash and cash equivalents............... 705 70 (94) 297 (246)
Cash and cash equivalents, beginning of period................. 702 1,407 1,477 1,477 1,383
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period....................... $ 1,407 $ 1,477 $ 1,383 $ 1,774 $ 1,137
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS AT SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1998 ARE UNAUDITED
(AMOUNTS IN THOUSANDS OF UNITED STATES DOLLARS)
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.
Unaudited financial information
The financial information as at September 30, 1998 and for the nine months
ended September 30, 1998 and 1997 is unaudited; however, such information
reflects all adjustments (consisting solely of normal recurring adjustments)
required for a fair presentation of the financial information for the interim
periods presented.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, particularly the
recoverability of 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 includes 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,
---------------- SEPTEMBER 30,
1996 1997 1998
------ ------ ----------------
(UNAUDITED)
<S> <C> <C> <C>
Finished goods....................................................... $ 732 $2,185 $1,064
Work in progress..................................................... -- -- 1,163
Raw materials........................................................ 1,004 1,876 1,749
------ ------ ------
$1,736 $4,061 $3,976
------ ------ ------
------ ------ ------
</TABLE>
F-8
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1998 ARE UNAUDITED
(AMOUNTS IN THOUSANDS OF UNITED STATES DOLLARS)
1. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
Amortization is provided on a product by product basis over the shorter of the
estimated economic life of the product or three years. Amortization commences
when the product is available for general release to customers. Research and
development costs and capitalized software and related development costs can be
summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------- ----------------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Research & development expense
Continuing operations............................. $1,340 $2,130 $2,536 $1,615 $3,366
Discontinued operations........................... 1,149 639 304 230 --
Capitalized software and related development costs..... 143 623 1,354 1,323 460
------ ------ ------ ------ ------
$2,632 $3,392 $4,194 $3,168 $3,826
------ ------ ------ ------ ------
</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 five years.
License
The Company has the North American license to manufacture and distribute
computer peripherals for digital signal processing systems designed by
Loughborough Sound Images Ltd. The license was recorded at a nominal value of $1
and expired in July 1997. During 1997, the Company negotiated a non-exclusive
extension of manufacturing rights to 2002 and distribution rights to
January 17, 1999. Both the manufacturing and distribution rights may be extended
under certain conditions.
F-9
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1998 ARE UNAUDITED
(AMOUNTS IN THOUSANDS OF UNITED STATES DOLLARS)
1. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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. 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 currency denominated
balances of the Company are measured in Canadian dollars. Under this method,
monetary assets and liabilities denominated in a foriegn 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 rates
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.
Acquired Technology
The acquired technology is stated on the basis of cost, based on fair value
at the acquisition date, less accumulated amortization as of September 30,
1998--$53, and is amortized on a straight line basis over 7 years with one half
of the annual rate in the year of addition.
Revenue Recognition
DSP Products revenue is recognized upon shipment, which is when title
passes to the customer. Computer telephony integration ("CTI") product revenue,
which is included in discontinued operations, is recognized upon the later of
shipment or transfer of title. Revenue from product development contracts is
recognized upon reaching certain development milestones which are generally
correlated to the timing of payments.
F-10
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1998 ARE UNAUDITED
(AMOUNTS IN THOUSANDS OF UNITED STATES DOLLARS)
1. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
The Company follows the cost reduction method of accounting for investment
tax credits whereby the benefit of tax credits is recognized as a reduction in
the cost of the related asset or expenditure when there is reasonable assurance
the tax credits will be realized.
Share issue costs
The costs of issuing common shares, net of income tax recoveries thereon,
are applied to reduce the proceeds of such shares.
Deferred share issue costs
Costs incurred on proposed share issuances are included as deferred costs
until the shares are issued, at which time the costs are recorded as a reduction
of proceeds. Deferred costs are expensed when a proposed offering is abandoned.
Technological risks
The market for the Company's products is characterized by rapidly changing
technologies, evolving industry standards and frequent new product introductions
and enhancements. There can be no assurance that the Company will successfully
develop, complete, introduce, and market new products or product enhancements,
or that the products or product enhancements currently in development or that
may be developed by the Company in the future will meet industry requirements
and achieve market acceptance. Any significant delay or failure to develop,
manufacture or ship new or enhanced products could have a material adverse
effect on the Company's business, financial condition and results of operation.
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.
F-11
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1998 ARE UNAUDITED
(AMOUNTS IN THOUSANDS OF UNITED STATES DOLLARS)
1. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
Recent Accounting Pronouncements
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("FAS") No. 130, "Reporting Comprehensive Income." FAS No.
130 establishes standards for reporting and displaying comprehensive income and
its components in the financial statements. It does not, however, require a
specific format for the disclosure but requires the Company to display an amount
representing total comprehensive income for the period in its 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 establishes standards for the manner in
which public companies report information about operating segments in annual and
interim financial statements. The Company will be required to implement 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 establishes 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
establishes standards relating to the recognition of all aspects of software
revenue. SOP 97-2 will require the Company to modify certain aspects of its
revenue recognition policies. The Company does not expect the adoption of SOP
97-2 to have a material impact on the Company's consolidated results of
operations. The Company implemented SOP 97-2 for its fiscal year 1998.
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 and 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.
F-12
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS AT SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1998 ARE UNAUDITED
(AMOUNTS IN THOUSANDS OF UNITED STATES DOLLARS)
2. ACQUISITION OF 3L LIMITED
On June 20, 1997 the Company acquired all of the outstanding shares of 3L
Limited. The acquisition has been accounted for using the purchase method of
accounting and the results of operations have been consolidated since the date
of acquisition. The Company's interest in the net assets acquired at assigned
values are as follows:
<TABLE>
<S> <C>
Cash.................................................................................. $ 193
Current assets........................................................................ 136
Property and equipment................................................................ 19
Acquired in-process research and development.......................................... 865
Current liabilities................................................................... (274)
-----
Acquisition cost...................................................................... $ 939
-----
-----
Consideration
173,333 common shares............................................................ $ 934
Expenses on acquisition.......................................................... 5
-----
$ 939
-----
-----
</TABLE>
The following unaudited pro-forma results of operations assume that the
acquisition occurred as of the beginning of the respective periods presented.
The unaudited pro-forma information given below does not purport to be
indicative of the results that actually would have been obtained if the
operations were combined during the periods presented, and is not intended to be
a projection of future results or trends.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1996 1997
------- -------
(UNAUDITED)
<S> <C> <C>
Revenue........................................................................... $20,788 $26,582
Earnings from continuing operations............................................... 1,488 1,530
Net earnings...................................................................... 1,617 1,000
Earnings per share
From continuing operations................................................... $ 0.16 $ 0.17
------- -------
------- -------
Net.......................................................................... $ 0.18 $ 0.11
------- -------
------- -------
</TABLE>
3. ACQUISITION OF NET ASSETS OF ALEX COMPUTER SYSTEMS, INC. (UNAUDITED)
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
F-13
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1998 ARE UNAUDITED
(AMOUNTS IN THOUSANDS OF UNITED STATES DOLLARS)
3. ACQUISITION OF NET ASSETS OF ALEX COMPUTER SYSTEMS, INC.
(UNAUDITED)--(CONTINUED)
of accounting and the results of operations have been consolidated since the
date of the acquisition. The Company's interest in the net assets acquired at
assigned values are as follows (unaudited):
<TABLE>
<S> <C>
Cash................................................................................ $ 10
Current assets...................................................................... 1,095
Property and equipment.............................................................. 229
Acquired technology................................................................. 715
Acquired in-process research and development........................................ 6,168
Current liabilities................................................................. (2,050)
Long-term liabilities............................................................... (141)
-------
Acquisition cost.................................................................... $ 6,026
-------
-------
Consideration
772,626 common shares.......................................................... $ 4,917
110,375 warrants............................................................... 141
Cash.............................................................................. 677
Expenses on acquisition........................................................... 291
-------
$ 6,026
-------
-------
</TABLE>
The following unaudited pro-forma results of operations assume that the
acquisition occurred as of the beginning of the respective periods presented.
The unaudited pro-forma information given below does not 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>
NINE MONTHS
ENDED
SEPTEMBER 30,
------------------
1997 1998
------- -------
(UNAUDITED)
<S> <C> <C>
Revenue........................................................................... $20,581 $20,482
Earnings from continuing operations............................................... 949 (5,979)
Net earnings (loss)............................................................... 449 (5,979)
Earnings (loss) per share
From continuing operations................................................... $ 0.10 ($ 0.61)
------- -------
------- -------
Net.......................................................................... $ 0.05 ($ 0.61)
------- -------
------- -------
</TABLE>
F-14
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1998 ARE UNAUDITED
(AMOUNTS IN THOUSANDS OF UNITED STATES DOLLARS)
4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1996 1997 1998
------- ------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment.................................................. $ 1,762 $ 2,103 $ 2,612
Computer software................................................... 739 941 957
Furniture and fixtures.............................................. 606 753 736
Laboratory equipment................................................ 340 503 610
Leasehold improvements.............................................. 253 296 299
------- ------- --------
3,700 4,596 5,214
Less accumulated amortization....................................... (1,584) (2,148) (2,784)
------- ------- --------
Net book value...................................................... $ 2,116 $ 2,448 $ 2,430
------- ------- --------
------- ------- --------
</TABLE>
5. OTHER ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1996 1997 1998
----- ------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
Software and related development costs net of accumulated
amortization of $563 (1996--$142; 1997--$274)...................... $ 620 $ 1,823 $ 1,763
Acquired technology, net of accumulated amortization of $53.......... -- -- 662
Deferred share issue costs........................................... 193 -- --
License.............................................................. 1 -- --
----- ------- --------
$ 814 $ 1,823 $ 2,425
----- ------- --------
----- ------- --------
</TABLE>
6. 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 $3,300,000 operating line of credit (the "Line of Credit").
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. 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.
F-15
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1998 ARE UNAUDITED
(AMOUNTS IN THOUSANDS OF UNITED STATES DOLLARS)
6. LONG-TERM DEBT AND BANK INDEBTEDNESS--(CONTINUED)
(b) Long-term debt
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1996 1997 1998
------- ------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
Small Business Assistance program, repayable in monthly principal
payments of $3 plus interest at 6%................................ $ 9 $ -- $ --
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 76
Capital lease
The Company entered into a sale/lease back, whereby it sold $245
worth of office equipment at its book value and is leasing it
back over 30 months at monthly installments of $8 including
interest at 9.58% with a final payment of $24 on August 1,
1999........................................................... -- -- 119
------- ------- --------
9 75 195
Less: current portion............................................... (9) -- (94)
------- ------- --------
$ 0 $ 75 $ 101
------- ------- --------
------- ------- --------
</TABLE>
Minimum principal repayments over the term of the capital lease is as
follows:
<TABLE>
<S> <C>
1998........................................................... $ 51
1999........................................................... 75
----
126
Less: Amounts representing interest............................ (7)
----
119
----
Less: Current portion.......................................... (94)
----
$ 25
----
----
</TABLE>
F-16
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 ARE UNAUDITED
(AMOUNTS IN THOUSANDS OF UNITED STATES DOLLARS)
7. SHARE CAPITAL
(a) Issued and outstanding:
<TABLE>
<CAPTION>
NUMBER OF STATED
SHARES VALUES
---------- -------
<S> <C> <C>
Outstanding, December 31, 1994................................................. 8,899,902 $ 9,205
Issued for cash from share options........................................... 264,072 686
---------- -------
Outstanding, December 31, 1995................................................. 9,163,974 9,891
Issued for cash from share options........................................... 79,709 364
---------- -------
Outstanding, December 31, 1996................................................. 9,243,683 10,255
Issued for cash from share options........................................... 42,381 184
Issued for acquisition of 3L Limited......................................... 173,333 934
---------- -------
Outstanding, December 31, 1997................................................. 9,459,397 11,373
Issued for cash from share options........................................... 36,931 149
Issued for net assets of Alex Computer Systems Inc........................... 772,626 4,917
---------- -------
Outstanding, September 30, 1998................................................ 10,268,954 $16,439
---------- -------
---------- -------
</TABLE>
(b) 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>
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------------------------------- -------------------------------------------
NUMBER OF NUMBER OF
SHARES WEIGHTED AVERAGE EXERCISE PRICE SHARES WEIGHTED AVERAGE EXERCISE PRICE
--------- -------------------------------- --------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
CDN USD CDN USD
Outstanding, beginning
of period............. 1,322,650 $ 4.78 $3.27 1,216,646 $ 6.38 $4.37
Granted............... 194,000 13.50 9.25 416,556 12.50 8.56
Exercised............. (264,072) 3.57 2.44 (79,709) 6.23 4.27
Canceled.............. (35,932) 6.56 4.49 (59,597) 11.72 8.03
--------- ------- ----- --------- ------- -----
Outstanding, end of
period................ 1,216,646 $ 6.38 $4.37 1,493,896 $ 6.69 $4.58
--------- ------- ----- --------- ------- -----
Exercisable, end of
period................ 561,669 $ 3.78 $2.59 709,456 $ 4.43 $3.03
Weighted-average fair
value of options
granted during the
period................ $ 6.48 $4.44 $ 6.26 $4.29
<CAPTION>
DECEMBER 31, 1997 SEPTEMBER 30, 1998
------------------------------------------- -------------------------------------------
NUMBER OF NUMBER OF
SHARES WEIGHTED AVERAGE EXERCISE PRICE SHARES WEIGHTED AVERAGE EXERCISE PRICE
---------- -------------------------------- --------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
CDN USD CDN USD
Outstanding, beginning
of period............. 1,493,896 $ 6.69 $4.58 1,657,288 $6.63 $4.54
Granted............... 330,353 7.74 5.30 244,675 7.50 5.14
Exercised............. (41,964) 6.03 4.13 (36,931) 5.94 4.07
Canceled.............. (124,997) 10.22 6.99 (60,289) 7.69 5.27
---------- ------- ----- --------- ----- -----
Outstanding, end of
period................ 1,657,288 $ 6.63 $4.54 1,804,743 $6.73 $4.61
---------- ------- ----- --------- ----- -----
Exercisable, end of
period................ 918,201 $ 5.34 $3.66 998,271 $5.58 $3.82
Weighted-average fair
value of options
granted during the
period................ $ 2.89 $1.98 $2.94 $2.00
</TABLE>
F-17
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 ARE UNAUDITED
(AMOUNTS IN THOUSANDS OF UNITED STATES DOLLARS)
7. SHARE CAPITAL--(CONTINUED)
Information regarding the stock options outstanding at September 30, 1998
is summarized below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------------------------
WEIGHTED
AVERAGE
REMAINING
SHARES CONTRACTUAL
RANGE OF EXERCISE PRICES OUTSTANDING LIFE WEIGHTED AVERAGE EXERCISE PRICE
- ----------------------------------- ----------- ---------- --------------------------------
CDN USD
<S> <C> <C> <C> <C>
$ 0.70-$ 4.87...................... 324,172 2.59 years $ 1.84 $ 1.26
$ 5.75-$ 9.90...................... 1,480,115 4.52 years 7.78 5.33
$10.55-$14.75...................... 123 2.75 years 14.75 10.10
$16.10-$16.10...................... 333 2.67 years 16.10 11.03
--------- ---------- ------ ------
$ 0.70-$16.10...................... 1,804,743 4.17 years $ 6.72 $ 4.60
<CAPTION>
OPTIONS EXERCISABLE
---------------------------------------------
SHARES
RANGE OF EXERCISE PRICES EXERCISABLE WEIGHTED AVERAGE EXERCISE PRICE
- ----------------------------------- ---------- --------------------------------
CDN USD
<S> <C> <C> <C>
$ 0.70-$ 4.87...................... 324,172 $ 1.84 $ 1.26
$ 5.75-$ 9.90...................... 673,795 7.37 5.05
$10.55-$14.75...................... 82 14.75 10.10
$16.10-$16.10...................... 222 16.10 11.03
---------- ------ ------
$ 0.70-$16.10...................... 998,271 $ 5.58 $ 3.82
</TABLE>
The options outstanding at September 30, 1998 expire between October 19,
1998 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 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>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- -----------------
1995 1996 1997 1997 1998
------ ------ ------ ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net earnings (loss)--as reported................................. $ (751) $1,578 $1,005 $ 285 $(6,000)
Net earnings (loss)--pro forma................................... (813) 1,003 86 (369) (6,755)
Basic earnings (loss) per share--as reported..................... (0.08) 0.16 0.11 0.03 (0.61)
Basic earnings (loss) per share--pro forma....................... (0.09) 0.11 0.01 (0.04) (0.69)
Diluted earnings (loss) per share--as reported................... (0.08) 0.16 0.10 0.03 (0.61)
Diluted earnings (loss) per share--pro forma..................... (0.09) 0.10 0.01 (0.04) (0.69)
</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>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- -------------------------
1995 1996 1997 1997 1998
--------- ---------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Expected dividend yield........................ 0% 0% 0% 0% 0%
Expected Stock Price Volatility................ 45% 45% 27% 27% 33%
Risk-free interest rate........................ 8% 8% 7.5% 7.5% 7.0%
Expected life of options....................... 4.5 years 4.5 years 4.5 years 4.5 years 4.5 years
</TABLE>
F-18
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 ARE UNAUDITED
(AMOUNTS IN THOUSANDS OF UNITED STATES DOLLARS)
7. SHARE CAPITAL--(CONTINUED)
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.
(c) 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 6.34). The warrants
expire on April 30, 2000. The fair value of the warrants was estimated to be Cdn
$1.81 (USD 1.23) per warrant, using the Black-Scholes option-pricing model.
(d) Escrow shares
There are 42,985 shares, related to the 3L Limited acquisition, held in
escrow at September 30, 1998 which will be released on June 20, 2000.
(e) Additional paid-in capital
During 1994, the Company purchased and sold 248,000 of its common shares
for proceeds in excess of cost of $76.
8. INCOME TAXES
Earnings (loss) from continuing operations before provision of income taxes
consisted of:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------ -----------------
1995 1996 1997 1997 1998
---- ------ ------ ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Canadian................................................ $413 $2,958 $2,462 $1,399 $(7,023)
Foreign................................................. 228 (785) 612 382 94
---- ------ ------ ------ -------
$641 $2,173 $3,074 $1,781 $(6,929)
---- ------ ------ ------ -------
---- ------ ------ ------ -------
</TABLE>
F-19
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 ARE UNAUDITED
(AMOUNTS IN THOUSANDS OF UNITED STATES DOLLARS)
8. INCOME TAXES--(CONTINUED)
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------ -------------
1995 1996 1997 1997 1998
---- ------ ------ ---- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current
Canadian.................................................. $ -- $ -- $ -- $ -- $ --
Foreign................................................... -- -- -- -- --
---- ------ ------ ---- -----
Total current............................................. $ -- $ -- $ -- $ -- $ --
---- ------ ------ ---- -----
Deferred
Canadian.................................................. $277 $ 843 $1,115 $701 $(870)
Foreign................................................... 88 (119) 419 295 (59)
---- ------ ------ ---- -----
Total deferred............................................ $365 $ 724 $1,534 $996 $(929)
---- ------ ------ ---- -----
Income tax provision........................................ $365 $ 724 $1,534 $996 $(929)
---- ------ ------ ---- -----
---- ------ ------ ---- -----
</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>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------ ---------------
1995 1996 1997 1997 1998
---- ------ ------ ---- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Combined Canadian federal and provincial income taxes at
expected rate........................................... $293 $ 990 $1,406 $812 $(3,160)
Acquired in-process research and development.............. -- -- 398 398 2,812
Permanent and other differences........................... 72 4 (14) (12) (693)
Recoveries not tax effected............................... -- -- -- -- 112
Reduction of income taxes from use of unrecorded tax
benefits................................................ -- (270) (256) (202) --
---- ------ ------ ---- -------
$365 $ 724 $1,534 $996 $ (929)
---- ------ ------ ---- -------
---- ------ ------ ---- -------
</TABLE>
As at December 31, 1997 the Company, for Canadian income tax purposes, has
earned investment tax credits of approximately $196 and claimed an additional
$2,679 which are available to reduce future years' income taxes payable. These
investment tax credits expire between 2000 and 2007. The potential tax benefits
that may arise from the utilization of the $2,679 have not been recognized in
these financial statements, because their realization is not considered more
likely than not.
The Company has losses for UK income tax purposes of approximately $118
which can be carried forward indefinitely to reduce future taxable income.
F-20
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 ARE UNAUDITED
(AMOUNTS IN THOUSANDS OF UNITED STATES DOLLARS)
8. INCOME TAXES--(CONTINUED)
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,
---------------------------- SEPTEMBER 30,
1996 1997 1998
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets
Tax loss carry forwards........................................... $ -- $ 30 $ 353
Research and development expenses................................. 604 -- --
Investment tax credits recoverable................................ 239 229 218
Share issue costs................................................. 179 85 183
Other............................................................. 2 25 120
-------- -------- -------
Total gross deferred tax assets................................... 1,024 369 874
Less: valuation allowance......................................... (444) (237) --
-------- -------- -------
Total deferred tax assets......................................... 580 132 874
-------- -------- -------
Deferred tax liabilities
Research and development expenses................................. -- (659) (705)
Tax depreciation in excess of accounting.......................... (512) (592) (178)
Investment tax credits............................................ (107) (104) (74)
-------- -------- -------
Total deferred tax liabilities.................................... (619) (1,355) (957)
-------- -------- -------
Net deferred tax liabilities........................................ $ (39) $ (1,223) $ (83)
-------- -------- -------
-------- -------- -------
</TABLE>
9. EARNINGS (LOSS) PER SHARE
During 1997, the Company adopted Statement of Financial Accounting Standard
No. 128 ("FAS 128"), Earnings Per Share. Accordingly, historical earnings per
share have been restated under FAS 128. 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 NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Weighted average shares used in computation of
basic earnings per share......................... 9,000,552 9,194,558 9,234,926 9,229,106 9,801,099
Weighted average shares from assumed conversion of
dilutive options................................. 574,510 587,733 372,994 385,445 --
---------- ---------- ---------- ---------- ----------
Weighted average shares used in computation of
diluted earnings per share....................... 9,575,062 9,782,291 9,607,920 9,614,551 9,801,099
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
F-21
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 ARE UNAUDITED
(AMOUNTS IN THOUSANDS OF UNITED STATES DOLLARS)
10. COMMITMENTS
The Company has entered into various operating lease agreements with
remaining terms of up to five years, for office premises and equipment. As at
December 31, 1997 the minimum lease payments in each of the next five years are
approximately as follows:
<TABLE>
<S> <C>
1998....................................................................... $ 527
1999....................................................................... 457
2000....................................................................... 453
2001....................................................................... 448
2002....................................................................... 176
------
$2,061
------
------
</TABLE>
11. SEGMENTED INFORMATION
In the opinion of management, the Company operates in one industry segment,
being the design, manufacture and marketing of digital signal processing
systems. Substantially all assets and operations are in Canada. A summary of
sales by region and by major customers is as follows:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------------- ------------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
By Region
United States.................................. $ 9,376 $15,690 $22,284 $15,300 $13,577
Canada and other............................... 3,528 4,373 3,923 3,004 5,920
------- ------- ------- ------- -------
Total Sales...................................... $12,904 $20,063 $26,207 $18,304 $19,497
------- ------- ------- ------- -------
------- ------- ------- ------- -------
By Major Customer
United States Government and related
subcontractors.............................. $ 1,905 $ 6,284 $ 6,583 $ 5,567 $ 5,864
NAI Technologies............................... -- 527 4,843 1,901 --
Hewlett-Packard................................ -- -- 1,827 1,827 962
IBM, substantially all from discontinued
operations.................................. 3,090 6,372 298 37 44
Siemens Medical Systems........................ -- 1,544 1,162 604 1,958
Nikon Corporation.............................. -- -- -- -- 752
------- ------- ------- ------- -------
</TABLE>
12. 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
expects to close operations in this business in 1998. 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
continues to be consolidated in accordance with generally accepted accounting
principles.
F-22
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 ARE UNAUDITED
(AMOUNTS IN THOUSANDS OF UNITED STATES DOLLARS)
12. DISCONTINUED OPERATIONS--(CONTINUED)
The operating results of this business segment were as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------- -------------
1995 1996 1997 1997 1998
------- ------ ------ ----- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue......................................... $ 5,853 $7,008 $ 517 $ 348 --
Gross Margin.................................... 1,304 1,472 191 156 --
Expenses........................................ 2,696 1,279 1,066 976 --
Provision for taxes............................. (365) 64 (340) (320) --
------- ------ ------ ----- --
Earnings (loss) from discontinued operations.... $(1,027) $ 129 $ (535) $(500) --
------- ------ ------ ----- --
------- ------ ------ ----- --
</TABLE>
The net assets of discontinued operations are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1996 1997 1998
------ ---- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets......................................................... $ 898 $361 --
Current liabilities.................................................... (187) -- --
------ ---- --
$ 711 $361 --
------ ---- --
------ ---- --
</TABLE>
13. FINANCIAL INSTRUMENTS
a) Fair value of financial instruments
Carrying amounts of certain of the Company's financial instruments,
including accounts receivable and accounts payable and accrued liabilities
approximate fair value due to their short maturities. Based on borrowing rates
currently available to the Company for loans with similar terms, the carrying
value of its long-term debt approximates fair value.
b) Foreign exchange 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 September 30,
1998, the Company had a futures exchange contract with a notional principal of
$1,500 (December 31, 1996--nil; December 31, 1997--$1,500) Canadian dollars
maturing December 15, 1998. At September 30, 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 estimated by obtaining
quotes from brokers. At September 30, 1998 and December 31, 1997 there were no
carrying amounts related to future exchange contracts on the consolidated
balance sheets. Future exchange contracts to purchase $1,500 Canadian dollars
had an estimated fair value of $1,486 Canadian dollars at September 30, 1998
compared to future exchange contracts to purchase $1,500 Canadian dollars with
an estimated fair value of $1,486 Canadian dollars at December 31, 1997.
F-23
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 ARE UNAUDITED
(AMOUNTS IN THOUSANDS OF UNITED STATES DOLLARS)
13. FINANCIAL INSTRUMENTS--(CONTINUED)
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
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 neccesary.
Substantially all of the Company's revenues have been recognized in
currencies other than the Canadian dollar, principally the United States dollar.
Fluctuations in the exchange rates between these currencies and the Canadian
dollar could have a material effect on the Company's business, financial
condition and results of 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.
14. SUPPLEMENTARY INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------------- -----------------
1995 1996 1997 1997 1998
------- ------ ------- ------ -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest Paid........................................ 10 3 3 2 90
Income taxes paid.................................... -- -- -- -- --
Foreign exchange gains and (losses).................. (50) 5 323 61 319
</TABLE>
15. SUBSEQUENT EVENTS
a) The Company is filing an amended Form F-3 registration statement
January 20, 1999 with the SEC in order to qualify 772,626 common shares and
110,375 warrants, exercisable at Cdn $9.06 (USD $6.34) per share, for
distribution in the United States.
b) Subsequent to September 30, 1998 up to December 31, 1998, 67,525 stock
options were granted at an average exercise price of Cdn $4.25 (USD $2.91). No
stock options were exercised.
F-24
<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-26
Balance Sheets............................................................................................. F-27
Statements of Income and Retained Earnings................................................................. F-28
Statements of Cash Flows................................................................................... F-29
Notes to Financial Statements.............................................................................. F-30
</TABLE>
F-25
<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-26
<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-27
<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-28
<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 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
----------- ---------
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)
----------- ---------
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-29
<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-30
<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-31
<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-32
<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-33
<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-34
<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-36
Statements of Earnings and Retained Earnings............................................................... F-37
Statements of Cash Flows................................................................................... F-38
Notes to Financial Statements.............................................................................. F-39
</TABLE>
F-35
<PAGE>
ALEX COMPUTER SYSTEMS, INC.
BALANCE SHEET
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
FEBRUARY 28,
1998
-----------------
(UNAUDITED)
ASSETS
<S> <C>
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-36
<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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
INDEX TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma Consolidated Statements of Earnings............................................................. F-44
Notes to Pro Forma Consolidated Financial Statements...................................................... F-45
</TABLE>
F-43
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
PRO FORMA CONSOLIDATED STATEMENTS OF EARNINGS
(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>
NINE MONTHS ENDED SEPTEMBER 30, 1998
--------------------------------------------------
ALEX
COMPUTER
SYSTEMS
COMPANY INC. ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ---------
(NOTE 1(b)) (NOTE 2)
<S> <C> <C> <C> <C>
Sales...................................$ 19,497 $ 1,001 $ -- $20,498
Cost of sales........................... 8,302 432 8,734
--
----------- ------- ------- -------
11,195 569 -- 11,764
Expenses:
Administrative........................ 2,396 17 -- 2,413
Sales and marketing................... 5,495 223 -- 5,718
Amortization.......................... 596 78 -- 674
Acquired in-process research and
development charge................. 6,168 -- (6,168)(a) --
Research and development.............. 3,366 72 -- 3,438
----------- ------- ------- -------
18,021 390 (6,168) 12,243
----------- ------- ------- -------
Earnings (loss) from operations......... (6,826) 179 6,168 (479)
Other revenue (expense):
Interest and bank charges............. (120) (13) -- (133)
Other income (expense)................ 17 4 -- 21
----------- ------- ------- -------
(103) (9) -- (112)
----------- ------- ------- -------
Earnings (loss) before income taxes and
discontinued operations............... (6,929) 170 6,168 (591)
Income taxes (recovery)................. (929) 52 652 (b) (225)
----------- ------- ------- -------
Earnings (loss) from continuing
operations............................$ (6,000) $ 118 $ 5,516 $ (366)
----------- ------- -------
----------- ------- ------- -------
-------
Earnings (loss) per share (note 3):
Basic:
From continuing operations......... $ (0.04)
Diluted:
From continuing operations......... --
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
F-44
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1997 AND SIX MONTHS ENDED JUNE 30, 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 a unaudited basis, the consolidated
results of the Company's operations from continuing operations as if the
acquisition of certain intellectual property and tangible assets and assumption
of certain liabilities of Alex Computer Systems, Inc. ("Alex") had taken place
at January 1, 1997, after giving effect to the adjustments described in note 2.
These pro forma consolidated financial statements are not necessarily indicative
of the results of operations that would have been attained had the acquisition
taken place at the beginning of the periods presented and do not purport to be
indicative of the effects that may be expected to occur in the future.
The pro forma consolidated financial statements have been compiled from
financial information in the:
(a) audited consolidated financial statements of the Company for the
year ended December 31, 1997, and the unaudited consolidated
financial statements of the Company for the nine months ended
September 30, 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 exclude non-recurring charges or
credits directly attributable to the transactions set out herein.
2. PRO FORMA STATEMENT OF EARNINGS ADJUSTMENTS
The pro forma consolidated statements of earnings give effect to the
following:
(a) to eliminate the write-off of the acquired in-process research and
development 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>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ ------------------
<S> <C> <C>
Basic..................................................... 10,007,552 10,008,629
Diluted................................................... 10,380,546 --
</TABLE>
F-45
<PAGE>
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES
OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH AN OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF THE TIME
SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Enforceability of Civil Liabilities............ 2
Exchange Rate Information...................... 2
Currency Translation and Accounting
Principles................................... 2
Prospectus Summary............................. 3
Incorporation of Certain Documents by
Reference.................................... 3
Risk Factors................................... 5
Use of Proceeds................................ 10
Dividend Policy................................ 10
Price Range of Common Shares................... 10
Capitalization................................. 11
Selected Financial Data........................ 11
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 13
Business....................................... 19
Management..................................... 25
Principal and Selling Securityholders.......... 28
Description of Share Capital................... 29
Certain Tax Considerations..................... 31
Plan of Distribution........................... 34
Legal Matters.................................. 35
Experts........................................ 35
Additional Information......................... 35
Glossary....................................... 36
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. 2 TO ITS REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN VANCOUVER,
BRITISH COLUMBIA, CANADA, ON JANUARY 20, 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. 2 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>
* Chair of the Board of Directors January 20, 1999
- ------------------------------------------
Kenneth A. Spencer
/s/ BARRY W. JINKS President and Chief Executive Officer and January 20, 1999
- ------------------------------------------ Director (principal executive officer)
Barry W. Jinks
/s/ MARTIN MCCONNELL Vice President, Chief Financial Officer and January 20, 1999
- ------------------------------------------ Treasurer (principal financial and
Martin McConnell accounting officer)
* Director January 20, 1999
- ------------------------------------------
Dr. Karl H. Brackhaus
* Director January 20, 1999
- ------------------------------------------
John E. Brennan
* Director January 20, 1999
- ------------------------------------------
Charles C. Johnston
* Director January 20, 1999
- ------------------------------------------
Samuel Znaimer
Authorized Representative in the
United States:
* Director January 20, 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
January 20, 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
January 20, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Form F-S for the year ended December 31, 1997 and the nine months
ended September 30, 1998, and its qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-END> DEC-31-1997 SEP-30-1998
<CASH> 1,383 1,137
<SECURITIES> 0 0
<RECEIVABLES> 6,549 7,137
<ALLOWANCES> 170 159
<INVENTORY> 4,061 3,976
<CURRENT-ASSETS> 12,213 12,647
<PP&E> 2,448 2,430
<DEPRECIATION> 2,148 2,784
<TOTAL-ASSETS> 16,484 17,502
<CURRENT-LIABILITIES> 4,699 7,856
<BONDS> 0 0
0 0
0 0
<COMMON> 11,373 16,439
<OTHER-SE> (886) (6,977)
<TOTAL-LIABILITY-AND-EQUITY> 16,484 17,502
<SALES> 26,207 19,497
<TOTAL-REVENUES> 26,221 19,514
<CGS> 11,180 8,302
<TOTAL-COSTS> 11,095 11,853
<OTHER-EXPENSES> 872 6,288
<LOSS-PROVISION> 22 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 3,074 (6,929)
<INCOME-TAX> 1,534 (929)
<INCOME-CONTINUING> 1,540 (6,000)
<DISCONTINUED> (535) 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,005 (6,000)
<EPS-PRIMARY> 0.11 (0.61)
<EPS-DILUTED> 0.10 (0.61)
</TABLE>
