(Mark One)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-19906
SPECTRUM SIGNAL PROCESSING INC.
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant's name into English)
British Columbia, Canada
(Jurisdiction of incorporation or organization)
2700 Production Way, Suite 200 Burnaby,
British Columbia, Canada V5A 4X1 (Address of
principal executive offices)
Securities registered or to be registered pursuant to Section 12(b)
of the Act.
Names of each exchange on which registered Title of each class
Not Applicable None
Securities registered or to be registered pursuant to Section 12(g)
of the Act.
Common Shares, without par value
(Title of Class)
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act.
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the Annual
Report.
As of December 31, 1999, the Registrant had outstanding 10,161,904 common
shares, without par value (the "Common Shares").
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark which financial statement item the Registrant has elected
to follow. Item 17 Item 18 X
--- ---
<PAGE>
All monetary references throughout this Annual Report are expressed in
United States dollars ("$"), except where indicated as Canadian dollars
("Cdn$"). All financial information presented in this Annual Report, except
where otherwise indicated, has been prepared in accordance with accounting
principles generally accepted in the United States ("U.S. GAAP").
When used in this Annual Report, the words "believes," "anticipates,"
"expects," and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties which
could cause actual results to differ materially from those projected. In
addition to quarterly fluctuations, the Company's operating results are affected
by a wide variety of other factors that could materially and adversely affect
actual results, including: general economic conditions; dependence on
significant customers, suppliers and licenses; success of and requirements of
original equipment manufacturers; revenues from development contracts; rapid
changes in technology; competition; ability to manage growth and integrate
acquisitions; actions by governmental authorities; and foreign currency and
exchange rate fluctuations. As a result of these and other factors, the Company
may experience material fluctuations in future operating results on a quarterly
or annual basis, which could materially and adversely affect its business,
financial condition, operating results and stock price. Furthermore, this
document and other documents filed by the Company with the SEC contain certain
forward looking statements with respect to the business of the Company,
including prospective financing arrangement. These forward-looking statements
are subject to certain risks and uncertainties, including those mentioned above,
which may cause actual results to differ significantly from these
forward-looking statement. The Company undertakes no obligation to publicly
release the results of any revisions to these forward-looking statements which
may be to reflect events or circumstances after the date hereof or to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events. An investment in the Company involves various risks,
including those mentioned above and those which are detailed from time to time
in the Company's SEC filings.
MEDIA-LINK(R), DSP-LINK(R) and VASP(R) are registered marks in Canada
and the U.S.; DSP and Office F/X are registered trademarks of the Company in
Canada only. This Annual Report also contains trade names and trademarks of
other companies.
The Company hereby incorporates by reference the contents of this
Report on Form 20-F into its registration statement on Form F-3 (File No.
333-58115)
<PAGE>
PART I
Item 1. BUSINESS.
Spectrum designs, develops and markets a broad range of Digital Signal
Processing ("DSP") based hardware and software solutions for the
telecommunications, sensor systems and signal intelligence markets. Commercial
off-the-shelf DSP solutions currently offered by the Company are used in a wide
range of applications, including radio surveillance, communications
infrastructure equipment, industrial controls, and defense radar and sonar
applications. The Company's solutions incorporate proprietary and licensed DSP
software, hardware and application specific integrated circuits ("ASICs")
integrated with manufacturers' programmable DSP microprocessors..
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 has 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 technologies which enable sophisticated processing of images and
voice are 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. The Company also develops ASICs designed specifically to
increase the performance of its products. On the software side, the Company also
provides operating system software, software algorithms and libraries, and
debugging tools. The Company's broad line of DSP microprocessors (developed by
Texas Instruments and Analog Devices), hardware interfaces, modular product
architectures, ASIC capabilities and software development tools allow customers
to tailor the Company's products to a wide variety of applications.
The prices for the over 100 products currently offered by the Company
generally range from $1,000 to $20,000 per board for standard products,
including the Company's catalog product offerings; to up to $30,000 for the
Company's customized DSP boards.
<PAGE>
A complete DSP system involves a number of hardware and software
components that are integrated onto a single DSP board. At the core, all
solutions start with a DSP chipset. A chipset consists of one or more DSP
microprocessors as well as other chips such as ASIC, memory and audio chips. The
chipset, along with numerous other components, is mounted on a circuit board,
which is then installed in 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 DSP hardware and software
for each DSP system.
Software. In June 1997, the Company acquired a Scotland-based software
company, 3L Limited, in order to provide more complete DSP software solutions to
its customers. 3L Limited specialized in real-time operating systems
specifically for applications requiring multiple DSPs. The Company divested
itself of the assets related to 3L Limited, including acquired in-process
research and development, in a transaction which became effective April 30,
2000. The Company retains a license to, and may continue to sell, the software
provided by 3L.
In March 1998, The Company acquired the net assets of Alex Computer
Systems, Inc. ("Alex Computer"), a company with strong DSP software and hardware
solutions based on Analog Devices' SHARC-based processors. The acquisition
enabled the Company to provide system level SHARC-based solutions.
Markets
The Company historically has targeted the general purpose DSP
marketplace. Effective January 1, 2000, the Company began implementing a new
strategic plan targeted at the telecommunications, sensor systems and signal
intelligence markets.
Telecommunications. The Company's telecommunications business unit is
developing advanced technologies and products to enable the convergence of
telecommunications networks. The Company's products are being developed to
perform the core voice-over-packet processing in voice gateways, enabling such
applications such as packet-based voice network backbones, voice over Internet
Protocol, voice over broadband access, Internet Protocol-based PBXs, and
high-density echo cancellation. The Company's telecommunications products are
targeted to be complete DSP solutions, including board-level hardware, software
and DSP firmware. The Company focuses on offering a fast time to market
advantage to telecommunications original equipment manufacturers. Historically,
the Company's customers in this market have included Motorola and Level 3
Communications.
Sensor Systems. 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, as opposed to custom,
off-the-shelf DSP hardware solutions supported by software development tools
from reliable, quality DSP system suppliers. This market is characterized by
rapid product cycle updates, which usually requires new hardware, and increases
development and integration costs and schedules, in turn often requiring
improved software tools. The Company's customers in this market include Boeing,
Northrop Grumman and the U.S. Department of Defense.
<PAGE>
Signal Intelligence. The Company's signal intelligence business unit
focuses on two complementary facets of the signal intelligence market -
commercial and military. The commercial group provides DSP solutions for
wireless transceiver applications and is developing DSP solutions for cellular
base stations, smart antennae, beam forming applications and satellite modems.
The Company's products enable its customers to increase channel density,
optimize signal collection and adaptively compensate for cable losses and poor
signal reception. The military group develops hardware and software for military
applications including electronic countermeasures, surveillance and encryption.
This group develops sophisticated signal collection solutions including
receivers that can scan and collect specific signals from thousands in the radio
frequency ("RF") spectrum including cellular telephone, microwave,
ship-to-shore, and military transmissions. This group also develops signal
processing equipment that is used to evaluate the characteristics of collected
signals and select those signals likely to contain relevant information. While
overall defense spending has decreased over recent years, the combination of
continued government spending on cost-effective technological-based solutions
and the mandated use of commercial-off-the-shelf products generally has
countered in part this overall trend with respect to DSP equipment sales. The
Company's customers in this market include Hewlett-Packard, General Dynamics,
and the U.S. Department of Defense.
Customers
The Company historically has supplied DSP system solutions to a broad
base of customers representing a range of industries and applications. In 1999,
the Company conducted business with over 250 customers. The Company's two
largest customers together accounted for approximately 32% and 53% of the
Company's sales in 1998 and 1999, respectively. The Company's largest customer
accounted for approximately 24% and 38% of the Company's sales in 1998 and 1999,
respectively. The Company's second largest customers accounted for 8% and 15% of
the Company's sales in 1998 and 1999, respectively.
Effective January 1, 2000, the Company began implementing a new
strategic plan targeted at the telecommunications, sensor systems and signal
intelligence markets.
Logistics, Manufacturing and Quality Control
The Company's logistics, manufacturing, purchasing, quality assurance,
customer service and after-sale technical support functions are managed by the
Company's corporate operations group. 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 application engineers generally document problems or questions
reported by customers creating a database that assists in the 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.
<PAGE>
Suppliers
The Company's DSP solutions incorporate a number of products and
components that are sourced from third-party suppliers, including Texas
Instruments and Analog Devices. The Company attempts to use standard parts and
components wherever possible. While the Company attempts to ensure third-party
components are available from multiple vendors, 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. This
geographic diversification helps the Company mitigate some of 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. The Company's
research and product development efforts focus primarily on the development of
next generation products for the telecommunications, sensor systems and signal
intelligence markets. In addition to new research and development, the Company
is also committed to the ongoing enhancement of existing ASICs, DSP and Windows
software and modules. The Company generates less than 1% of its revenue from
development contracts 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 currently is conducting development work under
development contracts with customers. The Company intends to continue to seek
development contracts with strategic partners.
During 1997, 1998 and 1999, the Company's research and development
expenditures were approximately $4,233,000, $4,852,000and $3,591,000,
respectively.
Engineering
Building on its expertise in developing DSP solutions, the Company
provides a 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, The Company's own team of engineers uses anarray of proprietary and
licensed DSP technologies to identify the appropriate hardware and/or software
solution for each application. The Company's engineers work with customers'
counterparts early in the design process to ensure that the benefits of DSP are
realized in the customer's end product. The engineering team will 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 the customer has approved a DSP design, 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.
<PAGE>
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(R), DSP-LINK(R) and VASP(R), and is
seeking registration for Accelera, Solano, aXs, and flexComm.
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. 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 generally are 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.
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. The Company's three strategic markets each have a
unique group of competitors.
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
sensor systems market, the Company faces competition from companies including
DY4, Ixthos, Mercury Computer Systems and CSPI. In the signal intelligence
market, the Company faces competition from companies including Blue Wave Systems
Inc. and Pentek. In the telecommunications market, the Company faces competition
from companies including Audiocodes, Natural Microsystems, Blue Wave Systems
Inc. and Dialogic.
Sales, Marketing and Distribution
The Company's sales and marketing strategy is to have products designed
in to customer products, support the development of customer end product
development, and ultimately support volume production requirements.
The Company maintains regional sales offices in Maryland, California,
New York, Texas and the United Kingdom. The Company also makes use of technical
third-party sales representatives in the United States. The Company currently
maintains distribution agreements with international distributors in Australia,
Belgium, Canada, China, France, Germany, Hong Kong, India, Israel, Italy, Japan,
the Netherlands, Norway, Singapore, South Korea and Taiwan. All channel sales
are managed centrally from the Company's Canadian headquarters.
Employees
As of April 30, 2000, the Company had a total of 168 full-time
employees, of which 51 were administrative and operations personnel, 39 were
sales and marketing personnel and 78 were engineering personnel. None of the
Company's employees are represented by a labor union or collective bargaining
agreement. The Company believes that its relationship with its employees is
good.
<PAGE>
CERTAIN RISKS
The Company is optimistic about the Company's prospects in the year 2000 and
beyond. Any evaluation of the Company's growth outlook should take into account,
among other things, the following factors, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Rapid Technological Change and Competition
The market for the Company's products is characterized by rapidly changing
technologies, evolving industry standards and frequent new product introductions
and enhancements. Competitors vary in size and in the scope and breadth of the
products and services offered. Certain competitors may have a technology or
market advantage with respect to products that relate primarily to such
competitor's specific area of expertise. Other companies participating in the
DSP industry may enter the markets in which The Company competes.
Certain trends in DSP technology, such as native signal processing and silicon
integration, could displace certain of the Company's products, or the Company
may not be able to develop new products in response to such trends that achieve
market acceptance. Delays or difficulties associated with new product
introductions or product enhancements may also affect orders.
Significant Customers
In 1998 and 1999, the Company's largest customer, the U.S. Governement
(principally the Department of Defence) accounted for approximately 24% and 38%,
respectively, of the Company's sales during such periods. 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.
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. 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.
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 customer commitment to pay for them.
<PAGE>
Reliance on Original Equipment Manufacturers
Historically the Company's strategy has been 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 while its new strategy develops new business
opportunities. 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 reschedule or
decrease their level of purchases.
Future Initiatives and In-Process Research and Development
The Company intends to expand its product lines to satisfy customer demand in
its target markets. Unexpected technical delays in completing these initiatives
could lengthen development schedules and result in lower revenues based on the
products or technologies developed from these initiatives. There can be no
assurance that the products derived from in-process research and development
activities will achieve market acceptance.
In addition, the acquisitions of 3L Limited and Alex Computer each resulted in a
charge related to the write-off of acquired in process research and development
that substantially impacted the Company's results of operations during the year
each company was acquired. The amount of the charge recorded in 1997 relating to
the acquisition of 3L Limited was $872,000. The amount of the charge recorded in
1998 relating to the acquisition of Alex Computer was $2,640,000, which
accounted for most of the Company's net loss for 1998.
Revenues from Development Contracts
The Company generates a percentage of its total revenues from development
contracts. Revenues generated from development contracts during 1998 and 1999
were approximately 5.9% and 5.7% 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'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.
Dependence on Third-Party Suppliers
The Company purchases DSP microprocessors and certain other components from
Analog Devices and Texas Instruments, each of which is the sole manufacturer of
the respective DSP microprocessor upon which The Company products have been
developed. The Company does not have long- term agreements with these suppliers.
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.
If any software developed and maintained by third parties, which is incorporated
into certain of the Company's products, fails or fails to be supported by their
respective vendors, it could be necessary for the Company to redesign those
products Furthermore, should new releases of such third-party software prove to
be incompatible with the current version of the Company's product lines, this
could result in a decline in demand for the affected products.
<PAGE>
Intellectual Property Rights
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.
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.
Contract Manufacturing
The Company currently has long-term contractual supply agreements with 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.
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 who 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 may be materially and adversely affected. The Company does not
maintain key man insurance on any of its key management and technical personnel
and has no present intention of obtaining any such insurance.
<PAGE>
Market Risks
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.
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 Company 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.
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.
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 United States dollars while incurring costs in
varying proportions in Canadian dollars, United States dollars and other
currencies. Thus, the Company's operations are susceptible to fluctuations in
currency exchange rates. In addition, if the Canadian dollar rises relative to
the US dollar, the Company's reported operating expenses and net income may be
materially and adversely affected. Since 1995, the Company has entered into
currency derivative contracts to attempt to reduce a portion of its exposure to
foreign exchange rate fluctuations. These contracts typically have maturities of
no greater than one year when entered into. The market price of these contracts
generally approaches the spot exchange rate as the contracts approach the
expiration of their term. The maximum amount the Company has hedged under these
contracts at any one time is Cdn$8,000,000.
<PAGE>
GLOSSARY
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 that 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 microprocessor 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.
<PAGE>
Item 2. DESCRIPTION OF PROPERTIES.
The Company's head office is located in a facility it leases in
Burnaby, British Columbia, Canada and consists of approximately 63,000 square
feet. The lease on this facility expires in 2009. The lease provides for annual
rental payments of $641,000 in 2000 increasing to $707,000 in 2001. The head
office facility houses sales, marketing, engineering, logistics, and
administration, with development and test facilities.
The Company also leases sales office space in New York, California,
Maryland, Texas and the United Kingdom.
Item 3. LEGAL PROCEEDINGS.
Not applicable.
Item 4. CONTROL OF THE COMPANY.
The following table sets forth certain information regarding the
beneficial ownership of the Common Shares as of April 30, 2000 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>
----------------------------------------------------------- ---------------------------- -------------------------
Name and Address(1) Number of Shares Percentage of Ownership
Beneficially Owned (2) (2)
----------------------------------------------------------- ---------------------------- -------------------------
<S> <C> <C>
Kenneth A. Spencer(3) 36,035 *
----------------------------------------------------------- ---------------------------- -------------------------
Pascal Spothelfer (4) 4,329 *
----------------------------------------------------------- ---------------------------- -------------------------
Martin McConnell(5) 100,500 *
----------------------------------------------------------- ---------------------------- -------------------------
Brian Lowe(6) 80,600 *
----------------------------------------------------------- ---------------------------- -------------------------
Douglas Johnson(7) 68,000 *
----------------------------------------------------------- ---------------------------- -------------------------
David Hobbs(8) 79,000 *
----------------------------------------------------------- ---------------------------- -------------------------
Andrew Talbot(9) 43,523 *
----------------------------------------------------------- ---------------------------- -------------------------
Andrew Harries (10) 4,329 *
----------------------------------------------------------- ---------------------------- -------------------------
John E. Brennan(11) 87,999 *
----------------------------------------------------------- ---------------------------- -------------------------
Samuel Znaimer(12) 35,331 *
----------------------------------------------------------- ---------------------------- -------------------------
Banque Nationale De Paris (Canada)
Tour BNP 772,626 7.5%
1981 Avenue McGill College,
Montreal, PQ H3A 2W8
Canada
----------------------------------------------------------- ---------------------------- -------------------------
All directors and executive officers
as a group (10 persons)(13) 539,646 5.3%
----------------------------------------------------------- ---------------------------- -------------------------
</TABLE>
* One percent or less.
(footnotes on following page)
<PAGE>
(1) Except as otherwise noted, the address of the named shareholder is c/o
Spectrum Signal Processing Inc., 2700 Production Way, Suite 200,
Burnaby, British Columbia, Canada V5A 4X1.
(2) Percentages of outstanding Common Shares are based upon 10,251,268
Common Shares outstanding as of April 30, 2000, being 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 April 30, 2000.
(3) Includes 12,335 Common Shares issuable upon the exercise of options.
(4) Includes 4,329 Common Shares issuable upon the exercise of options.
(5) Includes 97,500 Common Shares issuable upon the exercise of options.
(6) Includes 80,000 Common Shares issuable upon the exercise of options.
(7) Includes 67,000 Common Shares issuable upon the exercise of options.
(8) Includes 71,500 Common Shares issuable upon the exercise of options.
(9) Includes 43,523 Common Shares issuable upon the exercise of options.
(10) Includes 4,329 Common Shares issuable upon the exercise of options.
(11) Includes 18,999 Common Shares issuable upon the exercise of options.
(12) Includes 24,331 Common Shares issuable upon the exercise of options.
(13) Includes 423,846 Common Shares issuable upon the exercise of options.
<PAGE>
Item 5. NATURE OF TRADING MARKET.
The Common Shares have been traded under the symbol "SSPI" on the
NASDAQ National Market since June 1993, and under the symbol "SSY" on The
Toronto Stock Exchange since September 1993. The following table sets forth the
high and low closing prices of the Common Shares on the NASDAQ National Market
and The Toronto Stock Exchange for the periods indicated:
<TABLE>
<CAPTION>
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
Calendar Year 1997
First Quarter US$7.750 US$4.750 Cdn$10.500 Cdn$6.750
Second Quarter 6.125 4.375 8.500 6.400
Third Quarter 9.000 4.750 11.800 6.600
Fourth Quarter 8.250 4.750 11.250 6.750
Calendar Year 1998
First Quarter US$7.000 US$5.250 Cdn$9.850 Cdn$7.500
Second Quarter 6.563 4.625 9.200 7.000
Third Quarter 5.625 2.500 7.800 4.100
Fourth Quarter 4.000 2.500 6.750 3.550
Calendar Year 1999
First Quarter US$3.688 US$1.875 Cdn$5.500 Cdn$2.750
Second Quarter 2.063 1.088 3.800 2.390
Third Quarter 4.813 1.813 6.900 2.600
Fourth Quarter 3.938 1.750 5.750 2.700
Calendar Year 2000
First Quarter US$7.500 US$3.188 Cdn$11.350 Cdn$4.600
</TABLE>
At April 30, 2000, the Company had 146 shareholders of record and
10,484,568 Common Shares outstanding, including 233,300 Common Shares held in
treasury. Of these amounts, there were 117 U.S. shareholders of record holding a
total of 9,484,914 Common Shares, or 90.5% of the Common Shares outstanding.
<PAGE>
Item 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS.
In accordance with the laws of the Province of British Columbia,
Canada, under the Company Act (British Columbia) (the "BC Act"), the amendment
of certain rights of holders of a class of shares, including Common Shares,
requires the approval of not less than three-quarters of the votes cast by the
holders of such shares voting at a special meeting of such holders. Pursuant to
the Company's Articles, a quorum for a special meeting of the holders of the
Common Shares is two persons, present in person or by proxy, representing not
less than 5% of the shares entitled to vote at the meeting. Therefore, it is
possible for the rights of the holders of Common Shares of the Company to be
modified otherwise than by the affirmative vote of the 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.
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 "Taxation."
There is no limitation imposed by Canadian law or by the Articles of
the Company (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 Canada Act (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 equaled or exceeded $160 million in 1995 dollars, as indicated on
the Company's most recent financial statements. In subsequent years, such
threshold amount may be increased or decreased in accordance with the provisions
of the Investment Act.
An investment in Common Shares of the Company by a non-Canadian (other
than a WTO investor) would be reviewable under the Investment Act if it were an
investment to acquire control of the Company and the value of the assets were
$5.0 million or more, as indicated on the Company's most recent financial
statements.
A non-Canadian, whether a WTO investor or otherwise, would acquire
control of the Company for the purposes of the Investment Act if he, she or it
acquired a majority of the Common Shares. The acquisition of less than a
majority, but one-third or more of the Common Shares, would be presumed to be an
acquisition of control of the Company unless it could be established that the
Company was not controlled in fact by the acquirer 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;
<PAGE>
(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.
Item 7. TAXATION.
U.S. Federal Income 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.
<PAGE>
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 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 therefore 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.
<PAGE>
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.
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.
<PAGE>
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.
<PAGE>
Item 8. SELECTED CONSOLIDATED FINANCIAL DATA.
The selected consolidated financial data for the Company presented
below under the captions "Statements of Operations Data" for the years 1995,
1996, 1997, 1998 and 1999 and "Balance Sheet Data" as of December 31, 1995,
1996, 1997, 1998 and 1999, is derived from the Company's annual audited
consolidated financial statements. The Company's financial statements as of
December 31, 1997, 1998 and 1999 and for each of the years in the three year
period ended December 31, 1999 and the auditors' report thereon are included
elsewhere in this Annual Report. The "Statements of Operations Data" for fiscal
years 1995 and 1996 and the "Balance Sheet Data" as of December 31, 1995 and
1996 are derived from audited financial statements that are not included herein.
This selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto included elsewhere in this Annual
Report.
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------
1995 1996 1997 1998(1) 1999
---- ---- ---- ------- ----
(In thousands, except per share data)
(U.S. GAAP)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Sales $12,904 $20,063 $26,207 $26,000 $26,391
Cost of sales 5,688 8,340 11,180 10,607 11,030
------- ------- ------- ------- -------
Gross profit 7,216 11,723 15,027 15,393 15,361
Administrative 2,068 3,049 3,146 3,417 4,695
Sales and marketing 3,198 3,880 4,769 7,204 6,379
Amortization 422 497 644 1,299 1,428
Research and development 1,340 2,130 2,536 4,374 3,591
Acquired in-process research and development charge -- -- 872 2,640 --
------- ------- ------- ------- -------
Earnings (loss) from operations 188 2,167 3,060 (3,541) (732)
Interest income (expense) and bank charges (31) (23) 2 (149) (121)
Other income (expense) 484 29 12 (7) 95
------- ------- ------- ------- -------
Earnings (loss) before income taxes and discontinued 641 2,173 3,074 (3,697) (758)
operations
Income tax expense (recovery) 724 1,534 (789) 84
------- ------- ------- ------- -------
365
Earnings (loss) from continuing operations 276 1,449 1,540 (2,908) (842)
Earnings (loss) from discontinued operations (1,027) 129 (535) -- --
------- ------- ------- ------- -------
Net earnings (loss) $ (751) $ 1,578 $1,005 $ (2,908) $(842)
======= ======= ======= ======= =======
Foreign currency translation 216 (108) (357) (894) 485
--- ----- ----- ----- ---
Comprehensive earnings (loss) (535) 1,470 648 (3,802) (357)
------- ------- ------- ------- -------
Basic Earnings (loss) per share from continuing operations $ 0.03 $ 0.16 $ 0.17 $ (0.29) $(0.08)
Basic Earnings (loss) per share from discontinued (0.11) 0.01 (0.06) -- --
------- ------- ------- ------- -------
operations
Basic Earnings (loss) per share $(0.08) $0.17 $0.11 $ (0.29) $(0.08)
------- ------- ------- ------- -------
Weighted average number of common shares outstanding 9,001 9,195 9,235 9,860 10,077
(basic)
Diluted earnings (loss) per share from continuing $0.03 $0.15 $0.16 $ (0.29) $(0.08)
operations
Diluted earnings (loss) per share from discontinued (0.11) 0.01 (0.06) -- --
------- ------- ------- ------- -------
operations
Diluted earnings (loss) per share $(0.08) $ 0.16 $0.10 $ (0.29) $(0.08)
------- ------- ------- ------- -------
Weighted average number of common shares outstanding 9,575 9,782 9,608 9,860 10,077
(Diluted)
December 31,
--------------------------------------------------------
1995 1996 1997 1998 1999
Balance Sheet Data:
Working capital $5,614 $7,032 $7,514 $4,970 $5,344
Total assets 11,368 14,983 16,484 19,447 16,568
Long-term debt, net of current maturities 10 -- 75 75 --
Shareholders' equity 8,088 9,923 10,487 11,761 11,469
</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.
<PAGE>
Exchange Rate Information
The following table sets forth, for the periods indicated, the high and
low exchange rates for Canadian dollars expressed in US dollars, the average of
such exchange rates on the last day of each month during such period and the
exchange rate at the end of such period, based on the inverse of the noon buying
rate in New York City for cable transfers in foreign currencies as certified for
customs purposes by the Federal Reserve Bank of New York (the "Noon Buying
Rate").
<TABLE>
<CAPTION>
Years ended December 31,
1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
Exchange rate at end of
period US$0.7323 US$0.7246 US$0.6991 US$0.6504 US$0.6925
Average exchange rate during period
0.7305 0.7334 0.7223 0.6703 0.6730
High exchange rate during
period 0.7829 0.7472 0.7415 0.7105 0.6925
Low exchange rate during
period 0.7023 0.7274 0.7009 0.6341 0.6535
</TABLE>
Item 9. 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 Annual Report.
General
The Company was founded in 1987 to manufacture and market digital
signal processing products for the North American military/aerospace and
commercial markets. Effective January 2000, the Company commenced implementation
of a new strategic plan targeting the Telecommunications, Sensor Systems and
Signal Intelligence markets.
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, The Company 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.
All financial statements included herein are expressed in United States
dollars and prepared in accordance with United States generally accepted
accounting principles unless otherwise noted.
<PAGE>
Results of Operations
<TABLE>
<CAPTION>
Years Ended December 31,
------------- ------------- -------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of sales 42.7 40.8 41.8
----- ----- -----
Gross margin 57.3 59.2 58.2
Administrative 12.0 13.2 17.8
Sales and marketing 18.2 27.7 24.2
Amortization 2.5 5.0 5.4
Acquired in-process research and development charge 3.3 10.1 -
Research and development 9.7 16.8 13.6
----- ----- -----
Earnings (loss) from operations 11.6 (13.6) (2.8)
Interest income (expense) and bank charges - (0.6) (0.5)
Other income (expense) - - 0.4
Earnings (loss) before income taxes and discontinued operations 11.6 (14.2) (2.9)
----- ----- -----
Income tax (expense) recovery (5.8) 3.0 0.3
Earnings (loss) from discontinued operations (2.0) - -
----- ----- -----
Net earnings (loss) 3.8 (11.2) (3.2)
===== ===== =====
</TABLE>
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Sales. Net sales in 1999 were $26,391,000, an increase of $391,000, or
1.5%, relative to sales in 1998. Included in sales in were revenues from the
Company's internally developed Texas Instruments-based products of $11,101,000,
or 42.1% of sales, compared to $7,511,000, or 28.9% of sales in 1998. Also
included in sales in the year were revenues from the Company's Analog
Devices-based products of $6,241,000, or 23.6% of sales, compared to $5,791,000,
or 22.3% of sales in 1998. Also included in sales in the year were sales of
products produced by or manufactured under license from Blue Wave Systems Inc.
of $2,057,000, or 7.8% of sales, compared to $4,872,000, or 18.7% of sales in
1998. Included in sales in 1999 were development contract fees of $1,505,000, or
5.7% of sales, compared to development contract fees of $1,530,000, or 5.9% of
sales in 1998. The Company actively sells its internally developed products to
customers that have historically purchased Blue Wave Systems, Inc-developed
products. The decline in sales of Blue Wave Systems-developed products was
attributable to the termination of the Company's exclusive North American
distribution agreement with Blue Wave Systems Inc. (formerly Loughborough Sound
Images) in January 1998. The Company maintains the right to manufacture and sell
Blue Wave Systems-developed products until January 2003. The increase in sales
of Analog Devices-based products reflects the Company's continued expansion of
its Analog Devices-based product line. The variation in the balance of the
Company's sales is due to ordinary course fluctuations in the timing and amount
of orders.
Gross Profit. Gross profit remained relatively flat at $15,361,000 in
1999 compared to gross profit of $15,393,000 in 1998. Gross margin (profit as a
percentage of sales) decreased slightly to 58.2% in 1999 from 59.2% in 1998. The
decrease in gross margin was the result of inventory obsolescence provisions
taken in 1999. The Company's historical gross margin has varied period to period
due to volume-related efficiencies, changes in product and customer mix,
amortization of deferred software and related development costs, and provisions
for inventory obsolescence.
<PAGE>
Administrative, Sales and Marketing. AS&M expenses were $11,074,000, or
42.0% of sales in 1999, compared to $10,621,000, or 40.9% of sales in 1998. AS&M
expenses were higher in 1999 due to increased facilities-related expenses
associated with the Company's move to new premises in July 1999, as well as
charges related to a specific executive separation agreement, executive
recruitment and strategic planning initiatives.
Amortization. Amortization expense in 1999 was $1,428,000, an increase
of $129,000, or 9.9% over 1998. The increase in amortization expense reflects
the Company's amortization of goodwill and other intangibles acquired pursuant
to the Company's acquisition of the net assets of Alex Computer Systems in the
first quarter of 1998.
Acquired In-process Research and Development Charge. Acquired
In-process research and development ("IPR&D") represents the value assigned in a
purchase business combination to research and development projects of the
acquired business that were commenced but not yet completed at the date of
acquisition and which, if unsuccessful, have no alternative future use in
research and development activities or otherwise. An IPR&D charge of $2,640,000
(restated) was expensed in the first quarter of 1998 in connection with the
purchase of the net assets of Alex Computer Systems based on management's
discounted cash flow valuation.
Research and Development. Research and development expenses were
$3,591,000, or 13.6% of sales in 1999, compared to $4,374,000, or 16.8% of sales
in 1998. R&D expenses incurred in 1999 consisted primarily of costs associated
with new product developments undertaken by the Company including both Texas
Instruments-based and Analog Devices-based products. Total research and
development expenditures, including those capitalized as software and related
development costs, were $3,591,000, or 13.6% of sales in 1999, compared to
$4,852,000, or 18.7% of sales in 1998. R&D expenditures of $478,000 were
capitalized in 1998 in connection with certain development activities based on
Texas Instrument's C6x processor. These development projects were completed in
1998. The reduction in absolute R&D expenditures reflects the cost savings
following the reorganization and reduction of development programs which were
realized beginning in the fourth quarter of 1998, as well as certain cost
savings arising from the completion of the integration of the development
activities of Alex Computer Systems.
Other Income. Other income, consisting primarily of interest income on
short-term deposits and interest expense on bank indebtedness was an expense of
$26,000 in 1999 compared to an expense of $156,000 in 1998. The decrease was due
primarily to decreased working capital borrowings under the Company's line of
credit facility.
Income Taxes. The Company's provision for income tax was $84,000 in
1999 as compared to a recovery of $789,000 in 1998. A US state tax liability was
incurred in 1999 despite the net operating loss position of the Company. A tax
asset related to the net operating losses of the Company's UK operations has
been fully provided for.
Net Loss. The Company had a net loss of $842,000 in 1999, compared to a
net loss of $2,908,000 in 1998. The Company's loss per share (basic) in 1999 was
$0.08, compared to a loss per share (basic) of $0.29 in 1998. The Company's net
loss in 1998 included a one-time in-process research and development charge of
$2,640,000 expensed in connection with the Company's acquisition of the net
assets of Alex Computer Systems.
<PAGE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Sales. Sales from continuing operations for 1998 were relatively
constant at $26,000,000, compared to sales of $26,207,000 for 1997. Included in
sales for 1998 were development contract fees of $1,530,000, or 5.9% of sales
for the year, compared to development contract fees of $1,589,000, or 6.1% of
sales, for 1997. Also included in sales for 1998 were revenues from the
Company's internally developed C3X, C4X and C6X products of $7,511,000, or
28.9%, of sales for the year, compared to $6,205,000, or 23.7%, of sales for
1997. Also included in sales for 1998 were revenues from the sale of Blue Wave
Systems Inc. products of $4,872,000, or 18.7% of sales, compared to sales of
Blue Wave Systems Inc. products of $12,234,000, or 46.7% of sales, during 1997.
Sales for 1998 also reflect the inclusion of $5,791,000, or 22.3% of sales, from
Alex Computer, which was acquired in 1998. The Company actively markets its
internally developed products to customers that have historically purchased Blue
Wave Systems, Inc-developed products. The increase in sales of
Spectrum-developed products and decrease in sales of Blue Wave Systems,
Inc.-developed products is due to this activity. The variation in the balance of
the Company's sales is due to ordinary course fluctuations in the timing and
amount of orders.
Gross Profit. Gross profit increased to $15,393,000 for 1998 from
$15,027,000 for 1997, an increase of 2.4%. Gross margin (profit as a percentage
of sales) increased to 59.2% for 1998 from 57.3% for 1997. The increase in gross
margin was due primarily to increased sales in higher gross margin, internally
developed products as opposed to licensed products.
Administrative, Sales and Marketing. Administrative, sales and
marketing ("AS&M") expenses consist primarily of salaries, sales commissions and
benefits related to the Company's sales, marketing and administrative personnel
and independent sales representatives. AS&M expenses for 1998 were $10,621,000,
or 40.9% of sales for the year, compared to $7,915,000, or 30.2%, of sales for
1997. AS&M expenses are net of foreign exchange gains of $287,000 for 1998,
compared to foreign exchange gains of $323,000 for 1997. AS&M expenses were
higher by $2,706,000 in 1998 due mainly to the costs associated with increased
European and Asian sales and marketing initiatives (approximately $1,016,000),
an increase in the Company's North American sales and marketing staff levels
(approximately $1,062,000) and the inclusion of AS&M expenses of Alex Computer
Systems, which was acquired in 1998 (approximately $650,000).
Amortization. Amortization consists of the depreciation of the
Company's fixed assets and amortization of goodwill and other intangibles.
Amortization expense for 1998 was $1,299,000, an increase of $655,000, or
101.7%, over 1997. The increase in amortization expense was due primarily to the
amortization of an increased investment in goodwill and other intangibles
related to the acquisition of the net assets of Alex Computer in 1998.
Acquired In-process Research and Development Charge. Acquired
in-process research and development ("IPR&D") represents the value assigned in a
purchase business combination to research and development projects of the
acquired business that were commenced but not yet completed at the date of
acquisition and which, if unsuccessful, have no alternative future use in
research and development activities or otherwise. An IPR&D charge of $2,640,000
was expensed in 1998, compared to $872,000 in 1997. The 1998 charge was recorded
in connection with the purchase of the net assets of Alex Computer based on
management's discounted cash flow valuation. The 1997 charge was recorded in
conjunction with the purchase of 3L Limited.
Although the Company previously reported its quarterly and annual
results for 1998 in accordance with established accounting practice, in April
1999 it adjusted certain amounts stated in its 1998 consolidated financial
statements in response to new guidance recently provided by the Securities and
Exchange Commission to the accounting profession related to the valuation of
IPR&D in purchase transactions. None of these adjustments impact the Company's
net operating cash flow.
<PAGE>
Research and Development. Research and development ("R&D") expenses consist
primarily of salaries, related personnel benefits, engineering service costs
relating to development contract fees and direct overhead costs. R&D expenses
were $4,374,000 for 1998, or 16.8% of sales for the period, compared to
$2,536,000 for 1997, or 9.7% of sales for the period. R&D expenses were higher
in 1998 than in 1997 since a significant portion of 1997 R&D expenses qualified
for capitalization, while all R&D expenses for 1998 were expensed as incurred.
Actual R&D expenditures for 1998 were $4,851,000, an increase of $618,000 over
1997. The increase in actual expenditures resulted primarily from an increase in
R&D spending to develop the Company's Analog Devices-based product line.
Other Income. Other income, consisting primarily of interest income on
short-term deposits and interest expense on bank indebtedness, was an expense of
$156,000 for 1998 compared to other income of $14,000 for 1997. This change was
due primarily to increased working capital borrowings under the Company's Line
of Credit during 1998.
Income Taxes. The Company's income tax provision (recovery) for 1998
was $(789,000), or (21.3%) of earnings before taxes and discontinued operations,
compared to $1,534,000, or 49.9% of earnings before taxes and discontinued
operations for 1997. The percentage for 1998 was unusually low due to the
significant impact of the acquired IPR&D charge in the first quarter of 1998, a
significant portion of which is non-deductible for tax purposes. The Company's
income tax provision (recovery) for 1998 was 74.6% of earnings before taxes and
the charge related to IPR&D. Excluding the portion of the income tax provision
related to the acquired IPR&D, the remaining income tax provision was 30.3% of
earnings before taxes and the charge related to IPR&D.
Net Earnings. The Company had earnings (loss) from continuing
operations for 1998 of $(2,908,000), compared to earnings (loss) from continuing
operations for 1997 of $1,540,000. Earnings (loss) per share (basic) from
continuing operations in 1998 was $(0.29) per share, compared to earnings (loss)
per share (basic) from continuing operations of $0.17 per share in 1997.
Earnings (loss) from continuing operations before the charge related to acquired
IPR&D for 1998 was $(268,000), or earnings (loss) of $(0.03) per share (basic),
compared to earnings (loss) from continuing operations before the charge related
to acquired IPR&D of $2,412,000, or earnings (loss) of $0.26 per share (basic)
in 1997.
Financial Condition
The Company historically has met its operating and capital requirements
from cash flow from operations, from borrowings under its line of credit
facility and from funds generated by sale of its equity securities.
The Company has a credit facility with the Bank of Montreal (the
"Bank") consisting of a Cdn$5,000,000 (approximately $3,450,000) operating line
of credit (the "Line of Credit"). The Company's US dollar borrowing capacity
under its Canadian dollar-denominated Line of Credit will vary period to period
based on exchange rate fluctuations. Borrowings under the Line of Credit bear
interest at the Bank's US base rate plus 1/2%, unless the borrowings are
denominated in Canadian dollars, in which case the rate of interest is the
Bank's prime rate plus 1/2%. Borrowings are due on demand and interest is due
monthly. Borrowings may not exceed certain percentages of a specified borrowing
base consisting of domestic and foreign accounts receivable. The agreement
relating to the Line of Credit requires the Company to maintain certain
financial ratios, including a current ratio of 1.50 to 1.00 and a debt to
tangible net worth ratio of 1.25 to 1.00. The Company believes it is in
compliance with the terms of the Line of Credit. Borrowings under the Line of
Credit are secured by substantially all of the Company's current assets. The
Company's net borrowings under the Line of Credit as of December 31, 1999 were
negligible. The Company has no significant long term debt at December 31, 1999.
At December 31, 1999 and December 31, 1998, the Company's net cash
surplus (deficit) was $1,422,000 and $(509,000), respectively. Net cash provided
by (used in) operating, financing and investing activities was $(271,000) and
$310,000 in the years ended December 31, 1999 and December 31, 1998
respectively.
<PAGE>
Accounts receivable, net at December 31, 1999 and December 31, 1998 was
$6,461,000 and $5,404,000 respectively. The increase in accounts receivable was
attributable to increased 1999 fourth quarter sales relative to 1998 fourth
quarter sales. The Company's standard collection terms are net 30 days, subject
to adjustment for certain customers.
The Company made capital expenditures of $797,000 during the year ended
December 31, 1999 relating primarily to the purchase of computer equipment,
furniture and fixtures, and leasehold improvements.
Other than with respect to operating leases and the TPC agreement
described below, the Company does not have significant future expenditure
commitments at December 31, 1999.
In March 1999, the Company entered into an agreement with Technology
Partnerships Canada ("TPC"), an agency of the Canadian government, providing for
an investment in the Company by TPC to finance approximately one-third of the
Company's research and development costs to develop a new product line targeted
to the telecommunications market. The agreement provides for a maximum
commitment by TPC of $4,350,000 (Cdn$6,300,000) through 2002. The Company plans
to use the funds to accelerate development of next-generation hardware and
software systems that can be deployed in high-end commercial applications, such
as telecommunications servers and wireless base stations. The investment is
structured as a repayable investment, with repayment beginning no earlier than
2001, by way of a 2.5% royalty on the new products being financed by the
investment. If the Company has not paid at least $7,400,000 (Cdn$10,746,500) in
royalties to TPC by December 31, 2006, royalties shall continue to be due at a
rate of 2.5% until an aggregate of $7,400,000 (Cdn$10,746,500) in royalties has
been paid. The investment also is repayable immediately upon the occurrence of
certain events of default, which include bankruptcy events. Otherwise, the
Company is not required to repay the investment except by way of royalties, if
any, on the products financed by the investment. TPC did not receive an equity
participation in the Company in connection with its investment.
The Company believes that cash generated from operations and borrowings
available under the Line of Credit, as well as funds received from TPC, will be
sufficient to meet its working capital and capital expenditure requirements for
at least the next twelve months. However, the Company may in the future require
additional equity or debt financing to meet its working capital, property and
equipment and acquisition requirements. There can be no assurance that
additional financing will not be required sooner, or, if required, that it will
be available on a timely basis or on terms satisfactory to the Company.
Charges Related to Acquired In-process Research and Development
During 1997 and 1998, the Company completed two acquisitions, some of
the assets of which included in-process research and development. The Company
regarded its acquisition of 3L Limited as an opportunity to provide more
complete DSP software solutions. The Company regarded its acquisition of Alex
Computer Systems as an opportunity to expand its product offerings to include
products based on the Analog Devices processor. The acquisitions of 3L Limited
and Alex Computer Systems were accounted for using the purchase method of
accounting. A portion of the purchase price for each acquisition was allocated
to in-process research and development, which resulted in a charge of
approximately $872,000 related to the 3L Limited acquisition in 1997 and a
charge of $2,640,000 related to the Alex Computer acquisition in 1998.
The efforts required to develop the acquired in-process research and
development into commercially viable products principally relate to the
completion of all planning, designing and testing activities that are necessary
to establish that the products can meet their design requirements, including
function, features and technical performance requirements.
<PAGE>
The Company based its determination of the acquired in-process research
and development allocation on recently issued guidance by the Securities and
Exchange Commission and considered such factors as degree of completion,
technological and market uncertainties, costs incurred and projected costs to
complete. Other than one 3L Limited project discontinued due to poor market
conditions, acquired in-process research and development projects continue to
progress, in all material respects, consistent with management's original
assumptions used to value the acquired in-process research and development.
Alex Computer Systems, Inc.
The acquired in-process research and development was valued using a
cash flow model, under which projected income and expenses attributable to the
purchased research and development were identified and discounted to arrive at a
present value. Cash flows related to the acquisition of Alex Computer Systems
were discounted using discount rates ranging from 21% to 28% depending on risks,
probabilities and uncertainties, including inherent technical, market acceptance
and other risks. The Company assumed revenues would occur evenly throughout each
relevant period and assumed direct overhead costs as percentage of revenues of
15% for 1999, 14% for 2000 and 14% for 2001.
As of the acquisition date, Alex Computer Systems was conducting
significant in-process research and development into five new software and
hardware projects to which a portion of the Alex Computer Systems purchase price
was allocated. At the date of acquisition, these projects had not reached
technological feasibility and had no alternative future uses. The five
in-process research and development projects included:
Rugged Impedance Cables - an inter-processor connect scheme designed to
significantly increase the distance over which high bandwidth signals
may be reliably transmitted. At the time of the acquisition, Alex
Computer Systems was in the design/testing stage of completion. The
Company estimated the fair value of the IPR&D at $60,000 and the cost
of completion at $5,000. The project was completed in July 1998. At the
time of the acquisition, the Company regarded technical feasibility as
the principal risk relating to the project.
Hammerhead Development System - a development platform for generation
two-based systems, an AD processor offering an improvement in
performance to then-existing technologies. At the time of the
acquisition, Alex Computer Systems was at the concept/pre-design stage
of completion. The Company estimated the IPR&D had nominal value and
the cost of completion at $380,000. The Company expects to complete the
project in fiscal 2000. At the time of the acquisition, the Company
regarded technical feasibility and market acceptance as the principal
risks relating to the project.
Hammerhead VME, PCI, cPCI boards and PMC Modules - circuit board
architectures built around Analog Devices' generation two processor. At
the time of the acquisition, Alex Computer was at the
concept/pre-design stage of completion. The Company estimated the fair
value of the IPR&D at $1,570,000 million and the cost of completion at
$705,000. Company expects to complete the project in fiscal 2000. At
the time of the acquisition, the Company regarded technical
feasibility, accurately estimating future costs and market acceptance
as the principal risks relating to the project.
Apex Software - a comprehensive programming environment that simplifies
the development of user parallel applications while retaining
efficient, optimized code. At the time of the acquisition, Alex
Computer was at the design stage of completion. The Company estimated
the fair value of the IPR&D at $590,000 and the cost of completion at
$120,000. The project was completed in late 1998. At the time of the
acquisition, the Company regarded technical feasibility as the
principal risk relating to the project.
<PAGE>
Apex Trace Software - a visualization tool to provide developers with
accurate non-intrusive timings of system operation and multiple
processor interaction. At the time of the acquisition, Alex Computer
was at the design/testing stage of completion. The Company estimated
the fair value of the IPR&D at $430,000 and the cost of completion at
$140,000. The project was completed in 1998. At the time of the
acquisition, the Company regarded technical feasibility and accurately
estimating future costs as the principal risks relating to the project.
3L Limited
The acquired in-process research and development was valued using a
cash flow model, under which projected income and expenses attributable to the
purchased research and development were identified and discounted to arrive at a
present value. Cash flows related to the acquisition of 3L Limited were
discounted using a 20% discount rate for risks, probabilities and uncertainties,
including inherent technical, market acceptance and other risks. The Company
assumed revenues would occur evenly throughout each relevant period and assumed
direct overhead costs as percentage of revenues of 15% for each of 1998, 1999
and 2000.
As of the acquisition date, 3L Limited was conducting significant
in-process research and development into two significant new software products
to which a portion of the 3L Limited purchase price was allocated. At the date
of acquisition, these projects had not reached technological feasibility and had
no alternative futures. Descriptions of the in-process research and development
projects are as follows:
SHARC Parallel C Software - a programming environment for the SHARC
processor which simplifies the development of user parallel
applications while retaining efficient, optimized code. At the time of
the acquisition, 3L Limited was at the concept/pre-design stage of
completion. The Company estimated the fair value of the IPR&D at
$525,000 and the cost of completion at $95,000. The project was
completed in 1998. At the time of the acquisition, the Company regarded
technical feasibility and market acceptance as the principal risks
related to the project.
C4x 3.0 Parallel C - a multi-processor upgrade to the C compiler tools
for Texas Instruments' C4x processor. At the time of the acquisition,
3L was at the design stage of completion. The Company estimated the
fair value of the IPR&D at $347,000 and the cost of completion at
$85,000. The project was discontinued in 1997 due to poor market
conditions. At the time of the acquisition, the Company regarded
technical feasibility and market acceptance as the principal risks
related to the project.
The Company divested itself of all assets including acquired in-process research
and development related to 3L Limited in a transaction which became effective
April 30, 2000. The Company has signed a perpetual license agreement giving it
the right to continue to provide 3L Limited intellectual property to its legacy
customer base.
Inflation, Foreign Currency Fluctuations and Hedging
The Company believes that inflation and other changes in prices have
not had a material effect on the Company. The Company intends to continue to
sell the majority of its products in US dollars while incurring costs in varying
proportions in Canadian dollars, US dollars and other currencies. Thus, the
Company's operations are susceptible to fluctuations in currency exchange rates.
In addition, if the Canadian dollar rises relative to the US dollar, the
Company's reported operating expenses and net income may be materially and
adversely affected. Since 1995, the Company has entered into currency derivative
contracts to attempt to reduce a portion of its exposure to foreign exchange
rate fluctuations. These contracts typically have maturities of no greater than
six months when entered into. The market price of these contracts generally
approaches the spot exchange rates as the contracts approach the expiration of
their term. The maximum amount the Company has hedged under these contracts at
any one time is Cdn$8,000,000. While the Company does attempt to mitigate some
of the risks of exchange rate fluctuations between the US dollar and the
Canadian dollar by denominating many of its payment obligations in US dollars
and, to a lesser extent, through its use of exchange-traded or over-the-counter
contracts, there can be no assurance that these strategies will substantially
reduce the potential adverse effect of exchange rate fluctuations on the
Company's business, financial condition or results of operations.
<PAGE>
Item 10. DIRECTORS AND OFFICERS OF THE COMPANY.
As at April 30, 2000, the directors and executive officers of the
Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Kenneth A. Spencer (1)(2)(3)(4) 56 Chair of the Board and Director
Pascal Spothelfer 39 President, Chief Executive Officer and
Director
Martin McConnell 48 Vice President, Finance, Chief Financial
Officer and Secretary
Brian Lowe 49 Vice President, Signal Intelligence
Douglas Johnson 36 Vice President, eBusiness and Operations
David Hobbs 44 Vice President and Chief Technical Officer
Andrew Talbot 35 Vice President, Sensor Systems
Andrew Harries (2)(4) 38 Director
John E. Brennan 53 Director
Samuel Znaimer (1)(3) 43 Director
</TABLE>
(1) Member of the audit committee. There is currently a vacancy on the audit
committee that is anticipated to be filled by the Board when two Board
vacancies are filled.
(2) Member of the compensation committee. Pascal Spothelfer is an ex-officio
member.
(3) Member of the governance committee
(4) Member of the nomination 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
Associates, Ltd., and General Manager of Glenayre Technologies Inc.
Pascal Spothelfer has been President and Chief Executive Officer of the
Company since January 2000 and a Director since 1999. Mr. Spothelfer was
previously Senior Vice-President, Strategic Development at Teekay Shipping
(Canada) Ltd. From 1994 to 1998, Mr. Spothelfer served as the Chief Operating
Officer and later President and CEO of Novatel Inc., a high tech company
specializing in global positioning systems.
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, Signal Intelligence of the Company
since January 2000. From 1992 through 1999, Mr. Lowe held the position of Vice
President, Sales. From 1977 to 1992, Mr. Lowe held several management positions
with Epic Data Inc., most recently serving as Vice President, Sales.
<PAGE>
Douglas Johnson has been Vice President, eBusiness and Operations of the Company
since January 2000. From 1994 through 1999 Mr. Johnson held the position of VP,
Logistics. 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.
David Hobbs has been Chief Technical Officer of the Company since
January 2000. From 1994 through 1999, Mr. Hobbs held the position of Vice
President, Engineering. 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.
Andrew Talbot has been Vice President, Sensor Systems since January
2000. From March 1998 through December 1999, Mr. Talbot was Director, Business
Development for the Company. From 1994 through 1998, Mr. Talbot held the
position of President and founder of Alex Computer Systems Inc. From 1989
through 1994 Mr. Talbot served as the General Manager and Vice President of
Transtech Parallel Systems, a high technology company specializing in embedded
super computer technology.
Andrew Harries has been a Director of the Company since 1999. Mr.
Harries is currently Vice-President, Marketing of Sierra Wireless Inc., a
wireless data modem company he co-founded in 1993.
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.
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 and executive
officer. There are no arrangements or understandings between any Director and
executive officer.
The Board of Directors met eleven times in 1999. 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, a Compensation
Committee, a Governance Committee, and a Nomination Committee. The Audit
Committee, whose members are Messrs. Spencer and Znaimer, is charged with
reviewing the Company's annual audit and meeting with the Company's independent
auditors to review the Company's internal controls and financial management
practices. The Audit Committee met three times in 1999. The Compensation
Committee, whose members are Messrs. Harries and Spencer, recommend to the Board
of Directors the compensation for the Company's key employees. The Compensation
Committee met four times in 1999. The Nomination Committee, whose members are
Messrs. Spencer and Harries, is charged with recruiting and proposing new
nominees to the Board and for assessing Directors on an ongoing basis. The
Nomination Committee was formally established in February 2000. The Governance
Committee, whose members are Messrs. Spencer and Znaimer, reviews the
composition and governance practices of the board and makes recommendations to
the board concerning board effectiveness and contribution by each of the
members. The Governance Committee was formally established in February 2000.
<PAGE>
Item 11. COMPENSATION OF DIRECTORS AND OFFICERS.
Aggregate compensation paid to all directors and officers as a group
for services in all capacities during 1999 was $857,941. 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, 1998 and
1999.
<TABLE>
<CAPTION>
Summary Compensation Table
Name and Principal Position Securities
Other Annual Underlying
Year Salary Bonus Compensation Options(#)
---- ------ ----- ------------ ----------
<S> <C> <C> <C> <C> <C>
Barry W. Jinks, President and Chief 1999 $167,138 $ -- $ 220 13,000
Executive Officer(1) 1998 158,155 -- 291 13,000
1997 158,910 104,985 205 13,000
</TABLE>
(1) Resigned effective July 31, 1999
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, 1999.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year And Year-end Option Values
Shares Value Number of Securities Value of Unexercised
Acquired on Realized Underlying Unexercised In-The-Money Options
Exercise(#) (Cdn$) Options at Fiscal Year End (#) Fiscal Year End (Cdn$) (1)
Name Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Barry W. Jinks(2) 125,000 $312,500 307,393 13,000 $355,471 $25,350
</TABLE>
(1) Total value of 'in-the-money' unexercised options is based on the
difference between the last sales price of the Common Shares on The Toronto
Stock Exchange on December 31, 1999 ($4.600 per share) and the exercise
price of the `in-the-money' options, multiplied by the number of
'in-the-money' option shares.
(2) Resigned effective July 31, 1999. All options vested to July 31, 1999 in
ordinary course, extended for exercise until October 2000 or January 2001.
Directors' Compensation
In 1998, the Board of Directors approved a fee of $670 for each meeting
attended in person. The Board also approved the grant of an annual option to
each member of the Board of Directors to purchase 3,000 Common Shares.
Additionally, the Chair of Board, the Chair of a committee of the Board and each
member of a committee of the Board will be granted an annual option to purchase
1,000 Common Shares. All options will have an exercise price equal to the market
price of the Common Shares on the date of grant.
From January 1, 1999 to June 30, 1999, Kenneth Spencer, chair of the
Board, acted as a consultant to the Company and received a consulting fee of
$6,747.
.
In addition to the above, Kenneth Spencer, Sam Znaimer and Pascal
Spothelfer, each a Director of the Company, also acted on an executive
management committee to assist with the management of the Company from July 1999
to December 1999 while a search for a new CEO was conducted. These Directors
received a consulting fee of $24,288, $12,144 and $12,144, respectively.
No other compensation was paid to directors of the Company during the
last completed fiscal year.
<PAGE>
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.
Item 12. OPTIONS TO PURCHASE SECURITIES FROM COMPANY.
Stock Option Plan
In June 1995, the Company adopted a stock option plan (the "Plan") that
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
nontransferable and generally terminate on cessation of employment with the
Company.
The maximum number of Common Shares that may be issued under the Plan
is 3,050,000 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 April 30, 2000, options to purchase an aggregate of 2,257,427 Common
Shares were outstanding under options issued to directors, officers and eligible
employees under the Plan. Exercise prices under the foregoing options range from
$0.47 to $6.41 per share. Of such options, options to purchase 1,393,622 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 3,050,000 shares reserved for issuance under the Plan.
Item 13. INTERESTS OF MANAGEMENT IN CERTAIN TRANSACTIONS.
None.
PART II
Item 14. DESCRIPTION OF SECURITIES TO BE REGISTERED.
Not applicable.
PART III
<PAGE>
Item 15. DEFAULTS UPON SENIOR SECURITIES.
None.
Item 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES
None.
PART IV
Item 17. FINANCIAL STATEMENTS.
Not applicable.
Item 18. FINANCIAL STATEMENTS.
See Item 19.
<PAGE>
Item 19. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
<TABLE>
<CAPTION>
Page(s)
<S> <C>
Selected Consolidated Financial Data 25
Management's Discussions and Analysis of Financial Condition and Results of Operations 28
Index to Consolidated Financial Statements of Spectrum Signal Processing Inc.
Auditors' Report F-1 Consolidated Balance Sheets (audited) at December 31, 1998
and 1999 F-2 Consolidated Statements of Operations (audited) for the years ended
December 31, 1997, 1998 and 1999 F-3 Consolidated Statements of Stockholders'
Equity (Deficit) (audited) for the years ended December 31, 1997, 1998 and 1999
F-4
Consolidated Statements of Cash Flows (audited) for the years ended December 31, 1997, 1998 and 1999 F-5
Notes to Consolidated Financial Statements F-6
</TABLE>
<PAGE>
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Spectrum Signal Processing
Inc. as at December 31, 1999 and 1998 and the consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
three year period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 1999
and 1998 and the results of its operations and its cash flows for each of the
years in the three year period ended December 31, 1999 in accordance with
generally accepted accounting principles in the United States.
On February 4, 2000, we reported separately to the shareholders of the Company
on the consolidated financial statements as at and for the periods presented
above, which consolidated financial statements were prepared in accordance with
Canadian generally accepted accounting principles.
Chartered Accountants
Richmond, Canada
February 4, 2000
F-1
<PAGE>
<TABLE>
<CAPTION>
SPECTRUM SIGNAL PROCESSING INC.
CONSOLIDATED BALANCE SHEETS
(Expressed in thousands of United States dollars, except share amounts)
Prepared in accordance with United States generally accepted accounting
principles.
------------------------------------------------------------------------------------------------------------------------------------
December 31,
1998 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,693 $ 1,422
Accounts receivable, net of allowance for doubtful accounts of $204 5,404 6,461
(1998 - $173)
Inventories (note 3) 4,935 2,402
Prepaid expenses 203 69
------------------------------------------------------------------------------------------------------------------------------------
12,235 10,354
Property and equipment (note 4) 2,287 2,545
Other assets (note 5) 4,925 3,669
------------------------------------------------------------------------------------------------------------------------------------
$ 19,447 $ 16,568
====================================================================================================================================
------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank indebtedness (note 6) $ 2,202 $ ---
Accounts payable 3,680 3,319
Accrued liabilities 1,303 1,618
Current portion of long-term debt (note 6) 80 73
------------------------------------------------------------------------------------------------------------------------------------
7,265 5,010
Long-term debt (note 6) 75 ---
Deferred income taxes (note 8) 346 89
Stockholders' equity
Share capital (note 7)
Authorized 50,000,000 common shares, no par value
Issued 10,395,204 (1998 -10,268,954) 16,309 16,374
Outstanding 10,161,904 (1998 -10,035,654)
Warrants (note 7) 140 140
Additional paid-in capital 76 76
Treasury stock, at cost, 233,300 shares (1998 - 233,300) (1,232) (1,232)
Deficit (1,671) (2,513)
Accumulated other comprehensive income
Cumulative translation adjustments (1,861) (1,376)
------------------------------------------------------------------------------------------------------------------------------------
11,761 11,469
Commitments and contingencies (note 10)
------------------------------------------------------------------------------------------------------------------------------------
$ 19,447 $ 16,568
====================================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
SPECTRUM SIGNAL PROCESSING INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in thousands of United States dollars, except per share amounts)
Prepared in accordance with United States generally accepted accounting principles
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
1997 1998 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales (note 11) $26,207 $26,000 $26,391
Cost of sales 11,180 10,607 11,030
------------------------------------------------------------------------------------------------------------------------------------
15,027 15,393 15,361
Expenses
Administrative 3,146 3,417 4,695
Sales and marketing 4,769 7,204 6,379
Amortization 644 1,299 1,428
Acquired in-process research and development charge 872 2,640 ---
Research and development 2,536 4,374 3,591
------------------------------------------------------------------------------------------------------------------------------------
11,967 18,934 16,093
------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from operations 3,060 (3,541) (732)
Other
Interest income (expense) and bank charges 2 (149) (121)
Other income (expense) 12 (7) 95
------------------------------------------------------------------------------------------------------------------------------------
14 (156) (26)
------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes and discontinued 3,074 (3,697) (758)
operations
Income tax expense (recovery) (note 8)
Current --- 88 341
Deferred 1,534 (877) (257)
------------------------------------------------------------------------------------------------------------------------------------
1,534 (789) 84
------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations 1,540 (2,908) (842)
Loss from discontinued operations (note 12) (535) --- ---
------------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 1,005 $ (2,908) $ (842)
====================================================================================================================================
Earnings (loss) per share (note 9)
Basic
$ 0.17 $ (0.29) $ (0.08)
From continuing operations
After discontinued operations $ 0.11 $ (0.29) $ (0.08)
Diluted
From continuing operations $ 0.16 $ (0.29) $ (0.08)
After discontinued operations $ 0.10 $ (0.29) $ (0.08)
Weighted average shares (in thousands)
Basic 9,235 9,860 10,077
Diluted 9,608 9,860 10,077
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements. F-3
<PAGE>
<TABLE>
<CAPTION>
SPECTRUM SIGNAL PROCESSING INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Expressed in thousands of United States dollars, except numbers of shares)
Prepared in accordance with United States generally accepted accounting
principles.
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Common Stock Additional Warrants Treasury Stock
Paid in
Number Amount Capital Number Amount Number Amount
------ ------ ------- ------ ------ ------ ------
Balance,
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1996 9,243,683 $ 10,255 $ 76 --- --- (16,400) $ (30)
Net earnings --- --- --- --- --- --- ---
Foreign currency
translation --- --- --- --- --- --- ---
Issued for cash from
share options 42,381 184 --- --- --- --- ---
Issued for acquisition
of 3L Limited 173,333 934 --- --- --- --- ---
Purchase of treasury --- --- --- --- --- (216,900) (1,202)
stock
------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1997 9,459,397 11,373 76 --- --- (233,300) (1,232)
Net loss --- --- --- --- --- --- ---
Foreign currency
translation --- --- --- --- --- --- ---
Issued for cash from
share options 36,931 149 --- --- --- --- ---
Issued for net assets of
Alex Computer
Systems Inc. 772,626 4,787 --- --- --- ---
Issuance of warrants --- --- --- 110,375 140 --- ---
------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1998 10,268,954 16,309 76 110,375 140 (233,300) (1,232)
Net loss --- --- --- --- --- --- ---
Foreign currency
translation --- --- --- --- --- --- ---
Issued for cash from
share options 126,250 65 --- --- --- --- ---
------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1999 10,395,204 $ 16,374 $ 76 110,375 $ 140 (233,300) $ (1,232)
Retained Accumulated Total Comprehensive
Earnings other Income
(Deficit) comprehensive (loss)
income (loss)
Balance,
December 31, 1996 $ 232 $ (610) $9,923 $ 1,470
============
Net earnings 1,005 --- 1,005 1,005
Foreign currency
translation --- (357) (357) (357)
Issued for cash from
share options --- --- 184 ---
Issued for acquisition
of 3L Limited --- --- 934 ---
Purchase of treasury --- --- (1,202) ---
stock
------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1997 1,237 (967) 10,487 648
============
Net loss (2,908) --- (2,908) (2,908)
Foreign currency
translation --- (894) (894) (894)
Issued for cash from
share options --- --- 149 ---
Issued for net assets of
Alex Computer
Systems Inc. --- --- 4,787 ---
Issuance of warrants --- --- 140 ---
------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1998 (1,671) (1,861) 11,761 (3,802)
============
Net loss (842) --- (842) (842)
Foreign currency
translation --- 485 485 485
Issued for cash from
share options --- --- 65 ---
------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1999 (2,513) $ (1,376) $ 11,469 $ ( 357)
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
SPECTRUM SIGNAL PROCESSING INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in thousands of United States dollars)
Prepared in accordance with United States generally accepted accounting
principles.
------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
1997 1998 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings (loss) $ 1,005 $ (2,908) $ (842)
Add loss from discontinued operations 535 --- ---
------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations 1,540 (2,908) (842)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities
Amortization 781 1,915 2,217
Acquired in-process research and development 872 2,640 ---
Deferred income taxes 1,534 (826) (293)
Deferred share issue costs 193 --- ---
Changes in operating assets and liabilities
Accounts receivable 1,882 1,154 (713)
Inventories (2,311) (739) 2,783
Prepaid expenses 311 2 144
Accounts payable (366) 149 (979)
Accrued liabilities 488 150 364
Deferred revenue (616) (18) ---
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operations 4,308 1,519 2,681
------------------------------------------------------------------------------------------------------------------------------------
Loss from discontinued operations (535) --- ---
Deferred income taxes, an item not involving cash (340) --- ---
--------------------------------------------------------------------------- --------------- ------------ ------------
Net cash used for discontinued operations (875) --- ---
--------------------------------------------------------------------------- --------------- ------------ ------------
Net cash provided by operating activities 3,433 1,519 2,681
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Purchase of property and equipment (1,040) (559) (797)
Proceeds from disposition of property and equipment --- 1 ---
Software and related development costs (1,393) (477) ---
Acquisition of net assets of Alex Computer, net of cash received --- (2,204) ---
Cash received on acquisition of 3L Limited, net of expenses 188 --- ---
------------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (2,245) (3,239) (797)
Cash flows from financing activities
Increase in bank indebtedness --- 2,036 ---
Repayment of bank indebtedness --- --- (2,284)
Issue of shares from share options 184 149 65
Principal payments on long-term debt (7) (61) (80)
Purchase of treasury shares (1,202) --- ---
--------------------------------------------------------------------------- --------------- ------------ ------------
Net cash provided by (used for) financing activities (1,025) 2,124 (2,299)
Effect of foreign currency exchange rates on cash and cash equivalents (257) (94) 144
--------------------------------------------------------------------------- --------------- ------------ ------------
Net increase (decrease) in cash and cash equivalents during the year (94) 310 (271)
Cash and cash equivalents, beginning of year 1,477 1,383 1,693
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 1,383 $1,693 $1,422
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
See supplementary information (note 14).
F-5
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1999, 1998 and 1997 (Expressed in thousands of United
States dollars except per share amounts and numbers of shares)
--------------------------------------------------------------------------------
Prepared in accordance with United States generally accepted accounting
principles.
--------------------------------------------------------------------------------
The Company was incorporated under the laws of British Columbia. The
Company develops, manufactures and supports a broad range of
multiprocessor-based hardware and software solutions for customers in the
telecommunications, signal intelligence and sensor systems markets.
1. Significant accounting policies
The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States.
Basis of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary 3L Limited. All material intercompany
balances and transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, particularly the
recoverability of property and equipment and other assets, and liabilities
and the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from the
estimates.
Cash and cash equivalents
Cash equivalents include short term deposits, which are all highly
marketable securities with a maturity of three months or less when
acquired. Short term deposits are valued at cost.
Inventories
The Company uses the average cost method of accounting for its inventory.
Inventories are valued at the lower of cost and net realizable value.
Government assistance
Government assistance is recorded as either a reduction of the cost of the
applicable property and equipment or credited against expenses incurred in
the statement of operations, as determined by the terms and conditions of
the agreements under which the assistance is provided to the Company.
F-6
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Years ended December 31, 1999, 1998, 1997 (Expressed in thousands of United
States dollars except per share amounts and numbers of shares) Prepared in
accordance with United States generally accepted accounting principles.
--------------------------------------------------------------------------------
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. Annual amortization is the amount determined by the greater
of the ratio of current product revenue to the total current and
anticipated product revenue or the straight-line method over the remaining
estimated economic life, generally three years. Amortization commences when
the product is available for general release to customers.
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:
Computer equipment 30%
Computer software 20%
Furniture and fixtures 20%
Laboratory equipment 20%
Amortization of leasehold improvements is provided on a straight-line basis
over the lesser of their estimated useful lives or the lease term.
Employee stock option plans
The Company accounts for its employee stock option plans using the
intrinsic value method.
Translation of foreign currencies
A majority of the Company's shareholders, customers, and industry analysts
are located in the United States. Accordingly, effective January 1, 1998,
the Company adopted the U.S. dollar as its reporting currency. Historical
figures previously reported in Canadian dollars have been translated into
U.S. dollars as follows: assets and liabilities are translated into U.S.
dollars at the rate of exchange in effect at the balance sheet date and
revenue and expense items are translated at the average rates for the
period. Unrealized gains and losses resulting from the translation to the
reporting currency are accumulated in a separate component of stockholders'
equity, described as cumulative translation adjustments.
F-6
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Years ended December 31, 1999, 1998, 1997 (Expressed in thousands of United
States dollars except per share amounts and numbers of shares) Prepared in
accordance with United States generally accepted accounting principles.
--------------------------------------------------------------------------------
1. Significant accounting policies, continued
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 foreign
currency have been remeasured in Canadian dollars at the rate of exchange
in effect at the balance sheet date. Other assets, revenue and expense
items are measured using the rate of exchange prevailing at their
respective transaction dates. Exchange gains and losses resulting from the
remeasurement of foreign denominated monetary assets and liabilities in
Canadian dollars are reflected in earnings for the period.
Financial statements of foreign operations for which the functional
currency is the local currency are translated into Canadian dollars using
the current rate at the balance sheet date. Under this method, assets and
liabilities are translated into Canadian dollars at the rate of exchange in
effect at the balance sheet date and revenue and expense items are
translated at the average rates for the period. Unrealized gains and losses
resulting from the translation of the financial statements are deferred and
accumulated in a separate component of stockholders' equity, described as
cumulative translation adjustments.
Goodwill and other intangibles
Goodwill and other intangibles are stated at cost, based on fair value at
the acquisition date, less accumulated amortization. Amortization is
recorded utilizing the straight-line method over the estimated lives of the
respective assets, generally three to six years.
Revenue recognition
Revenue is recognized upon the later of shipment or when title passes to
the customer. Revenue from product development contracts is recognized upon
reaching certain development milestones which are generally correlated to
the timing of payments.
Warranty
The Company generally provides a one year warranty to the original
purchaser. Warranty costs are accrued based on a best estimate, with
reference to past experience, at the time of sale.
F-6
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Years ended December 31, 1999, 1998 and 1997 (Expressed in thousands of United
States dollars except per share amounts and numbers of shares)
--------------------------------------------------------------------------------
Prepared in accordance with United States generally accepted accounting
principles.
1. Significant accounting policies, continued
Income taxes
The Company calculates its provision for income taxes in accordance with
Statement of Financial Accounting Standard No. 109 "Accounting for Income
Taxes" ("FAS 109"), which requires an asset and liability approach to
financial accounting for income taxes. Under this method, deferred income
taxes are recognized for the future income tax consequences attributable to
differences between the financial statement carrying values and their
respective income tax basis (temporary differences). The resulting changes
in the net deferred tax asset or liability are included in income. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which temporary differences are
expected to be recovered or settled. The effect on deferred income tax
assets and liabilities of a change in tax rates is included in income in
the period that includes the enactment date. Deferred income tax assets are
evaluated and if realization is not considered "more likely than not", a
valuation allowance is provided.
The Company follows the cost reduction method of accounting for investment
tax credits whereby the benefit of tax credits is recognized as a reduction
in the cost of the related asset or expenditure when there is reasonable
assurance such 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.
Foreign currency hedging instruments
The Company enters into future exchange and currency option contracts to
hedge its foreign currency risks. To be accounted for as hedges, 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 and currency option contracts as
hedges of firmly committed transactions. Gains and losses on these
contracts are recognized as an offset to the gain or loss of the underlying
transaction when recognized.
Impairment of long-lived assets
The Company monitors the recoverability of long-lived assets, which include
property and equipment and other 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.
F-6
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Years ended December 31, 1999, 1998 and 1997 (Expressed in thousands of United
States dollars except per share amounts and numbers of shares)
--------------------------------------------------------------------------------
Prepared in accordance with United States generally accepted accounting
principles.
1. Significant accounting policies, continued
Comparative figures
Certain comparative figures have been reclassified to conform with the
presentation adopted in the current year.
Recent accounting pronouncements
The FASB issued FAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities". FAS No. 133 established standards relating to the
recognition and disclosure of all aspects of derivative instruments and
hedging activities. The Company is currently evaluating the impact of FAS
No. 133. The Company will be required to implement FAS No. 133 in its
fiscal year ending December 31, 2001.
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Years ended December 31, 1999, 1998 and 1997 (Expressed in thousands of United
States dollars except per share amounts and numbers of shares)
--------------------------------------------------------------------------------
Prepared in accordance with United States generally accepted accounting
principles.
2. Acquisition of net assets of Alex Computer Systems Inc.
On March 17, 1998 the Company acquired the majority of the operating assets
and liabilities of Alex Computer Systems Inc, of Ithaca, New York. The
acquisition has been accounted for using the purchase method of accounting
and the results of operations have been consolidated since the date of the
acquisition. The Company's interest in the net assets acquired at assigned
values are as follows:
Cash $ 10
Current assets 1,093
Property and equipment 229
Goodwill and other intangibles 4,243
Acquired in-process research and development 2,640
Current liabilities (933)
Long-term liabilities (141)
---------------------------------------------------------------
Acquisition cost $7,141
===============================================================
Consideration
772,626 common shares $4,787
110,375 warrants 140
Cash 675
Expenses on acquisition 1,539
---------------------------------------------------------------
$7,141
===============================================================
Each Common Share issued pursuant to the acquisition agreement was valued
at the average closing price of the Common Shares on the NASDAQ National
Market during the 30 trading days prior to the date of the acquisition
agreement.
Acquired technology valued at $1,010 was acquired as part of the
acquisition of the net assets of Alex Computer Systems ("Alex"). Acquired
technology consisted of Alex's generation one product line, a two year
license for the use of the Alex name as well as Alex's product brand names,
customer account lists, sales and distribution channels, technical
development expertise, patents, copyrights and existing technical
inventory.
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Years ended December 31, 1998, 1997 and 1996 (Expressed in thousands of United
States dollars except per share amounts and numbers of shares)
--------------------------------------------------------------------------------
Prepared in accordance with United States generally accepted accounting
principles.
2. Acquisition of net assets of Alex Computer Systems Inc., continued
Acquired in-process research and development represents the value assigned
in a purchase business combination to research and development projects of
the acquired business that were commenced but not yet completed at the date
of acquisition and which, if unsuccessful, have no alternative future use
in research and development activities or otherwise. Acquired in-process
research and development consisted of Alex's generation two research and
development projects. Such generation two research and development projects
did not represent an improvement of nor redesign of its generation one
products. In accordance with Statement of Financial Accounting Standards
No. 2 "Accounting for Research and Development Costs," as interpreted by
FASB interpretation No. 4, amounts assigned to acquired in-process research
and development meeting the above criteria must be charged to expense at
the date of consummation of the purchase business combination. In this
regard, a charge of $2,640 was recorded in conjunction with the purchase of
the net assets of Alex Computer Systems based on managements' discounted
cash flow valuation.
The following unaudited pro-forma results of operations assume that the
acquisition occurred as of the beginning of the respective periods
presented. The pro-forma information given below does not purport to be
indicative of the results that actually would have been obtained if the
operations were combined during the periods presented, and is not intended
to be a projection of future results or trends.
Years ended
December 31,
1997 1998
------------------------------------------------------------------------
(Unaudited)
Revenue $ 29,544 $ 27,033
Earnings (loss) from continuing operations 2,650 (2,911)
Net earnings (loss) 2,115 (2,911)
Earnings (loss) per share
From continuing operations $ 0.29 $ (0.30)
Net $ 0.23 $ (0.30)
3. Inventories
Net inventories at December 31, 1998 and 1999 consisted of the following:
December 31,
--------------------------------
1998 1999
----------------- --------------
Finished goods $ 2,683 $ 1,353
Work in progress 1,132 394
Raw materials 1,120 655
----------------- --------------
$4,935 $ 2,402
================= ==============
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Years ended December 31, 1998, 1997 and 1996 (Expressed in thousands of United
States dollars except per share amounts and numbers of shares)
--------------------------------------------------------------------------------
Prepared in accordance with United States generally accepted accounting
principles.
4. Property and equipment
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1999
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
Computer equipment $ 2,527 $ 2,739
Computer software 1,039 1,166
Furniture and fixtures 820 997
Laboratory equipment 619 768
Leasehold improvements 296 362
--------------------------------------------------------------------------------------------------------
5,301 6,032
Less accumulated amortization (3,014) (3,487)
--------------------------------------------------------------------------------------------------------
Net book value $ 2,287 $ 2,545
========================================================================================================
5. Other assets
December 31,
-------------------------------------------------------------------------- -----------------------------
1998 1999
--------------------------------------------------------------------------------------------------------
Software and related development costs, net of accumulated amortization $ 1,534 $ 823
of $1,607 (1998 - $876)
Goodwill and other intangibles, net of accumulated amortization of
$1,337 (1998 - $554) 3,391 2,846
-------------------------------------------------------------------------- -----------------------------
$ 4,925 $ 3,669
========================================================================== =============================
</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 Cdn $5,000,000 (approximately U.S. $3,450,000) operating
line of credit (the "Line of Credit"). The Company's U.S. dollar borrowing
capacity under its Canadian dollar denominated Line of Credit will vary
period to period based on exchange rate fluctuations. Borrowings under the
Line of Credit bear interest at the Bank's U.S. base rate plus 1/2%, unless
borrowings are denominated in Canadian dollars, in which case the rate of
interest is the Bank's prime rate plus 1/2%. Borrowings are due on demand
and interest is to be paid monthly. Borrowings may not exceed certain
percentages of a specified borrowing base consisting of domestic and
foreign accounts receivable and inventories. The Line of Credit agreement
requires the Company to maintain certain financial ratios and limits
capital expenditures. Borrowings under the Line of Credit are secured by
substantially all of the Company's current assets.
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Years ended December 31, 1999, 1998 and 1997 (Expressed in thousands of United
States dollars except per share amounts and numbers of shares)
--------------------------------------------------------------------------------
Prepared in accordance with United States generally accepted accounting
principles.
6. Long-term debt and bank indebtedness, continued
(b) Long-term debt
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------------------------------
1998 1999
------------------------------------------------------------------------------------------------------------
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.
Capital lease
<S> <C> <C>
The Company leased office equipment under a capital lease which expired $ 75 $73
August 1, 1999. Under the terms of the lease, the Company made monthly
installments of $8, including interest at 9.58%, with a final payment of
$24.
80 ---
------------------------------------------------------------------------------------------------------------
155 73
Less: current portion (80) (73)
------------------------------------------------------------------------------------------------------------
$ 75 $---
============================================================================================================
</TABLE>
7. Share capital
(a) Stock option plan
The Company has reserved 3,050,000 common shares for issuance under its
stock option plan. Of these, 564,459 options have been exercised, 738,601
options have been cancelled, 1,853,448 options are currently outstanding
of which 106,508 are subject to shareholder approval, and nil options are
available for issue. 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.
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Years ended December 31, 1999, 1998 and 1997 (Expressed in thousands of United
States dollars except per share amounts and numbers of shares)
--------------------------------------------------------------------------------
Prepared in accordance with United States generally accepted accounting
principles.
7. Share capital, continued
Options generally vest over three years in equal amounts at the
anniversary date of the grant. Options generally have a five year term
with ten years being the maximum.
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------------------------------------------
1997 1998 1999
---------------------------- ----------------------------- ----------------------------
Number of Weighted Number of Weighted Number of Weighted
shares Average Shares Average Shares Average
Exercise Price Exercise Price Exercise Price
---------------- ---------------- ----------------
CAD USD CAD USD CAD USD
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of
year 1,493,896 $6.69 $4.58 1,657,288 $6.63 $4.54 1,763,884 $6.62 $4.31
Granted 330,353 7.74 5.30 312,200 6.80 4.42 562,049 3.50 2.42
Exercised (42,381) 6.03 4.13 (36,931) 5.94 3.86 (126,250) 0.77 0.53
Canceled (124,580) 10.22 6.99 (168,673) 7.29 4.74 (346,235) 7.32 5.07
------------------------------------------------------------------------------------------------------------------------------------
Outstanding, end of year
1,657,288 $6.63 $4.54 1,763,884 $6.62 $4.31 1,853,448 $5.92 $4.10
------------------------------------------------------------------------------------------------------------------------------------
Exercisable, end of year
918,201 $5.34 $3.66 975,197 $5.69 $3.70 1,017,469 $6.76 $4.68
Weighted-average fair
value of options granted
during the year $2.89 $1.98 $4.42 $2.96 $2.47 $1.66
</TABLE>
Information regarding the stock options outstanding at December 31, 1999 is
summarized below:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------------------------------------------------------------------------
Range of Shares Weighted Average Weighted Average Shares Weighted
Exercise Prices Outstanding Remaining Exercise Price Exercisable Average
Contractual Life Exercise Price
------------------------------------------------------------------------------------------------------------------------------------
CAD USD CAD USD
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$0.70 - $4.87 804,306 4.16 years $3.26 $2.26 237,960 $2.76 $1.91
$5.75 - $7.00 345,555 2.96 years 6.83 4.73 313,905 6.85 4.74
$7.50 - $9.90 703,587 3.77 years 8.44 5.85 465,604 8.73 6.05
------------------------------------------------------------------------------------------------------------------------------------
$0.70 - $9.90 1,853,448 3.79 years $5.92 $4.10 1,017,469 $6.76 $4.68
</TABLE>
The options outstanding at December 31, 1999 expire between February 15,
2000 and June 21, 2009.
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Years ended December 31, 1999, 1998 and 1997 (Expressed in thousands of United
States dollars except per share amounts and numbers of shares)
--------------------------------------------------------------------------------
Prepared in accordance with United States generally accepted accounting
principles.
7. Share capital, continued
The Company has 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 to employees. All options are granted 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>
--------------------------------------------------------------------------------------------------------------
Years ended
---------------------------------------------------
December 31,
1997 1998 1999
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings (loss) - as reported $1,005 $(2,908) $ (842)
Net earnings (loss) - pro forma 86 (3,848) (1,571)
Basic earnings (loss) per share - as reported 0.11 (0.29) (0.08)
Basic earnings (loss) per share - pro forma 0.01 (0.39) (0.16)
Diluted earnings (loss) per share - as reported 0.10 (0.29) (0.08)
Diluted earnings (loss) per share - pro forma 0.01 (0.39) (0.16)
</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 valuation model with the following
assumptions:
<TABLE>
<CAPTION>
Years ended
December 31,
1997 1998 1999
----------------------- ------------------- ------------------
<S> <C> <C> <C>
Expected dividend yield 0% 0% 0%
Expected stock price volatility 27% 82% 82%
Risk-free interest rate 7.5% 5.5% 6.0%
Expected life of options 4.5 years 4.7 years 5.5 years
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Years ended December 31, 1999, 1998 and 1997 (Expressed in thousands of United
States dollars except per share amounts and numbers of shares)
--------------------------------------------------------------------------------
Prepared in accordance with United States generally accepted accounting
principles.
7. Share capital, continued
(b) Employee share purchase plan
The Company established an Employee Share Purchase Plan ("the ESPP")
effective November 1, 1999. A total of 250,000 shares are authorized for
issuance under the ESPP. The ESPP allows eligible employees to purchase a
limited number of shares of the Company's stock at 85% of the market value
at certain plan-defined dates. No shares were issued pursuant to the ESPP
in the year ended December 31, 1999.
(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 CAD $9.06 (USD $6.27). The
warrants expire on April 30, 2000. The fair value of the warrants was
estimated to be CAD $1.81 (USD $1.25) per warrant, using the Black-Scholes
option-pricing model.
8. Income taxes
Earnings (loss) from continuing operations before provision of income taxes
consisted of:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------
1997 1998 1999
----------------- ---------------- ----------------
<S> <C> <C> <C>
Canada $ 2,462 $ (1,796) $ (252)
Other 612 (1,901) (506)
----------------- ---------------- ----------------
$ 3,074 $ (3,697) $ (758)
================= ================ ================
The provision for income taxes consisted of the following:
Years ended December 31,
---------------------------------------------------
1997 1998 1999
----------------- ---------------- ----------------
Current
Canada $ --- $ --- $ 291
Other --- 88 50
----------------- ---------------- ----------------
Total current --- 88 341
----------------- ---------------- ----------------
Deferred
Canada 1,115 (444) (85)
Other 419 (433) (172)
----------------- ---------------- ----------------
Total deferred 1,534 (877) (257)
----------------- ---------------- ----------------
Income tax provision $ 1,534 $(789) $ 84
================= ================ ================
</TABLE>
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Years ended December 31, 1999, 1998 and 1997 (Expressed in thousands of United
States dollars except per share amounts and numbers of shares)
--------------------------------------------------------------------------------
Prepared in accordance with United States generally accepted accounting
principles.
8. Income taxes, continued
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 (loss) before income taxes and
discontinued operations as shown in the following table:
<TABLE>
<CAPTION>
Years ended
December 31,
------------------------------------------------------ ----------------- ---------------- ----------------
1997 1998 1999
------------------------------------------------------ ----------------- ---------------- ----------------
<S> <C> <C> <C>
Combined Canadian federal and
provincial income taxes at expected rate $1,406 $(1,686) $ (346)
Acquired in-process research and
development, not tax deductible 398 300 ---
Permanent and other differences (76) 111 294
Change in valuation allowance (194) 302 21
Foreign losses tax effected at lower rates --- 96 65
State taxes --- 88 50
------------------------------------------------------ ----------------- ---------------- ----------------
$1,534 $ (789) $ 84
------------------------------------------------------ ----------------- ---------------- ----------------
</TABLE>
As at December 31, 1999 the Company has claimed, for Canadian income tax
purposes, investment tax credits of approximately $5,205 which are
available to reduce future years' income taxes payable. These investment
tax credits expire between 2003 and 2009. The potential tax benefits that
may arise from the utilization of the $4,978 of these tax credits 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 $780
which can be carried forward indefinitely to reduce future taxable income.
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Years ended December 31, 1999, 1998 and 1997 (Expressed in thousands of United
States dollars except per share amounts and numbers of shares)
--------------------------------------------------------------------------------
Prepared in accordance with United States generally accepted accounting
principles.
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,
----------------------------------
1998 1999
------------------ ---------------
<S> <C> <C>
Deferred tax assets
Tax loss carry forwards $ 106 $ 182
Goodwill and acquired technology
867 1,007
Investment tax credits recoverable 213 220
Share issue costs 109 69
Other 50 80
------------------ ---------------
Total gross deferred tax assets 1,345 1,558
Less: valuation allowance (539) (560)
------------------ ---------------
Total deferred tax assets 806 998
------------------ ---------------
Deferred tax liabilities
Research and development expenses (551) (366)
Tax depreciation in excess of accounting (504) (537)
Investment tax credits (97) (184)
------------------ ---------------
Total deferred tax liabilities (1,152) (1,087)
------------------ ---------------
Net deferred tax liabilities $ (346) $ (89)
================== ===============
</TABLE>
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Years ended December 31, 1999, 1998 and 1997 (Expressed in thousands of United
States dollars except per share amounts and numbers of shares)
--------------------------------------------------------------------------------
Prepared in accordance with United States generally accepted accounting
principles.
9. Earnings (loss) per share
Basic earnings (loss) per share are 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.
<TABLE>
<CAPTION>
The following weighted average number of shares was used for the computation of earnings (loss) per share:
Years ended
December 31,
------------------------------------------------
1997 1998 1999
---------------- --------------- ---------------
<S> <C> <C> <C>
Weighted average shares used in
computation of basic earnings per share 9,234,926 9,860,218 10,077,496
Weighted average shares from
assumed conversion of dilutive options 372,994 --- ---
---------------- --------------- ---------------
Weighted average shares used in
computation of diluted earnings per share 9,607,920 9,860,218 10,077,496
================ =============== ===============
</TABLE>
10. Commitments
The Company has entered into various operating lease agreements with
remaining terms of up to ten years, for office premises and equipment. As
at December 31, 1999, the minimum lease payments are approximately as
follows:
2000 $ 756
2001 796
2002 797
2003 797
2004 843
2005 and thereafter 4,316
-------------------------------- ----------------
$8,305
================================ ================
In March 1999, the Company entered into a contribution agreement with
Technology Partnerships Canada to develop a new line of communications
products. Under this agreement, Technology Partnerships Canada will
contribute 31% of the costs incurred in the development of these products
to a maximum contribution of $4,350. In exchange for this contribution, the
Company has agreed to a 2.5% contingently repayable royalty on
communications product revenues to a maximum of $7,400 commencing January
1, 2001. During the year ending December 31, 1999, the Company claimed and
credited $219 against research and development expenses.
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Years ended December 31, 1999, 1998 and 1997 (Expressed in thousands of United
States dollars except per share amounts and numbers of shares)
--------------------------------------------------------------------------------
Prepared in accordance with United States generally accepted accounting
principles.
11. Segmented information
In the opinion of management, the Company operates in the digital signal
processing systems industry, and all sales of its products and services are
made in this segment. Management of the Company makes decisions about
allocating resources based on the one operating segment. Substantially all
assets and operations are in Canada. A summary of sales by region and by
major customers is as follows:
<TABLE>
<CAPTION>
Years ended
December 31,
------------------------------------------ ---------------------------------------------------
1997 1998 1999
------------------------------------------ ---------------- ----------------- ----------------
<S> <C> <C> <C>
By Region
United States $22,284 $21,821 $21,325
Other 3,923 4,179 5,066
------------------------------------------ ---------------- ----------------- ----------------
Total Sales $26,207 $26,000 $26,391
By Major Customer
Customer A $ 6,583 $ 6,251 $10,056
Customer B 4,843 --- ---
Customer C 1,827 2,098 1,983
Customer D --- --- 3,963
========================================== ================ ================= ================
</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 ceased operations in this business as of December 31, 1997.
Accordingly, the results of operations have been disclosed separately from
those of continuing operations for the years presented. The financial
position of these discontinued operations was consolidated in accordance
with generally accepted accounting principles.
The operating results of this business segment were as follows:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------- -----------------------------------------------
1997 1998 1999
-------------------------------------- ---------------- --------------- --------------
<S> <C> <C> <C>
Revenue $ 517 $ --- $ ---
Gross margin 191 --- ---
Expenses 1,066 --- ---
Provision for taxes (340) --- ---
-------------------------------------- ---------------- --------------- --------------
-------------------------------------- ---------------- --------------- --------------
Loss from discontinued operations $ (535) $ --- $ ---
-------------------------------------- ---------------- --------------- --------------
</TABLE>
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Years ended December 31, 1999, 1998 and 1997 (Expressed in thousands of United
States dollars except per share amounts and numbers of shares)
--------------------------------------------------------------------------------
Prepared in accordance with United States generally accepted accounting
principles.
13. Financial instruments
a) Fair value of financial instruments
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, bank
indebtedness, accounts payable and accrued liabilities approximate fair
value due to their short maturities. Due to the uncertainty over the timing
of repayment, the fair value of the Company's long term debt is not
reasonably determinable.
b) Foreign exchange risk management
The Company utilizes future exchange and currency option contracts to
manage its exposure to fluctuations in foreign exchange rates which
typically expire within one year. These instruments are used for purposes
other than trading and are employed in connection with an underlying asset
or liability. At December 31, 1999, the Company had futures exchange and
currency option contracts with a notional principal of $4,000 (December 31,
1998 - $1,061) maturing between March 3, 2000 and June 20, 2000. At
December 31, 1999 and December 31, 1998, deferred gains and losses on
future exchange and currency option 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 and currency option contracts are
evaluated by obtaining quotes from brokers. At December 31, 1999 and
December 31, 1998 there were no carrying amounts related to future exchange
and currency option contracts on the consolidated balance sheets. Future
exchange and currency option contracts to sell $4,000 had an estimated fair
value of $4,045 at December 31, 1999 compared to future exchange contracts
to sell $1,061 with an estimated fair value of $1,051 at December 31, 1998.
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
necessary.
A substantial amount of the Company's revenues have been recognized in
currencies other than the Canadian dollar, principally the United States
dollar. Fluctuations in the exchange rates between these currencies and the
Canadian dollar could have a material effect on the Company's business,
financial condition and results of operations. The Company attempts to
mitigate some of this risk by denominating many of its payment obligations
in United States dollars, and, to a lesser extent, through the use of
currency derivative contracts.
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Years ended December 31, 1999, 1998 and 1997 (Expressed in thousands of United
States dollars except per share amounts and numbers of shares)
--------------------------------------------------------------------------------
Prepared in accordance with United States generally accepted accounting
principles.
14. Supplementary information
<TABLE>
<CAPTION>
Years ended
December 31,
-----------------------------------------------------
1997 1998 1999
--------------- ----------------- -------------------
<S> <C> <C> <C>
Cash received for interest $ 33 $ 22 $ 56
Cash paid for:
Interest 3 149 152
Income taxes --- 15 13
Non-cash financing and investing activities
Issue of shares for acquisition of the
net assets of Alex Computer Systems,
net of share issue expenses --- 4,787 ---
Issue of warrants for acquisition of the
net assets of Alex Computer Systems --- 140 ---
Issue of shares for acquisition of 3L
Limited, net of share issue expenses 934 --- ---
Rent expense 366 512 672
Bad debt expense 83 17 14
Foreign exchange gains 323 287 37
</TABLE>
<PAGE>
(b) Exhibits
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.
<TABLE>
<CAPTION>
<S> <C>
2.1 -- Share Purchase Agreement, dated May 27, 1997, among the Company, 3L Limited and the
shareholders of 3L Limited.
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)).
4.1 -- Specimen Share Certificate (incorporated by reference to the Company's Registration Statement
on Form F-1 (No. 333-4820)).
4.2 -- Spectrum Signal Processing Inc. 1995 Stock Option Plan, as amended (incorporated by reference
to the Company's Registration Statement in Form S-8 (No. 333-30136))..
4.3 -- Form of Stock Option Agreement (incorporated by reference to the Company's Registration
Statement in Form S-8 (No. 333-30136)).
4.4 -- Spectrum Signal Processing Inc. 1999 Employee Stock Purchase Plan (incorporated by reference to
the Company's Registration Statement in Form S-8 (No. 333-30136))..
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
(incorporated by reference to the Company's Report on Form 20-F filed on June 30, 1998).
10.8 -- Share Purchase Agreement, dated May 27, 1997, among the Company, 3L Limited and the
shareholders of 3L Limited (incorporated by reference to the Company's Registration
Statement on Form F-3 filed on June 30, 1998 (No. 333-58115)).
10.9 -- Asset Purchase Agreement, dated March 20, 1998, among the Company, Alex Computer Systems, Inc.
and Alex Informatics Inc. (incorporated by reference to the Company's Registration
Statement on Form F-3 filed on June 30, 1998 (No. 333-58115)).
10.10 -- Registration Agreement, dated April 30, 1998, among the Company and Alex Computer Systems, Inc.
(incorporated by reference to the Company's Registration Statement on Form F-3 filed on
June 30, 1998 (No. 333-58115)).
10.11 -- Share Purchase Warrant Certificate to purchase 7,726 Common Shares issued to Andrew Talbot
(incorporated by reference to the Company's Registration Statement on Form F-3 filed on
June 30, 1998 (No. 333-58115)).
<PAGE>
10.12 -- Share Purchase Warrant Certificate to purchase 102,649 Common Shares issued to Alex Computer
Systems, Inc. (incorporated by reference to the Company's Registration Statement on Form
F-3 filed on June 30, 1998 (No. 333-58115)).
10.13 -- Agreement, dated March 31, 1999, between the Company and Technology Partnerships Canada
(incorporated by reference to the Company's Amendment No.4 to its Registration Statement
on Form F-3 (No. 333-58115)).
27 -- Financial Data Schedule.
* Confidentiality requested. Confidential portions have been omitted and filed separately with the
Commission, as required by Rule 24b-2 of the Securities Exchange Act of 1934.
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and duly caused this Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in Vancouver, British
Columbia, Canada, on June 26, 2000.
SPECTRUM SIGNAL PROCESSING INC.
By: /s/ Martin McConnell
--------------------
Martin McConnell
Vice President and Chief Financial Officer
